The discussion included in this section, as well as other sections of this Quarterly Report on Form 10-Q, contains forward-looking statements as that term is used in the Private Securities Litigation Reform Act of 1995. These statements are based on our current expectations about future events or future financial performance. Forward-looking statements by their nature address matters that are, to different degrees, uncertain, and often contain words such as "may," "could," "expect," "intend," "plan," "seek," "anticipate," "believe," "estimate," "predict," "potential," or "continue." These statements involve known and unknown risks and uncertainties that may cause the events we discuss not to occur or to differ significantly from what we expect. For us, these risks and uncertainties include, among others, general industry conditions and competition, including the current global financial crisis that began in 2007; the impact of market volatility on revenue from asset-based fees; damage to our reputation resulting from claims made about possible conflicts of interest; liability for any losses that result from an actual or claimed breach of our fiduciary duties; financial services industry consolidation; a prolonged outage of our database and network facilities; challenges faced by our non-U.S. operations; and the availability of free or low-cost investment information.

A more complete description of these risks and uncertainties can be found in our other filings with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2008. If any of these risks and uncertainties materialize, our actual future results may vary significantly from what we expect. We do not undertake to update our forward-looking statements as a result of new information or future events.

All dollar and percentage comparisons, which are often accompanied by words such as "increase," "decrease," "grew," "declined," "was up," "was down," "was flat," or "was similar", refer to a comparison with the same period in the prior year unless otherwise stated.

Understanding Our Company

Our Business

Our mission is to create great products that help investors reach their financial goals. We offer an extensive line of Internet, software, and print-based products for individual investors, financial advisors, and institutional clients. We also offer asset management services for advisors, institutions, and retirement plan participants. Many of our products are sold through subscriptions or license agreements. As a result, we typically generate recurring revenue.

We emphasize a decentralized approach to running our business to create a culture of responsibility and accountability. Beginning in 2009, we changed our segment reporting to focus on two operating segments: Investment Information, which includes all of our data, software, and research products and services, and Investment Management, which includes our asset management operations.

Historically, we have focused primarily on organic growth by introducing new products and services and expanding our existing products. However, we have made and expect to continue to make selective acquisitions that support our five key growth strategies, which are:

†         Enhance our position in each of our key market segments by focusing on
          our three major Internet-based platforms;
†         Become a global leader in funds-of-funds investment management;
†         Continue building thought leadership in independent investment
          research;
†         Create a premier global investment database; and
†         Expand our international brand presence, products, and services.

Industry Overview

We monitor developments in the economic and financial information industry on an ongoing basis and use these insights to help inform our company strategy, product development plans, and marketing initiatives.

The U.S. equity market generally showed strong performance in the third quarter of 2009, continuing the positive trend from the second quarter. Morningstar's U.S. Market Index, a broad market benchmark, was up 16.2% during the quarter and 21.2% for the first nine months of 2009. Total U.S. mutual fund assets increased to $10.8 trillion as of September 30, 2009 based on data from the Investment Company Institute (ICI), up slightly from $10.6 trillion as of September 30, 2008.

Despite the more positive market environment, alternative asset classes, such as hedge funds, continued to show mixed results. In aggregate, hedge funds included in Morningstar's database, excluding funds of hedge funds, experienced net outflows of about $58 billion for the year-to-date period through August 30, 2009.

Assets in exchange-traded funds (ETFs) increased to $693 billion as of September 2009, compared with $580 billion as of September 2008, based on data from the ICI.

Based on data from Nielsen/Net Ratings, aggregate page views, unique users, and pages viewed per visit for financial and investment sites declined by about 5% to 10% compared with the third quarter of 2008, while the amount of time spent per visit decreased slightly. We attribute these trends to the unusual level of market volatility in 2008, which increased investor interest in financial and investment sites in the year-ago period. Although unique users for Morningstar.com also declined in the third quarter of 2009, the site continued to perform well based on metrics such as pages viewed per visit and time spent per visit.

Economic uncertainty continued to weigh on the global advertising market. Some industry researchers, including Emarketer, Cowen and Company, and the Interactive Advertising Bureau, have revised their forecasts for global advertising sales to project continued downturns in 2009. Although online advertising has held up better than other areas as advertisers have continued to shift spending from traditional media to the Internet, we believe that spending in the financial services area remains under pressure. Following this year's downturn in advertising sales, several industry surveys have projected moderate increases in overall ad spending in 2010.

Overall, we remain cautious because of the difficult market environment, which has persisted in the wake of the financial crisis that began in 2007. Despite the recent upturn in the U.S. equity market, we believe asset management firms and other financial services companies continue to carefully scrutinize their spending levels, creating additional pricing pressure and increasing the time required to close new business and renewals. On the positive side, however, we believe some of the uncertainty in the financial services sector began easing during 2009.

