Thomson Reuters Q3 Earnings Call Transcript

123jump.com Staff
11 Dec, 2010
New York City

The information company reported quarterly revenues rose 1.2% to $3.26 billion. Net quarterly earnings surged 65% to $268 million reflecting increase in revenues at its Professional and Markets division. Earnings grew to 32 cents per share from 19 cents per share in the year-ago quarter.

Thomson Reuters Corporation ((TRI))
Q3 2010 Earnings Call Transcript
October 28, 2010 8:30 a.m. ET

Executives

Frank Golden – Senior Vice President, Investor Relations
Thomas Henry Glocer – Chief Executive Officer
Robert D. Daleo – Executive Vice President and Chief Financial officer

Analysts

Drew McReynolds – RBC Capital Markets
Colin Tennant – Nomura Securities
Brian Karimzad – Goldman Sachs
Vince Valentini – TD Newcrest
Thomas Singlehurst – Citigroup
Phillip Huang – UBS
Mark Braley – Deutsche Bank Securities
Tim Casey – BMO Capital Markets
Paul Steep – Scotia Capital

Presentation

Operator

Ladies and gentlemen, good morning. Thank you for standing by and welcome to the Thomson Reuters Third Quarter 2010 Earnings Conference Call. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session. In the interest of time, please limit yourself to one question today. If you should require any operator assistance during the call, please press star then zero and an AT&T operator will assist you. And as a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Senior Vice President, Investor Relations, Mr. Frank Golden. Please go ahead.

Frank Golden

Thanks very much and good morning. And thank you for joining us as we report our results for the third quarter. We will begin today with Thomson Reuters'' CEO, Tom Glocer, who will be followed by our CFO, Bob Daleo. Following Tom''s and Bob''s presentations, we will open the call for questions. I would ask that you please yourselves to one question each so that we can get to as many as possible.

Now, throughout today''s presentation, keep in mind that we when we compare performance period-on-period, we look at revenue growth rates before currency, as we believe that this provides the best basis to measure the underlying performance of the business.

Today''s presentation does contain forward-looking statements. Actual results may differ materially due to a number of risks and uncertainties discussed in reports and filings that we provide to the regulatory agencies. You can access these documents on our website or by contacting our Investor Relations Department. It is my pleasure to now introduce the Chief Executive Officer of Thomson Reuters, Tom Glocer.

Thomas Henry Glocer

Thank you, Frank and thanks to everyone for joining us today. I’m pleased to report that the company returned to revenue growth in the third quarter. We are past the bottom and on the way back up.

Our markets are slowly improving and we are encouraged by what we are seeing in the business, revenue growth, positive net sales and strong customer uptake of our new products. For Q3, revenues were up 3%, with both divisions recording growth. The Professional division''s revenues rose 5% and growth was good across each of Professional''s business units, with the Tax & Accounting and Healthcare & Science businesses achieving particularly strong results.

Legal revenues were up 3%, its best performance in almost two years, in what continues to be a challenging environment for law firms. Nevertheless, we continue to believe our growth rates exceed those of our peers and the industry as a whole.

The markets division returned to growth in Q3 on the back of improving sales trends. This quarter marked the second consecutive quarter of positive net sales, which have steadily improved from their bottom in Q2 2009 and these trends bode well for continued revenue growth in Q4 and 2011.

Underlying operating profit declined 4% for the firm as a whole, primarily due to ongoing product investment, product mix and the dilutive effect of acquisitions. We continue to believe we will meet our full-year operating margin guidance of low 20% margins.

We are making good progress on our integration program, with run-rate savings exceeding $1.3 billion. And we remain confident that we will achieve our previously announced goal of $1.6 billion by year-end 2011. Adjusted earnings per share for the quarter was $0.49 compared to $0.43 in the prior period, helped by lower integration-related costs and lower interest expense and a decline in income tax expense.

Lastly, we continue to be confident that we will achieve our full-year 2010 outlook, given the year-to-date results and the favorable trends in the business. In fact, we now expect our revenue performance to be slightly better than previously forecast, with revenues flat to slightly up for the full year, versus flat to slightly down before.

All in all, the third quarter was a period of continuing solid execution with positive net sales, the launch of new product platforms and steady progress on integration programs. Trends in the Legal business continue to improve. Revenue growth of 3% was driven by an 8% increase in subscription revenues, thanks to good growth at FindLaw, the IP business and the International Legal businesses.

WestlawNext sales, now at 9,000 positions, continue to be strong, helping to drive growth and further strengthen our competitive position. And for the first nine months of the year, net sales for print are up, compared to a decline in the prior-year period, as print attrition is close to historical levels, some 9%.

Tax & Accounting and Healthcare & Science continue to perform well, as revenues grew 9% and 7% respectively for the quarter. The Tax & Accounting market continues to be healthy. And we expect revenue growth for this business to accelerate in the fourth quarter.

Turning to Markets, trends continue to be encouraging. Net sales were positive for the second consecutive quarter, reflecting positive customer reaction to our new offerings, including Thomson Reuters Elektron, our new low-latency data distribution platform and of course, Thomson Reuters Eikon, our new flagship desktop product.

Enterprise revenues were up 10%, with strong growth across the segment except for Omgeo, which was negatively impacted by lower equity volumes over the summer. Tradeweb grew 9% due to higher volumes for U.S. Treasuries and mortgage-backs.

By geography, revenues grew across all major regions of the world except North America. Customers in rapidly developing economies continue to demand our products, as evidenced by Asia as a whole up 4%, of which China grew 12%, India 7% and over in the Middle East and Africa we were up 15% and in Brazil up 8%. Transaction revenues were up a healthy 5%, despite a dip in FX volumes during the summer months.

