Q2 2023 Thomson Reuters Corporation Earnings Call

To all participants on hold we appreciate your patience and we ask that you. Please continue to standby your conference will begin momentarily.

Yeah.

[music].

Good day, everyone and welcome to the Thomson Reuters second quarter Earnings Conference call. Today's conference is being recorded and all phone participants are in a listen only mode. But later you will have the opportunity to ask questions to get us started with opening remarks and introductions.

I am pleased to turn the floor to head of Investor Relations Mr. Gary Bisbee. Please go ahead Sir.

Thank you Jim and good morning, everyone and thank you for joining us today for our second quarter 2023 earnings call.

Joined today by our CEO , Steve <unk>, and CFO , Mike Eastwood, each of whom will discuss our results and take your questions. Following their remarks, David Wang Our Chief product Officer is also available for the Q&A.

To enable us to get to as many questions as possible. We would appreciate it if you limit yourself to one question and one follow up when we open the phone lines.

Today's presentation, when we compare performance period on period, we discuss revenue growth before currency as well as on an organic basis. We believe this provides the best basis to measure the underlying performance of the business.

Today's presentation contains forward looking statements and non <unk> financial measures actual results may differ materially due to a number of risks and uncertainties discussed in reports and filings that we provide to regulatory agencies. You may access these documents on our website or by contacting our Investor Relations Department.

I'll hand, it over to Steve as you.

Thank you Gary and thanks to all of you for joining us today.

I'll start by reviewing our Q2 highlights.

That momentum continued in the second quarter with revenue largely in line and margins ahead of our expectations. Although the latter was driven primarily by expense timing.

Total company organic revenues grew 5% driven by 6% recurring revenue growth the big three segments grew 7% organically.

Amid an uncertain macro backdrop, we continue to see good momentum for many out areas in our business.

Whistler was Whistler precision strong side continues with more than 2000 and sales to date and it contributed to legal professionals organic revenue growth returning to 6% in the quarter.

The short pipe acquisition is going extremely well our international business is again, all grew by better than 10% and many of our key products remain double digit grow as including practical confirmation and high cube.

These areas of strength are tempered somewhat by the impact of tighter customary customer discretionary budgets in a few pockets of our business. For example, the sales cycle lengthening. We have mentioned in recent quarters has led to a modest slowdown in revenue growth at our corporate segment and growth in the events business and digital advertising.

Revenue at Reuters news.

<unk>.

All in we are largely maintaining our full year 2023 outlook, including for organic revenue growth adjusted.

EBITDA margins and free cash flow.

Mike will discuss several tweaks to other garden guidance items in a few minutes.

Looking forward our confidence around the generative AI opportunity continues to strengthen.

We made good progress against our build partner by approach in the second quarter.

With organic builds progressing and announcements of both an intelligent drafting solution with Microsoft.

And our intention to acquire case text.

Discussing AI on our Q1 call our conviction around our opportunity to leverage generative II has strengthened.

As a result, we are accelerating our investment in the short term as we work to leverage these exciting capabilities for the benefit about professional markets.

Our capital capacity and liquidity remain a key asset that we are focused on deploying to create shareholder value and we made good progress on this during the second quarter.

In addition to announcing our intention to acquire <unk>, we monetized an additional $1.6 billion about L. Cig stake in May <unk> completed the sale of a majority stake in elite.

And executed the previously announced $2 billion return of capital and concurrent share consolidation.

<unk> reduced our share count.

Approximately three 5%.

We remain committed to a balanced capital allocation approach and continue to assess additional inorganic opportunities.

Now to the results for the quarter.

Second quarter organic revenues grew 5% organic recurring and transactional revenue both grew 6% while print revenue declined modestly.

Reported revenue grew 2% with currency, having little impact and net divestitures of 3% drag adjusted EBITDA increased 18% to $662 million.

Collecting a 540 basis point margin improvement to 40%.

Benefiting in part from expense timing that will normalize in the second half.

Mike will discuss these in more detail.

Adjusted earnings per share grew 40% from the prior year period to 84 cents.

Turning to the second quarter results by segment, the big three businesses achieved organic revenue growth of 7%.

Legal organic revenue growth returned to 6% driven by continued wished low precision momentum and the elite divestiture.

Demand for our key offerings remains healthy led by West La practical law and high cube and customer.

Interest you know AI driven offerings and product roadmap remains very encouraging we expect the 6% growth pace to continue in the second half of 2020 three.

Corporates organic revenue growth slowed sequentially to 7%.

As the sales cycle lengthening we have mentioned in recent quarters has impacted our book of business growth recurring revenue grew 8%, while transactional revenue was slightly lower.

Practical law confirmation clear in our Latin America business remained healthy drivers, we expect second half growth to approximate the Q2 level.

Tax and accounting organic revenue rose 10%.

With recurring revenue up 9% and transactional up 12%.

Our Latin America operations confirmation and short trip each contribute meaningfully to growth.

Reuters news organic revenues rose, 1%, which was modestly below our expectations. In addition to a lower price increase then in 2022 on the news agreement with the data and analytics business of L. Sig.

