Thomson Reuters Corp

NYSE:TRI

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to Thomson Reuters First Quarter Earnings Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I'd now like to turn the conference over to the Senior Vice President, Investor Relations, Frank Golden. Please go ahead.

[Frank J. Golden, Senior Vice President of Investor Relations]

Good morning, everyone, and thank you for joining us today. Our CEO, Jim Smith; and our CFO, Stephane Bello, will review the results for the first quarter in a moment. [Operator Instructions] Now there are several items to mention before we get started. Today's results is shown for our continuing operations, Legal, Tax and Reuters News. The Financial & Risk business is reported for the first time as a discontinued operation and will continue to be shown that way until we close the transaction with Blackstone. Therefore, adjusted earnings per share no longer reflect any revenue or operating income contribution from the Financial & Risk business. Now consistent with that statement, our 2018 guidance is for our continuing operations and, again, does not include F&R. However, since we do not yet have a definitive closing date in the Financial & Risk transaction, we're not able to provide guidance for interest expense for the second half of the year, and we're also not including in our revenue guidance a portion of the $325 million payment from -- that Reuters News will receive from the partnership post close. We're also not yet in a position to provide specifics regarding the timing, size or the structure of the expected tender offer. We anticipate providing details on the tender offer, or SIB, in connection with the close of the transaction in the second half of the year. Lastly, in today's press release, we include a schedule that provides detailed first quarter results for the Financial & Risk business. The information included in that schedule will be provided each quarter following the close of the transaction. As a reminder, throughout today's presentation, when we compare performance period-on-period, we discuss revenue growth rates before currency, as we believe this provides the best basis to measure the underlying performance of the business. Now today's presentation contains forward-looking statements. Actual results may differ materially due to a number of risks and uncertainties discussed in reports and filings that we provide regulatory agencies. You can access these documents on our website or by contacting our Investor Relations Department. Now I'll ask Jim Smith to take us through the results for the quarter.

[James C. Smith, President, CEO & Director]

Thank you, Frank. Good morning, and thanks to all of you for joining us today. Before we begin, I just want to say I don't think I've ever so looked forward to being in the seat for earnings call. In fact, the only thing better this year was learning about our Reuters News team had been awarded 2 Pulitzer Prizes on my first day back in the office. So I want to publicly offer my congratulations to our journalists and let all of you know how proud we are of the work they do around the world each and every day. Personally, I also want to thank those of you who reached out, the kind words and thoughts earlier this year. Given that the results that we are about to discuss are the best we have reported in some time, it appears I should be spending more time out of the office. Now in all seriousness, I'm very pleased with our results to start the year, particularly as it pertains to revenue growth. I'll separate my remarks into 2 parts. First, I'll highlight the first quarter's performance. And second, I'll update you on our partnership with Blackstone. First, to the results for the quarter. I'm pleased to report that the year is off to a good start with reported revenues for continuing operations up 4%. Continuing operations include our Legal, Tax and Reuters News businesses. Reported revenues were $1.4 billion, up 4% on a reported basis and up 3% at constant currency. Adjusted EBITDA for the quarter was up 4% to $430 million. The EBITDA margin was unchanged from the prior period at 31.2% on a restated basis. And the currency had no impact on the margin in the quarter. And EPS was up 12% in the prior year at $0.28 per share. Now the results on this slide exclude the Financial business given that it is now classified as a discontinued operation. For the quarter, the Financial business grew 7%, 3% at constant currency. Stephane will provide more detail in a moment, including the results of our Financial business.Now let me update you on our transaction with Blackstone. Let me start by reiterating several points I made when we announced the partnership with Blackstone and the agreement to sell 55% interest in our Financial & Risk business. Given the fact that we've been working together on this strategic approach and separation planning, we have even greater conviction about the potential business resulting from the deal for our customers, our shareholders and our colleagues. As I said at the time, this is a transformational deal for both Thomson Reuters and for our Financial Services business. I could not then, and cannot now, think of a better partner. Blackstone is uniquely positioned to accelerate our progress. And they have the financial wherewithal and operational expertise to enable the business to achieve its full potential. This deal repositions the Financial business for accelerated growth in a rapidly consolidating industry, while benefiting customers across the sell side, buy side and trading venues. We believe Blackstone's strong relationships in the financial services industry, long and successful history of corporate partnerships and proven ability to execute will help the business provide new and innovative products and services, while also driving further efficiencies. We're also very pleased to retain the 45% interest, which demonstrates our continued confidence in the business that permits us to