TRI Stock | Thomson Reuters Corp Q4 2020 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Thomson Reuters Fourth Quarter and Full Year Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. Should you require assistance during the call, please press star and then zero, and an operator will assist you offline. As a reminder, today's conference is being recorded. I would now like to turn the conference over to our host, Frank Golden, Head of Investor Relations. Please go ahead.

Good morning, and thank you for joining us today for our Fourth Quarter and Full Year 2020 Earnings Call. This morning, I'm joined by our CEO, Steve Hasker, and our CFO, Mike Eastwood, each of whom will report our results and will take your questions following our presentation. They will also discuss the change program we announced this morning and our outlook for 2021 through 2023. To enable us to get to as many questions as possible, we'd appreciate it if you would limit yourselves to one question each and one follow-up when we open the phone lines later. Throughout today's presentation, when we compare performance period on period, we discuss revenue growth rates before currency as well as on an organic basis, as we believe this provides the best basis to measure the underlying performance of the business. Today's presentation does contain forward-looking statements. Actual results may differ materially due to a number of risks and uncertainties related to the COVID-19 pandemic and other risks discussed in reports and filings that we provide from time to time to regulatory agencies. You may access these documents on our website or by contacting our Investor Relations department. Now, I'll pass it over to Steve.

Thank you, Steve, and thanks to all of you for joining us today. As a reminder, I will talk to revenue growth before currency and on an organic basis. Let me start by discussing the revenue performance of our Big Three segments. Organic revenues and revenues at constant currency were both up about 5% for the quarter. Legal Professionals revenues increased 5%, and organic revenues were up 4%. Recurring organic revenue growth of 5% was partially offset by a 6% decline in transaction revenues, primarily related to our Elite business. Westlaw Edge continues to drive over 100 basis points to Legal's organic growth while continuing to maintain a healthy premium. Our government business, which is reported within Legal, had another strong quarter with total revenue growth of 14% and organic growth of 10%. In our Corporate segment, total revenues increased 4%, and organic revenues were up 3%. Recurring organic revenues were up a healthy 6%, but transaction revenues declined 11%, primarily due to lower implementation revenues. And finally, Tax and Accounting's total revenues grew 6%, with organic revenues up 8%. The difference between total growth and organic growth was mainly related to the sale of our government tax business in November 2019. Also, we accelerated the release of some of our UltraTax state software from January to December to align with the traditional December release of our U.S. Federal software. Excluding this timing benefit, organic revenues were still up a healthy 5.5%. Moving to Reuters News, revenues declined 1%, with organic revenues down 3%, mainly due to lower news agency revenues and the cancellation of in-person conferences at Reuters Events due to COVID-19. This performance was slightly better than we had anticipated due to the conversion of several in-person conferences to virtual events. And Global Print revenues declined 10% in the quarter, with organic revenues also down 10%, as expected. We expect an improvement in Print's 2021 full-year performance, but we still forecast revenues to decline between 4% and 7%. On a consolidated basis, fourth quarter revenues each increased 2%. Before turning to profitability, let's look closer at recurring and transaction revenue results for the fourth quarter. Starting on the left side, total company organic revenue for the fourth quarter of 2020 was up 2%, compared to 4% growth in the fourth quarter of 2019. But if you look at the Q4 2020 performance for the Big Three, you will see organic revenue increased 5%, a strong performance and only slightly below the 6% performance in Q4 2019. And as you can see at the top right of the slide, the recurring revenue growth continues to be very encouraging. Total company recurring organic revenue grew 5% in Q4, only 30 basis points below Q4 2019, and the Big Three recurring organic revenues grew 6%, in line with last year's fourth quarter. Turning to the graph in the bottom right of the slide, transaction revenues were down over 900 basis points year-over-year, impacted by COVID-19, which affected our implementation services and the Reuters Events businesses. So despite the COVID-19 related disruptions, we continue to remain encouraged by the momentum we carried into 2021, especially for recurring revenues, giving us confidence in the trajectory of the business. Turning to our profitability performance in the fourth quarter, adjusted EBITDA for the Big Three segments was $495 million, up 11% from the prior year period, and the related margin was up 230 basis points. This strong performance for the Big Three reflected four key items. First, strong revenue growth across all three segments. Second, Legal Professionals adjusted EBITDA margin in the fourth quarter grew 300 basis points to 37.5% compared to the prior year period, driven by higher revenue growth. Third, Corporate adjusted EBITDA margin was up 110 basis points to 31.1% due to higher revenues. And fourth, Tax and Accounting's adjusted EBITDA margin increased 240 basis points to 51.1% due to solid revenue growth, which included the accelerated release of some of our UltraTax state software mentioned earlier. Moving to Reuters News, adjusted EBITDA was $6 million, $4 million less than the prior year period, primarily due to several non-recurring costs in the quarter. Global Print adjusted EBITDA margin for the quarter declined about 480 basis points due to the decline in revenue. So total company adjusted EBITDA was $525 million, a 33% increase versus Q4 2019. This next slide provides more color on the various factors impacting our full year 2020 adjusted EBITDA margin. As you can see, our reported 2020 