Thomson Reuters Q2 net profit drops

Adjusted EBITDA increased 3% from the prior-year period and the corresponding margin was 27.6% versus 27.2% for the second quarter of 2012. Underlying operating profit was up slightly and the corresponding margin was 18.3% versus 18.4% in the prior-year period. 

Second-quarter adjusted earnings per share (EPS) were $0.48, unchanged from the prior-year period. 

"Our second-quarter performance was consistent with our full-year expectations," said James C. Smith, chief executive officer of Thomson Reuters. "I am pleased with the progress we continue to make despite challenging market conditions, particularly in the banking and legal sectors.

"We continue to make consistent, tangible progress across the business and we expect the company's performance in the second half of the year will be better than the first half."

Consolidated Financial Highlights

The declines in operating profit and diluted earnings per share were primarily due to significantly higher prior-year gains related to divestitures, which were $789 million in the second quarter of 2012 versus $142 million in the second quarter of 2013. Second-quarter 2012 divestitures included the company's Healthcare business and second-quarter 2013 divestitures included the company's Corporate Services business. Additionally, in the second quarter of 2013, the company recorded a $161 million tax charge reflecting its continued efforts to achieve greater efficiencies through simplification and consolidation of its technology and content assets.

• Revenues from ongoing businesses were $3.1 billion, a 2% increase before currency.
• Adjusted EBITDA increased 3% and the corresponding margin was 27.6% versus 27.2% in the prior-year period.
• Underlying operating profit was up slightly and the corresponding margin was 18.3% versus 18.4% in the prior-year period. A $20 million increase in depreciation and amortization expense had a 50 basis point impact on the margin.
• Adjusted EPS was $0.48, unchanged from the prior-year period. Higher depreciation and amortization and interest expenses were offset by an improvement in EBITDA and a lower effective tax rate.

(1) These and other non-IFRS financial measures are defined and reconciled to the most directly comparable IFRS measures in the tables appended to this news release. Additional information is provided in the explanatory footnotes to the appended tables.

Second-Quarter Business Segment Highlights

Unless otherwise noted, all revenue growth comparisons in this news release are before the impact of foreign currency as Thomson Reuters believes this provides the best basis to measure the performance of its business. 

Financial & Risk

• Revenues were down 1% as growth of 13% in Governance, Risk & Compliance and strength across the transaction-based businesses was offset by declining subscription revenues driven by the impact of negative net sales over the past 12 months. Organic revenues declined 3%.
• Recurring subscription-related revenues decreased 3% due to negative net sales over the past 12 months. Transactions-related revenues increased 22% (5% organic) primarily due to the acquisition of FXall and growth at Tradeweb. Recoveries revenues were down 4% and Outright revenues increased 2% (down 3% organic).
• By geography, revenues in Europe, Middle East and Africa (EMEA) were down 4%, revenues in the Americas were up 3% (down 2% organic), while revenues in Asia declined 2%.
• EBITDA was $420 million, unchanged from the prior-year period, with the related margin up 40 basis points to 25.3%, due to cost savings initiatives.
• Operating profit was $260 million, down 5%, with a related margin of 15.7%. Operating profit margin decreased 40 basis points due to higher depreciation and amortization expense ($12 million).
• Eikon desktops totaled approximately 61,000 at the end of the second quarter, up 30% from March 31, 2013.

Trading

• Revenues decreased 6% with growth in Elektron Managed Services offset by legacy desktop cancellations primarily in Equities and Fixed Income.
• Recoveries revenues were down 5%.

Investors

• Revenues declined 1% versus the prior-year period.  Enterprise Content revenues increased 9% offset by a 4% decline in Investment Management revenues. Banking & Research and Wealth Management revenues were essentially unchanged.

Marketplaces

• Revenues increased 6% (down 1% organic) driven by the acquisition of FXall and growth of 5% at Tradeweb.

Governance, Risk & Compliance

• Revenues grew 13% to $59 million due to strong sales growth and continued strong demand.