Reuters events scrubbed softened amid tight corporate discretionary budgets in digital advertising revenue continued the recent weaker trend.

We believe both are due to the uneven macro environment.

And see subdued growth from Reuters is likely in the next few quarters Lastly, global print organic revenues met our expectations declining 4% year over year.

So in summary, we're pleased with our results and the solid momentum in the business.

Before I turn it over to Mike I thought it would be worthwhile to recap the exciting progress we have made on the generative AI front during the second quarter.

I'll also discuss T O labs or internal data science and innovation group. It is playing a key role you know generally AI efforts.

On our first quarter earnings call in May we discussed the significant potential we see from incorporating generally by eye across our product portfolio. We also reviewed our significant competitive advantages, including the depth of our proprietary content and legal and tax expertise, we made commitments to invest more than 100 million.

Dollars annually on AI technologies and to bring these capabilities to keep franchises, including west low precision by year end. We recently began how part to pilot I'll ask Westwood generally the AI capability with select customers and initial feedback is very encouraging.

Later in May we announced an intelligent drafting solution will be offered through integration with Microsoft 365 co pilot.

Legal professionals will be able to leverage Thomson Reuters content and AI solutions seamlessly when drafting documents in Microsoft word.

Through both a copilot plug in and how office plug in.

And in June we announced our intention to acquire case takes a leading provider of generative AI powered tech solutions through its legal AI assistant offering co council.

We see a number of key benefits from this purchase including it in accelerating agenda.

Matt.

Adding new capabilities, and helping us drive new value for the legal industry through the merging of insights and workflow tools.

We remain confident that our build partner by investment approach positions us to take a leadership role in bringing generally by our capabilities for the benefit of our markets. In fact, our conviction in the long term opportunity and the competitive advantage. We bring to bear is rising we remain disciplined in our investment approach.

But we wont hesitate to make high ROI investments to capture this evolving market opportunity.

Now a few words on T. Our labs.

Last quarter, we discussed Thomson Reuters rich history, as a leader in leveraging new technologies, including machine learning and AI.

That history stretches back more than 30 years to 1991, when an R&D group was formed within wished publishing.

To accelerate the capabilities of online legal research in the decades since then technological.

Advancements in processing power data storage and network bandwidth have expanded the potential.

And email capabilities.

Our labs group has been at the forefront driving thought leadership contributing to commercial success and being an engine for innovation for both internal and client facing applications.

Currently we have approximately 300, AI and ml practitioners within Thomson Reuters, just under half of which arena T O Labs group.

One quarter of our labs workforce of ph DS in hot hold a masters degree we have labs teams based primarily in five global cities, Toronto, Minneapolis, Saint Paul London, Zouk and Bangalore.

That team has a good mix of long tenured II subject matter experts.

With additions through a number of AI driven acquisitions in recent years. This includes Joel hormone.

Who joined our company through the early 2022 acquisition of fortress illegal AI contract analysis provider.

Oh It was recently appointed the new head of T. I labs, and brings significant experience as well as a startup mentality to our efforts.

In addition to talent T. O labs has a history of thought leadership labs as an active member of the entrepreneurial and research ecosystems partnering with universities businesses and customers.

We are a founding sponsor of the Victor Institute Canada's Premier.

Tank and research Center.

We have sponsored a number of key industry events related to technology, and our professional markets, including our recent hackathon with Stanford University focused on generally by eye and the law since 2020, our labs group has been awarded 29 patents, bringing its total to date more than 100 and the team of regulation regularly.

Publishes well received external research papers.

While talent and thought leadership reporting contributing to commercial success is really the key.

And from the early days our Labs group has made many contributions you may remember this slide from our discussion last quarter of the legacy of AI at Thomson Reuters, what we didn't say last quarter was the T. L. Edge group was key in delivering most of these advancement a few examples in 1992 based on.

Statistical ranking west La is.

He's a natural was launched becoming the first natural language search engine or industrial scale perspective. This was several years before Google was founded.

In the early two thousands the team delivered a machine learning based classification and recommendation engine cold cure.

That has been used across the company to classify legal tax news and finance documents to large textile enemy advances have continued through Westwood next in 'twenty 10, Whistler edge in 2018, and wistful precision in 2022 which all bought successively more advanced machine learning and AI.

<unk>.

Successes have included quick check.

Litigation analytics.

T side overruled in part among others outside of Wistful Labs has played a key role in the launch of checkpoint edge practical law dynamic search and legal track out looking forward I'll lab's talented an important asset that has been refocused heavily on our degenerative AI roadmap.

Working with our I O government governance, and AI platform teams, how labs talent is key to upskilling and enabling our broad of engineering and product, if it's totally but compelling II driven capabilities for our customers in a responsible and ethical way.

We are actively hiring to expand labs beyond.

Across our global footprint.

And I've seen very strong applicant response in demand to our recent recruiting efforts and now I'll turn it over to Mike to review our financial performance.

Steve Thanks, again for joining us today.

As a reminder, I will talk to revenue growth before currency and on an organic basis letting.

Let me start by discussing our second quarter revenue performance of our big three segments.

