Okay, we're back, so I'm Gary Bisbee, the Business and Information Services Analyst here at B of A Securities, and I'm pleased to have the management team of Thomson Reuters here with me today: Steve Hasker, President and CEO, Mike Eastwood, CFO. Guys, thanks, welcome, and thanks for joining us.
Thanks, Gary. Good to be with you.
You know, I feel really lucky two days after the Investor Day to have 35 minutes. Frankly, I wish it was 90 minutes because I feel like there was a lot of detail and certainly a lot of areas I'd love to dig into some more, but the timing here is really good. I thought what I'd do is start the questioning by asking a question or two about four key priorities that you laid out, both, I guess, first on the fourth quarter call, but then on Tuesday at the Investor Day, and maybe just ask for a little more color, and then we'll move on to some other questions about the targets and a few other areas.
But as you discussed the two overarching goals, moving from a holding company to an operating company structure and from a content provider to more of a tech-enabled content business, I think you laid out four tactical goals. And the first one I wanted to ask about was this concept of reimagining the customer experience. And I think the opportunity to modernize and upgrade your technology and sort of standardize and do a bunch of things to improve the customer experience all clearly is very logical, and it seems needed, given a lot of the anecdotes you provided about what that's like today. Question I've got from investors: given that the retention is so high in your business already, how should we think about what executing on improving the customer experience will deliver for the business? Is this about cross-sell? Is this about new sales?
Really, how much more room is there on the retention front to drive improvement, given that you're 90%+ already in most of your businesses?
Yeah, thanks, Gary. I'll start just with a couple of comments as to why we think this is a big opportunity for us, and then turn it over to Mike to talk a little bit about the retention rates and other things because retention differs by different subsegments for our company. So I think I had the luxury my first year, last year, of really doing a pretty comprehensive survey of our customers. Most days, I was initially in person and then on video calls with our customers across our Big Three and across geographies. And what I heard time and time again was, "Look, we love your content. It's the best content out there." And in many cases, we love your people. "We love the individual folks who sort of bring that content to life and ensure that we're properly served.
But we do not like the customer service," and whether that was sort of the onboarding process, whether that was getting sort of the right answer within the content, or whether it was some sort of more menial billing or administrative issue, we make it hard for our customers, so we are very focused, Gary, on reinventing this and using the latest, best- of- breed technologies in terms of our customer experience and customer service to do that, and if you look at retention rates, yes, they are healthy, but there's lots of room for improvement, particularly amongst the smaller law firms, the smaller tax accounting firms, and the SMBs.
But really, we think that if we can get our customer experience right, if we can drive our NPS from pretty subscale, substandard today, well below the B2 B averages, to healthily above those B2 B averages, then the appetite to consume more from Thomson Reuters, whether that be cross-selling our existing offerings, which is very modest today, or just opening the aperture and the acceptance of our new products. We've got a very aggressive new product development plan betting in behind David Wong and Shawn Malhotra, who you will have seen at our Investor Day. And obviously, David and Shawn and their teams can come up with great products, but the end customers need to be open to it.
The best way to get that sort of acceptance up is to provide a great experience that reaches their mind today, which we think will enable good things to happen on the cross-sell and new sale front. Mike, anything to add to that?
Yeah, I would just supplement here. Steve mentioned the B2B industry average. It's 27. We're significantly below that industry average of 27. Our goal is not to get to 27, it's to far exceed it. And we're at 90% retention today, with our NPS significantly below the industry average. We're quite optimistic that we can increase that 90%. I had mentioned on recent calls at least one percentage point. One percentage point is about $50 million of annualized revenue, about 90 basis points for us. And as Steve mentioned, 90% is the overall average for TR. That varies quite a bit. If you look at our government business, 95%+, Westlaw overall is 94%. We have other businesses that are below 90%. But getting that composite of 90% to 91%, we think is quite reasonable, and we're very optimistic about that opportunity, Gary.
