Clarivate Plc (CLVT) Earnings Call Transcript & Summary

Okay. Good afternoon, everyone. I'm Ashwin Shirvaikar, I'm Citi's Payments, Processors and IT Services analyst, accompanied by my colleague, Pete Christiansen. Together, we cover Clarivate, which is the next company we're hosting and delighted to have, from Clarivate, Jerre Stead, who's the Executive Chairman and CEO; and Richard Hanks, who's the CFO. A couple of notes with regards to logistics, just before we jump right in. First thing is, if you have any questions, you'll see my and Pete's e-mail up on screen, you could just e-mail us and we'll kind of incorporate your questions into our own. And then the second thing is this, obviously, is a Citi Research Event, so no media. If you're a member of the media, you should disconnect.

With that, let's get started. So Jerre and Richard, thank you very much for doing this. Appreciate your being with us. I wanted to kick off, Jerre, maybe with one of the more frequent questions we get is with regards to -- as we look forward, the pathway to improving organic growth. Could you maybe delve into that topic a little bit, what should investors expect over the next couple of years?

Sure will, Ashwin and Pete, and thank you. We're pleased to be here. It's great. I'll start, Richard will pick up. When we laid out what we had to do to be able to execute consistently 8% to 10% organic growth. And we've laid that out in several components. First one is pricing. 1 year ago, we did a little less than 2%. This year will be 3%. We have just loaded the plans now for all of our annual subscription-based renewals at over 4%. Critical thing this year is, for the first time, we're able to do all the pricing based on usage by customer, product by customer, that we've never had before. So it's really a significant enhancement for us. The usage, by the way, is so critical as a tool for our sales force to be able to, and we spent the year training them, and I've been deeply involved with it on selling value, not price. And so I'm really pleased with that. You should think about us going forward, including after CPA merger, acquisition close. Think about us going forward at somewhere between 4% and 5% organic, years after years, 4.5%. As you'll remember, at IHS, 18 years I ran 10% organic compound. This one has that kind of potential. But think about 4.5% to make it easy, on revenue. Think about retention improving from where we started at the end of 2018 at 90% to improving in total, over 95% and being that for years to come. It makes a huge difference. Of course, that means we don't starting nearly in the whole we did. I'm going to ask, as a reminder, Ashwin, in just a second, for Richard to describe how we measure the renewals because we have a very firm rule that I'm really appreciative of. So Richard, if you just tell them about that, and then I'll carry on with the other pieces of organic growth.

Yes. So we measure retention rates very purely. We measure it by dollar, not by customer. So we -- if you have $100 of subscription revenue and if there's a downgrade to $99, then that's considered a 99% renewal rate, not 100%, even though you've retained the client. We also exclude price increases as well and upsells from the equation. So we're only measuring the downside. So it's a very pure measure, but the right measure for us.

