Thomson Reuters Corporation
Q4 2010 Earnings Call Transcript

Published: 10 Feb 2011

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Thomson Reuters Full Year and Fourth Quarter 2010 Earnings Call. [Operator Instructions] Now I turn the conference over to Mr. Frank Golden, Senior Vice President, Investor Relations. Please go ahead.

[Frank Golden:]

Good morning, and thank you for joining as we report our fourth quarter and our full year 2010 results. We'll begin today with Thomson Reuters CEO Tom Glocer, who will be followed by our CFO, Bob Daleo. Following Tom and Bob's presentations, we'll open the call for questions and I ask that you please limit yourself to one question each so we can get to as many as possible. Now throughout today's presentation, keep in mind that when we compare performance period on period, we look at revenue growth rates before currency as we believe this provides the best basis to measure the underlying performance of the business. The company announced today its intention to sell its BAR/BRI Legal Education business and its Scandinavian Legal and Tax Accounting business, both of which are expected to close by midyear. Today's presentation and discussion includes the results of these disposals within ongoing businesses for comparability purposes since we owned the businesses for the entire reporting period. Operating results, which exclude the results for these two businesses, are reflected in the supplemental schedule noted as Appendix A in today's release that I would draw your attention to. The company's 2011 outlook is based on the results reflected in Appendix A, which again exclude these disposals. Lastly, on our website, you'll find some supplemental information that provides additional details on the quarterly and full year 2010 results, excluding disposals. Now today's presentation contains forward-looking statements and actual results may differ materially due to a number of risks and uncertainties discussed in reports and filings that we provide to regulatory agencies. You can access these documents on our website or by contacting our Investor Relations department. It's now my pleasure to introduce the Chief Executive Officer of Thomson Reuters, Tom Glocer.

[Thomas Glocer:]

Thank you, Frank. And thank you, all, for joining us this morning. I plan to cover three topics today. First, I'll discuss our full year 2010 results and selected highlights for the year. Second, I'll discuss our priorities as we enter 2011. And lastly, I'll discuss our outlook for 2011 as we look forward to accelerating revenue growth and profitability. Let me begin by saying that 2010 was a good transition year for us in the sense that we achieved what we set out to accomplish. But it is by no means indicative of either our growth ambitions or what we're capable of. In 2010, the company returned to growth helped by new products that are gaining momentum and markets that are improving. We released great new flagship products including WestlawNext, Thomson Reuters Eikon and Thomson Reuters Elektron, which will accelerate our growth in 2011 and beyond. And we delivered on our efficiency initiatives which, along with higher revenue growth, will contribute to improving margins and growing free cash flow. So let's take a look at the numbers. 2010 revenues came in a little bit stronger than we originally anticipated and we ended the year with good momentum and growth of 4% in the fourth quarter. I'd characterize the current economic environment for us as one of rising business optimism, although that optimism and the opportunity for growth is unevenly distributed across the globe. We're encouraged by what we're seeing in the business

[Robert Daleo:]

Thank you, Tom, and good day, everyone. I'm going to cover the following topics with you

[Frank Golden:]

Thanks very much, Bob. Before we get started with Q&A, let me direct you to two additional supplemental schedules that we have on our website, one of which is the additional financial metrics for 2011, including our estimates for depreciation and amortization, interest expense and tax rate, as Bob has touched on, and we also provide you with a pie chart that reflects revenue and expenses by major currency for 2010, which I know is of interest to many of you. So with that, let me open the call for questions, please.

[Operator:]

[Operator Instructions] Our first question is from Drew McReynolds with RBC Capital Markets.

[Drew McReynolds:]

My one question will, I guess, focus on margins and margins outlook. Just a couple of sub-questions in that margin question. First, in terms of the acquisition impact, Bob, you talked in the past about the initial accounting impact of making some of these acquisitions versus just the underlying lower margins that these businesses have. Can you kind of break out the two and whether you get a little catch-up in margin from an accounting perspective? And then secondly, perhaps, you can comment on the timing of when we should see the Eikon efficiencies come through. And then last part of margins. On the 2011 outlook, I just want to make sure I have all the ins and outs right, an acquisition impact of negative 30 basis points is in there. On a year-over-year basis, the divestiture is another negative 50 basis points. And then higher amortization, another negative 70 basis points. And those three items, presumably, are factored into that, correct?