full year adjusted EBITDA margin was 33%. There were several factors in 2020 that drove the significant increase over the prior year period. First, M&A activity had a 40 basis point positive impact on margin. Second, lower revenues related to COVID-19 had a 220 basis point negative impact on margin. However, the savings from the $100 million cost savings initiative we announced in the first quarter more than offset the dilution from COVID-19 impact, and we exceeded our $100 million cost savings target and reinvested a portion of the savings in the fourth quarter. The net cost savings improved the margin by 180 basis points. On an underlying basis, excluding stranded and one-time costs in the prior year, the adjusted EBITDA margin expanded 150 basis points, which was primarily related to the cost savings measures as a response to COVID-19. We continue to expect these savings will be permanent. Overall, we believe the investments made in the fourth quarter and the visibility into the levers at our disposal provide us with a solid position as we entered 2021 and began to execute on the change program. Now let me turn to our earnings per share and free cash flow performance. I will also update you on our capital structure. Starting with earnings per share, adjusted EPS increased by 17 cents to 54 cents per share in the fourth quarter. The increase was mainly driven by higher adjusted EBITDA, partially offset by higher income taxes. Currency had a 1-cent positive impact on adjusted EPS in the quarter. Let me now turn to our free cash flow performance. For the year, we finished the year on a very strong footing and significantly exceeded our forecast, thanks to strong collections in Q4. This strong performance also reflects the resiliency of our customers and their ability to successfully manage their businesses and practices despite COVID-19 impacts. Reported free cash flow was $1.3 billion, or $2.67 per share, and was better than the $2.40 per share we had forecast at our December 2018 Investor Day, a great achievement. The $1.3 billion in 2020 compares to $159 million in the prior year period, an improvement of nearly $1.2 billion. Consistent with previous quarters, this slide removes the distorting factors impacting free cash flow performance. Working from the bottom of the page upwards, the Refinitiv-related component of our free cash flow was better by $147 million from the prior year period. 2019 included residual payments for employee costs and tax expenditures related to the operations of our former F&R business, and in 2020, we made $95 million of payments for separation costs incurred in 2019 related to our transformation program. And in the prior year period, we made a pension contribution and other payments totaling $746 million, primarily related to the Refinitiv transaction. So if you adjust for these items, comparable free cash flow from continuing operations was $1.3 billion, approximately $230 million better than the prior year period, primarily due to higher EBITDA and lower income taxes. A quick update on our capital structure and liquidity. As you can see, our capital structure and liquidity position remained strong as we exited 2020. We generated $1.3 billion of free cash flow last year. We had $1.8 billion of cash on hand at December 31st. We have an undrawn $1.8 billion revolving credit facility, and we also have a $1.8 billion commercial paper program. From a liquidity and capital structure standpoint, we enter 2021 in a very strong position, and we would like to put that capital to work. We have a pipeline of potential acquisitions within our core markets, but as we all know, a transaction requires a willing buyer and seller, and we will see where the discussions lead. We do have the ability and desire to move quickly if an opportunity presents itself this year. Let me also note we have completed the repurchase of 200 million common shares under the normal course issuer bid which began in January. We do not currently intend to repurchase additional shares in 2021, as we have set a target to maintain approximately 500 million common shares outstanding. And lastly, we recently received notice we will have to pay the UK tax authorities $90 million in March related to an ongoing tax dispute. We expect to receive additional notices in 2021 to pay as much as an additional $600 million to $700 million. While we believe we will prevail on these issues and be refunded substantially all of the payments, we are required to pay the disputed amounts upfront while contesting them. The largest portion of these issues relate to our F&R business which was divested in 2018. Any payment made by us would not reflect our view on the merits of the case because we believe our position is supported by the weight of law. We expect our existing sources of liquidity will be sufficient to fund any required payments. As a final note, the majority of these potential payments will be recorded in discontinued operations and will not impact our free cash flow. And finally, I am pleased to report today we announced a 10-cent, or 7%, annualized dividend increase to $1.62 per share, the largest increase since 2008. This marks the 28th consecutive year of annual dividend increases for the company. The increase will be effective with our Q1 dividend payable next month. These annual dividend increases speak to the solidity of our business and consistent and growing free cash flow generation, even during unprecedented times like 2020. Now an update on our investment in Refinitiv. The agreement to sell Refinitiv to the London Stock Exchange Group closed on January 29th, and we are confident Refinitiv has found a good home with LSEG. We look forward to a mutually beneficial relationship as a shareholder and a board member. The pre-tax value of our 82.5 million shares is currently $11.2 billion, or $23 per share in TR stock price, up from $6.7 billion, or $13 per TR share, at the time we announced the transaction in July 2019. We plan to sell shares equivalent to $1 billion and will use the net proceeds of $750 million to pay $700 million in taxes related to the transaction in 2021. Our future equity interest in LSEG will represent a store of value which can be monetized over time and will provide us a significant level of financial flexibility. We expect to receive