Q3 2024 Thomson Reuters Corp Earnings Call
Please stand by.
Speaker Change: Good day and welcome to the Thompson Reuters third quarter earnings call. Today's conference is being recorded. At this time I would like to turn the conference over to Gary Bisbee, head of investor relations. Please go ahead sir.
Gary Bisbee: Thanks for, good morning and thank you all for joining us today for our third quarter, 2024 learning call. I'm joined by Steve Hasker or CEO and our CFO Mikey Switt, each of whom will discuss a results and take your questions following your remarks.
Gary Bisbee: To enable us to get to as many questions as possible, we appreciate it if you'd limit yourself to one question and one follow of each when we open the phone lines.
Brought today's presentation when we compare performance period on period. We discussed revenue growth rates before currency as well as on an organic basis. We believe this provides the best basis to measure the underlying performance systems.
Gary Bisbee: Today's presentation contains forward-looking statements and non-IFRS and other supplementary financial measures, which are discussed on this special note slide. Actual results meet different materialy 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 my contact in our investor relations.
Speaker Change: Let me now turn it over to see Pastor.
Speaker Change: and thanks to all of you for joining us today. Good momentum continued in the third quarter, with revenue and margins modestly ahead of our expectations.
C Pastor: Total company organic revenues grows 7% and the big three segments growing by 9%.
C Pastor: As expected, the pace of organic investments picked up in the third quarter as we worked to position the company for faster revenue growth in 2025 and beyond.
Gary Bisbee: To incorporate the strong years of days, we are modestly increasing our 40 year 2024 organic revenue growth outlook to approximately 7% including approximately 8.5% for the big three segments.
Gary Bisbee: We continue to see healthy momentum from many areas in our portfolio. This includes double digit growth from key products including practical law, confirmation, and the GARO indirect tax and our international businesses.
C Pastor: Interest in our Gen. AI offerings remains strong, with Westlaw, Precision and Co-Counsel, momentum continuing.
C Pastor: Our 2024 investment plans are on track as we execute against the ambitious product roadmap. We discussed at our March Invest today.
Gary Bisbee: We made important progress against our roadmap in the third quarter, including the launch of co-council 2.0, which I will discuss in a few minutes.
Gary Bisbee: We remain focused on driving innovation across our portfolio on markets.
C Pastor: particularly as it relates.
Gary Bisbee: to AI.
Gary Bisbee: To this end, our investments in AI are now running at more than $200 million annualised, which is a pace we expect to continue over the next few years and is incorporated within our 2024 to 2026 financial framework.
Gary Bisbee: In addition to our organic efforts, we have made two small but strategically important inorganic.
Gary Bisbee: Investment that reflect our continued confidence in the Gen. AI opportunity. The acquisitions of safe-signed technologies and material bring key talents and accelerate our Gen. AI roadmap.
Gary Bisbee: We also recently announced the signing of a definitive agreement to sell our fine law business to internet brands.
Gary Bisbee: While Findler is a premier provider of customer acquisition and marketing services for small war firms, it's offerings deeper from our primary focus within legal professionals, of helping lawyers practice more effectively and efficiently through the use of content enabled technology.
Gary Bisbee: This has led in recent times to outside management focus on the business relative to its scale.
Gary Bisbee: The transaction will allow both Thompson Reuters and Internet brands to concentrate on their respective strategic priorities, ensuring customers continue to receive top tier service and support from Find Law.
Gary Bisbee: We remain extremely well capitalised and focused on shareholder value creation.
Gary Bisbee: We currently estimate $10 billion of capital capacity through 2027 up from our previously discussed $8 billion through 2026.
Gary Bisbee: We continue to assess additional inorganic opportunities.
Gary Bisbee: Now to the results for the quarter.
Gary Bisbee: Third quarter organic revenues grew 7% modestly ahead of our expectations. Organic recurring and transactional revenue grew 8% and 12% respectively while print revenues declined 6% in line with expectations.
Gary Bisbee: A Justin Everdough fell 4% to $609 million.
Gary Bisbee: reflecting a 430 basis point margin decline to 35.3%. This lower profitability was expected and results from organic and inorganic investments that we are making in 2024 to position the company for accelerating profitable revenue growth.
Gary Bisbee: Turning to the third quarter results by segment, the Big Three segments to live at 9% organic revenue growth. This is the fourth consecutive quarter of 8% or better growth for the Big Three.
Gary Bisbee: Legal Organic Revenue Group 7% driven by continued momentum from Westlaw, Precision and Co-Council. Corporates Organic Revenue Group 10% driven by offerings from our legal, tax and risk portfolios.
Gary Bisbee: Taxony County Organic Revenue's Group 10% Now Latin American Business and Tax Compliance offerings were key contributors.
Gary Bisbee: Reuters News Organic Revenue's rose 8% driven by additional, DENERITY AI related transactional content licensing revenue and growth from the news agreement with the data and analytics business of a London Stock Exchange group.
Gary Bisbee: While we have called out the transactional benefits for voices from a high-related licensing revenue.
Gary Bisbee: It is worth noting that there is also a growing recurring revenue component to these contracts, but the use of our Royce's news content in AI applications beyond model training.
Gary Bisbee: These contracts with both transactional and recurring revenue highlight the value of our Reuters news content. And lastly global print organic revenues met our expectations, declining 6% year on the year. And in summary, we're pleased with our results.
Gary Bisbee: Let me close my prepared remarks with updates on our product portfolio and innovation efforts.
Gary Bisbee: At our March Investor Day, we discussed a robust product roadmap that if executed well, should deliver strong value for our customers and improving growth problems, the Thompson Reuters.
