Report
Colin Plunkett
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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.
Underlying
Thomson Reuters

Thomson Reuters provides source of news and information. Co. operates three business: Financial & Risk, a provider of news, information and analytics, enabling transactions and connecting communities of trading, investment, financial and corporate professionals, as well as a provider of regulatory and operational risk management solutions; Legal, a provider of online and print information, decision tools, software and services that support legal, investigation, business and government professionals; and Tax & Accounting, a provider of integrated tax compliance and accounting information, software and services for professionals in accounting firms, corporations, law firms and government.

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
Colin Plunkett

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