Q2 2024 Thomson Reuters Corp Earnings Call
Please stand by. Your conference is about to begin.
Operator: Good day, everyone, and welcome to the Thomson Reuters second quarter earnings call. Today's conference is being recorded.
Operator: Good day, everyone, and welcome to the Thomson Reuters second quarter earnings call. Today's conference is being recorded. At this time, I'd like to turn the call over to Gary Bisbee, Head of Investor Relations. Please go ahead.
Gary Bisbee: Good day everyone and welcome to the Thomson Reuters Second Quarter Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the call over to Gary Bisbee, Head of Investor Relations. Please go ahead.
Gary Bisbee: At this time, I'd like to turn the call over to Gary Bisbee, Head of Investor Relations. Please go ahead.
Gary Bisbee: Thank you, Melinda. Good morning, and thank you everybody for joining us today for our second quarter 2024 earnings call. I'm joined today by our CEO, Steve Hasker, and I'm CFO, Mike Eastwood.
Gary Bisbee: Thank you, Melinda. Good morning. Thank you, everybody, for joining us today for our second quarter 2024 earnings call. I'm joined today by our CEO , Steve Hasker, and our CFO , Mike Eastwood, each of whom will discuss our results and take your questions following their remarks.
Gary Bisbee: Each of whom will discuss the results, take your questions following their remarks. To enable us to get to as many questions as possible, we would appreciate it if you'd let me yourself to one question and one follow-up each when we open the phone lines.
Speaker Change: 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 each when we open the phone lines.
Gary Bisbee: Throughout 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 fast-based measure of the underlying performance of our business.
Unknown Executive: Throughout 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 our business.
Speaker Change: Throughout 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 our business.
Gary Bisbee: Today's presentation contains forward-looking statements and non-IFRS financial measures. Actual result may be accurate for materially due to a number of risks and uncertainties discussed in reporting filings that we provide to regulatory agencies.
Speaker Change: Today's presentation contains forward-looking statements and non-IFRS 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.
Gary Bisbee: To may access these documents on our website or by contacting our Investor Relations department.
Speaker Change: You may access these documents on our website or by contacting our Investor Relations Department. Let me now turn it over to Steve Hasker.
Steve Hasker: Let me now turn it over to Steve Hasker. Thank you, Gary. And thanks to all of you for joining us today. Good momentum continued in the second quarter with revenue in line and margins modestly ahead of our expectations. Total company organic revenues. As we predicted, the pace of organic and inorganic investments picked up in the second quarter as we worked to position the company for faster revenue growth in 2025 and beyond. To incorporate a strong first half, we are raising our full year 2024 revenue outlook to the high end of the prior ranges and now see organic growth of approximately 6.5%, including approximately 8% for the big 3D segments.
Steve Hasker: Thank you, Gary, and thanks to all of you for joining us today. Good momentum continued in the second quarter with revenue in line and margins modestly ahead of our expectations.
Unknown Executive: Total company organic revenues rose 6%, with the big three segments growing by 8%. As we predicted, the pace of organic and inorganic investments picked up in the second quarter as we work to position the company for faster revenue growth in 2025 and beyond. To this point, we recently launched two additional Gen-AI capabilities. The first is CoCounsel Drafting, a new legal drafting solution that works in Microsoft Word and leverages practical law content as well as a customer's own document, which brings better, faster answers to complex tax research questions through a chat-based search experience.
Steve Hasker: Total company organic revenues rose 6% with the big three segments growing by 8%.
Steve Hasker: As we predicted, the pace of organic and inorganic investments picked up in the second quarter as we worked to position the company for faster revenue growth in 2025 and beyond.
Steve Hasker: To incorporate a strong first half, we are raising our full year 2024 revenue outlook.
Steve Hasker: To the high end of the prior ranges, and now see organic growth of approximately 6.5%, including approximately 8% for the big three segments.
Steve Hasker: We continue to see growing momentum from many areas in our portfolio. This includes double digit growth from key products, including Practical Law, Confirmation, Short Prep, Baguero, Indirect Tax and our international businesses. Interest in our generative AI offerings remains strong with Westlaw Precision and Co-Counsel momentum continuing. Our second annual Future Professionals Report supports this narrative as it indicates that knowledge workers are optimistic about a significant boost to productivity with AI employees to redefine workflows, drive innovation, and unlock new opportunities for growth. Our 2024 investment plans are on track as we execute against the ambitious product roadmap we discussed at our March Investor Day.
Steve Hasker: We continue to see growing momentum from many areas in our portfolio. This includes double-digit growth from key products including Practical Law, Confirmation, SurePrep, Pagaro, Indirect Tax, and our international businesses.
Steve Hasker: Interest in our generative AI offerings remains strong, with Westlaw Precision and co-council momentum continuing.
Steve Hasker: Our second annual Future of Professionals report supports this narrative, as it indicates that knowledge workers are optimistic about significant boost to productivity, with AI poised to redefine workflows, drive innovation, and unlock new opportunities for growth.
Steve Hasker: Our 2024 investment plans are on track as we execute against the ambitious product roadmap we discussed at our March Investor Day.
Steve Hasker: At this point, we recently launched two additional GNI capabilities. The first is Co Council drafting, a new legal drafting solution that works in Microsoft Word and leverages Practical Law content, as well as a customer's own documents. The second is Checkpoint Edge with Co Council. Russell, which brings better, faster answers to complex tax research questions through a chat-based search experience. This is the first launch of GNI capabilities into our tax and accounting portfolio. This is a key asset that we are focused on deploying to create shareholder value, and we made good progress on this during the second quarter.
Speaker Change: The first is CoCouncil Drafting, a new legal drafting solution that works in Microsoft Word and leverages practical law content as well as a customer's own documents.
Unknown Executive: This is the first launch of Gen-AI capabilities into our tax and accounting portfolio. Customer feedback on both of these offerings has been strong, and we continue to work towards delivering additional enhancements and launches over the next few quarters. 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. We completed the monetization of our stake in the London Stock Exchange Group, bringing gross proceeds to date to $8.3 billion. We also completed the $1 billion share repurchase program launched last November.
Speaker Change: 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.
Steve Hasker: We completed the monetization of our stake in London Stock Exchange Group, bringing gross proceeds to date to $8.3 billion. We also completed the $1 billion share repurchase program launched last November. On the M&A front, Figaro integration efforts are underway, and we continue to assess additional inorganic opportunities. As a reminder, we estimate $8 billion of capital capacity through 2026.
Speaker Change: We completed the monetization of our stake in London Stock Exchange Group, bringing gross proceeds to date to $8.3 billion. We also completed the $1 billion share repurchase program launched last November .
Unknown Executive: On the M&A front, Peguero integration efforts are underway, and we continue to assess additional inorganic opportunities. As a reminder, we estimate $8 billion of capital capacity through 2026. Now to the results for the quarter.
Steve Hasker: Now to the results for the quarter. Second quarter, organic revenues grew 6% in line with our expectations. Organic recurring and transactional revenue grew 8% and 5% respectively, while print revenue declined 7%. Reported revenue grew 6%. Adjusted EBITDA fell 2% to $646 million, reflecting a 300 basis point margin decline to 37.1%. This lower profitability was expected, and results from organic and inorganic investments we are making in 2024 to position the company for accelerating profitable revenue growth.
Unknown Executive: Second quarter organic revenues grew 6% in line with our expectations. Turning to the second quarter results by segment, the big three businesses delivered 8% organic revenue growth. Legal organic revenue grew 7%, driven by continued momentum from Westlaw Precision and co-council.
Speaker Change: Organic, Recurring and Transactional Revenue grew 8% and 5% respectively, while Print Revenue declined 7%.
Speaker Change: and results from organic and inorganic investments we are making in 2024 to position the company for accelerating profitable revenue growth.
Steve Hasker: Turning to the second quarter results by segment. The big three businesses delivered 8% organic revenue growth. Legal organic revenue grew 7%, driven by continued momentum from Westlaw Precision and Co-Counsel. Demand for our key offerings remains healthy, led by Westlaw, Practical Law co-counsel, and strong performance in our international businesses. Find law remains a headwind to the segment growth rate. Corporate's organic revenue grew 8%. Practical Law, Indirect Tax, Clear, Peguero, and our international businesses were key growth drivers in the second quarter. Tax and accounting organic revenues grew 10%. Our Latin American business, Shore Prep, and Audit were all key contributors.
Speaker Change: The Big Three Businesses Delivered 8% Organic Revenue Growth.
Speaker Change: Driven by continued momentum from Westlaw Precision and Co-Council.
Unknown Executive: Demand for our key offerings remains healthy, led by Westlaw's Practical Law Co-Council and strong performance in our international businesses. Corporate's organic revenue grew 8%. Practical law, indirect tax, CLIA, Peguero, and our international businesses were key growth drivers in the second quarter. Our Latin American business, Shore Prep, and Audit were all key contributors. The fund invests in early-stage companies, with a focus on Series A fundraising, and has a global mandate. AI and emerging technologies are a focus, as are workflow automation.
