Thomson Reuters Corporation Q1 2009 Earnings Call Transcript

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Thomson Reuters Corporation (NYSE:TRI) Q1 2009 Earnings Call May 7, 2009 10:00 AM ET


Frank Golden - SVP of IR

Tom Glocer - CEO

Bob Daleo - CFO


Mark Braley - Deutsche Bank

Drew McReynolds - RBC Capital Markets

Paul Gooden - RBS

Paul Steep - Scotia capital

Sami Kassab - Exane BNP Paribas

Peter Appert - Piper Jaffray

Colin Tennant - Nomura

Vince Valentini - TD Newcrest

Patrick Wellington - Morgan Stanley

Jeffrey Fan - UBS Securities

Giasone Salati - Execution

Randal Rudniski - Credit Suisse


Ladies and gentlemen, thank you for standing by. Welcome to Thomson Reuters first-quarter 2009 Earnings Call. (Operator Instructions) As a reminder, this call is being recorded. I would now like to turn the conference over to our host, Mr. Frank Golden, Senior Vice President of Investor Relations. Please go ahead.

Frank Golden

Good morning and thank you for joining us. We will begin today with our CEO, Tom Glocer, who will be followed by Bob Daleo, our CFO. Following their presentations, we will open the call for questions. I would ask that you please limit yourself to one question each.

Today's presentation contains forward-looking statements. 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 is my pleasure to now introduce the Chief Executive Officer of Thomson Reuters, Tom Glocer.

Tom Glocer

Thank you, Frank, and thank you to all of you for joining us. I plan to cover two topics today. First, I'll discuss our results for the quarter; and second, I will provide an update on current market conditions.

I'm pleased to report that we are off to a good start for the year. Despite the continuing decline in the global economy and deep disruption in financial markets, our businesses continue to grow, gain share, and further solidify their competitive position.

We serve a wide variety of customers with a single, tested business model. It is the same in our Markets Division as in our Professional Division. We provide must have content and services to professionals on a recurring subscription basis, creating a business that is highly cash flow generative, and enabling us to maintain leading and scalable positions in our chosen markets.

Now, we have certainly been affected by the economic downturn as our rate of growth has slowed compared to last year. However, we are growing, and believe this will continue in 2009, even though we see few signs of any near-term recovery, other than a bit of a lighter feeling in market sentiment out there.

Let's look at our results for the first quarter. Keeping in mind that when we compare performance year-on-year, we look at revenue growth rates before currency, as we believe this provides the best basis to measure the performance of our business.

I'm pleased with the operating performance of the company for the first quarter, as total revenue rose 3%, with the Professional Division up 5% and the Markets Division still positive.

The resilient Professional Division performed well given a more challenging economic landscape, and a tough year-ago comps, when revenue increased 8% organically. Our Professional products are still in demand, as evidenced by growth of 7% in Healthcare & Science; 10% in Tax & Accounting; and 3% in Legal.

The performance in Legal is notable given the wave of law firm layoffs, a significant decline in ancillary revenues, and very weak demand for print. The Markets Division organic revenue was up four-tenths of 1% for the quarter due to continued retrenchment in the financial markets, and tough first quarter '08 comps, when we grew 9% organically.

The consolidated underlying profit margin was up 100 basis points, primarily due to favorable currency movement and the benefits of integration related savings. The Reuters integration and legacy efficiency programs continued to go very well, with run rate savings equal to $850 million at quarter end, on their way to the higher $1.4 billion target we announced in February.

Adjusted earnings per share for the quarter was $0.40 per share, compared to $0.44 per share a year ago, benefiting from higher underlying profits, offset by higher integration-related costs amounting to some $0.07 per share. Given the subscription nature of our business, and the visibility, but not the clairvoyance that this affords us, we are affirming our 2009 outlook.

For several quarters now, I've been highlighting the resilience of our Professional businesses. Our balanced portfolio and leading franchises enable us to continue to deliver above market growth.

In fact, online, software, and services, which are 80% of the Division's revenues, grew 7%, of which 4% was organic. Our deep understanding of markets has allowed us to defend and grow our core business, gain share, while tightly managing costs to drive profitability.

Yes, we're facing challenges. Legal has seen a decline in ancillary, Bar Review, and consulting related revenues, as well as a softening in print revenues; and attorneys are expecting 2009 to be a difficult year.

In fact, in a recent survey of major law firm partners, 60% expect 2009 billings to decrease. However, 63% expect a rebound in 2010, and the same percentage expects litigation work to increase over the next year. Despite these circumstances, Legal is continuing to grow and take share, thanks to its diverse portfolio of businesses and loyal customer base.

US Westlaw was up 6%. Our international legal businesses continued to do well, up 7%. FindLaw rose 17%, and sales to government, an increasingly important customer across our businesses was up 14% in Legal. So the picture is an appropriately balanced one for the legal world.

Our soon to be $1 billion Tax & Accounting business continues to take share and grow at above market rates, led by gains in core products, particularly software and services. First quarter revenue growth was 10%, 4% of which was organic, and it's accelerating.

Finally, Healthcare & Science is operating in growing markets and recorded organic growth of 7% for the quarter, driven by our core analytics business, which we call the Payer segment, and our scientific and scholarly research business, primarily the Web of Science.

