Thomson Reuters Corporation

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Thomson Reuters is a global provider of business information services and workflow solutions, primarily serving professionals in the legal, tax, accounting, and media sectors.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview Thomson Reuters (TRI) operates as a diversified global business, providing specialized information, workflow solutions, and software tools primarily to legal, tax, accounting, and media professionals. The company’s reach is extensive, touching various aspects of the financial and legal information ecosystem.

  • Revenues and Segments:
    • The company’s revenues are largely recurring, with around 90% derived from subscriptions. The two primary segments are:
      • Legal Professionals: Provides legal research and workflow tools to law firms, corporations, and governments, a historically stable business that currently accounts for most of the revenue.
      • Tax & Accounting Professionals: Offers tax software and services, solutions for accounting and audit professionals. The company also has a smaller segment that provides news and information.
  • Industry Trends:
  • The industry continues to evolve towards digitalization, automation, and cloud computing, with a lot of innovation around new AI tools. This transition puts pressure on legacy systems and traditional working methods, while creating opportunities for those who can innovate and provide next-generation solutions.
    • The demand for expert knowledge is growing, and the sector is becoming increasingly specialized.
    • Regulatory requirements, tax compliance, and the risk environment are all getting more complicated, so specialized knowledge is vital.
  • The major trends according to their Q1 2024 report is “continued focus on higher levels of recurring revenue and investment in growth”.
    • Clients are increasingly asking for integrated solutions. They want platforms that make their workflow easier by having multiple functionalities on one platform.
    • Competition is increasing with new companies providing specialized knowledge.
  • Competitive Landscape:
    • Major competitors include Wolters Kluwer, LexisNexis, Bloomberg, and FactSet. The competition is fierce and concentrated in a few players, all large and well-capitalized, all providing services tailored for specific verticals and customer segments.
    • As AI gets more relevant for the business, there are also new competitors popping up that offer AI tools.

What makes TRI different? TRI’s long-standing history and dominance in legal research gives it a strong advantage. It’s difficult for new entrants to compete with their massive databases of historical case data, sophisticated and established software, and a huge number of existing clients.

Financial Analysis

  • Revenue Growth: TRI has delivered slow but steady revenue growth, driven primarily by recurring revenues.
  • Margins: The margins are relatively high and consistent in the core business of legal professionals and tax & accounting.
  • Debt: TRI’s debt levels have historically been manageable, although it has increased debt in recent years to fund acquisitions and returns of capital to shareholders, this has been paired with a steady increase in asset value, and revenue has remained high, so risk is relatively low.
  • Cash flow: Free cash flow has been reasonably stable. As they transition to more of a recurring revenue model, the stability of cashflows will increase.
  • Guidance: The company has projected an increase in revenues of around 5.5% in 2024, a little less than the 5.9% they had in 2023.
  • Capital Expenditure: The company is planning to increase capital expenditure by a fair amount to reach their target to spend at least 10% of revenue in capital spending on automation and technology, mostly for the development of new products and tech.

Moat Analysis (3/5)

  • Intangible assets (Brand and Intellectual Property): The brand is strong in its core legal professional business, where many lawyers use it as an all-inclusive research tool. The business also has many exclusive licenses and data that are very difficult to replicate, which helps it retain a portion of their customers, giving it a narrow but stable moat. The company also possesses a diverse patent portfolio that further extends this advantage.
  • Switching costs: The company’s core legal and tax products have high switching costs for its clients, who tend to be very reliant on its workflow tools and integrated data and are unlikely to switch due to disruption.
  • Network Effects: There’s a mild network effect in the software and legal databases, because users often want to use the same software that others use for collaboration. Still, other factors are more important and there’s some possibility of losing to other more technologically advanced solutions.
    • Scale: TRI’s sheer scale provides cost advantages, especially in legal research, and also provides a very vast database that other companies cannot easily replicate. However, technology may change this landscape.
    • Conclusion: Based on the factors above, I give it a moat rating of 3, as it has strong moats in the legal division through scale and switching costs but doesn’t have much moat in other areas of business, and is vulnerable to a potential change in technology leadership as AI becomes a bigger part of the market.

Risks to Moat and Business Resilience

  • Technological disruption and AI: The rapid development of AI could challenge established players if they are too slow in adopting new technologies, and potentially allow new entrants to eat into their market share. At the same time, companies with the best solutions can win this technology race.
    • Competition: The industry is quite competitive, and their big competitors are doing their best to grow and create value, presenting a constant threat.
      • Customer Retention: Even with switching costs, customers could move to competitors due to price or better features.
      • Debt: The increasing debt that TRI has taken on to fund acquisitions might put a strain on the company’s finances if it cannot maintain revenue and profit.

Understandability (3/5) The core business model of TRI is fairly straightforward to grasp, providing specialized data and software to legal, accounting, and tax professionals, but the full extent of their business operations and complicated financials makes them more difficult to fully understand. I am rating it 3 out of 5 as it might require a deeper investigation to fully grasp the value of the business.

Balance Sheet Health (4/5) TRI’s balance sheet is pretty healthy, though their net debt has increased significantly in recent years, however, most of the increase was funded with assets that generate consistent revenue and cashflows. Its liquidity position is relatively strong, and they have ample means to pay off their debt. I am rating it 4 out of 5.

Recent Concerns & Problems * Debt Load: TRI’s increasing debt burden is a concern, because the leverage has increased the company’s financial risk. * Slow Growth in Earnings: Although revenue is increasing, there have been instances of slow growth in earnings, especially considering the resources being put in, and it also has to compete with many competitors that operate in an increasingly competitive market, which increases pressure on pricing. * Technological Changes: The company is in a constant effort to incorporate AI into its existing models, and it is a big challenge for a company with a lot of legacy systems. Failure to do so will cause an erosion of their moat.

Management on Recent Issues:

  • Management is actively working on integrating AI, they have mentioned that most of their growth strategy is based on investment on new technologies. They also emphasized in their earnings calls that the goal is to maintain high recurring revenues and profit. They are also planning to cut costs by using AI and new technology to automate processes.

In conclusion, Thomson Reuters is a mature business that has a strong position in its core businesses but is undergoing a transition to modern technologies. The company has a defensible but not very wide moat, so it makes it important to monitor closely its competitive position and revenue and earnings growth, while also keeping tabs on the risks.