Gary Bisbee: The third quarter features important progress against this roadmap, including a number of new capability launches. In August, we introduced co-council 2.0, a major upgrade to the co-council AI assistant. The new version delivers results three times faster.
Gary Bisbee: brings important connectivity to customer documents and includes a highly requested document comparison tool, along with several other user experience enhancements.
Gary Bisbee: During the course we also launched co-council drafting, Techpoint Edge with co-council and the claims explore a tool in West law precision.
Gary Bisbee: Customers feedback on these offerings has been positive and we continue to work toward delivering additional enhancements and launches over the next few quarters.
Gary Bisbee: As we've discussed in the past, there were organic innovation efforts assembled at its partnerships and strategic M&A through our build partner by strategy.
Gary Bisbee: We made two small but strategically significant acquisitions in recent months. In August, we acquired safe science technologies, which brings a strong team affiliated with Cambridge and Harvard universities that is developing legal, specific language models.
Gary Bisbee: In addition to its unique talent, our testing of safe science models in development has shown potential to enhance outcomes and improve accuracy of our generative AI offerings in the future.
Gary Bisbee: In October we acquired material which has developed and recently launched an agentic generative AI assistant for accounting, tax and audit professionals. We believe material will mean economic accelerate our AI roadmap in the tax and accounting in order spaces.
Gary Bisbee: Thompson Royd is ventured in early investor in material and led a proof of concept that allowed certain checkpoint users to leverage its content through materials AI assistant.
Gary Bisbee: The promising initial results from this work provides confidence in our joint potential to deliver significant value to tax accounting and order professionals. I'll now turn it over to Mike to review our financial performance.
Mike: Thanks Steve, thanks again for joining us today.
Mike: As a reminder, I will talk to revenue growth before currency and on an organic basis. Let me start by discussing the third quarter revenue performance for a big three segments.
Gary Bisbee: Organic revenue grew 9% with a third quarter, continued. Brand of 8% are better growth, we have delivered in recent quarters.
Gary Bisbee: Legal Professionals Organic Revenue Group 7% consistent with the first half.
Gary Bisbee: He drivers from a product perspective remain, West Law, Code Council and our International Businesses.
Gary Bisbee: Government grew 6% in the quarter and final all remained ahead when to the segment growth rate.
Gary Bisbee: Legal professionals revenue growth continues to benefit from the migration of customers from a global current product to Westwall.
Gary Bisbee: This added 5 million to year-over-year revenue growth in the quarter.
Gary Bisbee: Our corporate segment had a strong quarter with organic revenue growth of 10%.
Gary Bisbee: recurring revenue through 9% while transactional rows 13%.
Gary Bisbee: Trust, practical law, direct and indirect tax, and our international businesses were key contributors.
Gary Bisbee: faction accounting continues to deliver robust growth with another quarter 10% organic revenue growth.
Gary Bisbee: Recurring and transactional revenues grew 10% and 13% respectively.
Gary Bisbee: Our Latin America Business, One Source, UltraTax, and Confirmation for T-Driver.
Gary Bisbee: Moving to Rorters News, organic revenue increased 8% for the quarter, boosted by transactional revenue from additional generative AI content licensing agreements signed in the quarter.
Gary Bisbee: Excluding this revenue, Rorders Organic Revenue Increased Approximately 4%.
Gary Bisbee: On a year-to-date basis, we have recorded 33 million of transactional revenue from the AI content licensing agreements, up from 18 million in 2023.
Gary Bisbee: As a reminder, we will face difficult comparison for orders and for total TR in the next two borders.
Gary Bisbee: as we laugh the 18 million in 25 million of transactional revenue.
Gary Bisbee: that occurred in the fourth quarter of 2023 and the first quarter of this year, respectively.
Gary Bisbee: Lastly, global print organic revenues declined 6% or 3% when excluding the impact of the migration of customers from a global print product to West law.
Gary Bisbee: This was in mind with our expectations.
Gary Bisbee: On a consolidated basis, third quarter organic revenues increased 7%.
Gary Bisbee: Before I turn to our profitability, I would like to discuss a new metric we're introducing this quarter to help you track our success at bringing generous to say I capability into our product portfolio.
Gary Bisbee: The metric is the percent of our annualized contract values or ACV from products that are an AI enabled.
Gary Bisbee: As September 30th, approximately 15% of our ACV is from these GenAI-enabled products.
Gary Bisbee: Currently, Westlock Precision, in fact, Claw Dynamic are the largest contributors with co-counsel, co-counsel drafting, and checkpoint with co-counsel, also contributing.
Gary Bisbee: As we grow penetration of these products,
Gary Bisbee: introduced new Gen AI naval products and add Gen AI tools to other existing offerings. We expect that Gen AI product enabled ACV penetration percentage will continue to rise in the future.
Gary Bisbee: Herning to our profitability adjusted EBITDA with a big three segments was 555 million, down 2% from the prior year period with a 39.5% margin.
Gary Bisbee: The lower profitability result from organic and inorganic investments were making in 2024, position the company for improving profitable revenue growth in 2025 and beyond.
Gary Bisbee: We expect the higher level of investments to continue through Q4.
Gary Bisbee: Moving to Rortus News, adjusted EBITDA was 40 million with the margin of 20.4%.
Gary Bisbee: Global Prance Adjusted EBITDA was 43 million with the margin of 33.1%.
Gary Bisbee: In aggregate, total company adjusted EVIDA was 609 million, a 4% decline versus Q3 2023.
Gary Bisbee: Turning to Arnie's per share, adjusted EPS with 80 cents full of quarter versus 82 cents in the prior year period.