Speaker Change: Demand for our key offerings remains healthy, led by Westlaw Practical Law Co-Council and strong performance in our international businesses.
Speaker Change: Corporate's organic revenue grew 8%. Practical law, indirect tax, CLIA, Peguero, and our international businesses were key growth drivers in the second quarter.
Speaker Change: Tax and Accounting Organic Revenues grew 10%.
Steve Hasker: Reuters news organic revenues rose 4%, driven by our agency business and the news agreement with the data and analytics business of LSEG. And lastly, global print organic revenues met our expectations, declining 7% year on year, impacted by the migration of customers from a global print product to Westlaw, which we discussed on our Q4 earnings call.
Speaker Change: Reuters News organic revenues rose 4% driven by our agency business and the news agreement with the data and analytics business of LSEG.
Speaker Change: And lastly, global print organic revenues met our expectations, declining 7% year-on-year, impacted by the migration of customers from a global print product to Westlaw.
Steve Hasker: In summary, we're pleased with our results.
Steve Hasker: Fox. Let me close my prepared remarks with a few thoughts on Thomson Reuters' ventures, our in-house venture fund. As background, in October of 2021, we announced the creation of a $100 million venture fund to support and accelerate our innovation efforts. We subsequently hired a team, led by Tamara Stephens, an experienced corporate venture investor. The team is tasked with understanding how and investing in emerging companies that are building differentiated technologies in the end markets we serve, while also bringing important insight and intelligence for Thomson Reuters. The fund invests in early-stage companies with a focus on Series A fundraising and has a global mandate.
Speaker Change: Let me close my prepared remarks with a few thoughts on Thomson Reuters ventures.
Speaker Change: Our in-house venture fund. As background, in October of 2021, we announced the creation of a $100 million venture fund to support and accelerate our innovation efforts.
Steve Hasker: AI and emerging technologies are a focus as a workflow automation and other themes that we're going to focus on. We're going to align with the strategic priorities of our big three segments. Since the inception of the fund, the team has invested approximately $50 million in 18 companies.
Unknown Executive: Other themes that align with the strategic priorities of our Big Three segment. Since the inception of the fund, the team has invested approximately $50 million in 18 companies. While we expect the team to deliver attractive financial returns, there are greater benefits to Thomson Reuters from the Ventures team and fund. First, they bring significant insight and understanding about our markets and emerging technologies. The team facilitates introductions and product demonstrations for TR leaders and leverages TR's broader product and engineering talent to help vet potential investors.
Speaker Change: Since the inception of the fund, the team has invested approximately $50 million in 18 companies.
Steve Hasker: While we expect the team to deliver attractive financial returns, there are greater benefits to Thomson Reuters from the Ventures team and fund. First, they bring significant insight and understanding about our markets, emerging technology, and startup players and activity. This knowledge has been built up through meetings with more than 1,500 startups since the fund's inception. The team facilitates introductions and product demonstrations for TR leaders and leverages TR's broader product and engineering talent to help vet potential investments. In addition to insight, the Ventures team contributes to our growth strategy by surfacing opportunities for select product integrations and go-to-market partnerships.
Speaker Change: While we expect the team to deliver attractive financial returns, there are greater benefits to Thomson Reuters from the Ventures team and fund. First, they bring significant insight and understanding about our markets, emerging technology,
Unknown Executive: In addition to insight, the Ventures team contributes to our growth strategy by surfacing opportunities for select product integrations and go-to-market partnerships. To date, this has yielded several agreements, with many others in development. We also see the Ventures portfolio as a pipeline for potential future M&A candidates. We highlight on this slide the fund's investments by end market and capability. I'll quickly mention two investments to illustrate some of the opportunities that the portfolio brings to Thomson Reuters. First, I'll highlight Neotech, which uses generative AI to automate research and development tax credit preparation. We are working to formalize a partnership, and we see its offerings as complementary to our audit methodology content.
Speaker Change: In addition to insight, the Ventures team contributes to our growth strategy by surfacing opportunities for select product integrations and go-to-market partnerships.
Steve Hasker: To date, this has yielded several agreements, with many others in development. We also see the Ventures portfolio as a pipeline for potential future M&A candidates. We highlight on the slide the funds' investments by end market and capability.
Speaker Change: To date, this has yielded several agreements, with many others in development. We also see the Ventures portfolio as a pipeline for potential future M&A candidates.
Speaker Change: We highlight on the slide the funds investments by end market and capability. I'll quickly mention two investments to illustrate some of the opportunities that the portfolio brings to Thomson Reuters.
Steve Hasker: I'll quickly mention two investments to illustrate some of the opportunities that the portfolio brings to Thomson Reuters. First, I'll highlight NeoTax, which uses generative AI to automate research and development tax credit preparation. Their product is highly complementary to our direct tax offering, and we have a commercial partnership where our Salesforce can sell NeoTax offerings with one source direct tax. I'd also note that our internal tax team is adopting NeoTax's solution after being introduced to the company by our Ventures team. Second, I'll mention Field Guide, which provides next generation AI-based audit workflow technology. We are working to formalize our partnership, and we see its offerings as complementary to our audit methodology content.
Speaker Change: Their product is highly complementary to our direct tax offering.
Michael Eastwood: With that, I'll now turn it over to Mike to review our financial performance. Thanks, Steve. Thanks again for joining us today. As a reminder, I will talk to revenue growth before currency and on an organic basis. Let me start by discussing the second quarter revenue performance for a big three segments. Organic revenue grew 8% for the second quarter. The third consecutive quarter of the big three had grown 8% or better. Including the impact of acquisitions and investors, revenues rose; that legal professionals' organic revenue grew 7%, consistent with the first quarter. Key drivers from our product perspective remain, Westlaw, Practical Law, Co-Cancel, and our international businesses.
Speaker Change: As a reminder, I will talk through revenue growth before currency and on an organic basis.
Unknown Executive: Let me start by discussing the second quarter revenue performance for our big three segments. Organic revenue grew 8% for the second quarter, the third consecutive quarter the big three has grown 8% or better. Including the impact of acquisitions and investors, revenues rose. Key drivers from a product perspective remain Westlaw, Practical Law, CoCouncil, and our international business. Government grew 7% in the quarter, while fine law remains a headwind to the segment growth rate. This added just under $5 million to year-over-year revenue growth in the quarter. Repairing revenue grew 10% while transactional revenue rose 1%.
Speaker Change: Let me start by discussing the second quarter revenue performance for our big three segments.
Speaker Change: Organic revenue grew 8% for the second quarter. The third consecutive quarter of the big three has grown 8% or better.
Michael Eastwood: Government grew 7% in the quarter, while fine law remains a headwind to the segment growth rate. Legal professionals' revenue growth continues to benefit from the migration of customers from a global print product to Westlaw. This added just under 5 million to year-over-year revenue growth in the quarter. In our corporate segment, organic revenues grew 8%; recurring revenue grew 10%, while transactional rose 1%. As expected, growth moderated from the key one level, which had benefited print and seasonal tax-related offerings. Figaro, Practical Law, Clear, Indirect Tax, and our international businesses were key contributors. Tax and accounting delivered enough to fund quarter with organic growth of 10%.
Speaker Change: Government grew 7% in the quarter, while fine law remains a headwind to the segment growth rate.
Speaker Change: This added just under $5 million to year-over-year revenue growth in the board.
Unknown Executive: As expected, growth moderated from the Q1 level, which had benefited from strength in seasonal tax-related offerings. Figueroa, Practical Law, Clear, Indirect Tax, and our international businesses were key contributors; recurring and transactional revenues grew 10% and 11%, respectively. A Latin American business, SurePrep, and Audit Products were key drivers. boosted by the agency business and the news agreement with the data and analytics business of LSAC. Finally, global print revenues decreased 7% on an organic basis. Excluding the impact of the revenue shift to legal professionals, which I mentioned earlier, global print declined 5%.
Speaker Change: Pragera, Practical Law, Clear, Indirect Tax, and our international businesses were key contributors.
Speaker Change: Facts in Accounting delivered another strong quarter with organic growth of 10%.
Michael Eastwood: Recurring and transactional revenue grew 10% and 11% respectively. Our Latin American business sure prepped an audit products for key drivers. Moving to voters news, organic revenue rose 4% for the quarter, driven by the agency business and the news agreement with the data and analytics business of LSEG. Finally, global print revenues decreased 7% on an organic basis. Excluding the impact from the revenue shift to legal professionals, which I mentioned earlier, global print declined 5%. On a consolidated basis, second quarter organic revenues increased 6%. Turning to our profitability, adjusted EBITAB with the big three segments was 581 million.
Speaker Change: Recurring and transactional revenues grew 10% and 11% respectively.
Speaker Change: A Latin American business, SurePrep and Audit Products were key drivers.
Speaker Change: Finally, global print revenues decreased 7% on a organic basis.