Now, most companies would be thrilled to release one or two important new products per year. We continued to invest through the great recession of 2008/2009 and are in the enviable position of releasing six new products this year, Eikon, Elektron, Insider; WestlawNext; ONESOURCE, a global tax workstation; and the Advantage Suite 5.0 in Healthcare & Science.

I want to talk today just about two of these products, Eikon and WestlawNext. Just last night, Toronto was the setting for the Canadian launch of Thomson Reuters Eikon and similar launches have been held in New York and London in October.

Eikon targets the new generation of financial professionals who are distinguished by their affinity for technology, who demand greater real-time information and whose outlook transcends social, geographic or language barriers. It offers these professionals a single place to turn for comprehensive, critical content.

And Eikon is a real game-changer for us, much in the way that WestlawNext sets a standard for what this generation of legal professionals needs to do their jobs. Following an extensive beta test across more than 100 sites around the world that provided deep user feedback, Eikon officially launched on September 14.

The product has been very well received in the market and early sales results are encouraging. We have signed contracts for over 1,000 new desktops, not just migrations; those are new-new desktops and sales continue to ramp up.

In addition to being a terrific product, it is a comprehensive business platform also enabling us to improve customer service, deliver content and functionality updates more rapidly and reduce costs for our customers and for ourselves. Three years in the making, Eikon is truly a new tool for a new era and I couldn''t be more excited about its prospects.

Now with all the focus on Eikon, it would be easy to overlook the tremendous performance put in by WestlawNext in its first nine months. This innovative legal platform continues to outperform our expectations with over 9,000 customers signed up, 20% of whom are new to Westlaw, which is a relatively hard thing to do given our market penetration.

But we are not standing still. The new architecture and agile development process allows us to deploy enhancements to WestlawNext much more frequently and with fewer resources. For example, the time needed to deploy new code has been reduced by 60% and personnel needed to deploy new code has been reduced by 33%.

So, in closing, let me say it is good to be able to report positive numbers to you again. We are past the bottom from both the sales and reporting standpoint. And despite the choppiness of our markets, we are well positioned for further growth in 2011.

We have had the rare support of our Board and investors over the past two years to keep investing in the projects that we believe in, including the new product platforms that I have been discussing. We do not take that for granted and have made 2010 a year of focused execution on these investments for us. And now the time has come for us to reap the fruits of these investments and turn our market leadership and confidence into revenue and profit growth for our shareholders.

This balance between investment and return over the short and the long-term is a balance that we are determined to get right. And it is with this in mind that we have begun to prepare our 2011 plan. I will spare you the usual platitudes about how difficult the planning environment is this year, although it is true.

Let me just say that when we are done, I am confident we will show good growth next year. With that, let me turn over to my partner, Bob Daleo.

Robert D. Daleo

Thank you, Tom. Again, thank you all for joining us on the call today. I’m going to discuss the results for the third quarter and I’m going to provide a brief update on where we are on our integration initiative.

Now, you will recall that in the second quarter we anticipated that based on encouraging net sales performance and a more constructive environment in our markets, we''d return to growth in the third quarter and we have. We are tracking to our expectations with few surprises and three quarters of the way into the year, the results are consistent with the full-year outlook which we presented to you all in February.

The encouraging net sales performance that Tom outlined and an improved market environment lead us to believe this trend is likely to continue into 2011. Now, as in prior quarters, I am going to speak to revenue growth before currency. Reported revenues are also highlighted on each of the slides.

In the third quarter, foreign exchange had a negligible impact on both revenues and the consolidated margin for the company. Our overall revenues in the third quarter were $3.3 billion. This is up 3% versus the prior year, with 2% of that benefit coming from acquisitions.

Let me point out that we provide organic revenue growth rates for each of our business segments on the P&L found in today''s earnings release. Both the Professional and Markets divisions achieved organic revenue growth in the quarter.

Underlying operating profit was $681 million in the quarter. The corresponding margin decreased primarily due to previously announced investments in new product launches, the products mix from our current sales or revenues and the dilutive impact of acquisitions, which at the company level was 50 basis points. These factors more than offset integration savings and initiatives across the business.

On a year-to-date basis, our revenues are flat, with 2% contribution from acquisitions. Underlying operating profit is down 10%. Corresponding margin is 19.7%. About 20 basis points of decline is due to currency.

Now, I would like to turn to the performance of the business. The Professional division revenues were $1.4 billion, up 5%, of which 4% was attributable to acquisitions. Organic revenue growth was 1%. Operating profit declined 4% as anticipated and the corresponding margin declined to 26.7%.

Margins continue to be pressured by a combination of the investments that we have made and acquisition costs, lower revenue growth and the revenue mix from the current year. I will discuss more detail when we get to each of the segments. And again, currency had a negligible impact on Professional''s margins.

Year-to-date, the division''s revenues are up 2% with flat organic growth. Operating profit is $1.1 billion and the corresponding margin is 25.7% with really no impact from foreign exchange. We expect the Professional division''s revenues to continue to improve into the fourth quarter.

The revenue dynamics for the third quarter in Professional serve to demonstrate the improving results and are consistent really with what we have talked about in prior quarters. Tax & Accounting, Legal Subscription and Healthcare & Science businesses all continue to generate solid growth.

In fact, on a combined basis, these business segments grew 8% and represent 77% of the division''s overall revenues. These businesses are growing faster and becoming a larger share of the Professional division. Offsetting this performance was the continued decline in Legal''s print revenues, down 4% versus a 9% decline in Q2 and a 17% decline in Q1. Both areas have been impacted by unfavorable timing on a year-to-year basis.

In addition, Legal non-subscription revenues declined 4% versus a 5% decline in Q2 and an 8% decline in Q1. So we are seeing improvements in both these segments, although they still are declining. Penetration has significantly improved from the prior year. We are now near normal levels and it''s a meaningful step towards stabilizing the business and turning to growth.

