I'm Heather Balsky, BofA's Business and Information Services Analyst, and I'm pleased to be here with the management team from Thomson Reuters. I've got Steve Hasker, President and CEO, and Mike Eastwood, Chief Financial Officer. Thank you both for joining us. You hosted your investor day two days ago, so congratulations on that. I'm sure it was a lot of work that went into it. You know, it was clear that your team is confident that Big Three and total organic sales can accelerate over the next three years. This is partly a GenAI story, but it's also about all the other investments and changes you've made over the last three years to your organization. So actually, let's start there. Walk us through the drivers of the acceleration and what you're most excited about outside of GenAI.
Yeah. Well, it all starts with the end markets, Heather, that we serve. So, you know, legal professionals, tax and accounting professionals, risk, fraud, and compliance professionals. Those are very stable, growing markets where we enjoy leading positions in sort of deeply embedded products and software. So the sort of starting point for all of this is a really attractive one. The second sort of, I'd say, source of growth relative to the last few years and the periods before that has been all the hard work we did through our change program, which was a 2-and-a-bit year program. We spent about $600 million modernizing our tech stack, migrating to the cloud, cleaning up our org and getting the right talent in the right places, and doing an end-to-end revamp of our customer experience.
And so all of those things we see, they're starting to result in higher NPS, and we're looking for it to transfer into higher retention and higher NRR. So there's a sort of a fundamental health and wellness that we've undertaken, and we're starting to see the results, and we're optimistic that that will accelerate. So with that sort of new operating company structure and orientation toward content-driven technology in mind, along comes GenAI. And we're a company that put a functioning search algorithm on the front of Westlaw 30 years ago, and we've been investing heavily over a 30-year period in advanced machine learning. So GenAI is not a big step out for us. David Wong, our head of product, was at Meta prior to coming here. He worked on GenAI there.
Shawn Malhotra, Joel Hron, who runs our engineering and all of their teams are steeped in this. So that's why you've seen us being able to go from the launch of ChatGPT-4 to the early work and, in a matter of months, launch Westlaw with AI. And then fast following that will be or is Practical Law launched recently with AI, Checkpoint drafting, and obviously the integration of the CoCounsel acquisition. So all of these things, we think, and it's not only an AI story to your point, but all of these things, I think, give us great confidence in that sort of elevated organic growth rate over the next few years.
Yeah. Heather Balsky's, supplement with the acquisitions.
So we've made in the last 14 months. We acquired SurePrep in January 2023, which goes into our tax and accounting professionals business. In August, we acquired Casetext, which is largely legal professionals but also supports the corporate segment. And then most recently, in January, February, we acquired Pagero with e-invoice indirect tax, which goes into our corporate segment. So we've made three key acquisitions in the last 14 months that will help propel the organic growth. Just for clarity, in 2025, 2026, we provided guidance of 6.5%-8% for total TR and 8%-9% for the Big Three segments for 2025, 2026.
That's really helpful. You know, Steve, you touched on this, about the products you have in market, but can you just catch us up on what's kind of in the market today, contributing to the top line? You know, what's been released recently, what geographies, just kind of where we are today?
Yeah. Yeah. So we have, we launched Westlaw Precision AI on November 15th. We've got about 5,000 customers using that product, paid users. So that's, you know, that, that continues contributes to the sort of ongoing acceleration of the Westlaw franchise. We will extend that Precision AI to other markets this year. So we're looking at sort of second quarter UK, third quarter Australia, New Zealand, Canada, and we'll go beyond that as, as, as we move forward. We've launched Practical Law AI, and we'll look to extend that into the UK, into Canada, Australia in the months to come. And of course, CoCounsel, which is, which is a legal AI assistant with a with, with a multitude of skills, started in the United States. We're, we're doing, we've launched it in Canada.
We launched it two weeks ago in Canada, and we've seen really interesting uptake there amongst the large and medium-small law firms. We'll extend CoCounsel into some of those other territories I mentioned. So, it's a case of sort of going through these products and then also starting predominantly in the United States and then moving them to other markets. We also have on the roadmap for this year a AI-driven intelligent drafting solution. We have the injection of generative AI into HighQ and into Checkpoint Edge. Have I covered it all, Mike?
Yeah. Those were the two I was thinking of, intelligent drafting and Checkpoint. Yeah.
