Good day, everyone and welcome to the Q2 2022 Earnings Call hosted by Gary Bisbee, Head of Investor Relations. My name is Nica and I'm your operator today. [Operator Instructions] I would like to advise all parties that this conference is being recorded for replay purposes. And with that, I'd like to hand the floor to Gary. Please go ahead.

Thank you. Good morning, everyone and thank you for joining us today for Thomson Reuters' second quarter 2022 earnings call. I'm joined today by our CEO, Steve Hasker; and our CFO, Mike Eastwood, each of whom will discuss our results and take your questions following their remarks. [Operator Instructions] Throughout today's presentation, when we compare performance period-on-period, we discuss revenue growth rates before currency as well as on an organic basis. We believe this provides the best basis to measure the underlying performance of the business. Today's presentation contains forward-looking statements and non-IFRS financial measures. Actual results may differ materially due to a number of risks and uncertainties discussed in reports and filings that we provide from time to time to regulatory agencies. You may access these documents on our website or by contacting our Investor Relations department. Let me now turn it over to Steve Hasker.

Thank you, Gary and thanks to all of you for joining us today. Thanks. Now on to our Q2 highlights. I'm pleased to report the momentum that has been building in our businesses continued in the second quarter with healthy sales and revenue ahead of our expectations. 4 of our 5 business segments again recorded organic revenue growth of 6% or greater and total company organic revenues rose 7%. Our Big 3 business segments also grew 7% organically. We see internal and external drivers of our improving momentum. Solid execution and efforts to better prioritize investments toward our best opportunities have contributed. And we're starting to benefit from meaningful tailwinds driven by a step change in complexity of regulation and compliance in our Legal, Tax and risk-related markets. We believe these tailwinds are in the early innings and position us well to continue our recent momentum over the next few years. Due to the Q2 revenue strength and healthy book of business or annual contract value growth, we are raising our full year revenue outlook. We now expect to see total revenue rising by 6% and Big 3 revenue by 7%, up from our prior views of 5.5% and 6.5%, respectively. We maintain our margin outlook as we continue to invest in our businesses and also absorb heightened inflationary pressures. Overall, the strong first half provides confidence that we're on the right path to achieve our 2022 and 2023 targets. While market concerns around slowing economic growth and inflation have increased, our business is well positioned. Our momentum through Q2 was strong and leading indicators remain healthy. And we're blessed with a resilient business. 80% of our revenue is recurring and we operate in historically stable and growing end markets. We also benefit from our Change Program efforts which will…

Thank you, Steve and thanks for joining us today. As a reminder, I will talk to revenue growth before currency and on an organic basis. Let me start by discussing the second quarter revenue performance of our Big 3 segments. Revenues rose 7% organically and at constant currency for the quarter. This marks the fifth consecutive quarter our Big 3 segments have grown at least 6%. Legal Professionals organic revenues increased 6%. This also marks the fifth consecutive quarter of 6% growth for Legal Professionals. Organic growth was driven by Practical Law, FindLaw and our Government business. Westlaw Edge continues to add about 100 basis points to Legal's organic growth rate. It is maintaining a healthy premium and is expected to continue to contribute at a similar level going forward, supported by the planned release of Westlaw Edge 2.0 later this year. In our Corporates segment, organic revenues increased 9% for the quarter driven by recurring revenue growth of 9% and transactional revenue growth of 8%. CLEAR, Practical Law and Indirect Tax were key drivers of the recurring revenue. The transactional revenue growth benefited from volumes that are seasonal in nature and is unlikely to continue at that level in the second half of the year. However, we see recurring revenue growth momentum continuing. And finally, Tax & Accounting's organic revenues grew 9% driven by recurring revenue growth of 11%. Organic growth was driven by Ultra Tax, audit products and the segment's businesses in Latin America. Moving to Reuters News. Total and organic revenues increased 12%, exceeding expectations due to strength in our Professionals business. In particular, Reuters Events drove the growth as it benefited from both a favorable event calendar shift into Q2 and also the return of in-person events. We expect more moderate growth from Reuters News in…

Thank you, Mike and Steve. Nica, we're ready to begin the Q&A.

[Operator Instructions] We have received a couple of questions and the first one is coming from Toni Kaplan of Morgan Stanley.

