Thomson Reuters Corp (TRI) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by and welcome to your Thomson Reuters third-quarter earnings conference call. All phone participants are in a listen-only mode at this time. Later we will conduct a question-and-answer session and will give instructions at the time. (Operator Instructions) As a reminder, this conference is being recorded.

And with that, we will turn the call over to our host and Senior Vice President, Investor Relations, Mr. Frank Golden. Please go ahead.

Thank you for joining us today. We will begin today with Thomson Reuters' CEO, Tom Glocer, who will be followed by our CFO, Bob Daleo. Following Tom and Bob's presentations, we will open the call for questions. Please limit yourself to one question each to enable us to get to as many as possible.

Let me remind you that we closed the sale of Dialog and small businesses in our Scientific segment on July 1. The sale has been treated as a disposal within our year-to-date reported results. Updated historical pro forma information reflecting this change has also been posted to our website.

Now today's presentation contains forward-looking statements. Actual results may differ materially due to a number of risks and uncertainties discussed in the reports and filings that we provide to regulatory agencies. You can access these documents on our website or by contacting our Investor Relations Department.

It is now my pleasure to introduce the Chief Executive Officer of Thomson Reuters, Tom Glocer.

Thanks, Frank, and thank all of you for joining us today. As you can see from today's earnings release, the third-quarter and nine-month results were very good reflecting the strength, the breadth, and the balance of our company.

It's now obvious that the problems born in the mortgage and credit markets have spread to the broader equity markets and to the economy at large, but our businesses have continued to perform as we expected. This is because our business model of providing must-have information and tools to professionals is sound.

I plan to cover three topics today before I turn it over to Bob, who will take you through the numbers in more detail. First, the headline results for the quarter. Second, an update on the current market environment for the Professional and Market divisions. And third, our expectations for the full year and our longer-term thinking.

Let's start by looking at the headlines for the quarter. Momentum continued in the third quarter as our diversified global operations, superior product platforms, and leading market positions allowed us to continue to grow across all of our businesses. The solid Professional Division continues to outperform and the Markets Division continues to grow, including on the net sales line despite a very difficult market.

Strong top-line growth combined with $550 million of run rate savings led to underlying operating margin improvement of 160 basis points and generated free cash flow of over $330 million for the quarter. And that is after deducting about $125 million for integration-related costs. As you will hear Bob discussed in more detail, the integration program and related savings are ahead of target and we are very pleased with our success and pace to date.

Given our strong year-to-date results and the positive sales momentum across the Company, we are confident in raising in part and in affirming in part our full-year guidance. For the quarter, total revenue excluding exchange rose 7% with 5% organic growth. The Professional Division grew 10% with organic growth of 6% driven by continuing good demand for our Legal and Tax & Accounting products.

The Legal business' organic growth rate of 6% was impressive given the tough comparable of 8% achieved in the third quarter of 2007. The Markets Division also performed strongly in the quarter with organic revenue up 5%. I'm very pleased with this achievement, given last year's tough comps and this year's s very challenging markets.

Go flow through from the solid top-line growth coupled with integration-related savings, led to a 17% increase in underlying operating profit for the quarter. And in these illiquid markets, it's reassuring to note that our businesses continue to generate significant levels of free cash flow, over $1.1 billion for the year through September. And that again is after this time $380 million of integration and transaction-related costs.

Lastly, that all adds up to adjusted earnings per share for the quarter of $0.48.

Now let me describe how our businesses are performing in the current market environment. Let's start with the market environment for the Professional Division. It's fair to characterize the mood of our customers across Legal, Tax & Accounting, Scientific, and Healthcare as cautious, but getting on with their work. Remember, these 82% subscription businesses are less exposed to the recession hitting consumer markets than say advertising-based models are.

Must have products in our Legal franchise, such as Westlaw and Elite, continue to perform well, while we are positioned to profit from the already mounting level of litigation, restructuring work, and the new regulation that will be coming. It's likely that within the first year of the new Obama administration we will see far-reaching new regulation of the capital markets and many changes to the tax code. This will inevitably boost demand for our Legal and Tax & Accounting products.

However, as I have said before, our Professional Division businesses are not immune to the economic cycle. So we are seeing some softening in the ancillary or one-time revenues in the Legal and Scientific businesses and in our sales to local governments. But this is a $5 billion business growing the top line at 6% organically.

I expect these businesses to continue to perform well as our digital subscription-based model is sound, our services consist of must-have information and tools, and despite the slowing general economies in which we operate, nearly 75% of our revenues grew over 8% organic in the third quarter.

Let me turn now to the Markets Division, where the reality is more positive than I think is generally understood. I don't need to tell those of you on this call that parts of the financial markets shut and other parts are barely functioning. If our entire Markets Division consisted of services covering CLOs and CDOs or mortgage backs and prime brokerage, I wouldn't have much to tell you today. However, 7% total growth for the third quarter and continuing positive average monthly net sales through October tell a different story.