It's the way everybody should do it because when we get to that 95%, and if you think about price realization at 5%, that means we're starting every year with 100% base up. The other 3 big pieces, just to carry on with the renewal rate increase from the 90% to 95% or north of that. Some of our products are there now. A significant part of that comes as we set up our 3 global business centers. The 3 will be 100% up and running with inside sales as we go into 2021. Great centers in Penang, London and Chandler, Arizona. Really have hired great people. It's been interesting for us that I think the pandemic has helped us, but we have outstanding people. And we're shifting so that -- and by the way, this will apply with CPA as we go forward too, there -- it's interesting, their numbers are similar to ours. We have about 18,000 customers today including DRG. If you think about that, about 80% of those customers will shift to inside sales and about 20% of the revenue will shift to inside sales. That's going to -- that will significantly improve our retention rate. Simple way to think about it, today, we have 300 salespeople and 18,000 customers. So you know how that works, this will shift that entirely. We'll see that start to be positive in 2021. Much more full impact in 2022. We've then also done a great job of introducing the new products that we laid out. Just as a reminder, there wasn't -- when Richard arrived, there was not a new product pipeline. Built that, have most of those products in place and now are adding a lot more and have done the work that we needed to on user enface -- user interface. So that's significant. Those pieces, like I said, I think you can count on 3% organic growth year after year with that, plus the new products being introduced. Then what's most exciting to us is cross-selling. As a reminder, this business was 5 units operating entirely separately. As we brought them together just a year ago right now into the Science Business worldwide, Science Group and the IP group worldwide, that moves the 5 or 6 to 2, very focused, and they're inside of those businesses the cross-selling has started. The big cross-selling, though, will go forward, and I'll give you just a couple of examples in just a second. That's worth at least 3-organic-percent growth every year. So I've now got you north of 10%. But what's so important with cross-selling, I'm just going to give you a couple of examples. Then I'll give you one with CPA because we're very positive of how that'll play out. Right now, we started measuring and rewarding our salespeople this year for cross-selling. Historically, they were -- there was negative reward. So they didn't do it. We're now running about $1 million a week of new cross-selling opportunities. We're closing in 3 weeks from that time, about 70% of those. So that's the first time we've measured it this year. We feel very good about that example only. One of the sales groups I support are the people selling into the 20 largest research universities in the United States. The white space for them, they're primarily have sold historically, Web of Science, the white space for them in Life Science, and in patents particularly, it’s huge. And so as we bundle those and put that offering on, you'll see that get some impact in 2021 significant in 2022 and very significant in 2023. DRG, we knew we'd get a lot of that, including selling into Asia, above and beyond that, which is the other piece that's probably worth 1.5 to 2 points a year is as we broaden our base in Asia to give us well over 11% potential organic growth. So with CPA, I'll give you just two examples. There are -- today, they manage 3.3 million -- of the 20 million, they manage 3.3 million of the current active patents with their renewal business. They're by far the leader. So they manage about 15%, closest competitor would manage less than 2%. And two examples would be pharmaceutical A company and pharmaceutical B company, both doing their own management from end-to-end. And as you know, patents are renewed each year. It's a huge task to manage all of it. We can go in and will offer those 2 that are good customers, clients for us today in life science. We can go in and offer them to reduce their cost by $4 for every $1 they give us. And that'll happen, again, that doesn't happen overnight. It's a big job, big ship, but that's what we'll see because CPA is really world-class software to manage, 90% of that automated. And then flip side is Samsung, great customer of CPA, small customer for us. We've already started to go to work with them to integrate our products into theirs. Tuesday of this week, we had our first airing committee team of folks representing CPA and folks representing Clarivate. As you know, we got to get closed, which we hope to do around October 1. When we do get closed, we'll move actively on day one, but the fun on the revenue synergies was enormous. So we feel very good. When we announced this reverse merger with CCC in January of 2019, we said we'd exit 4% to 6% organic growth in 2020. We're going to do that plus some. We said we'd exit 2021 in 6% to 8%, and we'll do that plus some because the last piece, which is going to be lots of fun is, we're now a major factor in Life Science and the Life Science global market is growing north of 12%. So I hope that helps.

No, that's tremendous. That's a lot of good information, and we could maybe jump into a couple of the areas and get a little bit deeper. Maybe let's start up with the potential that we have with CPA. And when you think of the -- and you gave a couple of examples there, but broadly speaking, thinking of the revenue and client overlap, is it that you have the same clients, except you've widened the -- what you do for them? How much of an overlap exists the -- how much of the client base is not overlapping? If you can break it up in that fashion?

Yes. Richard, a great question. Help them.