So, you know, the AI story for us is not only legal. You know, we'll extend the CoCounsel brand and the CoCounsel skills and functionality into our tax and accounting franchise and eventually into our risk and government franchises as well. So, you know, the aspiration just to take a step back for everybody, the aspiration we set out a number of years ago at the start of the change program was to be the most innovative company in business information services. And the trajectory to your question, Heather, we're really well, if anything, we're a little bit ahead of schedule in terms of the work that our product and engineering teams are doing.
We're looking forward to seeing that result in more frequent and bigger enhancements and new launches, but more importantly, greater impact at our customers and giving us a chance to play a larger role in the success of our legal, tax and our risk customers.
Correct me here. It sounds like there's a kind of a ramp as you move into the back half of 2024 in terms of these products and then presumably as you move into 2025 and beyond.
Yeah. At the investor day a couple of days, David Wong showed a chart which sort of showed the product launches over the last few years, and it was very much a, you know, a funnel. And it's deliberately so.
You know, this is something that it's a view for us from Mike and I to sit on a stage like this and say, "You know, we're gonna be the most innovative or amongst the most innovative." But actually, you know, building the foundations and putting the talent in place, investing in the right places, building a singular platform for generative AI that allows us to swap large language models in and out so we're not dependent on any one particular model, and then be able to apply that to every part of our business, those are the things that, that's the hard work that we've gotten through.
Yeah.
I think what you'll now see is that hard work start to yield bigger, more frequent, and more valuable product releases as we go.
Yeah. What's interesting on the GenAI front is that your customers across the Big Three segments seem really eager to adopt these products. You know, what are the secular tailwinds that you think are driving this sort of eagerness or urgency, however you wanna frame it?
Well, I think I mean, they're sort of differ depending on which customer segment you're looking at.
Yeah.
They tend to be quite similar across geographies. So if you start in tax and accounting, there is a fundamental decline in the number of people getting qualified as CPAs. And at the same time, the number of tax returns and the complexity of those returns, the number of audits, the complexity of those audits is going up. So the technology has to fill a gap in order for the global economy to continue to function. I know that sounds grandiose, but it's not an understatement. You know, the fact of the matter is, if you talk to your own tax and accounting professional who's in the middle of doing your return for this year, or you talk to, you know, the chair of one of the Big Four, they'll tell you the same thing.
You know, "What's your biggest worry?" "My biggest worry is just getting talent at the bottom of the funnel and pushing them through our apprenticeship model. They just can't get it. It's not there. It wants to go into consulting or it wants to go into other, you know, financial services or whatever, whatever." And so the technology has to address that. In the legal profession, on the other hand, there's certainly been coming out of the pandemic, there was a real sense in the profession that it was that the work-life balance was unsustainable for sort of young lawyers, mid-tenure, and even junior partners, just completely unsustainable in terms of the number of hours that were being demanded.
So there's an aspect of the technology needing to perform tasks that they don't, you know, repetitive, menial, grinded-out type legal tasks like drafting, like document production of timelines, analysis of documents, and so forth, e-discovery, these kinds of things. So that's definitely still an impetus even though, you know, the sort of global economy is in a slightly different place, and the level of demand is in a different place. But ultimately, it boils down to a general counsel who's under cost pressure from the CFO and needs to do things more efficiently with fewer lawyers and a set of partners at a law firm who wanna increase partner profit. And ultimately, that's an incredibly important driver. And so we think we can play a really important role in both of those constituents achieving both of those objectives.
That's really helpful. You know, it seems like GenAI could be both transformative and disruptive to the legal industry. And you know, we're already hearing about rumblings in what's going on in legal, and how do you navigate that dynamic, you know, helping your customers, you know, disruption in their industry and still drive your own growth? And you know, how do you think about that?
Yeah. I mean, well, it's worth sort of noting that we have relationships with, you know, small, medium, and large law firms that are many, many decades old. We've been serving federal and state courts for decades, and so we have deeply entrenched relationships. Those have been hard-earned, and they've been earned through consistent investment over the decades in the quality of our underlying content and our reference attorneys, you know, 1,200 reference attorneys who do nothing but produce very high-quality content and integrate that into our products. So where we start from as this, you know, sort of disruption and transformation occurs is from a position of deep trust.