Now, turning to the Markets Division, we saw very difficult trading conditions in the first quarter, just as we expected. Against a very strong first quarter '08 comparable, revenue was up slightly on a constant currency basis. Importantly, our recurring subscription revenues were up a healthy 2%, but were pulled down by a 12% decline in transactional revenue.

We focus on this because transaction revenues are traditionally quite volatile. They are quick to fall during difficult markets, but they bounce back rapidly as volumes increase. Q1 '08 was very strong for transactional volumes and revenues as well.

Now, our geographic sector and product diversity is paying off in enhanced market share and retained revenues. Revenue by geography showed both Asia and EMEA were positive in the first quarter, though the Americas did decline.

Both the Enterprise and Investment & Advisory segments continued to post revenue growth, as demand for data feeds and corporate and wealth management services continued. In Sales & Trading, Commodities & Energy and Tradeweb performed well.

Now, as we expected, net new sales were down in the first quarter, as cost cutting spread from sell-side to buy-side. Firms cut back operations or in some cases disappeared completely, and problems such as lack of deal flow in investment banking and the turbulence in Eastern European markets intensified.

So, where does this leave us? Well, 2009 will continue to be challenging, but we are managing the business accordingly. We are reallocating resources to higher growth areas, delivering on our aggressive integration plan, and focusing on our customers.

In this environment, we continue to invest for the future in products and platforms that will enable us to capture share in any market conditions, and grow strongly when markets improve.

So, before I turn things over to Bob Daleo, let me just say that we are off to a good start in 2009, and continue to be prudent yet confident about our prospects for the balance of the year. We are managing the firm by cutting all the nice to have projects and expenses, concentrating our investments on our customers and new products that will grow revenues, and focusing on cash generation, margin, and returns.

In 2010, will have a new flagship products in Legal and Markets, and the whole company is excited about their potential. Sure, the markets are tough right now, but our mission is clear. Our products, must-have; our business, highly cash generative; and our balance sheet, strong.

While our ancillary and consulting related revenues in Legal, and our transaction and ad revenues in Markets are down, our recurring subscription revenues have held up well across the company. In addition, we have the strong financial and operating benefits of the Reuters integration very much in our control to manage and deliver.

So all in all, I feel very good about where we are as a company, and that's probably a good note to turn it over to Bob.

Bob Daleo

Thank you Tom, and good morning and good afternoon everyone. Today, I will discuss the results for the first quarter, briefly provide an update on our integration initiatives, and provide some detail on our recent debt offering and our current capital structure.

While growth rates in the first quarter certainly slowed relative to last year, they continue to be positive despite the headwinds brought on by a slowing worldwide economy.

In the first quarter, 87% of our businesses recorded positive organic revenue growth, with 21% having grown 7% or more. These growth engines are more than offsetting declines in areas most directly impacted by the economic environment, such as equities and investment banking.

As Tom mentioned, geographic diversity, market diversity, and product diversity are all helping to sustain our growth, and give us confidence that we will achieve our 2009 objectives.

We continue to push forward and make progress with our integration and legacy savings programs, and are confident we will achieve our targeted savings of $1.4 billion.

Now let's turn to the results for the first quarter. During the quarter, the strengthening US dollar relative to last year had a negative impact on our reported revenue growth. However, the strengthening dollar had a favorable impact on margins, given that we have a large component of our cost base in sterling, against which the dollar saw significant appreciation.

Throughout today's presentation, I will speak to revenue before currency, for the reasons Tom previously mentioned. Reported revenues are highlighted on each of the slides.

Consolidated revenues for the first quarter were $3.1 billion, up 3%, 2% of which was organic and 1% came from acquisitions. Underlying operating profit was up 2%; and the corresponding margin increased 100 basis points, primarily due to the benefit of currency, but also with integration related savings, and tight cost controls measures across the company contributing.

Now, I would like to discuss the operating performance of the businesses. Professional Division revenues rose 5% in the quarter to $1.3 billion, 3% organic and 2% from acquisitions. Growth in the Division was driven by online, software, and service offerings, which represented 80% of the revenue and grew on average 4% organically.

Segment operating profit rose 2% and the margin increased 10 basis points over the prior period. This is primarily driven by the benefit of currency, offset by the impact of acquisitions and other one time costs, including technology related expenses.

Note that the first quarter is a relatively small quarter for the Professional Division, representing 23% of revenue and only 19% of segment operating profit in 2008. Let me also remind you that we continue to anticipate a modest decline in the Professional margins for the year as a result of investment and growth initiatives, revenue mix, and the dilutive impact of acquisitions.

Let me turn to the results by segment for the Professional Division. Legal revenues grew 3%, 2% organic, 1% from acquisition. As Tom mentioned, US Westlaw continued to perform well, up 6%, and continues to be the primary driver of growth.

However, we are seeing softness in areas that are more discretionary such as ancillary services, which were down 15% as law firms closely monitored their spend. This decline comes on the heels of a 13% revenue reduction in ancillary in 2008.

We continued to achieve good growth in FindLaw, which was up 17%, and our international businesses grew 7%. However, our legal education related revenue declined due to lower student enrollments for the winter bar exam. For law students, financing options have contracted for those whose firms do not pay the cost of bar exams and preparation courses. This is one factor having an impact on spending on our services.