[Robert Daleo:]

Let me answer the last one first. Yes, all those items are factored into the guidance that we've provided you. And when you say the -- and the other thing I would remind you is that guidance is off of the ongoing business, which would be excluding the announced disposal that we just made. So those would have an impact in lowering the margin for the company and the division. But on a comparable basis, the year-to-year increase would be the same. In terms of the acquisitions impact, there are a couple things that I think you have to speak to -- a lot depends on the nature of the acquisitions. Some of them that are easy folding where there's content to them, they become accretive immediately. But there are a number of acquisitions that we have made which -- some of which I have outlined in my talk which really are so foundational to the long-term growth of the Legal segment, Professional segment in particular. And also by the way, I'd say markets slow where we made that number that these actually will take a while before they get up to the kind of margins that are in the core business. So it's a couple of things. First of all, these businesses on a stand-alone basis generally have lower margins than we do. I mean, there are very few companies that can rival the margins that we have to begin with, right? So they have lower margins to begin with. Second of all, you do have some accounting base that goes into that because some of these are software businesses. And when you acquire a software business, you have to push out the purchase price and amortize that over of -- our amortization is pretty, I think, conservative. We amortize over three years, generally speaking. And then third is, in some of these businesses, we're actually making investments in them to position them for the growth. Because one of the reasons that these businesses -- we acquire them and they want to be acquired -- is because they don't have the resource or capability. So building up the right kind of sales organization, a great example is the acquisition in Brazil. What did we do, the very first thing in an ongoing business, we invested in launching an online product. So those things we're driving and as a consequence, many times when we report acquisition revenues as part of our growth, they tend not only not to -- some of them actually are dilutive from a loss perspective. But all of them, all of them are dilutive from a margin perspective even if without a loss. So that's a challenge. But I think that a history in Thomson Reuters of investing strategically for the longer-term. And our objective here, and the guidance we've given is, it's our responsibility. We have to grow over these. We have to find a way to generate profits and margin improvement in our core businesses to help fund the development for the future. And that's what 2011 represents. That's the balance we're trying to seek here that Tom talked about.

[Thomas Glocer:]

I can jump in, Drew, and answer, I guess, your second question about Eikon and its effect on margins. We will begin in 2011 this year to see the beneficial effect of Eikon rolling out on the cost side as well. But there is no sort of one large step function this year. It sort of rolls out ratably, and as we simplify the architecture, deploy less CapEx as well. The really larger impact comes in future years and that's part of the story of how Markets expects to get their margin up to the low- to mid-20s as well.

[Operator:]

We have a question from Paul Steep with Scotia Capital.

[Paul Steep:]

Tom, maybe we'll pick one for you, just in a completely different direction. Get your feedback on what impact might be. Lots of exchange mergers happening out there. Obviously, their data supplier. Is there any competitive pressure or threat on other enterprise or an opportunity out of a bunch of the combinations that look to be happening out there?

[Thomas Glocer:]

I was teasing the head of the London Stock Exchange yesterday that they missed our dual-listed London-Toronto structure so much that they've gone to recreate it by merging the exchanges. [indiscernible] was slightly amused by that. Look, I think it's a very -- if you understand the economics of exchanges, the consolidation wave is very logical. They have been faced with fragmentation of liquidity as rival trading venues like that, et cetera, get set up. And therefore, they don't get enough scale on their platform and these are very, very highly operationally-geared enterprises. So it makes sense to get the maximum amount of trading, and at a low cost per trade. In terms of the impact on our business, unless the entire world moved to one single trading venue, which I think is very unlikely, it's largely neutral, where we have complex relationships with all the exchanges, very good ones in fact, and we remain the largest partner of the exchanges in distributing their information out to end users. But it's very interesting to watch and I think we'll see a bit more consolidation as well.

