Data vendors risk losing momentum

Thomson Reuters and Bloomberg face slowdown in growth

On the face of it, this year may look like a grim one for the firms that supply the world’s banks with financial data but the outlook may not be as bad as it seems, at least for those companies that have diversified their businesses.  

The big two data vendors, Thomson Reuters and Bloomberg, which between them account for more than half the market in the Americas, derive a large chunk of their revenues from terminals leased en masse by investment banks and asset managers.

Contracts for these terminals last one to three years, so the financial impact on their suppliers is not necessarily immediate in a downturn.  But with banks cutting tens of thousands of staff in recent months, it is only a matter of time before these contracts are up for cancellation.

The vendors are fairly flexible in these talks.  They do not want their largest clients to cancel multi-million dollar contracts and are wary of angering a firm that could be a lucrative customer again when the markets recover, which they inevitably will.

Thomson Reuters, the largest data supplier to financial services, will tomorrow report its results for last year, which will give a potentially crucial insight into the future of the sector.

Analysts expect the figures to stand up but they raise doubts about the group’s revenue growth for this and next year as its biggest earner, the markets division, comes under pressure.

A consensus of analysts’ forecasts predicts Thomson Reuters’ 2008 revenue will be $13.5bn (€10.64bn), an increase of 8.4% on 2007, but turnover will fall back slightly this year, by 2.3% to $13.18bn, and a further 0.8%, to $13.06bn, next year).

Deutsche Bank is bearish, predicting a 5% fall in revenue in the markets division this year and a further 5% drop next year, which amounts to a $775m loss in this business alone before the end of next year.

Mark Braley, an analyst at Deutsche Bank, wrote last month: “Thomson Reuters is a better business this time round than was standalone Reuters last time round.  The problem is that its underlying financial customer base is in a much worse hole and the headcount pain is only just starting.”

Braley said attention was fixed on news from Thomson Reuters’ customers: “This is likely to remain dire, with the “competitive demanning” phase—investment bank managements firing staff—only just starting and probably with some time to run.  We stress that overall headcount is still only 3% off its peak.”

Thomas Singlehurst, an analyst at Citigroup agreed that Thomson Reuters’ markets business was “vulnerable to the slowdown and headcount reductions in the financial services industry” and could suffer from a drop-off in trading activity.  But he is bullish, predicting only a 1% fall for the markets division this year.

Singlehurst wrote in a November report: “The group should deliver only mildly negative organic growth in its markets division in 2009 despite specific pressures in financial end markets.  This is supported by decent growth in foreign exchange and commodities by asset class, emerging markets by geography, and the investment management, corporate and enterprise client base by end-user segment.”

Singlehurst said Thomson Reuters’ figures for the start of this year would be crucial.  He said: “The outlook for markets in the first quarter will also be a key area for debate, firstly because the first quarter suffers the toughest comparable from 2008 (+9% pro forma), and secondly—perhaps more importantly—because the first quarter is the quarter where, if historic recessions are a guide, organic revenue growth in markets should turn negative.

Douglas B Taylor, chief executive of data specialist Burton-Taylor International Consulting, said: “Last year was net positive but it wasn’t a particularly difficult year until the fourth quarter and the data firms have not yet had to deal with the full impact of the financial crisis.  This will be the year in which we’ll see how they manage their businesses in difficult times.”

Burton-Taylor last week predicted total data revenue this year would be down by up to 5% in the Americas and 2% in Europe while Asia, a smaller market by value, would be up between 3% and 5%.

Burton-Taylor, which next month publishes for the first time a comparative study of the news services provided by Thomson Reuters and Bloomberg, believes the impact on the two biggest players will be proportionally greater, perhaps as much as 10%.  Taylor said: “If aggressively priced competitors can hold their own, Thomson Reuters and Bloomberg could actually see an overall 8% to 10% drop in their revenue from the region.”

Taylor said that with banks more focused on cost in the fallout of the credit crisis, competitive pressure would increase on those vendors that charge more for their terminals. Roger Sargeant, managing director, international, at rival vendor Interactive Data , said:  “Interactive Data is the third largest provider and, at a time when everyone is looking at their spending, there is always the opportunity that firms will look to alternatives.”  

Sargeant said the trading environment was challenging and that firms were under pressure to manage costs but he said there were some emerging opportunities, such as providing high-value content for pricing complex assets.

Simon Alterman, senior vice-president for strategy and business development at Dow Jones Enterprise Media Group, another competitor, agreed.  He said: “The current market turmoil and economic downturn are bound to affect suppliers to the financial information industry.  But the need for high-quality information has never been greater.  Now more than ever, organizations need access to that kind of credible, timely and relevant information in order to be fully aware of both warning signals and opportunities. by Luke Jeffs

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