In fact, the number of lenders to law school students has decreased from 19 to 4 due to the conditions in the financial markets. IP revenue showed modest growth, partly impacted by declines in trademark search volumes.

Lastly, print volumes grew 1%, primarily due to a small timing benefit; but returns and cancellations increased substantially. We expect print sales to be soft throughout the year due to its more discretionary nature, and the pressure legal librarians are under to reduce costs. This by the way is similar to the 2001 and 2003 downturn.

Operating profit for the quarter grew 3%. and the margin increased 110 basis points due to currency and several efficiency initiatives. Tax & Accounting's revenues grew 10%, of which 4% was organic. Organic growth was driven by continued strong performance in core product sets across the business.

Organic revenue did face a difficult first quarter of a year ago comparison, when it grew 13%, and some adverse timing items. We expect organic growth to accelerate for the remainder of the year.

Operating profit actually declined 8% for the quarter, and the corresponding margin decreased by 260 basis points. These anticipated declines are largely due to the dilutive impact of 2008 acquisitions. Let me remind you that Tax & Accounting is a very seasonal business, with more than 50% of its operating profit generated in the fourth quarter.

Healthcare & Science revenue grew 7%, all organic, driven by a 20% increase in our Payer decision-support segment as corporations continued to utilize our service as a means to help reduce healthcare costs, detect fraud, and improve the quality and efficiency of care. It's also aided by double-digit growth from the Web of Science product.

Operating profit increased 4% for the quarter and the margin was essentially flat. Flow-through on the solid revenue growth was offset by technology costs related to a data center move. Healthcare & Science is also a seasonal business, with less than 20% of its operating income generated in the first quarter last year.

Now this slide helps to illustrate the trends I described on the previous slide regarding the Legal segment. Working from bottom to top, online subscription-based businesses, which are largely nondiscretionary, maintained healthy growth at 7%, compared to 10% of a year ago. This is important given that online is predominantly Westlaw, which represents 50% of the Legal segment's portfolio.

The slowing growth rate for the Legal segment versus the prior year is in part attributable to this 15% decline in ancillary revenues, which are primarily discretionary, as well as the softening growth in software and services.

Let me point out that ancillary revenues are not headcount driven, and are impacted more by the macroeconomic or market specific conditions. They are what I would call coincident indicators, certainly first to decline and first to recover. So as the economy improves and litigation and bankruptcy work ramps up again, which they will, ancillary revenues will likely ramp up quickly, leading to faster growth in balance.

Software and Services grew 3% versus 10% last year, and include client development, which is FindLaw; enterprise software; bar review courses; trademark searches; and consulting services. While FindLaw continued its growth, all these other software and services were essentially flat.

Lastly, print and CD revenues did grow slightly in the first quarter of both 2008 and 2009; but as we previously mentioned, we do not expect to sustain this growth for the full year.

Now the Markets Division revenues were up slightly against very tough year ago comparables. Since Tom has already discussed the results at the divisional level, I will go straight to the underlying business unit results in just a moment.

Operating profit for the Division was $337 million, essentially unchanged from last year, while margins increased by 120 basis points primarily due to currency-related benefits, but also including savings from the integration program and tight cost controls.

Reflected in this performance, it is important to point note, is that the Markets Division's ability to expand on a 600 basis point margin improvement from last year's first quarter, despite a slowdown in top line growth.

Now, let's review the performance of the Markets Division's four business segments. Sales & Trading revenue declined 2% organically due to the twin headwinds of desktop exposure and tough comparables for foreign exchange transaction revenues.

Despite these challenges, we saw good growth in Tradeweb due to strong volumes in US Treasuries, and expansion into new asset classes. Commodities & Energy grew 10% driven by customer demand for our transaction products and sophisticated information products.

Investment & Advisory grew 1%. Our buy-side oriented businesses are being impacted by redemptions and lower fee income, which has resulted in customers aggressively cutting costs. Despite this, we continue to see strong growth in our Corporate business, which benefited from geographic expansion and cross selling.

The Wealth Management business achieved excellent double digit revenue growth in Asia, and overall, the Investment Management business grew 2% in the quarter.

Enterprise continued to deliver very strong growth, up 9% in the quarter. Our customers come to us to help them reduce costs via automation, respond to regulatory requirements for pricing transparency, and valuation services, and drive returns from high speed machine based trading.

This demand has driven very strong growth for Enterprise information, although Omgeo, our Trade Processing joint venture, saw lower transaction revenues in the quarter.

Finally, Media's revenue declined 8 % organically. Our agency business was broadly stable. However, consistent with the current environment, we saw marked declines in our advertising driven businesses, which serve the consumer and professional space. These advertising driven businesses are small relative to our operations as a whole.

I want to examine more closely our transaction revenues, which account for about 10% of divisional revenues, and are derived from four main sources. FX transactions on our matching platform, which is part of Sales & Trading; fixed income on Tradeweb, which is also part of Sales & Trading; BETA, our brokerage processing business, which is part of Investment & Advisory; and Omgeo, our trade processing joint venture , which is part of Enterprise.

As mentioned earlier, transaction revenues in the first quarter declined 12%. This decline was due in large measure to the tough comps of a year ago, when foreign exchange revenues were up 22%.