Mm-hmm.
And it's been really exciting to see the number of managing partners, the number of sole litigators, court systems have said, "Okay. I know it's coming. TR, please help me." You know, "What show me your product roadmap. Tell me how you think this is going to play out." You know, we released a report last year and an entire sort of body of work around the future of professionals. And that's been incredibly well-received in terms of, "Okay. Tell me what my profession's gonna look like in two to three years' time and how I then re-engineer my firm. What do I need to?" And they trust us to get it right.
You have to remember that in many cases, these are sort of budget-constrained general counsel, budget-constrained heads of tax within corporations, and they're also private partnerships on the legal and tax and accounting front. So they don't have a lot of appetite or capacity for experimentation, and they don't have a big tech team. They might have, you know, the biggest firms might have a CTO who's talented, but they don't have endless appetite to sort of sponsor 15 different experiments. They'll turn to us. They'll turn to one or two of our competitors. They'll turn to Microsoft. And it's up to us to get it right. You know, we think we're on the right track, and the early signs are good, but there's very much a reliance on, "Show me what you've got.
I'm starting and hopefully ending with you," versus, you know, "Let me talk to everyone and sort of let 1,000 flowers bloom.
Yeah. That.
Heather, could I just take a?
Oh, yeah.
Steve, you may wanna mention that you referenced private partnerships. We've seen more recently some PE investment in some of the large accounting firms and how that might create an opportunity for us linking back to Heather's questions on transformation, evolution.
Yeah. I mean, it, you know, Hellman & Friedman obviously made an investment in Baker Tilly recently, which is an interesting data point. And there's quite a few examples of that. I don't know whether it's sort of gonna resemble what's happened in the sort of veterinary industry where there've been these PE-driven roll-ups. I'm not suggesting it goes that far, but I do think there's an analogy potentially to Wall Street. You know, 20 or 30 years ago where, you know, technology there was on the cusp of a tech revolution, there was a need to sort of change the governance structure from private partnerships to a much more corporate to embrace more tech talent and a much bigger tech budget.
We see the sort of first signs of a transition a little bit like that in both tax and accounting because it's allowed and to a different degree in law where there's some constraints around moving away from a partnership model, particularly in the United States. But I think it's back to your original question, Heather. This is sort of chapter one of a really interesting professional transformation.
Yeah. All right. Well, I think it's interesting you talked about your investor day, Millennial employees and younger employees asking for tech and kind of expecting tech. That, you know, I think that's, that's kinda fair. We grew up with.
Yeah.
With tech.
Well, I mean, one of the questions that most talented graduates coming out of law school ask is, "Show me which technology you're using." You know, and they wanted, "Are you using CoCounsel? Yes or no?" You know, and it's sort of, and if you're the sort of partner in charge of recruiting, right, that's a message that resonates the first time you hear it, and you take that back to your partners and say, "Okay. You know, if you want me to do my job and get the best people, we're gonna have to make some quick decisions here and move quickly." And so.
Yeah.
You know, that's been—that's the other dynamic that's sort of coming from the other direction.
Yeah. That makes a lot of sense. And you kinda touched on this, but you know, some large competitors are investing in the tech. There's also a number of startups. You bought one of them.
We did.
How should we think about your competitive advantage and your reason to win in GenAI?
Yeah. I mean, I think, you know, the way we have sort of articulated this and certainly the proof, the evidence is growing to support these arguments. The first is we start with the best content. We have never blinked in terms of investing in our attorney editors, our reference attorneys, our tax and accounting experts. And you know, our ability to take the Australian government federal budget and integrate that into our tax software instantly is better than anyone else's. Same in the United States in sort of taking the case law and making sure that the key cite numbering system, the annotations, all of the intel that's added to that through a product like Westlaw. So it starts with the quality of our content.
It is then extended by a combination of our ability to do the prompt engineering, so to understand how a litigator thinks and conversely, how the judge thinks and how that needs to translate that back into the Westlaw Precision AI product. That is not simple or trivial to do, and it's not something a startup can sort of suddenly reimagine just because they've got access to ChatGPT-4 or Llama or Bard or, you know, what, whatever it might be. And then lastly, we do have 500,000 customers, many of whom have built their businesses on our content and our software.
