EUR 850.00 For Business Accounts Only

Morningstar | Thomson Reuters' Improving Growth Partly Aided By Regulatory and Compliance Offerings

Narrow-moat Thomson Reuters has begun its transformation from primarily being a provider of financial data into a firm focused on tax and legal software and data. As such, investors shouldn't take too much away from the company's third-quarter reported results, where the firm carved out its financial business (selling 55% of its financial & risk business to Blackstone in late August), but should focus more on individual segment performance and ongoing corporate costs. We believe Thomson's divestiture will prove to be accretive, with the level of accretion driven in part by corporate cost reductions.

For the third quarter, revenue from continuing operations was $1.3 billion, an increase of around 2% from the previous year, but down 1.4% sequentially. While Thomson Reuters lost $0.08 per share during the period, it shouldn’t alarm investors since corporate costs have surged as the company seeks to rebuild the capabilities its losing with the carve-out. For the quarter, Thomson had $137 million in total corporate expenses including depreciation. Over the long run, management is looking to decrease corporate expenses to around $50 million per quarter. We’ll be making some small adjustment to our model to reflect near-term performance, but do not anticipate any material changes to our fair value estimate of $46 per share or narrow moat rating for the firm.

With Thomson Reuters, our biggest focus is whether the company can reinvigorate growth in its legal business. In recent years, Thomson’s legal segment has generated minimal growth. This past quarter, legal revenue increased 3% from the previous year. Some of the acceleration was attributable to the inclusion of Thomson’s regulatory and compliance products, which are growing at faster rates than the remaining portions of the legal business, in the mix. Global solution, which accounts for 41% of legal revenue, grew revenue 9% year over year while online legal information saw top-line growth of just 2%.

During the third quarter, Thomson Reuters' legal division generated operating margins of 37%, about a 300-basis point decline from the year-ago period. This signals to us the company is continuing to investment in legal offerings. At the start of the third quarter, management announced the launch of WestLaw Edge with much fanfare stating that "[w]ith the launch of WestLaw Edge, we have once again revolutionized legal research." While we were impressed by management's commentary, it may be premature to call it a success, as WestLaw Edge's uptake hasn't been revolutionary based on the average Google Trend score for the word "WestLaw" of 77.7 during the third quarter (which was only modestly better than the 73.5 score that the same phrase had in the year ago period). During the company's third-quarter conference call, management seemed to suggest that WestLaw's growth would be slow and steady, which we feel is a more likely outcome as opposed to the heightened optimism we saw when the product was launched in early July. We’ll need to see an improvement in Google Trends before we can say the firm is gaining traction.