Given the current markets, we will likely continue to face some tough transaction related comparables in the second and third quarters, but they ease considerably in the fourth quarter.

Encouraging relative to last quarter of 2008, transaction revenues in this quarter were more stable. Transactions are an important part of our Markets Division strategy. Similar to what I discussed about Legal's ancillary revenues, Markets' transactional revenues are more quickly impacted, both positively and negatively, by macroeconomic changes and market specific developments such as market volatility and interest rate spreads. They are not headcount driven.

Transaction revenues growth will resume as market conditions recover, and will have an immediate beneficial impact on our top line. Our transactions capability also adds value to desktop products, as clients can analyze investment opportunities, locate liquidity, and trade, what we call, view and do.

Now, free cash flow, which we believe is a critical measure for any company, free cash flow for the quarter was $51 million, and this compares with $155 million for the standalone Thomson in the first quarter of 2008.

I will remind you, 2008 is not pro forma in free cash flow, and these headline numbers mask a very strong performance. As you can see, net cash from operations before interest rose 66% or $161 million to over $400 million. Operations cash, I should point out, also reflects within the Markets Division, the typical and rather significant use of cash in the legacy Reuters business. This is roughly about $100 million.

Net cash interest saw a swing of $194 million, reflecting our positive net cash position in 2008, when we had the cash from the sale of our Learning business, and versus the higher more consistent current debt level resulting from the Reuters transaction.

Lastly, capital expenditures increased $85 million and reflect investments we continue to make in new platforms both in Legal and Markets, as well as other growth and product development initiatives across the company. This increased level of spending is consistent with our CapEx guidance of 8.5% to 9% of revenue for 2009.

We believe 2009 will peak for the year for capital spending, and expect that over time, we will settle between our long-term guidance of 7% to 8% of revenue. All of these factors continue to be indicative of the underlying strength and cash generative nature of our business, which allows us to fund important investments that position us for growth on the upswing of the cycle.

Let me turn to synergy savings at our integration programs. As Tom mentioned, the integration programs are ahead of our original schedule, and we continue to be extremely pleased with the progress we are making across the organization.

Current run rate savings totaling $850 million as of March 31 are $100 million higher than at the end of 2008. P&L integration costs were $88 million for the quarter, primarily related to severance and technology costs.

One year into the combination, we have essentially completed the first wave of integration initiatives, including real estate integration, the rationalization of redundant positions; and the harmonization of infrastructure tools to support the business. We remain confident that we will hit our year-end target of $975 million and our total program goal of $1.4 billion by 2011.

Before I conclude, let me spend a moment updating you on our recently completed debt offering. In March, we issued the equivalent of $600 million in Canada. This is roughly C$750 million; of seven year bonds at a rate of under 7%.

We were again proactive, taking advantage of an attractive window in debt markets and essentially pre-funding our 2009 debt redemption requirements. Issuing early will result in slightly higher carry costs, which we expect to have a dilutive effect of about $0.02 per share this year. However this cost, in our judgment, is well worth the certainty and liquidity that the pre-funding afforded us.

Our net debt at the end of the quarter was $6.9 billion, and we remain in line with our target of a 2 times net debt to EBITDA ratio. In summary, we are pleased with the continued growth of the business, and we are delivering on our plan despite the difficult economic environment.

We are managing the business accordingly, given the environment, and have the benefit of a significant integration program to sustain our margins in these downtimes while offering significant future operating leverage.

Like all companies, we continue to face challenges. We are encountering some challenging dynamics in our growth, but we continue to grow. Our performance through the first quarter is in line with our expectations, enabling us to affirm our guidance for the full year.

With that, let me turn it over to Frank for the questions-and-answers.

Frank Golden

Operator, we would like to take the first question, please.

Question-and-Answer Session


(Operator Instructions) We have a question from the line of Mark Braley with Deutsche Bank.

Mark Braley - Deutsche Bank

I just want to clarify on net new sales. You said net new sales were down in the Markets business. Do you mean they were positive or negative? The second question is also on Markets; there is still good growth in Asia in particular. I'm wondering is that the impact effectively of the growth you were getting in the first half of last year. Can you give us a feel for whether the Asian business sequentially is still growing, because anecdotally, a lot of the headcount reduction in the bulge bracket have actually been in precisely that area in the last two or three months.

Tom Glocer

First quarter net new sales were into negative territory Mark, so they are below zero, just as we expected. In terms of Asia, the 5% growth overall that Markets had, we continue to see balance and resiliency in Asia. So, the growth rate has come down year-on-year versus what different markets were growing at, but we think Asia can remain positive through the year. There are healthy pockets as well as more stagnant ones, so it's really the picture across the world; more of a balance of different trends, but still positive.


We have a question from the line of Drew McReynolds, RBC Capital Markets.

Drew McReynolds - RBC Capital Markets

Thanks very much and good morning. I have one question with two parts to it, just on the Legal business. I just want to get your comments on, I guess, a trend that some are seeing out there with respect to legal firms moving from having both Westlaw and LexisNexis, and consolidating that into one vendor. Then just as a separate Legal question, I not sure you've done this before, what percentage of Legal revenues are ancillary?

