Clarivate Plc (CLVT) Earnings Call Transcript & Summary

All right. Good morning, everybody. My name is Manav Patnaik. I'm Barclays' Business and Information Services Analyst. Thank you all for zooming in or webcasting in here today, which is day 3 of our financial services conference. And I'm especially pleased for this session to have with us Clarivate Analytics, and Jerre Stead, who's the CEO; and Richard Hanks as the CFO. So thank you, both, gentlemen, for being here.

It's a great pleasure to be with you, Manav. Thank you.

Thank you. Just right before we get started, just some quick logistics for the audience. If you do want to send some Q&A, I believe there's a box on your left of the screen where you could, but otherwise, it'll be just a fireside chat between myself and Jerre and Richard. There's also some polling questions on the left. If you guys want to take a look at it. But otherwise, we'll get right into it.

So Jerre, my first question, which I've been asking all the other executives really is just your thoughts, your views, your vision on this kind of work from home, virtual environment, how well you guys have done? How you foresee the future? Because I think a lot of us are missing the physical interaction, but at the same time, productivity is pretty good as well. So...

Yes, it's a great way to start, Manav. Thank you. It's been an amazing time. If you think about going back to March 15 roughly for us, which is not very long ago, but it seems like forever ago, we basically took everybody out of the workplace, sent them home, all around the world, went through a wonderful job by our IT people of equipping all of our folks, particularly the folks we had in India, who many worked in the office with desktops. Got everybody on -- in 2 weeks, we did all of it. We got everybody on laptops, got everybody hooked up around the world if they worked out of their homes with Internet, just couldn't be more pleased. 2 or 3 things, and it's been so interesting. Our productivity is the best, it's ever been, point one. Point two, as you'll remember, Manav, I always start my virtuous circle of performance with colleague engagement. And we ran that survey in May. And one of the questions we asked was, how are we handling the pandemic for you, 93% positive score. Just couldn't have been better for our ability to do that and be able to help all 5,400 people. By the way, when we close with a hope in early October with CPA that will add 3,100 more. So -- and we've worked together them and us about optimizing that. So we'll have 8,500 people who are working from home more productive than ever before. And a couple of quick comments on that. We took the position and continue to communicate, communicate, communicate. I do an all-hands meeting every 2 weeks. We do a letter, Manav, out every day on where we're at, what's going on, how we're doing it. The all-hands meetings have been wonderfully attended, and I've alternated with our leadership team, each of them coming on at different times to be able to talk about the performance. I just couldn't be happier. And we also have done two customer delight surveys during that time because you never know. Those are the higher scores that we've had yet. So feel very good about that. The way I would describe this is, if you'd have told me, even in February that I could close on DRG and integrate that and be ahead of schedule. And that I could literally, with having one face-to-face meeting, be able to announce the agreement to bring CPA on a large acquisition and then prepare to do all that remotely, I wouldn't have believed it. And we can do it. We're now deep into really what we call a digital workplace. And we'll redo, not will redo, are redoing our entire footprint from a standpoint of how to help our people be more productive, but understanding much of that can be done from home. So I'm delighted. I'm very thankful for our people and very, very pleased with the progress.

Got it. That's super helpful. Jerre, also just to set the stage, a lot of investors are familiar with yourselves, with you. We've obviously known you since IHS, and you took that over in 2001. But you've also had a very strong career even before that, you didn't really need to do anything else. So maybe just for a perspective, like your history with the asset Clarivate, just to set the stage, I think that would be very helpful here.

Thanks Manav. So this is really amazing if you think about it. In 2012, we were looking for the third leg of IHS. I had a handshake with Jim Smith, the CEO, that we would acquire what became Clarivate and take that out of Thomson. Turned out the family didn't think we were offering them enough money. And I -- as you know, Manav, don't -- I always try to give full and complete price, not negotiate because you want acquisitions to be part of you, and it didn't work out. During that period, though, it was so interesting. We also [ locked Cheryl Van Bleeker ], who's been with me for 21 years, a great strategist and analysts. We looked hard back then, believe it or not, at DRG. It was right when the India public company was acquiring them. And we also looked at CPA as they were going through a transition from a private investor to another private investor. So believe it or not, I've been tracking those 3 companies since 2012. When we did the SPAC and took that public in September 14, actually almost exactly 2 years ago, we've raised $690 million, we had a good view of platforms that we wanted to go after. And if you remember, what we said was we want to do the same things we did at IHS and be successful doing those in half or less of the time than we did that one. And I was very excited about it because I love creating wealth. I love creating jobs, and I love creating customer delight. So we were actually in London, looking in another platform. We got a call that Onex wanted to talk to us about Clarivate. I had not approached them because they'd only owned the company for about 2 years, actually not quite 2 years. So I was delighted to have that happen. In mid-October of 2018, we started discussions. We announced it on January 14, 2019, January 13. By the way, Richard and I that day gave guidance for what we thought we would do as we exited 2020 with organic growth 4% to 6%, adjusted EBITDA 35% to 37%. We're going to end up outperforming those, which makes me very happy and very pleased. And then we closed on May 14, 2019. So think about us now in the last 16 months almost to the date, what we've been able to accomplish. We closed with a great promise of what we could do. We've made a lot of changes, a lot of reorganizations, a lot of programs, very good programs to reduce cost, which we're well ahead of on tracking. 3 tuck-ins and 2 major acquisitions, all done in those last 16 months, and I couldn't feel better. And this went so interesting to me your question. Thank you, Manav. Why am I doing it? Because this company makes a bigger difference to the world than most companies do. We're actually the first one to provide an end-to-end solution on making innovation better, quicker and more successful than ever before. We're very strong in life science, as you know, including all the pieces, and that's pretty exciting. So I'm having the most fun I've ever had. And I have fun every day. But the most fun I've ever had. And a quick side comment, the other thing that's happened to me, Mary Jo and I got married, as you may remember when we were 18, we've lived all over the world, just celebrated our 59th wedding anniversary in December, and I've been home with her for 6 months every night, which is the first time that it's ever happened since college. So she's now an expert on -- because she hears this kind of thing. She's now an expert on Clarivate, and she thinks it's the most fun we've ever had. So that's a freebie.