Parts of our businesses are certainly under pressure, including as you would expect, our Investment Banking and Fixed Income franchises, but they are also examples of good growth. Market volatility is helping our transaction businesses. FX Dealing, Tradeweb, Omgeo, BETA are all seeing significant volume increases and September saw the highest foreign exchange volume in our history with a single day over $1 trillion.

In Commodities & Energy, volatility helped drive double-digit revenue growth.

Additionally, our Corporate business was up 18% as it expands its footprint globally and the Enterprise business continues to experience solid growth, up some 11% in the quarter, while we are building a good order book with risk management and trading automation sales. Our geographic footprint is also allowing us to take advantage of those regions that continue to grow.

I'm just back from a trip to Asia last week where not only did we post 11% growth in the third quarter, but significant new business continues to be signed.

Finally, we have good evidence that we are taking share at large accounts as headcounts are cut but Enterprise infrastructure is growing. As I said last quarter, we expect growth to continue to moderate in the fourth quarter and into 2009.

Nevertheless, I'm confident we are well-positioned to effectively manage and lead through these challenging times. With the Thomson Financial integration accelerating and well-positioned geographic and product franchises, this is not the Reuters of 2002, 2003.

So as we look to the balance of the year and into 2009, let me say that I am pleased with our progress. Sure, financial markets are tough, but we are well-positioned to weather the storm. Sure, professional businesses are not immune to the economic cycle, but our products are not discretionary goods and we have a sound business model and leading franchises.

I am also pleased that we have a range of self-help levers to pull. So we are aggressively moving forward with the integration ensuring targets are achieved or ahead of schedule, and we are managing our overall costs base tightly. We are focused on value for our customers and for our shareholders, creating opportunities and investing where it makes sense or where we see attractive long-term returns.

In this, we are fortunate to have a strong balance sheet and a highly cash generative business, which gives us the agility to both return significant cash to shareholders in the form of dividends and buybacks, while investing at the same time for the future. We are taking advantage of our scale and our strengths to build a truly world-class business.

So finally, for all of those reasons, we are able to affirm our full year 2008 outlook and raise our important cash flow target. With that, let me turn it over to Bob.

Thank you, Tom. I will cover several topics today. Results for the third quarter, an update on our integration programs, and I will review our 2008 outlook. Before we run through the financials, let me highlight some key takeaways.

First, we continue to deliver strong top-line growth. Organic revenue growth was very good in both the Professional and Markets Divisions, despite some very tough comparables from last year and uncertainty in the markets we serve. This performance is proof of the quality, resilience, and diversity of these businesses.

We continue to make good progress with our integration programs and we are taking costs out of the business. More on this later.

We stand on a solid financial footing with a very strong balance sheet that currently has nearly $1 billion of cash on hand. And finally, based on the year-to-date results, we are confident in affirming our full-year guidance and actually increasing it when it comes to cash flow.

Let me point out that I will be discussing results from ongoing businesses, which excludes the Dialog business that was divested in the second quarter and moved to the disposable line in our income statement. For the quarter, revenues grew 8% to $3.3 billion. 5% of this was organic, 2% came from acquisitions, and 1% from foreign exchange.

Underlying operating profit, which excludes amortization of intangibles and one-time items, such as the costs associated with integration and synergy intiatives, was up 17% in the quarter to $676 million. The impact of foreign exchange on operating profit was negligible in the quarter.

On a year-to-date basis, our revenues rose 10% -- 7% was organic, 1% from acquisitions, and 2% from foreign exchange. Underlying operating profit rose 21% and the margin rose 170 basis points. Now excluding the impact of foreign exchange, operating profit rose 15%.

I would like to discuss the operating performance of the businesses, starting with the Professional Division. Third-quarter revenue growth in the Professional Division was 10% -- 6% organic and 4% from acquisitions. The Online Software and Services segments of this business represent nearly 75% or three-quarters of the revenue base, and they grew at 8% organically.

Operating profit rose 11% and the operating margin increased 50 basis points over the third quarter of 2007. Year-to-date revenues increased 10%, operating profit rose 9%, and the operating margin declined 30 basis points, 27.6%, due to timing and acquisition accounting. Historically, about one third of the Professional Division's profit is generated in the fourth quarter and we anticipate that to be the case again this year.

As I mentioned last quarter, we continue to expect to see a slight margin improvement in the Professional Division for the full year.

I will now discuss third-quarter revenue results for each of the four business units which comprise the division. The Legal segment grew 7% in the quarter -- 6% organic and 1% from acquisitions. Online Solutions grew 6% organically, benefiting from an 18% organic growth from an international online product and continued growth in US Westlaw subscription revenue. Partially offsetting this growth is continued softness in transactional type revenues like ResultsPlus.