Non-subscription businesses achieve good growth in trademarks. However, we continue to experience double-digit declines in ancillary revenues as customers continue to monitor spending above and beyond their base contracts.

Now, let''s turn to the revenue performance for the business units in the third quarter. Legal revenues were unchanged on an organic basis and up 3% including acquisitions. As mentioned, subscription revenues grew 8% in the quarter, led by a 23% growth in FindLaw, 14% growth in international revenue, both helped by acquisitions and a 7% growth in our IP business.

Non-subscription revenues declined 4%, print products declined 4%. The corporate business grew 9% and government-related revenues increased by 4%. Tax & Accounting revenues grew 9%, 4% which was organic. Workflow & service solutions represented nearly two-thirds of Tax & Accounting revenues in the quarter and grew 15%, led by good organic growth in income tax products, which include InSource and our Creative Solutions suite of products and the global tax technology segment, which includes tax provisioning with TaxStream and transfer pricing with our cross-border business. And we had the benefit of acquisitions.

Business compliance & solutions revenues were down 1%. This is despite a 9% increase in checkpoint revenues, which were not enough to offset the decline in print, which comprised 9% of Tax & Accounting''s overall revenues and a significant portion of this segment''s revenues. As I stated last quarter, we expect growth in margins for Tax & Accounting to continue to improve as the year progresses.

Healthcare & Science revenues grew 7% in the quarter, of which 4% was organic. The Payer business grew 11% on the strength of continued demand for healthcare spending analytics. The Scientific & Scholarly Research business grew 14%, driven by an acquisitions and the solid growth in our core informations offerings, Web of Knowledge and Web of Science, which actually grew 6% organically in the quarter. Partially offsetting this was a modest growth in the provider business, which was up 1%, and an expected decline in our Life Sciences segment, which was down 2%.

Now, let''s turn to the segment operating profit for the Professional division. In Legal, the third quarter operating profit, as expected, declined 6% and the margin was 30.4%. Now, lower margins, lower revenues from high-margin print and non-subscription products contributed 30 basis points of the decline. The impact of acquisitions here contributed about another 100 basis points and our investment in strategic growth initiatives and the higher depreciation and amortization contributed 160 basis points of the year-to-year decline.

This more than offset any of the efficiency savings for the growth in other businesses. Year-to-date, our operating profit is down 9% and the margin is 29.7%. And we do expect a rebound in margins in this Legal segment as growth returns.

Tax & Accounting operating profit decreased 8% for the quarter and the corresponding margin remained flat at 16%. Operating profit growth was driven by revenue flow-through, partly offset by the dilutive impact of the higher depreciation and amortization from 2009 acquisitions.

Now, it''s important to note here that EBITDA increased 15% for Tax & Accounting in the quarter. And we continued -- we expect continued operating profit growth and margin expansion in the fourth quarter as this segment exits a heavy phase of investment and we see the benefits of these investments.

Year-to-date operating profit is down 6% and the margin is 14.2%. This is not indicative of the full year. Let me remind you that Tax & Accounting is historically a seasonal business, with nearly half of its operating profits generated in the fourth quarter.

Healthcare & Science operating profit was unchanged from the prior year at $50 million. The related margin fell to 22.7% really due to timing and difficult prior-year comparables and foreign exchange, which impacted this business by 90 basis points. As I mentioned when discussing Tax -- Healthcare & Science revenues, quarterly figures can be impacted by really the small timing shifts between quarters. This is really a case of the law of small numbers.

On a year-to-date basis, the operating profit is up 7% and the related margin is 10 basis points higher on a reported basis. And if you conclude that currency impact, you are up (inaudible) basis points.

Now, turning to the markets division, revenues increased 1% in the quarter to $1.8 billion. Revenue trends continued to improve. Revenue growth in the third quarter marked the first quarter of growth in more than a year. The modest rise is due to strong transaction discreet revenues, offset by the impact of revenue dyssynergies which we have talked about associated with the integration. And I have discussed these in previous quarters.

By revenue type, recurring subscription revenues were flat and recoveries declined 2%. The revenue categories not subject to lag effect of lower net sales of 2009, transactions and outright, increased by 5% and 42%, respectively. By geography, Asia revenues were up 4%, EMEA was up 3% but the Americas declined 2%.

Operating profit of $359 million was down 3% and the corresponding margin declined, as expected, 19.4% due to higher expenses related to investments supporting our new product platforms, Eikon and Elektron. The current quarter included some one-time benefits. These were a timing benefit and they amounted to about $25 million. We do report them but let me remind you that these come up from time to time; in fact, we had similar one-time benefits in last year''s numbers as well.

Excluding the impact of currency, operating profit declined 2%. Year-to-date revenues are down 2%. Operating profit is $1 billion and the related margin is 18.1%. Currency had a 30 basis point negative impact on this margin.

Now, let''s turn to the performance of the business segments. Sales & Trading revenues were flat in the quarter but they were actually up 2% when you exclude recoveries. You will recall that second-quarter revenues declined 5%. So there has been a significant sequential improvement in growth rates.

Transaction revenues were up 8% driven by Tradeweb. We continue to see strong growth from our Commodities & Energy segment, which was up 13%, which about half was related to an acquisition. And Tradeweb delivered 9% growth on the heels of stronger treasury and mortgage-backed security volumes.

The treasury business remained flat versus prior-year as flowthrough from 2009 Subscription cancellations offset a 2% increase in transaction revenues, driven by growing foreign exchange volumes. Investment & Advisory revenues declined 2%, with organic revenue down 3% and a 1% contribution from acquisitions.