Organic revenue grew 7% for the second quarter, continuing the trend of 6% or better big three growth that began in the second quarter of 2021.

Total revenue rose, 3%, including the impact of divestitures.

Legal professionals organic revenue growth returned two 6% driven by continued west la precision momentum and delete divestiture.

Key drivers from a product perspective remain west la.

Practical law high cube, and our international businesses.

We expect a 6% growth trend to continue in the second half.

On west La precision I am happy to report penetration trends continue to go well.

After 10 months precision is at 10% penetration and is 8% ahead of edge on a dollar basis.

And our corporate segment organic revenue growth slowed slightly to 7%.

The sales cycle lengthening we have mentioned in recent quarters has softened our book of business grows.

Looking forward, we expect second half growth to approximate the Q2 level.

Tax and accounting had another good quarter growing 10% organically.

Recurring and transactional revenue grew 9%.

And 12% respectively.

Moving to Reuters news organic revenues rose 1%.

Which fell modestly below our expectations.

Finally, global print revenues decreased 4% on an organic basis in line with our expectations.

On a consolidated basis organic revenues increased 5% for the second quarter.

Turning to our profitability adjusted EBITDA for the Big three segments was $597 million.

14% from the prior year period, with a 44, 9% margin.

Segment margins rose nicely across all big three segments.

I'd caution expense timing drove much of the Q2 upside versus expectations.

We expect this to normalize in the second half, especially amid investments in Gen AI and higher share of Pep integration expenses.

Moving to borders news adjusted EBITDA was $45 million with a 23, 1% margin.

Global Print's adjusted EBITDA was $53 million with a margin of 39, 7%.

Margins Rose 430 basis points year over year, but this was largely due to expense timing related to material sourcing and labor.

We expect this to normalize in Q3.

In aggregate total company adjusted EBITDA was $662 million, an 18% increase versus Q2 2022.

Excluding cost related to the change program from the prior period adjusts.

Adjusted EBITDA increased 12%.

Turning to earnings per share adjusted EPS was <unk> 84 for the quarter.

Up from 61 in the prior year period.

The increase was mainly driven by higher adjusted EBITDA with a lower tax rate and last 12 months share repurchases also contributing.

Our effective tax rate on adjusted earnings of 15.5% benefited from the settlement of a tax audit, which added six cents to adjusted EPS in the quarter.

Currency had no impact on adjusted EPS in the quarter.

Let me now turn to our free cash flow performance for the first half.

Reported free cash flow was $729 million versus $428 million in the prior year period.

Consistent with previous quarters. This slide removes so distorting factors impacting our free cash flow.

Working from the bottom of the page upwards, the cash inflow from discontinued operations was $1 million, which is a $72 million improvement from the prior year period.

Also in the first half we made 74 million of change program payments as compared to $186 million in the prior year period.

If you adjust for these items comparable free cash flow from continuing operations was $802 million.

117 million higher than the prior year period, due largely to higher EBITDA.

Next I will provide an update on our London stock Exchange group holding.

During may we sold an additional $15 3 million shares in a public market transaction.

We have now sold 41 million shares year to date and have 31 9 million shares remaining of which 2 million shares or eligible to be sold in 2023.

Two other quick updates.

First our.

Our tax basis on the remaining 31 9 million shares is $1 3 billion.

Well your math, we would assume a 25% capital gains tax rate on gains above one 3 billion.

Second the value of foreign exchange hedges held against our <unk> state for $49 million as of June 30th.

We currently have approximately 68% of our remaining <unk> position hedged.

Let me conclude with our updated 2023 outlook.

As Steve outlined we are largely maintaining our full year 2023 guidance.

We continue to expect organic revenue growth of five 5% to 6%.

Adjusted EBITDA margin of approximately 39% and free cash flow of approximately one 8 billion.

We are adjusting the outlook for three line items, our effective tax rate.

Interest expense and Capex.

We now forecast, our 2023 effective tax rate at approximately 17% down.

Down from the prior approximately 18% when incorporating the Q2 benefit from the settlement of a tax audit as I mentioned earlier.

We are narrowing our interest expense forecast to approximately $190 million, which is the low end of the prior $190 million to $210 million range.

This incorporates the accelerated pace of al Sag monetization.

As well as the benefit from higher interest rates on our cash balances.

Lastly on Capex, we now forecast full year accrued capex as a percentage of revenue of approximately 8%.

This compares to our prior view of approximately 7% plus.

Plus $30 million for nonrecurring real estate spend related to exiting two owned facilities.

We continue to expect real estate expand within the new 8% target.

But also incorporate accelerating investment in Gen AI focused growth strategies.

As Steve mentioned, we are increasingly bullish about the potential to leverage Gen AI to deliver meaningful value for our professional markets and are investing to deliver with this opportunity.

Looking ahead to the third quarter, we expect organic revenue growth to be on the high end of our full year five 5% to 6% range.

Given by the continued momentum of west La.

Improvement in government and the divestiture of elite.

We expect our third quarter EBITDA margin to be approximately 36%.

This incorporates the normal seasonal low point in our profitability.

