Thomson Reuters Corp /Can/ Q1 FY2024 Earnings Call

Good day, and welcome to the Thomson Reuters First Quarter Earnings Call. As a reminder, today's call is being recorded. At this time, I'd like to turn the call over to Mr. Gary Bisbee, Head of Investor Relations. Please go ahead.

Thank you, Maddie. Good morning, and thank you all for joining us today for our first quarter 2024 earnings call. I'm joined today by our CEO, Steve Hasker; and our CFO, Mike Eastwood, each of whom will discuss our results and take your questions following their remarks. To enable us to get to as many questions as possible, we appreciate it if you'd limit yourself to one question and one follow-up each when we open the phone lines. 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. We believe this provides the best basis to measure the underlying performance of our business. Today's presentation contains forward-looking statements and non-IFRS financial measures. Actual results may differ materially due to a number of risks and uncertainties discussed in reports and filings that we provide to regulatory agencies. You may access these documents on our website or by contacting our Investor Relations Department. Let me now turn it over to Steve Hasker.

Thank you, Gary, and thanks to all of you for joining us today. With many of you having spent several hours with us at our Investor Day in March, we plan to keep our remarks today concise and focused on our first quarter results. 2024 has started out on a strong note, with revenue and profits exceeding our expectations. Total company organic revenues rose 9% with the Big 3 segments growing by 10%. In addition, strong revenue flow-through boosted margins, driving a healthy profit beat. To incorporate the Q1 upside, we are raising our full-year 2024 revenue outlook and now see organic growth in a range of 6% to 6.5%, including 7.5% to 8% for the Big 3 segments, up from our prior outlook of approximately 6% and 7.5%, respectively. While we are pleased with the strong start to the year, I would caution that the revenue upside was driven largely by transactional revenue and strength from seasonal offerings, which are unlikely to recur at this level through the remainder of the year. Mike will provide additional detail on our outlook in a few minutes. At our March 12 Investor Day, we discussed our innovation focus and why we are confident in our outlook for future revenue growth acceleration. As part of that discussion, we highlighted two important market dynamics that are providing what we expect to be long-term demand tailwinds for our business. The first is the rising complexity of regulatory compliance, and the second is generative AI. We believe our portfolio is uniquely positioned for these tailwinds, and we continue to invest heavily in innovation and our product roadmap as we seek to play a larger role in the success of our customers. These efforts are contributing to the growing product momentum we see from many areas in our business. Our capital capacity and liquidity remain a key asset that we are focused on deploying to create shareholder value, and we have made good progress on this during the first quarter. In February, we raised our 2024 annual dividend by 10% to $2.16, we successfully acquired Pagero for approximately $800 million, and we repurchased approximately $350 million of our shares. Year-to-date, we have also sold approximately 11.7 million shares of the London Stock Exchange Group, generating gross proceeds of $1.4 billion. Looking forward, we remain committed to a balanced capital allocation approach and we continue to assess additional inorganic opportunities. Now to the results for the quarter. Our first quarter organic revenues grew 9%, improving from 7% in the fourth quarter of 2023. Organic recurring and transactional revenue grew 9% and 22%, respectively, while print revenue declined 10%, in line with our expectations. Reported revenue grew 8%. Adjusted EBITDA increased 19% to $806 million, reflecting a 390 basis point margin improvement to 42.7%. The margin expansion was driven by strong revenue growth and the timing of certain expenses. Adjusted earnings per share grew 30% from the prior year period to $1.11. Turning to the first quarter results by segment. The Big 3 businesses delivered 10% organic revenue growth, an all-time high and up from 8% in the fourth quarter of 2023. Legal organic revenue grew 7%, driven by continued generative AI momentum in Westlaw Precision and CoCounsel. Demand for our key offerings remains healthy, led by Westlaw, Practical Law, CoCounsel, HighQ, and strong performance in our international markets, partially offset by lower growth at FindLaw. Corporate's organic revenue growth was 12%, up from 7% in the fourth quarter and well ahead of our expectations. Organic recurring and transactional revenue grew 11% and 16%, respectively. Very strong seasonal revenues were a key driver, with the inclusion of Pagero also boosting growth. Trust, Indirect Tax, Practical Law and our international markets were key growth drivers in the first quarter. Tax & Accounting organic revenues grew 14%, driven by recurring and transactional growth of 14% and 15%, respectively, strong seasonal demand for tax and audit products and an easier comparison boosted growth. And our Latin American operations, UltraTax, SurePrep, and Confirmation were all key contributors. Reuters News organic revenues rose 17%, driven as expected by generative AI-related content licensing revenue that was largely transactional in nature. Excluding this, Reuters revenue grew modestly, driven primarily by the news agreement with the Data & Analytics business of LSEG. Lastly, Global Print organic revenues met our expectations, declining 10% year-over-year, impacted by the migration of customers from a Global Print product to Westlaw, which we discussed last quarter. And in summary, we're very pleased with the strong start to the year. Let me now hand it over to Mike to review our financial performance.