Software and Services revenue grew 27% in the quarter, 20% of that was organic. FindLaw, Barberry, and Elite all had strong results. Included in these numbers is a roughly $7 million benefit related to the timing of a Barberry course taken in this quarter versus the second quarter of a year ago. In addition, there was a non-recurring sale in Elite. So excluding these items, Software and Services grew 11% organically.

Print and CD actually declined 1% and was up 2% on a year-to-date basis. Tax & Accounting revenues grew 31% in the quarter, 9% of this was organic. This growth continues to be triggered driven from core products such as Checkpoint, which grew 22% in the quarter. UltraTax and InSource were also up double digits in the quarter.

Acquisition revenue is primarily from our Property Tax Services business, our countercyclical business that generates and submits property tax appeals on behalf of its customers.

The Scientifics segments revenues rose 8%; 3% organic and 5% acquisitions. Revenue growth in the quarter was driven by subscription sales of the Web of Science and sales of Intellectual Property Services. Acquisition-related to revenue came primarily from Prous, which was acquired in the fourth quarter of last year. A decline in transaction-related revenue partly impacted the quarter's results.

Healthcare's revenue increased 2% in the second quarter, all organic, driven by strong growth in the Payer segment from our Medstat business. The Company is currently evaluating the future options for the Physicians Desk Reference, or PDR, which continues to be a drag on growth within the Healthcare segment.

Let's turn to the operating profit for the Professional segment. Legal's operating profit for the quarter grew 13% and the margin increased 170 basis points. Year-to-date margins are up 70 basis points. Improvements are attributable to revenue flow-throughs and the impact of a certain efficiency initiative.

Tax & Accounting's profit grew 31% for the quarter and margins were flat year-over-year. As I have previously discussed, the accounting treatment of prior-year acquisitions has negatively impacted margins through out 2008. These are, by the way, are non-cash impacts.

Year-to-date operating profit was up 12% and the margin declined 250 basis points. We do expect a substantial improvement in fourth-quarter margins within Tax & Accounting, but believe the full-year margin will finish below last year's result.

Scientific's operating profit increased 5% and the margin declined 60 basis points. Benefit from efficiency projects were offset by the impact of costs associated with investments in growth initiatives primarily in Asia. Year-to-date operating profit was up 5% and the operating margin decreased by 100 basis points. We expect this pattern to continue for the remainder of the year as we continue to make investments in the business.

Healthcare operating profit decline and margins were down in the third quarter due in part to declines in PDR and just a lot of small numbers. I will remind you that historically, about 70% of Healthcare's operating profit is generated in the fourth quarter.

Turning to the Markets Division, this division has delivered a very solid quarter, despite the turbulence in financial markets as Tom has mentioned. Revenues grew 7% to $2 billion; 5% of this was organic. Year-to-date revenues are up 10%. Given the business mix and geographic diversification, we were able to continue to grow the business in the quarter despite the challenges that Tom mentioned.

Our Transaction Revenues business benefited from the high levels of volatility in the quarter driving our FX Matching business, BETA, and Tradeweb where revenues were up mid to high single-digits in the quarter. By asset class, our Commodities & Energy, Corporate, and Investment Management business all delivered strong revenue growth.

By product, overall desktop counts declined modestly compared to the previous quarter. However, sales of data feeds continue to be extremely robust as customers look to understand and manage risk, increase automation, and obviously, reduce costs. By region and excluding foreign exchange, North America was up 4%, EMEA was up 6% and Asia grew 11%.

Operating profit was up 20% in the quarter and 34% year-to-date including the exchange. Excluding the exchange, operating profit grew 17% in the quarter and 22% year-to-date reflecting tight cost control, the benefits of savings programs, and good operational adherence as revenue growth flows through the bottom line.

Now let me run through the revenue performance of the four strategic business units of the Markets Division. Sales & Trading delivered revenue growth of 5%; 3% of this was organic. This performance was driven by continued strength in our core Treasury franchise with active FX markets driving both transactions and demand for information products.

Similarly, our Tradeweb platform benefited from high transaction volumes in the quarter. Year-to-date sales and trading growth were 8%.

Investment & Advisory grew 9%; 7% on an organic basis. Growth in I&A was driven by three segments, partially offset my weakness in Investment Banking. Our Investment Management franchise continued to grow strongly driven by increased product functionality, in particular high-value analytics.

The Corporate segment continues to grow well benefiting from geographic expansion and improved client penetration. Wealth Management continues to deliver good growth reflecting increased volumes at BETA. Year-to-date, I&A growth was 10%.