participate in its upside potential. Finally, as I said in January, I believe that Thomson Reuters' prospects are now stronger than ever. And coupled with our remaining ownership interest in our Financial business, we are in a position to deliver long-term, sustainable value for all shareholders. This includes returning a healthy dividend and maintaining a strong capital structure that provides us with significant resources and flexibility. Now let me update you on where we are in the deal process and our expectations regarding timing for closing. We and Blackstone are making good progress from a regulatory, operational and financing standpoint. And we continue to expect the deal to close in the second half of the year. The regulatory process with antitrust authorities is moving forward, and we already received Hart-Scott-Rodino approval. We also require financial regulatory approvals in the U.K., U.S. and other countries, as a number of our businesses are regulated entities. Operationally, we're moving at a rapid pace, as we designate people, cost and resources to each business. More on this in a moment. And Blackstone is progressing on arranging the financing for the transaction, which is expected to consist of $13.5 billion of debt. Now let me turn to the time line as we see it over the next several months. As I previously said, we anticipate closing the transaction in the second half of the year. As you can see on this slide, there are numerous pre-closing items that need to be completed, including regulatory filings, employee consultations and separation planning. And as Frank mentioned, we don't have answers today regarding the form, size and timing of the tender offer. What I can say is that, shortly after the closing, we expect to commence the tender offer and hope to complete it as quickly as possible. And I can confirm that Woodbridge is expected to participate in the tender offer on a pro-rata basis, which should allow us to maintain a sizable and attractive public float position. We are working with our banks on the structure of the offer, and we expect to provide details at the time that we close the transaction. Following the completion of the tender offer, we plan to host an investor day in Toronto, where we will discuss the operating and capital strategy for the company. This will include presentations from leaders of our business segments who will discuss their strategy to accelerate growth in their respective areas. To sum up, we are on track, and we do not anticipate any surprises. Now let me update you on the balanced approach we plan to take regarding the allocation of the $17 billion in proceeds resulting from the transaction. We expect $9 billion to $10 billion to be returned to shareholders through the tender offer. This is a narrowing of the previous range. We also expect to use $3 billion to $4 billion to pay down debt. A paydown of $4 billion means we would no longer require the dividend reinvestment program given that we expect to have significant financial flexibility with our leverage ratio well below 2x. I'll remind you that our target leverage ratio is less than 2.5%. Next, an investment fund of $1 billion to $3 billion will be intended to facilitate strategic targeted acquisitions to bolster our positions in key growth segments of our Legal and Tax businesses. And lastly, we expect to utilize about $1.5 billion to $2.5 billion for cash taxes, hedging contributions, bond redemption cost and other fees and costs related to the transaction. Let me also emphasize that this figure includes the $500 million to $600 million of onetime spend necessary to eliminate stranded costs as well as investments to reposition the company following the separation of the business. Since signing the F&R partnership with Blackstone in late January, we've been focused on splitting the company into 2 strong standalone businesses. This involves the signing 47,000 employees to each business, transferring hundreds of legal events -- legal entities, signing new contracts with suppliers with several thousands of technology stacks. Simultaneously, with the separation plan, we're working on repositioning the company. The question I've asked my management team is how would we rebuild the company if we were starting anew. We have a unique opportunity to reposition Thomson Reuters in a way that better addresses our customers' needs and generates growth. Our customers want solutions delivered digitally and seamlessly. We've already taken significant steps to improve customer experience, and we see that technology developments are creating opportunities for all parts of our business. Bringing together our data with that of our customers and third parties and applying advanced analytics and artificial intelligence is increasingly important. Our Legal business has the traction here, and we will have more to share with you on our progress in the next few months. These initiatives are all intended to drive accelerated growth. Faster growth will also come from improved customer analytics to drive deeper insights and from a more effective digital sales offering. This includes building a digital customer experience, the sales channel for smaller legal and tax firms to effectively serve those 400,000 customers who pay us less than $10,000 a year. It also involves enabling other firms who are not currently our customers to more easily access and purchase our products. And last, but certainly not the least, we are focused on and investing in expanding our position in the fast-growing corporate market, where we see a significant opportunity going forward. I believe we have a bright future by doing what we do best, combining information, technology and human expertise to provide trusted answers. We have the capital flexibility to execute on that ambition. And we plan to strategically and prudently ramp-up investment in our businesses, both organically and inorganically. I'll now turn it over to Stephane, who will discuss the results by business units.

