Thomson Reuters Corp (TRI.TO) (TRI.N) reported on Friday a 15 percent fall in operating profit because of declining revenue and higher costs at its division that serves the financial industry.
The slip in profit in the third quarter underscored the problems facing some of Thomson Reuters' clients, such as banks and brokerages that are reducing staff and trimming costs to cope with increased regulation and the struggling global economy.
This business climate is leading the global news and information provider to keep a tight grip on costs while at the same time investing in customer service for its flagship financial product Eikon.
Thomson Reuters reaffirmed its 2012 forecast, due in part to stability at its Legal division, which includes WestlawNext. Revenue there rose 1 percent to $830 million on growth in Latin America and products such as legal resource provider FindLaw Elite.
The company's smaller units, meanwhile, showed strong growth. Governance, Risk & Compliance's revenue jumped 17 percent while revenue at the Tax & Accounting division rose 8 percent.
Still, its trading business, which rivals the Legal division as the biggest contributor of revenue, saw an 8 percent decline in revenue to $816 million in the quarter.
The trading performance weighed down the company's operating profit, which fell to $585 million from $690 million. The corresponding margin slipped to 18.5 percent from 21.6 percent in the same period a year ago.
The company said that in the third quarter last year, its underlying profit margin was "the high-water mark" for 2011.
"The big headline is the decline in operating profit," said Claudio Aspesi, senior analyst at Sanford Bernstein & Co. "It's clear they need to be aggressive on costs. There is no way of knowing when the top-line will recover."
Thomson Reuters Chief Executive James Smith said that he does not expect net sales to financial institutions to turn positive in the fourth quarter.
The net sales trend is an important gauge of the company's future performance because subscription-based revenue typically lags sales by about 12 months.
"We're gaining momentum and traction but the down drafts at the big global banks and in Europe (are) still offsetting improved traction and momentum," Smith said, declining to provide net sales figures.
"We have to keep moving faster at removing complexity in the organization. There is too much siloed behavior and too many layers," he said.
The company is attempting to move away from some older legacy products since the 2008 merger of Thomson Corp and Reuters Group Plc, and bring clients products like Eikon, its new desktop for financial professionals.
Thomson Reuters reported that its Eikon desktops totaled 25,600 at the end of the third quarter, up about 35 percent from the end of the second quarter.
"It's a good number," said Doug Arthur, an analyst with Evercore Partners. "It's a positive sign that Eikon is showing steady growth."
Smith said in a memo to employees that last month the company sold 1,000 Eikon terminals a week; two-thirds were upgrades and one-third were new sales.
New York-listed and Toronto-listed shares of Thomson Reuters were down 1.4 percent in afternoon trade at $28.12 and C$28.01, respectively.
The company stood by its full year outlook despite the struggling global economy. Revenue growth is expected to be in the low single-digits and underlying operating profit margin is anticipated in the range of 18 -19 percent.
In the United States, financial companies have announced plans to cut 28,000 jobs through the first nine months of this year, compared with 54,000 jobs during the same period in 2011, according to Challenger, Gray & Christmas.
Swiss bank UBS UBSN.VX said earlier this week that it planned to fire 10,000 employees, or 15 percent of its staff, in an effort to save billions of dollars.
Thomson Reuters is not the only market data provider to feel the reverberations from the cutbacks occurring in the banking sector and persistent economic weakness dogging Europe.
In September, FactSet Research Systems (FDS.N) reported its weakest revenue growth in two years.
Privately held Bloomberg LP, which competes with Thomson Reuters on several fronts, is seeing growth of its terminal sales to financial institutions slowing, according to a recent report in the New York Post. A Bloomberg spokeswoman declined to comment.
Third-quarter revenue from ongoing businesses this year rose 1 percent before currency changes to $3.2 billion. That is in-line with analysts' expectations, according to Thomson Reuters I/B/E/S. Stripping out acquisitions, divestitures and currency changes, revenue fell 1 percent.
"The market for financial professionals is going to pick up," said Ryan Bushell, a portfolio manager with Leon Frazer & Associates, who manages the IA Clarington Canadian Conservative Equity Fund. "We think that Thomson Reuters is going to survive and thrive." Leon Frazer holds 2.7 million Thomson Reuters shares.
For the quarter, Thomson Reuters reported adjusted earnings per share of 54 cents, unchanged from the same period a year ago. Analysts, on average, had forecast earnings per share of 48 cents.
The company recorded a net tax benefit of $140 million in the period, a reversal of a tax expense of $145 million in the same period a year earlier. Negotiations with tax authorities primarily in the United States and Taiwan ended favorably for the company, reducing Thomson Reuters' projected tax rate for the year to 16 to 18 percent from 21 to 23 percent.
(Reporting By Jennifer Saba; Editing by Edward Tobin and Toni Reinhold)