Tom Glocer

Yes. I'll give Bob time to see if we can give you a number on the ancillary. You know, there are certainly firms that rely on only one. We think where they do we tend to come out ahead on that. However, by and large, all the middle to larger size firms have both. It's really more a function of which system is the sort of go-to center of desk, and which one is kept for more specialized or backup.

We think generally if you look at our Westlaw trend, which is the most closely correlated, let's say, to the electronic research function which was up 6% in the quarter, despite, as Bob mentioned, other Legal components and the more volatile ones weakening. So we think we are holding up quite well. That is a good growth percentage at this stage of the market and I think would compare favorably to any competitor. The question on the ancillary?

Bob Daleo

It's only about 1% to 2% of the overall revenues for Legal, but when even that 1% or 2% is declining, where it cumulatively over this 12 month cycle it declined 25%, it has a big impact on relative growth rates. Like I said, in the quarter, it declined 15%, but it is a relatively small part of the overall business.


We have a question from the line of Paul Gooden with RBS.

Paul Gooden - RBS

A question on new product launches. Could you size for us the extra investment you are putting into new launches this year? Just give us a sense of, do you see that investment level as a permanent level of investment or do you see the levels of investment coming down over coming years?

Bob Daleo

Let me tackle that for you, Paul. Here is the way I would think about what we are spending in terms on products investment. If you look at the level of our capital expenditures, which we said are 8% or 9% of total revenues, the vast majority of that is product development. In that, in this particular year, we had carved out and said we had a couple hundred million dollars that related to integration or the integration product launches related to our new common platform in Legal, in Markets, as well as some additional spending in Legal to launch some improved interfaces for West.

In addition to that, I would say that a significant portion of the expense that we're incurring in the integration, which is $500 million, a significant portion of that is also driving, I would say, growth in efficiency. A portion of that as well is was also product development. So in broad terms, it would be easy for me to say that expanding our new product development this year is probably somewhere between $500 million to $700 million.

Paul Gooden - RBS

Just thinking in terms the process of doing these new flagship launches that you are planning for end of this year, beginning of next year, I just wondered, is all of that in nonrecurring or is it kind of like a permanent level of investment?

Bob Daleo

I think in terms of our common platform, the last time we did something like this in the financial space was Thomson ONE, which was 10 years ago. I expect that a significant portion of the investment that we are making in common platform will be long-lived, because that will represent the core of how we deliver, and how we manage our data and deliver our products.

To give you an example of that on the Legal side. On the Legal side, we invested a couple of hundred million dollars in building the Novus platform. It replaced the Westlaw platform which was built sometime in the mid-80s. So these core investments, the nature of them are really, I wouldn't say nothing in business is one time, but they certainly are long-lived. The biggest cost that we will have going forward after we make these are really routine maintenance. So I think that I would classify them as almost one time.


We have a question from the line of Paul Steep, Scotia capital.

Paul Steep - Scotia capital

I guess we will throw this to Bob or maybe to Tom. When we think about the synergies and the pacing you are doing right now, maybe just talk about the major activities that have pulled it forward a little bit, at least ahead of our expectations, and what the opportunity is to maybe move forward on that. The sort of second half of that would be, on the product side relating to common platform, just any updates on your launch timing and thoughts there around the BETA. Thanks.

Tom Glocer

Bob and I will split this. I'll start with the second part. No real update on common platform, sometimes called Project Utah. It's end of the year launch. As I have said, I think at least the last couple of quarters' calls; you really shouldn't expect any material revenues until 2010 given the rollout cycle at our major customers. However, the product looks great, and we're all very excited about it.

In terms of amounts, I'll turn over to Bob. But in the integration in general, just the shape of it, we did a ton of work in the first year. 12,000 office moves, structures, roadmaps, service centers, a ton of work. SAP platform rolled across the firm. We're now into sort of the second and third waves, which are by their very nature longer.

So, things like consolidating data centers, migrating clients off of platforms, which doesn't mean to say that we can't continue to sort of outpace targets. That is sort of what we live for around here. I don't think you should expect that you're going to see the progression of $500 million savings when we announced the deal; $750 million when we closed last year; $1 billion in February. I wouldn't continue that trend.

Bob Daleo

I agree entirely with what Tom has said. One way to think about this Paul is that, in these first phases, as we have upped the opportunity, I would say the increase in the opportunity has come from understanding of what I will call our Phase 1, as Tom has (inaudible) the low-hanging fruit, and the very rapid integration, which is why you've seen not only an increase in the target but an acceleration of those savings.

The next part of Phase 1 is core to the real efficiency of the business going forward from a platform perspective. So, therefore we're going to be deliberate in how we approach these, and measured in how we roll them out. So, therefore, those would be more timed.

Having said that, we would love to up it again, and we'll certainly look for opportunities to accelerate where we can, but not at the expense of the ultimate success of the business.


We have a question from the line of Sami Kassab, Exane BNP Paribas.

Sami Kassab - Exane BNP Paribas

Good morning, gentlemen. One question on the Legal Division. Given that you expect print and CD revenues to decline in the remainder of the year, at least given the seasonality of the print revenues, do you expect some organic revenue growth this year in the Legal Division or do you think that it will be difficult to get to that number?