Okay, and that's helpful. And then the SMB was an area that was called out, in particular, digital and omnichannel capabilities, self-service approach. Again, that's very logical. Now, there were a number of things in the 2018 Investor Day. I realized, Steve, you weren't there, and Mike, you weren't in the top seat at that time, but about digitizing to help the SMB market. And so is the right way to think about that? There just wasn't enough progress made, and that opportunity still is ahead of you. And I ask just because this SMB story has been talked about at Thomson Reuters for a long time. And how are you confident now you can do this in the next couple of years?
Gary, it's a fair question. It's a fair push. It's one that we talk very candidly about. I'll start and ask Steve to supplement there. Gary, as I mentioned on a recent call, you go back to 2018 and 2019, and my handprints are all over, my fingerprints are all over it. We did two things. We had three big goals. We did two of them really, really well. First one, we eliminated our stranded costs. We got the total corporate cost from $280 million, pre-Refinitiv, down to $130 million in 2020, so check mark there. Second item we did, which was the separation from Refinitiv. Very pleased with the progress and work we did there. The third area was really developing the new TR, which included the digital self-services. We made some progress, but far from where we need to be there.
So right now, we're focused on the customer. Back in 2018, 2019, full transparency, we had to nail the stranded costs. We had to separate from Refinitiv with the full dedication and focus now, and with the new talent that we brought in, Karen Stroup, new Chief Digital Officer, has been with us for 12 months now. She's added more talent. So I think the focus that we have now, the key learnings from 2018 through 2019, the additional talent, I'm quite optimistic that we can move there. Gary just mentioned when we are successful with it, we've been at about 500,000 net customers now for a period of time. As we add those new customers, as we move forward, that will also help us with the top line. And the cross-sell, we're about 15% of our overall sales activity today is from cross-sell activity.
So I think cross-sell plus the opportunities we have with SMB also help add to the optimism on the top line.
Can I just add something, Gary, on the talent front? So I obviously wasn't here for the previous incarnation, but what I've observed in my 12+ months at the company is we have a lot of talent that's very well trained and tuned to serve the largest customers. That's within legal, it's within tax accounting, it's in corporates. And what we've done is we've really been focused on adding talent of various types to that existing bench. But if you think about sort of David Wong and what he did at Facebook, very much focused around a huge set of products in and around measuring advertising effectiveness for SMBs. Charlie Claxton came from Amazon, who of course have a tremendous focus on SMBs. Kirsty Roth from HSBC, she built these capabilities at HSBC to serve a very wide number of large and particularly smaller customers.
And we've got another couple of folks who will join us in the next few months who come out of this SMB world. We think that's a really important addition, and that gives us much more confidence that this time we'll get it right because we do have talent who have done it before. It's not new news for them as it was for the prior team.
Okay, great. Let's move on to the second of those four priorities: optimizing products in the portfolio. You've highlighted seven key offerings or families of offerings, maybe a better way to put it, that contributed 55% or 60% of revenue as your key investment priorities, and you're calling for those to grow at an upper single-digit compound rate over the next three years. Can you just help us understand, were they growing at that rate in recent years, or is part of the increased focus and investment here driving acceleration in the performance of that portfolio?
Gary, I'll start there. These products have been very solid for us, but they have picked up in recent time. And as we move forward into 2021 to 2023, we see accelerated growth from each of these seven. We talked in more detail than we had previously on Tuesday regarding Practical Law. I'll just mention that one and a couple others illustratively. Practical Law, nearly $400 million in revenue for us, double-digit there. Elizabeth, who you met on Tuesday, dedicated focus now on Practical Law. We see that definitely accelerating. Steve Rubley, who you met on Tuesday in regards to the government business, but more importantly, with risk, fraud, and compliance there, we see double-digit growth in 2020 from the overall government business. We see that accelerating. With Westlaw Edge, you know the story there, 52% penetration by year-end, getting to 60%-65% by the end of 2021.
Andy, who spoke on Tuesday, continuing now to work on Westlaw Edge 2.0 that will be released most likely sometime in 2022, so really solid product offerings for us, Gary, but even stronger growth to be accelerated as we move forward, so the short answer would be we are forecasting accelerated growth from those seven strategic priorities in 2021 through 2023.
Okay, and then.