The Corporates business grew 6% in the quarter on the strength of acquisitions. The remainder of the business was affected by light -- light late cycle impact of the negative net sales from last year. Investment Management revenues declined 9% as a result of the flowthrough of cancellations from buyside customers seeking to cut costs or exit the business entirely.

Wealth Management grew 4% due to strong desktop and add-on solutions and feeds growth, which offset the planned retirement of products including Reuters Plus and ILX. It is worth noting that we''re seeing good momentum in the business, with positive net sales across Corporates, Investment Banking and Wealth Management.

Enterprise grew 10% in the quarter, all organic. Foreign exchange had a negative 3% impact. Enterprise real-time solutions, which represent about 40% of the business, grew 10% on strong performance in consolidated feeds and tick history.

Risk Management, which represents about 14% of the business, grew 15% in the quarter. And the Platform business grew 17% on sales of recurring products. Omgeo was down 5% in the quarter on the back of weak equity volumes.

Finally, Media''s revenues declined 3%, driven by 2009 cancellations in the Agency business, which continues to be adversely affected by tight customer budgets. The Consumer business was essentially flat compared to the prior year; however, recent product introductions including mobile and the iPad applications are garnering new sources of advertising revenues.

Now, the revenue dynamics for the third quarter in the markets division serve to demonstrate the improving results. Recurring subscription revenues, which represent about 77% of the division''s overall Q3 revenues, were flat as the weaker 2009 sales and planned phase-out of low-margin products offset positive 2010 sales and our lower cancellations.

Outright revenues were up 42%, driven by strong performance in Enterprise and I&A. There are some timing issues with Q3 that aided that comparison. Transaction revenues, which are 9% of the overall revenue base, increased 5%, driven by Tradeweb, as I said, a growth of 9%, which I noted previously. Given the trends, we''re seeing across the markets businesses, we expect to continue to see improvements in the division''s revenue growth rates into the fourth quarter.

Now, let''s turn to performance compared to the previous quarter. In the past, we have shown this chart that highlights sequential revenue growth for the markets division as a means to provide a more real-time performance metric. This view effectively removes the inherent lag effect from our year-to-year results.

Recurring subscription revenues grew two-tenths of 1% in the quarter, fairly consistent with the second and first quarters, which also had the benefit of a price increase of about a point and a half. Recoveries'' revenues declined slightly versus last quarter. And I will remind you that these are very low-margin and pass-through revenues generated by third-party vendors, largely exchanges.

FX volumes were lower than Q2 due to an unusual spike in trading related to the euro zone credit concerns in last quarter. This led to a sequential decline in transaction revenues during the quarter.

However, we are feeling quite good about transaction revenues overall. They are up 5% year-on-year and recent events including the talk of currency wars have supported higher transaction volumes in September and October and may provide a tailwind for this segment.

Note, that we have excluded Outright revenues despite their strong performance in the quarter, since they are extremely seasonal with over 40% of annual revenues recorded in the fourth quarter. Outright represented less than 4% of consolidated Markets revenues this quarter.

Now, let''s turn to our corporate costs, which totaled $259 million in the quarter. Our core corporate costs were up $5 million versus the prior year. Overall corporate costs were up $15 million, primarily due to a $55 million increase in fair value adjustments, which I will remind you are non-cash FX accounting adjustments made quarterly when we mark-to-market certain customer contracts. This is partially offset by the $45 million favorable swing in integrated related expenses.

Year-to-date, our core corporate costs are down $9 million, which highlight that the $5 million increase in the quarter was really a timing-related issue.

Now, let''s turn to the adjusted earnings per share. Earnings attributable to common shares were $268 million in the quarter. To arrive at adjusted earnings we make the following adjustments.

We deduct $44 million of income listed as Other Finance income, which in 2010 refers to gains realized from FX changes on our inter-company funding arrangements, offset by FX losses on derivative instruments. All of this is non-cash. We remove the amortization of intangible assets, again non-cash. And we normalize for an anticipated full-year tax rate, which we have estimated to be between 20% and 24% for the full year. This results in $11 million lower adjusted earnings in the quarter.

The net result is $406 million of adjusted earnings or $0.49 per diluted share, an increase of $0.06 versus a year ago. This increase is largely due to lower integration costs, lower taxes and interest expense, offset by the decline in underlying operating profit which we have noted.

Year-to-date, our adjusted EPS figure is $1.32 versus $1.41 last year. Now, a complete reconciliation to adjusted earnings is available in the press release which we issued this morning.

Turning to free cash flow, year-to-date, our free cash flow is $852 million. Underlying free cash flow, which removes integration-related cash spending, is $1.2 billion. Declines relative the prior period were driven by lower underlying EBITDA and higher cash taxes. For the full year, we again expect to generate strong levels of free cash flow but slightly lower than last year.

I will provide you with a brief update on our integration synergy programs. We continue to make progress on these projects and have achieved a run-rate savings of $1.35 billion. The incremental $75 million in savings in the quarter was related to communications expense savings and content data center consolidation within the markets division. I will reiterate we remain on track to achieve our targeted savings of $1.6 billion by the end of 2011.

In the quarter, we incurred $103 million of integration-related expenses, primarily related to severance costs, consulting fees and technology costs. Year-to-date, we have recorded about $290 million of one-time costs. We could potentially see about $25 million to $50 million of our anticipated spending this year actually shift to 2011, strictly a timing issue.

Over the past year, we have taken advantage of an historically low interest rate environment to further strengthen an already-strong capital structure. We proactively refinanced about $2 billion in debt maturities at some very attractive rates.

In September, we closed a public offering in Canada of $750 million, which is about $730 million in U.S. terms and over -- 10-year notes with a coupon of 4.35%. The proceeds from this offering will be used to repay our €500 million principal medium-term notes upon their maturity in November. This is the last of the Reuters debt that we inherited on the acquisition.