Enterprise delivered good growth of 11% in the quarter, of which 8% was organic. We continue to experience excellent growth in demand for data feeds particularly in such areas as pricing and reference data. Clients turn to us for help on hard-to-value instruments, corporate actions, and counterparty data. We are also seeing good growth opportunities from customers taking a buy-not-build approach in data feeds -- in directories, I should say.

And PORTIA, our portfolio accounting solution continues to deliver strong growth. Year-to-date Enterprise's growth was 17%.

Finally, Media grew 5%; 2% organic. Solid growth in the core Agency business was offset by softness in advertising driven by consumer and professional businesses. Year-to-date Media growth was 10%.

Now let me turn to our integration program. We continue to make good progress on our integration programs in the quarter. Here are a few key points to note. First, in Sales and Service in the Markets Division, our account teams are now fully integrated and experienced success exploiting cross-selling opportunities. Importantly, there has been no integration-related service issues.

Second, we identified strategic product and content sets and communicated this road map to our customers. We started retiring redundant content sets, our first important step in removing duplicate products. Third, we continue to roll out our new versions of Global Customer Account Administration Program, which we call GCap, which will deliver a smarter way to sell, administer, and support customers as it transforms and simplifies the way markets work.

Lastly, the common platform project itself is on schedule for deployment of the first product next year and general ledger systems across the Company have been replaced with a common one based on SAP.

Now that I have provided you an update on the synergy initiatives, let me walk you through the associated financials. As of September 30, our synergy programs have yielded a run rate savings of $550 million, compared to $490 million at the end of the second quarter and approximately $300 million at the time the companies combined. We remain on track to reach our stated target of the $600 million in run rate savings by the end of this year.

The pro forma P&L benefit year-to-date is $280 million, up $130 million since the end of the second quarter. Year-to-date, we spent $237 million in cash on these programs. This is an increase of $110 million since the second quarter. These costs primarily relate to severance and technology. We anticipate an acceleration in these costs in the fourth quarter, some of which of these may slip into 2009.

As I highlighted in the first quarter, we anticipate approximately $200 million of integration and transaction related costs in 2008 and 2009. Year-to-date, we have spent $146 million on these items. Of these cash costs, only $78 million incurred after closing, most due to the pro forma P&L. $68 million of transaction-related costs incurred pre-closing, and did not impact the pro forma P&L.

In the quarter, total Corporate costs decreased by $25 million from the prior period to $85 million. Core Corporate costs, which we would define as total Corporate costs excluding one-time integration and synergy costs as well as changes in the fair value of embedded derivatives, were down $3 million in the quarter to $61 million. This reflects the achievement of synergies together with a small positive impact of benefit costs, offset in part by severance and closure costs not associated with the Reuters integration.

Year-to-date total Corporate costs have increased $44 million, primarily driven by integration and synergy expenses, largely offset by the fair value adjustment which relates to the FX impact on certain customer and vendor contracts. For the full year, we continue to expect core Corporate costs to be approximately $250 million.

Now let me turn to our pro forma adjusted earnings per share calculation. Let me remind you that to calculate this pro forma EPS, we begin with our underlying operating profit figure which excludes amortization of intangibles and all profits associated with the Reuters acquisition. Next we deduct the following items from underlying operating profit to arrive at our adjusted EPS.

$85 million of related -- costs related to integration and synergies, $107 million of interest expense. Now this is the actual expense figure in the third quarter and is proportioned in-line with our full-year guidance. We deduct $80 million of taxes, translating to a 25% tax rate. Again, this is in line with our guidance. $3 million is deducted for the impact of our Tradeweb minority interest and $1 million of paid unpreferred dividend for Tradeweb.

Based on this methodology, pro forma earnings were $400 million in the quarter and diluted EPS was $0.48 per share in the quarter and $1.38 for the year-to-date.

Year-to-date reported free cash flow was $1.1 billion. After adjusting for the one-time cost related to the Reuters acquisition and integration-related costs, adjusted free cash flow was $1.5 billion. This performance reflects growth in our underlying operating profit and strong free cash flow generating capabilities of the Company. Let me turn for a minute to review our capital structure.

We ended the quarter with about $1 billion of cash on the balance sheet and enough untapped $2.5 billion credit facility that we believe we have plenty of liquidity to weather the current storm. From a debt repayment standpoint, we have one bond maturing later this month for about $400 million, which we plan to repay with cash on hand. We also have three bonds maturing in 2009 for approximately $650 million.

If debt markets were unfavorable, we can fund these through our untapped credit facility. So while there is obvious sensitivity in the capital markets related to the lack of available credit, we are confident that our sound financial position coupled with our ability to generate substantial free cash flow positions us very well and provides us with the necessary flexibility from an operating and financial perspective.

