Thomson Reuters - Earnings Call - Q1 2018
May 11, 2018
Transcript
Operator (participant)
Ladies and gentlemen, thank you for standing by. Welcome to Thomson Reuters' First Quarter Earnings Call. At this time, all participant lines are in a listen-only mode. Later, there will be an opportunity for your questions. Instructions will be given at that time. 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 Golden (SVP 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. When we open the call for questions, we'd appreciate it if you would limit yourselves to one question each to enable us to get to as many questions as possible. Now, there are several items to mention before we get started. Today's results are 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 treatment, 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 for 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 the portion of the $325 million payment 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.
Jim Smith (CEO)
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 an earnings call. In fact, the only thing better this year was learning that our Reuters News team had been awarded two 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, and personally, I also want to thank those of you who reached out with kind words and thoughts earlier this year.
Given that the results 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 am very pleased with our results to start the year, particularly as it pertains to revenue growth. I'll separate my remarks into two 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's off to a good start with reported revenues for continuing operations up 4%. Continuing operations include our Legal, Tax, and Reuters News business. 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. Currency had no impact on the margin in the quarter. EPS was up 12% from 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 that we've been working together on this strategic approach and separation planning, we have even greater conviction about the potential benefits resulting from the deal for our customers, our shareholders, and all 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 and 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've already received Hart-Scott-Rodino approvals. 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, costs, 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 timeline 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 prorated 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 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 the 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-$10 billion to be returned to shareholders through the tender offer. This is a narrowing of the previous range. We'd also expect to use $3 billion-$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 two times. I'll remind you that our target leverage ratio is less than 2.5%. Next, an investment fund of $1 billion-$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-$2.5 billion for cash taxes, pension contributions, bond redemption costs, and other fees and costs related to the transaction. Let me also emphasize that this figure includes the $500 million-$600 million of one-time 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 two strong standalone businesses. This involves assigning 47,000 employees to each business, transferring hundreds of legal entities, signing new contracts with suppliers, and several thousands of technology stacks. Simultaneously with the separation plan, we are 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 gained 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 offer. This includes building a digital customer experience and 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.
Last but certainly not 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 of my business unit.
Stephane Bello (EVP and CFO)
Thank you, Jim. Good morning or good afternoon to everyone. As Jim and Frank mentioned earlier, this marks the first quarter that the results of our financial business are reported as a discontinued operation.
Since this business represented more than half of our revenue base, our financial results will obviously be distorted 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 strive to give you as much transparency as possible on these various distorting factors, but it will take a few quarters before they fully impact this space. 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 stated 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.
Revenue growth at constant currency rates was encouraging, with both businesses growing 3% during the quarter. Breaking the growth down by revenue type, in Thomson Reuters, our 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 obviously the number one priority for both businesses. In the case of Thomson Reuters, our core subscription revenue base is already growing at 4% today. Our Legal and Tax businesses both enjoy market-leading positions.
This, combined with greater focus in investment following the closing of the F&R transaction, makes 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 help 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 three-quarters 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 two 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. And the rationale for this change is that our print businesses around the world are now experiencing similar trends to those we've seen in the United States. During the quarter, Global Print revenues declined 2% versus the prior year, aided by a small tuck-in acquisition. On an organic basis, print revenues declined 4%, but this is largely timing-related.
For the full year, we continue to expect print revenues to decline around 6%-7% organically, which is in line with prior years. By consolidating all of our print revenues into the Legal 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 grew at 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 at 2%, and it represented 42% of total revenue. 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 a quarter of the 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 is our most seasonal business, with nearly 60% of full-year revenues generated in the first and 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 costs are incurred in a more linear fashion throughout the year.
Looking at Tax & Accounting's result 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.
During the first quarter, Reuters News revenues were $72 million, down from the prior year due to a reduction in agency spend and a one-time contractual payment received in the first quarter of 2017, which created a difficult year-on-year comparison. 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 had always said that the underlying performance of our financial business, excluding the various headwinds we had to deal with over the last few years, would be about 3%. So we were pleased to see that our first quarter performance validates these expectations. Adjusted EBITDA rose 14% to $526 million, with the margin up a healthy 220 basis points to 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, that 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-$4 billion to pay down debt, and utilize $9 billion-$10 billion to reduce our share count. We now turn to our free cash flow performance.