Thanks, Steve. Thanks again 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 first quarter revenue performance for our Big 3 segments. Organic revenues improved sequentially from 8% to 10% in the first quarter, a new high watermark for the Big 3. Total revenue rose 9%, including the impact of acquisitions and divestitures. Legal Professionals organic revenue grew 7%. Key drivers from a product perspective remain Westlaw, CoCounsel, Practical Law, HighQ, and our international businesses. Government grew 6% in the quarter, while FindLaw remains a headwind to the segment growth rate. Legal Professionals revenue growth also included a benefit of $4 million due to migrating customers from a Global Print product to Westlaw, as I previewed last quarter. In our Corporate segment, organic revenues grew 12%, improving sharply from 7% in recent quarters. Recurring revenue grew 11%, while transactional was up around 16% year-over-year. Several factors drove the improvement. Seasonal offerings contributed significantly, especially ONESOURCE tax information reporting within Trust and to a lesser extent, Confirmation. The inclusion of Pagero added roughly 30 basis points to organic growth. Indirect Tax, Practical Law, and our international segments all delivered strong growth. While this was clearly an encouraging result, there was a bit more than 2.5% contribution from items we see as unlikely to recur beyond Q1, including outsized tax information reporting revenue and select comparison favorability versus the first quarter of 2023. For Q2, we expect a return to growth rates closer to the 2023 trend than the first quarter level. Tax & Accounting also had a very strong quarter, growing 14% organically. Recurring and transactional revenue grew 14% and 15%, respectively. Seasonal revenue strength from SurePrep and Confirmation, along with continued robust growth from our Latin American businesses, were key drivers. In addition, we faced an easier comparison as Q1 of 2023 included a minor revenue reserve that we called out last year. This benefited the segment revenue growth rate by nearly 2% this quarter. Moving to Reuters News. Organic revenue increased 17% for the quarter, driven primarily by transactional revenue from additional generative AI content licensing agreements as we had previewed last quarter. Excluding this revenue, Reuters organic revenue increased approximately 3%. Lastly, Global Print organic revenues declined 10%, or 6% when excluding the impact from the revenue shift to Legal Professionals I mentioned earlier. This was in line with our expectations. On a consolidated basis, first quarter organic revenues grew by 9%. In total, the seasonal strength, which is unlikely to recur beyond Q1, along with the Reuters transactional content licensing revenue and select comparability items I mentioned, contributed approximately 2% to Q1 revenue growth. Turning to our profitability. Adjusted EBITDA for the Big 3 segments was $716 million, up 15% from the prior year period with a 45.8% margin. Segment margins rose nicely across all Big 3 segments, driven primarily by strong revenue growth and the timing of expenses. We expect technology, product, and acquisition integration spending to increase in the second quarter versus the Q1 spend level and persist at a higher level through the remainder of the year. Moving to Reuters News. Adjusted EBITDA was $60 million with a 28.3% margin. The significant profit increase from the prior year period is largely attributable to the revenue flow-through from the aforementioned generative AI content licensing deals. We expect margins to return to more typical historical levels for the remainder of the year. Global Print's adjusted EBITDA was $47 million with a margin of 38.2%. In aggregate, total company adjusted EBITDA was $806 million, a 19% increase versus Q1 2023. Turning to earnings per share. Adjusted EPS was $1.11 for the quarter, up 32% from $0.84 in the prior year period. The increase was mainly driven by higher adjusted EBITDA and a lower share count. Currency had no impact on adjusted EPS in the quarter. Let me now turn to our free cash flow performance for the first quarter. Reported free cash flow was $271 million, up 101% from $133 million in the prior year period. Consistent with previous quarters, this slide removes the distorting factors impacting our free cash flow. If you adjust for the discontinued operations component of our free cash flow and change program payments of $63 million in the prior year period, comparable free cash flow from continuing operations was $272 million, up $78 million year-over-year, primarily due to higher EBITDA. We continue to successfully monetize our stake in the London Stock Exchange Group. In the first quarter, we sold 10.1 million shares for $1.2 billion of gross proceeds. This includes 7.5 million shares sold in a March block trade and 2.6 million shares sold through exercised call options. Yesterday, we sold an additional 1.6 million shares for gross proceeds of approximately $175 million. Following these sales, our remaining stake is 4.3 million shares, which are eligible for sale in Q1 2025. Our tax basis on the remaining shares is approximately $100 million. For your math, we would assume a 25% capital gains tax rate on gains above $100 million. I will conclude with our updated 2024 outlook. As Steve outlined, we are increasing our 2024 total and organic revenue growth outlooks for TR and the Big 3 to incorporate the first quarter upside. We now see total revenue growth of 6.5% to 7%, up from approximately 6.5%; organic revenue growth of 6% to 6.5%, up from approximately 6%; total Big 3 revenue growth of 8% to 8.5%, up from approximately 8%; and organic Big 3 revenue growth of 7.5% to 8%, up from approximately 7.5%. We are maintaining other 2024 guidance metrics, including adjusted EBITDA margins of approximately 38% and free cash flow of approximately $1.8 billion. I would note that our full-year effective tax rate outlook remains approximately 18%, despite the first quarter coming in at 19.1%. We expect tax developments later in the year will bring the full-year rate down to 18%. For the second quarter of 2024, we see organic revenue growth of approximately 6%, with the growth rates for our Corporates, Tax & Accounting, and Reuters segments moderating as the Q1 seasonal strength wanes and above-trend transactional growth rates return to more typical levels. We see a Q2 adjusted EBITDA margin of approximately 36%, reflecting an uptick in the pace of investments we are making in product, infrastructure, and acquisition integration. Let me now turn it back to Gary for questions.