So to wrap up, and before we take your questions, let me say that we remain pleased with the year-to-date results and are confirming our full-year pro forma outlook with one positive exception. We now estimate that full-year cash flows excluding integration and synergy costs will be in the range of 13% to 15% of revenue, up from the original 11% to 12% that we provided back in May.

Lastly, we anticipate providing our 2009 guidance when we release our fourth-quarter and full-year earnings in February. With that, let me turn it back to Frank.

Okay. Thanks very much, Bob. Now we would like to open the call for questions. We will take the first question, please.

(Operator Instructions) Vince Valentini, TD Newcrest.

Thanks very much. Tom, can you just confirm that you said net sales were positive for Thomson markets in both the months of September and October? And if so, can you just give us some color on the math there of how that flows through the next 12 months and how difficult it would be to get to negative revenue performance in 2009? What type of drop would you need to see in November, December, and early months of next year to get to negative?

Sure, Vince. What I said was that the average monthly net sales have remained positive through the first 10 months of the year, were positive also for the third quarter. I'm trying not to get into a sort of month-to-month mark-to-market of net sales in our, just in our Markets Division because, frankly, I think it continues a focus which is to fine a one and ignores the overall balance and breadth of the Company.

I do understand why it's important, so I don't want to duck the question. So sort of on a one-time exceptional basis, I will say, yes, in the month of October, which is the most recent month for which we have data, we had positive net sales.

Now to bridge into the second part of your question, the math is relatively simple. You take your entry rate into the new year, in this case, let's say 2009. If you have had positive net sales, you are building up an installed book of business and you have only had a partial year of revenue, in this case, 2008, and can expect the full year in 2009.

You factor in the price increase that we do in Markets every year, which went perfectly normally as in prior years. It's a little over 2%, typically, the yield. And you get -- start to have a pretty good idea of what the following year can look like.

Now, I want to be really clear, it is certainly mathematically possible that if November, December were very bad and if continued to be negative in the first quarter, you can have a negative 2009. We are one reason why, as Bob says, we are not giving specific guidance until February is neither company ever did before.

It is obviously a very volatile environment. But what I can tell you is sitting this far into the year in November, we feel very good about how our business has held up through one of the most wrenching periods -- well, the most wrenching I have ever seen in my 15 years in at least part of this business.

Thanks.

Tom Singlehurst, Citigroup.

Good afternoon. Yes, Tom Singlehurst here from Citigroup. Obviously, it's too soon to try and paint the credit crunch as something positive, but you talked about the impacts of regulation and political interference on your Professional business. I was wondering whether you could talk about whether you anticipate any changes from that regulation of capital markets that might impact, either negatively or positively, on the Markets Division?

Well, you know, I think there will be and there already have been some cases of the silver lining in the disruption. So the demand for financial news, for pricing data, for data feeds, for infrastructure is strong. We are participating in both sides of the Atlantic, in new business to governments, or for the prime contractors that have won government mandates, let's say, in connection with TARP in the US.

We have got an unprecedented entry of governments and treasuries into asset management that they have never been in before. That does and is resulting in some business. We are also winning some Enterprise business associated with the consolidations of disappearing institutions. But, on balance, obviously, this is not a great thing for the financial services market.

Paul Steep, Scotia Capital.

Great. Thanks. Bob, I guess I will put this one to you. You talked a little bit about the synergies, maybe you could speak about what exactly was accelerated into the quarter? It looks like the momentum is picking up. Then secondly, the ability to maybe pull forward some of the savings out of '09 and '10 further forward? Thanks.

Yes, Paul, the things that have accelerated that we have seen the benefit on or simply the stuff that we thought would come out easier, like in terms of elimination of duplicate management positions, and some other simple ones, they simply came out faster than we thought. And that is -- you are seeing the benefit of that.

Our objective, obviously, is to drive these synergies as quickly as possible. We have -- I think it's important to remember that this project, while we give it one name, is a compilation of literally hundreds of efforts across the organization. So all of these are in different stages and so therefore, we want to be cautious in terms of the guidance we provide about the timing of these.

But obviously, the one thing that is consistent across all of these is the objective is to do it as quickly and as effectively as possible. If that translates to achieving our timelines sooner, that will be great. As soon as we feel comfortable that that would be the case, we are happy to communicate that.

But at the president time, you can see that momentum is picking up and that in fact, where we have been able to, for example, eliminate content sets more quickly and begin to get the benefits of the duplicate content sets, get the benefits sooner we are taking that to the bank.

Great. Thank you.

Sami Kassab, Exane.

Thank you very much. Good morning, gentlemen. Question on the subscription renewal season in the Professional Division. Do you see renewal rates holding up, or would you say that it is getting harder to pass on the price increases and maintain renewal rates in the current economic conditions in the Professional Division? Thank you.