Our net debt-to-EBITDA is just over two times and these refinancings have stretched our duration to eight years. In addition to the cash on the balance sheet, we have $2.5 billion in untapped credit lines.

I thought I would add this slide this quarter, because as you all know acquisitions have always played an important role in our overall corporate growth strategy. In order to sharpen our strategic focus on providing electronic solutions to our business and professional markets, we always continually assess our portfolio. This process assures that we are investing in areas that offer the greatest opportunities to achieve higher growth and returns.

In 2010, we have made six acquisitions greater than $20 million. In February, the markets division acquired Aegisoft, a provider of electronic trading platforms that will enhance our ability to provide client broker sponsored direct market access. In June, the division acquired Point Carbon, a Norwegian-based business that is a leader in information for the energy markets including the emerging carbon-trading market.

In May, the Professional division acquired Revista dos Tribunais, the leading legal publisher in Brazil. This acquisition gives us exposure to the legal market in one of the world''s fastest-growing economies and builds on the strength of our math-based technology platform.

In June, we acquired Complinet, the U.K.-based financial services GRC business that, along with our other GRC assets, formed our new group in Legal that is attacking a large, global, and growing Governance, Risk & Compliance market. In August, we closed on the Canada Law Book, expanding our global content base in Canada alongside our leading Carswell legal and tax publishing business.

Finally, in October, the compliance group in Legal closed on the acquisition of -- I should say the corporate group in Legal closed on the acquisition of Serengeti, greatly expanding our capabilities for serving the corporate general counsel. These acquisitions will contribute revenue growth for the full year; however they will have a dilutive impact on operating margins, which I have already noted, which is why we are not raising our margin guidance for the full year.

Now, turning to our 2010 outlook, as Tom mentioned we have reaffirmed our full-year outlook, but with an upward revision for growth. Year-to-date revenues are flat before currency. For the full year we now expect revenues to be flat to up slightly, rather than our original expectation of being flat to down slightly. And this improvement is based upon a slight improvement in organic revenues and the benefit of acquisitions.

On a year-to-date basis, margin before currency -- that is, at last year''s rates -- is 19.9%. However, Q3''s underlying margin was 21%. As previously expected, we expect full-year margins to fall short of last year''s 21.3% but remain above 20% despite the dilutive impact of acquisitions. And free cash flow generation for the full year will continue to be strong, but slightly lower than last year.

So in closing my comments, let me reiterate that our performance is tracking to our expectations and the trends we expected to see are coming to pass. Based on the investments we have made, the positive trends we see in net sales, the improving economic environment in our markets, we believe the business is on an upward trajectory.

This growth will provide a tailwind for margin improvement and continued strong free cash flow generation. And our strong capital structure will continue to allow us to invest for growth while providing good returns to our shareholders.

Now, let me turn it over to Frank for your questions.

Frank Golden

Thanks very much, Bob. We’d like to now open the call for questions. As I mentioned earlier in my comments I would appreciate it if you would keep it to one question each. So can we have the first question, please?

Question-and-Answer Session

Operator

Ladies and gentlemen, if you wish to ask a question, please press star and then one on your touchtone phone. We’ll hear tone indicating that you’re placed in queue. You can move yourself from the queue at any time by pressing the pound key. If you’re using speakerphone, please pick up you handset before pressing the numbers. Again if you do have a question, please press star one at this time. I’ll begin today from the line of Drew McReynolds with RBC Capital Markets. Please go ahead.

Drew McReynolds – RBC Capital Markets

Yeah. Thanks very much and good morning. Maybe for you, Tom, just looking at the sequential recurring revenues markets, obviously some modest, kind of 0.2% sequential growth in Q3 and in Q2. Just wondering if you can drill down into current net sales trends, visibility into 2011 and just within the context of what everyone realizes is a slower sluggish trading environment out there in certain asset classes. That would be great. Thank you.

Thomas Henry Glocer

Sure. So just to remind everyone, Drew and I know you know well, what we are seeing show up in the current period-on-period performance in markets is really the economic activity from the second half of last year into the beginning of this year. So as you note, the recurring line is flat to just slightly up. That is already a pretty good thing, given what the markets were looking like last year.

But the important thing from a trend perspective is that we were seeing net sales improve pretty much quarter on quarter right through the period. In particular, we only had, call it, two weeks of Eikon in the quarter and of that, essentially no revenue at all. So from a going-forward perspective and looking into 2011, it will be very helpful to have Eikon in there to increase significantly the competitive position on the desktop.

Enterprise, as you have seen, continued to do well right through the bottom of the recession and is now strengthened to about a 10% quarter on quarter. So I put all of that together and what do I extract as trend? Number one, the trend to substitute technology wherever possible for headcount growth in Financial Services continues. That is really what has been driving the Enterprise unit all along.

Although there are talk in the market about trimming or reallocating heads and we may see a little bit of that at the end of the year, nothing on the order of the wholesale cutbacks that we saw obviously 2008 into 2009. And generally, it is a sort of reallocation, growth in particular markets, like commodities and energy, FX, Treasury, growth in regions like Asia, Brazil, Middle East, offsetting reductions in large city centers.

So put all of that together, plus the competitive impact that having Eikon now on the desktop and what it looks like to us is not spectacular growth, but good, steady progress and a positive markets division.

Frank Golden

Next question, please.

Operator

Your next question comes from Colin Tennant with Nomura. Please go ahead.

Colin Tennant – Nomura Securities

Hi, morning, everybody. The question I had was on Eikon. I was just wondering, now that you have actually had the beta test, you have had the launch and getting some orders in, where is -- which segments of the market are -- is it most attractive to, both geographically and by activity?