Thank you. Maddie, we're ready to begin the Q&A.

We will take our first question from Drew McReynolds with RBC.

So obviously, a very strong quarter, one of the strongest I can ever recall. And obviously, Steve and Mike, in your comments, you're careful not to kind of indicate this is recurring clearly. But certainly, there's a lot of good things happening here. So I guess, the question, as you look out for the remainder of the year, when you think about the underlying business, excluding the year-over-year comps, the seasonality, the Reuters News impact, et cetera, relative to where you were a couple of months ago, where are you a little bit more optimistic on the trajectory of the Big 3 in the core business? And where are there still some kind of sources for caution?

Drew, thanks for the question. It's Steve. Look, I think the headline for me is cautious optimism. We're pleased with the start to the year. I think it sets us up to continue our investment program and look for opportunities to better serve our customers. But it is only one quarter. And so we're pleased with the start, but we're not going to sort of declare victory just yet.

Drew, I'll add a few additional items. As a reminder for everyone, Q1 is our smallest sales quota for the year, with Q4 being the largest, which reflects kind of tempering our level of enthusiasm after the first quarter. It's a question, kind of, Drew, is what do you have to believe for continued strong revenue performance. Very consistent with the Investor Day, I would highlight four items. Number one is our generative AI acceleration, which we've consistently stated we expect to accelerate in the second semester of '24 and then as we go into 2025. I think about that generative AI acceleration as pace acceleration in the sequencing given the upcoming product releases we have with generative AI. The second area is retention. We continue to be approximately 91% for total TR. The third area that we're focused on is in regards to the recent M&A. We're very pleased where we are today. But if you think about sustaining the pace of organic growth and accelerating over the time horizon, M&A is a key factor. And then the fourth area would be pricing. So I think those were the four areas, Drew, that we continue to focus on as we look over the time horizon.

We will take our next question from Aravinda Galappatthige with Canaccord Genuity.

One thing that obviously jumped out, including on Investor Day, was sort of the breadth of your new product development pipeline. Maybe, Steve, it would be helpful to sort of focus us on sort of the main new initiatives on that front that we should be thinking about in terms of what can sort of really materially push the organic number up. I mean, is it sort of the Drafting product? Is it sort of the CoCounsel sort of going across to the other professions? Maybe just sort of help focus that, so that we know what exactly to be watching more closely.

