Thomson Reuters Corporation (TRI) Earnings Call Transcript & Summary

We've seen, of course, last year was the first time pre-COVID. But for those of you who don't know, my name is Manav Patnaik. I'm Barclays' business and information services analyst. We have a great lineup here, of course, but happy to get this started with Thomson Reuters. We have Steve Hasker, who's the CEO here with us; and Matt Keen as well, who's Head of International. So really happy to have both of you guys here. Appreciate it.

Thanks, Manav.

Technically, this is Thomson Reuters' second time at the conference, but the last time, it was under the now Refinitiv business. And this is also Steve's second time at the conference, but he was at another company the last time he came. So it's kind of the first time to see Steve and the newco, if you call it, here. So I think it's very timely, a lot of new stuff has gone on here.

So Steve, maybe just get kick-started, a lot has changed, and you basically call the whole change the Change Program.

Yes.

So in that context, just to set the stage for the audience, just to walk through what all has changed, what the new portfolio looks like, just to set the stage and what we can talk about.

Yes. So for those of you who have followed us for a while, in 2018, we divested the Financial & Risk business. That became Refinitiv. That's now a big part of London Stock Exchange Group. So that's no longer part of Thomson Reuters. Thomson Reuters is now 3 -- the Big 3 sort of franchises in the main. And that's our Legal business, Legal Professionals; Tax & Accounting; and Corporates. And so we focus on 3 different areas. One is content-driven software for lawyers, whether that's in-house firms or general counsels; content-driven software technology for tax and accounting professionals and the same for risk professionals. We also have a legacy print business, and we have, of course, the Reuters News Agency. So that's sort of the business today. I joined the company early 2020, and we quickly launched what we call the Change Program. We finished it last year. We spent just shy of [ $600 million in onetime ] investment in driving $600 million in costs out of the business but, more importantly, equipping ourselves to now accelerate our growth. So we guided 5.5% to 6% organic growth this year. And we think we're well-placed to increase that over the next few years. The Change Program was really focused on an end-to-end modernization of the tech stack, including a migration to the cloud. It was focused on building a digital and omnichannel front end and a set of data and analytics capabilities to support our technology sales. And so we're happy with the results. It was a very, very broad and deep transformation done during an accelerated period of time. And we really sort of made the most of COVID in a sense, both in design and in program and also taking advantage of the fact that our customers are increasingly open to spending more on content-driven technology and less on real estate, amongst other things, and also are using self-service and omnichannel tools more and more. So as we sit here today, we've completed that program. We've still got a number of work streams to sort of -- that will be ongoing. But by and large, it's complete, and we think we're equipped to now, in sort of '24, '25, '26, improve our growth rate going forward.

And just I think there were 2 pieces of Change Program, the kind of the shared services stand-up, which I think is pretty straightforward. But to your point on modernizing the tech stack, where are we in that? You're never obviously fully modernized, right? You have to keep investing. So what's the next step, next phase from where you are today?

Yes. I mean the longest pole in the tent was migrating our major products into the cloud. And so by the end of this year, we'll have 90% of all our revenues available in the cloud, which will enable us to do a lot more in the AI space. It will enable us to do a lot more in terms of product integration and innovation. So we've set an aspiration to be the most innovative company in the business information services context, which is we think a pretty high bar given some of the folks you've got here today. But I would sort of modestly say that we're well on track to get there with recent launches of Westlaw Precision and Practical Law Dynamic, a new version of CLEAR coming out. So there's a whole series of big product launches. But more importantly, our ability to add features and functionality on a monthly and soon weekly basis to our major product groups is really where we're focused.

Got it. And we're definitely going to talk on AI and data in a second. But before that, just to get kind of the macro updates out of the way, perhaps if you -- however way you want to cut it, whether it's by legal and tax separately, but you talked about lengthening sales cycle, some end market pressures. Can you just elaborate a bit more on that?

Yes. So as you know, Manav, we've got -- close to 80% of our business is recurring revenues, multiyear contracts. So we're about as stable as you can be. We have some revenue streams that are a bit more volatile like print, like the events and advertising side of Reuters and the transaction revenues, but it's by far and away in the minority. So when we stepped up and announced the Change Program, we gave 3 years of guidance, '21, '22, '23. And our '23 guidance was 5.5% organic revenue growth and a 39 -- 38% to 40% margin. We're guiding 5.5% to 6% on the top line and a 39% EBITDA margin. So we've been able to sort of maintain that trajectory as we envisaged it when inflation was 1.3%. And I think that's a testament to the strength of the business. The thing we've talked about for a few quarters now which doesn't alter our guidance but nevertheless we're watching with some vigilance is a lengthening of the sales cycles, particularly in Corporates. So what we're not seeing is deals fall out of the pipeline. And these are big sort of software installations, corporate tax, Direct Tax, Indirect Tax, products like HighQ into the general counsel's office in corporations. And we're seeing some of those move from 1 quarter to the next as there's a little bit more caution amongst the corporate customer base, but again, not enough to knock us off our guidance or cause us any sort of undue concern.

