Thomson Reuters reported first-quarter results that were in line with our expectations, and we are maintaining our fair value estimate as a result.
The media giant's revenue growth slowed amid the effects of a stronger dollar and softening budgets in the firm's core legal and financial information markets. Revenue declined 3% to $3.12 billion compared with $3.23 billion in the year-ago quarter. However, excluding the impact of foreign currency translation effects, revenue grew 3%. Thomson Reuters' relatively strong performance can be attributed to the must-have nature of its content and subscription-based business model.
The professional division (40% of total revenue) remained largely resilient, with revenue up 2% year over year (up 7% excluding currency impact), aided by a strong showing from tax and accounting, which grew 8%. Legal, which accounts for 60% of the professional division's revenue, saw a marginal 1% decline in revenue, mainly because of law firm layoffs and weak demand for its ancillary services. The markets division (60% of total revenue), which mainly caters to clients in the financial services industry, finally showed some signs of weakness, with revenue growth moderating (0.4% growth excluding currency impacts) because of the continued contraction in the financial markets. As expected, the markets division's performance was pulled down by lower transaction volume (transaction revenue tends to follow the economic cycle) and sustained weakness in investment banking business.
The operating margin contracted 190 basis points, to 12% from the year-ago quarter's 13.9%. The decline was mainly due to higher integration-related expenses. The company appears to be making good progress on its restructuring plan, as it achieved yearly savings of $850 million from its integration programmes. Thomson Reuters is expected to save about $1.4 billion from its integration and legacy efficiency programmes. Management indicated that the integration efforts are on track to meet its target of $975 million in savings by the end of 2009.
Swami Shanmugasundaram is a stock analyst with Morningstar.com.