Yes, Aravinda, thank you for your question. As you know, we have ambitious plans for product development and innovation this year and beyond. We've entered a new phase in terms of our goals and our ability to provide new products that enhance our customers' professional lives, making them easier, more productive, and ultimately more successful. To answer your question, our focus is well-rounded across various products. While this may not simplify things for you, our main area of emphasis so far has been in Legal through our Westlaw generative AI and Practical Law generative AI, along with upcoming enhancements in intelligent drafting and the ongoing investment in CoCounsel, which we plan to integrate as our AI capability across all products. Initially, we have been customer and market-driven in the Legal sector. However, we also have a strong initiative in accounting, audit, and tax with Checkpoint Edge, AI assistant research, and integration efforts with ONESOURCE and Pagero, along with modernizing UltraTax and Virtual Office. Additionally, under Elizabeth Beastrom and Dave Wyle's leadership, we are investing in the audit space. Lastly, we will move CLEAR to the cloud, modernize it, and ensure it is FedRAMP compliant. It's shaping up to be a very busy year. The good news is that we are not overly reliant on any single product achieving extraordinary success; we believe all of them will bring value to our customers. All are receiving positive feedback, especially those that have already launched. Overall, it's a diversified story. Mike, would you like to add anything?

That's a great summary, Steve.

A quick follow-up for Mike. I know that in the prior calls, Mike, you've clarified that the weighted average price increase was about 3.5%. I just wanted to confirm we're looking at a similar level this year. Is that correct?

Yes. Aravinda, very consistent in that range of 3.5%, maybe slightly higher as we progress during the year, but that's a good estimate.

We will take our next question from Manav Patnaik with Barclays.

I have a question regarding capital allocation. You've completed most of the buybacks that were authorized and increased the dividend. What should we expect on those two aspects? Additionally, regarding mergers and acquisitions, I know you have the capital. I'm interested in how you assess whether your team has the capacity to pursue more deals and the potential timeline for that.

Yes, I'm happy to start with that, Manav. Just to remind everyone, we increased our dividends by 10% in the first quarter of 2024, marking the third consecutive year of such increases. We take it one year at a time, but I would expect that we might increase dividends by another 10% in the first quarter of 2025 to manage expectations. Additionally, concerning our buyback strategy, the $1 billion NCIB share buyback announced in November 2023 is nearing completion, with approximately $850 million already executed. We are on track to finish this by June 30, as previously stated. Moving on to mergers and acquisitions, we have $8 billion of capital capacity available until 2026, and our immediate focus will be on identifying strategic M&A opportunities to enhance our portfolio and address customer needs. We're optimistic about our prospects in this area; however, we will maintain a rigorous and diligent evaluation process. Regarding your question about capacity for M&A, we have that capability. Over the past three years, we've expanded our team and resources, so financial and resource bandwidth are not concerns for us. We continuously evaluate our position, and we feel we are well-prepared.

Yes. To add to that, Manav, thank you for the question. If you examine the past 18 months and the $2 billion we've invested, it has been quite evenly distributed, which was not our intention. Our approach to pursuing M&A opportunities is not a democratic one. SurePrep has been a valuable addition to our Tax & Accounting division, led by Dave Wyle and his team. Pagero is involved in the corporate sector, focusing on invoicing for Indirect Tax, while Casetext, under Jake Heller and his team, is dedicated to their product offerings for Legal Professionals. As mentioned, we see a significant opportunity to leverage these capabilities across all major areas of the business, potentially even in the newsroom with Alessandra's leadership. Additionally, Imagen, our insurer, is aimed at enhancing Reuters, and Westlaw Japan is a valuable international asset. Overall, the integration of these acquisitions has been well-managed, thanks to Kirsty Roth and her operations and technology team. As we move forward, we will continue to maintain a high standard for acquisitions, avoiding any impulsive decisions, but we are confident that our teams are prepared and ready for the right opportunities.

Just one final comment, Manav. I think we've discussed this in the past with Adrian Fognini, who leads Latin America now more broadly, our international assets, we remain keen to expand our international footprint from approximately 20% of revenue today. And Adrian will lead the charge on that for us internationally.