Gary Bisbee: Furnancy had no intact on adjusted EPS order.
Gary Bisbee: Let me now turn to our free test clock.
Gary Bisbee: First nine months of 2024, our free cash flow was 1.40 billion up 12% from 1.26 billion in the prior year period.
Gary Bisbee: Hira Ibida with the largest driver of the increase.
Gary Bisbee: I will conclude with a few thoughts on the financial impact of recent MNA and our updated 2024 outlook.
Gary Bisbee: On October 3, we announced the signing of a definitive agreement to sell a final business to Internet Brands in a transaction valued up to 410 million.
Gary Bisbee: We expect the transaction to close later in the fourth order.
Gary Bisbee: For modeling purposes, final all remains in our financial results through the closed date.
Gary Bisbee: The business has approximately 300 million of annual revenue with margin somewhat below overall to our levels.
Gary Bisbee: Looking forward, in an annualized basis, the expect-to-sell to start full-company organic revenue growth by approximately 30 basis points and be roughly neutral to margins when including stranded costs.
Gary Bisbee: We expect minimal impact on our full year, 24 results.
Gary Bisbee: We are very excited about the safe sign in materia acquisitions SD vindicated.
Gary Bisbee: From a financial perspective, those are early-stage startup businesses.
Gary Bisbee: State Sign is developing legal specific language models that in the future could bring performance and or class benefits to our GNI offerings.
Gary Bisbee: Materias on the Cusp of Generating Revenue have been recently released in the Genetic AI Assistant, going strong early potential.
Gary Bisbee: Both say sign and material will be lost making in 2025, but we plan to absorb this within the framework we have discussed for delivering 75 basis points of margin expansion in 2025.
Gary Bisbee: We remain focused on strategic MNA and our optimistic we will be able to complete additional transactions over the next year.
Gary Bisbee: As a reminder, we follow a rigorous financial approach to M&A, grounded by 10-year IRR NPV framework that is used to assess all acquisitions.
Gary Bisbee: We target an IRR, but at least two times are weighted average cost of capital and consider a number of additional metrics including payback period, integration, complexity, return on invested capital.
Gary Bisbee: Organic Growth Impact and a Creacian delusion to freak out flow in margins.
Gary Bisbee: We also risk adjusted the analysis based on the characteristics of the particular transaction being considered.
Gary Bisbee: The End
Speaker Change: As Steve outlined, we are raising our 2024 outlook for organic revenue growth for TR and the big 3 by 50 basis points each to incorporate strong year today performance.
Speaker Change: We now see organic revenue grows of approximately 7% up from 6.5% and organic big 3 revenue growth of approximately 8.5% up from 8%.
Speaker Change: We maintain our outlook for the remaining nine items. This includes our total revenue growth outlook, which is unchanged despite the higher organic growth due to the impact of the fine law divestiture.
Speaker Change: Looking forward, we remain confident in delivering to the 2025 and 2026 financial framework we discussed earlier this year.
Speaker Change: We are currently in our 2025 planning cycle and will provide more detailed 2025 and 2026 guidance on our Q4 conference call in February.
Speaker Change: But let me provide one early view on 2025.
Speaker Change: We expect our effective tax rate to be approximately 19% to 19.5%, up from approximately 18% in 2024, as the full impact from the OECD Global Minimum Tax Regulations materializes.
Speaker Change: We expect our cash tax rate to increase by a similar amount, but remain roughly 5% below our effective tax rate.
Speaker Change: Based on currently enacted tax legislation, we would expect our tax rate to remain stable in 2026 at the 19% to 19.5% level.
Speaker Change: These estimated increases in our effective and cash tax rate are already included in our 2025 to 2026 financial framework.
Speaker Change: As a reminder, Q4 revenue growth will be impacted by 1% from a tough comparison driven by the $18 million of Reuters Generative AI content licensing revenue recognized in the fourth quarter of 2023.
Speaker Change: We also expect that moderation of revenue growth from our corporates and tax and accounting segments due primarily to the seasonal mix of revenue.
Speaker Change: Let me now turn it back to Gary for questions.
Speaker Change: Thanks Ruth. We're ready to begin the Q&A. Thank you. If you would 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.
Speaker Change: We'll go first to Scott Fletcher with CIBC.
Scott Fletcher: Hi, good morning everyone. I wanted to ask a question on M&A given there's so much capacity on the balance sheet.
Speaker Change: particularly as it relates to AI deals. You've now done a few, some on the smaller end and then case text on the larger side at least from a capital deployed standpoint.
Speaker Change: I'm just wondering as you get further down the roadmap of GEN-AI, are you more comfortable looking at larger deals that involve a significant GEN-AI component, or does the risk-reward get more challenging as you start to look at larger deals on the GEN-AI standpoint?
Speaker Change: It's Steve, I'll start and I'm sure Michael will supplement.
Speaker Change: What I would say is, you know, we have...
Speaker Change: spent I think $2.2 billion over the last 12 or 18 months on the deals that we've spent a lot of time on these calls on. We're happy with each of those. We're happy with the way we identified them, the way we prosecuted those deals and the subsequent integration efforts. So, you know, I think you'll...
Speaker Change: Assuming that the targets are there and they meet our criteria, you'll see us do more of those kinds of deals in terms of size and scale.
Speaker Change: being additive to the customer experience within the big three.
Speaker Change: And as it pertains for anything bigger, we're gonna keep the bar really high. So we will not be.
Speaker Change: We won't get deal fever, notwithstanding the capital capacity that we have.
