Star-Studded Canadian Stocks Tour: TRI, Can the global leader in information services reach new heights?

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Thomson Reuters is one of the world's largest providers of professional information services. It provides news information and professional workflow products for law firms, accounting firms, governments, enterprises and other clients; At the same time, the Reuters News department provides professionals with the latest national and international news through a desktop terminal; Its Global Printing department provides legal and tax information primarily in print form to clients around the world.

TRI's main business includes the following aspects:

Professional information services provision: TRI provides professional services including tax products, legal research and news to the legal industry, the tax and accounting industry, and corporate clients; Among them, products and services for the legal industry accounted for the largest proportion 41% of 2023 total revenue, corporate clients accounted for 24%, and tax and accounting industry accounted for 16%.

Reuters News Dissemination: TRI provides business, financial and global news to media organizations, professionals and news consumers worldwide through Reuters, Reuters websites, Reuters events, Thomson Reuters products, and exclusively to financial market professionals through LSEG products. Its business accounts for 11% of total revenue in 2023

Global Print: TRI's Global Print provides legal and tax information primarily in print to clients around the world, accounting for 8% of total revenue in 2023

These show that although TRI's business is more diversified, the three divisions of legal, tax and accounting, and Corporate (Big 3) account for more than 80% of revenue. Therefore, the demand of professional information service market, macroeconomy and regulatory changes will have a greater impact on the company's income. At the same time, technological changes between TRI and its competitors in the field of information technology and data analytics will also affect its market share and pricing power.

TRI's overall earnings for the first quarter of 2024 significantly exceeded expectations, with profits up to 16.6%. The revenue growth rate and profitability of TRI's Tax and accounting division were the main growth drivers for the strong performance that exceeded market expectations.

The company's organic revenue, the revenue increase due to the company's core business operations and excludes non-organic factors such as acquisitions, rose to 9% in the first quarter of 2024 from 7% in the fourth quarter of 2023. Within this, the Tax and accounting division performed particularly well with organic revenue growth of 14%. The company reported that the 2023 update of its UltraTax software, a professional tax filing and tax preparation software, had a positive impact on the results of its tax and accounting segment.

The Tax and accounting division happens to be TRI's most profitable division, and the efficient conversion of revenue growth and profits drives TRI's overall profit margin. Its standardized EBITDA improved 390 basis points year-over-year, from 38.8% in the first quarter of 2023 to 42.7% in the first quarter of 2024. The increase also exceeded consensus expectations of 39.5%. At the same time, its net interest rate has steadily increased at a rate of about 100% for four consecutive quarters. Demonstrates the strong performance of its business.

After the first quarter earnings release on May 2, its share price continued to rise from C $222.003 to C $237.070 on May 27, an increase of nearly 6.79%. Reflects the market's affirmation and expectation of the company's favourable performance.

TRI is extremely forward-looking in generative AI, and according to its multi-year Global Artificial Intelligence (AI) investment strategy, TRI will spend more than $100 million annually on AI development. Within this, TRI has invested significant resources in the development of generative artificial intelligence (GenAI) products in its largest revenue focus area - legal professionals and firms. According to its investor day presentation, more than 5,000 customers have access to three GenAI products, Westlaw AI-Assisted Research, Ask Practical Law AI and CoCounsel. Westlaw Precision AI-Assisted Research, launched in late 2023, ensures that its AI outputs generate content based on factual data rather than linguistic patterns, while improving the relevance and accuracy of search results. Effectively addresses "LLM hallucinations", a major pain point for the use of AI in the legal industry (artificial intelligence generation tools designed for the legal industry fabricate false or misleading information 17% to 33% of the time). This will continue to increase trust and adoption of TRI's legal products.

At the same time, the interest in AI is not only coming from the company, but also coming from TRI's customers. According to TRI's Q4 2023 report, its customers' interest in AI-driven products and their future plans is very strong. The adoption of generative AI in the legal industry is accelerating as more and more law firms realize that GenAI can significantly increase firm productivity by making up for the lack of human resource efficiency in small-scale firms. TRI's rich product categories and product design that directly hit the user's pain points will undoubtedly attract more potential customers, driving up their demand and prices.

