TRI - Thomson Reuters: Favorable Takeaways From Recent Investor Event Participation

2023-11-19 22:03:51 ET

Summary

• TRI boasts strong pricing power and a meaningful proportion of multiyear contracts.
• Thomson Reuters' future financial performance could surpass market expectations, assuming that it can take advantage of growth opportunities emerging from the Generative AI wave.
• I have left my Buy rating for TRI unchanged, considering positive takeaways from the company management's comments and disclosures at the recent JPMorgan investor event.

Elevator Pitch

Thomson Reuters Corporation ( TRI ) ( TRI:CA ) stock is still rated as a Buy.

In my earlier article written on July 24, 2023, I touched on TRI's latest acquisition and the company's dividend policy.

My current write-up highlights the important insights drawn from Thomson Reuters' participation in the recent JPMorgan ( JPM ) Ultimate Services Investor Conference (transcript sourced from S&P Capital IQ) on Thursday, November 16, 2023.

TRI has a meaningful amount of recurring revenue derived from the multiyear agreements for its key business divisions, and it has the power to initiate decent price hikes when contracts are up for renewal. Moving forward, Thomson Reuters' robust Generative AI product pipeline puts it in a good position to register strong growth in the future. These are the key investment merits that support a Buy rating for Thomson Reuters.

Multiyear Contracts Provide Revenue Stability

Thomson Reuters shared at the JPM Ultimate Services Investor Conference a couple of days ago that 60%, 40%, and 20% of the company's contracts for Legal Professionals, Corporates, Tax & Accounting Professionals business segments, respectively are "multiyear in nature."

The reasonably high proportion of multiyear agreements for TRI's key business segments implies that there is a greater degree of visibility and predictability associated with the company's future revenue.

The company has stuck with its initial full-year fiscal 2023 financial guidance after reporting its results for the third quarter of this year. Thomson Reuters' management guidance suggests that it expects its top line to expand by between +4.5% and +5.0% for FY 2023, which will be better than TRI's +4.4% headline revenue increase in the prior year.

Looking beyond the current fiscal year, the market sees TRI registering stable mid-single digit percentage sales growth for the intermediate to long term. In specific terms, the sell-side analysts are currently forecasting that Thomson Reuters' revenue expansion rates for FY 2024, FY 2025, FY 2026, and FY 2027 will be +5.3%, +5.8%, +4.5%, and +4.7%, respectively as per S&P Capital IQ's consensus data.

In a challenging economic environment that sees many businesses witnessing a big drop in sales derived from one-off transactions, Thomson Reuters stands out with its resilient top line supported by a decent proportion of multiyear contracts that generate recurring revenue.

Strong Pricing Power Is Supported By Market Leadership And Customer Stickiness

TRI benefited from around "30 basis points to 40 basis points" of "incremental price lift in '23 versus '22" as indicated at the company's Q3 2023 earnings call .

At the JPMorgan investor event on November 16, Thomson Reuters gave an illustration of the company's pricing power using the Tax & Accounting Professionals business segment as an example. Thomson Reuters guided for a +10% organic sales increase for its Tax & Accounting Professionals segment, of which half or +5% growth is attributable to favorable pricing changes.

Thomson Reuters explained at the latest JPM investor conference that the company's market leadership and the substantial costs associated with changing to a new software provider enable it to push through price hikes for its clients with the Tax & Accounting Professionals segment. TRI claims that its Tax & Accounting Professionals business is either the largest or the second largest player in the various sub-segments in which it operates. Also, it is tough for existing customers to switch to other software providers because of their familiarity with TRI's UltraTax software and the huge amount of historical that is stored in the existing system.

It is realistic to think that TRI is less vulnerable to any changes in the inflationary environment going forward, thanks to its strong pricing power.

Successful AI Product Drives Expectations Of Revenue Growth Acceleration

Thomson Reuters noted that it is anticipating "a step-up in the Legal Professionals organic growth" rate based on "the September results for Westlaw Precision" as per its management commentary at the November 16 JPM event.

An Overview Of The Westlaw Precision Product

A Comparison Of Westlaw Precision With Other Westlaw Products

TRI's Westlaw Precision product powered by AI-assisted research has performed well based on the metrics revealed by the company at its Q3 2023 results briefing. As of end-September 2023, Westlaw Precision has penetrated about 15% of the Legal Professional business' client base with in excess of 3,000 sales.

Thomson Reuters' Generative AI New Product Pipeline

With a significant number of new products associated with Generative AI in the company's pipeline as presented above, it is reasonable to think that TRI's actual mid-to-long term growth might exceed the market's expectations. It is worthy of note that Thomson Reuters highlighted at the JPMorgan Ultimate Services Investor Conference that it will "talk more about sort of what that (new Generative AI product offerings) does to our TAMs (Total Addressable Markets)" at its 2024 Investor Day in March next year. TRI seems to be hinting that expectations of the company's growth potential for the long run could be revised upwards.

Closing Thoughts

I am still bullish on Thomson Reuters. After reviewing TRI's presentation at the recent JPM investor event, I am more confident about the company's revenue resilience and its ability to exploit opportunities relating to Generative AI.

For further details see: