Pascal Le Segretain
Elevator Pitch
My investment rating for Thomson Reuters Corporation’s (NYSE:TRI) stock is a Buy.
With my earlier November 26, 2021 update for Thomson Reuters, I touched on TRI’s “venture capital fund and cloud migration.” The focus of the current write-up is the review of Thomson Reuters’ most recent quarterly financial performance and its shareholder capital return outlook.
TRI’s actual Q4 2022 bottom line came in much better than what analysts were anticipating, thanks to the success of cost optimization actions. Looking ahead, Thomson Reuters has the intention to return a substantial amount of excess capital to the company’s shareholders, which translates into an estimated mid-to-high single digit percentage shareholder yield. Taking into account the above-mentioned factors, I have decided to raise my rating for Thomson Reuters from a Hold previously to a Buy now.
Earnings Beat
Thomson Reuters announced the company’s financial results for the fourth quarter of 2022 on February 9, 2023 before the market opened.
TRI’s non-GAAP adjusted earnings per share or EPS jumped by +70% YoY from $0.43 in Q4 2021 to $0.73 for Q4 2022. Excluding the effects of foreign exchange, Thomson Reuters’ YoY adjusted EPS growth in constant currency terms would have been even better at +72%.
The company’s actual Q4 2022 bottom line came in +11% higher than the sell-side analysts’ consensus normalized EPS forecast of $0.66. Thomson Reuters’ above expectations fourth quarter earnings was largely attributable to better than expected profitability rather than stronger than expected revenue growth as detailed in the subsequent sections.
Top Line
Revenue for TRI expanded by +3% YoY from $1,710 million for the final quarter of 2021 to $1,765 million in the most recent quarter. Thomson Reuters’ Q4 2022 revenue was marginally (+0.3%) above the market’s consensus top line estimate of $1.76 billion.
Adjusted for the effects of divestments and foreign exchange fluctuations, Thomson Reuters’ organic revenue growth for the fourth quarter of last year would have been a higher +6% YoY. With respect to the company’s three core business segments, Corporates and Tax & Accounting Professionals did well by delivering organic revenue growth rates of +9% and +8%, respectively on a YoY basis in Q4 2022.
The Legal Professionals business’ organic revenue growth rate slowed from +6% YoY in the preceding quarter to +5% YoY for the final quarter of the previous year. At the company’s Q4 2022 earnings call, Thomson Reuters explained that “slowdowns in the release of federal funding” and “lower professional services revenue associated with the SaaS offerings” had hurt the performance of the Government and Elite sub-segments (of the Legal segment), respectively.
In the next section, I highlight how TRI’s good cost control allowed the company to register higher than expected earnings.
Profitability
Thomson Reuters’ non-GAAP adjusted EBITDA increased by +40% YoY from $452 million in Q4 2021 to $633 million for Q4 2022, which was +4% above the Wall Street analysts’ consensus EBITDA projection of $611 million as per S&P Capital IQ data.
The non-GAAP adjusted EBITDA margin for TRI widened by +9.5 percentage points YoY and +1.9 percentage points QoQ to 35.9% in the most recent quarter. TRI had implemented a corporate restructuring plan, referred to as “Change Program”, two years ago with the aim of achieving $540 million in expense reductions on a yearly basis. Thomson Reuters’ “Change Program” has been a success, and this enabled TRI to record a better than expected improvement in the company’s profitability in the fourth quarter of 2022.
In a nutshell, Thomson Reuters’ +11% earnings beat for the recent quarter was driven by above expectations profit margin expansion supported by various cost optimization initiatives which were part of the company’s “Change Program.”
Shareholder Capital Return
In the company’s Q4 2022 earnings presentation slides, Thomson Reuters provided guidance suggesting that its shareholder capital return will double from $1.3 billion in 2022 to $2.7 billion for 2023. The $2.7 billion capital return expected is equivalent to around 4.7% of Thomson Reuters’ current market capitalization. As part of the meaningful increase in capital returned to shareholders, TRI also estimated that its number of shares outstanding could potentially be reduced by -4.4% from 476 million as of December 31, 2022 to 455 million at the end of the current year.
The targeted $2.7 billion shareholder capital return comprises of $700 million of buybacks relating to the existing share repurchase program and a $2 billion stock consolidation financed by the disposal of London Stock Exchange Group (OTCPK:LDNXF) (OTCPK:LNSTY) shares.
Thomson Reuters’ $2.7 billion capital return target doesn’t include dividends. TRI currently offers a consensus forward FY 2023 dividend yield of 1.6%. This implies that the total expected shareholder capital return yield (including dividends, buybacks, and share consolidation) for Thomson Reuters in 2023 could be in the mid-to-high single digit percentage range.
Closing Thoughts
I rate Thomson Reuters’ shares as a Buy now. TRI’s substantial +11% earnings beat for the fourth quarter of 2022 is pretty impressive, and there are expectations that the company will return a greater amount of capital to its shareholders this year.
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