annual dividends from LSEG of about $75 million per year based on LSEG's current annual dividend payout. Lastly, regarding the accounting treatment for our ownership interest, we will account for our indirect interest in LSEG at fair value each reporting period based on the price of LSEG stock. We will remove the impact from non-IFRS measures because we own the investment indirectly through a joint entity with Blackstone. The impact will be reported through the single line item share of post-tax income and equity method investments. We will include dividends from the investment as part of our free cash flow. Now let me turn to our outlook from 2021 through 2023. As we look to 2021, I will first speak to our total company organic revenue growth forecast. We expect organic revenue growth for 2021 to range between 3% and 4%, returning to pre-COVID-19 organic growth rates. We believe we can build upon 2021 growth with organic growth of 4% to 5% in 2022 and 5% to 6% in 2023. We forecast The Big Three organic revenues to grow between 4.5% and 5.5% in 2021. Let me provide some additional color on how we expect each segment to drive the overall acceleration. We will share more at our upcoming Investor Day on March 16th. Starting with Legal, we finished the year with strong sales momentum, which should lead to an acceleration in organic revenue growth in 2021. Our confidence stems from several items. First, the continued success of Westlaw Edge, as we ended 2020 with 52% ACV penetration and expect this to increase to between 60% to 65% in 2021 while continuing to command an attractive premium. Second, our government business is in a strong position in a rapidly growing market, evidenced by its nearly double-digit organic growth in 2020. We expect a similar performance in 2021. And third, products and workflow tools such as HighQ and Practical Law continue to see increased demand given their productivity, collaboration, and efficiency benefits with legal professionals. In summary, we are confident we will see continuing improvement in Legal's organic revenue growth rate in 2021. The Corporate segment is expected to build on its 2020 growth rate of 5% as transaction revenues improve over 2020. And finally, we forecast Tax and Accounting will again achieve solid organic revenue growth, fueled by continued growth in our UltraTax, Audit, and Latin American businesses. Finally, we expect Reuters News to grow low single digit, driven by improvement in our Reuters Professional business, which provides news, analysis, and events for decision-makers. And we expect Global Print revenues to decline between 4% and 7%. We have not traditionally provided quarterly guidance but did so last year due to COVID. We are also providing guidance for the first quarter since the impact of COVID is still with us. We want to provide greater clarity regarding expectations. We believe our first quarter revenue growth will be the low point for the year. Starting with the total TR chart on the top left, we estimate first quarter total revenues and/or organic revenues will grow between 1.5% and 2.5%, negatively impacted by Global Print. The Big Three total revenues are forecast to grow 4% to 5%, and organic revenues are forecast to grow 3.5% to 4.5% in the first quarter. And we anticipate the first quarter will be the low watermark for Legal Professionals organic growth for the year at between 3% and 4%. Moving to Reuters News, we forecast first quarter total revenues and organic revenues to be between -1% and 1%. The events team is currently holding all events virtual. We continue to assess when we can resume in-person events based on the local health experts' advice and feedback from our customers. Finally, Global Print first quarter revenues are expected to decline between 13% and 15%. This is partially due to an expected continuing delay in shipping some print materials. We continue to believe these print materials are viewed as critical content by law firms and government agencies. Overall, the first quarter does not reflect what we expect for the full year, evidenced by our total and organic revenue growth guidance of 3% to 4% for 2021. Turning to our adjusted EBITDA margin and free cash flow, our guidance in 2021 reflects the diluted impact of the change program investments. Adjusted EBITDA margin is forecast to range between 30% and 31%. Excluding the change program investment, the adjusted EBITDA margin would have been between 33% and 34%. Free cash flow is forecast to be between $1 billion and $1.1 billion. If we were to exclude the change program spending in 2021, underlying free cash flow would range between $1.2 billion and $1.3 billion. In 2022, we forecast we will begin to see the benefits of the change program, with higher revenue growth and cost savings helping to lift adjusted EBITDA margin to between 34% to 35% and free cash flow to between $1.2 billion and $1.3 billion. And in 2023, following the completion of the change program, we forecast the adjusted EBITDA margin will reach a record high between 38% to 40%, and free cash flow is forecast to range between $1.8 billion to $2 billion. Taking a closer look at our free cash flow growth, we forecast free cash flow per share in 2023 to range between $3.60 to $4.00, significantly higher than 2020's $2.67 per share, and we have several levers to pull to enable us to achieve that target. As you can see on this slide, bottom line, the changes we are implementing are intended to enable us to achieve record free cash flow per share in 2023. A little more on capital efficiency and effectiveness. Today, our capital to revenue ratio is 8.4%, down from 10% two years ago. There are three drivers we are focused on to drive further capital efficiency. First, we are scaling up machine learning, re-engineering underlying processes, and creating shared technology platforms to create a modernized technology approach across the organization. Second, we are simplifying the product portfolio and building world-class cross-product capabilities. And lastly, we are shifting our focus to a fewer number of higher-growth product categories. As a result, we anticipate CapEx as a percentage of revenue to be between 6% and 6.5% by 2023. Let me provide some guidance on the change program cost phasing. We anticipate approximately $300 million...