We will take our next question from Vince Valentini with TD Cowen.

Mike, can I clarify my understanding of the seasonal nonrecurring boosts and how they affect this quarter and future performance? Am I correct in thinking that if there's a 250 basis points increase in the corporate sector and a 200 basis points increase from tax, the resulting revenue would significantly flow through to EBITDA? Could this be part of the reason why the margins were particularly strong in this quarter, exceeding the full-year guidance? I'll pause there for part A of the question.

Yes. If I could address these individually as you present them. Vince, your summary is very accurate. It provides great insight and a thorough overview.

Okay. So moving forward, I have a question regarding the results, which are strong. I want to ensure I understand correctly. Do you anticipate that the timing benefits will balance out by the end of this year? You've already provided guidance for Q2, and it seems like some of the margin benefits may diminish as early as Q2. However, regarding revenue, will it all return to normal by the end of the year, or does this indicate a more challenging comparison for year-over-year growth in 2025?

Yes, as we move through the year, I have provided the Q2 guidance for both revenue and EBITDA, and I remain quite optimistic. I will share more insights as we continue. We are pleased with the Corporates performance in Q1, and we are keeping an eye on the sales pipeline for Corporates. In previous quarters, we noted longer sales cycles, but we saw some improvement in Q1. We are cautiously optimistic about progress throughout the year and will keep you updated on revenue each quarter. Our EBITDA margin has been maintained, and we believe there are still opportunities for investment. Please remember that Q4 of 2023 included $18 million in generative AI revenue from Reuters, which makes year-over-year comparisons more challenging. There will be various factors to consider as we continue through the year.

We will take our next question from Heather Balsky with Bank of America.

I was hoping you could just help us understand the sequencing for Legal, both thinking about how you performed in 4Q into 1Q and how we should think about trends for the rest of the year and if there's any seasonality there. You posted, I think, a 6% organic, ex the print shift. Last quarter was 7%. I know there tends to be some noise just because of how you round the number. So I imagine that, potentially, the basis point delta is a little bit different than how it looks on paper. But can you help us understand the trends there? Was there any seasonality? Was FindLaw a bigger drag? And then the follow-up question there is specific to FindLaw, that's been a drag for some time. Anything you can do there to help accelerate that growth?

Sure, Heather, I'll begin and then Steve will add to it. If you compare Q4 2023 to Q1 2024 for Legal Professionals, both show organic growth of around 7%. However, Q1 2024 reflects a stronger 7% than Q4 2023, which is a crucial point to note. Additionally, in our Legal Professionals segment, while I won't detail every category, we often highlight Westlaw, Practical Law, CoCounsel, HighQ, and then we touch on Government and FindLaw. As mentioned earlier, Government had a growth rate of 6% in Q1 2024, consistent with recent quarters, addressing your question about FindLaw. FindLaw serves as a leading provider of marketing solutions and lead generation for attorneys and law firms, particularly focusing on solo and small law firms, generating around $300 million in annual revenue under Mark Haddad's leadership. This segment differs significantly from our primary research services like Westlaw and Practical Law. Mark and the team performed well in Q1, and we are hopeful for continued progress as we move into Q2 and Q3. However, we want to be clear about FindLaw, as our optimism regarding legal research offerings such as Westlaw and Practical Law is somewhat tempered by FindLaw's performance. Although we're observing solid development in FindLaw, it is not on par with the overall growth we are seeing from Westlaw and Practical Law. We believe this context is helpful. Looking ahead to Q2 and through Q4, we remain optimistic about incremental growth in Legal Professionals as a whole. And once again, it's important to note that Q1's performance is indeed a stronger 7% compared to Q4 of 2023. Steve?

Yes, Heather, I’d like to add that during our Investor Day, we expressed our strong belief that the growing complexity of regulatory compliance, along with advancements in generative AI, presents us with an opportunity to play a larger role in our customers' success over the next few years. Everything we observe today supports this belief. However, we also noted that the extent of this expanded role and the timeline for achieving it remain uncertain at this moment, and it still appears to be unclear a quarter later. As you can imagine, our Legal Professionals business, led by Raghu and with Ryan Kessler overseeing finance and general counsel, is very focused on quarterly progress, as are Steve Rubley and Pat Eveland in the Government sector. Customer response has been very positive, though their adoption rates will vary. Our emphasis is on achieving quarterly progress while working diligently towards our broader goal of enhancing our role in our customers' success through these AI-driven products, both within and outside the legal field. It’s an exciting journey, but it is likely going to be a multi-year process before we reach our objectives.