You raised the '22 organic growth guidance by 50 basis points which is great to have a few quarters in a row of raising the guidance there, so congrats on that. I noticed you didn't raise '23. Is that conservatism or concern about potential recession in '23? Or do you just need to go through your in-depth planning process first? Just what drove sort of the decision not to raise '23?

Yes, it's more of the latter, Toni. We certainly remain very confident in delivering on our 2022 updated guidance. We remain confident in delivering on our 2023 targets as we provided. We're very confident in our team. We're very confident in our execution. But we think it's very prudent, given the various macro factors, to wait to complete our full year planning process in the next few months. And we look forward to providing an update on our 2023 guidance in February. But based on the first half of the year, the strength of our underlying book of business and the execution of our sales and go-to-market team, the execution against our Change Program, confidence is very high. But it's more what you mentioned, Toni, in regards to going through the planning process and being very prudent in assessing the macro factors but all signals are very positive.

Yes. Toni, it's Steve. Just adding to that. So Mike and Dave Larson conduct our QBR, quarterly business review process and that comes in late September, October. And as you know, we have -- 80% of our revenue is recurring. We have a very high percentage of multiyear contracts across our Big 3 segments. So we've got good visibility but we want to get through that process and be very diligent about it before we make any sort of further predictions.

Just one additional point there, Toni, in regards to that, getting through the plan process, so you mentioned also, as we complete the year, the visibility, to Steve's point, at 80% is recurring in nature. Our book of business will have good line of sight as we complete Q3 and Q4 which will give us a good visibility as we go into the February earnings call.

Great. And hoping you could sort of talk about, has the macro changed to have any client conversation?

Toni, thanks for the question. So as you know, we like to spend an enormous amount of time with customers and getting a deeper and deeper understanding of their businesses. I think based on my conversations with the heads of small, medium, large law firms, tax and accounting firms and some of our corporate and government customers, I would say that to date, their results have been pretty solid. I mean the law firms had record results in 2021. And so far, in 2022, they've seen pretty robust demand through their litigation practices through their restructuring. The corporate practices are a bit soft, fewer IPOs, fewer debt issuance. But I think the -- our customer base has the same stance that we have which is sort of proud of results to date but I think a bit of healthy paranoia as to what might come next and just watching very, very carefully for some early signs of softness. But we haven't seen it yet and most of our customers haven't seen it yet either.

Yes. Toni, I would supplement with 2 additional points that we monitor, our renewal rates or retention rates. Retention rates are slightly higher in 2022 thus far than 2021. As a reminder, we have a lot of multiyear contracts. And also on the pricing front, our pricing is slightly higher in 2022 versus 2021. And then the third quantitative measure is our sales pipelines that we monitor with all of our segments, subsegments and regions. Do we have a second question?

Yes, we do and that is coming from the line of Tim Casey of BMO.

Yes, 2 for me. Just quickly, I know it looks like you did an acquisition in the quarter. Could you just talk a little bit about what happened there? And Steve, a question for you, just a recurring one really. Just wondering if you can give us an update on your assessment of the, I guess, the progress you've made and the shortcomings to date of your initiative to improve really the customer experience. I know that's been a primary focus on things like customer interfaces and whatnot. How -- what's your assessment of where you are on that journey?

Yes. Thanks, Tim. Great question. So our most recent acquisition was of a business called ThoughtTrace which is based in Houston, Texas, run by a very talented executive by the name of Nick Vandivere. ThoughtTrace, we think, is the leading AI-driven contract analysis tool. Nick and his team are focused today on oil and gas, particularly oil and gas leasing contract. But we've done a lot of work with them prior to the closing of the acquisition and, as you can imagine, an awful lot more since closing the acquisition as to how we can extend that capability into a broader set of commercial verticals. So whether that's financial services or pharmaceutical or you name it, we're looking at it. And so it's a small acquisition for us. It's very much at the cutting edge in the application of AI and machine learning to our unique content but we like to look at that. And Emily Colbert and Kriti Sharma from our teams, amongst others, have been focused on building that out. The second part of your question with relation to the Change Program, look, it's a complicated program with many moving parts, as you know, Tim but we have spent a good chunk of the $600 million onetime investment. Mike talked about the run rate savings that are accruing from that and how it positions us for 2023. So from a financial standpoint, the Change Program is in great shape and it's delivering what we expected it to. I think the sort of components that are going -- amongst a number of the components that are going very well would be our cloud conversion, firstly. Secondly, the progress that Jason Escaravage, our cyber leader, has made in terms of addressing our strengths around cyber fraud and compliance. Thirdly, digital…

Yes. Tim, I'll just add one additional data point in regards to the cloud migration. We provided back in February that we had 37% of our revenue available in the cloud at the end of 2021. At the end of June, we were 47%. We forecast to be at 60% by the end of '22. And we remain confident in being at 90% by the end of 2023 which is consistent with our prior estimates.