Three and Nine Months Ended September 30, 2009 vs. Three and Nine Months Ended September 30, 2008

Consolidated Results



                         Three Months Ended September 30              Nine Months Ended September 30
Key Metrics ($000)                2009             2008    Change             2009            2008    Change
Revenue                  $     120,088    $     125,505      (4.3 )%  $    356,353    $    383,186      (7.0 )%
Operating income                33,683           34,176      (1.4 )%       100,996         110,431      (8.5 )%
Operating margin                  28.0 %           27.2 %     0.8 pp          28.3 %          28.8 %    (0.5 )pp

Cash used for
investing activities     $     (39,247 )  $     (28,235 )    39.0 %   $    (76,102 )  $    (61,339 )    24.1 %
Cash provided by
financing activities             3,778            9,388     (59.8 )%        19,797          39,322     (49.7 )%

Cash provided by
operating activities     $      36,066    $      49,245     (26.8 )%  $     67,333    $     98,364     (31.5 )%
Capital expenditures            (3,518 )        (11,936 )   (70.5 )%       (10,286 )       (29,290 )   (64.9 )%
Free cash flow           $      32,548    $      37,309     (12.8 )%  $     57,047    $     69,074     (17.4 )%

NMF - not meaningful

pp - percentage points

We define free cash flow as cash provided by or used for operating activities less capital expenditures. We present free cash flow solely as supplemental disclosure to help investors better understand how much cash is available after we spend money to operate our business. Our management team uses free cash flow to evaluate the performance of our business. Free cash flow is not a measure of performance set forth under U.S. generally accepted accounting principles (GAAP). Also, the free cash flow definition we use may not be comparable to similarly titled measures used by other companies.

Because we've made several acquisitions in recent years, comparing our financial results from year to year is complex. To make it easier for investors to compare our results in different periods, we provide information on both revenue from acquisitions and organic revenue, which reflects our underlying business excluding revenue from acquisitions and the impact of foreign currency

translations. We include an acquired operation as part of our revenue from acquisitions for the first12 months after we complete the acquisition. After that, we include it as part of our organic revenue.

Consolidated organic revenue (revenue excluding acquisitions and the impact of foreign currency translations) is considered a non-GAAP financial measure. The definition of organic revenue we use may not be the same as similarly titled measures used by other companies. Organic revenue should not be considered an alternative to any measure of performance as promulgated under GAAP.

The table below shows the period in which we included each acquired operation in revenue from acquisitions.

                                                    2009 Revenue from
Acquisition                                         Acquisitions
Hemscott data, media, and investor relations Web    January 1 through January 8,
site businesses                                     2009
Financial Computer Support, Inc.                    January 1 through
                                                    September 1, 2009
Fundamental Data Limited                            January 1 through
                                                    September 30, 2009
10-K Wizard Technology, LLC                         January 1 through
                                                    September 30, 2009
Tenfore Systems Limited                             January 1 through
                                                    September 30, 2009
InvestData (Proprietary) Limited                    January 1 through
                                                    September 30, 2009
Global financial filings database business of       April 20 through
Global Reports LLC                                  September 30, 2009
Equity research and data business of C.P.M.S.       May 1 through September 30,
Computerized Portfolio Management Services Inc.     2009
Andex Associates, Inc.                              May 1 through September 30,
                                                    2009
Intech Pty Ltd                                      June 30 through
                                                    September 30, 2009
Morningstar Korea Co., Ltd.                         September 10 through
                                                    September 30, 2009

Consolidated Revenue

In the third quarter of 2009, our consolidated revenue decreased 4.3% to $120.1 million. Revenue for the first nine months of the year fell 7.0% to $356.4 million. The majority of the revenue decline in both the three- and nine-month periods was driven by our Investment Consulting business, which suffered because of the impact of two client non-renewals that occurred in the fourth quarter of 2008 and May 2009, respectively. The expiration of the Global Analyst Research Settlement term in July 2009 also contributed to the consolidated revenue decline in the quarter.

Revenue from acquisitions partially offset the revenue declines in both the quarter and year-to-date periods. Acquisitions contributed about 7.4 percentage points to our consolidated revenue growth in the quarter and 5.7 percentage points through the first nine months of 2009. The impact of foreign currency translations reduced revenue by about 1.6 percentage points in the quarter and 3.3 percentage points year to date. Currency movements had a negative effect in the quarter, as the U.S. dollar was stronger against most other major currencies compared with the prior-year period. The impact of currency movements in the quarter was not as significant as in the first half of the year, though, as most major currencies strengthened against the U.S. dollar in recent months.

International revenue continues to increase as a percentage of our consolidated revenue and rose about 13% in the third quarter, including about $8.0 million from acquisitions.

The table below reconciles consolidated revenue with organic revenue (revenue excluding acquisitions and the impact of foreign currency translations):