Yes. Heather, just a couple of additional points in case it's helpful to round out the discussion on Legal. I didn't mention it in my prepared remarks, but the Westlaw Precision ACV penetration is about slightly over 30% at the end of Q1. And one of the things that we'll do in a subsequent quarter, certainly by year-end, is an additional kind of operating metric that will help you in regards to our progression on gen AI and Legal and across the board. But that's 30% ACV penetration for Precision.

We will take our next question from Scott Fletcher with CIBC.

I'm interested in knowing if there's any difference in the adoption rate or the willingness to pay for the new AI enhancements in products like Westlaw or Practical Law between law firms and corporate clients.

Scott, it's a great question. I think it's a little early to tell. I mean, we're certainly seeing tremendous appetite for the products, and we're getting very favorable reactions to our products and favorable comparisons to the sort of various other offerings in the marketplace. So for us, reasons for optimism. We have a much larger business serving law firms than we do general counsels. But I think the pricing is holding up in both so far, but it's early days. So I think as the quarters roll on, we'll have more to say on that. But today, the pricing that we're asking for is holding up quite well in both the general counsel's selling process, so that into a law firm's large, medium and small.

Okay. That's helpful. And then just a second question. I'm just curious if there's been any changes to that $100 million internal investment target for the AI investments, whether that's $100 million doesn't go as far in AI, given any cost increases or if there's more opportunity to spend more, just looking forward.

Yes. Certainly, Scott, that $100 million that we discussed throughout calendar year '23 has increased. So if you look at calendar year '24, it's in excess of the $100 million that we discussed last year. And it's one that we work with our team on constantly to ensure that we are deploying investments optimally there. But it's in excess of $100 million this year, Scott, which is baked into our guidance.

We will take our next question from Kevin McVeigh with UBS.

Going back to the EBITDA a little bit. Is there any way to think about how much of the overperformance was on the revenue as opposed to the timing of some expenses? Maybe, Mike, we could start there.

Yes. Certainly, it's a combination, Kevin. I didn't break that down in the prepared remarks. But certainly, given our business model and the operating leverage that we have, given that 60%, 65% of our costs are fixed in nature, given the level of organic revenue growth that we achieved this year, that creates higher operating leverage in Q1 than you would have seen historically. So that's a factor. I think I previously discussed at 6% organic growth, you see about 75 basis points of flow-through on an annual basis. So at the 9%, you'll see a higher flow-through in Q1 of 2024. Certainly, on the timing of expenses, I mentioned as we go into Q2 and the remainder of the year, we'll see a step-up in areas like technology, product, and the integration for the recent M&A there. Also a reminder, Kevin, in regards to flow-through, if you look at the Reuters generative AI, the flow-through on that is actually larger when you think about operating leverage, but the flow-through on those Reuters generative AI content licensing deals would be even higher than what you would see normally on an incremental dollar of revenue. Then once again, as a reminder, as you get into Q4 this year, we're going to have a tougher comp because we had that $18 million generative AI deals from Reuters in Q4 of 2023.

That's helpful. I recognize there's a portion of transactional revenue, and 10% is the highest it's ever been in my experience. Clearly, there's a structural element to this, and you did well to outline the four factors involved: generative AI, retention, M&A, pricing, and so on. As we consider Q1 and the changes that occurred, especially the noticeable increase in organic growth, can you clarify what influenced that among those four factors? I'm aware that there will be a slowdown, but what specifically contributed to that change?

Yes, the four items you mentioned relate to what we need to believe for sustained stronger revenue moving forward. In the first quarter of 2024, there were four key factors that contributed significantly to our strong organic growth. First, the Reuters AI licensing revenue, which generated $25 million. Second, the seasonal tax offerings in Tax & Accounting Professionals and Corporates. Third, we experienced some timing items from quarter to quarter. Lastly, we had some easier year-over-year comparisons. Those are the four factors to consider regarding Q1 2024. When I addressed the earlier question, I was thinking more about what is necessary for accelerated organic growth. I hope that provides some clarity.