Speaker Change: and look to execute them. Mike, anything to add? Scott, I would just mention that when we think about M&A, we also have to think about financial capacity, which Steve just mentioned, which we have the $10 billion through 2027. Check the box there.
Mike: The other item that we consider is integration capacity, throughput within our organization, operationally, commercially, which I think we're in good shape there with the resources that we've added, Scott. And as Steve mentioned, the bar remains high, but we'll consider acquisitions that require shareholders and customers.
Scott Fletcher: Okay, great. And then just a follow-up on the M&A front. Is there any, can you provide any detail on sort of how much of the margin impact in the quarter was organic versus inorganic in terms of integration?
Speaker Change: Scott, that's one we'll ask Gary to follow up on with you later today. I think he has a follow-up with you, Gary, if that's okay.
Speaker Change: But certainly, Scott, there's a combination of organic and inorganic impact on the Q4. I'm sorry, Q3. That's fine, thanks. Yep.
Speaker Change: Thank you.
Speaker Change: We'll go next to Manav Patnik with Barclays.
Manav Patnik: Thank you. I just wanted to ask on, you know, the 15% of ACV from your Genii-enabled products,
Manav Patnik: I'm guessing most of that is on the legal side versus tax and accounting, and I guess over time, what is the right number that 15% should grow to?
Speaker Change: You're correct, I'm going to have in regards to currently that 15%.
Speaker Change: primarily relates to the Westlaw Precision AI.
Speaker Change: Secondly, the practical law dynamic, and then to a lesser extent right now but growing, is the co-council and we have co-council drafting and then checkpoint with co-council.
Manav Patnik: In regards to the right percentage, a number will continuously increase. I think it's difficult to say what that percent will be going forward, other than we would expect continuous improvement and increases on a monthly, quarterly basis, which we will provide.
Manav Patnik: Certainly, with the additional acquisitions of SafeSign and Materia, we have optimism that the tax and accounting, corporate-related products will continue to help us on this evolution, but we'll see that 15% continuously expand.
Speaker Change: Got it. And Mike, maybe just a good follow-up, you know, just on the moving parts. Apologies, I missed it, but I guess you raised the organic diversity basis point, but the overall growth is the same. So what is the moving pieces on the divestiture and the two acquisitions, I guess?
Mike: Yeah, the impact there, the reason we did not increase the total revenue growth is the impact of the fine law divestiture. Normally we've had this year about a 50 basis point delta, but with the pending close of fine law, we factored that in, MNAB, and that's why we did not increase the total revenue growth percentage. It's the fine law divestiture.
Speaker Change: Okay, thank you.
Mike: Sure.
Speaker Change: We'll go next to Vince Valentini with T.D. Cowan.
Vince Valentini: Thank you very much. Can I start with a clarification? The 15% ACV, is that just on big three recurring revenue or does it include news in print? Does it include transaction revenue?
Speaker Change: That's on the big three events. Thanks for the clarification points there. Basically think of that underlying ACV correlated to big three recognized recurring revenues of big three events.
Speaker Change: Thank you.
Speaker Change: And a question, I mean, there's not much to criticize in what you guys are doing. It's obviously great execution. But if I can nitpick a little, I mean, fine law looks like you're getting four times EBITDA for it.
Speaker Change: You can't do any better than that with the assets you're looking to sell. Should we expect other non-core stuff to be that low on the divestiture price? And if it's that cheap, why not just keep it? It's not really hurting you, is it?
Speaker Change: Is there multiple things to consider? Certainly the financial lens that you just applied but the additional lens that I don't think is reflected is in your comment is in regards to the leadership focus or as I think about
Speaker Change: The management time that's required, similar to last year when we acquired Elite, fine law requires a significant amount of outsize management time and bandwidth.
Speaker Change: So when you think about the opportunity cost, what it takes to lead fine law versus some of the other opportunities, we have to balance the financial metrics that you just mentioned, which are obviously important with the bandwidth that it requires. So that was certainly a factor, an additional factor similar to LEED.
Speaker Change: fine law is a little different than the core legal professionals business meaning if you think about legal professionals
Speaker Change: We're helping lawyers practice more effectively and that's outside the scope.
Speaker Change: Last point, and Steve may want to supplement, with fine law, we have additional industry dynamics, more cyclical, more macro there, but I would just double down and emphasize the amount of management time.
Speaker Change: that found FAMO was requiring. Yeah, I mean the only thing I'd add is I think Vince over the last 12 months
Speaker Change: We have sharpened and I think enhanced
Speaker Change: our strategy as it pertains to serving law firms and in-house.
Speaker Change: lawyers, court systems, attorneys general and so forth.
Speaker Change: And a lot of that, not all of that, but a lot of that is around this Gen AI opportunity. And that has focused the mind. We also see significant international growth opportunities for our legal professionals and corporate's legal abilities.
Speaker Change: And with that as the backdrop, the time spent navigating Google algorithm changes.
Speaker Change: and the disruptive impacts of Gen-AI.
Speaker Change: on this lead generation business that is, for small law firms, that is fine law. We just felt that that distraction was starting to far and away outweigh the size and benefit of holding onto that business, which is why we did the deal that we did.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Kevin McVeigh with UBS.
Kevin Mcveigh: Great, thanks so much. Hey, I just wanted to just.
Kevin Mcveigh: clarify that the $200 million of Gen-AI investment up from $100 million
Kevin Mcveigh: Is that all kind of reflected in the P&L, the incremental hundred, and I guess where's the offset? I mean you're seeing some pretty good momentum on the license sales, things like that, but just is that all, it sounds like 24, again just maybe help us understand that a little bit because I think it's a critical part to the story.