The next question is coming from the line of Kevin McVeigh of Credit Suisse.

Congratulations on the results. I guess, Steve or Mike, the 50 basis point boost to the organic growth guidance, was that pricing, retention, a little bit of everything? Or I guess, what gave you the confidence to do that? Number one. And then can you talk about retention just a little finer in terms of maybe upmarket versus down versus mid? And are you starting to see any initial benefits from the Change Program around retention?

Sure, Kevin. Let me focus on the guidance question first. The increase in 50 basis points for total TR and the Big 3 was really driven by the underlying performance and health of the business. Price is included therein but price is up only slightly, Kevin, in 2022 versus 2021. That will continue to increase as we progress in '22 and '23, given the multiyear contracts, as I mentioned earlier in regards to Toni's question there, so primarily the underlying health of the business. The book of business that we have, Kevin, at June 30, coupled with the pipeline for the remainder of the year, were really the drivers for us increasing our guidance by the 50 basis points. In regards to retention, we're seeing slight increases across the firm. But we still have significant opportunity on a weighted average basis using revenue as the benchmark, not number of customers. But based on revenue, we're slightly over 91%. So we continue to have a lot of opportunity to improve our retention and the time horizon as we continue to address the underlying customer expense -- experience items that Tim addressed during his questions there. So a little bit of improvement in price, a little improvement in retention but we continue to have opportunity in retention. And just a reminder, Kevin, our recurring revenue growth rate, we're forecasting at 7% for the full year. Each quarter is roughly 7% rounded. So a couple of quarters a little higher, a couple of quarters a little lower. As we go into Q3, Q4, the comps are a little higher. So hopefully, that's helpful, Kevin.

And next, we have a question from Aravinda Galappatthige of Canaccord Genuity.

Steve, when you talked about the M&A criteria, you touched on the legal software and workflow space. Can you just sort of revisit the size of that market? I know that it's encumbered right now seemingly by some mid-tier companies. Are you kind of looking at that space as sort of simply just being large enough and you being positioned to kind of take share there? Or do you even look at sort of the industry participants as relatively weaker and that kind of gives TRI even maybe some incremental opportunity? Just wanted to get your sort of expanded thoughts there. And then secondly, just with respect to 2023, maybe for Mike, when you think about inflation, I mean, obviously, you have a significant labor component. Can you just talk about how that changes the puts and takes there, recognizing, of course, that there may be some opportunities to sort of move rates around as well on the recurring -- on the subscription front? Any color would be helpful there.

Yes. Thanks, Aravinda. Let me quickly address the first point. So as you know, we've got a pretty robust pipeline of M&A that we're looking at. We're optimistic that the valuations are coming our way versus the other way around. But we'll be very rigorous, very disciplined and patient about going after them. Focused on automation, workflow automation tools that drive efficiency and take many hours out of key tasks for our Legal, Tax & Accounting and Risk, Fraud & Compliance and Government customers. That's really the sort of area of focus, also with an eye to some selected international expansions. Within Legal, yes, look, we're very bullish. What we see is an industry that is at the start of a transformation and it's an information- and tech-driven transformation. So for many years, the legal profession has been reasonably slow to move and slow to adopt technologies. And we've seen that change pretty markedly coming out of the pandemic. So every head of a law firm is asking us the questions around how can our tools, how can our research content and our tools combined help them be less reliant on hiring new lawyers or additional lawyers to drive growth. So they want to create a different set of economics and a different vibe within their firm. And we're one of the few players that's well positioned to take advantage of that. So as we look at the life cycle management, document management, further workflow tools, we see a pretty big opportunity. And the TAM is growing in a meaningful way because traditionally, it's a profession that's underspent on information and technology and arguably overspent on real estate. And that is being addressed pretty aggressively by the leading firms. We think it provides a pretty big opportunity. So that's a few thoughts on the first part of your question.

