Thomson Reuters says Europe business worse than expected

Tue Jul 31, 2012 4:50pm EDT

(Reuters) - Thomson Reuters Corp (TRI.N) (TRI.TO) said it expects net sales to financial institutions to continue to decline for the rest of this year as conditions in Europe have deteriorated more than anticipated and major banks are still slashing costs.

Shares of the company fell about 3 percent after it said net sales in its Financial & Risk division were still negative in the second quarter and likely to remain so through the fourth quarter. Net sales, which are total sales minus cancellations, are an important indicator because of Thomson Reuters' subscription-based business model. Its revenue typically lags sales by about 12 months.

"It is fair to say the external environment is worse than we had expected at the beginning of the year, particularly in Europe and with the big global banks," Chief Executive James Smith told analysts on a conference call.

"While we remain confident in the trajectory of our business, achieving positive net sales in the fourth quarter will be challenging as the market environment continues to deteriorate," he said.

In the second quarter, Europe accounted for approximately 40 percent of Financial & Risk revenue.

The global news and information provider said on Tuesday that revenue from ongoing businesses rose 3 percent before currency changes to $3.2 billion in the second quarter, which was in line with analysts' expectations. (Click here for a graphic: link.reuters.com/zuf79s)

Financial & Risk, which serves banks and other financial institutions, reported a 1 percent drop in organic revenue to $1.8 billion. Organic revenue strips out acquisitions, divestitures and currency changes.

"I thought it was a pretty weak quarter," said Evercore Partners analyst Doug Arthur. "Clearly a big benchmark for them all year has been returning to net sales growth for Financial & Risk by year end."

Still, the company stood by its 2012 revenue growth forecast and reported better-than-expected second-quarter earnings, as weakness in its financial business was offset by growth in its other divisions.

The Tax & Accounting division reported the strongest organic revenue growth, up 5 percent to $283 million. Organic revenue in the Legal division, which includes WestlawNext, rose 2 percent to $818 million.

STANDS BY 2012 OUTLOOK

Thomson Reuters said adjusted profit per share was 54 cents in the second quarter, compared with 51 cents a year ago. It attributed the rise to the elimination of integration expenses related to the 2008 merger of Thomson Corp and Reuters Group Plc, and a lower tax rate. Analysts were expecting earnings of 50 cents per share, according to Thomson Reuters I/B/E/S.

The company stood by its forecast for low single-digit revenue growth this year, but analysts on the conference call expressed concerns about 2013 and questioned executives about the impact of negative net sales on revenue.

Smith did not give any financial forecasts for next year but said the company would scrutinize costs to protect profits in a difficult environment.

Chief Financial Officer Stephane Bello said that while net sales have improved in the last two quarters, they remain negative and made it difficult to predict when the Financial & Risk business would hit a trough. Bello said the drop in net sales in Europe was three times sharper than in the Americas.

Thomson Reuters competes against Bloomberg LP, FactSet Research Systems Inc (FDS.N) and Interactive Data Corp in selling market data terminals to banks and other financial firms. Big banks including Morgan Stanley (MS.N), Goldman Sachs (GS.N), and Deutsche Bank (DBKGn.DE) have announced further belt-tightening by cutting costs, including reducing staff, as they address the impact of the European debt crisis and the costs of increased regulation.

Last month, FactSet warned that quarterly revenue would fall below Wall Street expectations, sending its shares plunging to their lowest level in more than a decade.

Thomson Reuters said sales of Eikon, its flagship desktop product, totaled more than 19,000 at the end of the second quarter, up around 20 percent from the end of the first quarter.

The company said underlying operating profit, which excludes divestitures, slipped 8 percent in the quarter, to $617 million. Underlying operating profit margin fell to 19.3 percent from 21.2 percent a year ago because of investments and planned increases in expenses.

"We understand that the global financial services market is likely to remain challenged and therefore we will give equal attention to the cost side of the equation, and we will cut our coat according to our cloth with the imperative of maintaining profitability," Smith said on the call with analysts.

Separately, the Municipal Securities Rulemaking Board is reviewing how several market indexes are prepared, including those published by Municipal Market Data, a Thomson Reuters company.

Smith said on the call that Thomson Reuters is "very forthcoming and cooperative with all regulatory agencies" and, he added, "We do not believe we have any exposure at this point at all."

Thomson Reuters shares closed down 2 percent at $28.31 on the New York stock exchange and down 1.7 percent at C$28.44 on the Toronto exchange.

(Reporting by Jennifer Saba; Editing by Tiffany Wu and Toni Reinhold)

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