Thomson Reuters Corporation (TRI) Earnings Call Transcript & Summary

I'm Heather Balsky, BofA's Business and Information Services analyst, and I'm pleased to be here with the management team from Thomson Reuters. I've got Steve Hasker, President and CEO; and Mike Eastwood, Chief Financial Officer. Thank you both for joining us.

So you hosted your Investor Day 2 days ago, so congratulations on that. I'm sure it was a lot of work that went into it. It was clear that your team is confident that Big 3 and total organic sales can accelerate over the next 3 years. This is partly a gen AI story, but it's also about all the other investments and changes you've made over the last 3 years to the organization. So actually, let's start there. Walk us through the drivers of the acceleration and what you're most excited about outside of gen AI.

Yes. Well, it all starts with the end markets. Heather, that we serve, so legal professionals; tax and accounting professionals; risk, fraud and compliance professionals. And those are very stable, growing markets where we enjoy leading positions in sort of deeply embedded products and software. So the sort of starting point for all of this is a really attractive one. The second sort of, I'd say, source of growth relative to the last few years and the periods before that has been all the hard work we did through our Change Program, which was a 2-and-a-bit-year program. We spent about $600 million modernizing our tech stack, migrating to the cloud, cleaning up our org and getting the right talent in the right places and doing an end-to-end revamp of our customer experience. And so all of those things we see they're starting to result in higher NPS, and we're looking for it to transfer into higher retention and higher NRR. So there's a sort of a fundamental health and wellness that we -- program that we've gone -- we've undertaken, and we're starting to see the results. And we're optimistic that, that will accelerate. So with that sort of new operating company structure and orientation toward content-driven technology in mind, along comes gen AI. And we're a company that put a functioning search algorithm on the front of Westlaw 30 years ago. And we've been investing heavily over a 30-year period in advanced machine learning. So gen AI is not a big step out for us. David Wong, our Head of Product, was at Meta prior to coming here. He worked on gen AI there. Shawn Malhotra, Joel Hron, who runs our engineering, and all of their teams are steeped in this. So that's why you've seen us being able to go from the launch of ChatGPT-4 to the early work and, in a matter of months, launched Westlaw with AI. And then fast following that will be what is Practical Law launched recently with AI, Checkpoint, Drafting and, obviously, the integration of the CoCounsel acquisition. So all of these things, we think, it's not only an AI story, to your point, but all of these things, I think, give us great confidence in that sort of elevated organic growth rate over the next few years.

Yes, Heather, I would just supplement. The acquisitions we've made in the last 14 months, we acquired SurePrep in January of '23, which goes into our Tax & Accounting Professionals business. In August, we acquired Casetext, which is largely Legal Professionals, but also supports the Corporate segment. And then most recently, in January, February, we acquired Pagero with like e-invoice, Indirect Tax, which goes into our Corporate segment. So we've made 3 key acquisitions in the last 14 months that will help propel the organic growth. Just for clarity, in '25, '26, we provided guidance of 6.5% to 8% for total TR and 8% to 9% for the Big 3 segments for '25, '26.

That's really helpful. And Steve, you touched on this, about the products you have in market. But can you just catch us up on what's kind of in the market today contribute to the top line? What's been released recently? What geographies? Just kind of where we are today.

Yes. So we have -- we launched Westlaw Precision AI on November 15. We've got about 5,000 customers using that product, paid users. So that's -- that continues -- contributes to the sort of ongoing acceleration of the Westlaw franchise. We will extend that Precision AI to other markets this year. So we're looking at sort of second quarter, U.K.; third quarter, Australia, New Zealand, Canada. And we'll go beyond that as we move forward. We've launched Practical Law AI, and we'll look to extend that into the U.K., into Canada, Australia in the months to come. And of course, CoCounsel, which is a legal AI assistant with a multitude of skills, started in the United States. We're doing -- we've launched it in Canada. We launched it 2 weeks ago in Canada. We've seen really interesting uptake there amongst the large and medium, small law firms. And we'll extend CoCounsel into some of those other territories I mentioned. So it's a case of sort of going through these products and then also predominantly starting in the United States and then moving them to other markets. We're also -- we also have, on the road map for this year, an AI-driven intelligent drafting solution. We have the injection of generative AI into HighQ and into Checkpoint Edge. Have I covered it all, Mike?