Just, Gary, one other flavor to sort of add to this, which I think is important. Under the sort of previous incarnation of a portfolio or holding company, the capital allocation process, we're very much sort of some capital allocated to each silo, if you like, and it was a pretty democratic process. So in other words, everyone got a bit. And I think what we've done in moving to an operating company structure and identifying these seven growth initiatives is to say, "This is no longer a democracy," right? If we see an advantage position with higher growth prospects and have real confidence around the team you execute, we're going to bet more. I'm going to bet heavier, which I hope explains why we see these products as having really good starting points.
We think we can accelerate their growth rate because we're allocating more talent, more capital, and more focus to them than was the case previously when they were sort of got a little bit within portfolio structure.
Yeah, that makes sense.
Sorry to interrupt, Gary. In that seven, you'll notice a couple of recent acquisitions that have been HighQ and then also Confirmation. So as we drive accelerated growth in 2021 through 2023, that'll come not only from organically, which we emphasize at Investor Day, but we see opportunities to supplement that with some acquisitions as we move forward.
Yeah, yeah. My brother-in-law is an internal auditor, and he raves about Confirmation, by the way. I can't say enough good about it. I shouldn't have mentioned it because he brings it up every time I see him now. But at any rate, one thing we haven't talked about and you didn't really talk about is what about the other 40% of revenue? Is there some risk that you will de-emphasize or shutter some of that? And is maybe the risk of that happening contemplated in this three-year revenue targets you've laid out?
Gary, if you look at an overall customer offering, what's not in the 55% are things like FindLaw, things like Elite, and Checkpoint. Those are really, really important offerings for our customers. We'll continue to invest in those, not at the same levels as we would the top seven that you asked about earlier. We do not anticipate any significant divestitures like you saw in recent years with F&R or IP & Science there. If you look at the full portfolio effect, those are really, really important offerings for our customers. With that said, might there be a few items or smaller items that we consider transitioning, migrating from very, very possibly, but nothing significant within that overall group contemplated here.
Okay, that's helpful, and then if we could move on to the next priority, which was simplifying operations and leveraging technology, and I think a good part of this is encouraging to me as a playbook we've seen other information and data services companies do in recent years, which is this concept of upgrading to a cloud architecture, streamlining legacy technology infrastructure, and several benefits we've seen, cost side, innovation acceleration from that, and so that's a key part of it, but I guess I wanted to ask on that portion of this, what's the timeline to make substantial progress? What gets done this year versus what do we think is 2022 and 2023 in terms of the technology? Because it sounds like there's a lot to do there.
Yeah, there is a lot to do. As Kirsty said on Tuesday, we're late to the game, right? We're not doing anything, Gary, that dozens, if not hundreds of other companies haven't already done. And we'll benefit from their wins and losses as they went through this. This is work that many of us have done before, and particularly Kirsty and her team have done before. But it is a complicated process. We've got 13 or 14 order-to-cash systems. We've got 83 call centers. We still have some very significant products that are run out of data centers that need to be migrated to the cloud. What we're seeing so far, and Kirsty profiled a little bit of this, is real progress in terms of building some of the new capabilities in and around customer service, like chatbots, like e-billing, some of those fundamental.
We've made really good progress in the first quarter in doing that, firstly. Secondly, if you think about a migration to the cloud, I mean, we're going to do the heavy lifting this year and next, and that'll occur early 2023. So that, if you like, is the long pole, okay? And it needs to be because it's complicated, and we want to take our time and do it properly.
Okay, yeah, that makes sense. The technology piece, I think we're all familiar with, as I said. I wanted to ask about non-technology operations as well. That slide Kirsty had like 50+ call centers, and there was a bunch of other statistics that weren't so much tech infrastructure but support and others. How meaningful is sort of the, and I realize that's tech-related, but the non-technology part of just streamlining and simplifying this business? Is that a key part of this initiative?
Yeah, absolutely. I mean, we have north of 80 call centers today, right? So 80 different locations, 80 different teams, managed differently with different supporting technologies, none of which are best of breed, right? And so this is a really important part of what we're going to do. And that work has started and is continuing at pace and will take hold in 2022, right? And we'll see the full benefits in 2023.