Speaker Change: Sure, Kevin, let me break that down into multiple pieces. Certainly for calendar year 23, it was slightly over $100 million. When we reference the $200 million, that includes both operating expense and capital expenditure. It does not include any cost of acquisition, so that's strict within our core operating P&L and underlying CapEx.
Speaker Change: So that $200 million, Kevin, does reflect.
Speaker Change: The amount, if you go back 20 months ago, when Gen AI really began to accelerate, we earmarked X amount for it. Then when we acquired Case-Tex in August of 2023, that certainly added.
Speaker Change: additional amounts to our run rates, both OPEX and CAPEX. And as we began 2024...
Speaker Change: we were very purposeful and intentional as we set our 2024 management plan to make additional investments OPEX and CAPEX in Gen AI. So it's really a culmination, Kevin, of OPEX, CAPEX evolution, which is all factored into
Speaker Change: our operating expense and capital directionally. It's about half and half if you think about OPEX and capital directionally. Kevin, does that help? Happy to go deeper.
Kevin: No, that's super helpful. And Mike, that would be the same split as the $100 million goes up to $200 million. It's the same split in terms of OPEX as opposed to CAPEX.
Kevin: Directionally, certainly in a given quarter, you're going to have a little bit of ebb and flow. But if you look at it on an annualized basis, that's roughly 50-50, Kevin.
Kevin Mcveigh: Got it. And then just real quick, especially relative to investor date, it feels like the organic growth in the big threes accelerating kind of even faster than what we would have thought.
Kevin Mcveigh: Is that the kind of pacing of the Gen-AI and just maybe is that retention starting to improve? Just any thoughts around, you know, the broad strokes there on the organic growth?
Speaker Change: That's a very fair question, Kevin. If you go back to February when we set guidance and then expand it out in March investor day, three things have evolved.
Kevin Mcveigh: over the time horizon. First is the corporate segment, about 45 basis points longer than we had anticipated, Kevin, at the beginning of the year. Huge credit to Laura Clayton McDonald, president of the corporate segment, and her leadership team. Execution has been phenomenal.
Kevin: As a reminder, 7% organic growth in calendar year 23, be over 9% this year. Second item that's contributed is tax and accounting professional. Obviously, 9.5% last year, we're probably looking at 7.5% this year. About 20 basis points stronger than we anticipated in tax and accounting.
Kevin: And then the third vector, Kevin, is Rewarders' GNAI. We certainly did not anticipate the incremental GNAI. We had baked into plan the $25 million in Q1 that we were very transparent about, but the most recent.
Kevin: Gen AI content licensing deal was accretive. So in summary, corporate's about 45 basis points, tax and accounting, 20 basis points, and Reuters Gen AI, about 20 basis points, Kevin.
Kevin Mcveigh: Super helpful. Thank you.
Kevin Mcveigh: Bye. Bye.
Speaker Change: Our next question comes from the line of Aravinda Galapathaj from Canaccord Genuity
Aravinda Galapathaj: Good morning. Thanks for taking my questions. Just a quick, I guess, housekeeping question before the main one. With respect to corporate costs, I mean, it does look like you're tracking below the guide, meaningfully, when I look at the nine-month numbers. Is there anything we should sort of consider when you look at Q4 there?
Speaker Change: I know everyone, it's a very fair question. There is a little bit of variability or seasonality with our corporate costs if you just annualize.
Speaker Change: through year-to-date nine months, it would appear that we're going to be below our guidance. I believe, Aravinda, we're going to be spot-on at least the lower end of our corporate cost just due to, I'll call it seasonality, that we're expecting in Q4, a good visibility into that Aravinda. So I think we'll be within the range that we have provided, but a very fair question.
Speaker Change: Okay, great. And then maybe just going back to the $200 million in spend, obviously you have the space to continue to invest in and sort of the encouragement from the results you've seen so far, but the 75 basis point margin expansion that you've originally guided for 2025,
Speaker Change: Does that envisage this $200 million level, recognizing, of course, only half of that is OPEX, or is there more room to grow that within that margin guide? I just wanted some color on that. Thank you.
Speaker Change: Yeah, a couple points. I would just add clarity as I referenced in my prepared remarks. If you look at 2025, we committed to 75 basis points of margin expansion, which we reaffirmed today.
Speaker Change: That means that we'll be able to absorb this 200 million of Gen-AI, the portion that's OPEX. Also, as I mentioned in the prepared remarks, we'll be able to absorb
Speaker Change: the dilution from the SafeSign acquisition and the Materia acquisition. One item to consider, Aravinda, is we go, historically I've talked about 75 basis points of natural operating leverage at 6% organic growth.
Speaker Change: If you go up to 7% organic growth, that...
Speaker Change: Natural Operating Leverage increases from 75 basis points to slightly over 100.
Speaker Change: So, when you look at that decision in regards to margin expansion versus reinvestment,
Speaker Change: That incremental operating leverage, now that we're at 7%, kind of affords us that optionality, but we are comfortable absorbing the Gen-AI at the 200 in addition to the acquisitions that we mentioned today.
Speaker Change: Thank you very much. I'll pass the line.
Speaker Change: Sorry Amanda. We're good.
Speaker Change: We'll go next to Andrew Steinerman with J.P. Morgan. Hi, Steve. As law firms have embraced Thomson Reuters GenAI-enabled products, have you seen law firms change any of their intentions around hirings and or practices around value billing?
Speaker Change: Thank you. Bye.
Speaker Change: Andrew, the short answer is not yet. There are very active conversations going on.
Speaker Change: amongst law firm partnerships.
