Reuters drew a line under four years of revenue decline yesterday but saw its shares fall 7.4% after warning investors that a new growth plan will hit profits.
In a double-edged announcement to the stock market, the news and financial information group reported growth in subscriptions to its data screens and said it would return £1bn to shareholders. However, the interim results statement was met with a series of analysts' downgrades.
Reuters also revealed a growth strategy that will knock £70m off profits over the next two years as the group invests in new markets, with the bottom line taking another hit from a £170m cost-cutting programme.
Analysts at Cazenove, Reuters' house broker, described the new strategy as "more pain short-term for greater gain long-term". The market concentrated on the short term as the group's shares closed down 7.4% at 381.75p.
Tom Glocer, chief executive of Reuters, said he believed long-term investors would keep patience with a group that will have been through its eighth successive year of restructuring by the end of the latest phase in 2008. The group said yesterday it was on course to meet the £440m cost-reduction target set by its three-year Fast Forward strategy, which was launched in 2003 to a barrage of sell orders from shareholders.
"The growth investors thought this was a terminal business. To some extent those who were here for short-term value are leaving. We have begun attracting growth investors back to the stock," he said.
David Grigson, finance director, said the new strategy, christened with the more sober moniker of Core Plus, would employ a radically different approach to the slash-and-burn ethos of Fast Forward. He said: "Fast Forward is about cost take-out opportunities. This is about transformation."
The Core Plus plan will increase the size of Reuters' target market from £6bn to £11bn. The group will seek inroads into four areas: electronic trading; new kinds of content such as financial analysis; selling Reuters products as packages - such as the 3000 Xtra screens, the infrastructure behind them and the data that feeds into them; and new geographical markets such as India and China.
Reuters also ratcheted up its long-term growth ambitions as it casts a wider net. Predicting long-term growth of 2%-4% in the financial information market, it expects improvements in its core business and success in new markets to push group revenue growth to between 5% and 7% per year by 2008.
However, Reuters said the transformation would come at a cost. The investment in new markets under Core Plus will reduce profits by £50m next year and by a further £20m in 2007. This will be accompanied by a cost-cutting programme that will cost £170m to implement between 2005 and 2008. As a result, analysts at Numis Securities reduced pre-tax profit estimates for 2006 by 31% to £280m and cut 2007 forecasts by 19% to £400m.
If the new cost savings initiatives go to plan, Reuters will have taken £1bn in costs out of the business between 2001 and 2010.
Reuters offered more immediate gains for shareholders by announcing a £1bn share buyback programme yesterday, funded in part by the proceeds from the imminent $1bn (£570m) disposal of its electronic trading subsidiary, Instinet. The buyback, which starts immediately, will run over two years.
While investor attention was focused on the new strategy, the short-term picture looked rosier yesterday. Reuters said revenues from its main subscription business grew by 0.4% year-on-year in the second quarter, the first time it has registered such an increase since the third quarter of 2001.
Turnover for the six months to June 30 beat analysts' expectations, despite falling from £1.17bn to £1.14bn year-on-year. Pre-tax profits halved from a disposal-inflated £300m last year to £147m.
Four-point plan for growth
Tom Glocer yesterday promised a more "resilient" performance from Reuters as he laid down a template for future growth following a three-year survival programme.
The chief executive of the venerable media group said the Fast Forward restructuring plan, brought in to rescue the group nearly three years ago, had helped make Reuters a "healthier, resilient and even more fun place to be".
"I think Reuters chronically underinvested through the 1990s and, to some extent, it was trading on borrowed time. The things that we have been doing are catch-up," he added.
Reuters traded on lofty valuations during the dotcom boom but its complex structure of individual fiefdoms left it leaden-footed when a global stockmarket downturn and strong competition left it stranded from 2001 onwards. Following remedial action, Reuters yesterday unveiled a four-point programme to expand its target market and add three percentage points to growth estimates.
Mr Glocer said a move into trading platforms was the most "readily demonstrable" strategic shift because the group already has 18,000 subscriptions to its premium 3000 Xtra screens within the trading community. The second area earmarked for expansion, high value content, will see Reuters add "context, analysis and insight" to the news and company research that it already offers.
He said the third component of the strategy could be likened to selling a suite of products, such as Microsoft Office, rather than individual products such as Powerpoint and Excel. "Traditionally, Reuters has sold a lot of itsy-bitsy components, so you can build a risk-management system, or a trading system. We are saying, 'let's try to sell a cohesive package'."
The final leg is dubbed "investment in new markets". Those include countries such as India and China, and new media such as mobile phones, broadband-delivered TV services and the internet.