Yeah, let's be clear. Technology is one aspect. But if you look at our Change Program, it includes every functional area within TR, every support area, all of the segments. So your direct question there, are there other opportunities outside technology? There are, and they're incorporated within our Change Program. They're included in the very granular work streams that we have that Kirsty's leading. We own it. Kirsty's leading it with it, but it is a very wholesome program that includes product, editorial, technology, all of the back office teams. And then as we make progress with the go-to-market, lower costs are—so it's very fulsome here.
And then one goal that I think you've cited is 90% of revenue available on the cloud by the end of this three-year period. Can you just level set for us? Where are you today? I mean, should we think it's substantially below that at this point?
Yeah, we're around 20%,25%, Gary, available on the cloud at the end of 2020. By the end of 2022, we'll be roughly 60%, getting to 90% by 2023. The big piece, Gary, that's remaining there is where Steve and I are today. We're in our Eagan, Minnesota facility. This is the data center that we own that really supports Westlaw, Westlaw Edge, and also Checkpoint, more of our research products. Kirsty's also here with us this week. So this is the large data center that we have remaining. The other data centers that were commingled with Refinitiv, we completed the separation from Refinitiv on the data center side by the end of 2020.
Okay. And then if I could go quickly to talent, which was effectively the last of those four priorities. Two quick questions. The senior team, you've added a lot of talent in the last year, obviously. Are there further needs on the senior executive team, or do you feel like you're in the right place with the right team today?
I think we're in, broadly speaking, the right place. As a company, we've lifted our aspirations and we'll continue to raise the bar, and that goes for all of us. But I think the adds we've made over the last 12 months, I think, position us really well. And now it's a case of adding more talent where we need it. And that's in AI and machine learning. That's in cloud and SaaS-based business models, things like that. From a senior team perspective, I think we're pretty well placed.
Okay. And yeah, I guess you just alluded to the final one on talent. It's technology. I've seen some other companies go through portions of what you're targeting here and have needed to go through an upgrade cycle of their technology talent. I know you brought in new senior leadership and appear to have a strong team, but the level of your programmers and all the workers, do you have the horses in the company already that can do this shift to cloud architecture that can improve the user interface and integration of your offerings? Or is that an area you're going to have to add a lot of talent to deliver?
I think, by and large, we're pretty well placed because remember, a lot of these people, a lot of these people worked on Refinitiv in addition to the professionals out of the business. They're used to operating at great scale. They're used to very complex environments and high stakes. And so I think our sort of starting point is pretty solid, Gary. But we continue to add talent, and we'll do that through this year and next, for sure.
Okay. If I could shift to a couple of questions about the targets that you've laid out. When I think about the revenue acceleration to 5%-6% and 6%-7% for the Big Three businesses in the next three years, what are the key two to three factors that you'd highlight that will be the most important to delivering that organic revenue growth acceleration?
Yeah, I'll start, and I'm sure Michael will supplement so if you think about sort of, we've said 5%-6% in 2023, well, let's go back to 2019 because sort of pre-pandemic is probably the best comp. Our growth rate then was 3.6%,3.7%, so we're talking about a leap up, for sure, but it's not, it's sort of not unfathomable by any means. There's a couple of things here. The first is, the first and maybe most important is just getting this customer experience right and enabling cross-sales and new sales, enabling receptivity to our new product innovation and development plans. I think that's a big part of it. The second we've already talked about, which is to see these seven growth initiatives show higher growth than they have before because we're putting more capital, more talent, more focus on them.
And then beyond that, I think there's obviously a significant push into SMB, and that's where we've been most conservative, just in terms of sort of the mathematics of this. We've basically said we're probably most excited about that one overall, but we've been most conservative in terms of what we'll deliver and when we'll deliver it. We've backed it up today. Anything else, Mike?
Good summary. Gary, just a reminder for everyone, the Big Three in 2020, COVID environment, 3%-4%. So quite optimistic about that as we go into 2021. We had really good net sales activity in Q3, Q4 of 2020, which helps us in 2021.