We will take our next question from Tim Casey with BMO.

Steve, can you discuss how the international strategy is evolving now that Pagero is part of the company? I would appreciate it if you could elaborate on your aspirations in this area. In this context, how much of the growth is coming from your current clients as they expand internationally? How much of it involves leveraging Pagero beyond its existing capabilities, and is mergers and acquisitions a significant component of this strategy?

Sure, Tim. Let me go through those points, and I'm sure Michael will add. Just as a reminder, nearly 20% of our revenues come from international markets outside of the United States. We see this as a significant opportunity. We believe we can leverage many of the capabilities that serve our customers in the U.S. in these markets. We have a solid starting position in Brazil, Australia, New Zealand, and parts of Europe. This isn’t a completely new venture for us. Following the Westlaw Japan acquisition, we are focused on accelerating our efforts there. We are also investing in Brazil and Mexico while looking into opportunities in Southeast Asia and remaining opportunistic in Europe. From a product and capability perspective, Pagero represents a significant advancement for us. We believe Pagero is the only unified e-invoicing solution available, with competitors having pieced together various solutions across different regions. Pagero has an interesting starting point, mainly focused in continental Europe, the U.K., and Scandinavia due to its background. The chance to expand into Latin America and Southeast Asia as e-invoicing mandates are implemented is quite promising. Additionally, CoCounsel is another exciting aspect of the Casetext acquisition for us. It is not limited to specific geographies. As we consider launching CoCounsel in various markets, the response has been very positive across all areas we are discussing, not just common law markets or those where we traditionally operate, such as Westlaw or Practical Law. Furthermore, the Dominio asset in Brazil is robust, and we are looking into ways to extend its reach due to its unique data and customer acquisition capabilities. Adrian and the team have done an excellent job of consistently onboarding new customers over the years, and we are keen on maintaining that momentum. Lastly, I believe we are just beginning to tap into the potential of better serving global customers, including Fortune 500 and Fortune 1000 companies. Laura Clayton McDonnell has been focused on exploring this opportunity, starting with U.S. and European-headquartered companies. I think the international opportunity for us will involve gaining new customers as we currently have a relatively modest position. But Mike, what would you like to add?

I wouldn't add anything further. I just want to emphasize my optimism and support for Laura's team, Erin Brown, regarding Pagero e-invoicing and the broader indirect tax. I believe we will have positive developments to share in upcoming quarters related to Indirect Tax overall.

We will take our next question from Andrew Steinerman with JPMorgan.

This is Stephanie Yee stepping in for Andrew. I wanted to ask about the 2024 guide. So you're raising a little bit the revenue growth, but you're keeping the margin guide the same. So I guess, is the implication that you see additional opportunity to reinvest that flow through? Or have, I guess, costs been going up, and so that's why the margin guide is the same?

Stephanie, it's the former in regards to the opportunities to invest. We're very encouraged with the road maps that we shared during Investor Day and just the 6 to 8 weeks since Investor Day. Certainly, our teams continue to identify additional opportunities. So maintaining the EBITDA margin and free cash flow is a reflection of the opportunities that we see to drive our top line in '24, '25, and beyond.

That sounds great. Can you comment on the competitive landscape, specifically regarding generative AI? Are you seeing mostly the same established players, or are startups also part of the conversation?

Yes, Stephanie, I believe we're observing a combination of both established competitors and new entrants. As I mentioned earlier, our primary focus is on our customers and how we can serve them better, rather than on our competition. We hold great respect for both long-standing and emerging players in the field. With disruptive technology that has the potential to transform the professions we cater to, we see a balanced mix in the competitive landscape. I believe we have made a solid start in the generative AI sector through our organic investments and the expertise we have in advanced machine learning and large language models. The addition of Casetext has also provided a significant boost for us. Our goal moving forward is to accelerate our initiatives in this area, and if we succeed, we will be in an excellent position against all competitors.

We will take our next question from Toni Kaplan with Morgan Stanley.

Earlier, you mentioned the improvement in the pipeline and sales trends in the corporate sector. It also seemed like there was some improvement in Legal based on your previous response. Could you clarify if you are noticing better trends in the selling environment for Legal? Are there any changes in the sales cycle or pipelines in that area? It sounds like while you observed improvement in Corporate, you are still somewhat cautious and monitoring the situation to ensure it continues. What factors would need to change for you to feel confident that you have fully emerged from the challenges in that area?