Yes. Aravinda, on the second part of the question in regards to 2023 and inflation, I would say both for 2022 and for our 2023 guidance, based on how we see inflation of the top line and bottom line, we have fully incorporated our current view into '22 and '23 guidance. To your point there on labor, we certainly provided higher merit increases in 2022. We're working very closely with our HR team, Chief People Officer in regards to 2023 there. But we think we factored in the appropriate increases for the labor cost. The other element of inflation that we monitor with Jennifer Prescott leading the Print businesses, paper print and postage, we've certainly received -- incurred some inflationary increases on the cost there but we've been able to offset majority of that with our pricing. So managing pricing, coupled with the increased labor cost and other costs, we think we're managing all of those aspects very well. As you mentioned, there are a lot of puts and takes. But with those puts and takes, we think we've fully incorporated them into our guidance for '22 and '23.

The next question is coming from the line of Heather Balsky of Bank of America.

I was curious if you can just talk about some of the sort of incremental areas you're investing in. You talked about on the margin keeping kind of guidance the same for opportunity to invest. What are the organic opportunities you're most excited about?

Yes, I'll start with that, Heather. First, I would say that we're continuing to invest in our Change Program where we've centered that on improving our customer experience. I think Steve itemized a number of items earlier that involved the Change Program. So I'd say, first, we're continuing to execute that. A lot of lifting still in Q3, Q4. But I think the team has a very good glide path to work on the Change Program items. In regards to other areas of investment, I would highlight our product and engineering. First, our Westlaw Edge 2.0 which will be released later this year within Legal, that's an important area for us. Practical Law that we highlighted during our May 3 earnings call, Practical Law helps both our law firm customers and also our general counsel customers within Corporates. Risk, Fraud & Compliance, as Steve discussed today, impacts both our government customers and also our corporate customers is another area. Steve referenced Kriti earlier. Certainly HighQ that we acquired back in July of 2019 is a key area for us. Over within our Tax & Accounting Professionals business, Ultra Tax that I referenced during the prepared remarks today. Confirmation that we acquired in July of 2019 continues to perform incredibly well under Elizabeth Beastrom's leadership. We also have leverage there within our corporate customers. So outside of our Change Program, Heather, the key focus for us is in regards to investing in our products to help our customers there. And it's very balanced across our portfolio, including within our Latin America region and also Asia and emerging markets.

Yes, I mean, it's -- if you go back to our Investor Day presentations at the start of last year, we talked about 7 growth initiatives. We continue to invest behind those because we're seeing good results and we're excited about where they can take us.

Helpful. And as a follow-up, when you think of 2023, if there is a downturn, if you were to see some sort of sales impact on the margin side, you have the benefit of the cost cutting with Change Program. But more broadly, how are you thinking about margins and the things you can control?

Yes. I think, Heather, for '23, we remain confident in achieving our guidance of 39% to 40%. In regards to any revenue headwinds, where we would potentially see those first would be in transactional revenue which includes our Reuters Events. I'd say Reuters Events is having an incredibly good year, over $20 million of revenue in Q2 for us there. Transactional certainly did well in the first half of the year. As I mentioned, we expect it to normalize in the second half for us. But for margin, 39% to 40%, back to Aravinda's point, we have lots of puts and takes that we can manage and pull. And we feel confident in delivering 39% to 40% in 2023. And we have enough levers to effectively manage through while supporting our employees and our customers.

Yes, not -- Heather, not to be flippant about it but should we head into a recession, be it a broad and deep one or a relatively shallow one, we view it as an opportunity, an unequivocal opportunity to emerge stronger relative to our customers and be better able to -- relative to our competitors and better able to serve our customers. We have #1 and #2 positions in just about every market in which we operate. And we think a more difficult economic backdrop will provide us with an opportunity to further those leads which, should it happen, we'll be looking forward to.

Yes. Heather, back to your first questions on areas of investment, I think the areas of investments just intentionally make us stronger as we go through '22 and certainly position us, to Steve's point, for '23. So we think they go hand in hand.

Next, we have a question from the line of Drew McReynolds of RBC.