Speaker Change: Excluding the impact from the revenue shift to legal professionals, which I mentioned earlier, global print declined 5%.
Unknown Executive: On a consolidated basis, second quarter organic revenues increased six percent. The lower profitability results from organic and inorganic investments we're making in 2024 to position the company for improving profitable revenue growth in 2025 and beyond. Moving to Voters News, adjusted to 51 million with a margin of 24.8%.
Speaker Change: On a consolidated basis, second quarter organic revenues increased 6%.
Speaker Change: Turning to our profitability, adjusted EBITDA for the big three segments was $581 million, down 3% from the prior year period with a 41% margin.
Michael Eastwood: Down 3% from the prior year period was 41% margin. The lower profitability results from organic and inorganic investments were making in 2024 to position the company for improving profitable revenue growth in 2025 and beyond. We expect the higher level of investments to continue in the second half. Moving to voters news, adjusted 51 million with the margin of 24.8%. Global print suggested EBITAB was 43 million with the margin of 35.2%. Grant, an aggregate, total company adjusted EBITDAV was $646 million, 82% decline versus Q2 2023. Turning to Arnie's per share, adjusted EPS was $0.85 for the quarter versus $0.88 in the prior year period.
Speaker Change: Global print suggested EBITDA was $43 million with a margin of 35.2%.
Unknown Executive: In aggregate, total company adjusted EBITDA was $646 million, a 2% decline versus Q2 2023. Earnings-to-earnings-per-share adjusted EPS was $0.85 for the quarter versus $0.88 in the prior year period. Currency had a one cent positive impact on adjusted EPS in the quarter. Let me now turn to our precast flow.
Speaker Change: In aggregate, total company adjusted EBITDA was $646 million, a 2% decline versus Q2 2023.
Speaker Change: Returning to earnings per share, adjusted EPS was $0.85 for the quarter versus $0.88 in the prior year period.
Michael Eastwood: Currently, he had a one-cent positive impact on the adjusted EPS in the quarter.
Michael Eastwood: Let me now turn to our free cash flow. You will see a change in presentation for this slide from the past few years. Our form of presentation of comparable free cash flow provided more clarity into the underlying performance when excluding change program payments and the impact of the 2018 investiture of our former Refinitive segment. With those now largely in the past, we have shifted to the free cash flow schedule shown in our earnings press releases, which we believe provides a more insightful view. For the first half of 2024, our free cash flow was $812 million, up 11% from $729 million in the prior year period.
Unknown Executive: You will see a change in presentation for this slide from the past few years. Our former presentation of comparable free cash flow provided more clarity into the underlying performance when excluding change program payments and the impact of the 2018 investment in our former refinitive segment. With those now largely in the past, we have shifted to the free cash flow schedule shown in our earnings press releases, which we believe provides a more insightful view, up 11% from $729 million in the prior year period.
Speaker Change: You will see a change in presentation for this slide from the past few years.
Speaker Change: Our former presentation of comparable free cash flow provided more clarity into the underlying performance when excluding change program payments and the impact of the 2018 divestiture of our former refinitive segment.
Speaker Change: With those now largely in the past, we have shifted to the free cash flow schedule shown in our earnings press releases, which we believe provides a more insightful view.
Speaker Change: For the first half of 2024, our free cash flow was $812 million.
Michael Eastwood: Higher EBITDAV was the largest driver of the increase. I am pleased to announce we completed the monetization of our LSEG state, selling $5.9 million shares in the second quarter, with gross proceeds of $610 million. This brings the total gross proceeds to date to approximately $8.3 billion. A significant return from the $3 billion at which our equity stake in Refinitiv was valued in the fall of 2018. In the second quarter, we also completed the $1 billion NCIB or share repurchase program launched last November. And given the strength of our capital position, we plan to use cash on hand to repay the small bond issues scheduled to mature this September.
Unknown Executive: Higher EBITDA was the largest driver of the increase, a significant return from the $3 billion at which our equity stake in Refinitiv was valued in the fall of 2018. In the second quarter, we also completed the $1 billion NCIB, or Share Repurchase Program, launched last November. And given the strength of our capital position, we plan to use cash on hand to repay the small bond issues scheduled to mature this September.
Speaker Change: Higher EBITDA was the largest driver of the increase.
Speaker Change: I am pleased to announce we completed the monetization of our LSAC stake, selling 5.9 million shares in the second quarter with gross proceeds of $610 million.
Speaker Change: This brings the total gross proceeds to date to approximately $8.3 billion.
Speaker Change: A significant return from the $3 billion at which our equity stake in Refinitiv was valued in the fall of 2018.
Speaker Change: And, given the strength of our capital position, we plan to use cash on hand to repay the small bond issues scheduled to mature this September .
Michael Eastwood: From a capital allocation perspective, strategic M&A remains a key focus within our broader balance capital allocation approach. This includes annual dividend growth, strategic M&A, and shareholder returns.
Speaker Change: From a capital allocation perspective, strategic M&A remains a key focus within our broader balanced capital allocation approach.
Unknown Executive: This includes annual dividend growth, strategic M&A, and shareholder return. I will conclude with our updated 2024 outlook. As Steve outlined, we are raising our 2024 outlooks for total and organic revenue growth for TR and Big 3 to the high end of the prior ranges to incorporate a strong first half. Total Big 3 revenue growth of approximately 8.5%, up from 8% to 8.5%, and organic Big 3 revenue growth of approximately 8%, up from 7.5% to 8%.
Michael Eastwood: I will conclude with our updated 2024 outlook. As Steve outlined, we are raising our 2024 outlooks for total and organic revenue growth for TR and Big 3 to the high end of the prior ranges to incorporate a strong first half. We now see total revenue growth of approximately 7%, up from the prior 6.5% to 7%. Organic revenue growth of approximately 6.5%, up from 6% to 6.5%. Total Big 3 revenue growth of approximately 8.5%, up from 8% to 8.5%. And organic Big 3 revenue growth of approximately 8%, up from 7.5% to 8%. In addition to revenue, we're also adjusting two other guidance metrics.
Speaker Change: As Steve outlined, we are raising our 2024 outlooks for total and organic revenue growth for TR and Big 3 to the high end of the prior ranges to incorporate a strong first half.
Steve Hasker: We now see total revenue growth of approximately 7% up from the prior 6.5% to 7%.
Speaker Change: Total Big 3 revenue growth of approximately 8.5%, up from 8% to 8.5%.
Speaker Change: and Organic Big Three revenue growth of approximately 8% up from 7.5% to 8%.
Unknown Executive: In addition to revenue, we're also adjusting two other guidance metrics. We are shifting $15 million from DNA of internally developed software to amortization of acquired software. This reflects updated purchase price accounting allocations for the Pagaro acquisition. This reduction results from an earlier than expected completion of our LSAG monetization and the impact of higher interest rates on our cash balance. For the third quarter of 2024, we see organic revenue growth of approximately 6% and an adjusted EBITDA margin of approximately 34 percent. We expect the third quarter margin to be the lowest point for the year as our investment spending increases during the seasonally lowest revenue quarter of the year.
Speaker Change: In addition to revenue, we're also adjusting two other guidance metrics.
Michael Eastwood: While the total outlook for depreciation and amortization of computer software remains unchanged, we are shifting 15 million from the DNA of internally developed software to amortization of acquired software. This reflects updated purchase price accounting allocations for the Pregaro acquisition. We are also reducing our outlook for interest expense to 125 to 145 million, from 150 to 170 million previously. This reduction results from an earlier than expected completion of our LSAG monetization and the impact of higher interest rates on our cash balances. For the third quarter of 2024, we see organic revenue growth of approximately 6% and an adjusted EBIT on margin of approximately 34%.
Speaker Change: While the total outlook for depreciation and amortization of computer software remains unchanged, we are shifting $15 million from DNA of internally developed software to amortization of acquired software.
Speaker Change: This reflects updated purchase price accounting allocations for the Braguero acquisition.
Speaker Change: We are also reducing our outlook for interest expense to $125 to $145 million from $150 to $170 million previously.
Speaker Change: and an adjusted EBITDA margin of approximately 34%.
Michael Eastwood: We expect the third quarter margin to be the low point for the year as our investment spending increases during the seasonally lowest revenue quarter of the year.
Speaker Change: We expect the third quarter margin to be the low point for the year as our investment spending increases during the seasonally lowest revenue quarter of the year.
Gary Bisbee: Let me now turn it back to Gary for questions. Thank you, Melinda. We're happy to begin the Q&A session. Thank you. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. During today's session, we ask that you limit yourself to one question. If you have any further questions, you may rejoin the Q. Once again, that is star one to signal for a question, and we'll pause just briefly to assemble our Q.
Gary Bisbee: Let me now turn it back to Gary for questions.
Operator: Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. During today's session, we ask that you limit yourself to one question. If you have any further questions, you may rejoin the queue. Once again, that is star 1 to signal for a question, and we'll pause just briefly to assemble our queue. And we'll take our first question from Drew McReynolds with RBC. Please go ahead.