Yes. So when -- during due diligence, we obviously had a keen look at that. We're delighted to report that this is a very limited degree of overlap in terms of our client base. So when we think about really pushing home on cross-selling. So for example, selling our Derwent patent product into a patent renewal customer, there's an obvious synergistic play there. Likewise, taking their renewal business into our trademark and patent business as well. So there's a lot of cross-sell opportunities. So when we think about pricing and packaging and what we term frictionless IP through the platform capabilities that we'll have, we see tremendous revenue synergies available to us, which we didn't include in our valuation. We only include our cost synergies in the valuation. So as we execute revenue synergies, that will just be further create -- further value creation for our investors. As Jerre referenced, we had a stakeholder meeting on Tuesday. 70% of the time we were discussing product packaging, pricing, cross-selling opportunities from day one. So having a really clear plan as we go to market immediately after close at the beginning of October, and then 30% of the time I spoke about the expense synergies, of which we all -- which we're -- we've got a lot of experience in executing against over the last 3, 4 years since the carve-out from Thomson Reuters. So both from a revenue play, cost play, margin play, this is a great opportunity for our combined business.

Okay. Okay. No, that helps. I want to broaden out that question though because CPA, while it's a great deal, is one deal. And we've kind of seen DRG, CPA, the track record at IHS is very long with regards to having that process of creating value via acquisitions. And it would, I think, help investors to hear some of the elements of that process. Now you -- I think Richard touched on some of the points in the prep meetings and going into it piece by piece. But can you lay that process out, and then I'm going to turn it over to Pete.

Okay. No, happy to do that. What we do, just as a refresher for everybody, we do not participate in auctions. The 2 big ones we just did were a good example of that. What we do is work to become the preferred acquirer. That may take a month or it may take 18 months. When we did Darts-ip, it took 18 months. And we were the only ones and it turned out to be -- that's bigger than a tuck-in and it turned out to be a grand slam home run. So we build a pipeline. We build it from 3 places. One, we get great input from our customers. Just as an example, about a little more than 50% of the acquisitions we made, the '81 after '82 after we went public at IHS, 50% of those came from customers. We're not to that point here yet, but will be, we're now getting very good input from customers, point 1. Point 2, they come from our product management and leadership team, where we're now very focused with the two groups of what we need to complement what we have, and it starts out with several screens. One, strategic, obviously. Two, critical is culture. Out of the 200-plus acquisitions I've made over my career, I can tell you the 5 that failed were all because of -- I mean 90% because we blew it. It wasn't a culture that would work for us. So that's critical for us, and we work that hard from a distance. We then go to work with patient, like I said, patient persistent but becoming the preferred. If you go back to DRG, it's a great example of that. DRG, Mukhtar was running Life Science for us when he was in India. This is the owners of DRG. Actually in 2018, when I got involved, that I spent a lot of time with them, and we convinced them that we would be the only better with them. We got an exclusive. We worked through that. We're very good at doing it very quickly, and that's a critical question. We -- example, only that one, we did all the due diligence, all the paperwork, all the agreements in about 35 days. And that's critical, especially as a public company because you don't want it to leak out. In parallel with that, as we're building that pipeline, we look at tuck-ins that will bring in proprietary data, which is exactly what happened with Darts-ip. Data that nobody else in the world had, and yet they had not sold it other than outside of a few countries in Europe. Next, we look at the financial. It needs to be a business that will do 3 or 4 things. It needs to be a business that is global or can be made global because that's where our strength is, the ability to grow in Asia better than almost any other business that we compete with, point 1. Point 2, it needs to be a business we believe, that within 18 months can meet or exceed our goals in organic growth and meet or exceed our goals that are very straightforward in adjusted EBITDA margins. And then critical for us is, we don't do -- we don't buy anything as a stand-alone. We buy it as an asset that we will integrate. And after we've gotten a good job, look at it, and understand the integration and what we can do to take cost out and increase top line, that becomes the critical part. And what we want to do is deliver what -- there'll be exceptions always, but we, in general, want to deliver after synergies at 12 -- 10 to 12x trailing EBITDA multiple after 15 to 18 months. The other thing that's so critical is you got to be willing to walk away and we are, and have been. I can tell you at IHS, we're doing the same thing here. And we're blessed to have Cliff Smith with us who did 50 plus of the acquisitions with me and Sheryl von Blucher who's on our Board, who did all the research for us over many years at IHS and we're as proud of the ones we've walked away from as the ones we've acquired because you've got to make sure the market understands that we are going to pay full value and we'll pay full value, but not excess. And that when we say best in final, it's not negotiation. It's really best and final. So I feel really good about that. It won't surprise you that we walked away from several this year for those very reasons. And then critically important that one of the things -- the tuck-in we did in June is, CustomersFirst Now that CFN does, it brings a team together who's used to doing integration, maybe one of the best that I've ever seen. So we're ready to go 30, 60, 90 including day 1, as Richard just said. So that's the process. Two other -- 3 other critical things. One is the day we close, we changed our annual report -- our annual goals, including bonuses based on whatever the balance of the year is for that acquisition gets added to our targets. That's critical. You don't get a free ride ever. Secondly, we measure them every 3 months. And third, we report back to the Board against what we said we'd do on an annual basis. So that's the beginning and the end. A great question.