Late coming on to the call, so I apologize if you've covered this off. Maybe Mike, just an update on Westlaw Edge 2.0, if that's still on track for some launch in the back half of this year. And maybe a bigger-picture question, it's my understanding in terms of Thomson's internal AI and machine learning capabilities, you went down that path many, many years ago. And obviously, you're leveraging it into products like Westlaw Edge. Just wondering, as the AI and machine learning markets have evolved over the last 5 or 6 years, could you speak to your internal capabilities to keep pace with that kind of innovation versus your M&A strategy where you look to different companies with these capabilities perhaps to backfill your own internal kind of innovation machine? So sorry for the kind of broad motherhood big-picture question but just curious just in light of what you just acquired in the quarter.

Drew, great questions. Let me tackle Westlaw Edge 2.0. Drew, we confirm that we will launch Westlaw Edge 2.0 in the second half of this year. Steve and I have had multiple sessions, demos from Andy Martens, Mike Dahn, Paul Fischer, David Wong, in the last few weeks. I think you'll be incredibly pleased. More importantly, our customers will be super pleased when we launch it later this year. So fully on target there. In the meantime, Drew, the team, our go-to-market team within Legal Professionals and Corporates, they continue to work with our customers on Westlaw Edge 1.0. We're approaching 70% penetration with Westlaw Edge 1.0 but 2.0 will definitely launch later this year, Drew. And look forward to sharing it with all of you and our customers. I think Steve will address the AI, ML question.

Yes. So we have a couple of hundred AI and ML and world-class experts in our TR Labs. And so those folks are spread throughout the world. There's quite a number of them here in Toronto. There are a number in London, in New York into -- and in other operating centers like MSP and Ann Arbor and Dallas. And we're very proud of the work they do. They have been instrumental in Westlaw Edge 1.0 and have been, I think, even more influential as we think about the launch of 2.0. So the proof is there. I think we are keeping up with a changing environment, if not outrunning it which is obviously no mean feat. And the opportunity for us is to, in along the lines of being a content-driven technology company, is to increasingly add AI and machine learning to our unique content and best-of-breed software. We've done more of that in the Legal Professionals area but we are starting to ramp those efforts up across the portfolio, including in Tax & Accounting and Risk, Fraud & Compliance, amongst others.

Super. And maybe one last quick one. Back to you, Steve, just you spoke about taking advantage of your #1, #2 positions in a downturn. Just before we get to that phase, as your kind of peers coming out of COVID and not that these are only your peers but Wolters Kluwer and RELX, are you seeing any change in their capabilities, their ability to execute on all the things they're trying to capitalize on post-COVID? Just any change in the competitive dynamic, that would be great.

No, Drew. As you know, we have towering respect for our traditional competitors and the new and emerging competitors. So we don't take it lightly. And without -- of doing it, we do keep abreast of what they're up to. I don't discern any meaningful change in competitive intensity or rate of innovation from our customers at the moment but we'll stay on top of that.

Next, we have a question from Andrew Steinerman of JPMorgan.

It's Stephanie stepping in for Andrew. Thanks for all the color you provided on the Corporates segment. I was wondering if you can talk about your positioning in Indirect Tax relative to competitors in the marketplace. Is Thomson gaining market share in that area?

Yes. Thanks, Stephanie. So our Indirect Tax proposition, I would say, in terms of its size is not a #1 or #2 to the earlier points made but it's closer to 3 or 4. So we tend to compete at the high end of the market with Vertex. And I think we're holding our own or a bit better there. It is 1 of the 7 -- so 1 of our 7 growth verticals that we announced at Investor Day last year. So we've been investing in it and building the capability and the team and we're proud of the efforts. Avalara in a different territory. They've come from the SMB space but they're trying to move up the scales there. And of course, Sovos which is private equity owned, have a pretty robust portfolio. It's a somewhat fragmented portfolio but a robust portfolio. So I think this is an area where we're seeing robust growth -- industry growth in the mid-teens. We're matching that but we'd like to -- we'd certainly like to have a bigger, more robust presence and move into a #1 or #2 position over time. And we'll be sort of thoughtful and rigorous about how we might get there.

And so the next question is coming from the line of Scott Fletcher of CIBC.

I just have a question on the sales cycle and the impact of macro headwinds and your comments around sort of that healthy paranoia and whether it's extending sales cycles given some more scrutiny on or different levels of review as you go through the new sales cycle.