Operator: Thank you. If you'd like,
Speaker Change: Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.
Drew Mcreynolds: And we'll take our first question from Drew McRunnell with RBC.
Drew Mcreynolds: Please go ahead. Yeah, thanks very much.
Speaker Change: And we'll take our first question from Drew McReynolds with RBC. Please go ahead.
Steve: Yeah, thanks very much. Good morning, and nice to see the momentum continue here. I think three relatively quick ones for me just on the M&A environment. You've made it pretty clear that this is your kind of priority focus. Just if you can provide us an update on, you know, at a high level, how the pipeline is progressing and what you're seeing in terms of dynamics. Secondly, good granularity on the TR ventures. So much appreciated.
Drew Mcreynolds: Good morning and nice to see the momentum continue here. I've been three relatively quick ones for me just on the MNA environment. You've made it pretty clear. It is your kind of priority focus. Just if you can provide a step date on, you know, at a high level, how the pipeline is progressing in what you're seeing in terms of dynamics. Secondly, good granularity on the TR Ventures. So much appreciated.
Speaker Change: Secondly, good granularity on the TR Ventures, so much appreciated.
Drew Mcreynolds: Just would love an update on the competitive environment, just with respect to the startup activity, particularly around AI and Gen AI.
Drew Mcreynolds: And then lastly, on the cold council pricing strategy, just as you launch here, just kind of remind us how you're monetizing that out of the gate here.
Steve Hasker: Thank you.
Steve Hasker: Yeah, Drew, it's Steve. I'll start. I'm sure Michael will add to my comments. So on MNA pipeline, we have a new head of Cork dev and strategy, Tinelli, Ruta. He's been with TR for many years, but he's stepped into that role in the last six months and bought a fresh perspective to our pipeline. So we're excited about where that pipeline is, and we're assessing a number of different opportunities.
Steve: Yeah, Drew. It's Steve. I'll start.
Steve: Just would love an update on the competitive environment, just with respect to the startup activity, particularly around AI and Gen AI. And then, lastly, on the Coal Council pricing strategy, just as you launch here, just kind of remind us how you're monetizing that out of the gate here. Thank you. Yeah, Drew. It's Steve. I'll start.
Speaker Change: Yeah, Drew, it's Steve. I'll start and I'm sure Mike will add to my comments.
Speaker Change: So on M&A Pipeline, we have a new head of corp dev and strategy, Tonelli Rudder. He's been with TR for many years, but he's stepped into that role in the last six months and brought a fresh perspective to our pipeline. So we're...
Speaker Change: We're excited about where that pipeline is, and we're assessing a number of different opportunities. Nothing to announce today, and I think everything we do will be consistent with our playbook of taking
Steve Hasker: Nothing to announce today. And I think everything we do will be consistent with our playbook of taking products that are showing real value to our customers that we could push through our distribution and take advantage of that footprint and our customer relationships.
Steve: I'm sure Michael will add to my comments. On M&A Pipeline, we have a new head of corp dev and strategy, Tonelli Rudder. He's been with TR for many years, but he's stepped into that role in the last six months and brought a fresh perspective to our pipeline, so we're excited about where that pipeline is going. And we're assessing a number of different opportunities; nothing to announce today. And, and, and I think everything we do will be consistent with our playbook of taking products that are showing real value to our customers that we can push through our distribution and take advantage of that footprint in our customer relationships.
Steve Hasker: So that's on the M&A front. With regard to ventures in the competitive environment, you know, we do see an uptick in competitive activity both from our traditional competitors and from a relatively small number today, but a number of startups. And we do this as a good thing. Insofar as I think it speaks to the opportunity to use generative AI to transform the product. So, it suggests to us that we're on the right track. It suggests to us that the kind of tan expansions that we alluded to on our March 12th investor day are in fact very likely to eventually over the form of some time.
Steve: So that's on the M&A front. With regard to ventures in the competitive environment, you know, we do see an uptick in competitive activity, both from our traditional competitors and from a relatively small number today, but a number of startups.
Speaker Change: So that's on the M&A front. With regard to ventures in the competitive environment,
Steve: And we view this as a good thing insofar as I think it speaks to the opportunity to use generative AI to transform the professions that we serve. So it suggests to us that we're on the right track. It suggests to us that. Let me stop there, Drew, and turn it to Mike for any other thoughts. That was a great summary, Steve. Thanks, Drew.
Speaker Change: The kind of TAM expansions that we have alluded to on our March 12th Investor Day are in fact very likely to eventuate over the fullness of time and as I said in my remarks,
Steve Hasker: And as I said in my remarks, the response to each and every one of our new product launches to date, which have been numerous. And I think unprecedented in the history of T.R. has been uniformly positive from our customers and from prospects. So, you know, we're sort of very respectful of our existing and new competitors, but, but, but increasingly confident of our outlook and our trajectory in this environment. In terms of co-counsel pricing, one of the things that we've done is, I think like everyone, we've been testing and learning in terms of generative AI pricing.
Speaker Change: So, you know, we're, we're sort of very respectful of our
Speaker Change: One of the things that we've done, I think like everyone, we've been testing and learning in terms of generative AI pricing. Mike's team have done, I think, a tremendous amount of work.
Steve Hasker: Mike's team have done, I think, a tremendous amount of work to sort of understand the cost structure of these two products and make sure that they provide value to our customers, first and foremost, in the price to reflect that value. And secondly, that they more than adequately cover our costs and protect our margin profile. What we try to avoid is a person pricing. We prefer the sort of enterprise-wide model where we can drive that because we think these products are going to drive significant efficiencies within our customer base. So, we want to be a beneficiary of that alongside our customers, rather than on the wrong side of that trade, so to speak.
Speaker Change: to sort of understand the cost structure of these two products and make sure that
Speaker Change: is per seat pricing. We prefer the sort of enterprise wide model where we can drive that because we think these these products are going to drive significant efficiencies within our customer base. So we want to be a beneficiary of that alongside our customers.
Drew Mcreynolds: rather than on the wrong side of that trade, so to speak. Let me stop there, Drew, and turn it to Mike for any other thoughts. That was a great summary, Steve. Okay, thanks, Drew.
Michael Eastwood: Let me stop the air drill and turn it to Mike for any other thoughts. That was a great summary, I said.
Michael Eastwood: Thanks, Drew. Thank you.
Drew Mcreynolds: Thank you.
Scott Fletcher: We'll go next to Scott Fletcher with CIBC. Please go ahead. Good morning. I might follow up on one of your answers there, Steve, just regarding efficiencies that you think you're going to drive for your customers. Are you starting to get a better sense of what the magnitude of those efficiencies might look like, and subsequently being able to price a little more accurately based on that. Yeah.
Operator: We'll go next to Scott Fletcher with CIBC. Please go ahead.
Speaker Change: We'll go next to Scott Fletcher with CIBC. Please go ahead.
Steve: Good morning. I might follow up on one of your answers there, Steve, just regarding efficiencies that you think you're going to drive for your customers. Are you starting to get a better sense of what the magnitude of those efficiencies might look like?
Scott Fletcher: Good morning. My follow-up on one of your answers there, Steve, just regarding efficiencies that you think you're going to drive for your customers. Are you starting to get a better sense of what the magnitude of those efficiencies might look like and subsequently being able to price a little more accurately based on that?
Scott Fletcher: It's a great question, Scott. Look, I think it's, I think it's early days for us and for everyone. But if you had a chance to read out Future Professionals report that we put out a few weeks ago, we quantified the impact this year from applying our co counsel legal AI assistant as for four hours per week per lawyer. And we think that will grow to something like 12 hours per week in a couple of years' time. And when you play that out across a size of all general counsels' offices or a law firm of any size, it's pretty significant.
Steve Hasker: Yeah, it's a great question, Scott. Look, I think it's early days for us and for everyone, but if you had a chance to read our Future Professionals Report that we put out a few weeks ago, we quantified the impact
Scott Fletcher: So that's really what our pricing team has been focused on aligning with, and I would say so far, so good.
Scott Fletcher: Okay, thanks, and then secondly, another sort of follow-up on the earlier question in terms of looking for enterprise-wide deals and sort of that approach. Are you finding the customers, as it stands, are more, are looking for more, you know, targeted initiation, but initial deals and sort of like in certain areas of the business and then hoping to expand? Is that sort of the approach at the moment, or, you know, are you able to go in with the full enterprise-wide license right after that? Yeah, I would say we see a pretty normal distribution here, Scott, insofar as there are a number of customers who are particularly law firms, but also general counsels who are very forward-looking and very aggressive.