And so our ability to listen to them and learn from them and put products in their hands that they trust and then get the feedback and iterate, we think, is a big advantage as well. What have I missed, Mike?
It's very complete.
I wanna make sure that we're not just talking about GenAI, so I'm gonna switch here and, and, you know, your go-to-market strategy 'cause I think this is something that, you know, started with the change program. You know, what are your opportunities to continue to enhance go-to-market, and, and what are you most excited about this year?
Yeah. I mean, we've, I think we're sort of at the in the early stages of, of this becoming sort of a world-class go-to-market operation around SaaS, you know, with next-gen customer success and driving NRR, driving adoption, you know, those and seeing that sort of flow through to our recurring revenues, you know, and a couple months ago, we had Raghu Ramanathan join. He ran a big part of SAP. Before that, we had Laura Clayton McDonnell join from ServiceNow. So these are very talented software and technology go-to-market leaders, and you put them together with the folks who've been with us, like Mike Dane, who's been with us for decades and leading Westlaw. We think it's a powerful combination.
So, our objective and obligation is to deliver on that over the next year or two and really sort of, you know, ensure that we're among the top technology sales organizations.
Yeah. Heather, I'll just add just for clarification. We adopted four years ago the operating company model. We shifted from a holding company model to an operating company model. However, we maintain the separate sales go-to-market sales organizations for each of our segments and subsegments. We certainly leverage common systems, tools, processes, but we do have dedicated sales go-to-market teams for each of our segments and subsegments. One item that we talked about some on Tuesday was digital. We still have a hell of a lot of work to do there, but we've made a lot of progress in the last few years leveraging digital e-commerce, both from a new sales perspective but also renewals. I think that's been a change for us and one that we can further leverage going forward.
That's helpful. As you drive innovation across your portfolio and your products and you deliver more value to your customers, how do you think about pricing?
Mike?
Mike.
Pricing is always important, and it's certainly one that's been very interesting for us in the last 6-9 months with GenAI. We're truly learning every day. Majority of our business is enterprise-based, not seat-based.
Yeah.
But as we now with GenAI think about driving adoption, we have to be very, very open, open-minded with it. I think in the coming quarters, we'll be able to share more information as to where we finally land on the pricing for GenAI. But we certainly favor the enterprise-based model there, but we have to be open-minded, especially with the importance of adoption.
That makes sense. Well, I mean, everything is moving so quickly and changing and all that, so it makes a lot of sense.
Yeah.
You know, what's interesting is that retention came up at your investor day. You have 91% retention. And you talked about other info services companies that are in the 94%-95% range, and, you know, talking about thoughts around closing the gap and the potential to close that gap. You know, is there anything about your customer base or business mix that just naturally has a lower retention rate? Or, if not, what do you think it takes to narrow that gap?
Yeah. Sorry. Just to clarify and lay the foundation, the 91% refers to weighted average, based on revenue, not number of customers or logos, so that's a revenue number.
Yeah.
The 91% varies by our business, but the common theme that we see, larger customers have the higher retention across each of our businesses. Smaller customers have the lower retention for us. When we compare ourselves to more of the best-in-class retention rates, 94%-95%, so that three or four of the BIS peer Group companies have, we certainly aspire to be there. I don't think there's anything fundamentally that is stopping us, other than ourselves. We talked about on Tuesday, we've improved our Net Promoter Score by 35% over the last three years, but our Net Promoter Score remains below the B2B industry average. So I think there's a direct correlation. As we improve our customer experience, improve our Net Promoter Score, we'll see higher retention rates for us.
Given that 80% of our revenue is recurring in nature, that will certainly have a direct boost to our organic growth as we go from 91 to something higher, hopefully 94 over the time horizon.
That's great. And your guidance assumes some margin expansion, in as in 2025 and 2026. Can you talk about how you approach your margin expectations? Kind of, what are the drivers in there, and where's maybe some downside and upside risk?
Yeah. For 2025, it's at 75 basis points of improvement and at least 50 basis points of improvement, annually thereafter. Given the construct of our business, we have really strong operating leverage. 60%-65% of our costs are fixed in nature. And when you think about 6%-6.5% organic growth, that naturally yields about 75 basis points of operating leverage for us each year. So as we go into 2026, the question that we often get, "Could we possibly do better than the 50 basis points?" We could, but we're providing optionality, optionality in the form of investment. We currently see a lot of opportunity to drive further organic investment. So the key for us is as we drive higher organic revenue growth, that 75 basis points of natural operating leverage is going to increase over time.
