The Blog
How Many Publishers Does It Take To Change A Light Bulb?
Posted: 22 June 2012
Three. One to screw it in, and two to hold down the author.
Actually make that 5, as there?s two guys holding the ladder?no wait, 7?there?s another two checking light levels before and after?no wait?9, there?s two guys with a clipboard checking everything every one else does...
Sadly these proportions are not that far out.
Fiction? You?d like to think so, but hidden - and really well hidden too ? in divisional accounts deep within the bowels of Reed Elsevier is the trading position of the market leader in UK legal and professional publishing. A close reading suggests that?s pretty much what?s been going on.
Cards on the table ? I know LexisUK quite well. Family members have worked there and written for them. I spent 14 years as a head to head competitor beating up their tax, Tolley and IRS brands (and winning, frankly). During the EU Competition Commission negotiations for Wolters Kluwer nv and Reed Elsevier plc merging I was the UK negotiator quantifying any divestments necessary. I?ve resolved at Cabinet Office level High Court disputes between them and others. I?ve been sounded out for jobs at board or group level twice on a serious basis and several times informally. They have also bought several of our publications over the years. More than most outsiders I?ve seen under the bonnet a few times. I rate Lexis and LexisUK staff ? for decades they have been a solid market leader.
Make no mistake, this is the £200m "big-blue" in UK legal solutions with fingers in every pie from case management software to "furniture publishing" (a phrase coined by yours-truly back in 97). For decades when what mattered to lawyers was being better informed than the rest, they did just that, very well. They took on monopolistic source data suppliers and opened markets up, they tackled market abusers and nailed them ? they took the market leader role seriously and did it well.
What they also did, was underpin a lot of the unseen work in the Reed part of Reed Elsevier, and in recent years they have been their key £30m+ profit engine (and probably at least twice as much as this historically as this is a nett figure). The global brand may be Reed Elsevier, the local one may be Lexis, the book may say Butterworths on the spine, but hats off to the invoices with the name Halsbury in there somewhere.
So the problem is ? where has all that £30m gone? To understand the Lexis UK accounts you have to do some dismembering of the group reporting, so here?s a few pointers:
1. Ignore the fact that Martindale-Hubbell, EGi and XpertHR are in other divisions ? Reed?s internal horse trading to give the magazine and directory businesses some cyclical protection is what it is; all the big firms do it in some form or other.
2. The fact that income from some group undertakings comes in here and is very sizeable (£139m) can be disregarded as far as LexisUK is concerned, ditto "other operating income" of some £37m. In group terms it is great news that the RBI division is doing well again and coming out of the advertising related cycle that caused headaches in recent years.
3. Interest and income from participating interests largely relates now to non-LexisUK legal issues and divestments, etc have largely related to the Reed Business division, so ignore those too for these purposes.
What you are left with is a business which has sales of £196.7m (£169.8m in the UK), gross profit of £130.6m (GM 66.4%), costs of £162.2m, and an operating profit run rate of -£31.6m. Don?t stop there, however, as amortisation charges and depreciation are normally disregarded for comparison purposes, and give them credit for taking some hard decisions on write offs etc, and you add back some £32.2m. The net effect is an ?ebitda? for the LexisUK legal business of £702k, or just under £1m. It is what it is, and let?s call this "adjusted or normalised ebitda" (and accept that even here you can assume some of the HQ activities are disproportionately represented).
What is interesting is that the top line is down -1.8% on last year and -3.7% from its peak in 2008 of £204.3m. GP is down -7.2% in 10/11 (and -4.8% in ratio terms from its peak in 08). The adjusted or normalised profit is down from £983k in 2010, but down again from a peak of £31.2m in 2008. A division historically reporting 16-20% adjusted "profits" since 2001 is down to 0.4-0.5% on a like for like basis.
That?s why we are saying there?s been a £30m negative impact on the profitability of UK legal publishing here.
Group says, understandably, that this is due to adverse market conditions. Lawyers and legal services are in turmoil. Well no ? actually; law firms may be in turmoil, but they are spending more on legal information services to deal with it. The legal publishing market saw flat sales, ie +0.03% growth in ?09, but it grew by 2.8% in 2010 and is on track to confirm 4.7% growth in 2011 (most results are in now, but not all; and the +4.7% allows for LexisUK?s top line decline).