[Operator:]

We have a question from Michael Meltz with JPMorgan.

[David Lewis:]

This is David Lewis for Michael Meltz. Bob, what's the implied organic x currency revenue growth expectation in the mid-single-digit guidance?

[Robert Daleo:]

First of all, all of our guidance is excluding currency. And second of all, we provide guidance for the -- since we don't really want to share that at this point, we always talk about the overall revenue growth. And I'd like to leave it at that. Although, I would say that the vast preponderance of that growth is organic. But there is some acquisition growth in there. Obviously the carryover from the prior year as well.

[Operator:]

We have a question from Phillip Huang with UBS.

[Phillip Huang:]

I want to go back to the Legal side of the business. Looks like the U.S. Legal market finally saw, I guess, litigation activities return to growth in Q4 and the trends into the new year seem pretty encouraging. But Legal firms continue to, I guess, cut costs, although it's still at a moderating pace. Can you maybe give us a sense to what extent your business is already benefiting from from that recovery in the litigation activities? And based on your current visibility, do you expect Legal growth to really accelerate now as we finally start to see some signs of cyclical recovery in the Legal Markets ? And what is the net effect on margins after, I guess, taking into consideration the offsetting dilutive impact of acquisitions and investments?

[Thomas Glocer:]

Got it. So the short answer is, yes. Fourth quarter net sales in the Legal segment were the strongest they've been in several years, certainly back to pre-crisis times. With a bit more color, anecdotally, the pipelines are filling up nicely at firms. Just think about the exchange mergers we're talking about, the private equity activity, the capital markets and IPO calendar. And the good news, and you flagged it in your comment, is litigation, which we were surprised actually in the downturn, that litigation didn't trend up as much as had typically occurred. Litigation is coming back, perhaps as companies are willing to fund their general counsels to pursue a bit more of it. Certainly, lot of white-collar work, all the insider trading defense work that's going on at the moment in New York and in London. So Legal is looking strong with momentum going into the year. In terms of the rest of your question around margin, I think Bob was very specific about guiding you to what the expectation should be, short term, in Legal as a result of the mix effect. But we really do think we've hit the bottom in terms of Legal margin, that they'll be improving slowly from here on out, and really it's down to mix effect. I think we'll see greater stability in print and that will be helpful. But I don't want to really go beyond the guidance Bob's already given.

[Phillip Huang:]

And maybe just a quick clarification on your integration program. Where is the higher savings coming from? Are you -- I understand the program ends at the end of the year, but are you accelerating the shutdown of some legacy infrastructure? Or was it that you're seeing more opportunities for savings than before? And can we see, potentially, some lumpiness in the Markets revenues as a result of revenue dis-synergies from this?

[Thomas Glocer:]

Not really. Bob will join me on this one. I mean, you're looking at an extra $100 million on top of a $1.6 million program and more of it is really down to, as we've gotten a couple of years into the third year at this, wherever people see opportunity, they come back and say, "Hey, you know actually, I could do a little bit more." We're getting greater efficiency than we thought in data centers. Or maybe I need fewer people than I originally thought to do this process because we can automate it. It's going to cost me a little bit of money, Bob, but I've got a really good, in fact, on this case in essence, a return of -- give me $75 million more this year, I can give you $100 million this year and $100 million thereafter. So the good news is, it's not coming from any one big, lumpy thing. There are, as I mentioned earlier in my comments, in particular in Markets, as you get out a couple of years and we really have migration over to Eikon and the two-platform strategy at full-bore, there are additional savings out there which will all just show up in margin improvement over the years.

[Operator:]

We have a question from Patrick Wellington with Morgan Stanley.

[Patrick Wellington:]

A question really about the underlying potential in the markets of both Legal and indeed your Markets division, and to what extent your optimism about 2011 relates to the Markets themselves? And to what extent it relates to the impact of the new products? And if you could give us any detail on how much incremental revenue you think the new products may have contributed. That's all, that would be very helpful. And then Tom, I have to say that after three years or so of integration expenses and processes at Thomson Reuters and a decade of integration at Reuters with over 1 billion pounds of cost, not all of it yours, that's quite a lot of integration, and yet after for the 13 years, it all comes to end on December 31? I mean, how can one be so confident? To what extent do you have a self-denying ordinance that the integration doesn't start up a year or two later? I mean, can you give us your thoughts around that?