Our reported free cash flow was $120 million during the first quarter versus -$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 component of free cash flow was $91 million versus -$44 million in 2017, and that was primarily driven by higher EBITDA and favorable working capital movements. Also, in the first quarter of last year, we had $41 million of costs 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. To exclude all these items, comparable free cash flow from continuing operations was about $30 million in the first quarter, very similar to the prior year period. As we move through the year, we will call out the free cash flow impacts resulting from the 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 2018, I'd like to discuss our expectations for corporate costs over the next three years and then focus specifically on corporate costs for 2018.
I will speak to the three parts of corporate costs: core corporate costs, strategic costs, as well as the 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 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 50% of all our corporate costs to Financial & Risk. Certain costs, for instance, those related to 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 strategic costs. These costs will be lower in the first half of the year, and they will increase throughout the year as we build standalone capabilities in advance of closing the transaction. For the full year, we expect these strategic 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 the full run rate sometime in 2020.
As a result, we expect strategic 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-$600 million over 2018 and 2019. These investments will allow us to reduce strategic 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-$600 million investments, are included in the $1.5 billion-$2.5 billion of deal-related expenses that we referred to earlier, so in aggregate, for 2018, we expect that total corporate costs will range between $500 million and $600 million.
This will be comprised of the $140 million of core corporate costs, of about $150 million of strategic costs, and of somewhere between $200 million and $300 million of investments that we will make to eliminate strategic costs and to reposition the business. When we report going forward, all three buckets will be included in the consolidated corporate cost level. In 2019, we expect to have reduced the strategic costs to about $100 million, as I said, and we expect investments to, again, be around $250 million-$300 million. By 2020, our target is to reduce strategic 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 just mentioned will differ somewhat from today, but they are a reasonable barometer of what we think we need in the way of investments in order to reconfigure the business to properly position the overall 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 core 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.
Strategic costs started at a very low level in the first quarter, but they are expected to increase at a run rate of $40 million-$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 this slide is our current best estimate, but these numbers are likely to fluctuate somewhat based on a number of factors.
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 slide. 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 firm 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 strategic costs and the investments I just explained. And as I just mentioned, these strategic costs and investments will decrease our 2018 EBITDA performance 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 a restated prior year due to the investments required to operate as 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 around this date, we are providing guidance for the first half of the year only and will provide more information when the timing of retiring some of our outstanding debt becomes clear. And finally, we expect our effective tax rate on an adjusted earnings to be between 14% and 16%, a bit higher than in the past few years, primarily due to the non-deductibility of some deal-related costs resulting from the Financial & Risk transaction.
With that, let me turn this back over to Jim for a brief conclusion before we take some of your questions.
Jim Smith (CEO)
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 one as two separate companies, enabling the rest of us to stay focused on delivering against current business opportunities. As we approach day one, 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 a great opportunity 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 by the opportunity we have to effect 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 Golden (SVP 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 (participant)
Thank you. Ladies and gentlemen, if you would like to ask a question, please press star, then one on your telephone keypad. You will hear a tone indicating you have been placed in queue. You may remove yourself from this queue by depressing the pound key. Once again, to ask a question, please press star, one to place your line in queue. We will go to a question from the line of Paul Steep. Please go ahead.
Paul Steep (Director and Equity Research Analyst)
Morning. Jim, welcome back. Good to hear that you're feeling better. I guess the first question is maybe for you. And if we think about the use of proceeds post the deal, how would we think about your level of patience to waiting before you either relevered the business back to sort of the target range Stephane talked about?
And then I have a quick follow-up as well.
Jim Smith (CEO)
Yeah. I want to assure 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 at looking for opportunities to support our key growth vectors. 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 return. So we'll be very disciplined about that process and don't feel any pressure around timing. We'll take the opportunity and the opportunities as they present themselves.
Paul Steep (Director and Equity Research Analyst)
Great. And then the quick follow-ups 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 costs we talked about, you talk 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. Thanks.
Stephane Bello (EVP and 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 aimed at when you see some of the product introduction we make, I would say probably in the middle of the year. So stay tuned on these. So I would say they are temporary from that regard.