Much of the cost timing that benefited Q2 margins normalizing and also higher Sharpe Rep integration expenses.

As is our typical seasonal pattern, we expect Q4 margins to be sharply ahead of the Q3 level yellow.

Yielding the full year 2023, adjusted EBITDA margin of approximately 39%.

Let me now turn it back to Gary for question.

Mike Jim we're ready to begin the Q&A.

Gentlemen, thank you and to our phone audience joining at this time, if you would like to ask a question simply press star and one on your telephone keypad pressing star one replace your line into a queue and we ask that if you are joining today on a speaker phone. Please ensure that you've returned to your handset or that your mute button is disengaged you allow your signal to reach our equipment.

We ask that you limit yourselves to a question I had a follow up and if you have further comments you may re queue as well with star and one once again, ladies and gentlemen that is star and one we'll hear first today from drew Mcreynolds RBC capital.

Yes, thanks very much good morning, two for me first.

Just with respect to the uptick in Capex intensity.

I think we're all eyes wide open to the incremental investments you're making in AI just wondering.

More broadly what kind of sustainable Capex and can you see for the overall business has that changed versus that 6% you talked a couple of years ago, and then second just on the sales cycle.

No surprise there just wondering what you saw through the quarter end.

Up until through July and August .

As the rate of change here.

Deterioration.

Accelerating just any granularity there would be helpful. Thank you very much.

Yeah drew in regards to your first question on cap Capex with capital intensity as I referred to it.

As we move forward, we'll see rates more closely to the 2023 level, that's driven largely by what we see as opportunities to invest in areas that will generate strong returns for us certainly Gen. AI is one aspect there, but I think we'll also see.

<unk> opportunities for investment so I think it will be closer to the current rate in 2024, but as we work through the 2024 planned process.

As always we will keep you updated with the November earnings call and then certainly the February because I think that's what we see with capital I think we're working very closely with.

All of our teams in regards to the opportunities, but the opportunities that we see.

It really be the key factor in driving the capex intensity, but we'll ensure that all of these opportunities to drive strong returns for shareholders.

Item before I pass to Steve for his thoughts on the sell cycle I'll break it down into two components drew first in regards to legal professionals in tax <unk> accounting professionals, we remain quite optimistic we have not seen any noticeable change.

In those two segments or lines of businesses and the corporate segment very consistent with prior quarters, we have seen that elongated sales cycle happen.

Happening for net sales and also renewals, that's what drove that slightly lower 7% this quarter versus eight in the second area, where we've seen it is within their borders.

<unk>, but we are quite optimistic overall, and especially within legal and tax and tax we have not seen any noticeable change, but Steve your thoughts yeah, just to add drew on the.

On the generative II opportunity I think since we last checked in with you all we've seen a couple of.

A couple of things, which give us.

More excitement and more optimism about the opportunity in and around generative IR for us. So the first is I think a growing and and they're very resolute consensus, but the differentiator in this environment will accrue to those who own unique proprietary datasets and that's us.

So you know that that view really has crystallized over the last couple of months and I think continues to strengthen by the day and the second is even greater customer interest in.

In our product Roadmaps.

And al leading both in terms about.

Integrating.

Generative AI into our existing flagship products, but also exploring new areas without customers and our customers.

<unk> given us a very clear, particularly in legal but increasingly in text and accounting as well that they expect us to lead in these spaces and they certainly looking forward to doing that so with that in mind I'll build partner by strategy. The Microsoft announcement, the $100 million investment in the <unk> and the intention to acquire <unk> have all been well received by customers.

It's really if I could just add one more point in regards to the sales cycle. The January acquisition of share of prep led by Dave While that's really gone well for us for the first six months of the year, we expect that to continue that sharp drop down acquisition very similar to if you go back a few years ago with practical law, we have the same level of optimism.

With sharp drop some of the prior acquisitions.

All very helpful. Thank you.

Yeah.

Our next question comes from the line of Arab Linda Gallo Gallo pathology at Canaccord Genuity.

Good morning, Thanks for taking my questions.

I wanted to have a single question and a follow up can you maybe talk a little bit more about.

The opportunity on the I guess, the workflow side of legal the contract drafting now that you've sort of.

Have a greater grip of case tax and the opportunities coming out of that.

I know that that's a space that's already encumbered by some players how do you sort of see you know Toms.

Tom's its ability to exploit that and instead of that that the pathway to that and then really quickly to follow up for Mike can you just remind us for the second half sort of the puts and takes to habit from the divestitures and the acquisitions.

Yeah.

It's Steve I'll start and then ask.

David to supplement on the first question and Mike can take the second so with regard to the legal work.

And specifically drafting.

I think it's worth noting today that we don't we don't play in a very significant way. So that that is one of many new use cases, and new addressable markets for us in large part and one of the reasons we were.

So interested in case text is that as I have you.

In quick time.

The honest.

Access to chat G. P T four with their own expectation content to create what they call schools or particular use cases, most of those on new to us. So.

We see it as a we see it is as it is a new market opportunity as much as anything else. Firstly, having said that we haven't closed that deal yet so.