Yes, Toni, I believe you are correct on both points. In the Corporate segment, we've discussed the extended sales cycles over the past five or six quarters. In the first quarter, we observed a slight improvement in that area, which positively impacted our results. However, it's premature to declare that we've fully overcome those challenges. We want to see several more quarters of consistent improvement before we report on better trading conditions in the Corporate sector. In the Legal segment, we've experienced steady progress from quarter to quarter, especially throughout 2023 and continuing into 2024. Our focus is on sustaining this gradual improvement. The trends in these two areas are quite different, and we remain cautious. Mike, do you have anything to add?

I want to emphasize, Toni, that gaining stronger confidence will depend on seeing consistent performance from Q2 to Q3 in our Corporates net sales. We have a lot of faith in the team, but we need to observe this consistency first. We've invested significant time with the Corporates team this year and are encouraged by our findings. We hope to report positive results for Q2 and Q3 in Corporates, which will provide the confidence you’re asking about, Toni.

We will take our next question from George Tong with Goldman Sachs.

You've rolled out several products with new generative AI features lately. Can you talk a little bit about traction with how you're monetizing those additional functionalities and how the incremental monetization compares with investments that you're making in generative AI?

Yes, I would say we are seeing very encouraging early progress regarding customer reception to our new products and how they measure up against any competitive offers, as well as customers' willingness to pay. However, it is still early, especially considering the investments we've made. We initiated our investment program with a one-time expenditure of around $600 million for the change program. Last year, we invested an additional $100 million, and as Mike mentioned earlier on this call, we are spending slightly more than that this year. Plus, there’s an additional $650 million from the Casetext acquisition. Given the scale of these investments, it's still early days. Nevertheless, we remain optimistic, and all initial indicators are positive. We look forward to providing updates on our ongoing progress as it happens.

George, just in regards to comparison to the investments of our ability to deliver margin and sustaining our guidance for full year '24 given that we expect an uptick in generative AI, I think is indicative of the return on investment that we're getting on the generative AI.

Got it. That's helpful. And just a follow-up on the topic of gen AI. Can you talk about the different ways in which you're monetizing? Is it consumption-based? Is it modules, upsell-based? Is it part of the standard package? What are the different ways that you can monetize gen AI?

George, the best way to respond is that we are exploring various options. Our goal is to simplify adoption for our customers regarding pricing and value proposition while clearly communicating the significant benefits, such as time savings, efficiency, productivity, and improved quality of work. We are focused on enhancing our customers' profitability and adjusting our pricing accordingly. However, as I mentioned earlier, we're still in the early stages and conducting a lot of experimentation.

We will take our next question from Sami Kassab with BNP Paribas.

Steve, you said that the increased complexity of regulatory compliance was a driver of growth. In that context, do you see the Corporate Transparency Act as a meaningful driver of your performance this year? Or is it just one out of many examples of complexification? And secondly, could you please elaborate on the impact of gen AI on your cost efficiency? In the previous call, you said it was too early to quantify the impact, but have the last 3 months perhaps brought any more visibility in terms of the impact of gen AI on your own cost base?

Thank you for the questions. Regarding the Corporate Transparency Act, it's just one of many regulations we're facing in every market and segment where we operate. We're experiencing increasing rules and guidelines, whether they're laws, industry standards, or internal processes, which seem to continually evolve. It's clear that corporations and their advisers can't simply hire more staff to manage this workload; technology will be essential in easing that burden. We believe we are among the few companies positioned to capitalize on this opportunity. As for our internal AI initiatives, Mary Alice Vuicic, our Chief People and Communications Officer, and Kirsty Roth, who leads our operations and technology, are spearheading this initiative. While we're in the early stages with many experiments and tests underway, we maintain cautious optimism about the potential outcomes. We will approach guidance on cost efficiencies conservatively, ensuring we understand the benefits and their implications for our customers. I will let Mike provide updates on this in future quarters as we're not rushing into any conclusions.

And we're at the top of the hour, so Maddie, I think we'll end the call there. But thank you, everyone, for your attention.

Okay. Thank you.

Thanks, everybody.

This concludes today's call. Thank you for your participation. You may now disconnect.