[Stephane Bello, Executive VP & CFO]

Thank you, Jim, and good morning, or good afternoon to everyone. As Jim and Frank mentioned earlier, this marks the first quarter as the results of our Financial business are reporting as a discontinued operation. Since this business represented more than half of our revenue base, all financial results will obviously be historic for the next few quarters, as we navigate through the transition towards a smaller, but more focused business. For instance, our profitability metrics at the consolidated level will be temporarily depressed by stranded costs. As discussed previously, we intend to gradually eliminate most of these stranded costs over the next couple of years. Importantly, virtually all of these costs will be held within the corporate center, meaning that the performance by business unit will remain relatively clean throughout this transition period. Also while our EBITDA performance will no longer include the contribution from our Financial business, both our debt level and share count will remain the same for most of 2018. Once we close the Blackstone partnership, we will use a large portion of the cash proceeds to buy back shares and reduce outstanding debt, which will allow us to bring down our interest expense and improve earnings per share and free cash flow per share performance. As we always do, we will try to give you as much transparency as possible on these various distorting factors, but it will take a few quarters before the full impact dissipates. And now to our quarterly results. On a constant currency basis, first quarter revenues were up 3%. Adjusted EBITDA was up 4% with the margin unchanged versus the restated prior year period. Corporate costs decreased slightly versus the prior year. But looking ahead to the remainder of the year, and as you can see in the guidance we provided in today's release, we do expect corporate costs to increase temporarily over the course of the year due to stranded costs and to investments we will incur over the next couple of years to reposition the business. I will provide additional color on corporate costs later in my presentation. This next slide provides some additional color around the revenue growth performance of both Thomson Reuters and the Financial business. As Jim said, the year is off to a good start for both businesses. For Thomson Reuters, reported revenues grew 4% with 1% of the improvement coming from currency. And for our Financial & Risk business, reported revenues grew 7% with 4% of the improvement coming from currency. So revenue growth at constant currency rate was encouraging with both businesses growing 3% during the quarter. Breaking the growth down by revenue type. In Thomson Reuters, the core recurring revenue base grew 4%, while transaction and print revenues declined as expected. In Financial & Risk, a return to higher volatility levels triggered a significant increase in transaction revenues, which were up 14% during the quarter. Recurring revenue growth excluding recoveries, was 1%, and we expect this to slowly improve throughout the year. Overall, these results are encouraging. Revenue growth is, as you see, the #1 priority for both businesses. And in the case of Thomson Reuters, the core subscription revenue base is already growing at 4% today. Our Legal and Tax businesses both enjoyed market-leading positions. This, combined with greater focus in investment following the closing of the F&R transaction, make us confident that we can continue to improve our overall growth trajectory over the next few years. For Financial & Risk, the strategic partnership with Blackstone is expected to accelerate the growth trajectory of the business, given Blackstone's deep and strategic relationships within the financial services industry. Now let me provide some additional color on the performance of our individual segments, starting with Legal. Overall, Legal revenues were up 2%. This represents the best performance of this business since the first quarter of 2016. Recurring revenues, which make up almost 3/4 of the total, were up 4%. Transactions, 9% of the total, were down 1%. And Global Print, which makes up the remaining 18%, was down 2%. On an organic basis, Global Print was down 4%. Now from a profitability perspective, Legal's margin was 36.6%, down 70 basis points, and this was driven by product and marketing investments we made in this year. Here's a more detailed look at Legal's revenue performance, and you'll notice that we have made changes to 2 of the segments that we report in an effort to provide a better perspective on the dynamics within the business. Going forward, we will report Global Print rather than only U.S. Print as we have done in the past. The rationale for this change is that our Print businesses around the world are now experiencing similar trends to those we see in the United States. During the quarter, Global Print revenues declined 2% versus the prior year, aided by a small tuck-in acquisition. But on an organic basis, Print revenues declined 4%, but this largely timing-related. On the full year, we continue to expect Print revenues to decline around 6% to 7% organically, which is in line with prior years. After consolidating all of our Print revenues into the gray segment on this slide, it also becomes easier to appreciate the performance of our Global Solutions businesses, which now make up 40% of the total. These businesses were up 4% versus the prior year. And importantly, recurring revenues in Global Solutions grew 6% in the first quarter, which was in line with the mid-single-digit growth performance we recorded over the last several quarters and which also demonstrates the solid underlying trajectory of that segment. The U.S. Online Legal Information segment was up 2%, and it represented 42% of total revenues. This segment provides a solid foundation for Legal, overall, given its high margins and strong free cash flow characteristics. Now looking at our Tax & Accounting business. First quarter revenues grew 5%. Recurring revenues, which are about 70% of the total, were up 8% during the quarter. Transaction revenues, about 1/4 of total, declined 1%. And Print revenues, which is just 3% of the total, declined 7%. Adjusted EBITDA was up 4% with the margin down 20 basis points versus the prior year period, all driven by currency movements. I will remind you that Tax & Accounting was our most seasonal business with nearly 60% of full year revenues generated in the first and the fourth quarter of each year. As such, the margin performance of this business is generally much stronger in the first and fourth quarter and weaker in the second and third quarters because cash [indiscernible] in a more linear fashion throughout the year. Looking at Tax & Accounting results by subsegment. You can see on this next slide that our Professional and Corporate businesses delivered another strong quarter, as both segments grew 6% versus the prior year period. Knowledge Solutions grew 1%. And the smaller Government segment saw revenues decline 1%. Moving to Reuters News. Results for this segment will be presented very much in line with how we have historically treated the business until the Financial & Risk transaction closes. In other words, the revenues detailed on this slide do not reflect any payment from the F&R business yet. Once the transaction closes, Reuters News revenues will increase by $325 million annually. This additional revenue will have little, if any, EBITDA benefit. And it essentially covers the cost of providing the new service to the partnership. So during the first quarter, Reuters News revenues were $72 million, down from the prior year due to a reduction in agency spend and a onetime contractor payment received from the first quarter of 2017, which created a typical year-on-year comparison. And adjusted EBITDA in the quarter was $8 million, down $5 million versus the prior year, driven by the same factors that impacted revenue.Let me now speak for a moment to the performance of our Financial & Risk business, which, as we mentioned before, is now reported as a discontinued operation. The information presented on this slide reflects the metrics that we will continue to report once the transaction closes. These metrics will allow you to value a 45% ownership interest in the partnership, following the completion of the transaction with Blackstone. Financial & Risk started the year on a strong footing as revenue grew 3% to $1.6 billion. We have always said that the underlying performance of our Financial business, excluding the various headwinds we had to deal with over the last few years will be about 3%. So we were pleased to see that our first quarter performance validates this expectation.Adjusted EBITDA was 14% to $526 million with the margin up a healthy 220 basis points over 33%. EBITDA growth benefited from strong profitable transaction revenue growth as well as continued tight expense management. Capital expenditures were $108 