TRI expects to release more generative AI products in the second half of 2024. Cross-cutting and deep industry demand for AI products will continue to support high single-digit organic growth of 7-9%. At the 2024 Microsoft Build keynote, TRI demonstrated the power of its generative human assistant, CoCounsel, when combined with Microsoft Copilot. Cocounsel is not limited to any area of expertise and can serve a wide range of clients including law, tax and accounting, and corporate. Combined with the application of Copilot in Microsoft programs, TRI and Microsoft's shared customers can experience a personalized AI experience in a Microsoft work environment, saving effort, reducing risk, and simplifying compliance.

At the same time, TRI's product organization structure will also be adjusted to the rapid update iteration of AI technology. According to the company's report for the fourth quarter of 2023, the emergence of GPT-4 and advanced generative artificial intelligence technology has brought significant changes to their product organization, and the company needs to re-construct the AI usage logic that meets the needs of customer experience, and quickly deliver to the professional laboratory TR Labs under the brand to improve the quality of TRI products. According to a TRI report published at the 2024 Investor Day, TR Labs has more than 300 experts in artificial intelligence and machine language, and it is definitely capable of keeping up with technology developments in the future and further expanding its AI-related products. At the same time, TRI also has more than 2,500 experts responsible for the generation of proprietary topic content, combined with the power of technology, they can ensure that TRI's different professional products are updated to meet the needs of the current market.

Despite TRI's strong performance last quarter, the main factor was revenue growth in the tax and accounting professional division, which has the highest margin. But it's worth noting that TRI's other divisions are growing at equally impressive rates. Corporate, Tax and accounting, Reuters News' revolving revenue (cyclical revenue) and trading revenue (one-time transaction revenue) all showed high growth. Among them, Reuters News organic revenue growth reached 17%. To a certain extent, it has promoted the organic growth recovery of the company as a whole. The segment's average organic growth rate has been in the low single digits until the fourth quarter of 2023. This growth is driven by revenue from generative AI-related content transactions. With the increasing acceptance of AI content in different fields, this growth will drive TRI's structural organic revenue and performance in the long run.

TRI's three segments, which account for nearly 70% of total revenue, are significantly affected by the macroeconomic environment and corporate regulatory conditions. In recent years, with the rapid development of electronic business, the regulatory authorities in North America are also increasing the corresponding legal requirements, creating a long-term demand for TRI. According to data disclosed by TRI at its 2024 Investor Day, the number of new clauses published in the U.S. Federal Register has been on the rise in recent years. The Corporate Transparency Act is an example of increased regulatory requirements for businesses this year. It went into effect on January 1, 2024, and requires certain companies to submit beneficial ownership information reports to the Financial Crimes Enforcement Network. While the demand for accounting is increasing, the supply of certified public accountants is decreasing. It is difficult for companies or the legal counsel they employ to cope with the regulatory compliance burden by increasing the number of employees. TRI helps companies and institutions navigate increasingly complex regulations through its efficient legal and accounting products. Recognizing the increase in underlying demand, TRI raised its FY2024 revenue growth forecast to 6.75% from 6.5%, in line with its medium-term revenue growth target of +6.5% to 8.0%. This shows that the company is confident that it can use regulation-related product demand to drive its own growth. This also means that TRI's revenue growth is expected to accelerate significantly from last year's 3%.

At the same time, the interest rate cut expectation in North America is expected to stimulate macroeconomic development, and the increase in business activities such as international business and mergers and acquisitions will increase the demand for tax filing, trust business and confirmation business. Strong seasonal demand will continue to drive TRI's customer demand growth.

In general, TRI has performed well in the past three quarters, with revenue and earnings growth exceeding expectations. At the same time, the company has vigorously developed the application of artificial intelligence technology in products in the fields of accounting and regulation, catering to the market demand for GenAI, and effectively improving its competitiveness in the industry. At the macro level, the complexity and strictness of regulatory regulations are conducive to increasing the demand for TRI related products in various sectors. Based on the above positive, TRI also raised its revenue forecast for 2024. According to Bloomberg, its 2024 revenue is expected to reach $9.972 billion, an increase of 8.78% compared to 2023, and its earnings per share is expected to reach 5.08, an increase of nearly 7.2% compared to 2023.

However, TRI's reinvestment in technology and merger and acquisition plans may put downward pressure on near-term margins. At the same time, the possibility of downward economic conditions cannot be ruled out. In the following scenario, client companies may reduce or defer certain legal and accounting product expenditures. For investors, paying attention to the impact of macro factors on the demand for TRI products and judging the change of the company's profit model will be the key factors to grasp the value of their investment.