Unknown Executive: Okay, thanks. And then, secondly, another sort of follow-up on the earlier question in terms of looking for enterprise-wide deals and sort of that approach. Are you finding that the customers, as it stands, are more? Unknown Attendee, Unknown Shareholder, Unknown Attendee, Unknown Shareholder,
Speaker Change: Okay, thanks. And then secondly, another sort of follow-up on the earlier question in terms of looking for enterprise-wide deals and sort of that approach. Are you finding the customers, as it stands, are more
Speaker Change: are looking for more targeted initial deals and sort of like in certain areas of the business and then hoping to expand. Is that sort of the approach at the moment or are you able to go in with the full?
Steve: Yeah, I would say we see a pretty normal distribution here, Scott, insofar as there are a number of customers.
Speaker Change: Yeah, I would say we see a pretty normal distribution here, Scott, insofar as there are a number of customers.
Speaker Change: who are particularly law firms, but also general counsels.
Steve Hasker: So they've basically gone through the tests of our products and said, okay, let's go all in and move forward. I would say you've then got the sort of bulk of customers who, for example, as a partnership group, have decided that they need to adopt generative AI, that it's going to be transformative, but they're really in test-and-learn phase. So they're evaluating their products; they're evaluating others; they're doing trials and looking to move forward. And then, of course, there's always those that would prefer to go wind the clock back a couple of years. And with them, what we're trying to do is just make the products available in test form and get them more and more comfortable with generative AI as a concept and as a set of tools, and we're confident that they'll sort of move through that cycle.
Speaker Change: They've basically gone through the tests of our products and said, OK, let's let's go all in and and move forward. I would say you've then got the sort of bulk of customers.
Speaker Change: who, for example, as a partnership group have decided that they need to adopt generative AI, that it's going to be transformative, but they're really in test and learn phase. So they're evaluating their products, they're evaluating others.
Speaker Change: make the products available in test form and get them more and more comfortable.
Speaker Change: with Generative AI as a concept and as a set of tools.
Steve Hasker: So, along with saying, I think we're seeing a bit of everything, and our teams under Ragoo and Laura, I think are doing a great job of ensuring that each of those different customer personas has been catered to.
Speaker Change: And we're confident that they'll sort of move through that cycle. So long I've saying, I think we're seeing a bit of everything and our teams under Raghu and Laura, I think are doing a great job.
Speaker Change: of ensuring that each of those different customer personas has been catered to.
Minab Patnaik: Great, thanks. If you find that your question has been answered, you may remove yourself from the queue by pressing star two, and we'll move on next to Minab Patniak with Barclays. Please go ahead. Thank you.
Speaker Change: Great, thanks.
Minab Patnaik: I just see why I said a question on, you know, it sounds like the PR machines that, you know, your firm and the competitors, obviously rolling, you know, with all the different rollouts of AI and Genie and offerings, just in your discussions. You know, with your client's sake, is there a potential, you know, for shareships, given who rolls out the better product, or is this everyone kind of, you know, also just reestablishing their current, you know, market dynamics, which have been pretty consistent over the years. But now, I think it's a great question. I think it's too early to tell how this is going to play out.
Speaker Change: Thank you.
Speaker Change: I just had a question on, you know, it sounds like the PR machines that, you know, your firm and the competitors obviously rolling, you know, with all the different rollouts of AI and Gen AI and offerings, just in your discussions,
Steve Hasker: I mean, we are, as I said earlier, respectful of our sort of existing and emerging competitors, but we're very focused on our customers and serving them in new and improved ways and creating more value for them and driving more profit for them. And that's a shift for us in terms of, in terms of our selling motion. You know, traditionally, we've been focused on accuracy, completeness of information, you know, efficient use of our software tools and embedded in the workflow. And we're expanding that proposition and the sort of ROI story we tell. I think it's too early to tell us to sort of whether there will be shareships.
Steve: And serving them in new and improved ways and creating more value for them and driving more profit for them. And that's a shift for us in terms of, in terms of our selling process. You know, traditionally, we've been focused on accuracy, completeness of information, efficient use of our software tools, and embedded in the workflow. And we're expanding that proposition and the sort of ROI story we tell. I think it's too early to tell as to whether there will be share shifts.
Speaker Change: and and serving them in new and improved ways.
Speaker Change: and creating more value for them and driving more profit for them. And that's a shift for us in terms of.
Speaker Change: In terms of our selling motion, you know, traditionally, we've been focused on accuracy.
Speaker Change: and we're expanding that proposition and the sort of ROI story we tell. I think it's too early to tell as to sort of whether there will be shareships, but as I say, I hope you can tell we're respectful of competition, but very confident as to where we sit in the investments.
Steve: But as I say, I hope you can tell where we're respectful of competition but very confident as to where we sit in the investments that we've made so far and the investments we have planned for the back end of this year.
Steve Hasker: But, as I say, I hope you can tell where we're respectful of competition, but very confident as to where we sit in the investments that we've made so far and the investments we have planned for the back end of this year and in the next.
Heather Balsky: Thank you. We go next to Heather Balsky with Bank of America; Caroline is open. Hi, thanks for taking my question.
Operator: We go next to Heather Balsky with Bank of America. Your line is open.
Speaker Change: Thank you.
Speaker Change: We go next to Heather Balsky with Bank of America. Your line is open.
Heather Balsky: Hi, thanks for taking my question. Um, I had a question on legal, the legal segment during the quarter, just because there's some moving pieces with those sales coming from the print business. When you look at the organic growth, kind of x the print shift, you know, how is, how are the organic sales you're trending? sequentially?
Heather Balsky: I've had a question on legal, the legal segment during the quarter, just because there's some moving pieces with those sales coming from the print business. When you look at the organic growth, kind of X the print shift, how are the organic sales trending? Sequentially, are you seeing the modest sequential improvement that's kind of baked into your longer term outlook?
Heather Balsky: Hi, thanks for taking my question. I just had a question on legal, the legal segment during the quarter, just because there's some moving pieces with those sales coming from the print business. When you look at the organic growth,
Unknown Executive: You know, are you seeing the modest sequential improvement that's kind of baked into your longer-term outlook? Um, and also, just now that you're a couple quarters into this, what have been the biggest learnings with regard to the gen AI rollout? And how have you been kind of adjusting your strategy as you go?
Heather Balsky: And also just now that you're a couple quarters into this, kind of what have been the biggest learnings with regards to the gen AI roll out and how have you been kind of adjusting your strategy as you go?
Steve Hasker: Sure, Heather, I'll start with that. In regards to legal professionals, organic growth rate, Q2 2024 was stable with Q1 of 2024. However, when you compare it with Q2 2023, it's nearly 200 basis points higher.
Unknown Executive: Sure, Heather; I'll start with that. In regards to legal professionals' organic growth rate, Q2 2024 was stable with Q1 2024. However, when you compare it with Q2 of 2023, it's nearly 200 basis points higher. What you would see, given that we provide rounding, not to the decimal, a rounding basis is 6 versus 7, but given I have visibility into the decimal, it's about 200 basis points higher than Q2 of 2023.
Speaker Change: Sure, Heather, I'll start with that. In regards to legal professionals' organic growth rate,
Speaker Change: Q2 2024 was stable with
Michael Eastwood: What you would see, given that we provide grounding not to the decimal on a rounding basis, is six versus seven, but given I had visibility into the to the decimal, is about 200 basis points higher than Q2 2023. Your question focused on the sequential performance of the business. So once again, stable in Q2. As we look at Q3, Q4, we see a modest improvement step up in the second half of this year, which is a result of the performance, not just the gen AI products, but the products overall for legal that include Westlaw, Practical Law, co-cancel our international businesses along with drafting and high Q.
Speaker Change: It's nearly 200 basis points higher. What you would see, given that we provide rounding, not to the decimal.
Speaker Change: On a rounding basis, it's 6 versus 7, but given I have visibility into the decimal, it's about 200 basis points higher than Q2 of 2023. Your question focused on the...
Unknown Executive: Your question focused on the sequential performance of the business, so once again, stable in Q2. As we look at Q3 and Q4, we see a modest improvement step up in the second half of this year, which is a result of the performance of not just the Gen-AI products, but the products overall for legal that include Westlaw, Practical Law, Co-Counsel, our international businesses, along with Drafting and High-Q. I mentioned during the call today that government business was 7% in Q2, which was a slight uptick from Q3.
Speaker Change: which is a result of the performance, not just the Gen-AI products, but the products overall for legal that include Westlaw, Practical Law, CoCancel, our international businesses.
Michael Eastwood: I mentioned during the call today that the government business was 7% in Q2, which was a slide uptick in Q2 versus Q1. The business that continues to provide some headlines is to find law business, which I've now mentioned, I think for three quarters consecutively. Growth rate for fine law is slower in the other portions of the business, which creates some question. As we go into the second half of this year, we do see a modest step up, Heather, in the legal to total legal professionals organic growth rate.