Thomas Henry Glocer

Okay. So, in Version 1, right out the door, it is attractive to basically anyone who has 3000 Xtra on their desktop today. And we will be seeing a significant amount of migration activity. But as I pointed out in my remarks, the thing that I am probably happiest about is the very strong start in what I usually call new-new positions. So people who had known no Thomson Reuters position before and that is either a competitive displacement or a new source of growth.

By region, we will be introducing in 2011 Chinese language version, Japanese language version, which is more than just changing the language of some of the content. It is a -- the entire software framework goes into localized version. So we will have to wait until that to really see significant geographic pickup in Asia but that is all good sales to come, I believe.

So it is off to a good start. It is the Sales & Trading core where we are focused now. I guess, the only thing else I would add is that there will be an ongoing and rolling basis of functionality and content upgrades. In particular, the Asia and in particular more buyside oriented functionality which will be coming over the next, call it six to nine months.

Colin Tennant – Nomura Securities

Okay. So I mean what I was trying to get at I guess is, are you -- is it in your traditional strong markets, like money markets and so forth, that it is getting the best reception so far or are you seeing a bit of a fight back and really -- I guess you have traditionally lost some share to Bloomberg like in equity markets or is it too early to say at this point?

Thomas Henry Glocer

The bottom line is, it is too early to say. However, the version that is out right now is perfectly suitable for international equity markets, certainly the large treasury money market franchise. And I do expect with the combination of Tradeweb, trading functionality, some of the enhanced pricing and analytics and always the strong news offering, you will see a much more competitive showing in Fixed Income as well.

Colin Tennant – Nomura Securities

Thank you.

Operator

Next, we will go to line of Brian Karimzad with Goldman Sachs. Please go ahead.

Brian Karimzad – Goldman Sachs

Hi. Good morning. As you think about pricing for the markets division next year, I know Bob alluded to some modest year-over-year gains this year. And I know with Eikon you are selling it as a complementary upgrade to just existing users; explicitly there is not a price increase there. But implicitly, as you look at the overall price increases you are seeking for 2011, do you see an acceleration in what you are asking for? And any sense, communication you have had with customers about that?

Robert D. Daleo

Well, first of all, we have already sent out price increase letters for 2011. And, they of course, vary depending upon the product; I think on average are about 2.5%. The responses that we have gotten, the ones that I am aware of, have been positive in the sense of that they understand the basis for it. And with Eikon, while we are not increasing Eikon''s price but the fact that we have been able to go to the market and say that we have launched a meaningful new products improvements and a meaningful introduction, certainly they understand that these price increases that we have gotten from them in the past we have used to their benefit to continue to invest back into the business.

So our strategy is that, like anything, in all of our businesses you price to value. And our strategy with Eikon is to offer this value to our customers because we realize that there is a whole new generation of financial managers out there, as Tom talked about. And with Eikon is about really the longer-term positioning of Thomson Reuters in this marketplace.

Brian Karimzad – Goldman Sachs

Very well. If I may just quickly -- I know you gave out the organic versus all-in color on the broad segments but within Legal subscription there is some nice acceleration. Any sense when you classified a couple of those acquisitions, did they fall into that subscription revenue component?

Robert D. Daleo

No. We would have pulled it out for organic purposes.

Brian Karimzad – Goldman Sachs

Okay.

Robert D. Daleo

What we were reporting was organic.

Operator

Our next question comes from the line of Vince Valentini representing TD Newcrest. Please go ahead.

Vince Valentini – TD Newcrest

Yeah. Thanks very much. A question on the margins. In the Legal segment, Bob, thanks for the color on Q3. Can you give us any sense of how long these, kind of, drags from both the acquisitions and from the new strategic initiatives, how many more quarters you expect to see that kind of pressure? And also is it possible to give a same margin impact figure from Eikon''s startup costs in the quarter as well?

Robert D. Daleo

Let me start with the Legal side of it. I think that our investments that we have made that have a drag in the quarter will certainly continue to drag throughout -- certainly throughout the balance of this year and a bit into next year, but to a lesser degree. I think that -- so for example, let me take them apart. Like acquisitions, what causes it? When you acquire a business, two things. First, they don''t tend to have the same margin as our existing businesses, so it takes a while to integrate them.

Second of all, many of these acquisitions are software, like they had been in Tax & Accounting. You take a portion of the purchase price and set it up as software costs and our policy is we amortize them over three years. So for those that fall in that category we will have three years. Now, we will see, obviously margin accretion as we integrate them and as we grow them but certainly they will be a drag. In terms of the investments, I think a significant portion of them are this year. We will see them start to decline certainly in 2011.

But the product mix issue is a longer-term issue for us. It is no secret that when you lose a dollar of print revenue versus gaining say a dollar of FindLaw revenue, that changes. So I think that the return to growth that we will -- the margin improvement will say return to growth, will come from volume more than a shift in our product mix. I think the product mix that we have is more really a permanent one. So I think that as we think about that long-term, that is the perspective we have on Legal.

In terms of Markets, really if you look at -- I don''t have it separately. But if you looked at Eikon, Elektron and we have an internal project called Aurora which really has to do with streamlining our technology infrastructure, those three items together represent about 130 basis points of margin investment in the quarter.

Vince Valentini – TD Newcrest

Great. Thanks.

Operator

And next we’ll go to line of Thomas Singlehurst with Citigroup. Please go ahead.

Thomas Singlehurst – Citigroup

Yes. Good morning, Tom. Good morning, Bob. The question I had, was on I suppose the differential between constant currency growth and organic growth. Felt rather excited first thing about the level of uplift in Professional and then noticed that actually on an organic basis the Legal side is actually flat. The question is this. Firstly, that is quite a big step up in differential relative to previous quarters. Is that going to be more of a feature going forward?