More to come once we close that deal and have a chance to work with our with Jake and his team so.

So David before handing to Mike anything to add yes, I think I would add a couple of couple of.

Other thing is the number one is that as we've been exploring the the drafting use case with our customers one of the biggest questions that you're always asking the problem that they have as a starting point.

And that's where Steve's point around proprietary content. It really comes to play a practical law has thousands of standard Docker standard clauses, which serve as a starting point for drafting right now when you use practical law you click opened in word and then you do the drafting we're looking to try to complete that.

That.

That workflow for our customers by incorporating jet AI through both our own plug ins as well as the Microsoft co pilot through 65 copilot rather.

Plug ins for for drafting so again, we see a big opportunity in providing not only the AI tech but also.

The content to be able to provide a starting point for so many lawyers that are doing drafter, yes.

There are vendor in regards to your second question on puts and takes and the impact on EBITDA margin from acquisitions and divestitures. Our policy is that we update and incorporate the impact of acquisitions divestitures. When they close so that means the divestiture of elite and May 31st I should say, we sold 80 approximately 80 per.

<unk> that has been incorporated.

With that Ah.

The <unk> acquisition that is pending closure.

It would provide a further financial update upon closing hopefully later in the second half of 2023, but we update our guidance and provide updates to all of you when the acquisition actually closes.

But we do looking at case tax.

I would see some near term dilution there is expected normally from acquisitions of this nature, but we will provide a more fulsome update upon closing.

Thank you very much.

Heather Walski at Bank of America. Your line is open.

Hi, Good morning, Thank you for taking my question.

With regards to the sales environment and you talked about not seeing any material change in legal mm bye.

We actually got some today headlines around a law firm lay off I'm. Just curious if you can talk to admit all of that.

Your ability to upsell.

LOL firm clients in some of your new tools is there increased demand for these tools in environment, where head count has been reduced is there any change in sales cycles any color would be helpful.

Heather It's Steve I think it's some I think it's a little bit too early to tell to be honest sort of prescribed in a sensor an equation between.

You know sort of head count to spend on technology, and the extent to which one one will be reduced and the other one will be increased I think we're very confident that overtime law, French we'll spend less on real estate and more on <unk>.

On technology, that's a trend that really sort of.

Appeared at the start of in terms of the car.

Our dialogue with customers just out of the pandemic and this.

Has continued and if anything strengthened so we say the broad market opportunities is increasing we have noted some layoffs in certain pockets of the industry.

But but exactly what that relationship looks like I think he is a is a little bit too early to tell.

Heather I would just add Steve and I, just completed some business reviews with Paul Fisher and the legal team within the last week, we've talked quite a bit about west la precision, but practical all led by Emily Colbert continues to be quite well received and we continue to do quite well with high Q. So the overall portfolio.

Legal is doing well Heather.

I appreciate it thank you.

Now, we'll hear from Scott Fletcher at CIBC.

Hi, good morning.

I'm just wondering now with a larger return of capital transaction complete could you give an update on near term capital allocation plans and priorities.

Sure Scott we remain in a very very strong position, we continue to estimate approximately $10 billion of capital capacity through 2025, which gives us ample capacity to continue our three pronged approach, which is what I referred to continuously.

Is the and Formula which will allow us to continue to deliver dividend growth I would anticipate another 10% increase in 2020 for Scott Therefore, our debit annual dividend.

Secondly, allow us to continue to do strategic M&A and then lastly can allow us to continue additional returns to shareholders whether that be in the form of a another return of capital like we did in June and NCI b or other forms so in a very strong position.

Got and I think it will be a combination of all three.

As we move forward just as a reminder, we have the 32 million shares left in the <unk> state coupled with very strong cash flow from the business in a very low leverage were one two times. So that those three factors drive that $10 billion of capital capacity through 2025.

Okay. Thanks, and then a follow up on the M&A front.

I'm wondering if obviously theres still a lot of.

For startups and legal companies that are focusing on generative AI is there an appetite on your end to continue looking at more about something similar to the vein of case packs or.

One of.

A little broader than that.

Yeah.

Scott.

Lindsay is broadcast lenses broader I'd say, a couple of things with regard to.

With regard to our sort of M&A approach. The first is we have the same set of criteria across acquisitions. So whether that's whether that's case text or bush or short prep and.

Anything else, we're looking at we have a very high bar for these acquisitions and we think we're very rigorous about making sure that the value of crews.

To our shareholders and our customers.

That's the first thing and we'll keep looking at those kinds of deals be they various flavors of <unk>.

I I will specifically generally by the other area, where we're I think seeing great benefit is you know T O Ventures fund run by Tamara Stephens, Inc.

And basically what what she's been able to do is make a pretty significant number of acquisitions in and around the area on the periphery of our core big.

<unk> III segments and.

And that I think has enabled us to open our aperture.

To to the ecosystem and the innovations therein.

And also.

We have the core benefit.

Accrued to the to the big three segments and our teams are.

Within those segments so that.

That's really our approach and we don't see any deviation from that.

Over the next number of quarters.

Okay. Thank you.

