Focus on costs to maintain profitability - James Smith

TR shares fell about three per cent after the company said on Tuesday that net sales in its financial and risk division, which serves banks and other financial institutions and includes Reuters news agency, were still negative in the second quarter and likely to remain so for the rest of the year. Net sales are total sales minus cancellations, an important indicator because of the group’s subscription-based business model. Its revenue typically lags sales by about 12 months.

“It is fair to say the external environment is worse than we had expected at the beginning of the year, particularly in Europe and with the big global banks,” chief executive James Smith told analysts in a conference call after the company released its Q2 results. “While we remain confident in the trajectory of our business, achieving positive net sales in the fourth quarter will be challenging as the market environment continues to deteriorate,” he said.

Europe accounted for approximately 40 per cent of financial and risk revenue in the second quarter. 

Revenue from ongoing businesses rose three per cent before currency changes to $3.2 billion. Financial and risk reported a one per cent drop in organic revenue to $1.8 billion. Organic revenue does not include acquisitions, divestitures and currency changes.

Thomson Reuters stood by its 2012 revenue growth forecast of low single-digit revenue growth and reported better-than-expected Q2 earnings as weakness in its financial business was offset by growth in its other divisions. The tax and accounting division reported the strongest organic revenue growth, up five per cent to $283 million. Organic revenue in the legal division rose two per cent to $818 million.

Thomson Reuters said adjusted profit per share was 54 cents in the second quarter, compared with 51 cents a year ago. It attributed the rise to the elimination of integration expenses related to the 2008 merger of Thomson and Reuters, and a lower tax rate.

Although the company stood by its 2012 forecast analysts on the conference call expressed concern about 2013 and questioned executives about the impact of negative net sales on revenue. Smith did not give any financial forecasts for next year but said the company would scrutinise costs to protect profits in a difficult environment.

Chief financial officer Stephane Bello said that while net sales had improved in the last two quarters, they remained negative and made it difficult to predict when the financial and risk business would hit a trough. He said the drop in net sales in Europe was three times sharper than in the Americas.

Thomson Reuters said sales of Eikon, its flagship desktop product, totalled more than 19,000 at the end of the second quarter, up around 20 per cent from the end of the first quarter.

“We understand that the global financial services market is likely to remain challenged and therefore we will give equal attention to the cost side of the equation, and we will cut our coat according to our cloth with the imperative of maintaining profitability,” Smith said on the call with analysts.

Thomson Reuters shares closed down two per cent in New York and 1.7 per cent in Toronto. ■