million in the quarter, and free cash flow was $91 million. Now debt outstanding has also been included on this slide. But obviously, it won't be relevant until after the transaction closes. Now let me update you on our earnings per share and free cash flow performance. Let me start with earnings per share. Adjusted EPS in the quarter increased $0.03 to $0.28 per share, a 12% increase compared to a restated prior year period. As shown on this slide, this improvement was primarily driven by stronger operating results and lower interest expense. Currency had no impact on EPS during the quarter. As indicated earlier, our earnings per share performance will be impacted by F&R now being classified as a discontinued operation and, therefore, removed from our consolidated results. However, we do expect EPS to improve in 2019 as we deploy a portion of the $17 billion in proceeds for acquisitions, use $3 billion of $4 billion to pay down debt and utilize $9 billion to $10 billion to reduce our share count. Let me now turn to our free cash flow performance. Our reported free cash flow was $120 million during the first quarter versus negative $585 million in the prior year period, which represented an improvement of over $700 million. As shown on this slide, there are a number of distorting factors, which impact our free cash flow performance. And hopefully, this slide gives you a better picture by removing the noise that impacts our free cash flow. Working from the bottom of the page upwards, the Financial & Risk's performance on free cash flow was $91 million versus negative $44 million in 2017, and that was primarily driven by higher EBITDA and favorable working capital weakness. Also in the first quarter of last year, we had $41 million of cost related to the IP & Science divestiture. We made a $500 million pension contribution, and we also made payments related to the charge we took in the fourth quarter of 2016. If you exclude all these items, comparable free cash flow from continuing operations was about $30 million in the first quarter, very similar to prior year period. As we move through the year, we will report our free cash flow impacts resulting from Financial & Risk transaction, but there was no real impact in the first quarter. Now let me discuss our guidance for 2018. But before turning to our specific guidance for '18, I'd like to discuss our expectations for corporate costs over the next 3 years and then focus specifically on corporate costs for 2018. And I will spark -- I will speak to 3 parts of corporate costs: core corporate costs, strategy costs as well as reinvestment we will make to reposition the business. First, as I previously said, we are determined to reduce our core corporate costs. We simply must bring these costs in line with what is appropriate for a smaller revenue base, and this will take some investment and some time. As you recall, our corporate costs in 2017 were about $280 million, and that was down, as a reminder, from about $340 million in the prior year. Since we are losing about half of our revenue and profit base through the Blackstone transaction, it would be fair to assume that we should also be able to reduce corporate costs by half to about $140 million. Now in reality, we will not be able to pass on the 50% of overall corporate costs to Financial & Risk. Certain costs, for instance, those related for being a public company, will simply stay with us. In addition, we will incur some dissynergies as we lose some of the scale benefits we have achieved through our transformation initiatives. We define all these as stranded costs. These costs will be lower in the first half of the year and then will increase for the year as we build standalone capabilities in advance of closing the transaction. For the full year, we expect these stranded costs to be approximately $150 million. We will implement a number of initiatives aimed at offsetting these costs. And the savings from these initiatives should start occurring in 2019 and reach a full run rate sometime in 2020. As a result, we expect stranded costs to gradually decline from $150 million in 2018 to about $100 million in 2019 and to be less than $50 million by 2020. Finally, we will also make investments totaling about $500 million to $600 million for 2018 and 2019. These investments will allow us to reduce stranded costs to replace capabilities lost through the sale of Financial & Risk and to better position Thomson Reuters for the future. And as a reminder, as Jim mentioned, these investments -- these $500 million to $600 million investments are included in the $1.5 billion to $2.5 billion of fee-related expenses that we refer to earlier. So in aggregate, for 2018, we expect that total corporate costs will range between $500 million and $600 million, and this will be comprised of the $140 million of core corporate costs, of about $150 million of stranded costs and of somewhere between $200 million and $300 million of investments that we will make to eliminate stranded costs and to reposition the business. When we report going forward, all 3 buckets will be included in the consolidated corporate costs bucket. In 2019, we expect to have reduced the stranded costs to about $100 million, as I said, and we expect investments will, again, be around $250 million to $300 million. And by 2020, our target is to reduce stranded costs to less than $50 million, bringing our run rate corporate costs to about $190 million annually. Of course, we will strive to bring this number even lower, but this is our current target. Now as we move through 2018 and 2019, I expect that the figures I've just mentioned will differ somewhat from today, but they are reasonable barometer of what we think we need in the way of investment in order to reconfigure the business to properly position it for growth going forward.Now let me turn to the timing of corporate spend in 2018, and the timing will obviously be impacted by the exact closing date of the transaction. However, these slides provide you with an initial indication as to how corporate costs may be incurred throughout the year. The first quarter of the year benefited from lower corporate costs than we expected, and this is timing related. For the remainder of the year, we expect core corporate costs to average $40 million per quarter and to total about $140 million for the full year, as I just explained. Stranded costs started at a very low level in the first quarter, but they are expected to increase at a run rate of $40 million to $50 million per quarter over the balance of the year as we establish new capabilities to prepare for the separation of F&R. In terms of investment spend, we expect to start spending in the second quarter to prepare the company for the separation, and we expect spending to ramp up in the third and fourth quarter as we enact the transformation required once the transaction closes. This is obviously the category of costs that is the hardest to predict. What you see on these slides is our current best estimate, but these numbers are likely to fluctuate somewhat based on a number of factors. So in summary, at a combined level, we expect corporate costs to increase gradually over the course of 2018 before declining again in 2019, as I just explained on the prior slides.Now to our guidance, which excludes Financial & Risk. First, we expect our revenue growth for the full year to be in the low single-digit range. Due to our inability to assess a close date at this stage, this growth rate does not include any portion of the $325 million payment that Reuters News will receive from the partnership following the close. We also expect to generate between $1.2 billion and $1.3 billion in adjusted EBITDA. This number reflects corporate costs of somewhere between $500 million and $600 million, including stranded costs and the investments I just explained. And as I just mentioned, these stranded costs and investments will depress our 2018 EBITDA performance slightly by $350 million to $450 million. Turning to the other guidance metrics. We expect depreciation and amortization to range between $500 million and $525 million, up versus the restated prior year due to the investments required to operate a standalone company. We expect capital expenditure to be in line with the restated prior year. Interest expense will be impacted by the transaction close date and, therefore, the timing of when we are able to pay down debt. Given the uncertainty on this date, we are providing guidance for the first half of the year only and will provide more information when the timing of recurring some of our [indiscernible] becomes clear. And finally, we expect our effective tax rate on adjusted earnings to be between 14% and 16%, a bit higher than in the past few years, primarily due to the nondeductibility of some fee-related costs resulting from the Financial & Risk transaction. With that, let me turn this back over to Jim to make a conclusion before we take some of your questions.