Then sort of longer-term, what is the balance between acquisition and organic in terms of the anticipated size of this growth over the next 12, 18 months within Legal in particular, but also across the rest of the business? Thanks.

Robert D. Daleo

Well, let me -- and I am sure Tom can jump in on the strategic. Let me talk a little about -- let''s step back and understand our model again, the Subscription model. Right? The reason that we lag going into declines and lag coming out is just the mathematics of that. So we continue to record revenue growth even as we see perhaps negative sales or slowing sales. And we continue to show revenue decline or slow down or lower revenue growth even as we build sales momentum.

So the significant part of the Legal performance this quarter is the fact that we have continued to see strengthening sales and in fact have seen a flat performance in terms of overall revenues. That is a positive sign and we expect to see acceleration. But given the model, it does take us a while. I think that is the -- that the beauty of our model is its tremendous consistency in our business. We understand and anticipate and can plan for movements. So we tend to be -- we are obviously very patient with it. But I can understand why you would expect to see a more significant move. That is not the way it happens.

In terms of as we think about going forward, I think that as we look forward we will see an improving balance between what comes from acquisition and what comes from organic as the overall growth of the division accelerates into 2011. I think that the benefits from a number of these acquisitions that we made will actually drive organic growth for us, certainly into 2011 and into 2012.

So our objective is not to drive growth through acquisitions, to drive growth through organic performance. We use acquisitions to achieve that goal over both the short and longer term.

Thomas Singlehurst – Citigroup

One very quick follow-up though. But for 2010, should we interpret the increase in revenue guidance as being purely a function of acquisition?

Robert D. Daleo

I did say when we talked about it that there is a little bit of improvement in organic performance but the majority of it does come from acquisitions.

Thomas Singlehurst – Citigroup

Thank you.

Operator

Next question comes from the line of Phillip Huang representing UBS. Please go ahead.

Phillip Huang – UBS

Good morning, guys. Thanks for taking my question. It''s obviously encouraging to see that you have signed up more than 1,000 new desktops in less than two months after launching Eikon. And I know these are not migrations, but for your existing customers just wanted to get a better understanding of the process to migrate those customers to Eikon. So for example say some of your larger customers with more than say 50 users, can you maybe talk a bit about how long the migration process is on average? Is it closer to two weeks or six weeks and whether there may be any dual costs to support the two systems during the migration process?

Thomas Henry Glocer

Okay. Let me jump in on that one, Phillip. So, let''s start with the cost element. To the extent that there are dual costs -- and I will address both ours and customers''. From the Thomson Reuters point of view, there are dual costs running these two systems. They are in the run rate now of the business? Therefore they offer the promise as we get deeper into the migration and ultimately convert and shut down old systems to reduce the cost of dual running. That will obviously have implications and that is one of the main ways in which we intend to get the Markets margins up.

From a customer point of view, there is always some level of dual running but it is really not significant, because there is a sharing of infrastructure. And in terms of the timing, no two customers are completely alike. So we already have several hundred folks actually migrated, let''s say, 3000 Xtra over to Eikon. If you were reasonably stand-alone -- let''s say you are a small to medium-size shop and you wanted to transfer over your 20 terminals, it would not be a significant undertaking. Could be done in a matter of a couple of weeks.

Typically, with our largest customers, there will be a fair amount of customization into the trading room of that bank as well as an internal schedule of testing when is the bank planning to let''s say upgrade servers anyway. And therefore, unlike maybe the electricity company and the water company who tear up the street twice, our experience is most of our clients are much more efficient with that and wait and have us do it when they are on their schedule. But we have got ambitious targets and all of the markets division is focused on taking clients up to our latest and greatest offerings. So it looks good.

Phillip Huang – UBS

Got it. That''s very helpful. Just a quick follow-up. Obviously, there are several versions of the platform to be rolled out in the years ahead. But based on the current version of the product, is there a specific region or asset class that the sales force is currently more focused on primarily?

Thomas Henry Glocer

Just to come back to you on the way you have asked the question because I think it includes an important business model change that Eikon represents, there is actually only a single flavor of the platform. It is the common platform that we’ve talked about for several years and in that is very important scale economics advantages.

You are right in that, it will allow a variety of different flavors. Right out of the box today a form of, let''s call it mass customization that allows a fixed-income trader to see something different than an FX options trader. But over time, additional functionality and content, both localized, let''s say in Asia markets but also specialized in different industry markets that we can add without major site visit, remotely, which was not a feature typically of let''s say the 3000 Xtra architecture.

Going back to my answer to Colin''s question earlier, I guess the day one fit-for-purpose of Eikon is the large installed base of 3000 Xtra, treasury in particular; more sell-side orientation than buyside; Western Europe and U.S. before, let''s say Asia. But all of that -- those are in the plans and, as this may suggest, there are good things to come in the natural rollout from here. What I am happiest about is we have got a version out. As you know, we waited until we felt it was of high quality. Not only did we get it out on time per that schedule, but the testing we did ahead of time has -- this is a very good piece of software that is holding up well in its first weeks of really critical customer use.

Phillip Huang – UBS

Perfect. Thanks very much.

Operator

Next question is from Mark Braley representing Deutsche Bank. Your line is open.

Mark Braley – Deutsche Bank Securities

Yeah. Good afternoon. Just a couple of questions. Following on Legal, could you give us a feel for how significant the timing benefits in Print were in the third quarter? And whether -- if those are effectively a pull-forward from the fourth quarter and if so, could we -- should we assume you will actually be in organic growth in Legal in the fourth quarter? And then just one for Bob, the tax rate comment you made, 20% to 24%, is that on the adjusted earnings? If so, can you give us a feel for why that is such a wide range on the adjusted figure?