Tom Glocer

I don't think your line was breaking up but I think I got the gist of the point, which was, do we have a forecast specifically for organic growth in Legal for rest of the year, taking into account the weakness we've mentioned in print? The answer is, we internally do. I really don't want to go into any more depth than the guidance which we are affirming generally, and from which you can gather certainly my view that Legal will be positive for the year, but I don't want to break down sort of business by business, organic versus not et cetera.

Sami Kassab - Exane BNP Paribas

In the Enterprise Division within Thomson Reuters Markets, were the renewals of the contracts in line with your expectations or as one of your competitors mentioned, somewhat below their own expectations?

Tom Glocer

Here I think it's important to remember that we use the word Enterprise and Markets often to mean two things. Somewhat related but important to be clear on. The Enterprise Division is the part of Markets that sells the heavy duty data feeds, the infrastructure and the risk management systems. We also perhaps unhelpfully use the term Enterprise agreements or have in the past to refer to a sort of comprehensive contract that we will enter into with our biggest clients that serve sort of 'soup to nuts' the need of the firm, which includes many of the Enterprise Division offerings, but also includes I/B/E/S, First Call, Datastream, Buy-side components, transaction systems, et cetera.

So, I'll answer it both ways. Within Enterprise, the best sign of that is the 9% increase for that unit. That reflects healthy demand for the products and good renewal rates as well. With respect to the e-use of Enterprise agreements, we have seen actually a very good trend even at some of our very largest accounts, ones that have been in the news, let's say, for stress testing renewal. That doesn't mean that overall we are not seeing weakness here and there in Markets, but I've been pleased with that trend.


We have a question from the line of Peter Appert, Piper Jaffray.

Peter Appert - Piper Jaffray

Tom or Bob, can you give us any color on sort of how the pace of business progressed through the quarter in terms of whether you saw any acceleration or deceleration in terms of year-to-year revenue growth rates, likewise on the pace of renewal activity?

Tom Glocer

I think at this point, it is just a little bit too granular. I typically look at average monthly activity over a quarter, or better, over six months. There is a sawtooth movement. Things move around. Obviously, over the last several weeks I think it's fair to say that sentiment is certainly improving in the equity markets. We steer the Company on a longer-term basis. Right? We have set prudent cost budgets. We are not dependent on an early recovery. If it comes, great. That might mean some over-performance.

However, what we are really doing is focusing on the big investments and ringfencing those, and being tight on cost, so that if this is an L-shaped rather than a V or U-shaped recession, we are well placed, safety first, and building the things we know will drive value over the longer term.

Peter Appert - Piper Jaffray

I interpret that as no meaningful improvement or deterioration in business as the quarter progressed?

Tom Glocer

Yes. I'm now thinking about the month-to-month data I've seen. I don't see a trend either way in that; and I'm not sure I would expect to yet.


We have a question from the line of Colin Tennant, Nomura.

Colin Tennant - Nomura

My question was just on visibility. You've reiterated your expectation of positive revenue for the Group for the year. I just wondered, maybe speaking across the divisions, where you have the greatest visibility at this point in the year.

Tom Glocer

I stressed that we weren't clairvoyant. There is no guarantee in life, certainly not in the markets that we are operating in. About the transaction volumes, I think this time we've gone out of our way to explain the extent to which they can either increase Markets' revenues overall or pull them down, as they did in the first quarter. So obviously, nobody tries to predict what, let's say, fourth-quarter transaction volumes will look like.

We look at our longer-term trends. We look at sales activity, and putting all of that together, we are comfortable that the firm as a whole should grow. However, as I mentioned to Peter, we are not trying to do a one week or one month mark-to-market. That feels right to us. It is our best forward visibility, but this is a very difficult environment to be making any forward predictions, and we are doing our best to give you as much transparency as we have.


We have a question from the line of Vince Valentini with TD Newcrest.

Vince Valentini - TD Newcrest

The question is on the margins within the Markets Division. You noted they were up year-over-year, but I think you would agree with me that the bulk of the merger synergies are buried in that Division. So, if you back those out, even though you had a slight increase in revenues, you would have seen underlying margins drop. I am ballparking sort of 300 basis points.

So two questions slinging out of that that may help explain it. The foreign exchange obviously had a very big impact on the revenues. It was about 7.5% impact. So can you talk about how much impact FX would have had on EBITDA or on margins? Then secondly, the Transaction revenues, can you give us any color on what margins are like for those types of revenues? Are they significantly higher or lower than your average within the Markets division? Thanks.

Bob Daleo

I will answer that second question first, because it does have an impact. Transaction revenues have very high margins to them, because if you just think about them, they are over a platform and the incremental service costs are very low. So a decline transaction revenues has a significant impact,

In terms of the foreign exchange, foreign exchange was a significant portion of the improvement, probably 80% of it in total. It didn't have an impact on the absolute dollar amount, but the margin itself because of the impact of revenues. I think the way to think about this Vince is that, if we didn't have an integration program going, we would have been attacking other costs to try to drive our cost base down in that business, and across all of our businesses, because of the toughening environment.

What we said from the very beginning was that, it's a little bit unfair to pull out what we are saving in integration, because that is how we are driving to make the business more efficient, and that is the major program that we have. Certainly there are other things that we are doing in Markets across all of our businesses to cut our costs with travel and discretionary expenditures and so on, but short of that, you would have to do a major restructuring to cover that kind of a profit decline from the revenue impact of those.