Speaker Change: amongst the partners as to, firstly, what happens to the per-hour billing.
Speaker Change: and how much of the efficiencies will be shared with customers. So that's a sort of active conversation both within the partnerships themselves and with the general counsels that they serve.
Speaker Change: There's also active conversations around how much they spend and what sort of in-house data analytics, data science, technology, talent.
Speaker Change: they need. And so, you know, I think we're starting to see...
Speaker Change: Law Firm's resolve they're going to spend a bit more on technology and then try to figure out sort of where that where that funding and investment is going to come from as they think about their people spend and
Speaker Change: their real estate spend. A number of law firms through the middle of this year sort of said okay we're thinking about
Speaker Change: holding the number of new graduates that we hire or perhaps even reducing that number as we go forward in the next few years. But I think it's too early to tell as to sort of exactly how this is going to play out across the
Speaker Change: large, medium and small firms. We're obviously, you know, every single day in conversation and providing support and monitoring those conversations. And they're occurring, and I think they're healthy, but it is early in the context of that broader transformational change.
Speaker Change: Makes sense. Thank you.
Speaker Change: We'll go next to Mayor Yagi with Scotiabank.
Mayor Yagi: Thank you for taking my question. My first one relates to your NCIB program. I noticed that you did not buy any stocks during the Q3 because you exhausted your NCIB back in Q2. As we stand today, your leverage is very healthy at 0.5 times.
Speaker Change: What are your plans in terms of returning capital to shareholders here with another potential NTIB program? and if so
Speaker Change: Should we expect a similar size to 2023, or the formulaic requirements allow you this year to buy more than the $10 million of last year? The second question is on case text.
Speaker Change: So with one year now under your belt, can you update us on the performance that you have been able to achieve on that asset since you closed the transaction? Maybe if you can provide some metrics.
Speaker Change: on Revenues or Amplification Implications to Existing Products, i.e. Delivering on Your Expectations and Returns to Expectations. Thank you.
Speaker Change: I'll take the first one in regards to NCIB. I think we foreshadowed on the August earnings call not to expect any NCIB or share buyback in Q3 or Q4.
Speaker Change: and that's really driven by the current interest rate environment. Certainly, we have seen a decline in interest rates, but at the current interest rates, based on our calculations...
Speaker Change: and assessment were still slightly diluted.
Speaker Change: But I would not expect any share buybacks or NCIB in Q3, Q4.
Speaker Change: If we decide to move forward with an NCIB, we'll certainly discuss with our board.
Speaker Change: But given at the beginning of 2024, we committed to 75% capital return.
Speaker Change: over the time horizon. If you look at just our dividends, our dividends gets about 50 to 55%. So mathematically, we would need on an individualized basis about 500 million.
Speaker Change: of an NCIB in calendar year 2025 to hit that 75% capital return guidance that we provided so early earlier this year. So to summarize,
Speaker Change: We do not anticipate any NCIB in Q4. The timing in 2025 will be based on interest rate, environment, and then the size will be based on a multitude of factors, including the timing of potential strategic M&A.
Speaker Change: And then Mayor, it's Steve, on case text...
Speaker Change: We don't provide sort of, you know, product by product.
Speaker Change: revenue guidance for something like Haystacks, but unequivocally from my point of view, this one is on or ahead of track.
Speaker Change: relative to the acquisition case we made and the price we paid. And there's a few reasons for that. The first is we're seeing really good growth in the core co-council product.
Speaker Change: in the United States. And of course, we put out co-council 2.0 and we're excited about some of the enhanced features of functionality I mentioned in my prepared remarks.
Speaker Change: Secondly, co-council is a vehicle through which we plan to explore international growth in the legal field in a way that perhaps we haven't in the past.
Speaker Change: given the association of research with common law rather than civil law markets. And then thirdly,
Speaker Change: We've extended Co-Council to Checkpoint, with Checkpoint with Co-Council, and also most recently under the leadership of Ray Grove, one of our product executives in our OneSource suite.
Speaker Change: And so, not only is it sort of within that core legal franchise, we're seeing real applications and I think excitement from customers.
Speaker Change: beyond that. And of course, the material acquisition we think is additive here and will be an accelerant for that extension of the core AI assistant capabilities. So in summary, we're excited about what Case Text has brought to TR.
Speaker Change: and we're equally or even more excited about what the next few years will hold for that set of capabilities and the impact it'll have on our customers.
Speaker Change: Great. Thank you very much.
Speaker Change: Our next question comes from the line of Tony Kaplan with Morgan Stanley.
Speaker Change: Thank you.
Tony Kaplan: Is there less of a focus there or was just this was not the right product to be selling to them and you're better off selling the AI products?
Tony Kaplan: Thanks.
Speaker Change: Yeah, Tony, it does not represent a shift away from small law firms. We are excited about that segment under the leadership of Aaron Rademacher.
Tony Kaplan: He and his team are doing a great job.
Tony Kaplan: and specifically what we have seen is an interesting shift, which is
Tony Kaplan: As we've brought to market some of these brand new features and functionality around 10 AI,
Tony Kaplan: We've seen the very smallest of our law firm customers pick them up as quickly.
Speaker Change: as the global large law firms and I think historically
Speaker Change: That was not the case. It was the large law firms with very sophisticated teams, research and knowledge teams and budgets.
Speaker Change: that would be first in adopting these products and the smaller firms were much farther down the line. We've seen
Speaker Change: a pretty equal balance.
Speaker Change: Very excited about the small law firm segment and Aaron's leadership thereof. And the reason for the divestiture of fine law, as I said before, our strategy is sharpened and fine law was just not part of it, and we felt it was an increasing distraction.