Yes, Scott, thank you. In regards to the sales cycle, we're not -- we're watching it, as you can imagine, incredibly closely with all of our segment leaders and subsegment leaders there. We're not seeing any noticeable change right now in the length of our sales cycle. The one that's probably the trickiest for us is within our Government business and it's really nothing new. But just given the government procurement process, it's a little bit more variable in nature, a little bit less predictable than our other businesses right now. But we're not seeing any significant change right now in the sales cycle or length thereof. I do credit, Scott, our sales teams for that, both our direct sales reps but also account managers, client managers, customer success managers, all the different resources that we apply to supporting our customers there. But that's one that we're watching closely and we'll keep you updated in future quarters.

Yes. And the other thing to note is that we're investing in our growth initiatives, particularly around tools that drive efficiency. The conversations remain very healthy with customers where they can see a tangible, measurable increase in their own efficiency. So fewer hours required to achieve core tasks, fewer bodies required to achieve core tasks, that's really a big area of focus. And that embraces Westlaw and Practical Law, HighQ, ThoughtTrace and extends into our Tax & Accounting propositions.

Yes, Scott, 2 additional points I would mention. Just in the last 2.5 years, I think our teams, the sales go-to-market teams have done a hell of a job adjusting in this hybrid environment, virtual environment, supporting our customers that way. We do have our annual meeting with our sales leaders coming up in mid-August. That will give us additional time to get direct impact. But right now, we're not seeing any significant change, Scott.

We have a question from Manav Patnaik of Barclays.

This is Brendan on for Manav. Just wanted to ask real quick on the guidance. Obviously, revenue is up 50 bps, twice over the last 2 guidance increases. You kept margin at 35%. Just want to -- is there bias there or simply just a bit higher costs from inflation or investments? Or how should we think about that?

Yes, 3 items I would mention, Brendan [ph]. First is certainly we have made incremental investments. You're specifically focused on margin but we've made incremental investments in both OpEx and CapEx as we see opportunities to sustain and accelerate our organic revenue. Secondly, to your point, Brendan [ph], certainly, inflation. Here, I think we're doing a good job managing the puts and takes, as I've discussed earlier but certainly inflationary pressures is one that we're watching very closely. And then thirdly, I would mention, we're very -- being very prudent, eyes wide open on macro factors just during the remainder of the year. So I think the convergence of those 3 items that we're closely monitoring and investing in are the reasons why we maintained the margin at approximately 35% for the full year. But we're confident in delivering on that, Brendan [ph].

And the last question is coming from the line of Douglas Arthur of Huber.

Steve, just a sort of big-picture question. When you talk about technology work solution adoption at the big law firms, among others, is that enhanced by sort of a generational change in the leadership? I mean I think of some of the old-time law partners that I know and if you walk into their office and started talking about AI and cloud-based solutions, they'd look at you blankly. So -- but there does seem to be a younger group of managers and I'm wondering if that's sort of accelerating adoption.

Yes, Doug, it is for sure. I mean if you sort of looked at our business 5 or 10 years ago, you'd see on the research side a knowledge -- Chief Knowledge Officer or a librarian who was very much the sort of gatekeeper and curator of the research content for the practicing attorneys. Now more and more, the attorneys themselves would look direct into our products and they're very adept at doing so and providing us feedback. And we do our best to incorporate that feedback into subsequent releases. So I think that is very much the trend. The other thing that occurred during COVID amongst the senior-most, longest-tenured lawyers, including managing partners, because they went to work from home for the first time in their careers. And as one of them joked with me, he said, I've become my own IT guy, right? So I didn't have a clue how to do any of the stuff before the pandemic and now I have no choice. And I think -- so even the longest-tenured folks are starting to adopt technologies and getting much more comfortable with directly using our products. And that's a really healthy dynamic for our business because the more users are directly exposed to the experience and as we invest behind Charlie Claxton and our UX and design teams to improve that, we think the stickiness of those products goes up and that the chances of renewal at healthy price increments goes up, too.

I think, Nica, I think that's the last question. We really appreciate everyone's time today.

Thank you very much, everyone. That concludes your conference call for today. You may now disconnect. Thank you for joining and enjoy the rest of your day.

Thank you.