to 350 million of total Opex and capex change program spend in 2021. You can see on the slide the anticipated split of about 60% Opex and 40% capex, with about 115 million to 140 million total spend in the first half and 185 million to 210 million in the second half. We will continue to provide quarterly updates on our change program spend as we move throughout the year.

One housekeeping item to mention related to the expected variance between free cash flow per share and adjusted earnings as we look ahead. First, we expect our capital expenditures will be less than our depreciation and amortization by about 75 million to 125 million in 2021. There will be a quick impact to free cash flow due to the timing of the depreciation run-off. And second, there should be about 50 million to 75 million of miscellaneous items that impact the P&L but not free cash flow. We expect annual pension contributions to be lower than annual pension expense. In addition, there are expenses related to our Employee Stock Purchase Program and stock-based compensation that have no impact on free cash flow.

Let me now turn to our outlook. Given the size and scope of the change program, we think it is important to provide as much transparency as possible to enable you to track our progress. This is our detailed guidance for 2021, 2022, and 2023. It reflects our view we can achieve faster revenue growth, higher profitability, lower capital intensity, and significantly higher free cash flow as we benefit from transitioning to an operating company.

We are very excited and energized with the rollout of our change program. As always, success will require effective execution, but we are clear-eyed as to the work streams and deliverables required to meet our objectives. We are confident we can do so. As we have said, our goal is to transform Thomson Reuters into a leading content-driven technology company. When we are successful, Thomson Reuters will be built to consistently and sustainably drive strong operating and financial performance that builds value for shareholders for the long term. Let me now turn it back to Frank for questions.

Thanks very much, Mike and Steve. That concludes our formal remarks and presentation. Before we open it up for questions, I want to mention and reiterate what Stephen and Mike had said that we'll be hosting a virtual investor day on Tuesday, March 16th. That session will run from 8:30 in the morning till about 12:00 noon with presentations from our management team who will provide a more detailed discussion regarding our change program and they will also be highlighting our growth initiatives including the seven strategic priorities Steve had discussed. We'll be sending more information on the investor day later this week including a link to register for the meeting. So with that, I would like to open it up for questions. So if we could take the first question, operator, please.

