July 29, 2010 / 11:03 AM / in 7 years

UPDATE 6-Thomson Reuters Q2 misses, sees growth resuming

* Adj Q2 EPS $0.47 vs view $0.48; margin down to 20.4 pct

* CEO sees revenue growth in Q3

* Rev from ongoing businesses $3.22 bln vs view $3.23 bln

* Markets division rev down 4 pct, Professional up 2 pct

* New York shares fall 1.6 pct,Toronto shares fall 1.9 pct (Adds analyst comment, updates share activity, adds links)

By Jennifer Saba and Robert MacMillan

NEW YORK, July 29 (Reuters) - Thomson Reuters Corp (TRI.TO) (TRI.N) reported lower-than-expected quarterly results on Thursday as the news and data provider’s investment in new products for traders and lawyers squeezed margins.

The company said revenue would grow in the third quarter, showing it is slowly emerging from the shadow of the financial crisis that triggered Wall Street layoffs and cancellation of subscriptions to its terminals and other products.

But some analysts said they were taking a “wait-and-see” attitude, and the stock fell.

“The company puts a positive spin on new sales being better, but it doesn’t show up in the numbers yet, so there’s some skepticism,” said Piper Jaffray analyst Peter Appert, who has a “sell” rating on the shares.

Underlying operating profit fell 17 percent to $655 million in the second quarter. Adjusted earnings of 47 cents per share were just shy of expectations. Revenue also fell short, dropping 2 percent to $3.22 billion.

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For Starmine comparative data click on link.reuters.com/caz32n

For a table detailing the results click on [ID:nN29271240]

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“Net sales have been positive for the firm as a whole for three quarters, and increasingly positive toward the end of the second quarter,” CEO Thomas Glocer said in an interview.

The company had forecast growth in the second half of the year, most likely the fourth quarter, he said, “but sales have been encouraging enough that we think we actually will turn positive earlier.” Glocer declined to provide 2011 forecasts.

Thomson Reuters is investing heavily in new products, causing its operating profit margin to fall to 20.4 percent from 24.2 percent a year earlier.

“The hit in the second-half margin (that) it sort of alluded to was more significant than I think people were expecting,” said Citi analyst Thomas Singlehurst. “It still counts as a slight disappointment.”

DELAYED IMPACT

Thomson Reuters shares fell 1.6 percent on the New York Stock Exchange and 1.9 percent on the Toronto Stock Exchange.

The New York shares rose almost 20 percent from the beginning of the year through Wednesday while the Toronto shares were up about 17 percent.

“This has been a very robust performer,” Citi’s Singlehurst said. “I think it’s one of those things where it’s just no real surprise shares are slightly down. The fundamentals are still there. It’s a good company.”

Thomson Reuters, like Bloomberg LP and other companies that serve financial customers, gets much of its revenue from long-term subscriptions.

While net sales improved in the quarter, revenue was still down compared with the same quarter a year ago due to the delayed impact of canceled subscriptions.

“We knew Q2 was going to be the last of the weak quarters,” said RBC Capital Markets analyst Drew McReynolds. “I don’t think the slight miss on organic revenue growth is going to be a major factor for investors out there.”

In the Markets division, which serves the financial industry, revenue fell 4 percent from the same quarter a year earlier. Revenue from the division was up from the first quarter, excluding adjustments for currency, marking the second consecutive quarter of sequential growth.

Revenue rose 2 percent in the Professional division, which sells databases and other information reservoirs to lawyers, accountants, scientists and healthcare workers.

Thomson Reuters said sales of WestlawNext, a new version of the company’s Westlaw deep information database for lawyers, were well ahead of expectations, with about 5,700 customers buying the product since launch in February.

“I think Thomson’s got reasonable long-term growth prospects, but the size of the company limits the growth rate,” Appert said. “I don’t want to pay almost 22 times cash EPS for 5 percent secular growth. ... I think they’re doing good stuff, and I think the management is executing well. I just think the valuation is rich.”

Competition is growing in the legal market from Bloomberg Law, a rival to Westlaw and Reed Elsevier’s (REL.L) ELSN.AS Lexis Nexis.

Reed Elsevier said earlier on Thursday that underlying revenue returned to growth in the first half, beating expectations. It said, however, that the recovery of its professional publications would be slow. [ID:nLDE66R158]

Dutch competitor Wolters Kluwer (WLSNc.AS) on Wednesday reported a rise in first-half profit, though revenue was flat, and analysts said the results were as good as could be expected in a difficult market.[ID:nLDE66Q1E9]

The Reuters news agency business reported a 3 percent fall in revenue, but net sales turned positive after it won a contract with Time Warner Inc’s (TWX.N) CNN cable news network.

Thomson Reuters said its online video news service, Reuters Insider, which launched in the quarter, had 40,000 subscribers in about 8,000 companies. That was “well ahead” of expectations, Glocer said.

Thomson Reuters shares closed at $38.96 in Toronto and $37.60 in New York. (Additional reporting by Georgina Prodhan in London. Editing by Tiffany Wu and Ted Kerr)

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