It's Tom, Sami. In the Professional Division, let's start with Legal since it's the largest. We have, typically, multiyear contracts. The pricing and the packages are very tailored to the specific needs and workflow of the given customer. We are not seeing any dramatic patterns in terms of changes in subscription renewal rates.

If I am now more generalized to the rest of the Professional Division Tax & Accounting, you can obviously see from the numbers, even just the organic number up 9%, very strong, including strong renewal. That is a business that is going to be driven more by changes in the tax code than by the fact that the dollars on the bottom of your tax form may be smaller next year.

And the one area, and Bob's flagged it, where we have seen a bit of retrenchment is in the PDR, the Physicians' Desk Reference part of the healthcare unit, where you are seeing sort of slowing down in renewals and contraction. But that is less than $100 million of revenue for the whole group.

Thank you.

Scott Scher, Clovis Capital.

My question has been answered. Thank you.

Colin Tennant, Nomura.

Hi, Colin Tennant from Nomura. Just sticking with the Professional Division, I wondered within Legal if you are seeing any difference in market conditions between the large and small law sectors? And given the size of the organic growth that you have reported, I wonder if there is anything you can say about share, market share, changes that you are seeing in both large and small law?

Sure, Colin. We are seeing a bit of a divergence there. So, performance in the larger law firm market is stronger than the small law firms, now I am talking really about the US, large US West business. Typically, in some of the smaller firms you see more real estate related work. They are hurting a bit more, I would say.

The large firms tend to be better balanced and they are seeing very significant pickup in litigation. An area with which you are all too familiar from where you sit, Colin. Obviously, the bankruptcy work around Lehman is the single largest bankruptcy project that lawyers in New York have ever been involved in. That is just generating huge amounts of billing.

It's not just the one firm that lands it. It's every firm that has to advise anyone who might have any credit-related issue, any hedge fund trying to get its collateral back et cetera. So the large firms are going to get through this.

And in terms of share, market share? Are you seeing any change as you go through this period?

I mean, it's more anecdotal than anything else. Judging by, I think -- Reed announces tomorrow or the next day. In the second quarter, if I remember the numbers right there, we were looking at a 6% organic growth rate for our Legal business versus 4% at Reed. You know, we will see this week where that came out.

They are an excellent competitor, a really fine company. I think going forward, we may see that their numbers become less and less comparable as they include the ChoicePoint assets. And that sort of broadens them beyond just the legal business.

I don't know how they will account for it, but I think the evidence to the extent we have it to date, which is the first six months of the year, do show us taking share. Our surveys among practitioners and graduating law students also show a pretty significant preference for Westlaw.

Tim Casey, BMO Capital Markets.

Thanks. Tom, I'm wondering if you could follow up those share comments and give us a little more color on your comment that you think you are capturing share in the Markets group? You noted that that went through accelerated Enterprise sales, but is there any color you can provide across the various operating units within Markets as to what you are seeing?

Once again it's probably more anecdotal than anything, but how do you think you are comparing and indexing to your competitors out there? Thanks.

Yes, it's harder to do in Markets than let's say in the Legal business, and we don't have a definitive sort of market share study. What I was basing my comments on is really what customers have been telling me directly, and these tend to be the larger customers.

They are typically cutting back pretty dramatically on their credit fixed income desks. They have continued to at least keep, some are adding, to their FX franchise, which naturally tends to shift share in our favor.

We have seen very good sales of our infrastructure pricing valuation services. Then just looking at how the organic growth has held up in the Markets Division, I think we are seeing share gains. The part I don't have a good handle on as how much is the overall market contracting, but I think we are doing relatively better.

Drew McReynolds, RBC Capital Markets.

Thanks very much. Just two quick questions for Bob. The first is just on the cost savings, I guess one of the questions we get asked quite frequently is what is the capacity for further cost savings if the revenue environment deteriorates a little bit worse than expected in 2009, 2010? So maybe outside of Phase I and Phase II integrations that are ongoing can you just talk about that?

My second question, just on the Tax & Accounting margins being down slightly year-over-year, exiting '08 just a little bit more conservative than previous guidance. I think in the MD&A you refer to a change in revenue mix, just if you could flush a little bit more detail on that, that would be great. Thank you.

Sure. I will start with the last one. The big driver in Tax & Accounting is the fact that we have made a series of acquisitions. These acquisitions are largely software-based businesses. What happens when you acquire software based businesses that you have to take a portion of the purchase price and allocate that to software, because that is the reason you are buying the business. So you wind up amortizing that over a period of time. It's not a cash impact.

The other thing that happens in these acquisitions, as you are probably well aware of, is if there is any deferred revenue in an acquisition, you cannot earn it. So in fact, you take that revenue out of the mix, which would be -- and most of our businesses are subscription businesses, so you get this double whammy over time. In Tax & Accounting we have done several of these, and so that is what we are seeing.