Yes, those were the 2 I was thinking of, intelligent drafting and Checkpoint.

So the AI story for us is not only Legal. We'll extend the CoCounsel brand and the CoCounsel skills and functionality into our Tax & Accounting franchise and eventually into our Risk and Government franchises as well. So the aspiration -- just to take a step back for everybody, the aspiration we set out a number of years ago at the start of the Change Program was to be the most innovative company in business information services. And the trajectory, to your question, Heather, we're really -- if anything, we're a little bit ahead of schedule in terms of the work that our product and engineering teams are doing. And we're looking forward to seeing that result in more frequent and bigger enhancements and new launches, but more importantly, greater impact at our customers and giving us a chance to play a larger role in the success of our Legal and Tax and our Risk customers.

And correct me here, it sounds like there's kind of a ramp as you move into the back half of '24 in terms of these products, and then, presumably, as you move to '25 and beyond.

Yes. At the Investor Day, a couple of days, David Wong showed a chart, which sort of showed the product launches over the last few years. And it is very much a funnel, and it's deliberately so. And this is something that -- it's [ all right ] for us, for Mike and I, to sit on a stage like this and say, "We're going to be the most innovative or amongst the most innovative." But actually building the foundations and putting the talent in place, investing in the right places, building a singular platform for generative AI that allows us to swap large language models in and out, so we're not dependent on any one particular model, and then be able to apply that to every part of our business, those are the things -- that's the hard work that we've gotten through. And I think what you'll now see is that hard work start to yield bigger, more frequent and more valuable product releases as we go.

Yes. What's interesting on the gen AI front is that your customers across the Big 3 segments seem really eager to adopt these products. What are the secular tailwinds that you think are driving this sort of eagerness or urgency, however you want to frame it?

Well, I think, I mean, they sort of differ depending on which customer sets -- segment you're looking at. It tend to be quite simpler across geographies. So if you're starting Tax & Accounting, there is a fundamental decline in the number of people getting qualified as CPAs. And at the same time, the number of tax returns and the complexity of those returns, the number of audits, the complexity of those audits is going up. So the technology has to fill a gap in order for the global economy to continue to function. I know that sounds grandiose, but it's not an understatement. The fact that if you talk to your own Tax & Accounting professional who's in the middle of doing your return for this year or you talk to the Chair of one of the Big 4, they'll tell you the same thing. What's your biggest worry? My biggest worry is just getting talent at the bottom of the funnel and pushing them through our apprenticeship model. They just can't get it. It's not there. It wants to go into consulting or it wants to go into other financial services or whatever. And so the technology has to address that. In the legal profession, on the other hand, there's certainly been -- coming out of the pandemic, there was a real sense in the profession that it was -- that the work-life balance was unsustainable for sort of young lawyers, mid-tenure and even junior partners, just completely unsustainable in terms of the number of hours that were being demanded. So there's an aspect of the technology needing to perform tasks that they don't, repetitive, menial, grinded-out type legal tasks like drafting, like production of time lines, analysis of documents and so forth, discovery, these kinds of things. And so that's definitely still an impetus, even though the sort of global economy is in a slightly different place and the level of demand is in a different place. But ultimately, it boils down to a general counsel who's under cost pressure from the CFO and needs to do things more efficiently with fewer lawyers and a set of partners at a law firm who want to increase partner profit. And ultimately, that's an incredibly important driver. And so we think we can play a really important role in both of those constituents, achieving both of those objectives.

That's really helpful. It seems like gen AI could be both transformative and disruptive to the legal industry. And we're already hearing about rumblings and what's going on in legal. And if you -- how do you navigate that dynamic, helping your customers, disruption in their industry and still drive your own growth? And how do you think about that?

