Thomson Reuters Corp. held a steady course in a second quarter marked by change, delivering 2-per-cent higher revenue while continuing to spin out its largest division as part of a US$17-billion deal with private equity giant Blackstone Group LP.
The news and information provider is in the midst of a major overhaul, carving out its financial and risk arm to form a new joint venture to be steered by Blackstone. All the while, Thomson Reuters executives are gearing up to focus their energy and resources on three remaining core business lines: legal, tax and accounting, and Reuters News.
On Wednesday, the company said it expects to close the pending deal early in the fourth quarter. After that, the financial business will operate under the new name Refinitiv, with Blackstone holding a 55-per-cent stake and Thomson Reuters retaining the other shares. Both firms are gambling that Blackstone can use its extensive contacts in the financial sector and expertise at squeezing efficiency from businesses to boost the venture’s performance.
Revenue from the remaining Thomson Reuters businesses was US$1.31-billion for the second quarter, roughly in line with analysts’ expectations. And the company affirmed its financial guidance for 2018, predicting that revenue will continue to increase at a low-single-digit pace in percentage terms.
"It's kind of right on what we had expected,” said chief executive officer Jim Smith, in an interview. “And if we look at the underlying trends in our core subscriptions businesses, that book of business that builds the revenue ramp for the future, that performed quite nicely.”
The company’s financial results are temporarily distorted while it incurs higher corporate costs and reports the financial and risk division as a discontinued business. Thomson Reuters also recently reshuffled its leadership, appointing Brian Peccarelli and Neil Masterson as co-chief operating officers, and will report its results under a revamped structure later this year.
“It certainly feels like a transition quarter,” Mr. Smith said. “We certainly have a lot of balls in the air.”
One notable development in the second quarter was the July launch of Westlaw Edge, a new legal research platform driven by artificial intelligence. It is the first major product to emerge from a growing Toronto technology hub the company has been building out since 2016. Offered at a premium price to the existing Westlaw platform, it is designed to generate higher returns, which will be offset in the short term by higher spending on marketing. But it is also a signal of the kind of product that will come to define Thomson Reuters in the coming years.
“It's a living breathing example of what's possible in the future,” Mr. Smith said, adding that AI will one day “underpin every single product that we offer.”
Thomson Reuters reported profit from continuing operations of US$657-million in the second quarter, which ended June 30. That was up sharply from US$206-million in the same quarter a year earlier, but the discrepancy is mostly due to the fact that the company no longer reports depreciation on financial and risk assets held for sale.
The company earned 88 U.S. cents per share, compared with 27 U.S. cents a share a year earlier. But when adjusting to exclude discontinued operations, Thomson Reuters earned 17 U.S. cents a share, down two cents from the same quarter last year. That was better than analysts had predicted, due mostly to the timing of when the company incurred certain corporate costs.
In the legal division, which generates the lion’s share of revenue for the remaining Thomson Reuters business, revenue rose 3 per cent to US$882-million, and was up 2 per cent excluding the impact of foreign currency. That “is still below our aspirations,” said chief financial officer Stephane Bello, on a conference call with analysts.
Thomson Reuters’s tax and accounting division reported revenue of US$359-million, up 3 per cent – or 4 per cent on a constant currency basis.
Importantly, recurring revenue from subscriptions rose 4 per cent in each business during the second quarter.
Revenue from Reuters news declined by US$2-million to US$72-million.
The Woodbridge Co. Ltd., the Thomson family holding company and controlling shareholder of Thomson Reuters, also owns The Globe and Mail.
The financial and risk business – recorded as discontinued until the Blackstone deal closes – increased revenue by 3 per cent to US$1.55-billion. Excluding currency effects, revenue rose 2 per cent. Mr. Smith said he hasn’t seen “any impact” on competitive dynamics for the business as a result of the deal with Blackstone. But he conceded that Thomson Reuters was “very disappointed” to lose a bidding process that saw wealth managers at Merrill Lynch leave Thomson Reuters for smaller rival Factset.
“That particular contract was a unique event,” Mr. Smith told analyst on Wednesday.
When the deal with Blackstone closes later this year, Thomson Reuters expects to have between US$1-billion and US$3-billion available to spend on acquisitions. But Mr. Smith stressed that the company is firm in its conviction that any deals will support its existing core businesses. “We’re not looking for new frontiers to conquer,” he said.
Thomson Reuters is also still in ongoing talks with the Ontario Securities Commission (OSC) about Canadian banks’ access to a major foreign exchange trading platform offered by the company. The provincial securities regulator says the company has failed to provide enough information to prove it is compliant with domestic rules, and had threatened to cut off trading by domestic banks.
Yet Mr. Smith said Thomson Reuters has been having a “very constructive conversation” with the OSC, and he is “hopeful that we’ll have a positive outcome.”