Paul Steep (Director and Equity Research Analyst)
Thank you.
Operator (participant)
Next, we go to a question from the line of Manav Patnaik. Excuse me, Patnaik. Please go ahead.
Manav Patnaik (Managing Director and Equity Research Analyst)
Yeah. Thank you. Good morning, gentlemen. My first question is, I guess, embedded in your revenue guidance is the current run rate 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 are that we should keep an eye on.
Stephane Bello (EVP and 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 would 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. And that's about 42% of the revenue base. We then have a 40% portion that's this solutions business. That's currently growing at 4%, 6% subscription, but it's been detracted by transactions. That's probably the place in the business where if we have to make inorganic investments, you should expect us to make inorganic investments. So the faster we can make that portion of the business bigger, the faster we can get the growth rate to accelerate in our Legal business.
And then you'll get the print, which is less than 20% of the total revenue, and that's in secular decline, as we all know. If you turn to our Tax & Accounting business, that business, the dynamics there remain very healthy. You've seen 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 what we call the Professional business, which is like small software sold to accounting firms that help people prepare their 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 investments, we think it's a fantastic area to make such investments.
So I hope this answers more or less your question, but as I said, much more details to come along when we have Investor Days. The last point I would mention, and I would remind you, we always did that 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 that 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 cost 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 you're going to see throughout 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 dollars that you get in each quarter may vary.
Manav Patnaik (Managing Director and Equity Research Analyst)
Okay. That's super helpful. I guess just a quick follow-up there is. I mean, I think like us, I guess there's 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?
Stephane Bello (EVP and CFO)
I would hate to say, Manav, that we didn't pay a lot of attention to them. 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 in those businesses, where we have a clear leadership position. So yeah, it's 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.
Manav Patnaik (Managing Director and Equity Research Analyst)
All right. Thanks a lot guys.
Operator (participant)
Next, we go to a question from Aravinda Galappatthige. Please go ahead.
Aravinda Galappatthige (Managing Director and Institutional Equity Research Analyst)
Good morning. Thanks for taking my question. And it's for Stephane. Stephane, thanks for the details on the corporate cost component. That's really helpful.
I guess my thought here was that, and my question related to that is that these are such large numbers we're talking about and a substantial decline going into 2020. 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 (EVP and CFO)
Absolutely, Aravinda. And thank you for coming back on these points. It's an important point. So we said we've got about $500 million-$600 million of these investments that we're going to make.
I would say if you look at that $500 million-$600 million over the next couple of years, I would break them into three buckets of roughly the same size. So each of them about $150 million-$200 million. The first bucket consists in very specific initiatives we will take to generate savings that will help us bring the stranded cost down or rather finding savings that offset these stranded costs that we're going to be selling. So think about $150 million-$200 million dollars that will be spent to essentially generate savings of, if you take my number, $130 million-$150 million. The second bucket are essentially capabilities that we need to, and by the way, to give you some specific example of this first category, it would be, for instance, bringing some of our finance, HR, strategy function to a smaller level.
It would be bringing down our ET&O organization to a smaller level. So that's going to be right-sizing some areas in our organization. That's really what we're talking about here. The second bucket really represents capabilities that we need to redevelop from the new company, and one example that I would give you is that we've been, I think I mentioned that after we closed the transaction, we've been using the Financial & Risk networks, communication networks system, and we have shut down our networks on the other side, where we need to reestablish these. We will have a number of our servers that will go that reside in data centers, and these data centers will be transferred to F&R. What we will do, 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 to do. We're going to have to create some legal entities. So these are some examples of these capabilities or things that we need to reestablish in order to affect the separation. No return on these things. This is just an investment, and there's really, unfortunately, not a return associated with them. It's just what we get to do to offset the dissynergies. So one-time cost again, $150 million-$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 much stronger digital capabilities 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%-90% of our customers spend less than $10,000 a year with us. We get 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 customers that are each $150 million-$200 million when you speak of the largest one. Obviously, you are more focused on these ones. Now we're going to 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. And we got a really unique opportunity to make these investments now to reposition the company for the future.