Yes. I mean, well, it's worth sort of noting that we have relationships with medium, small -- large, medium and small law firms that have many, many decades old. We've been serving federal and state courts for decades. And so we have deeply entrenched relationships. And those have been hard-earned, and they've been earned through consistent investment over the decades in the quality of our underlying content and our reference attorneys. We have 1,200 reference attorneys who do nothing but produce very high-quality content and integrate that into our products. So where we start from, as this sort of disruption and transformation occurs, is from a position of deep trust. And it's been really exciting to see the number of managing partners, the number of sole litigators. Court systems have said, "Okay, I know it's coming. TR, please help me. Show me your product road map. Tell me how you think this is going to play out." We released a report last year and an entire sort of body of work around the future of professionals, and that's been incredibly well received in terms of, "Okay, tell me what my profession is going to look like in 2 to 3 years' time and how I then reengineer my firm. What do I need to?" And they trust us to get it right. And you have to remember that, in many cases, these are sort of budget-constrained general counsel, budget-constrained heads of tax within corporations. And they are also private partnerships on the legal and tax accounting front. So they don't have a lot of appetite or capacity for experimentation. And they don't have a big tech team. They might have -- the biggest firms might have a CTO, who's talented, but they don't have endless appetite to sort of sponsor 15 different experiments. They'll turn to us, they'll turn to 1 or 2 of our competitors or turn to Microsoft, and it's up to us to get it right. We think we're on the right track, and the early signs are good. But there's very much a reliance on, "Show me what you've got. I'm starting and hopefully ending with you," versus, "Let me talk to everyone and sort of let a thousand flowers bloom."

Steve, you may want to mention that you referenced private partnerships. We've seen more recently some PE investment in some of the large accounting firms and how that might create an opportunity for us, linking back to Heather's questions on transformation evolution.

Yes. I mean Hellman & Friedman obviously made investment in Baker Tilly recently, which is an interesting data point. And there's quite a few examples of that. I don't know whether it's sort of going to resemble what's happened in the sort of veterinary industry, where there've been these PE-driven rollouts. I'm not suggesting it goes that far. But I do think there's an analogy, potentially, to Wall Street 20 or 30 years ago, where technology, there was -- on the cusp of a tech revolution, there was a need to sort of change the governance structure from private partnerships to a much more corporate, to embrace more tech talent and a much bigger tech budget. And we see the sort of first signs of a transition a little bit like that in both Tax & Accounting because it's allowed and, to a different degree, in Law where there's some constraints around moving away from a partnership model, particularly in the United States. But I think it's -- back to your original question, Heather, this is sort of Chapter 1 of a really interesting professional transformation.

Yes. Well, I think it's interesting you talked about at your Investor Day, millennial employees and younger employees asking for tech and kind of expecting tech that -- I think that's kind of fair. We grew up with the tech.

Yes. I mean one of the questions that most talented graduates coming out of law school ask is, "Show me which technology you're using." And they wanted, "Are you using CoCounsel? Yes or no?" It's sort of -- and if you're the sort of partner in charge of recruiting, right, that's a message that resonates the first time you hear it. And you take that back to your partners and say, "Okay. If you want me to do my job and get the best people, we're going to have to make some quick decisions here and move quickly." And so that's been -- that's the other dynamic that's sort of coming from the other direction.

Yes. That makes a lot of sense. And you kind of touched on this, but some large competitors are investing in the tech. There's also a number of start-ups. You bought one of them.

We did.

How should we think about your competitive advantage and your reason to win in gen AI?

Yes. I mean, I think the way we have sort of articulated this, and certainly, the proof -- the evidence is growing to support these arguments, the first is, we start with the best content. We have never blinked in terms of investing in our attorney editors, our reference attorneys, our tax accounting experts. And our ability to take the Australian government federal budget and integrate that into our tax software instantly is better than anyone else's. Same in the United States, in sort of taking the case law and making sure that the KeyCite numbering system, the annotations, all of the intel that's added to that through a product like Westlaw. So it starts with our -- with the quality of our content. It is then extended by a combination of our ability to do the prompt engineering, so to understand how a litigator thinks and, conversely, how the judge thinks and how that needs to translate that back into the Westlaw Precision AI product. That is not simple or trivial to do, and it's not something a start-up can sort of suddenly reimagine just because they've got access to ChatGPT-4 or Llama or Bard or whatever it might be. And then lastly, we do have 0.5 million customers, who -- many of whom have built their businesses on our content and our software. And so our ability to listen to them and learn from them and put products in their hands that they trust and then get the feedback and iterate, we think, is a big advantage as well. What have I missed, Mike?