So we're gonna have the option to either expand the margin or do investment. I think the combination, Heather, will be a little bit of both, but we'll deliver at least 50 basis points of improvement in 2026 and thereafter.
That's helpful. You know, I think I think close things off here with a balance sheet cash flow question. You generate a lot of cash, and you have a very lean balance sheet. You know, how are you thinking about returning capital to shareholders, you know, and the pace at which you do that versus, you know, keeping cash on hand for M&A? You know, and how do you think about—actually, let's start with that, and then I'll ask a follow-up.
Sure. Our net leverage right now is approximately 1x, which we're very underlevered. We target with our value creation model 2.5x. Our bank covenants allow 4.5x, but internally, it's 2.5x. We're currently at 1x. So to your point, we're very underlevered right now. We estimate $8 billion worth of capital capacity between now and 2026. We will complete the current share buyback. We announced in November a $1 billion share buyback. We're about $650 million through it. Once we complete the current share buyback, Heather, we don't anticipate additional share buybacks in the near term. The reason is with the current interest rates, it's not as favorable as it was two or three years ago. It's a full recognition, which I acknowledged, you know, on Tuesday.
So our intent is to deploy our capital capacity to strategic M&A, if we identify the right assets. As we always say, we're not gonna let the cash burn a hole in our pocket, but we're prepared to move quickly if we identify the right assets for our customers, and shareholders.
How, I mean, it sounds like you're prepared to move, just as you said, you're prepared to move quickly, but how do you think about organizational bandwidth in terms of the number of deals that you may do in a given period and just the deals that you've got on your plate right now in terms of integration?
It's a great question. About three years ago, 3.5, when Kirsty Roth joined us, we had intentional focus. We formed an integration management office under Kirsty. So we feel like we have sufficient resources now, sufficient bandwidth to handle the recent acquisitions that we've done and more acquisitions. In addition to the acquisitions, we've done a number of divestitures in the last three years just to continue to optimize our portfolio. We received a question on Tuesday, and my response was, "We're never finished with portfolio optimization. We have a responsibility, obligation just to continuously assess." So we have adequate resources to handle additional acquisitions and divestitures if we identify those.
In terms of, I mean, you've talked a lot about this, but it's always good to reiterate this just when you think about the M&A that you would do, where your priorities are, you know, where you're focused, and kind of maybe even thoughts on the pipeline.
Yeah. So, you know, we're very focused on the Big Three. And so, firstly, secondly, we don't see the need to do anything that will surprise our investors. You know, we look for acquisitions that meet the following criteria. The first is they're additive to our Big Three customer experience. The second is that, you know, they're financially accretive to our shareholders, not just the exiting shareholders. The third is that they don't bring a lot of tech debt. And we've done an enormous amount of cleanup. We don't wanna add to that. You know, it's not to say we can't handle some, but we're not sort of looking for businesses that have a big, big cloud migration or something like that.
And then last but not least, we look for cultures that will be additive to ours, not necessarily the same as, but ones that we really think the two teams are gonna be able to complement each other. We, you know, we did a couple of very small acquisitions in and around Reuters, to add a focus on insurance, to add a digital rights management functionality. But it's the more substantive deals like SurePrep, Casetext, Pagero, very focused on the Big Three. So that's sort of where the focus is. I think going forward, we're always looking for opportunities in tax automation.
You know, and sort of looking for further opportunities to better automate that, and supplement our organic growth plans. We certainly, you know, have a focus on businesses that bring more international presence. You know, we're heavily U.S.-focused today. And then areas, you know, areas like indirect tax, building on the Pagero acquisition, and risk fraud and compliance, building on CLEAR, and then potentially extending into areas like ESG because we do have relationships with the general counsel, the head of tax, the CFO, all of whom are involved in those ESG conversations.
Client side.
But again, we're not gonna do anything that'll surprise our investors. We just don't feel like we need to.
Yeah.
and it really needs to. We'll keep that sort of rigorous, disciplined approach.
That's really helpful. Well, well, thank you so much. We really appreciate.
Thank you.
Thank you for being here. Thanks, everyone.
Thank you.