And you go around, obviously, meeting a lot of your clients and CEOs. So is there any nuances within the legal and the tax side of the equation that you foresee in terms of continued pressures?

No, I mean I think -- certainly, as I talk to managing partners of law firms, those that have big corporate practices with sort of debt and equity issuance more or less off the table and the M&A volumes down, the corporate practices have definitely softened. But a product like Westlaw is driven by the litigation environment, which, if anything, has ticked up a little bit. So the bigger diversified firms are doing okay. They're not going to have the kind of year they had in 2021, but they're doing okay. Those that are sort of very heavily focused toward corporates are starting to feel it a bit more to sort of the corporate finance side of things. But again, our product portfolio is diversified. So it's not really flowing through as it was.

Yes. And you have a big Government business, too.

We do.

Any changes there at all?

Yes. So the Government business has been -- over the last sort of 3 to 4 years has been one of the attractive parts of our portfolio, and it was growing at double digits. We saw that soften in the second half of last year, particularly in the U.S. with some of the budgetary issues. So a number of the big law enforcement agencies and other government agencies pulled back a little bit in terms of their spending against the major RFPs. And that hit us and hit everybody else. We're starting to see that open back up again. I think it will take a while to get back to its sort of full strength. But I was in D.C. last week, and I think there are real sort of signs of optimism that the purse strings are starting to be loosened a little bit. And we're optimistic that we'll see a return to that double-digit growth toward the back end of this year.

Got it. And then one last one in terms of regional differences. The legal business is very much a U.S.-skewed business. But since we are in the U.K., EU area, any different dynamics on the macros perhaps you want to call out there?

Well, I mean our legal business in the U.K. and in Europe is more focused on the Corporates side, so there's a little bit of an impact there. But there's also more willingness to adopt new technologies and take a transformation. So on the HighQ and on some of the other software solutions we've got, actually, you sort of see that playing out all the time. So no -- there's a different balance, but overall, still quite strong.

Got it.

I think there's a -- for us that -- your comment, Manav, about the Government business, within the Government business is a product called CLEAR, which is a highly differentiated data set that's used by government agencies, particularly law enforcement and increasingly by corporates in terms of those with e-commerce businesses and ones that want sort of advanced transaction monitoring. We see an opportunity to take that asset and our sort of brand and reputation for handling highly sensitive information and building a bigger Risk, Fraud & Compliance business internationally. And that will be a truly global opportunity for us. So unlike legal, which tends to be a little focused on sort of common law countries like the U.S., U.K., Australia, New Zealand, Canada, the Risk, Fraud & Compliance opportunity is a global one, just as the Tax & Accounting one.

Got it. Okay. Talking about differentiated data, let's move to kind of the AI, the hot topic out there in the market so far. So the view obviously is OpenAI, ChatGPT is going to do everything. Next year, there will be a deepfake version of me doing the fireside chat with you up here. But -- so I guess 2 parts. One, on the call last week, you guys had a slide -- a couple of slides on your AI journey. So maybe for the benefit of the audience that was not listening, maybe you could just refresh us on the AI journey and what's going on at Thomson Reuters today.

Yes. So I'd make a couple of points just to reiterate and expand a bit on what I said last week during our earnings call. The first is we have been at the forefront of machine learning and AI for 30 years. So Thomson Reuters had a version, had a highly successful search algorithm in the mid-'90s attached to the Westlaw franchise, and that was something that was developed in-house. We have been applying increasing amounts of AI ever since then. And so the latest version of Westlaw, which is Westlaw Precision that we've been selling since September last year, and we've sold over -- had over 1,400 sales, and that continues to accelerate. That has -- the attorney editors who did the work had access to an enormous amount of machine learning. And so as we think about generative AI and the opportunities that it affords us, this is not new news for us. We have hundreds of experts in AI who have turned their mind to generative AI. So that's the first thing. The second thing is across our different franchises, legal, tax and risk, customers are increasingly interested in working with us to understand how can you take your existing products and how much better do they get with generative AI. So what we're not hearing from them is, are we going to -- we can just go and take an alternative. And so let me just double-click on legal for a second. So the idea that in a high-stakes litigation, which is where Westlaw operates, that a litigator is going to be able to survive a hallucination by a large language model is not going to happen. The stakes are extraordinarily high, firstly. Secondly, our customers have access to client proprietary data and, in some cases, PII. And that information cannot be just thrown into a large language model, right? The stakes are too high, the risks are too high from that happening that they'll expose their clients in some way that they really can't afford to do. So they're coming to us and saying, look, we realized through the pandemic we spent too much on real estate. And in some cases, we're too highly dependent on hiring the best talent and putting them through an apprenticeship. We need to spend more on technology. So what have you got, TR? And there's only a couple of players that they truly trust, and we're one of them. So we see it as an opportunity to take our leadership position in research through products like Westlaw Precision and Practical Law Dynamic and extend that into workflow software in meaningful ways. And we think that generative AI -- and we'll do this in partnership. We don't have to do it all by ourselves. Generative will enable us to accelerate that integration and, in doing so, enable us to help transform the legal profession to be more dependent on technology, to be more efficient and effective and more accurate. And so for us, we look at this as a pretty exciting opportunity.