It's very complete.

I want to make sure that we're not just talking about gen AI, so I'm going to switch here. And your go-to-market strategy, I think this is something that you've started with the Change Program. What are your opportunities to continue to enhance go-to-market? And what are you most excited about this year?

Yes. I mean we've -- I think we're sort of at the -- in the early stages of this becoming sort of a world-class go-to-market operation around SaaS with next-gen customer success and driving NRR, driving adoption of those and seeing that sort of flow through to our recurring revenues. And a couple of months ago, we had Raghu Ramanathan join. He ran a big part of SAP. Before that, we had Laura Clayton McDonnell join from ServiceNow. So these are very talented software and technology go-to-market leaders. And you put them together with the folks who've been with us like Mike Dahn, who's been with us for decades and leading Westlaw, we think it's a powerful combination. So it's sort of our objective and obligation is to deliver on that over the next year or 2 and really sort of ensure that we're among the top technology sales organizations.

Yes, Heather, I'll just add just for clarification. We adopted 4 years ago the operating company model. We shifted from a holding company model to an operating company model. However, we maintain the separate sales go-to-market sales organizations for each of our segments and subsegments. We certainly leverage common systems, tools, processes, but we do have dedicated sales go-to-market teams for each of our segments and subsegments. One item that we talked about some on Tuesday was digital. We still have a hell of a lot of work to do there, but we've made a lot of progress in the last few years leveraging digital e-commerce, both from a new sales perspective, but also renewals. I think that's going to change for us and one that we can further leverage going forward.

That's helpful. And as you drive innovation across your portfolio and your products and you deliver more value to your customers, how do you think about pricing?

Mike?

Pricing is always important, and it's certainly one that's been very interesting for us in the last 6 to 9 months with gen AI. We're truly learning every day. Majority of our business is enterprise-based, not seat-based. But as we, now with gen AI, think about driving adoption, we have to be very, very open-minded with it. I think in the coming quarters, we'll be able to share more information as to where we finally land on the pricing for gen AI, but we certainly favor the enterprise-based model there. But we have to be open-minded, especially with the importance of adoption.

That makes sense. Well, I mean, everything is moving so quickly and changing and all that, so it makes a lot of sense. It was interesting is that retention came up at your Investor Day, of 91% retention. And you talked about other info services companies that are in the 94% to 95% range, and you're talking about thoughts around closing the gap and the potential to close that gap. Is there anything about your customer base or business mix that just naturally has a lower retention rate? Or if not, what do you think it takes to narrow that gap?

Yes. Sorry, just to clarify and lay the foundation. The 91% refers to weighted average based on revenue, not number of customers or logos. So that's a revenue number. The 91% varies by our business. But the common theme that we see, larger customers have the higher retention across each of our businesses. Smaller customers have the -- a lower retention for us. When we compare ourselves to more of the best-in-class retention rates, 94% to 95% that 3 or 4 of the best peer group companies have, we certainly aspire to be there. I don't think there's anything fundamentally that is stopping us other than ourselves. We talked about on Tuesday, we've improved our Net Promoter Score by 35% over the last 3 years. But our Net Promoter Score remains below the B2B industry average. So I think there's a direct correlation. As we improve our customer experience, improve our Net Promoter Score, we'll see higher retention rates for us. And given that 80% of our revenue is recurring in nature, that will certainly have a direct boost to our organic growth as we go from 91% to something higher, hopefully, 94% over the time horizon.

That's great. And your guidance assumes some margin expansion in '25 and '26. Can you talk about how you approach your margin expectations? Kind of what are the drivers in there? And where is maybe some downside and upside risk?