Robert D. Daleo

I can actually -- I''ll answer both of those, Mark. First of all, I apologize. You might have misinterpreted my comment. The timing benefits that we had were actually last year, not this year. This year, there are no timing benefits either in the quarter or actually year-to-date.

Mark Braley – Deutsche Bank Securities

Okay. So we should be quite well positioned on that basis then for organic growth in Legal in the fourth quarter. I''d just ask the question, is it the half year you were talking about expecting good growth in the second half? Implicitly, it feels like the third quarter has been slightly disappointing in Legal organic.

Robert D. Daleo

From your lips to God''s ears. Yes, we do expect overall organic performance to improve across the Professional division. In order for that to happen Legal has to be a part of that, obvious. So that is true. In terms of the tax rate, we have given this guidance for the year. Taxes, our tax rate, it is for adjusted earnings, not for the GAAP or IFRS earnings, which is really I think more meaningful for you to understand where the Company is going. The reason we provide a range like that is because it is so subject to the source of earnings and the timing benefits and so on.

So today I’d say that we are probably going to be towards the middle of that range, I think, if I''d narrow it a little bit down a little bit maybe. From -- if I were to think about it I would say it is probably 20% to 23%, not 20% to 24%. But there are so many things that can happen at the end of the year in terms of the source of revenues and incomes and how we book provisions and so on. So I think it is a reasonable guidance, one we have given in the past. And so I encourage you to, kind of, as you think about it, kind of split the difference or go towards the middle.

Mark Braley – Deutsche Bank Securities

Okay. That''s very useful. Thank you.

Operator

Our next question is from the line of Tim Casey representing BMO Capital Markets. Please go ahead sir.

Tim Casey – BMO Capital Markets

Thanks. Tom, questions on Legal. Could you comment on what impact you are seeing, if any, from Bloomberg Law? I will sneak another one in. You provided great detail on the rollout of Eikon. Is there anything to add with respect to the rollout of Westlaw? Obviously, it has been well received and you have given some details. Is there any milestones or targets or accelerated rollouts that we should be aware of going forward? Thanks.

Thomas Henry Glocer

Sure. Well, let me start with the second part of the question. Yes, WestlawNext has gone I think amazingly well. We had high hopes for the product. As you know, I am sort of product-y and spend a lot of time around the development process. And because this is what I used to do, I understood what a good product and how much of a step forward it was. But the 9,000 contracts actually concluded to date is well above our own internal forecast rate.

So both on a numbers signed, number of passwords at firms, we are penetrating large and medium-size firms as well as the smaller ones. We are doing particularly well at some of the smaller ones. There have been very significant competitive wins. And that, I attribute it to the significant increase in efficiency that the product allows a lawyer to be.

In terms of penetration, we are heading up pretty much towards 20% of the installed base. And in terms of price uplift, we’re still seeing very high single-digit increases, again attributable to the performance advantage. So on pretty much any metric I look at, WestlawNext is a really great success.

Now, I suppose that also begins to if not answer, at least add some color to the Bloomberg Law question. We have very healthy respect in the DNA of this organization for what Bloomberg can do and obviously their success in Financial Services. They are starting from a very different place in Law. I have had it expressed to me that their real target is probably the number-two player in this market, doesn''t mean that one day they might not set their sights on us, but we don''t see that, whether it is in the subscription revenues up 8%, the particular performance of WestlawNext; the anecdotal feedback on wins and losses in the field. They''re obviously making a serious run, but it doesn''t look to be in the core legal research market as much as around the edges of current awareness and news with a legal thrust, the BGOV initiative, or corporate dealmaking and the like.

Beyond that, I can''t really say. We are sticking to our knitting and it is knitting a nice sweater at the moment.

Frank Golden

Thank you. We’d like to take one final question, please.

Operator

All right. Our final question today will come from the line of Paul Steep with Scotia Capital. Please go ahead sir.

Paul Steep – Scotia Capital

Great. Tom, one for you. Slide eight, I guess in your slide deck is new. Maybe you could talk as we head into 2011 your perspective on that balancing of investment and return and the view towards either now maybe undertaking another material acquisition or where you are at today in terms of the higher level on the right side of the scale to return to shareholders?

Thomas Henry Glocer

Yeah. I mean what I -- all I really meant to do by highlighting the balance of investment and return on that slide or in my remarks is to say, I guess, I am personally grateful that our Board and investors have frankly been patient with us. Obviously, integrating a business of the size Reuters is not a sort of three months and you are done effort. And we have been doing it against the backdrop of the most significant disruption in financial markets and a Great Recession.

But we feel, as I turn and Bob and I work on 2011 plans, that it is appropriate for us to begin to show, I suppose, more of the R in the ROI equation. We have always been confident it is there. You have seen a lot of cost savings come out really ahead of plan in the integration. But I think it is also fair to say that because growth has been essentially flat over two years, a good amount of those cost savings has basically gone in to catch up for revenue that is not there.

As even slow revenue growth returns and it is faster in obviously some of our segments, we expect to bring more of that to the bottom line, so you will see margin expansion. And that is a very good thing. In terms of acquisition, obviously nothing to discuss specifically, given our general no-comment policy. You have seen the types of acquisitions we have made to date. They''re probably a little bit more international, i.e. global in nature. They continue to be acquisitions in furtherance of a strategy rather than just sort of portfolio-effect acquisitions.

And we’re -- you may likely see as cash increases going forward those sort naturally ramp up. But we have nothing other to say in terms of anything bigger, other than we have got plenty of really good things to do on our plate. So we are not wanting for challenges.

Paul Steep – Scotia Capital

Great. Thanks, guys.

Frank Golden

Okay. That will be our last question. In concluding our call, we would like to thank you all for joining us today.

Operator

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