[James C. Smith, President, CEO & Director]

Thank you, Stephane. So to conclude, we are encouraged by the best start to the year that we've had in several years, with each business having performed at or above our expectations. We have teams dedicated to closing the F&R Blackstone transaction as quickly as possible and preparing both sides to hit the ground running on day 1 as 2 separate companies, enabling the rest of the team to stay focused on delivering against current business opportunities. As we approach day 1, we're excited about the opportunities we see to further strengthen our Legal and Tax businesses, both organically and inorganically. Both of these businesses are the market leader in their respective segments, and I'm confident that we have great opportunities to accelerate their growth performance in the years ahead. As discussed today, we have the financial wherewithal and flexibility to capitalize on the growth opportunities we see in these markets. So in closing, I'm excited about the opportunity we have to affect significant change, as we transition and position the company for growth. We will further develop our digital capabilities from the front end to the back end, which will impact how we sell to customers, how we service our customers and how we deliver our products to our customers, all of which, I believe, will lead to attracting new customers and revenue streams. Now let me turn it back over to Frank.

[Frank J. Golden, Senior Vice President of Investor Relations]

Thanks, Jim, and thanks, Stephane, for those comments. And now operator, we'd like to open the call for questions, please.

[Operator]

[Operator Instructions] We will go to a question from the line of Paul Steep.

[Paul Steep, Analyst]

I guess, the first question is maybe for you, and if we think about the used proceeds post the deal, how would we think about your level of patience to waiting before you either re-lever the business back to sort of the target range Stephane talked about? Then I have a quick follow-up as well.

[James C. Smith, President, CEO & Director]

Yes. I want to share to everyone on the call, we're not going to let that money burn a hole in our pockets, right? We will take the same disciplined approach that we have taken in the past and looking for opportunities to support our key growth factors. And we think there are a number of interesting ones out there, but they will be and will have to be opportunities that fit both within our strategic framework and our financial guidelines and our expectations for returns. So we'll be very disciplined about that process and don't feel any pressure around timing. We'll take the opportunity as they -- I mean, opportunities as they present themselves.

[Paul Steep, Analyst]

Great. And then the quick follow-up is for Stephane. Stephane, in the release, you guys talked about, and maybe you should talk about it, at the operating group level, excluding all the other cost we talked about, you talked about making incremental product and marketing investments in the quarter. If we think about that ongoing business, talk to us a little bit about the investment there, whether that's temporary or permanent and maybe the magnitude.

[Stephane Bello, Executive VP & CFO]

Sure. There are some investments, particularly in our Legal group happening this year. And I think you'll have a better sense of what these investments are and at when you see some of the product introduction we make, I would say, probably the middle of the year. So stay tuned on this. So I would say they are temporary from that regard.

[Operator]

Next, we go to a question from the line of Manav Patnaik.

[Manav Shiv Patnaik, Director & Lead Research Analyst]

My first question is, I guess, embedded in your revenue guidance. Is the current run rate in the -- in each of the businesses, is that the trend we should expect, I guess, since we didn't really focus on these businesses before? I was just wondering if you could give us some more color on what the trends there that we should keep an eye on.

[Stephane Bello, Executive VP & CFO]

Sure, and let me try to take that question. I think that's exactly right. That's what's reflected in the guidance. And we will have to reacquaint everyone with the dynamics of each of the businesses. And that's why, as Jim said, we intend to have an investor day sometime in the fall to really do a deep dive on each of the businesses with you. But I will say, at a high level, if you look at our Legal business, and you refer to the pie chart that we showed during the presentation, the foundation, the base of that business is a very solid U.S. online business that's currently growing at 2%. We believe we can probably improve that a little bit, not massively, but a little bit, perhaps to the 3% range. We then -- and that's about 42% of the revenue base. We then have a 40% portion that's the Solutions business. That's currently growing at 4%, 6% subscription. But if you track it by transactions, that's probably the base in the business where, if we have to make inorganic investments, you should expect us to make organic investments. So the faster we can make that portion of the business bigger, the faster we can get the growth rate to accelerate on our Legal business. And then you've got the Print, which is less than 20% of the total revenue, and that's in [indiscernible] decline, as we all know. If you turn to our Tax & Accounting business, that business, the dynamics there remain very healthy. You see the growth rate at about 5%. That's really driven both by the corporate segment, which really sells large software modules to multinationals, primarily, and driven by the -- what we call the Professional business, which is like small software sold to accounting firms that help people prepare the tax returns. Both sides of the business are running strongly at about 6%, as you've seen. We don't see anything that would change these dynamics in the future. So there, again, if we can find opportunities to make that business bigger through inorganic investment, we think it's a fantastic area to make such investments. So -- and I hope this answers, more or less, your question. But as I said, much more details to come along when we have investor's day. The last point I would mention, and then I would remind you, we always depend in the past. But I think that given the reconfiguration of the business, having now put Financial & Risk in discontinued operation, our Tax & Accounting business is more seasonal. And that's simply due to the fact about the revenue recognition is much higher in the fourth quarter and in the first quarter and lower in the second and third quarter, whereas the gust spread is much more equal over the course of the year. So that will have an impact on the margins of that business throughout the year and also an impact on the absolute level of revenue [indiscernible] for the year, not so much revenue growth because it's a seasonality that repeats itself every year, so the revenue growth should be pretty consistent. But the absolute revenue tariffs that you get in each quarter may vary.

[Manav Shiv Patnaik, Director & Lead Research Analyst]

Okay, that's super helpful. I guess, just a quick follow-up there is, I mean, I think like -- the question is because you had been so focused on F&R before, is it true that maybe you hadn't paid as much attention to these remaining businesses and there's a lot of opportunity now that you do have that time?

[James C. Smith, President, CEO & Director]

I would hate to say that we didn't pay a lot of attention to this. I will say, we'll have an opportunity to pay even more attention to them in the future once we complete the separation. I also can say that, as many of you know, those are businesses that are very near and dear to my heart, and I'm looking forward to spending a lot more time focusing on them. I'm looking forward to our investor day later in the year, so we can give you some real detail around why we're so excited about the growth prospects of those business -- those businesses, where we have a clear leadership position. So yes, safe to say, we'll be able to concentrate more of our energy, attention, focus, capital resources, everything on those businesses than we did in the past.

[Operator]

Next, we go to a question of Aravinda Galappatthige.

