Thomson Reuters Operating Profit Down, Trading Pressured

Thomson Reuters Corp 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.

At the same time, Thomson Reuters is investing in customer service for its flagship product Eikon, which targets the financial sector.

While the global news and information provider reaffirmed its 2012 forecast, its underlying operating profit, which excludes divestitures, 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."

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.

Thomson Reuters' Eikon desktops totaled 25,600 at the end of the third quarter, up about 35 percent from the end of the second quarter.

Thomson Reuters Chief Executive James 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.

Still, an increase in revenue of 1 percent and 3 percent at the company's Legal and Tax & Accounting divisions, respectively, could not offset a 2 percent decline in organic revenue at the Financial & Risk division, which serves banks.

The company's trading business within its Financial & Risk operation recorded an 8 percent decline in revenue to $816 million in the quarter. Before currency effects it dropped 4 percent.

Citing the challenging environment, the company said to expect further operational improvements.

"We have to keep moving faster at removing complexity in the organization. There is too much siloed behavior and too many layers," Smith said in an interview. "I am looking for as much as anything to stop spending on things that don't make a difference."

Smith emphasized that the company reaffirmed its outlook. In February, the company forecast 2012 revenue growth in the low single-digits and underlying operating profit margin of between 18 percent and 19 percent.

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 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.

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, according to Thomson Reuters I/B/E/S.

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.

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 off setting improved traction and momentum," Smith said, declining to provide sales figures.

In the United States, financial companies plan 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 said earlier this week that it planned to fire 10,000 employees, or 15 percent, in an effort to save billions of dollars.

New York-listed shares of Thomson Reuters are up 6 percent at $28.43 year-to-date, while its Toronto-listed shares are up 3 percent at C$28.43.