[Thomas Glocer:]

Okay, I'll jump on the latter. It's a Wellington-worthy question, from a close watcher for years. Look, I think of it this way, which is, in the end, cost isn't something that sort of happens to us by cosmic accident. It's something that's in our control. One of the challenges when you run a company like ours is there are lots of attractive investment opportunities, that's a good thing. There have also been lots of efficiency opportunities where we knew we could invest some money and get a return. I think what's been unusual about the last three years is that, while we were making, we think sensible and high returning investments in efficiency, you also had in parallel, obviously, huge financial crisis and knock-on recession. And, therefore, the fruits of restructuring have, much of it has gone to in effect, replacing revenue. And if, and as we get into a more normalized revenue environment, and I'll leave to Bob to comment about on your first question, then we're going to see the fruits of that amount of restructuring. And finally, the question of how, at the end of the year, do we magically turn it on or turn it off? The answer is, it doesn't all magically go away, but we essentially consume it into the ongoing margin of the business. So there will always be, and that's a good thing, opportunities for us to invest. What we'll do is balance them against letting through to the bottom line continued margin investment. And because we expect revenues to be growing, we think we can do that, show margin improvement and continue to essentially self-finance what we've done in larger lumps at various times over the last few years. Bob, you want to hit the first part?

[Robert Daleo:]

Before I do, if you could just indulge me on the second part of that question, just to answer from my financial discipline perspective. When we embarked on this integration program three years ago, we felt it would take three years and we developed very specific targets and very specific programs. And that line of sight of these expenditures tie back to that original thought process. And so we haven't just magically said December 31. We've said, look, and I have to say since that time, while we may have added a few things around the edges, we've been very true to the execution of those core things that we identified previously. Patrick, to your point, businesses are always in the process of integrating or doing things like that. And our businesses, I'm sure, will continue to do that. I hope they continue to do that after December 31, 2011. But they'll be in their own P&Ls and we'll be part of our ongoing operations as it needs to be. So I do think that there is an absolute logic to this as opposed to just an automatic -- by edict at the end of the year. In terms of the revenue environment, I think that we have seen improving environments, as Tom has said so well, it's been a little bit inconsistent across some of our markets. And I think that as a consequence, I think that our guidance for overall revenue growth is certainly assured of what we'd like to see as long-term potential is tempered by that kind of mixed environment. In terms of new products, I think that the revenues that we get from these, particularly, I know you're talking about the two big ones here, WestlawNext and Eikon in particular. Well, clearly in the case of Eikon, we have a very specific strategy of doing platform replacement. And as a consequence, we want our customers to move to this far more robust and better product so there is no revenue gain to be had. We have sold a number of new customers as a result of that and that revenue is certainly nice, but not significant in the overall scheme of the business. And in the terms of WestlawNext, we have seen improvements. We've talked about, for example, a small law firm saw 4% revenue growth. I think that we've been very successful with WestlawNext there. But again, as it relates to the larger Westlaw business, the core, large-to-medium law firm, it's a platform play that will allow us to get better growth over time. So I wouldn't expect there'd be very much revenue from either of these businesses or the products reflected in the growth rate of the overall business of the company. So I hope I answered your question.

[Operator:]

We; have a question; from Brian Karimzad from Goldman Sachs.

[Brian Karimzad:]

I just want to dig in a little bit on the I&A business within Markets. I know Eikon formally launched last fall, but at least on the I&A side, that product hasn't fully rolled out. Can you walk us through one, objectively, where you think the current offering is falling short competitively? And then two, what you think is going to be addressed once Eikon is fully rolled out? And then third, when do you think this year it will hit the market?