[Aravinda Suranimala Galappatthige, Managing Director]

For Stephane, Stephane, thanks for the details on the corporate costs [indiscernible] and that's really helpful. I guess, my thought here was that -- and my question related to that is, is it -- if this is such large numbers we're talking about and a substantial decline going into 2020, could you -- and I don't mean in terms of numbers, but could you maybe just talk about the nature of these costs? When we say stranded costs, when we say new investments to reposition, could you give us some items that you're talking about, so we have a sense of the nature of it and the ability you would have to actually eliminate or reduce it as you get to 2020?

[Stephane Bello, Executive VP & CFO]

Absolutely, Aravinda, and thank you for coming back on these points. This is an important point. So we said we got about $500 million to $600 million of the investments that we're going to make. I would say, if you look at that $500 million to $600 million over the next couple of years, I would break them into, like, 3 buckets of roughly the same size, so each of them about $150 million to $200 million. The first bucket consists, in very specific initiatives we will take to generate savings that will help us bringing the stranded costs down or rather finding saving that offset these stranded costs that we're going to be saddled with. So think about $150 million to $200 million that will be spent to essentially generate savings. If you pick my number, $130 million to $150 million. The second bucket are essentially capabilities that we need to -- and by the way, on the first, to give you some specific example in this first category, this will be, for instance, bringing some of our finance, HR strategy function to smaller levels. So it could be bringing down our ET&O organization to a smaller level. So that's going to be rightsizing some areas in our organization. That's really what we're talking about there. The second bucket really represent capabilities that we need to redevelop from the new company. And one example that I will give you is that we'll be -- I think I mentioned that after we close the transaction, we'll be using the Financial & Risk networks, communication networks system, and we have shut down our networks on the other side, where we need to reestablish this. We will have a number of our servers that will go -- that -- those residing data centers, and these data centers will be transferred to F&R, where we will do is we'll try to move these servers not just in our data centers, but move them straight to the cloud. That requires investment. We'll have some real estate partitioning that we're going to have. So we're going to create some legal entities. So these are some example of these capabilities of things that we need to, like, reestablish in order to effect the separation. No return on these things. This is just an investment, and there's really, unfortunately, no return associated with them. It's just what we've got to do to offset the dissynergies. So onetime cost, again, $150 million to $200 million. And then the last category includes a number of investments, and Jim alluded to some of the initiatives that we're pursuing, right, that are really going to help us reposition the company. And I would say, these would include things like really establishing a much stronger digital capability in the way we go to market. Jim gave the example of the fact that we have close to 400,000 of our customers, so almost 80% to 90% of our customers spend than -- spend less than $10,000 a year with us. We've got to address these customers much more digitally, not with human beings. That's what our customers expect. That's what we think can really help us serve them better, maybe start accessing new customers that we don't access right now. You could say, we could have certainly done that before the F&R separation, but this is a perfect example of when you have a lot of priorities to pursue. And in F&R, you're dealing with these customers that are each $150 million to $200 million, when you speak of the largest one, obviously, you are more focused on these ones. Now we're going to, like, really focus about better serving these smaller customers. So that hopefully gives you some color about the type of investments that are included in the numbers that we gave you. And we've got a really unique opportunity to, like, make these investments now to reposition the company for the future.

[Aravinda Suranimala Galappatthige, Managing Director]

Okay. Great. That's really helpful, Stephane. And just a quick follow-up. In terms of the lead -- the spend, the $1 billion to $3 billion in new investments, which, I guess, definitely separate from this, which could be M&A, which could be organic investments in the Legal and Tax & Accounting, the timing of that, I suppose, is not clear. I mean, it will happen, I suppose, after the closing. But how that would shape is not determined at this point. Is that how you're presenting it?

[James C. Smith, President, CEO & Director]

Yes. And I think, just to be really clear, what Stephane talked about includes build opportunities that we see to accelerate our growth, particularly in those digital areas that he just mentioned. One -- the other pool would be reserved primarily for inorganic opportunities. And as I said earlier, we will not let that money burn a hole on our pockets. We will be judicious and we will be thoughtful about how we spend that, and we do not have a time line on it.

[Operator]

Next, we go to the line of David Ridley-Lane.

[David Emerson Ridley-Lane]

Wanted to check something. At the midpoint of your 2018 guidance, it implies about a 33.3% adjusted EBITDA margin before the corporate expenses compared to 34.5% on a restated 2017 basis. So just wondering what the headwinds you're seeing to the underlying segment margins in 2018 would be?

[Stephane Bello, Executive VP & CFO]

Sure. Let me take that question, if I may. I think that the biggest factor to include is the fact that later in the year, and that's why we've given for the first time some guidance based on an absolute EBITDA and not on a margin basis, it's because what's going to happen later this year, we're certainly going to have the impact of the Reuters contract kicking in, so that is $325 million payment we're getting from Reuters is going to increase revenue, at some point, pretty dramatically, but with no corresponding increase in EBITDA. And so that will have a depressing impact on the overall margin of the company, of course. We're not sure exactly when that will happen. It depends on the exact date of the closing. And that's why you can understand now why we provided EBITDA guidance rather than EBITDA margin guidance is because we know we got a better sense of what our EBITDA will be. That contract was not impacted EBITDA very much. But we have no idea how much revenue will be recorded this year from that $325 million payment. That depends on the timing of the closing.

[Operator]

And our next question comes from the line of Andrew Steinerman.

[Y. Cho, Analyst]

This is Michael Cho in for Andrew. Just had a quick one on the F&R segment. I was wondering if you can just give us some commentary on how year-over-year revenues performed for desktop versus speech.

[Stephane Bello, Executive VP & CFO]

Yes, happy to do that. So desktops for the first quarter represented about 35% of the revenue base, and they were down 3%. And the fees and risk portion of the business represented about 42% of the revenue base, and that was up 6%.