Aravinda Galappatthige (Managing Director and Institutional Equity Research Analyst)
Okay. Great. That's really helpful, Stephane. And just a quick follow-up. In terms of the spend, the $1 billion-$3 billion in new investments, which I guess are definitely separate from this, which could be M&A, which could be organic investments in Legal and Tax & Accounting, the timing of that, I suppose, is not clear. It'll happen, I suppose, after the closing, but how that would shape is not determined at this point. Is that how you're presenting it?
Jim Smith (CEO)
Yeah.
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. The other pool would be reserved primarily for inorganic opportunities. And as I said earlier, we will not let that money burn a hole in our pockets. We will be judicious, and we will be thoughtful about how we spend that, and we do not have a timeline on it.
Aravinda Galappatthige (Managing Director and Institutional Equity Research Analyst)
Okay. Great. Thank you. I'll pass the line.
Operator (participant)
Next, we go to a line of David Ridley-Lane. Please go ahead.
David Ridley-Lane (Equity Research Analyst)
Good morning. 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 the restated 2017 basis.
So just wondering what the headwinds you're seeing to the underlying segment margins in 2018 would be?
Jim Smith (CEO)
Sure.
Stephane Bello (EVP and CFO)
Let me take that question, if I may. I think 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 not on a margin basis, it's because what's going to happen later this year, we're suddenly going to have the impact of the Reuters contract kicking in. So this $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.
That's why you can understand now why we provided EBITDA guidance rather than EBITDA margin guidance, is because we know we get a better sense of what our EBITDA will be. That contract will not impact that EBITDA very much, but we have no idea of how much revenue will be recorded this year from that $325 million payment. That depends on the timing of the closing.
Operator (participant)
Our next question comes from the line of Andrew Steinerman. Please go ahead.
Michael Cho (VP and Equity Research Analyst)
Hi. Good morning. 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 perform for desktop versus feeds.
Stephane Bello (EVP and CFO)
Yeah. Happy to do that. Desktops for the first quarter represented about 35% of the revenue base, and they were down 3%.
The Feeds and Risk portion of the business represented about 42% of their revenue base, and that was up 6%.
Michael Cho (VP and Equity Research Analyst)
Okay. Thanks. And just one quick follow-up on that. When would we expect to, I guess, see a new or will there be a new F&R leadership team announced at the close as well?
Stephane Bello (EVP and CFO)
Our expectation is that right now the current F&R leadership team is the one you will see at the close.
Michael Cho (VP and Equity Research Analyst)
Okay. Thank you.
Operator (participant)
Our next question comes from the line of Doug Arthur. Your line's open.
Doug Arthur (Managing Director and Senior Research Analyst)
Yeah. Thanks. 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.
I say that kind of remembering over the last five 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 a mixed issue here in the first quarter?
Jim Smith (CEO)
Yeah. No, I don't think it's a mixed issue. I think it's—I start by saying I don't think there's been any sea change when you think 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 with the bigger firms doing better, small and medium firms having tougher times. So there's not been a 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 there's 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've tried to transition our positioning from just the library into the workflow, I think that's paying off. So if you look at our underlying core Legal information subscription businesses, it was great. It had 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 workflow 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's going to look like in the future, what their software spend's going to look like in the future, and how technology's 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 on the Legal and Tax workforce solutions. So I hope that that's helpful. The environment's largely the same, but we're trying to help in other areas.
Doug Arthur (Managing Director and Senior Research Analyst)
Yeah. That's very helpful. Appreciate it. Thank you.
Operator (participant)
Next, we go to a line of Drew McReynolds. Please go ahead.
Drew McReynolds (Managing Director)
Thanks very much. And welcome back, Jim. On the margin profile for Legal, Tax & Accounting, not in the next couple of years because I think everyone's acknowledging a lot of the temporary noise and 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 two businesses?
Clearly, the revenue mix will evolve, and we're aware of solutions, for example, in Legal being a little bit low margin and 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? Thanks.
Stephane Bello (EVP and CFO)
I wanted to try to take these two 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 as the other two businesses. If you look at the other two 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 2017. 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.
In the case of our 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. 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 your 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 also. 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 for that business to accelerate any initiatives that are in play and accelerate any reinvestments that the business may want to push behind the key growth initiatives.