Thank you. It's really important to understand that process and the repeatability of it. Pete?

Thanks, Ashwin. Yes, we often do get the question, what is the Jerre Stead playbook, but that was very well put there. One other thing, I want to dig more into the CPA deal a little bit more. There's a little bit of [indiscernible] going over here. On one hand, you say the overlap is fairly minimal but then on the other side, your -- it sounds like there's a lot of cross-sell opportunity now which is a little disjointed, but granted now that you're a platform company. So I'd just like to think, what gives you confidence today that you will be able to drive cross-sell between legacy Clarivate and CPA?

That's great. You start, Richard, I'll pick it up.

Yes. So the strategy around the CPA acquisition was that Clarivate is very strong in early-stage patent research where companies are determining spaces for R&D dollars, freedom to operate searches for both patents and trademarks. And where CPA is particularly strong is around the actual filing and prosecution of the patent once it's being written. And then the actual management of the renewal portfolio on behalf of our IP-intensive organizations such as Qualcomm, Siemens, et cetera. And so our strategy is all around value chaining and bringing to market those end-to-end capabilities around the protection -- the development and the protection and renewal of IP, what we call frictionless IP. And so that's CPA. As we are so strong upstream in the development of IP and CPA is very strong downstream, there's a natural synergistic play where we have assets in market with clients where they don't and vice versa, and that's where the cross-sell opportunity arises.

And I'll just add a couple of examples, Pete, because it's a great question. As I was telling you about the one of the teams I support with the top 20 research universities, 80% of those do their own asset management. Places like MIT, places that are really great research centers, John Hopkins. We can do that for them, where we're very strong, obviously, with Web of Science. We can do that for them at 20% of what they do today. And that gives us the entree, which frankly, CPA has never had. They've not gone after that university side at all. So we know those are going to happen. Again, that's a 2- to 3-year cycle. You don't do that overnight. And when you take cost out, although I would tell you today is probably as good a time as ever to be able to take cost out of universities. So that's a good example of where we'll see that. It is -- DRG and Clarivate or like this with products no overlap at all and a fair amount of overlap in the Life Science businesses. This one is the same thing, no overlap of products with some overlap of customers. But -- and particularly, I mean, what you'll see us do, and we're so excited about it. In Asia, where we have that strength in universities as an example, in the patent business in Japan. You'll see us bring those two together quickly. So I've done this for a long time, as you know, I've never seen one that has more cross-sell potential synergy wise. I would also tell you that we never -- I think you know that, I should have said it earlier, to Ashwin's question, we never build revenue synergies into our valuation. It's just something we don't do.

Was really helpful when you dissected the pathway to improved organic growth before. And I want to dip a little bit more into pricing. Certainly, you can't ask for higher pricing unless you're providing a value add or incremental value add to your customers. Can you talk about Clarivate's product development? Where it was? Where it has come? And perhaps some results you're getting from some of the newer products that you've launched? I know recently this week, Clarivate announced the launch of the AppExchange, which I think is very interesting. I think it would be great. If you could just walk us through that element of the story?