Got it. And I think on the deck, you had this commitment of $100 million plus of AI spend every year. Can you just give us some context on that $100 million as a percentage or size of your overall kind of tech spend? And $100 million feels a lot, but maybe it's not a lot either, but just some context there.

Yes. I mean it's certainly something that we can absorb within our sort of existing financial envelope. It is a step-up from where we are today, and we think that's the right thing to do. And we certainly have line of sight under David Wong's leadership into exactly the kinds of things we want to do in legal, in tax and in risk. And it's worth mentioning that over and above this, we have about $10 billion in dry powder. And so thinking about the balance between inorganic activity and returning that to shareholders, we've obviously done a big buyback and announced a return of capital, which we'll execute in July. And so we've got quite a lot of room to move in terms of pursuing acquisitions in the pipeline to build on the last 3 or 4 acquisitions, which have all been in the AI area. So if you look at Pondera that we bought in the sort of Risk, Fraud & Compliance space, you look at ThoughtTrace, which is a legal document analysis, AI-driven, and SurePrep, which is in Tax & Accounting in terms of document ingestion, all of those have been AI-dependent, and I would say the next 3 or 4 will be AI-driven as well. So look [Audio Gap] and which is sort of the CapEx and OpEx that we will dedicate out of ordinary operations and $10 billion in dry capital. We're pretty excited about the value we can add to our customers through a sort of hopefully skillful combination of those 2 things.

Got it. And AI has been around for some time. And I think the view has always been, it should clearly be a cost advantage at least and a potential revenue advantage. But now generative AI seems to make the case that it should be both for sure, like there's no debate around it. How do you think about the cost versus revenue? And if you have any examples on that.

Yes. I mean certainly, as we think about our own cost base, the work we did to create Westlaw Precision, so we've had hundreds of reference attorney or attorney editors who have been working now for decades in adding value to the case law information. We added another couple of hundred to develop Westlaw Precision. Now had we not had machine learning, we would have had to add more than 1,000. So just in terms of the cost of developing that product and the network effects of applying machine learning over a period of time, that has been a significant advantage, firstly. Secondly, as we think about bringing out the next version of Westlaw with AI and the next version of Practical Law and, maybe more importantly, seamlessly integrating those into an environment in which a lawyer is creating a work product with document, AI-driven document analysis, we think that's a revenue opportunity. And we'll take our time to sort of figure out how to price that and what the value is to our customers. And we're always focused on making sure that there's a disproportionate amount of value to those customers. But certainly, our experience with Westlaw, WestlawNext, Westlaw Edge, Westlaw Precision is that where we add sufficient value and we increase the accuracy and save time for customers, they're prepared to pay for it, and they'll pay us that premium. And if you look at the sort of growth of our Westlaw franchise, you see that in spades.

Got it. Just to wrap this conversation up, just to focus on the data that you have, okay, let me just play devil's advocate for a bit. I understand the lead you have in the technology, but let's just say it's all going to be off the shelf. So the differentiation is going to come down to access to data. So can you give us some perspective on -- you talked about CLEAR, you mentioned briefly earlier, but just some perspective maybe by legal, tax, corporate if that's the way, where your data comes from, how much is within walled gardens, proprietary. You talked about client data is not going to be just given to large language models. So just some flavor there because that's the big debate here.

Yes. So in each of those franchises, there's an element of sort of what I would loosely call publicly available data, whether that's case law, whether that's the tax accounting regulations or whether that's sort of information on individuals that's in the public domain. But that's a tiny fraction of the value. So the value comes from the editorial enhancements, in the annotations, the KeyCite numbering system and the sort of classification and codification in the legal area. The value comes in Practical Law, which is hundreds of attorney editors developing the very, very best clauses and constantly refining those with the help of machine learning. In Tax & Accounting, it really is client proprietary, right? This is -- you run the UltraTax or the ONESOURCE software and producing tax returns. That is proprietary to an individual client. And so there's nothing sort of that's necessarily public other than the application of the relevant laws to that tax return. And then the magic of CLEAR is the fact that it aggregates thousands of data sets to provide a point of view on a particular individual, which is invaluable to law enforcement, invaluable to an e-commerce provider. So I think there's a sort of a narrative, which is well, a lot of this data is publicly available. It is a fraction of the value that's created. And these values could be created over a long period of time, firstly. Secondly, the magic comes when we combine our data with clients' proprietary data. And as I said before, this is highly sensitive information. So the idea that that's just going to get thrown into large language models and be freely available is very, very difficult to see, right? That's in no one's interest.

Got it.