So, I think it's important you think of it as integral and not separate from it. Also, think about it this way. As I said in the presentation, that these are permanent costs we are removing. We are making the business permanently more efficient, so on the upside of this we will get the operating leverage out of these investments and get the margin improvement that we expect to get. Right now, this integration program is elegantly serving us to protect our bottom line and maintain our cash growth in a challenging market.


We have a question from the line of Patrick Wellington with Morgan Stanley.

Patrick Wellington - Morgan Stanley

Let's try an old one. Tom, just looking at Markets growth, would you agree that we have seen a bit more redundancy activity in Q1, so we might expect a more negative Q2 organic revenue number? Then as comps ease in the second half and maybe the redundancies level off, that life will get better in the second half of the year. Is that roughly how we should look at the shape of the business?

Tom Glocer

This is an old saw for us. You know, it's gotten to the point in Markets because of the really broad base of different markets that we address, that there always was certainly a relationship of headcount to organic revenue growth. However, that's broken down quite significantly, so I can't actually anymore tie the two together. One obviously because the non-headcount related revenues are now a majority of the revenues of Markets.

Even when I look at what was the performance of standalone Reuters in the years leading up to the acquisition by Thomson, terminal quarter for old Reuters was 10% organic growth, but the prior three years saw terminal numbers, therefore headcount numbers come down. So that link is less and less germane. That is one reason why Bob and I really look at terminal numbers.

There is certainly a systemic relationship between cost cutting activities at firms, partly reflected in their reduction in heads, and the overall environment for amount spent on outside parties like us, but the only last trend I would mention, and it certainly had been true over time at Morgan Stanley as well, is that, sometimes when heads go, let's say out of large IT departments, firms are asking themselves increasingly the question, should we use our own internal resources to do things that arguably the Thomson Reuters and Bloombergs' of the world can do at greater scale? Or rather, should we save our own IT folks to do the really proprietary close-in things?

There are a couple of examples I can think of it over the last six months where we have benefited, where there is a headcount reduction, it's coming out of the IT operations at the firm, and they've decided in effect to outsource, to rely on us to do things they did before. So for a variety of those reasons, I'll agree with you that headcount is still germane to the question; but there is enough noise and swings and roundabouts that I can't draw a linear relationship. Sorry, my math skills aren't better.


Next question comes from the line of Jeffrey Fan, UBS Securities.

Jeffrey Fan - UBS Securities

I want to ask about just the overall trends on your organic revenue growth. When you look at 2008, I think through quarter-to-quarter, we saw 100 basis points or maybe 200 basis points decline. In fact, in Q4 it was flat to Q3. Now this quarter, we saw about 300 basis points of sequential deceleration from Q4 to Q1, yet you guys are still reaffirming that the organic revenue growth for the year is going to be positive.

So, it certainly does imply that you expect the deceleration to be less as you go through the year. Maybe, Tom or Bob, can you guys just touch on areas where you feel a lot of confidence that the deceleration would be less or even see some revenue acceleration through the year?

I think one area you talked about was Tax & Accounting. You said that is going to accelerate, but are there other areas that you think will go through improvements in the year? Thanks.

Bob Daleo

Just to point out the math here as you look at it. When you look at the comparative of quarter-to-quarter, you are talking about the prior year. You have to remember that that prior year first quarter was the high watermark for 2008 with overall 8% organic growth rate. So, the fact that we were able to grow over the highest quarter is certainly indicative of an underlying strength in the business.

If you looked at, say Q4 to Q1, you would see recurring revenues in both our two big businesses, meaning Markets and Legal, meaning Westlaw, were growing at virtually the same rates. If you look more broadly at what happened in the quarter relative to a quarter a year ago, it was primarily in what I would call transactional, ancillary, and business-related revenue.

So for example, in the Legal business, the biggest decline didn't occur in the core Legal revenue. It occurred in ancillary revenues. It occurred in BAR/BRI revenues. It occurred in what we call the business of law revenues, which are much more sensitive to short-term cycle. So, my view is, you can't simply rely on that math, although I understand that it's certainly compelling to look at it that way. You have to really get below it. I will turn it over to Tom to talk about the trends.

Tom Glocer

I was just going to give a little data to make Bob's point. So let's look at Markets, which is an area obviously of focus. In Q4, if we want to look at sequential quarters to get a sense for the slope of the curve. In Q4 we had 4% growth, and that reads on first quarter 0.4%, which would suggest a fairly steep drop, but if you actually go one layer under the cover, which is as Bob suggests the way we look at it, in Q4, the actual recurring subscription number in Markets was 2.7% growth. The additional 1.3% was pretty much driven by transactions, which were up well over 20% year-on-year.

In the first quarter, the 0.4% we've just reported, actually the recurring subscriptions are 2% and transactions down 12%; pull you down to 0.4%. So, if I now try and plot a sequential quarter-on-quarter curve, it is 2.7%, reads on 2%, and a shallower slope. Ditto in Legal in the example Bob just gave. So, don't take any of this to mean that ancillary revenue or consulting revenue in Legal isn't important to us. It is. Or that we don't care about transactions in Markets. We very much do, and it's very strategic.