Drew McReynolds (Managing Director)
All right. 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 (EVP and CFO)
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's generated by F&R that's being shared between the two parties even before closing.
But you're generally right in terms of saying that you're going to see the impact of the free cash flow F&R as you've seen in the first quarter.
Drew McReynolds (Managing Director)
Okay. Thank you.
Operator (participant)
Next, we go to a line of Tim Casey. Please go ahead.
Tim Casey (Managing Director and Senior Equity Analyst)
Thanks. A couple of quick ones from 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. Thank you.
Jim Smith (CEO)
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 for us 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, I think 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 actually a good thing. Because most of our Tax products now today, because we've moved to print to online, most of those products are now subscription-based products so that 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, there's a nice healthy double-digit increase in how net sales have performed.
But what they do do when you have a pretty big change, it makes our products even more sticky. And so we would expect overall, nothing's 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.
Tim Casey (Managing Director and Senior Equity Analyst)
Thank you.
Operator (participant)
Next, we go to the line of Giasone Salati. Please go ahead.
Giasone Salati (CFO)
Hi, guys. Can you hear me?
Jim Smith (CEO)
Yes, we can.
Giasone Salati (CFO)
Hi. Great. Hi. Just one question. I see a bit about asking, please, even before the deal is closed. But when you look at F&R long term, three to five years, 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?
Jim Smith (CEO)
The honest answer is no.
Giasone Salati (CFO)
Okay.
Operator (participant)
And our final question is from a line of George Tong. Please go ahead.
Hi there. This is Gene on for George. So with the 45% ownership stake in F&R, what's your philosophy on your role managing the segment, and what do you see as the anticipated revenue and cost improvement coming onto the JV?
Stephane Bello (EVP and CFO)
I'm sorry. You were cutting out there. Could you start again, please?
Yeah, 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 as the anticipated revenue and cost improvements coming onto the JV?
Jim Smith (CEO)
So let me take the first, and Stephane can take a stab on the second.
So for the first part of your question, we're forming a board of directors for the JV, and that board will have nine voting members. Blackstone will have five, and we will have four. So we will actively participate in the overall management of that board. I can tell you that today, leading into the transaction, and I expect, given how closely integrated we're going to be, this will continue. We have biweekly calls now of senior management at Blackstone and senior management at Thomson Reuters to talk about issues, needs, codependencies, everything that we have to accomplish over the next two weeks until we speak again. And I suspect there will be maintained for some time to come a pretty healthy dialogue on an operational basis just because one of the size of the investment and two, how intricately tied together these businesses have been in the past. Stephane?
Stephane Bello (EVP and CFO)
Then on your other question, on the trajectory of revenue and profitability, I would break that down into two 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. 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, what we were expecting once all these headwinds we had to deal with would 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 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 we would expect that number to start improving over the balance of the year. After the close of the transaction, and once the influence of our partner starts to become more visible, we would expect the revenue growth of the business to hopefully accelerate. And that's really why we've entered into that transaction.
It was primarily based on, not on the fact that we were not confident in the revenue trajectory of the business, but based on the strong belief that we can actually even accelerate and improve that trajectory with the contribution from Blackstone. And in terms of profitability, I would say very much the same thing. What you're seeing in this year 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, the help, and the expertise of Blackstone, that we could see that margin trajectory to continue to improve going forward.
Jim Smith (CEO)
Stephane, I think that's a very good point.
I'd just like to add to that because it called your attention to something that I think is 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. But 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 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. Perfect.
Frank Golden (SVP of Investor Relations)
Thanks, Jim. Stephane, thanks 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 a good day.
Operator (participant)
Thank you. Ladies and gentlemen, this conference is available for digitized replay after 10:30 A.M. Eastern Time today through May 18th at midnight. You may access the replay service at any time by calling 1-800-475-6701 and enter the access code of 446610. International participants may dial 320-365-3844. Again, that's 1-800-475-6701 and 320-365-3844 with the access code of 446610. That does conclude your conference for today. Thank you for your participation and for using AT&T Teleconference Service. You may now disconnect. Mr. Golden, we're back into the private conference, sir.