Thank you. And ladies and gentlemen, if you wish to ask a question, please press one then zero on your touch-tone phone. You will hear an acknowledgement tone that you've been placed into the queue. You may remove yourself from queue at any time by repeating the one-zero command. If you are on a speaker phone, please pick up your handset before pressing the numbers. Once again, for any questions, please press one-zero at this time. And we'll go to the line of Tony Kaplan with Morgan Stanley. Please go ahead.

Thank you. I wanted to talk about the levers that you mentioned, the transitioning from a holding company to an operating company and from a content provider to content-driven technology company. I guess, do you see this as a significant change in culture at the company or do you think that just with the 500-600 million investment and new direction that you can get there? Just trying to understand what it means for turnover and for hiring, just anything on sort of that aspect. Thank you.

Got it. And just for a follow-up, you talked about bringing capex down to six to six and a half percent of revenue. I guess if you're becoming more of a technology-driven company, why is that the right level? I understand the main motivation is free cash flow and I appreciate that. Just wanted to understand if maybe the capex level needs to be higher than that on a sustainable basis. Thanks.

Yeah, Tony, Mike here. We've had a lot of debate and discussion internally. One data point that I would share with you that we have worked on a lot with Kirsty Wallace, David Wong, and others is currently about 33% of our capital is spent on keep the lights on, more of the legacy. We think over time, which we'll discuss more at the investor day, we can decrease that to in the 15% range. What that actually means is that we can decrease our absolute level spend 20%, but actually spend more on our product development. So ultimately that's where our focus is, is deploying our capital to the growth initiatives. Right now we're spending an exorbitant amount on the KT portion of our business. So that's where we see it. Certainly as opportunities arise going forward, whether it be organically or inorganically, we won't be shy if we think there's a customer need to meet there. But that's how we modulated that six to the 6.5, Tony, is really that driver on keep the lights on in the legacy.

Thanks so much. Yeah, thanks very much. Good morning. Just to broaden Tony's question out a little bit, maybe for you Steve, your 2023 outlook is well above I think forecasts out there, certainly above what Thomson has done historically. What gives you confidence that you can kind of pull this kind of lift up in the business? And the follow-up from Mike, you've architected a lot of restructurings and carve-outs at Thomson over the years. Can you just size this one up in terms of complexity and achievability? Thank you.

Mike here, Drew. I'll compare the '21 to '23 change program to what we did in 2018 to 2019. Back in 2018 and 2019, we had three primary vectors or goals. One was to eliminate the stranded cost pre-divestiture of F&R. We had 280 million of corporate cost and we're down to roughly 130 million in 2020, so we accomplished that. Our second goal back in 2018 was to separate from Refinitiv, and thanks to a hell of a lot of work from Stuart Bont, John Lions, Rob Newsmith, and many, many others, Kim, we are largely complete with the separation. So I think you put two check marks there. The third element of the 2018 initiative was really to advance our efforts in regards to digital and then also our lead-to-cash, really consolidating multiple systems internally to improve the customer experience. We still have more work to do on that third one. What makes the current change program different for me, Drew, is the really, really intense focus on improving the end-to-end customer experience, which I believe will improve our NPS. Currently, our net promoter score is significantly below the B2B industry average, but our goal is not to get to the industry average, it's to far exceed that. And as we improve the NPS and the customer experience, I'm quite optimistic we'll be able to accelerate our revenue. And to Steve's point earlier and to Tony's question, the pivot to the operating company I think will yield some efficiency for us along the way. Last point I would make, Drew, is in regards to confidence level. I think I and the full team, the Thomson Reuters team, learned a hell of a lot in the last 12 months with COVID, especially in regards to what's possible. That might sound very basic, but a lot of things that we accomplished in the last 12 months, I'm not confident we would have unfortunately without COVID, because it really eliminated some of the myth-busters within our company and I'm sure in the economy overall. So my confidence and conviction is quite high, Drew, and I think on March 16th you'll hear from 10 additional colleagues. We'll go deeper into the story.

Yeah, thanks very much. Just looking at the dividend, if we take the new dividend of $1.62 and the midpoint of the 2021 free cash flow guidance, it's obviously a bit of an elevated payout ratio at 77%. But if we just assume that's now the new normal and you increase it 7% each of the subsequent two years, you'd be back to just under 50% by my math on your 2023 guidance. So I just want to make sure you can level set us on that. Is 7% some sort of one-off catch-up dividend increase or should we take this as a signal of what you think the dividend growth potential is for the next couple of years as you go through this cycle?