So what?s going on? Well the top line is only part of the issue. LexisUK are actually doing rather well replacing some lost government library contract revenues. The cost that has gone up, +£37.2m since ?09 is staff. So what is Lexis throwing high price bodies at?
The "light bulb" is their latest attempt to offer a direct rival to Practical Law Company?s on-line services, and they?ve spent proportionately to catch up; editorial costs since 09 are up by a whopping 83.8%. Sadly this has also involved a 46.8% increase in the ladder holders (admin). On top of that finance (checking the "light levels") has also gone up by 78.1%. Management, of course, do not miss out and their costs have gone up a modest 40.1% by comparison. Remember, sales went down -1.8% and profits by -97.7% in the same period.
Worrying times. The long and the short of it is that less than 40% of the cost increases since 09 are actually stretching hard to screw in the metaphorical light bulb. But LexisUK is a big beast which will come around. It is unlikely in our view to be a 3 year plan that does it (and they?re probably on at least their second already).
Interestingly the market overall has absorbed much of the profit decline at LexisUK. Over the same period (09-11) the market?s profitability did not decline. It did drop as this is a big pill to swallow in any sector, but by only £2m.
So what? Simply put, the market is spending more, just not at headline levels at any rate with LexisUK currently, while the capacity of their competitors to invest is actually much stronger than it was in 09/10. As Voltaire had it: "God is not on the side of the big battalions, but on the side of those who shoot best". He also said "Qui plume a, guerre a ", and if you need to see the maps of these battlefields, see the RBP Financial Fundamentals reports.
My other favourite publishing light bulb joke? How many Editors does it take to change a light bulb? Only one ? but you have to rewire the entire building first.
Actually make that 5, as there?s two guys holding the ladder?no wait, 7?there?s another two checking light levels before and after?no wait?9, there?s two guys with a clipboard checking everything every one else does...
Sadly these proportions are not that far out.
Fiction? You?d like to think so, but hidden - and really well hidden too ? in divisional accounts deep within the bowels of Reed Elsevier is the trading position of the market leader in UK legal and professional publishing. A close reading suggests that?s pretty much what?s been going on.
Cards on the table ? I know LexisUK quite well. Family members have worked there and written for them. I spent 14 years as a head to head competitor beating up their tax, Tolley and IRS brands (and winning, frankly). During the EU Competition Commission negotiations for Wolters Kluwer nv and Reed Elsevier plc merging I was the UK negotiator quantifying any divestments necessary. I?ve resolved at Cabinet Office level High Court disputes between them and others. I?ve been sounded out for jobs at board or group level twice on a serious basis and several times informally. They have also bought several of our publications over the years. More than most outsiders I?ve seen under the bonnet a few times. I rate Lexis and LexisUK staff ? for decades they have been a solid market leader.
Make no mistake, this is the £200m "big-blue" in UK legal solutions with fingers in every pie from case management software to "furniture publishing" (a phrase coined by yours-truly back in 97). For decades when what mattered to lawyers was being better informed than the rest, they did just that, very well. They took on monopolistic source data suppliers and opened markets up, they tackled market abusers and nailed them ? they took the market leader role seriously and did it well.
What they also did, was underpin a lot of the unseen work in the Reed part of Reed Elsevier, and in recent years they have been their key £30m+ profit engine (and probably at least twice as much as this historically as this is a nett figure). The global brand may be Reed Elsevier, the local one may be Lexis, the book may say Butterworths on the spine, but hats off to the invoices with the name Halsbury in there somewhere.
So the problem is ? where has all that £30m gone? To understand the Lexis UK accounts you have to do some dismembering of the group reporting, so here?s a few pointers:
1. Ignore the fact that Martindale-Hubbell, EGi and XpertHR are in other divisions ? Reed?s internal horse trading to give the magazine and directory businesses some cyclical protection is what it is; all the big firms do it in some form or other.