Vince Valentini TD Cowen. Please go ahead with your question.

Yes, thanks, very much related to the timing benefits on operating cost just trying to get a bit more granularity on that Mike.

Two things first on the.

First quarter call. You said, you expected margins to be 38% in the second quarter and you. Obviously you did a lot better than that at just over 40.

It seems like the timing benefit happened just in the last couple of months and was a bit of a surprise so.

Why was that.

And was it looks like it's about $30 million. If you can sort of clarify that and is that going on.

All reverse in the third quarter or is it spread evenly over Q3 and Q4.

Yeah, Vince all fair questions. Your estimate of $30 million is very close let me give a little bit of granularity. There are events a few areas sure Pep integration is truly in regards to all of these are timing related as I mentioned, Dave while and team are working very well with them.

With base from there. So the first area is sure Pep integration costs.

Area relates to marketing costs led by Dave Carroll and our team.

Within technology, we have some cloud related costs that were timing also in technology. We had some software maintenance related items and then the last item I would mention as I referenced in our prepared remarks within our global print business led by Jen Prescott, we had some materials and labor.

Items, so those were five tangible areas.

Majority of that would be in Q3 with a little carrying over into Q4, but the majority of Q3, which is driving that 36% EBITDA margin estimate for Q3, along with that normally being our low point.

The largest of those dollars were in legal.

And in our tax and accounting segment, along with the print that was specific there.

Hopefully that color is helpful. Vince.

Very helpful. Thank you.

And Dave.

Yeah.

And now we'll hear from the line of Toni Kaplan at Morgan Stanley .

Thank you so much.

So just to ask about margin versus growth.

Yeah, you reset the cost base from the change program now there's this opportunity to invest in AI I'm just trying to.

I hear your updated thoughts on growth versus margin dynamics over the next few years.

Yeah, I'm happy to start with that.

Tony is something that we talk about quite a bit internally in regards to the growth I mentioned two vectors, both organic and inorganic you kind of referenced this a second ago. We certainly are very comfortable reinvesting, where we think there are opportunities and I think that's in the form of both organic and inorganic we'd now talk a lot about.

<unk> Gen AI, but our opportunities for growth go far beyond Gen. AI. So we'll.

We'll continue to be.

Be prepared to make those investments near term, even if there is a little bit of margin pressure or margin dilution near term both organically and inorganically. There I think over the time horizon is important for us to continue to build upon our current roughly 6% organic growth.

As we look at 'twenty four 'twenty five 'twenty six so we're gonna be very balanced and prudent.

And we will continue to invest both organically and inorganically and with those investments there's full recognition that margin expansion could be tempered as.

As we make those investments in Gen AI and other organic areas and also by acquisitions, but if you focus on our margins and free cash flow over the time horizon, given our operating leverage we have confidence that over the time horizon, we will be able to continue to build upon our margins, but near term.

It could be tempered as a result of acquisitions and organic investments and Tony I'll, just add to that I think you.

We obviously.

Ran the trains program intensively in 'twenty, one and 'twenty two and.

And we always position that I think correctly as a platform for accelerated growth as we go forward.

And you know as you pointed out a loan comes to you and anybody I and I think that.

From out bring brings that accelerated growth I think makes it more.

More tangible.

<unk>, a little bit more exciting.

For us and our shareholders.

And so.

The way I think about this is the change program has positioned us well to take advantage of generated by our growth had we not done that.

It would be much more typical for us to adapt in terms of al.

Our customer service support capabilities.

Well ops and tech stack and Hal and our talent base. So you know.

One one will feed into the other eye, hoping a fairly natural way, you're telling me that I'll just supplement maybe just one live example, once again the <unk> acquisition that closed in January that's one that is helping us fuel our growth in tap this year and beyond but we do have some margin dilution and <unk>.

Under year twenty-three from a very intentional decision for us to make that acquisition and to invest so I think that's a live example, as to how we got it in balance and do the trade offs between growth and margins and capital intensity.

Great and then one.

Had to ask about the go to market strategy.

First case tax do you see that product as more of a standalone offering or planning on bringing the content until west la or a practical law.

And I guess in terms of technology.

You integrate.

Laurie language model that case, Texas, using with what you've already developed for a lessor.

Ah Tony we've we've obviously done a lot of thinking around that but.

But we haven't because the deal Hasnt closed.

We haven't.

Had all the interactions that we need to make those calls with the with the case to exchange so.

As soon as we closed that deal we will have a chance to come back to you with those kinds of questions, but we do see.

We do see this as offensive in two ways, one supplementing accelerating our own internal efforts by adding more capacity.

In various ways and the second is enabling us to access.

New addressable market areas, along the lines of the skills that they've developed.

Developed so it'll it'll be a combination of those things, but the precise whiting.

We'll have to wait until until we.

Closed the deal and integrate it.

That makes sense, Jim forgotten on that thank you.

[laughter].

Next we'll hear from Kevin Mcveigh at Credit Suisse. Please go ahead.

Great. Thanks, so much hey.

I'm wondering if you could just update us on how we're thinking about pricing and then ultimately retention you know given what's clearly going to be.