It's just that we are pleased that the large engine, which in both cases is this recurring subscription model we keep on going on about, that has shown a shallower trend in the recession, and therefore gives us confidence, and some of the visibility. Going back to Colin's question and Peter's question about how do we still feel positive for the year? No guarantees.

Jeffrey Fan - UBS Securities

Just maybe one quick follow-up. Recently there was an article quoting Bloomberg about them growing in growing in Q4, hiring people et cetera. So maybe, they are implying that they are growing market share. So, maybe I will give you guys a chance to respond if you will.

Tom Glocer

It's a great company, and customers deserve a choice. I think the number I recall out of it least the article I saw in the FT was, Peter Grauer mentioned that they had seen a 2.5% decrease in terminal numbers, which back to Patrick's comment, terminal numbers in Bloomberg very much are revenues given their model. That would imply if that were an annual rate of something like close to a 10% decline, steeper than at least what we are seeing in the business.

It's difficult to sort of shadowbox with market share data via press articles. They are a great company. They do well. They deserve lots of credit, and Bob and I, the whole company's focused on making Thomson Reuters the absolute best in Markets and Legal and in all of our other businesses.


We have a question from the line of Giasone Salati, Execution.

Giasone Salati - Execution

I have two questions please. The first one on Legal. I think I've heard you saying that the ancillary revenues are the first ones to decline when the cycle goes down. Q1 was basically the first bad quarter, and we will have to go through maybe 18 months of further slowdown in Legal? The second one is on margins. If revenues, including acquisitions were not to be positive for 2009, do you think you would still push the business to maintain the similar margins to 2008? Or you would continue investing in new products and development for the long-term?

Tom Glocer

I'm going to do Bob a favor by answering the 2010 margin question. On my way to work today, among other things, my Financial Times told me that giving guidance is dead. I think we do a pretty good job, more than I see a lot of others doing, giving you what we have for the current year. Obviously, it is so related to the issue of revenue that we are just not going to give a 2010 revenue number at the end of the first quarter of 2009.

As to your first question, Giasone, about ancillary, I wouldn't make that conclusion. The ancillary revenue does come off when trends are down and does come back up, but most of the data that I've seen in the legal market suggests that litigation is now picking up, folks expect 2010 to be a significantly better year in Legal. So, I wouldn't imagine that we are at the beginning of a deep thaw in the Legal business.

Bob Daleo

I would add that, looking at the market, the legal market in the United States, and what happened in the first quarter was rather unique. In the first quarter, particularly in large law, there was a significant reaction to ultimately the performance of 2008, where they were not nearly as profitable as they had expected and took significant actions in that quarter to right-size themselves. Part of that resulted in kind of a freezing of the legal market in terms of expenditures and how they reacted, and we saw a precipitous decline.

As I mentioned earlier, we had seen ancillary declining all year last year throughout each quarter, but it wasn't of a significant nature to warrant any commentary. We saw this precipitous decline in this quarter in reaction to that current environment, just as we saw in a number of other aspects of our business of law revenues.

Subsequently, we've seen a bit of a thawing in that, in the legal marketplace early in April and now coming into May. There haven't been any major announcements of layoffs by law firms of any note really in the second quarter. So I think it's more related to that than anything else.

Giasone Salati - Execution

Come back to the second question. In terms of margins, I'm not really after guidance. I'm trying to understand what is your strategic view? If revenues were to decline faster than you expected two months ago than you may expect now, would you defend margins? Would you cut further costs or would you prefer to keep investing for the long run?

Tom Glocer

We would continue the strategy we have. Those things that we think really make a difference in a down period, and by implication that means, in terms of relative market share and competitive position we continue to invest in, and those things which are more at the discretionary end, there are always investments that you would make in a stronger market and make a lot of sense, but you could phase, those we would look at again.

We are solving for a sort of mid to longer term, what makes this an exceptional company with good, profitable growth. Therefore, we're not going to jeopardize those core investments. If you told me that for 20 years the world would be in a negative tailspin, and no one would buy anything, we would think about it. If you tell me that it could be an 18 month rather than a 12 month, and therefore an L-shaped recovery, we think we have the right strategy for that.

Frank Golden

Operator, we would like to take one final question, please.


We have a question from the line of Randal Rudniski with Credit Suisse.

Randal Rudniski - Credit Suisse

I think it is a question for Bob. Bob, when you were discussing free cash flow generation in the quarter, you kind of threw out there that the Markets' legacy business had a use of cash of $100 million in the quarter. I just wanted to confirm that is what you said. Then also, I wanted to get context behind that statement. Are you really trying to say that as you unwind those businesses there is $100 million of upside to free cash on a quarterly basis?

Bob Daleo

No, Randy. That wasn't the intent of my comment. First of all, if you looked at the legacy Reuters' business, historically that business, just the nature of its cycle, would actually consume cash in the first quarter, and that has been in the neighborhood historically of about $100 million. I meant that that was embedded in that comparative looking at 2008, which didn't have the Reuters' business in it.

No, we are not looking at unwinding those businesses, although I would say that the overall Markets Division actually did contribute some cash, a little bit. They weren't a consumer of cash, but in comparison to the prior year when we didn't have Reuters, it certainly is a fair observation. So, it is again just a point of comparative, that's all.

Frank Golden

Okay. Thanks very much. That concludes our call. We would like to thank you all for joining us this morning.

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