Yeah, several points there, Vince. Your math is correct. Our payout ratio for '21 and '22 will be above our target of 50 to 60%. We had discussions with our board regarding 2021. We set our dividend increases in January of each year with board approval. So your first point, your math is correct. As we go into 2023, based on our target stance, we will be below that 50 to 60%. The 7% is not a fixed target. As we go forward, we'll assess that on an annual basis going forward as we did in 2021. But based on the current targets, Vince, for 2023, we would certainly have some optionality there.

Okay. And just to clarify on taxes, the money you're talking about, 90 million soon and then another 600 to 700 million owed in the UK, is that a separate amount from the 700 million on the LSEG transaction?

Yeah, Vince, good question. Let me break it down. It's two separate categories of payments. First, in regards to the London Stock Exchange, the 700 million is due on the closing of the transaction. That's the portion that's not tax referable. That was related to the TradeWeb piece. So that's the first piece. The second piece relates to some disputes we have with the UK HMRC. And the majority of that, actually, Vince, relates to our divestiture of the Intellectual Property and Science business and also the F&R business. But it's two separate items. The first piece, Vince, in regards to the LSEG transaction, would not be refunded, we believe. On the second piece, we'll have to advance it just due to the UK tax regulation, but in our viewpoint, we will be refunded the majority of that because we think we have a very strong position. We have multiple external advisors and they have the same strong view as us.

Hey guys, good morning and congratulations on announcing the program. I'm sure there'll be more detail at the investor day, but I'd love some more detail on two areas. First, where does the 600 million of cost saves come from? Can you bucket some of the key buckets, the numbers? And then what are the key things to drive the revenue acceleration? I see focusing on the seven product categories you mentioned, SMB several times, but can you break down some of the key factors? Thank you.

Yeah, Gary, there are multiple pieces there. I'll start and ask Steve to supplement. First, you didn't ask the first part that I'm going to mention, Gary, but it might be helpful for the overall audience. The 500 to 600 million investment, we break that down into three tranches. First is in regards to the omni-channel digital SMB. That's the first third. The second third relates to what we call modernized technology and operations. Some of you will be familiar that at the end of 2020, we had completed the majority of our cloud migration with the exception of our data center in Eagan, Minnesota, outside Minneapolis, and then we have a few small leased data centers around. So that will be a big objective for us as we work through with Andy Martens, Paul Fischer, and the legal group along with Kirsty and David. And then the third tranche is organization and location. So a third, a third, a third in regards to the actual investments. In regards to your question on savings, multiple categories there as we work through it. Certainly attrition will be a portion of that as we work through it. As we pivot to the operating company, we think there is a lot of opportunity within product, technology, editorial, because we have a lot of legacy acquisitions that we still have not fully integrated and we think we will be able to be more efficient with those parts of the business. And then lastly, I would mention sourcing, procurement as a category, and then real estate. If you go back six or seven years, we had over 500 office locations. We're down to 100 now. Mir Ali Fusk, our chief people officer, has done a wonderful job in the last 12 months evolving our workplace of the future and really the workplace of today. So a lot of key learnings there that will help us continue to optimize our footprint as we move forward. Let me pause to see if Steve wants to add anything to that before I go to the revenue piece, Gary.

Yeah, Gary, I'll start on the revenue piece. I'm sure Steve wants to supplement. The first word I'm going to use, Gary, is focus. And that might sound incredibly basic, but around July 1st of 2020, we had Elizabeth Beastrom. Elizabeth is our president of the global print business, but we asked her to double hat and lead our Practical Law business, which is a product used by our legal professional customers and also our corporate customers. And I think with the focus that Elizabeth has put on this in the last eight months, not just Elizabeth but Elizabeth and the team, we have also now began to apply that to our indirect tax with Silla Pida, our new president of the corporates business. So focus, I'll mention first. Let me get a little bit more tactical, Gary. NPS, our retention is already 90%, but we're quite optimistic that we can continue to improve our retention as we move forward. As you know, each percentage point on retention is roughly 50 to 60 million for us. And then pricing, I think as we improve our customer experience, we can maintain the pricing that we currently experience, which is about 3% overall, which varies by segment for us. David Wong with product innovation, I think we're just scratching the surface with our product innovation. Charlie Claxton recently joined David's team as head of our design, and we'll continue to add more talent within our product area. And then I think upsell and cross-sell. Cross-sell, you've been hearing us discuss that for a while now. I think as Kirsty Roth and others help us with our internal systems, which we're making progress on, that will make it easier for Brian Pell's sales organizations, Michael Fredenberg with InPrinters, to really cross-sell and support our customers. So those are some of the areas, not to mention SMB. As you know, Gary, about a third of our business today comes from small firms, but we think we have the opportunity to drive further reach within SMB. I'll pass to Steve.