Yes. For 2025, I said 75 basis points of improvement and at least 50 basis points of improvement annually thereafter. Given the construct of our business, we have really strong operating leverage. 60% to 65% of our costs are fixed in nature. And when you think about 6% to 6.5% organic growth, that naturally yields about 75 basis points of operating leverage for us each year. So as we go into '26, the question that we often get, could we possibly do better than the 50 basis points? We could, but we're providing optionality, optionality in the form of investment. We currently see a lot of opportunity to drive further organic investment. So the key for us is, as we drive higher organic revenue growth, that 75 basis points of natural operating leverage is going to increase over time. So we're going to have the option to either expand the margin or do investment. I think the combination, Heather, will be a little bit of both, but we'll deliver at least 50 basis points of improvement in '26 and thereafter.

That's helpful. And I think close things off here with a balance sheet-cash flow question. So you generated a lot of cash, and you have a very lean balance sheet. How are you thinking about returning capital to shareholders and the pace of which you do that versus keeping cash on hand for M&A? And how do you think about -- actually, let's start with that, and then I'll ask a follow-up.

Sure. Our net leverage right now is approximately 1x, which we're very underlevered. We target with our value creation model 2.5x. Our bank covenants allow 4.5x, but internally, it's 2.5x. We're currently at 1x. So to your point, we're very underlevered right now. We estimate $8 billion worth of capital capacity between now and 2026. We will complete the current share buyback. We announced in November a $1 billion share buyback. We're about $650 million through it. Once we complete the current share buyback, Heather, we don't anticipate additional share buybacks in the near term. The reason is, with the current interest rates, it's not as favorable as it was 2 or 3 years ago, so full recognition, which I acknowledged there on Tuesday. So our intent is to deploy our capital capacity to strategic M&A, if we identify the right assets. As we always say, we're not going to let the cash burn a hole in our pocket. But we're prepared to move quickly if we identify the right assets for our customers and shareholders.

And how -- I mean it sounds like you're prepared to -- you just said you're prepared to move quickly. But how do you think about organizational bandwidth in terms of the number of deals that you may do in a given period and just the deals that you have on your plate right now in terms of integration?

It's a great question. About 3 years ago or 3.5 when Kirsty Roth joined us, we had intentional focus. We formed an integration management office under Kirsty. So we feel like we have sufficient resources now, sufficient bandwidth to handle the recent acquisitions that we've done and more acquisitions. In addition to the acquisitions, we've done a number of divestitures in the last 3 years, just to continue to optimize our portfolio. We received a question on Tuesday, and my response was, "We're never finished with portfolio optimization. We have a responsibility, obligation just to continuously assess." So we have adequate resources to handle additional acquisitions and divestitures if we identify those.

And in terms of -- I mean, you've talked a lot about this, but it's always good to reiterate this. Just when you think about M&A that you would do, where your priorities are, where you're focused and maybe even thoughts on the pipeline.

Yes. So we're very focused on the Big 3 and so -- firstly. Secondly, we don't see the need to do anything that will surprise our investors. We look for acquisitions that meet the following criteria. The first is additive to our Big 3 customer experience. The second is that they're financially accretive to our shareholders, not just the exiting shareholders. The third is they don't bring a lot of tech debt. And we've done an enormous amount of cleanup. We don't want to add to that. It's not to say we can't handle some, but we're not sort of looking for businesses that have a big, big cloud migration or something like that. And then last but not least, we look for cultures that will be additive to ours, not necessarily the same as, but ones that we really think the 2 teams are going to be able to complement each other. We did a couple of very small acquisitions in and around Reuters to add a focus on insurance, to add a digital rights management functionality, but it's the more substantive deals like SurePrep, Casetext, Pagero, very focused on the Big 3. So that's sort of where the focus is. I think going forward, we're always looking for opportunities in tax automation and sort of looking for further opportunities to better automate that and supplement our organic growth plans. We certainly have a focus on businesses that bring more international presence. We're heavily U.S.-focused today. And in areas like Indirect Tax, building on the Pagero acquisition, and Risk, Fraud & Compliance, building on CLEAR, and then potentially extending into areas like ESG. Because we do have relationships with the General Counsel, the Head of Tax, the CFO, all of whom are involved in those ESG conversations. But again, we're not going to do anything that'll surprise our investors. We just -- we don't feel like we need to. And it really needs to -- we'll keep that sort of rigorous disciplined approach.

That's really helpful. Well, thank you so much. We really appreciate it. Thank you for being here. Thanks, everyone.

Thank you.