The other thing that is happening in Tax & Accounting, which is a good thing, it's driving their growth government, is that as we move more into service businesses, service businesses have lower operating margins than content businesses do. So they are on a margin basis less profitable.

I mean they are still margins that most people would die for, but on the other hand, they also on the positive side, while they have lower margins, they have much higher return on invested capital because they don't require capital investment. Technology-based investment because the nature of the businesses or not as much. So that is a little deceptive here.

If you look at Tax & Accounting, even though their margins have been impacted negatively, their return on invested capital is as robust or even more so over the past couple of years as we have built up these businesses. So it's a very positive story and these are short-term implications. Over the longer term, the prospects for this business are very exciting and we are very exciting excited about continuing to invest in it.

In terms of the cost savings, I think that the obvious answer that you -- that any reasonable person would give is that we will manage our business in accordance with the environment in which we operate in. So what that means is that we are being very careful as we plan about 2009 and we are going through that planning process as we speak to make sure that every dollar we spend is really the most important.

So the answer is, that certainly we will look at our costs very carefully, not simply within say the Markets Division or even the Professional Division, but across the broad enterprise.

The second thing, and Tom has said this and we have said it to, that our objective is very much to see if we can accelerate, continue to accelerate these integration opportunities and synergies as much, as quickly as we can. Some of them just take time because they are complex. Some of them take time because they are customer-based and we have to engage our customers in making that happen.

We are very focused on making sure that we continue to provide them with the quality of service that they are used to, and in fact, improve upon it. But everyplace else where we can, we will definitely work hard towards accelerating, and we will very carefully manage our costs in this environment.

I will add to that, we will continue to make investments in this business to drive the long term. We will continue to look at opportunities to make sure that we can do that, so we will not sacrifice in those areas. We will just carefully manage all of the other ones.

Okay, thank you.

Patrick Wellington, Morgan Stanley.

Yes, afternoon, everybody. Tom, I think you said exceptionally you would say that October was a positive sales month. Would you say that that is positive because you have a slightly off September and October? You took Lehman, as I understood it, out of your sales figures in September and you have probably put them back in and October.

Related to that, you do give this very good description of how recurring your Markets business is and how these people are rolling on and then we will do a full year the following year. So would you say it's fair to say that what we are seeing in the third quarter this year reflects the state of market conditions nine to 12 months ago? Or would you be sufficiently confident to say that Markets' organic revenue growth would indeed be positive in 2009?

Well, I would say neither make any estimate of our growth rate in Markets. Neither would I say it's positive nor would I say it's minus 5%, which I think I read in one of your reports dating back to early in the summer.

Minus two now, Tom, if that helps. If you want to comment on that one.

No. But seriously, we are trying to share with you data that we think is meaningful. I, myself, don't look at month-by-month. I look at average monthly net sales quarter-by-quarter, precisely because there are swings and roundabouts. I don't think we did and in and out on Lehman, although undoubtedly there is activity on the Lehman account being reflected.

But there is -- at this point, there is so many accounts active that it's better to look really at quarter averages. I think the organic growth rate this far into a cycle that I think is 18 months in, is a good reflection that the financial services business, the Markets Division, is a very different beast from the Reuters of 2002 and '03.

It does not mean that we are not going to suffer. It's painful out there and we are losing business. We are seeing cancellations at our big accounts on Investment Banking, advisory floors, in the fixed income business.

All we have been saying all along is just that we are balanced enough both geographically and product line and we have positioned the company, I think, as well as it could be heading into this tough cycle, that my perspective is the business is doing better than it's generally taken to be and that is not just the lag effects.

And if I might just follow up with that, Patrick, the question about taking Lehman in and out. I think you should understand that while we give trends on this, that whatever we provide has the utmost integrity to it. We don't play with the numbers to give us an outcome that we might then be able to communicate that you or others might want to have.

So that is not something that we do. Like it's -- even though we don't -- we haven't -- we don't and won't report the absolute numbers on this, the trends are obviously indicative. We would never, ever make adjustments like that just to make it look good for external purposes. That would not be -- that is not something that Thomson Reuters would ever do.

No suggestion of that, Bob, because indeed you would have given yourself a worse September in that case. If I can just roll on then. The question that people most ask, I think, is are we in a period of phony war? Do you get an unusually large, relative to the rest of the year, or month of cancellations in December just because of the nature people's contracts?

And are we likely, therefore, to see -- or could it be possible that we see a sort of change in these conditions as we pass through that December month? That is the question that people often ask us.

Look, I think it's a fair question. I remember at our second quarter results folks said, well, it's only the second quarter. There is a lag, but let's look at the third quarter because then we will really get a good idea. Now we are sitting at the third, and it's a question of the fourth.