[Thomas Glocer:]

Sure, Brian. Tom, I'll take that one. There's a short answer to this which is we're just not doing well enough in investment management right now. I'll come to the Eikon bit in a second, but from my point of view, one of the nice things about having a real handle across our various businesses and geographies are that we've got some really good businesses, including good businesses in markets like enterprise, like Commodities & Energy, et cetera. And within then I&A group, our corporate's business, our investment banking product is excellent. But Investment Management is a competitive gap for us right now. Eikon first release came out in the fall and I use, I think you use as well, it's a great product, was never intended out of the box to be the sort of, specific fit for purpose of workflow portfolio manager or buy sider. It is more, in its first instance, more of the treasury S & T world that and I think you begin to see the positive effects in our S & T numbers. Now good news is, we're not just sitting around in I&A. Devin Wenig has a really good plan around it, focused on it. So during the course of 2011, what you'll see is a rolling series of content and functionality additions through the year, and that's the benefit of having the Eikon platform, which means we don't have to do these large, big bang releases and go to every site. Number two, he's already put through a comprehensive reorganization of our frontline, which is intended to, in essence, increase the specialization so that really, buy side, knowledgeable sales folks and trainers are in those institutions. And that occurred October into November. And then there are a series of other sort of tactical plans in place. It seems to beginning to bear fruit. I think Bob may have mentioned that the sales picture in Investment Management is slowly begun to improve. But I want to be really straight about this. This is not going to be an overnight, January, suddenly an overwhelming competitive advantage has occurred. This is probably our weakest unit right now, and it's getting a lot of attention. But I'm confident that we can fix it and strategically, we think it's an important place for us to play. Otherwise, we wouldn't be investing in it.

[Operator:]

We have a question from Tim Casey with BMO.

[Tim Casey:]

Can you talk a little bit more about your confidence on Legal margins? It seems some of the -- you rolled through some very specific issues on mix and whatnot. But one thing you didn't talk about is competition, and you didn't talk about price. Are those dynamics factoring in at all? And can you just reiterate or flesh out why you're confident you can get margins back to where they once were? And second, on Eikon, I understand it's not a revenue play, but how should we think about it from a cost side? When should we, as investors, think about margin -- tangible and noticeable margin improvements on the Markets group, as you do consolidate the platforms? I don't know how specific you can get in terms of time or quantity. But is there any direction you can give us there?

[Thomas Glocer:]

Well let me start. Again, simply, the direction is up. First, although, I totally understood the direction of your question, I would feel bad if I didn't jump in and say Eikon is very much about revenue, about increasing customer satisfaction and about really putting a great product in front of our customers that only gets better. Bob correctly referred to the fact that we're not -- we didn't put a gating function on the rollout, so we're not asking people to step up to an immediate price increase, because we want to move quickly in migration. But we are selling lots of new users as part of the migration program and that will be positive for our revenue and for our revenue growth. Now I know turning now to the cost side on Eikon and margin more generally in markets, you will see a very appreciable increase this year, 2011, in Markets margins. Some of that is a result of stopping the dual running of systems. We've already obsoleted quite a few in 2010. Ongoing efficiency in markets. Some efficiency coming from the front-line reorganization as well that I mentioned. But I suppose the good news from the point of view of how good a business can markets become, is that it is going to take several years to roll out all of Eikon and there are large savings that come really back-end loaded when you really do finally turn off systems. And that is to come and that's in years '12 and '13. On Legal margins, maybe Bob wants to comment as well. I'm not sure I can come at it too many more ways other than -- as we roll out electronic platforms, the marginal cost of the end user is pretty low. And so as we scale up and get more people on electronic systems, let's take Brazil since Bob mentioned it, there's 600,000 lawyers in Brazil. It's a tremendous market we will have totally to our own, no one else will have an electronic platform. The first thousand users will be reasonably low margin because there's a lot of money associated with the start up. Over time, that margin builds nicely. In the short-term, 2011, an important factor is going to be what is the attrition rate on print because we won't have yet that many people on the scale, the electronic platforms surround the world. But the good news there is, print attrition seems to have calmed down and it's just about at historical levels. Bob, do you want to comment anymore?