Deeper I would call kind of modules and you know even more innovative product as a result of degenerative AI.

Kind of where the retention is today and you know I know you've seen some success on that but how should we think about that going forward and then.

Maybe if he could we leave some context around pricing as well.

Yes, sure Kevin Let me, let me start with that I'm sure Kevin I'm sure, Steve will want to to supplement there.

Yes, let me start with the foundational piece that we've shared before the multiyear contracts. We worked through those in 2022, we continue to work through those in 'twenty three I think the premium that's associated with less law precision continues to materialize as we.

Anticipated so I think the price lift in 2023 slightly higher than in 2020 to the one that we're working through.

Kevin with full transparency as the impact of NII on pricing and also with the related cost there. So we're probably a quarter or so away from having a robust conversation with you on that but I'll say pricing slightly higher this year than.

In 2022 in regards to retention, we were up about 30 basis points in 2023, that's measuring retention based on revenue dollars. So we're slightly over 91% on a weighted average basis across total T. R.

As I've shared before that's a wide distribution with our smaller customers, having lower retention and our largest customers, having very high and it also varies by product.

With west La being being the highest so I think we're pleased with the momentum on both pricing and retention we need additional time on the <unk> piece.

If we start to frame up the opportunity, we do see it as being.

Helpful and additive.

Along at least three dimensions I think the first users side, Kevin pricing the second to Mikes point about retention.

Uh huh.

We think that the gen II and particularly integrated across our different products will enable us to be stickier and increase out of attention.

Third as I've said, a couple of times. This morning is just accessing new pools of spend.

And whether that could be.

Whether that be around automating tasks that are otherwise performed.

Bye bye human beings or whether it be enabling firms to do more and add more value I think that's to be determined more broadly across the across the industries. We serve but that's that's really where we're pointed out product development efforts.

Kevin I had just a final point on that retention question and net promoter score we have additional opportunity to improve there I think as we continue to improve our customer experience and net promoter score.

That should should yield a higher retentions over the time horizon.

Our next question.

And today comes from the line of Manav Patnaik at Barclays.

Yes. Thank you.

I have a question.

And now the focus has obviously been on Jenny I, which it probably should be but and in the legal business, but just curious on the tax side and also tied to capital allocation. That's obviously been a very fast growing business for you guys a great business, but it is a smaller piece of the puzzle. So just curious if.

Any thoughts around capital allocation and you know what.

What can be done to maybe make tax bigger.

Yeah, I'll start off Michael at a monopoly that thanks for the question.

Im very excited about our tax and accounting professionals business.

Under Elizabeth Proust Tim's leadership.

I think it's.

Incredible franchise and one that we're very keen to investigate.

Secondly.

The the sort of.

A strategy that does Elizabeth with a parade of Enron and and the team have laid out really used to automate and streamline the entire into and tax return process all the way to advisory services.

We're doing we're running some experiments in Latin America, and Roundup Dominion asset.

Two.

Well and truly extend that for the benefit of tax and accounting professionals in the smbs they serve.

Sure Prep is a very significant addition.

To that process because of course, it automates the document and information ingestion process and the front end of a tax return.

As Mike said in his remarks, we're very happy with that I think Dave while and the team are doing a wonderful job.

Since coming across from January three so the.

The strategy is very much in service of tax and accounting professionals to make their lives easier.

And more efficient there is a.

The number of returns goes up the complexity of those returns goes up and the and that the need for advisory services.

From tax and accounting professionals to their customers goes up so that the demand within the underlying demand within that within that segment continues to grow at a very healthy clip. However, there just aren't enough.

Yung.

Are people coming through with tax and accounting degrees when he joined the profession. So there's a real need.

For the automation and technology to streamline the process. We think we can play an important role in that.

And our strategy will be very much to sort of take that into in process automation streamline as much as possible to drive productivity and efficiency through the industry, that's where we're trying to go.

In terms of activity.

Jason.

Sorry go ahead.

I don't have any specific on the cat.

We put this in the same category as you.

You know under the generative II, we think theres opportunities first we need to go out generally by onto products like checkpoint that will require some some some some capex spend.

And if we as we see that ROI opportunity, we're not going to miss him.

Understood. Thank you for that and then just one technical question I guess on the $22 million of LPG shares available for sale and 24 is that the similar kind of like the March timeframe. When the available just I'm just trying to think about if you can pull that forward should you need to you know.

In terms of capital allocation.

Yeah Manav in regards to when the respective tranches the lockup periods expire in Q1 of each year. So Q1 24, and then also Q1 'twenty five it doesn't mean that we have to monetize in Q1 of each year, but that's the earliest time period.

On which we can monetize.

Okay makes sense. Thank you.

Indeed.

George Tong with Goldman Sachs. Please go ahead. Your question is next.

Hi, Thanks, Good morning, you talked about elongated sales cycles.

Corporate can you discuss why sales cycles are currently more resilient in legal and tax and accounting and assess the likelihood that sales cycles could at some point elongate in those segments.

I think.

The sort of broader corporate <unk>.

Enterprise software environment has softened a bit I think we see that.