Then, shifting to margins, obviously a terrific outlook you're calling for in 2021 will be depressed initially by the investments, but it's not like it's sort of hockey stick all in 2023. You've got a big step up in your 2022 plan from 2021. What are the key things you need to deliver or key drivers of the improvement? Is falling off of or slowing of investment a big part, and what are the other levers for the first of those, or second, I should say, of the three years?
Yeah, Gary, I would just anchor everyone. In 2020, we were at 33% EBITDA margin. If that were to change further, we'd be at 34% in 2021. As we go to 34%-35% in 2022, for me, the first item, most importantly, is the top line. As we go to that 4%-5% organic growth in 2022, given our cost base, 60%-65% for fixed costs, the flow through the operating leverage that we get is quite significant. As we go to that 4%-5% range, also with the investments that we're making in 2021, we're going to begin to see those benefits in 2022. So we're quite confident, Gary, with the margin expansion in 2022 and then as we go into 2023.
Understanding that confidence and certainly the history of achieving targets that the company has recently and over the long term, I'd argue, acknowledging that, what are the risks or the sort of key couple of things that have to go right to deliver the three-year targets on profitability?
Yeah, first of all, as I stated on Tuesday, very confident with the overall plan. Steve referenced SMB, and then you asked the question earlier about digital, Gary. I would say we have to absolutely execute, propel in regards to digital self-serve and the SMB because we have more to prove internally and more to prove externally in those areas. Those would be the two that I would highlight, Gary, but they really go hand in hand between digital self-serve and SMB.
Okay. And then if we could shift to capital allocation and M&A, let me start with one on the LSE stake. You've stated you'll sell $1 billion to cover the taxes due on the close of that transaction. Does the pullback in LSE shares, fairly meaningful one year to date, change that plan at all? And I guess, would you consider using cash from the balance sheet given how well capitalized you are rather than selling that many shares at this point, or is that not how you're thinking?
Gary, we plan to stay the course in regards to monetizing the $1 billion, which would yield $750 million net with a 25% tax rate associated therewith. Bringing up a good point, it's certainly something that we have contemplated internally. We have $1.8 billion of cash on hand at year-end. We've got untapped revolvers, et cetera. We want to keep that available for acquisition targets as we move forward. Our acquisition pipeline remains very healthy, and we're looking at acquisition candidates as we speak. So we want to keep the available cash on hand in our revolver for acquisition targets to supplement our Big Three. But we'll move forward with monetizing the $1 billion at the right time here.
Okay. All right. And that dovetails nicely into the next question, which is you're sitting on a lot of cash, and I'm getting the question from investors having not done anything beyond a modest amount of buybacks and certainly paying and growing the dividend, which I don't want to diminish the importance of that. But it's really been since the summer of 2019 when the company was last in sort of pretty aggressive acquisition mode. One might argue, given your attempt to reduce complexity, that M&A that's not truly a seamless fit into the core platforms might not make that much sense. Software multiples are up a lot in the last two years. Your buybacks are capped at a fairly low number to maintain the float. So just, I guess, what's the likelihood or potential you could really be aggressive with the balance sheet?
Maybe as part of that, is it realistic to think you could put $1 billion to work like you did from the fall of 2018 to the fall of 2019 in a 12-month period? Obviously, I won't hold you to that, but is that in the realm of possibility given how you're thinking about the pipeline and opportunities that are out there?
Gary, there are multiple items here. Let me start and ask Steve to add on. First, in regards to buyback, it's a fair question. But what kind of restricts us is that Woodbridge owns 66% of our common shares. Based on our analysis, probably the limit is about 70% to maintain adequate public float. So the amount of buybacks that we could do without having Woodbridge participate proportionately like they did a couple of years ago is fairly minimal on the buyback side. In regards to the acquisition, I prefer not to specify a number that you just referenced here. I think our position would be we have significant availability in regards to doing M&A.
And as I said, we have the ability, we have the desire to put that capital to work when we identify the right asset, but we're not going to jump the gun just to do an acquisition. We're going to make sure that it's the right acquisition for our customers and shareholders.