Speaker Change: Tony, I would just supplement. A small law firm is over 25% of our legal revenues. Hopefully that amplifies the importance of small law that Aaron leads for us.
Speaker Change: Very helpful. I was also hoping you could give us an update on your thoughts around how to how you're pricing the co-council product if there's been any changes to that and you know how you think about pricing it across different customer types.
Speaker Change: Yeah, I mean, without giving too much away, Tony, we've been in test and learn mode, I think, since we acquired CodeCouncil. You know, this is a dynamic market with a brand new proposition to a set of, you know, existing and prospective customers. So, you know, there has been a degree of sort of testing and iterating. What I would say is we price to value.
Speaker Change: firstly. Secondly, we prefer enterprise-wide pricing rather than per seat. You know, we've never gone down that path and we don't plan to start and we're always very mindful of covering, more than covering,
Speaker Change: the variable cost components associated with pinging large language models.
Speaker Change: which is obviously a relatively new dynamic for us.
Speaker Change: So, you know, I would say so far so good on the pricing front, we're pleased with what we see in terms of that pricing to value component and we'll just stay diligent and continue to be flexible as we see the market evolve. Anything to add on that, Mike? No, I think that's a good summary.
Speaker Change: Thanks, guys.
Speaker Change: Thanks, Tony.
Speaker Change: We'll go next to Drew McReynolds with RBC.
Drew Mcreynolds: Yeah, thanks very much. Good morning and hopped on late, so hopefully not repetitive here. I did hear an earlier question, Mike, on the organic revenue growth.
Drew Mcreynolds: guidance increment where you broke it down in terms of those three components, so super helpful there. Bigger picture, when we kind of look at the 7% kind of guided growth for
Drew Mcreynolds: 2024 and then acceleration in 2025. You know we're kind of firmly into high single digits here which I think the long-standing Thompson followers
Drew Mcreynolds: is great to see. At that high level, can you just kind of update us on whether
Speaker Change: the components or drivers of that growth have changed with respect to price.
Speaker Change: obviously TANF expansion, you talked at your March Investor Day, market share, you know, how much of this is asset mix evolution, et cetera, just again, at a high level. And then second, maybe for you, Steve, on the agentic AI acquisition with Materia.
Speaker Change: fascinated from my perspective on kind of the next generation capability here on the agency side. Can you kind of give us a sense of what additional capabilities that acquisition brings you? Thank you.
Speaker Change: Yeah, Drew, on the first one in regards to the seven percent and describing that first in regards to pricing. Pricing today is very consistent with what we
Speaker Change: price lift on a year-over-year basis. If you do like-for-like, if you look across all of our
Speaker Change: Total TR, certainly varies by segment and sub-segment there. If you look at the convergence of factors, we're certainly doing better on new cells, new logos, cross-cell upsell, certainly helping. I think the one item, if you dissect, is kind of some of the parts for TRs, the corporates. [inaudible]
Speaker Change: which I mentioned earlier in the call, 7% organic growth last year.
Speaker Change: approaching very nine and a half this year. That's been a key factor for us. And I think that's.
Speaker Change: largely the sales execution that we referenced earlier on this call and on prior calls there. So we've seen good execution sales-wise by corporates throughout calendar year 24. So if I were to isolate
Speaker Change: one item that would be it. The second one which I've referenced is
Speaker Change: on the broader side, the Gen-AI content licensing deal, that's certainly helping us in Q3. But pricing is very consistent, Drew.
Speaker Change: retention just slightly higher. It's incremental. I think Kevin asked a related question earlier. We have not seen a significant uptick yet in retention. We remain optimistic there, but it was just a small incremental increase thus far this year.
Speaker Change: and the agentic capabilities that Kevin and Lucas and the team there have built. We're pretty excited about this one for a few reasons. The first is, you know, obviously,
Speaker Change: In layman's terms, what the agentic capabilities enable the material to do is perform in sequence and in parallel multiple related tasks.
Speaker Change: and then be able to bring them together to provide answers to more sophisticated questions and problems.
Speaker Change: And what Kevin and Lucas did from day one was built their set of capabilities around
Speaker Change: agentic models. So that's sort of been the heritage and starting point for that capability.
Speaker Change: That was one of the reasons we were really intrigued. The second reason is they've dedicated their time to tax and accounting and audit.
Speaker Change: and as we think about Elizabeth Bistrom's teams and all the activities that are going on there and the work that Dave Weil is doing in leading our audit capabilities we are very excited about taking that capability, starting
Speaker Change: this week at our Synergy customer conference in Orlando to our customers. And then last but not least, the other thing the Materia team did was, we think in a very unique way, put
Speaker Change: put together the ability to interrogate and integrate customers' documents.
Speaker Change: And that, of course, sets these capabilities on a whole new sort of path to value creation.
Speaker Change: and that's something that our Head of Engineering, Joel Horan, has been focused on for a period of time and so when he was able to get to know Kevin and Lucas and understand the capabilities, I think our excitement grew here. So, it's early days for this one, but starting this week in Orlando, we're excited about the journey.
Speaker Change: Thanks for the context.
Speaker Change: We'll go next to George Tong with Goldman Sachs.
George Tong: Hi, thanks. Good morning. The legal business has seen 7% organic revenue growth for several quarters now. Can you talk about when you expect legal organic growth to accelerate and what the top drivers will be?
George Tong: Harvey, if you look at a longer time horizon over the last 12 to 18 months, has it been a meaningful step up?