Yeah, Gary, if I could just add one additional point. I know you were focused rightly on the organic side, but as I mentioned in my remarks, we have the ability and desire to deploy capital when the opportunity is right for our customers and for our shareholders. As you know, we have about 700 million of the two billion reinvestment fund that we set aside a couple years ago with the Blackstone transaction. So we'll continue to look, Gary, for opportunities to supplement the organic items that Steve and I mentioned with inorganic opportunities.

Great, thanks so much and congratulations. Mike, this might be better suited for Mike, but I think one of the underappreciated parts of this initiative is how much better positioned you are internally from an operational perspective. And maybe just compare and contrast the transition away from Refinitiv back in '18, because I feel a key part of it is just management's ability to execute given a much more streamlined business. If there's anything you can call out there just as you put this plan together, because I think that's a more subtle point that really increases the probability of success as you engage these next couple of years.

Yeah, Kevin, I'll just add one small item. In addition to F&R, now with LSEG, the amount of time all the colleagues that I mentioned had to spend on the separation, but there's more time that we can really focus on building our products. Now we tried to kind of ring-fence that group as much as possible, but we can now deploy those funds and resources to building and accelerating new products and capabilities.

Super helpful. And then just with retention at 90%, kind of where do we think we can get that to? And then if this is a third, respect you can't answer, but the new product innovation, the 200 million, is that in the organic target? Would that be something in addition as you execute on that?

Let me break it down first. In regards to retention, Kevin, I think we'll get a better feel with the investor day. Certainly we feel like we can get a percentage point as we move forward. We have a lot of customer pain points that we are addressing. We're very straightforward with our customers in that regard. And then as we continue to add more and more capabilities, you're very familiar with all the work that Andy Martens, Mike Dineen has done on Westlaw Edge. Just illustratively, and Charlotte Rusignan in tax and accounting professionals is now working on an initiative that she'll discuss. So I wouldn't be surprised, Kevin, if we can get another percent lift, but we'll closely monitor that and keep you up to date as we move forward. And then, Kevin, in regards to the revenue lift from the change program, that is reflected in the targets that we provided today.

Good morning, thanks for taking my questions. My first question is on the software and services component. I think Mike, in the past, you've been kind enough to give us a breakdown as to what that component was in some of the key divisions including legal and also on a consolidated basis. As you look to your 2022 and '23 targets, is there a number or a percentage you have in mind as to where that would transition to? And as my follow-up, with respect to the 600 to 700 million in tax on the disputed item, I know you talked about 90 million in Q1. Is there any sort of color as to how the remainder would phase out? And I apologize if I missed the commentary on that. Thank you.

Yeah, let me take the second question first. The 90 million we estimate would be paid in Q1 of this year. And then the 600 to 700 million estimate that I referenced, if we're still contending that, if paid, it would be Q3 of 2021. While we're on the topics of tax, the tax associated with the LSEG transaction, Orenda, those would be paid quarterly, April 15th, June 15th, September 15th, December 15th. Just from a timing perspective, all of these items are factored into our liquidity forecast for the full year. Let me just provide some grounding on the software and content, and I'll ask Steve to share his thoughts perspectively. Today, if you look at the legal business, about 30% estimated is software. Within corporates, about 60%, and in tax about 75%. So for total TR, looking at about 40% software. So Steve, share his thoughts perspectively.

Hi, thanks. Good morning. You mentioned that your 500 to 600 million in investment breaks out into three tranches: the omni-channel SMB, modernization of tech and operations, and the broader organization. Can you talk a little bit more about these initiatives within the tranches and how this compares with where your seven strategic investment priorities fall?