Yeah, look, I think that's well said. Look, Gary, your point about the software multiples has not lost on us, right? I mean, we want to buy quality assets that are complementary to the Change Program that are very, very focused on improving the customer experience within the Big Three. Those are high bars. And if we can find those deals, we'll definitely do them. But they are high bars, and we're not going to compromise just to put some money to work.
Okay. All right. Fair enough. A couple of final questions. You talked a lot about government, the government opportunity at the Investor Day, and certainly that's been growing quite well, and it sounds like there's a robust outlook in that business. I wanted to ask a question about that and then a question about risk and compliance more broadly. I know that Westlaw has been a big, the government's been a big customer in growth from that upgrade cycle. But is it right to think that those other assets, the risk and compliance assets, are sort of the key growth driver for government going forward? Or do you see those core legal products as still underpenetrated?
No, we see some room to grow in the core legal, Gary. So Westlaw, Westlaw Edge, as Andy Martens and Paul Fischer outlined on Tuesday, have seen really good uptake within the court systems. But the value and utility of that product to government agencies is, I think we're just starting to scratch the surface with that. The same goes for Practical Law, and we're starting to see, I think, some real green shoots around HighQ and its relevance to our government customers. So there's definitely, I think, room to grow there, and we're optimistic about it. To your second point, the combination of a clear dataset, the TRSS capabilities, and a small and recent but important acquisition for us called Pondera, are really starting to give us confidence in our broader risk, fraud compliance play.
We think we are one of the few companies that has the sort of practices and methodologies to truly protect data, to respect privacy, and to navigate what is a complicated situation, and certainly, we've had a chance to spend time during COVID with some of our bigger and growing government customers through those services, and they really see it that way. They say, "Look, this is not a place where we can have lots and lots of vendors. We need to truly trust the providers, and we think you folks have what it takes," so you'll see us over the next year or two, I think, get more aggressive as our confidence grows in that space, both organically and inorganically.
And then when I was doing customer diligence before Dun & Bradstreet's IPO last year, I heard about Thomson Reuters as a competitor to corporate customers in a couple of cases for know your customer, anti-money laundering type of offerings that seem to be the way you describe some of those offerings in government. So is that driven out of the government practice, or is the corporate segment selling these services as well into the corporate market? And since I haven't heard you talk a lot about that, do you see that as a legitimate opportunity? First of all, today, are you doing a lot of that? And is that a growth driver you're focused on within corporates going forward?
Yeah, today we're not doing a lot of it. It's mostly our government sector. It's mostly led by Steve Rubley, but Sunil Pandita, who joined us late last year to run our corporate sector, is looking hard at this, and I think it's pretty clear to him that this will be one of the growth factors that he really explores because any inorganic or organic play that we look at, the business case very quickly gravitates toward, "Okay, where and how can we sell this into the corporate sector?", so this is going to be a place where Steve and Sunil very much collaborate to figure it out for us.
And maybe I'll close with one question that you were asked a slightly different way at the Investor Day, but clearly the pandemic has accelerated digital transformation of the economy overall, and it would seem that you have a number of businesses that likely benefit greatly from that. And yet we saw, not surprisingly, revenue decelerate because of transactional revenue and some other aspects of the pandemic. But how does this digital transformation acceleration really impact the business in the short term? And were you able to benefit the way you'd like to, or is really getting a lot of this turnaround plan, technology progress needed to fully harness that acceleration that the economy has seen because of the pandemic?
Yeah, Gary, it's a great question. So as you know, we took hits in three places. One was Reuters Events, which was a recently acquired business. We bought that in 2019 prior to my time. The second was print, where we were sort of holding a bunch of shipments as librarians moved out of the office, off campus and so forth, to home. And the third was, as you say, transactional. Against that, we saw lots and lots of interest in and demand for Westlaw Edge, Practical Law, HighQ, these kinds of solutions. And we see real excitement in the tax accounting space around Onvio. And so the Change Program is about rapidly accelerating our ability to deliver those content-driven technology solutions to a customer set who are well and truly ready for it.
Okay. Great. Well, I think we're at the time limit, so I'll leave it there. Thank you both for your participation.
Thanks, Gary.
Thanks.
Thanks, Gary.
Have a good day.
Bye-bye.