Speaker Change: Along with drafting and IQ. I mentioned during the call today that the government business was 7% in Q2, which was a slight uptick in
Unknown Executive: Q2 versus Q1. The business that continues to provide some headwinds is the fine law business, which I've now mentioned for three, four quarters consecutively. The growth rate for fine law is slower than the other portions of the business, which creates some suppression. As we go into the second half of this year, we do see a modest step up, Heather, in the total legal professional organic growth rate. And then
Michael Eastwood: And then Heather, on which regards to your second part of your question on learning, look, I think there've been many and varied; I'd point to three in particular. So the first is that lawyers and tax accounting professionals, auditors are leaning in to generative AI. And I think, as it pertains to particularly the legal profession, I think it's certainly against where I thought they'd be. I think they are more open-minded about it and certainly pressing for four solutions and to test and learn and adopt.
Michael Eastwood: You know, the legal profession, depending on how you define it, is 350 or 400 years old, and it's been characterized to sort of moving very slowly. That is not what we are seeing here. So I think that's the first learning. The second learning is a real drum beat around the importance of trusted information and content to train and tune large language models and the need for the provider of these tools to be a responsible and ethical. Arbiter of Generative AI. And those themes are in every conversation: the sort of need to assure our customers that the output of these products can be relied upon.
Speaker Change: is a real drumbeat around the importance of trusted information and content to train and tune large language models and the need for the provider of these tools to be a responsible and ethical provider.
Steve: Arbiter of Generative AI. And those themes are in every conversation, the sort of need to assure our customers that the output of these products can be relied upon. And I think the third one, which is slightly different, is that the interest in demand has been just as large from the smallest customers as from the very large global firms. And that's been really interesting to see. Typically, when we put out a new version of Practical Law or Westlaw, it's typically the biggest firms with the deepest pockets.
Michael Eastwood: And I think the third one, which is slightly different, is the interest in demand has been just as large from the smallest customers as the very large global firms. And that's been really interesting to see. Typically, when we're looking at the market, we're looking at the market. We put out a new version of Fract the Law or Westlaw. It's typically the biggest firms with the deepest pockets who sign up. Whereas what we've seen is really good uptake within Aaron Radermarker's business, which is our small law firms, and also Liz Zimics, which is mid-law, just that the sort of uptake in demand has been just as strong within those segments as it has within Steve AC.
Speaker Change: The interest in demand has been just as large from the smallest customers as the very large global firms.
Michael Eastwood: So global large law segment.
Michael Eastwood: Thank you both very much.
Stephanie Yee: Once again, if you'd like to signal for a question, please press star one at this time, and we'll go next to Andrew Steinerman with JP Morgan. Your line is open. Hi, good morning.
Operator: Once again, if you'd like to signal for a question, please press star one at this time, and we'll go next to Andrew Steinerman with J.P. Morgan. Your line is open.
Operator: Thank you both very much. Once again, if you'd like to signal for a question, please press star one at this time, and we'll go next to Andrew Steinerman with JP Morgan. Your line is open.
Speaker Change: Thank you both very much.
Speaker Change: Once again, if you'd like to signal for a question, please press star one at this time, and we'll go next to Andrew Steinerman with J.P. Morgan. Your line is open.
Stephanie Yee: This is Stephanie, stepping in for Andrew. The corporate's organic revenue growth was a little bit faster than we were expecting. Would you say that you've seen a pickup and sale activity? And I know you called out a few products, but would you attribute the growth as primarily driven by legal products or tax products?
Stephanie Yee: Hi, good morning. This is Stephanie Yee stepping in for Andrew. The corporate's organic revenue growth was a little bit faster than we were expecting.
Stephanie Yee: Yeah, Stephanie, happy to start there. We're specifically pleased with the corporates segment. I know we're focusing today on the second quarter, but for the first half of this year, it's 10% organic growth for the total corporate segment. And if you look at the underlying net sales, a book of business, we had comparable growth. Stephanie, which gives us confidence as we go into Q3, Q4. We have called out in prior quarters elongated sales cycles for the corporate sales team. We're cautiously optimistic with the performance that we see right now. And once we go into Q3 and get another quarter behind us, I think we'll be able to provide further visibility, but certainly incredibly pleased in regards to the products right now.
Speaker Change: Yeah, Stephanie, happy to start there. We're pleased with the corporate segment
Stephanie Yee: For the total corporate segment and if you look at the underlying net sales of book of business
Speaker Change: will be able to provide further visibility, but certainly incredibly pleased. In regards to the products right now,
Michael Eastwood: We're seeing really strong performance from all that I mentioned, practical, all clear indirect tax in our international businesses. As a reminder, when we reference indirect tax, that includes the bigger acquisition from Q1 of this year, which includes Ian voicing. So we've had really strong performance from the overall portfolio in corporates thus far. As we look at our selves pipeline for Q3, Q4. We remain optimistic that we just have to continue to earn at each day, Stephanie, but off to a really good track there. That 10% organic growth for the first half is, that's 300 basis points higher than full year, 2023.
Stephanie Yee: We're seeing really strong performance from all that I mentioned, practical, all clear.
Stephanie Yee: Indirect tax in our international businesses. As a reminder, when we reference indirect tax, that includes the Bagheera acquisition from Q1 of this year, which includes e-invoicing. So we've had really strong performance
Speaker Change: from the Overall Portfolio Incorporates thus far.
Speaker Change: We remain optimistic. We just have to continue to earn it each day, Stephanie, but off to a really good track there.
Michael Eastwood: So look forward to providing a further update on Q3, but good traction thus far.
Michael Eastwood: I would say a key point, Stephanie, is execution by largely McDonald and our full team there.
Unknown Executive: I would say a key point, Stephanie, is the execution by Laura Clayton McDonald and her full team there.
Speaker Change: I would say a key point, Stephanie, is execution by Laura Clayton McDonald and her full team there.
Stephanie Yee: Okay, great.
Toni Kaplan: Thank you very much.
Operator: We go next to the line of Toni Kaplan with Morgan Stanley. Please go ahead.
Toni Kaplan: We go next to the line of Toni Kaplan with Morgan Stanley. Please go ahead. Thanks so much. I want to go back to T.R. Ventures.
Stephanie: Okay, great. Thank you very much.
Speaker Change: We go next to the line of Toni Kaplan with Morgan Stanley . Please go ahead.
Toni Kaplan: Thanks so much. I wanted to go back to TR Ventures. Looks like you still have about half the capital left to invest. But I guess, looking ahead, is this an area that you would look to put additional investment dollars in? And, you know, Mike, how are you thinking about ROI on this? Because I feel like there are a lot of innovation benefits, and that's maybe hard to measure. So I guess just talk about how you think about ROI as related to the ventures.
Toni Kaplan: Looks like you still have about half the capital left to invest, but I guess looking ahead, is this an area that you would look to put additional investment dollars in? And you know, my tower, you're thinking about ROI on this because I feel like there's a lot of innovation benefits, and that's maybe hard to measure contribution. So I guess just talk about how you think about ROI with related to the ventures.
Toni Kaplan: Thanks so much. I wanted to go back to TR Ventures. Looks like you still have about half the capital left to invest, but I guess looking ahead, is this an area that you would look to put additional investment dollars in and
Mike: Mike, how are you thinking about ROI on this because I feel like there's a lot of innovation benefits and that's maybe hard to measure contribution. So I guess just talk about how you think about ROI with related to the ventures.
Michael Eastwood: Sure, Toni. We have ongoing discussions with Tamara, who Steve mentioned in his prepared remarks. Given that we have roughly half the capital, still a fair amount left this year, but as we go into 2025 and beyond, we are prepared to make additional investments in these areas. We're pleased with the investments that we've made thus far. Toni mentioned the financial return is important, but also the strategic return. It's important to the company in regards to the innovation and particularly feeling our product pipeline, but we apply similar financial metrics and rigor to ventures as we do to other parts of our business, and I went into pretty lengthy detail during the March 12th Investor Day in regards to the financial metrics that we apply, Toni.
Mike: Sure, Toni. We have ongoing discussions with Tamara, who Steve mentioned in his prepared remarks, given that we have roughly half the capital, still a fair amount left this year. But as we go into 2025 and beyond, we are prepared to make additional investments in these areas. We're pleased with the investments that we've made thus far. Toni, you mentioned the financial return is important, but also the strategic return is important to the company in regards to innovation and really fueling our product pipeline.
Speaker Change: to make additional investments in these areas.
Toni Kaplan: We're pleased with the investments that we've made thus far. Toni, you mentioned the financial return.
Toni Kaplan: is important, but also the strategic return importance to the company in regards to the innovation and really fueling our product pipeline, but we apply
Mike: But we apply similar financial metrics and rigor to ventures as we do to other parts of our business. And I went into pretty lengthy detail during the March 12th Investor Day in regards to the financial metrics that we apply, Toni. But we are committed to incremental investments as we go forward in 2025 and beyond.
Mike: Similar financial metrics and rigor to ventures as we do to other parts of our business, and I went into pretty lengthy detail during the March 12th Investor Day in regards to the financial metrics that we apply, Toni, but we are committed
Michael Eastwood: But we are committed to incremental investments as we go forward in 25 and beyond, Toni.