We see that across the different points and so we're more sensitive to that environment than we are.

And then we have the law firms right now we think our content and our software is must have across all the segments.

Certainly.

Corporates for US is the newest of our segments and therefore, the degree to which it is truly embedded ease a little bit less.

And so those have been elongated and we've seen a little bit of softness we don't see it getting any worse.

George within corporates, and we don't see the same kind of trends in tax and accounting or legal eventuate.

Got it that's helpful.

And then you reiterated your EBITDA margin expectations of 39% for this year, which would imply about 400 bps of.

Expansion from 2022, where do you see most opportunity for EBITDA margin expansion by segment.

On your investment requirements and efficiency gains again at the segment level.

Yes, I think George as we look over the time horizon and I emphasize the time horizon I think we see opportunities to continue to expand margins in each of the segments.

The timing and the quantum of margin expansion will be influenced as I mentioned earlier by the timing of acquisitions and also the timing of organic investments whether it be Jenny.

<unk> risk <unk> compliance or other items, there so we see opportunities across the segments, but I would just kind of temper the level and timing.

Based on the timing and sequencing of acquisitions and organic investments.

Got any any comment on specifics or the segments. This year, where do you see most opportunity.

I think this year into calendar year 2023.

Legal is experienced the largest amount of margin expansion in calendar year 'twenty three I think corporates will experience the lower amount of margin expansion in calendar year 'twenty three George.

Very helpful.

I mentioned earlier, the tax and accounting just just as a reminder, when you look at tax <unk> accounting professionals year over year, you need to consider the impact of the sharp drop acquisition, which I think Gary during our.

February earnings call, we provided directional estimate.

The impact for.

For the full year. So just maybe a refresher there and then also Gary can do a follow up George if it's helpful. There the tax and accounting if you look at it sequentially year over year, you do need to do a pro forma just in regards to the dilutive impact of share of prep in calendar year 'twenty three.

Great. Thank you.

Andrew Steiner JP Morgan and you are welcome to pose your question.

Hi. Thank you. This is Stephanie stepping in for Andrew and I'll. Just ask one question can you provide a little bit more color on the government business.

I think the funding is point there now, but just any color on the end market and also how you arguing that area.

Sure.

Definitely I'm happy to start there we spent quite a bit of time with Steve <unk> discuss mothers Pat even on the government team as we look at the pipeline for Q3 Q4.

It is very optimistic I think Stephanie as we go into the November call, we will be able to provide you.

With more granular detail just given the federal government.

Cycle physical year cycle of September 30th we have a number of opportunities in the pipeline that we believe will close during Q3.

Which will lead to higher revenue growth in Q3 Q4, if you look sequentially. The government revenue increased in Q2 versus Q1, and we forecast that continuing to increase in.

In Q3, Q3 and Q4.

Pipelines are very optimistic Stephanie.

Just need to close those in Q3, and Steve and team <unk> team are working hard there and as you know clear risk fraud and compliance is.

As a key component there too along with T. Rss.

But the reason for a lot of optimism, but we do have to close the pipeline opportunities Stephanie.

Okay. Okay, great. Thank you so much.

And Dave.

And we will hear from Maher Yaghi at Scotia Bank.

Alright, Thanks for taking my question.

Lots of excitement in the AI for sure and.

Few parts of the hardware market.

Seen a significant uptick in revenues generation already.

Due to AI, but on the software side and as you probably are aware of lots of investments being made but.

We have many case studies that are clearly present.

But we're still waiting for a for an uptick in revenues. So I guess my question is what I'd like to hear from you.

When when do you expect to see a meaningful contribution from Gen AI too.

Health and grow your organic growth rate beyond what it's already at I E.

Is 2024.

Too early to see an uptick in your five 5% to 6% growth rate that youre seeing in 2023 or or it's you know it's got a couple of years out that will start to see that meaningful contribution kick in.

Alright, thanks for the thanks for the question. Yeah look we are we are excited about it and we're excited about it because of the but the the frequency nature volume of.

Of interest from from our from our customers.

The.

And we don't think it's an opportunity that sort of limited to the United States, who don't live in a particular geography or any particular.

Our products. So that's really why we're excited that's why where we are operating upping our investment we want we will be launching products. This year.

David Wong with sort of put put forth out there.

Product roadmap and started to discuss that.

With directly without without customers.

We won't see any meaningful.

Revenue uptick just given the size of our base business. This year I think we'll start to see it next year.

The degree the extent and the sort of nature of that.

That growth curve, we're yet to define so as soon as we sort of have more clarity on that as to how much it was.

Coming from the three drivers.

Ah referred to in your answer to Kevin's earlier question.

We'll come back to you.

Thank you.

Okay.

And that was our final Q from our.

Audience today, Mr. Bisbee I'd like to turn it back to you Sir for any additional or closing remarks that you have.

Thanks, Jim and thanks, everybody for joining us today, we're around today, if we can help so feel free to reach out to the IR team.

Thank you thanks, everybody.

Ladies and gentlemen, this does conclude today's meeting and we thank you for your participation you may now disconnect your lines.