2. The fact that income from some group undertakings comes in here and is very sizeable (£139m) can be disregarded as far as LexisUK is concerned, ditto "other operating income" of some £37m. In group terms it is great news that the RBI division is doing well again and coming out of the advertising related cycle that caused headaches in recent years.
3. Interest and income from participating interests largely relates now to non-LexisUK legal issues and divestments, etc have largely related to the Reed Business division, so ignore those too for these purposes.
What you are left with is a business which has sales of £196.7m (£169.8m in the UK), gross profit of £130.6m (GM 66.4%), costs of £162.2m, and an operating profit run rate of -£31.6m. Don?t stop there, however, as amortisation charges and depreciation are normally disregarded for comparison purposes, and give them credit for taking some hard decisions on write offs etc, and you add back some £32.2m. The net effect is an ?ebitda? for the LexisUK legal business of £702k, or just under £1m. It is what it is, and let?s call this "adjusted or normalised ebitda" (and accept that even here you can assume some of the HQ activities are disproportionately represented).
What is interesting is that the top line is down -1.8% on last year and -3.7% from its peak in 2008 of £204.3m. GP is down -7.2% in 10/11 (and -4.8% in ratio terms from its peak in 08). The adjusted or normalised profit is down from £983k in 2010, but down again from a peak of £31.2m in 2008. A division historically reporting 16-20% adjusted "profits" since 2001 is down to 0.4-0.5% on a like for like basis.
That?s why we are saying there?s been a £30m negative impact on the profitability of UK legal publishing here.
Group says, understandably, that this is due to adverse market conditions. Lawyers and legal services are in turmoil. Well no ? actually; law firms may be in turmoil, but they are spending more on legal information services to deal with it. The legal publishing market saw flat sales, ie +0.03% growth in ?09, but it grew by 2.8% in 2010 and is on track to confirm 4.7% growth in 2011 (most results are in now, but not all; and the +4.7% allows for LexisUK?s top line decline).
So what?s going on? Well the top line is only part of the issue. LexisUK are actually doing rather well replacing some lost government library contract revenues. The cost that has gone up, +£37.2m since ?09 is staff. So what is Lexis throwing high price bodies at?
The "light bulb" is their latest attempt to offer a direct rival to Practical Law Company?s on-line services, and they?ve spent proportionately to catch up; editorial costs since 09 are up by a whopping 83.8%. Sadly this has also involved a 46.8% increase in the ladder holders (admin). On top of that finance (checking the "light levels") has also gone up by 78.1%. Management, of course, do not miss out and their costs have gone up a modest 40.1% by comparison. Remember, sales went down -1.8% and profits by -97.7% in the same period.
Worrying times. The long and the short of it is that less than 40% of the cost increases since 09 are actually stretching hard to screw in the metaphorical light bulb. But LexisUK is a big beast which will come around. It is unlikely in our view to be a 3 year plan that does it (and they?re probably on at least their second already).
Interestingly the market overall has absorbed much of the profit decline at LexisUK. Over the same period (09-11) the market?s profitability did not decline. It did drop as this is a big pill to swallow in any sector, but by only £2m.
So what? Simply put, the market is spending more, just not at headline levels at any rate with LexisUK currently, while the capacity of their competitors to invest is actually much stronger than it was in 09/10. As Voltaire had it: "God is not on the side of the big battalions, but on the side of those who shoot best". He also said "Qui plume a, guerre a ", and if you need to see the maps of these battlefields, see the RBP Financial Fundamentals reports.
My other favourite publishing light bulb joke? How many Editors does it take to change a light bulb? Only one ? but you have to rewire the entire building first.
Lexis UK
The "big blue" of UK legal information services, historically mainly in publishing services, but with a presence in all sectors notably legal IT and tax publishing.
Legal Information Suppliers 1995-2015
The definitive review and analysis of the legal information suppliers markets in the UK.
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This is the only analysis to take such a definitive and comparative long term approach. It projects potential performance based on the financial character of every player in the market - this is the core data on which all professional plans are built.
Designed and used as a practical and authoritative strategic planning and budgeting tool, the precision, benchmarks and insights are used by many leading players in the market to test their plans and aspirations.
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