Legal

• Revenues increased 5% (1% organic). US Law Firm Solutions increased 1% as a 7% increase in Business of Law (FindLaw and Elite) was offset in part by a 1% decline in research-related revenues. Corporate, Government & Academic revenues decreased 1% as a result of continued cost pressures at the federal, state and local levels. Global businesses grew 23% (4% organic) driven by the recent acquisition of Practical Law Company (PLC) in the first quarter of 2013.
• US print revenues declined 7% as firms continued to reduce discretionary spending. Excluding US print, revenues grew 8% (2% organic).
• EBITDA increased 2% and the corresponding margin was 38.5% compared to 39.3% in the prior-year period. The decrease was due to the decline in revenues from the highly profitable print and research-related businesses and the acquisition of PLC.
• Operating profit was up 2% and the corresponding margin was 30.1% compared to 30.9% in the prior-year period. The decline in the margin reflected the same items that impacted EBITDA margin performance.
• 80% of Westlaw revenue has been converted to WestlawNext as of the end of the second quarter.

Tax & Accounting

• Revenues increased 7% (3% organic) driven by continued growth in subscription revenues and strong performance across all of the business segments except Government (5% of total Tax & Accounting revenues).
• EBITDA increased 10% and the related margin grew 130 basis points to 30.2%. Margin expansion was driven by flow-through of higher revenues.
• Operating profit increased 12% and the related margin increased 110 basis points to 19.8%.
• Small movements in the timing of revenues and expenses can impact margins in any given quarter for the Tax & Accounting business. Full-year margins are more reflective of the segment's underlying performance.

Intellectual Property & Science

• Revenues increased 9% (down 1% organic). Growth was driven by the MarkMonitor acquisition. Organic revenue was negatively impacted by softness in transactional revenues and the timing of revenues within the Life Sciences business, which are expected to be stronger in the second half of the year.
• EBITDA margin was 33.8%, a decline of 90 basis points, primarily due to the dilutive impact of the MarkMonitor acquisition and timing of revenues.
• Operating profit was flat with the corresponding margin declining by 210 basis points reflecting the same items that impacted the EBITDA margin.
• Small movements in the timing of revenues and expenses can impact margins in any given quarter for the Intellectual Property & Science business. Full-year margins are more reflective of the segment's underlying performance.

Consolidated Financial Highlights - Six Months

The declines in operating profit and diluted earnings per share were primarily due to significantly higher prior-year gains related to divestitures, which were $826 million in the first half of 2012 versus $156 million in the first half of 2013. First-half 2012 divestitures included the company's Healthcare business and first-half 2013 divestitures included the company's Corporate Services business. Additionally, in the first six months of 2013, the company recorded a $396 million tax charge reflecting its continued efforts to achieve greater efficiencies through simplification and consolidation of its technology and content assets.

• Revenues from ongoing businesses were $6.2 billion, a 2% increase before currency.
• Adjusted EBITDA was up slightly and the corresponding margin was 26.0% versus 26.2% in the prior-year period as higher revenues and cost savings initiatives across the company helped to offset $87 million of severance costs (versus $43 million in the first half of 2012).
• Underlying operating profit was down 3% and the corresponding margin was 16.6% versus 17.3% in the prior-year period due mainly to severance costs and an increase in depreciation and amortization of $40 million. Excluding the impact of severance, underlying operating profit would have grown by 1% with the related margin unchanged at 18.0% compared to the prior-year period.
• Adjusted EPS was $0.86 compared to $0.87 in the prior-year period. The decrease was primarily due to higher severance costs somewhat offset by a lower effective tax rate. Excluding the impact of severance in both periods, adjusted EPS would have increased by $0.04.
• Free cash flow was $501 million versus $653 million in the prior-year period. The decline was primarily due to timing of higher capital expenditures, loss of free cash flow from disposals and working capital requirements. For the full year, the company continues to expect to achieve free cash flow between $1.7 billion and $1.8 billion.

Corporate & Other (Including Reuters News)

Reuters News revenues for the second quarter were $82 million, up 2% from the prior-year period. Corporate & Other costs for the quarter were $62 million, down 7% compared to $67 million in the prior-year period.

Business Outlook (Before Currency)

Thomson Reuters today reaffirmed its business outlook for 2013. The company expects:

• revenues to grow low single digits;
• adjusted EBITDA margin to range between 26% and 27%;
• underlying operating profit margin to range between 16.5% and 17.5%; and
• free cash flow to range between $1.7 billion and $1.8 billion in 2013.

The full report can be read here.