Reuters Group PLC Annual Report and Form 20 ... - Thomson Reuters

28 Reuters Group PLC Annual Report and Form 20-F 2002Operating and financial reviewcontinuedUsage revenue (4% or £122 million of total revenue) is principallyderived from BTC and Dealing products where revenue is generatedbased on trading volumes. Usage revenue increased by 32% in 2002compared to a 56% increase in 2001, attributable to the full yearimpact of BTC.Revenue by customer segmentTreasury ServicesThe Treasury Services segment performed well against a challengingbackdrop of market consolidation and cost cutting. Revenue was£1,134 million, down 5% compared to 8% growth in the previousyear. On an underlying basis the decline was 3% – an underlying 7%decline in Dealing revenues was partially offset by strong demand for3000 Xtra and other information products and by a pick-up in forwardsmatching volumes, particularly in the fourth quarter.Recurring revenues within this segment experienced a modest decline,in tough market conditions, of 4% to £1,000 million, compared togrowth of 7% in the prior year. Information product revenue has grown,principally through 100% growth in 3000 Xtra reflecting a mix of newsales and upgrades from the 2000/3000 product series.Offsetting this growth was a 9% decline in revenue from Dealingproducts to £278 million (2001: 8% decline) from both Dealing 3000and Dealing 2000-1. The largest declines were in the UK and the US,the former due to various mergers (for example, Halifax and Bank ofScotland) and the latter due partly to merger activity but also as aresult of the full year impact of the events of 11 September 2001.Outright revenue declined by 18% to £80 million compared to 20%growth in 2001 reflecting the constraints on major IT projects by clients.The consulting practices saw a decline as a result, although this wassomewhat offset by an increase of almost a third in Commodities &Energy outright revenue, driven principally by two major deals in Japan.Usage revenue grew by 4% to £54 million (2001: 4% growth), drivenby increased activity on the Dealing Matching systems.Investment Banking (IB)Revenue increased 2% to £834 million due to the acquisition of Bridge,compared to 16% growth in 2001, but fell 11% on an underlying basis,as customers continued to cut costs by eliminating duplicate services,replacing existing products with lower cost alternatives and reducingheadcount.Asset Management (AM)Although the AM segment has not seen the same level of cost-cuttingas other parts of the financial services sector, there has been somelevel of retrenchment and consolidation in the industry. Revenue forthe year grew 3% to £709 million (2001: 6%) benefiting from theBridge acquisition, but was down 4% on an underlying basis. Recurringrevenues grew by 4% overall (2001: 8%) and fell just 2% to £674million on an underlying basis as demand for private client services,end-of-day pricing services and funds information partially offset theimpact of cancellations due to headcount reductions.Outright revenues declined by 24% to £32 million (2001: 20% decline)as asset managers cancelled or deferred IT expenditure plans or madegreater use of their internal departments for development. AM’sconsulting practices have also suffered from aggressive price competition.Corporates & Media (C&M)Revenues from C&M declined 7% (2001: 1% growth) on an underlyingbasis to £315 million. This was due to the impact on our traditionalmedia customers of the downturn in advertising, the fall-out amongour new media customers of the decline in online advertising and thereduced demand for research and advisory products within thefinancial services and IT sectors. Corporates were affected by thegeneral downturn in the economy particularly subsequent to theevents of 11 September 2001 as well as current political uncertainty.Recurring revenue declined by 7% to £307 million (2001: 2% decline)as corporate customers sought to trim costs and, as a result, held backor reduced installations of Reuters products. Clients also cut back quiteseverely on their research requirements, thus impacting our researchfocusedsubsidiaries Yankee and Tower.Operating costsOperating costs for Reuters as a whole were reduced by 5% in 2002,compared to an increase of 11% in 2001. The underlying costreduction in 2002 was 10%, compared to a 6% decline in underlyingrevenues. The principal drivers of this reduction were the businesstransformation programme initiated in 2000 and follow on savingsinitiatives. Annual savings from these totalled £235 million in 2002,£30 million more than originally planned. Reuters manages costs bygeographic sales and service channels and centres of excellence.Recurring revenue grew by 1% to £726 million (2001: 12%) reflectingthe inclusion of Bridge information revenue (principally BridgeStation,a premium product). On an underlying basis, recurring revenue wasdown 9% as cancellations of legacy products, particularly in Europe,were only partly offset by increased revenues from 3000 Xtra. IB’sbusiness has suffered from client headcount reductions (some 10,500staff cut in the second half of 2002 at the six largest investmentbanks) and the intensive competitive actions (price-cutting andlaunch of products).Partly offsetting the decline has been growth in Enterprise InformationProducts and the newly launched North American Capital Marketsproduct (NACAP).Outright revenues fell 32%, compared to 29% growth in 2001, asbanks remain reluctant to commit to new IT projects.Usage revenue grew 140% to £59 million aided by a full year of strongtrading performance from BTC. Excluding BTC, there was growth of11% driven by the Reuters InterTrade Direct product.