Thomson Reuters Corp's quarterly earnings fell short of market forecasts as heavy investment in new products weighed on operating margins, although the company said it expects revenue to pick up in 2011.
Thomson Reuters, which provides news and information to financial, legal, accounting and healthcare professionals, said on Thursday it expects revenue to increase by a mid-single digit percentage this year.
Analysts on average expect 2011 revenue to rise about 4 percent, according to Thomson Reuters I/B/E/S.
While the revenue forecast suggested that the company's professional customers are recovering from the recession, Thomson Reuters shares fell on concerns that growth was not picking up as quickly as many investors had hoped.
The magnitude of growth isn't sufficient, said Peter Appert, an analyst at Piper Jaffray in San Francisco, referring to the 2011 revenue forecast. Given that we have cycled through the negative impact in the Markets business, it feels like revenue growth should be stronger.
Thomson Reuters shares were down 3.3 percent in New York and 2.8 percent in Toronto.
Fourth-quarter adjusted earnings per share of 43 cents missed the average analyst forecast of 46 cents.
Thomson Reuters has been investing heavily in new products such as its financial desktop Eikon, online video news service Reuters Insider and legal database service WestlawNext.
I think the problem is the margins, said Swami Shanmugasundaram, an analyst at Morningstar in Chicago. In the short term we haven't seen signs of growth of these investments, he said.
The underlying profit margin for the quarter was 19.3 percent, down from 19.7 percent a year earlier. The company said it expects its underlying operating profit margin to rise by 100 basis points in 2011.
Claudio Aspesi, an analyst at Sanford C. Bernstein in Paris, pointed in particular to weaker margins in the Westlaw legal business. The negative surprise comes from Westlaw. It's not on the revenue side, it's on the cost side, he said.
Still, the revenue forecast suggested that the company's customers are recovering from the economic downturn that caused a pullback in spending and widespread layoffs.
Highlighting the brighter outlook, the company raised its annual dividend by 7 percent to $1.24 per share.
A shock like the world went through leaves a caution that hangs around for a while, Chief Executive Tom Glocer said in an interview. But there's no question that the conditions themselves are getting better in many of our markets.
Total revenue from ongoing businesses rose 4 percent in the fourth quarter to $3.46 billion, before currency adjustments, led by a 7 percent increase in revenue from the Professional division, whose customers include lawyers and accountants. Revenue in the Markets division rose 2 percent.
Analysts had forecast total revenue of $3.43 billion.
Underlying operating profit rose 3 percent to $669 million, driven in part by higher revenue in the Professional division.
The company raised its 2011 savings target by $100 million to $1.7 billion.
Glocer said the company's investments will pay off in 2011.
With this period of heavy investment now successfully completed and our markets improving, we have set our sights on accelerating growth and delivering strong returns on our investments, he said in a statement.
We have targeted mid-single-digit revenue growth for 2011, accompanied by strongly expanding margins and increasing levels of free cash flow, he said.
Growth in the Professional division was driven in part by an 8 percent increase in legal business revenue, though the operating profit margin in the legal business slipped to 26.3 percent from 29.7 percent in the year-earlier period.
The company said that WestlawNext, launched in February 2010, has been sold to more than 15,000 customers, well ahead of the company's initial expectations. The new product already accounts for almost a third of Westlaw's revenue.
Thomson Reuters also said it planned to sell its legal education business BARBRI, and its Scandinavian legal and tax and accounting business. Company executives declined to comment on expected proceeds from the sales of the businesses, which have combined revenue of $160 million.
In the Markets division, which competes with Bloomberg LP and News Corp's Dow Jones unit, revenue rose to $1.92 billion. Like Bloomberg, Thomson Reuters gets much of its revenue from long-term subscriptions.
The company said it has sold more than 12,000 of its latest flagship financial desktop product Eikon to both new and existing customers.
Fourth quarter revenue at Thomson Reuters media segment rose 2 percent, helped by TV revenue. Revenue in the consumer media segment, which includes Reuters.com and related mobile properties, rose 11 percent as online advertising picked up.
During the quarter, the company also launched its Reuters America domestic news service for media clients.
On Monday, Thomson Reuters named Stephen Adler as editor-in-chief of Reuters News, putting the former BusinessWeek executive in charge of all news operations across the Markets and Professional divisions.
The move is part of a strategy to unite the broad resources of the company, created by the $16 billion takeover of the 160-year old Reuters including its news operations by Thomson Corp in 2008.
The upbeat revenue forecast reflects a general upturn in the publishing business. Last month, British publishing group Pearson Plc , a major rival, raised its 2010 profit forecast for the second time in three months.
Thomson Reuters competitors Reed Elsevier and Wolters Kluwer are due to report results later this month.
Thomson Reuters shares were down 3.3 percent at $40.05 in early afternoon trading in New York. Up to Wednesday, the New York-listed shares had risen 11.6 percent in 2011.
The Toronto-listed shares were down 2.8 percent at C$39.90, having risen 10.8 percent to Wednesday.
(Additional reporting by Georgina Prodhan in London; Editing by Ted Kerr)