Let me try and address December as best I can. There is typically not any significant relationship between contract termination and year end. So our contracts are one-year or multiyear, and they are based really on when the sale is completed during the year. There tends to be, certainly, in the outright business, the software business, more of that on the market side comes in at the end of the year. We expect that again this year, certainly, let's say, in our Risk Management business.

It wouldn't surprise me -- people do sort of try and get their cost basis in line with whatever their 2009 budget is. So, we will obviously look at December and that is one reason why sitting now in November we just give you the best view we have today. We will give you our best guidance in February once we have had a chance to look at the year end.

People said the same thing last year. Remember going into December last year we saw some pretty dramatic developments and that December was certainly going to be an awful month. It turned out to be one of the most positive months we had. I doubt that will happen this year, but I really don't want to comment on it until I have seen the numbers.

Thank you both. That is very helpful.

Mark O'Donnell, JPMorgan.

Hi, everyone. Just in terms of the hints that you have given about potential acquisitions, what sort of scale are you thinking here? Is this more bolt-on acquisitions or something that is a new, separate division? And could we be thinking in the Professional area or maybe additions in Markets? Thank you.

I mean, I think we, both Bob and I have said before that both companies had a track record of making opportunistic bolt-on acquisitions because we have such leading platforms and such a nice geographic footprint. Our ability in the large Legal or in the Tax & Accounting business of picking up content or software assets and running them through the distribution channel or adding on a new sort of market area, tends to create synergy for us.

They are not sort of standalone acquisitions for growth. They are acquisitions where we think we can make the whole greater than the sum of the parts. That won't change.

Obviously, capital is king in this environment. I'm very happy that we have such a cash generative business; that we have kept our powder dry. That we refinanced all of the bridge debt in the first half of the year, so if there are attractive assets that spring up, we won't hesitate to look at them.

But we have a high bar in terms of what sort of returns we would need to see to deploy our capital. Other than that, I think we should probably stick with the usually advised 'no comment' on specific acquisition activity.

Okay, thank you.

Operator, we would like to take one final question, please.

Mark Braley, Deutsche Bank.

Hello? Can you hear me?

Yes, Mark.

Hi, just a question on the strength of transaction revenues in Markets? I wonder is it possible to give us some idea of how much of the 5% organic growth in the third quarter would be down to that growth in transaction revenues? I think over all transactions account for about 10% of the division.

So if we are seeing sort of 20% to 30% growth in this, which in markets this volatile doesn't seem impossible, that would be 2 or 3 percentage points of the growth.

Can you kind of sort of give us some sort of the steer of how much of your growth is transaction-driven? Then related to that, sort of how confident would you then feel about achieving further growth looking forward when you hear what your customers are saying about the process of taking capital out of their business models?

Mark, let me -- it really is difficult for us to -- or for me to quantify that specifically, but let me give you a sense of the real growth drivers here. First of all, one of our largest growth -- two of the largest growth drivers are Investment Management and Enterprise, which are less transaction related and more services related.

Those are the two large businesses that had significant growth and also, Corporate. Corporate had significant growth and that is not transaction related.

So while it certainly transactions, because I would say that certainly Commodities & Energy was a segment that grew nicely in the quarter and also Wealth Management grew on the backs of BETA. So while certainly they did contribute, I would say that that growth rate -- and even some of the places where saw declines, the declines were still -- I mean the decline in growth rates, they were still -- the growth rates were still in the low to mid single digits. They weren't off the map with the exception of Investment Banking where we obviously know that that segment is in decline.

The growth rate was really broad-based and it wasn't just anchored in transactions alone. We would expect that because of the nature of the business and the breadth of our segments and the geographic reach of them.

Let me just, Mark, to jump in on sort of the second part, the structural part of your question. You know, one of the joys of the FX market is that it was functioning very normally and at record volumes through this. And yes, we do believe that banks will restrict capital deployment into trading operations.

We have seen obviously the announcement at JPMorgan about pulling out of some prop activities. But the great thing about the FX market is that it clears and settles through CLS banks that continuously link settlement system, so in effect banks have been able to continue to settle FX trades because they are not even taking overnight risk on the vast majority of their positions.

Going forward, as long as you are seeing these big trades move, when the yen carry trade unwinds, huge FX volume. When Iceland goes down, those kronas are trading into dollars or pounds typically over FX Dealing. Obviously, the money being sucked out emerging markets like Russia, again, most of that ruble trading is on Reuters dealing services.

So I wouldn't say the FX markets are immune either, but structurally because of their credit nature and volume-related because of the amount of and velocity of the movements we have seen, we feel pretty good about them.

Okay. Thanks very much, Tom. That will conclude our call for today. I want to thank you for joining us.

Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and you can now disconnect.