[Y. Cho, Analyst]

Okay. And just one quick follow-up on that. Like, when would -- will you expect to, I guess, see a new -- is there -- or will there be a new F&R leadership team announced at the close as well?

[Stephane Bello, Executive VP & CFO]

Our expectation is that right now, the current F&R leadership team is the one you will see at the close.

[Operator]

And our next question comes from the line of Doug Arthur.

[Douglas Middleton Arthur, Managing Director and Research Analyst]

Jim, I wanted to ask you -- and by the way, great to hear your voice. It's good to see you're back. I wanted to ask you sort of about the general spending environment in Legal right now. And I say that kind of remembering over the last 5 years that the big law firms have been in kind of a cutback mode and you've been trying to develop services to help them cut costs. Do you think that the better growth here is partly a function of sort of stronger animal spirits and spending by the big firms? Or is this really more of mix issue here in the first quarter?

[James C. Smith, President, CEO & Director]

Yes. No, I don't think it's a mix issue. I think it's -- I'd start by saying I don't think there's been any sea change in some -- when you about law firms. In fact, overall law firm demand was slightly down in the first quarter, the demand for legal services. We've seen the same dynamics of the bigger firms doing better, small and medium firms having tougher times. So there's not been change in those dynamics. What we have seen, though, is while they have been pushing to cut costs, they've been adopting more and more technology and just more professional management of law firms. There are more General Managers in large law firms. There are more Chief Technology Officers and the like. And I think, as we try to transition our positioning from just the library into the workflow, I think that's paying off. So if you look our underlying core legal information subscription businesses, it was great. It did have a solid low single-digit growth start to the year. But we continued mid-single digits in some of the other areas where we're providing more tools, software and solutions. So I think what we're banking on and where we're seeing lots of traction is in working with those firms, not necessarily just to get more of their legal information spend, but to help them as they think about what their technology spend is going to like in the future, what their software spend is going to look like in the future and how technology is likely to impact the shape of their firms and the practice of law. That's why we're so excited about some of the work we're doing around applying artificial intelligence and cognitive computing to the legal process. And in fact, we have a big gathering of law firm managing partners next week together to talk about exactly where we are. But we're very excited about opportunities to kind of take that labs infrastructure that we built and focus it full tilt kind of on the legal and tax workflow solution. So I hope that's helpful. The environment is largely the same, but we're trying to help in other areas.

[Operator]

Next, we go to the line of Drew McReynolds.

[Drew McReynolds, Analyst]

Welcome back, Jim. On the margin profile for Legal, Tax & Accounting, not in the next couple of years because I think everyone is acknowledging a lot of the temporary noise in the numbers, but once we get beyond that, let's say, 2020, is there any kind of anticipated change in the margin profiles of those 2 businesses? Clearly, the revenue mix will evolve. And we -- we're aware of solutions, for example, in Legal being a little bit low margin in WestlawNext. But outside of mix, is there kind of any reason we should be thinking differently on margin? And one follow-up just in terms of free cash flow for 2018. Obviously, F&R will be in the numbers until it's not. Can you just confirm, could we pencil in, on an annualized basis, about $1 billion in free cash flow from F&R?

[Stephane Bello, Executive VP & CFO]

All right. Let me try to take these 2 questions. First, the margin question, and I'll expand a little bit on the answer I gave earlier. So overall, at the total company level, the margin will be depressed because of the factor I mentioned, the fact that the Reuters News business is going to be a bigger part of the revenue and doesn't have the same margin profile that the other 2 businesses. If you look at the other 2 businesses, which was your question, I would say, no major changes in terms of trends or trajectory. For 2018, I would expect the margins in our Legal business to be a bit lower than they were in '17. That's because of these investments that they're making. And again, you'll hear more about the nature of these investments later in the year, but I would view this as being temporary. And in the case of Tax & Accounting business, this year, given the growth profile, I would expect, over the full year, to see a slight improvement in their margin, actually. So there's really nothing fundamentally changed from what we talked about in the past in terms of revenue mix impact and the like. In the case of question about the free cash flow coming from the Financial & Risk business, I think that's a really tough question to answer because they will be, obviously, a private company going forward. They will certainly take a number of initiatives early on to really accelerate any cost takeout that can be taken, so that they can make reinvestments in the business early on. So very hard to say what the free cash flow of the business will be initially. I think we'll have to see and figure that out over the next few years. But the goal is obviously to forward that business to accelerate any initiatives that are in place and accelerate any reinvestments that the business, if they want to push behind the -- those initiatives.

[Drew McReynolds, Analyst]

And just a quick follow-up there, Stephane. Up until closing, though, are we to assume the contribution is what it historically has been, plus or minus, for the trend in the business? Obviously, a lot will change post closing, but is that a reasonable assumption?

[Stephane Bello, Executive VP & CFO]

It's a fair -- it is a good assumption. I would say, the way the agreement is set between Blackstone and ourselves, there's a portion of the free cash flow, if you remember, that generates by F&R as being shared between the 2 parties even before closing. But you're generally right in terms of saying that you're going to see, like, the impact of the free cash flow of F&R as you've seen in the first quarter.

[Operator]

Next, we go to the line of Tim Casey.

[Tim Casey, Equity Research Analyst]

A couple of quick ones for me. Just on the core Legal and the core Tax business. On Legal, is there any update on what you're seeing in terms of what we used to call litigation search, which, at one point, was the core of the business? My impression was that there were actually some encouraging trends there. A lot of it likely cyclical related to the economy, but just any color you could provide on that. And with respect to Tax & Accounting, are you expecting any lift or tailwinds based on the systemic changes in the U.S. tax code that have been brought about because my impression was that any major changes is usually good for business? Just some color on that.