Toni Kaplan: to incremental investments as we go forward in 25 and beyond, Toni.
Toni Kaplan: And then, as a follow-up, if the first half EBITDA margin increased by about 50 basis points year-over-year, if I look at the full year guide, that would imply a pretty steep deceleration in the back half year-over-year. Is there seasonality or acquisition dilution that we should be thinking about or what would maybe drive, or maybe it's just conservatism, so I guess what would sort of drive that implied margin decel in the second half? Thanks.
Michael Eastwood: Terrific. And then as follow up, if the first half EBITDA margin increased about 50 basis points year over year, if I look at the full year guide, I would imply a pretty steep deceleration in the back half year over year. Is there seasonality or acquisition dilution that we should be thinking about, or what would maybe drive, or maybe it's just conservatism. So I guess what would sort of drive that implied margin decel in the second half? Thanks.
Toni Kaplan: Terrific. And then as a follow-up, I guess the first half EBITDA margin increased about 50 basis points year-over-year. If I look at the full year guide, that would imply a pretty steep deceleration in the back half year-over-year. Is there...
Speaker Change: seasonality or acquisition dilution that we should be thinking about or what would maybe drive, or maybe it's just conservatism, so I guess what would sort of drive that implied margin de-sell in the second half? Thanks.
Mike: Sure, we, Toni, we remain committed to achieving our full year EBITDA margin guidance of 38%, approximately 38% that we provided back in February. We reaffirmed that today.
Michael Eastwood: Sure. We, Toni, remain committed to achieving our full year EBITDA margin guidance of approximately 38% that we provided back in February. Where we reaffirmed on that today. We've been very consistent in the last nine months, stating that 2024 is a year of investment, both in organic investments and inorganic by inorganic. I mean the integration-related cost that we have with the acquisitions we've done in the last 12 to 15 months. If you look at Q3 specifically, Toni, I would call out the convergence of four factors that contribute to that 34% margin guidance. Number one, Q3 will be the lowest revenue quarter due to the seasonality of our business.
Mike: Sure, we, Toni, we remain committed to achieving our full year EBITDA margin guidance of 38%, approximately 38% that we provided.
Mike: We've been very consistent in the last nine months stating that 2024 is a year of investment, both in organic investments and inorganic. By inorganic, I mean the integration-related costs that we have with the acquisitions we've done in the last 12 to 15 months. If you look at Q3, specifically, Toni, I would call out the convergence of four factors that contribute to that 34% margin guidance. Number one, Q3 will be the lowest revenue quarter due to the seasonality of our tab business.
Speaker Change: Back in February, we reaffirmed that today. We've been very consistent in the last nine months stating that 2024 is a year of investment, both in organic investments and inorganic.
Mike: So in absolute dollar terms, you have the lowest revenue in Q3. The third item that is incremental investment for us in Q3, and Q4 is the inorganic investments that you referenced, specifically integration work related to Beguiro, Sure Prep, Case Techs, and other acquisitions. And fourth item, which is to a lesser extent, we do have higher incentive compensation expense in Q3, Q4 due to us exceeding our revenue expectations, which aligns with us improving our Q3, Q4 results on today's call.
Michael Eastwood: So an absolute dollar term. 12th investor day. I went into lengthy detail there, in regards to product innovation, infrastructure, go to market and customer experience, initiatives, including partnerships. The third item that is incremental investments for us in Q3, Q4 is the inorganic investments that you reference specifically integration work related to the Garros, short curve case text and other acquisitions. And fourth item, which is to a lesser extent, we do have higher, higher incentive compensation expense in Q3, Q4 due to us exceeding our revenue expectations, which aligns with us improving our guidance. on today's call. So those four items really converge, Toni, in regards to the margin expectations for Q3, Q4, but once again, full year, we're committed to the approximately 38%, and we remain committed to the expansion in 25, 26.
Mike: And fourth item, which is to a lesser extent, we do have higher incentive compensation expense in Q3-Q4 due to us exceeding our revenue expectations, which aligns with us improving our guidance.
Mike: So those four items really converge. Tony, in regards to the margin expectations for Q3, Q4, but once again, full year, we're committed to approximately 38%, and we remain committed to the expansion in 25, 26. So we are proceeding as we planned at the beginning of the year with these investments. And given the ebbs and flows of our absolute revenue and the timing of the investments, those converge to a 34% margin.
Michael Eastwood: So we are proceeding as we plan at beginning of the year with these investments, and given the e-tabs and flows of our absolute revenue and the timing of the investments, those converge to 34% margin.
Mike: To the expansion in 2025-2026. So we are proceeding as we planned at the beginning of the year with these investments. And given the ebbs and flows of our absolute revenue and the timing of the investments, those converge to the 34% margin.
Mike: Super. Thanks, Mike.
Michael Eastwood: Super, thanks, Mike. Indeed.
Maher Yaghi: We go next to Maher Yaghi with Scotia Banks. Please go ahead. Great, thank you for taking my question. I wanted to just understand the puts and takes in your guidance. As we finish the first half of the year, the big three revenue organic growth rate was 9%, and your guidance is calling for eight. So basically a 7% in the back half, or seven and a half, something like that. So some deceleration. You discussed that corporate might see some deceleration in the back half. I'm trying to say, you know, just put that into context with your forward-looking statement about acceleration of revenue growth in 25, 26.
Speaker Change: Super. Thanks, Mike.
Operator: We go next to Maher Yaghi with Scotiabank. Please go ahead.
Mike: We go next to Mayor Yagi with Scotiabank. Please go ahead.
Maher Yaghi: I see some deceleration in the back half. I'm trying to think, you know, just put that into context with your forward-looking statement about acceleration of revenue growth in 2025-26.
Speaker Change: forward-looking statement about acceleration of revenue growth in 2025-2026
Maher Yaghi: So I'm trying to figure out why the deceleration is happening in the second half and how we're going to move to an acceleration in the 25, 26. Thank you.
Mayor Yagi: So I'm trying to figure out why the deceleration happening in the second half and how we're going to move to an acceleration in the 25-26. Thank you.
Michael Eastwood: I sure, Mera, happy to start there. First, I just remind you in the first semester for total TR in Q1. We had $25 million worth of orders, GNI licensing deal, which we stated was transactional one time. We had a similar 18 million in Q4 of 2023. So that 25 million of orders, GNI licensing deals was a strong contributor to Q1 and H1.
Mike: Sure, Mayor. I'm happy to start there. First, just a reminder, in the first semester for Total TR in Q1, we had $25 million worth of Reuters Gen-AI licensing deals, which we stated was transactional one time. We had a similar $18 million in Q4 of 2023, so that $25 million of Reuters Gen-AI licensing deals was a strong contributor to Q1 and H1. The second item I would mention is that we spent quite a bit of time during our Q1 earnings call explaining that we had some seasonal benefit in the first quarter in our corporate business and also in our tax and accounting professionals.
Speaker Change: Sure, Mayor. Happy to start there. First, a just reminder in the first semester for total TR in Q1,
Speaker Change: We had $25 million worth of orders to an AI licensing deal, which we stated.
Speaker Change: was transactional one time. We had a similar $18 million in Q4 of 2023.
Michael Eastwood: Second item I would mention is that we spent quite a bit of time during our Q1 earnings call explaining that we had some seasonal benefit in the first quarter in our corporate business and also in our tax and accounting professional. Just a reminder that if you look at our tax and accounting professional business and in the corporates business, we are impacted by seasonality in regards to when the tax professionals will regenerate the revenue from our tax products, which were both in tax and also in our corporates segment.
Speaker Change: Second item I would mention is that we spent quite a bit of time during our Q1 earnings call
Mike: explaining that we had some seasonal benefit in the first quarter in our corporates business and also in our tax and accounting professional. Just a reminder that if you look at our tax and accounting professional business and in the corporates business,
Mike: Just a reminder that if you look at our tax and accounting professional business and in the corporates business, we are impacted by seasonality in regards to when the tax professionals will regenerate the revenue from our tax products, which are both in the tax and also in our corporates segment. And we remain confident in further acceleration to 2025.
Michael Eastwood: Next factor I would mention is you look at year-over-year compatibility in Q4 of 2023. We had that 18 million of GNI. That creates about 100 basis points of organic growth delusion when you do comps year-over-year. So those are some of the factors prior that relate to the puts and takes this year. But we are very confident and achieve in the 6.5% organic growth or total TR, the 8% of the big three. And we remain confident in further acceleration into 2025.
Mike: Next factor I would mention as you look at year-over-year comparability in Q4 of 2023, we have that 18 million of Gen-AI.
Mike: That creates about 100 basis points of organic growth dilution when you do comps year over year. So those are some of the factors.
Mike: that relate to the puts and takes this year, but we are very confident in achieving the 6.5% organic growth for total TR, the 8% for the big 3, and we remain confident in further acceleration into 2025.