Sure, I'll start and then ask Steve to supplement. First category, I'm going to call it more of the go-to-market, which includes smaller customers, more digital self-serve and SMB, and the omni-channel. At the heart of that, George, is addressing our internal systems. We, as you know, have had many acquisitions over the years, so we're looking to consolidate the many disparate systems that we have today into as few as possible. What that does is improves our operational efficiency, but more importantly, it improves the sales go-to-market team's efficiency because they're dealing with fewer systems day-to-day. They get the full view across total TR in regards to the cross-sell that we mentioned earlier. Also within this is SMB. We're building the case capabilities. I mentioned Kirsty earlier and David. Karen Stout, chief digital officer, is working on this. We have about 500,000 customers today. That number has been fairly constant over the last few years. We think these SMB capabilities will allow us to attract and retain additional new customers as we move forward. The second tranche, in regards to modernizing our technology and operations, Kirsty, Sean Malhotra, and David Wong will discuss more at our investor day. I mentioned earlier the cloud migration, but we have some more older underlying editorial-type technology that we're in the process of investing in in the next two years that will accelerate our time to market. And then lastly, on organization and location, in different parts of the organization now we might have, for example, call centers or in finance, different areas that are kind of repeated multiple times. As we pivot to the operating company, we'll be able to have leverage there. And I mentioned the locations a few minutes ago.

Very helpful. And then just as a follow-up, you mentioned that organic revenue growth should reach 6 to 7% in the big three by 2023. Can you break out what that growth might look like within legal, tax and accounting, and corporates? Assumptions there that's included in that target?

George, we'll go deeper on that with the March 16th investor day. Paul Fischer will cover legal, Charlotte Rusignan tax, and Brian and Aon will cover the corporates. But we'll share more on that then, George.

Thank you. Good morning. Just to follow up slightly there, on a high level, that 6 to 7% growth rate, like how much of that is market growth that you're assuming? Because you compared the transition or the evolution to F&R before, and one of the problems I think was the market at F&R. And our impression has always been legal is a tough market as well. So I was just curious how you guys have factored what the market growth looks like or is this all innovation-driven?

Manav, once again, we're going to hear more about this from the segment presidents on March 16th. We've certainly updated our total addressable market data. And as we kind of triangulate what we see from a market growth perspective to our internal estimates, it's fairly consistent. Once again, we'll share both the TAM estimates by sub-segment along with our estimates of the big three that George just asked about on March 16th. But from our viewpoint, there's pretty good symmetry in regards to the TAM estimates that we see and then also the internal. There are some deviations. If you look at a Westlaw product that has really, really strong presence in the market, and then some of our earlier products that are in the earlier stages may not be a huge growth contributor today, but we see a lot of upside going forward. But we think we have good symmetry between our internal estimates, Manav, and then also the TAM estimates.

Okay, fair enough. I'll wait for that in the investor day. And then the other question I had was, this obviously seems like a pretty big organic lift, but I think along the way you mentioned a few times that you still want to do deals. And I was just curious what the capacity there is. I'm guessing these are all small deals or is there capacity to integrate a large deal amidst all this change going on?

I was going to a similar reference. Execute the change program like hell. I mean that's our first, second, third priority. And then we have the capacity to make an acquisition, smaller, mid-size acquisitions, if it's the right time and also meets our customer needs is the way I view it. But the 700 million that I referenced earlier that remains from the two billion original investment fund, obviously our capacity far exceeds the 700 million, but we don't have an urgency to put it to work. We will put it to work at the right time for our customers and shareholders.

Operator, I think we have time for one more question.

Thank you. Our final question will come from Doug Arthur with Huber Research. Please go ahead.

Yeah, thank you. Steve, in terms of the addressable markets that this transformation is targeting, is this kind of a dual track? You think your large, for instance, legal companies, the COVID issue has dramatically changed the way they will work going forward, so this is meant to address that. But it seems on the same vein that this is all about expanding the market into SMBs and really growing that customer base. I'm just trying to get a sense of priority.

Great, thank you. Thanks, Doug. Thanks everyone for joining us today. That will conclude our call. If you have any follow-up questions, feel free to reach out to me. As I mentioned, we will be sending out a notice regarding our investor day on March 16th later this week. If you do not receive that for some reason or other, you're not on our distribution list, please reach out to me. We'll make sure we get it to you. And we look forward to sharing more with you three weeks from today. Thank you.

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