[James C. Smith, President, CEO & Director]

Sure. Let me try both of those. And Stephane, please feel free to elaborate. First, litigation activity still remains surprisingly depressed, even IP litigation, which was taking off prior to the downturn. So we haven't really seen an uptick in kind of that core litigation, particularly in the United States. That was a big driver, of course, in the past. Conversely, we have seen an uptick in corporate work and overall corporate work and things like employment law and that sort of stuff. So the mix is shifting a little bit. Overall, all-in demand for the first quarter was slightly down, being 0.5% according to our own internal peer monitor. We did last year see a couple of quarters of encouraging movement in the right direction, but it's bouncing around pretty flat, to be honest, and that hasn't changed a great deal. On the tax side, it's interesting. All the tax changes, particularly those in the U.S., are definitely good for our business. They don't lead, however, to massive spikes, and that's a good -- that's actually a good thing because most of our tax products now today is we move to print to online, most of those products are now subscription-based products, so the people sign up for the long term. So what happens is there is an incremental opportunity to help our sales process. And if I look at our net sales performance, Q1 this year versus Q1 last year in the tax business, it was a nice, healthy double-digit increase in having that sales outperform. But what we do, do and we can have, particularly big change, it makes our products even more sticky. And so we would expect, overall, nothing is better for our business than complicated regulations, except for complicated regulations that change frequently. And that's kind of what we've got in the tax environment right now. So we think that's a positive trend, but I wouldn't expect a major spike in activity because of the nature of our products.

[Operator]

Next, we go to the line of Giasone Salati.

[Giasone Ulisse Salati, Senior Media Analyst]

Can you hear me?

[Frank J. Golden, Senior Vice President of Investor Relations]

Yes, we can.

[Giasone Ulisse Salati, Senior Media Analyst]

Great. Just one question on the -- and I'd say [indiscernible] asking, please be -- even before the deal is closed, but when you look at F&R long term, 3 to 5 years, how do you -- how will you decide when to supposedly exit the whole business? Do you have a set IRR in mind? Do you have a milestone timing or else?

[Stephane Bello, Executive VP & CFO]

Yes. The answer is no.

[Operator]

And our final question is from the line of George Tong.

[Jean Song, Research Analyst]

This is Jean on for George. So it's -- the 45% ownership stake in F&R, what's your philosophy on your role in managing the segment? And what do you see as the anticipated revenue cost improvement coming onto the JV?

[Frank J. Golden, Senior Vice President of Investor Relations]

Jean, I'm sorry. You were cutting out there. Could you start again, please?

[Jean Song, Research Analyst]

Yes, sure. So first kind of question is with 45% ownership stake in F&R, what's your philosophy on managing the segment? And what do you see is the anticipated revenue and cost improvements coming onto the JV?

[James C. Smith, President, CEO & Director]

So let me take the first, and Stephane can take a stand on the second. So to the first part of your question, we're forming a Board of Directors for the JV and that board will have 9 voting members. Blackstone will have 5, and we will have 4. So we will actively participate in the overall management of that board. I can tell you that today, leading into the transaction, I'd expect given the -- how closely integrated we're going to be if this will continue, we have biweekly calls now of the senior management at Blackstone and senior management at Thomson Reuters to talk about issues, needs, codependency’s, everything that we have to accomplish over the next 2 weeks until we speak again. And I suspect there will be maintained for some time to come, a pretty healthy dialogue on operational basis just because; one, of the size of the investment; and two, the -- how intricately tied these other businesses have been in the past. Stephane?

[Stephane Bello, Executive VP & CFO]

And then on the -- on your other questions on the trajectory revenue and profitability, I will break that down into it 2 pieces. The next 12 months, what you're going to see is essentially primarily the outcome of the net sales performance and all the actions we've done in the prior 12 months. And the first quarter, in that regard, at 3% revenue growth, as I said, was very pleasing to us because it's very much in line with, as I said, we -- what we were expecting was all these headwinds we have to deal with will dissipate. Now in the first quarter, a lot of that 3% performance was helped by strong transaction performance. I think as we look at the remainder of the year, what we would expect -- we don't know what's going to happen with these transactions, but we would expect the core recurring revenue growth, so the 75% subscription base of the business, to improve gradually over the year. It was about 1.5% in the first quarter and would expect that number to start improving over the balance of the year. After the close of the transaction and once the influence of partner starts to become more visible, we would expect the revenue growth of the business to hopefully accelerate. And that's really why we enter into that transaction. It was primarily based on the -- not on the fact that we didn't -- we were not confident into the revenue trajectory of the business, but based on the strong belief that we can actually -- we'll actually even accelerate and improve the trajectory with the contribution from Blackstone. And in terms of profitability, I would say very much the same thing. What you're seeing in that this year and is essentially still the results of some of the actions we took over the last few months. And you've seen the EBITDA profitability being at 33% in the first quarter, which is the highest EBITDA margin this business has ever realized. And I would expect, again, with the contribution and the help and the expertise of Blackstone that we could see that margin trajectory to continue to improve going forward.

[James C. Smith, President, CEO & Director]

Stephane, I think that's a very good point. I'd just like to add to that because you called our attention in something that -- but I think it's really important to emphasize. We realize -- and clearly from these questions we've had today, we realize this is a complicated transaction. And we realize there's some clarity to important questions that we won't be able to provide until the smoke clears around the transaction. The most important and encouraging thing to me about the first quarter is that the underlying trajectories of both of those businesses continue to move in the right direction. And in fact, each performed as well as they have performed, if not better than they have performed, in years. So we believe those businesses are well positioned. They're, again, in good places and that we will sort through the details of this transaction and look forward to getting it together when that smoke has, indeed, cleared.

[Frank J. Golden, Senior Vice President of Investor Relations]

Perfect. Thanks, Jim, Stephane. Thanks to all of you for joining us today for our first quarter call. That was our last question, so we'll conclude the call. And we will speak to you again in Q2 in early August. Have good day.

[Operator]

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