Steve Hasker: Thanks, Mike, and just a follow-up on your AI initiative on the in-legal. Now, in addition to the potential cost savings to lawyers and law firms, is there a potential revenue augmentation for these firms as they adopt AI, or is cutting costs going to be the main focus for them by adopting these funds? AIE can they turn around and with the, you know, the lower time used by lawyers can, is there a potential for them to get revenues upside or the market is so mature that it's the focus is mainly on cost savings?
Maher Yaghi: Thanks, Mike. And just to follow up on your AI initiative on the illegal. Now, in addition to the potential cost savings to, you know, lawyers and law firms, is there a potential revenue augmentation for these firms as they adopt AI? Or, you know, cutting costs is going to be the main focus for them by adopting these products, i.e. Can they? Transcribed by https://otter.ai Mayor
Steve Hasker: Thank you. Mayor, I would say it's probably too early to sort of declare one way or another, but what we're seeing from customers is a focus on both in the early going. So, on the revenue side, we have a number of particularly innovative customers who are starting to use our products combined with their own internal capabilities. We have a number of opportunities to experiment with new lines of business, and this is very early, but to say the least, very interesting. So we'll see how that plays out, but it's definitely an area of focus. It's not entirely cost.
Steve: Mayor, Steve, I would say it's probably too early to sort of declare one way or another, but what we're seeing from what we're seeing from customers is a focus on both in the early going. So on the revenue side. We have a number of particularly innovative customers who are starting to use our products combined with their own internal capabilities to experiment with new lines of, And this is very early, but to say the least, very interesting. So we'll see how that plays out.
Mike: Mayor, it's Steve. I would say it's probably too early to sort of declare one way or another, but what we're seeing from customers is a focus on both in the early going. So on the revenue side,
Speaker Change: We're starting to use our products combined with their own internal capabilities to experiment with new lines of business.
Mike: and this is very early but but to say the least very interesting so we'll see how that plays out but it's definitely an area of focus it's not entirely cost
Steve: But it's definitely an area of focus. It's not entirely cost. And on the cost side, I'd point to the experience or the history of the application of e-discovery tools within the legal profession. You know, before the e-discovery tools were rolled out, the legal profession. You know, a large firm may have several hundred people doing largely discovery-type tasks, and they were charging that by the billable hour, and then e-discovery tools were rolled out, so those couple hundred people were no longer required to do e-discovery, and yet the size of the firms grew, and the revenues grew.
Steve Hasker: And on the cost side, I'd point to the experience for the history of the application of e-discovery tools within the legal profession. You know, in before the e-discovery tools were rolled out. The profession, you know, a large firm may have several hundred people doing largely discovery type tasks, and they were charging that out by the billable hour, and then e-discovery tools were rolled out that those couple hundred people were no longer required to do e-discovery. And yet the size of the firms grew, and the revenues grew. So, in other words, the firms did two things successfully.
Mike: You know a large firm may have several hundred people doing largely discovery type tasks
Mike: And they were charging that out by the billable hour.
Steve: So, in other words, the firms did two things successfully. Firstly, they migrated that talent to different tasks. And secondly, they were able to adopt value-based billing or other revenue generation techniques to overcome the sort of decline in hours on that particular task. So, you know, history is not a perfect predictor of the future, but certainly that is one example that points to where the firms will try to go, and they're increasingly experimenting with at the moment. I hope that answers your question.
Steve Hasker: Firstly, they migrated that talent to different tasks. And secondly, they were able to adopt value-based billing or other revenue generation techniques to overcome the sort of declining hours on that particular task. So, you know, a history is not a perfect predictor of the future, but certainly that is one example, I think, that points to where the firms will try to go, and they're increasingly experimenting with at the moment. I hope that answers your question.
Mike: And secondly, they were able to adopt value-based billing or other revenue generation techniques.
Mike: to overcome the sort of decline in hours on that particular task. So
Steve Hasker: Yes, thank you.
Operator: We'll go next to Sami Kassab with BNP Paribas. Please go ahead.
Steve Hasker: Yes, thank you, Steve.
Sami Kassab: Thank you very much, and good morning, everyone. Can you please comment on my feedback from co-counsel early adopters, especially on reliability, given the context of the Stanford University study. In other words, are we seeing early adopters broaden their pilots to include a larger number of professionals within the firm, or is it too early to tell? So, Sami, the feedback on co-counsel from its early days when it was part of CaseText under Jack Heller's leadership all the way today with the significant investments that we've made in it under the ownership of TR has been very positive.
Sami Kassab: Can you please comment on the feedback from co-counsel early adopters, especially on reliability, given the context of the Stanford University study? In other words, are we seeing early adopters broaden their pilots to include a larger number of professionals within the firm, or is it too early to tell?
Steve Hasker: Thank you very much and good morning everyone.
Speaker Change: Can you please comment on the feedback from co-council early adopters, especially on reliability?
Steve Hasker: In other words, are we seeing early adopters broaden their pilots to include a larger number of professionals within the firm, or is it too early to tell? Thank you, Steve.
Unknown Executive: Thank you.
Unknown Executive: So, Sami, the feedback on co-counsel... from its early days when it was part of Case Text under Jay Keller's leadership, all the way to today with the significant investments that we've made in it under the ownership of TR has been very positive. So we're excited, increasingly excited about that acquisition, not only for the legal AI assistant and the skills they bring, but also in the application of those skills across all of our products.
Speaker Change: All the way to today with the significant investments that we've made in it.
Steve Hasker: So we're excited, increasingly excited about that acquisition, not only for the legal AI assistant and the skills they're in, but also in the application of those skills across all of our products. You know, and the launch of checkpoint with co-counsel is the first of many examples of that.
Unknown Executive: And the launch of Checkpoint with co-counsel is the first of many examples of that. And if you'd like a sort of a broader explanation as to where we're going, please go back to our investor, David Wong,'s presentation of the sort of integrated product set on March 12th.
Steve Hasker: And if you like a sort of a broader explanation as to where we're going, please go back to our investor, David Wong's presentation of the sort of integrated products set from March 12. You mentioned the Stanford study; the Stanford study did not cover co-counsel. Initially, it focused on practical law and incorrectly, some practical law, and then West Law, and just to be really clear on this, we disagree with the findings of the Stanford study. Our internal testing of West Law precision AI assisted research shows an accuracy rate of 90 percent, and that's what our customer testing is bearing out.
Speaker Change: And if you'd like a sort of a broader explanation as to where we're going, please go back to our investor name, David Wong.
Speaker Change: Presentation of the sort of integrated product set from March 12th. You mentioned the Stanford study. The Stanford study did not cover co-council.
Unknown Executive: You mentioned the Stanford study. However, the Stanford study did not cover co-counsel. Initially, it focused on practical law, and incorrectly focused on practical law, and then WESTLAW. And just to be really clear on this, we disagree with the findings of the Stanford study. Our internal testing of WESTLAW Precision AI-assisted research shows an accuracy rate of 90%, and that's what our customer testing is bearing out. So the short answer is we don't agree with the Stanford study, and we'll welcome as we go forward more robust independent research efforts, which will inevitably occur.
Speaker Change: Initially it focused on practical law and incorrectly on practical law.
Steve Hasker: Just to be really clear on this
Speaker Change: We disagree with the findings of the Stanford study. Our internal testing of Westlaw Precision AI-assisted research shows an accuracy rate of 90%, and that's what our customer testing is bearing out.
Steve Hasker: So the short answer is we don't agree with the Stanford study, and we're welcome as we go forward, more robust, independent research efforts, which will inevitably occur.
Speaker Change: So, the short answer is we don't agree with the Stanford study, and we'll welcome as we go forward more robust independent research efforts, which will inevitably occur.
Steve Hasker: I need to early to say whether the pilot symbol being brought into more lawyers and members of a firm, or are we seeing that trend happening now? We're seeing that. That process is starting. The process is starting, so what typically a firm will buy will apply the product to a portion of their population, and then in success they'll broaden that out. Excellent, and good news. Thank you.
Unknown Executive: And is it too early to say whether the pilots are being blown to more lawyers and members of a firm, or are we seeing that trend happening now?
Speaker Change: And is it too early to say whether the pilots are being blown to more...
Speaker Change: Lawyers and members of a firm or are we seeing that trend happening now?
Unknown Executive: We're seeing that. That process is starting. Typically, a firm will buy, apply the product to a portion of their population, and then if it is successful, they'll broaden it out.
Speaker Change: We're seeing that. That process is starting.
Operator: Thanks.
Speaker Change: Excellent. Good news. Thank you. Thanks, Sami.
Operator: And we have no further questions at this time. Great. Thank you. Thanks everyone.
Operator: And we have no further questions at this time.
Speaker Change: And we have no further questions at this time.
Operator: Thanks, everyone, for the time this morning.
Speaker Change: Great. Thank you. Thanks, Linda. Thanks, everyone, for the time this morning.
Operator: Thank you.
Operator: Thank you. This does conclude today's program.
Operator: This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.