George Tong: in the legal professionals organic growth rate driven by Westlaw Precision and also the GEN-AI launches that we discussed there.
George Tong: We did see a slight uptick in the recurring revenue in Q3.
George Tong: We had a downtick in the transactional revenue. I mentioned government was six...
George Tong: Some of that transactional relates to government there, so you have the correlation. If you look at Q4-24 in calendar year 25, we do anticipate a modest improvement as we go forward.
George Tong: was there.
George Tong: I think we touched on here that the co-council certainly were optimistic there.
George Tong: Westlaw, we still have more room on the Westlaw precision penetration that we've discussed in prior quarters there, so a very solid 7% and we anticipate modest improvements as we go forward, George.
Speaker Change: Yeah, just to add to that George, I would say
George Tong: We talked to the investor today about the potential for our TAM to expand.
George Tong: on the back of GNAI and its ability to enable us.
George Tong: to play a larger role in the success of our customers.
George Tong: Everything we've seen since March 12th supports that.
George Tong: But the other thing we said on Invest Today was, this will require.
George Tong: a degree of change management within and across the law firms. And it was really central to Andrew Steinemann's earlier question. That process is underway. We will play a role in supporting our customers through that transformation, but we're not the sole determinant. And so we're focused on the long-term growth opportunity.
George Tong: and expansion of the role we play with and for the profession rather than the quarter-to-quarter. We'll keep ourselves accountable quarter-to-quarter but we're laser focused on that longer term expansion.
George Tong: And we're not going to do anything in the short term that compromises our ability to meet or exceed our customers' interest in pursuit of that.
Speaker Change: Got it. That's helpful.
Speaker Change: And then you touched a little bit about your pricing philosophy with CoPouncil.
Speaker Change: Can you discuss how you plan to monetize GenAI more broadly?
Speaker Change: across the segments. Given the step up in investment, how much of a pricing or revenue uplift in return do you expect from Gen-AI?
Speaker Change: that has a Gen-AI component and we'll keep you apprised of that.
Speaker Change: George, I think it's...
George Tong: It's a bit early to sort of say here are the direct through lines between the Gen AI capabilities and explicit pockets of revenue. We've seen good growth of Westlaw precision since we put the AI functionality in the marketplace, same with practical law, same with checkpoint. As Mike talked about
Speaker Change: co-counsel. So all of that points, I think, to a
Speaker Change: to a positive outcome. But the focus, as I said, is on ensuring.
Speaker Change: that these capabilities are to the benefit of our customers. And that's what we're focused on. That's what we're starting to see. And as long as we stay focused on that, I think you'll see our growth rates expand as we believe they will.
Speaker Change: Got it. That's helpful. Thank you.
Speaker Change: We'll go next to Doug Arthur with Huber Research.
Doug Arthur: Yeah, thanks. Hey, Steve, just on Reuters News, you made an interesting comment that some of the AI
Doug Arthur: modeling ATAL is becoming recurring in nature. Does that sort of change?
Doug Arthur: your outlook for that business on a.
Speaker Change: intermediate term basis.
Speaker Change: Thanks for the question Doug. No, it doesn't because you've got to bear in mind that that half or more than half of the revenues of Reuters
Doug Arthur: News relates to the 30-year news agreement with the data and analytics side of the London Stock Exchange Group.
Speaker Change: to do a better and better job of serving LSEG is a laser and primary focus.
Doug Arthur: Paul Baskerville, Alessandra
Speaker Change: and the team. We've obviously benefited in the fourth quarter and through this year from these deals. As I said earlier, I think it's too early to tell as to sort of what the longer term run rate, recurring run rate will look on these deals. We're pretty optimistic. We're focused on ensuring that the customers
Speaker Change: see value and are incented to expand and renew those over time. But as I said earlier Doug, I think it's a bit early to tell and of course
Speaker Change: the agency side of the business, the new subscription, the event side of the business, all bring some variability. So we're sort of optimistic and I think growing in confidence, but it really is early in this journey.
Doug Arthur: Got it, okay, thank you.
Speaker Change: We'll take our last question from Sami Kassab with BNP Paribas.
Sami Kassab: Thank you very much and good morning everyone. I'm trying to put some context around the 15% share of AECD from GenAI enabled products.
Speaker Change: Now...
Sami Kassab: Given the relative contract length across the Big Three, I am tempted to think that every year...
Sami Kassab: and therefore given that most of the general revenues sit in the legal profession, am I right to conclude that it means over the last 12 months or so pretty much every single law firm that had to renew decided to trade up
Sami Kassab: to a Gen-AI product? Would that be a first statement? Or if not, then could you comment on the share of renewables illegal that trades up to Gen-AI? Thank you, Steve.
Speaker Change: Yes, Sammy, I'll start. Certainly we've been sharing the the ACV penetration for the Westlaw Precision product. I think we're around 37% there. As you'll remember with Westlaw Edge, the previous version, earlier version of Westlaw, we
Speaker Change: I reached around 75% I think was the last percentage that we applied. So, it's difficult to provide a direct correlation to your question there, Sammy. I would say certainly.
Sami Kassab: As contracts come up for renewal, we have a very strong hit rate.
Sami Kassab: in regards to customers adopting the Westlaw precision that Gen-AI enabled. I think that's probably as much specifics as we could provide to that.
Speaker Change: Thank you. Yeah, nothing to add. Thanks, Sammy.
Sami Kassab: Ruth, I think that brings us to the end of the Q&A session, so thanks everybody for your interest and attention.
Sami Kassab: Thank you.
Speaker Change: Thank you. This does conclude today's conference call. Thank you for your participation. You may now disconnect.