[Robert Daleo:]

I would add that I have tremendous confidence in Legal and Professional seeing significant improvement in their margins over the next several years. I think that if you put it into context and look at the 2010 erosion, it was about a basis point that was this mix. A large part of that had to do with print. And the business has done a very good job, as you might expect of driving different efficiencies. In terms of pricing, yes, we've had some challenges of pricing in 2010. Our customers had a very tough year, 2009 and 2010. And it's been challenging across virtually all of our markets in terms of pricing. But we have gotten some price increase. And so the good news is, as Tom reported, we started to see a rebound in the Legal marketplace, in terms of our customers' revenue potential increasing as M&A and bankruptcy work increases. And in that environment, with our product and we have this -- there's no way to say it, except we put a lot of blue water between ourselves and our competitors in terms of the capabilities of our product. We really do have the ability to distinguish ourselves and over time, make sure that we do the recoup of that pricing capability. So when you look at the erosion that's happened because of the investments in our -- in these new products like WestlawNext, when you look at the erosion from the acquisition I've talked about, those are all going to come back. And just to give you a little context here, the Legal margins right before the economic downturn in 2008 reached a high watermark of 32.8%, for probably five years before that, they were between the high-20s, maybe to 30%. Now I don't know whether we'll get back to the 32.8%, but I know that we'll get to 30% and maybe the other side of 30% on it. So you're not talking about -- and I think that difference will be more about the components of revenue when you look at the overall business and size of it because, like I said, we'll have businesses across the globe that will have good margins, 25%, 28% margins but they won't be 30%. And so that's what will cause that over time. And I have absolute confidence in our ability to deliver on that over the term we're talking about. And that's why we feel confident about the margin that Tom talked about for the longer term for us as a company. It's key to the performance, as you might expect, with Legal and Markets and also our other remaining business.

[Operator:]

The last question will come from Mark Braley with Deutsche Bank.

[Mark Braley:]

In terms of organic growth for next year, do you want to give us a feel whether the net sales trends indicate you would expect that to be better in Markets or in Legal? And then my second half of the question, is more of an observation, is you've delivered $1.4 million of integration savings, which must largely have come in the Markets business and the business is making around $1.4 billion of operating profit. Obviously there's been some organic revenue decline, some reinvestment. Sort of how confident should we feel about the next $300 million of savings actually dropping through to margin in the markets business?

[Thomas Glocer:]

I think you should be confident. I mean, in a way this is all wrapped up into our outlook for the year, so I've said this, I think, on last year's call and it remains true which is, if our $13 billion revenue company is flat or growing zero to 1%, absent very large restructuring programs, it's difficult to improve margins. But as soon as we get the machine running 3% plus, we can bring attractive profits down to the bottom line and you get a nice scissors effect. It's always hard before the dawn to imagine that the sun will come up, but we see that playing through our net sales numbers. Therefore, it gives us confidence that we're going to achieve the sort of escape velocity of growth, which for us is over 3%, to have it drop down to that $300 million to the bottom line. In terms of the relative organic growth rates of Markets and Legal, they're both positive, within the mid-single-digit total organic growth. I don't want to sort of pick hairs between the one and the other. It's not chalk and cheese between them. But we think on balance, both businesses should be growing at about the overall company level as we head through the year. But we've got a lot of work to do before we get there.

[Mark Braley:]

One final one, do you see anything of Bloomberg lure in your markets?

[Thomas Glocer:]

They're obviously out there. What their current offering seems to be more geared to the sort of current awareness and BGov part of the offerings, so partly an answer to the question that came before, are we seeing pricing pressures in the market from competitors. Bob is right, that the stronger pressure isn't competitive, it's from the budgets of our clients themselves. But Bloomberg seems to be focused on a longer-term strategy here, and we're ready for them.

[Frank Golden:]

Mark's question will conclude the call. I'd like to thank you all for joining us today. And please feel free to contact us if you have any follow up questions. Have a good day.

[Operator:]

Ladies and gentlemen, this conference will be available for replay after 11