We'll get her on to the next conference.

She'd be better than me.

Richard, maybe if I can just get you in here as well. Just in terms of the historical perspective, you've had carve out experience before, this was one of those, but it's largely done. So maybe with a little bit of your background, can you just talk to us about where the infrastructure Clarivate sits today?

Yes, sure. I joined 3.5 years ago. So March 2017, just 4 months after -- 5 months after the carve out from TR by Onex and Baring. First 2 years were really first year, 1.5 years, really focused on all the back office, getting that stood up, carve-out from TR, all the product rearchitecting, getting that out of on-premise facilities into all of our products now cloud-based hosted off AWS, primarily. So yes, it was complex. And just -- we did it extremely well. We're delighted with the progress, and it enabled us to obviously, consummate the reverse merger with Churchill Capital and take the company public because all of that -- all of these sort of architecting work have been completed, and we were a truly autonomous business at that stage. So it was important to get it done swiftly just to give us optionality in terms of the path forward. So now we have a great platform to ingest deals onto. So we're now very focused on post-acquisition integration management. And fortunately, my team, the whole company has got a lot of change management experience from that carve out work. So it sets us up nicely to execute the DRG transaction and the integration and now, off course, CPA, which is a fantastic opportunity for us and one we're looking forward to closing at the beginning of October.

Got it. And maybe that -- how well ready that platform was or something maybe we didn't fully appreciate. But Jerre, in December, when we had you at a TMT conference, it sounded like you had said it would just be tuck-ins, you're not ready to do larger deals. And I guess, a month later, it came DRG and 2 months later or a few months later came CPA. So what changed? Or was it just -- these assets just happen to come up quicker than expected?

It's a great question, Manav. As you remember, I said I'd been following those companies as had people like Richard after he joined, and Mukhtar, and Jeff. So I've always been a believer that you take advantage when you got the opportunity. As you’ll remember, I don't participate in auctions. We heard that DRG was going to come up. We agreed -- worked an agreement for an exclusive deal. And we did it. And I did it with great confidence that all the things we were doing we could execute we could bring them in. And to Richard's point, we've spent a lot of time and effort on working lead through cash, and we'll continue to make that the backbone of this company. People like Kathy Sullivan and others have done a marvelous job for us. But that platform was in place that allowed us to do that and do it really well. It was really interesting. So we pulled that all off, and I couldn't have been happier. We closed that, as you'll remember, on February 28, we had 1 day of February and 1 month in Q1 of DRG. In parallel, I had heard that the primary owners, Leonard Green, who I have great respect for CPA were looking at going public, which I could understand. I thought it was important that we have a discussion with them about what we could do and how we could bring the 2 together. So I visited them actually before we closed on DRG, and we were able to proceed through there with a great deal of confidence because we set the 2 groups up last September 15. The IP group led by Jeff, and the science group led by Mukhtar, and I knew what we could do. Prior to that, the companies operated smaller businesses operated pretty separately. So as we were pulling those all together, these 2 very critical additions let us get the scale I wanted to. If you think about it, in October, September actually, make it simple. In May, when we closed 2019 on the reverse merger, we were running about a $900 million revenue business. We'll exit 2020, assuming we get everything clearance wise done, and we certainly hope to with CPA at $1.7 billion run rate, approximately double. And if you think about what I've always tried to do is build the kind of business with back rooms, et cetera, that allows us to scale very effectively. And that's what I'm feeling so good about and then you should think about where we're going to go in the future with that kind of scale that we now have and the ability with the massive free cash flow we're going to enjoy because of the business model to be able to continue to double the growth and more importantly, triple the EBITDA as we move forward.

Got it. And this no auction philosophy you had at IHS as well. And I think in your history as well. And it's quite impressive, but does that limit your pipeline of deals? Can you just talk about what the pipeline at Clarivate looks like today as well?

Yes, it's a great question. I've always thought about how important it was to be patient persistent, be the preferred acquirer. And that's what we're working really hard. I'll give Jeff Roy, a good example, Manav. When we acquired Darts-ip in last year, he'd worked on at almost from the day he started at Clarivate, 18 months it wasn't for sale, we convinced them. It was the right place to go. It was proprietary information nobody else in the world had. So that's what we do. And your question is a great one. My view is no, it does not limit us at all because we're not out looking for companies that may think they want to sell, but we're out looking for companies our customers need us to acquire, to do a better job for them. So our pipeline, and I mean this really respectfully, but our pipeline is built inside by us, by our teams and by our customers saying, here's what we need, not by watching for auctions. Great question. No.

Got it. And you obviously did 2 big deals. They were in the 2 different segments. So I guess, in terms of bandwidth, I think we can understand you have that. But -- and I think tuck-ins, sound like you could easily digest those. But would -- should we be surprised if you do another big deal in either of your segments in the next 12 months?

You should not be surprised. But it will be only if it meets 2 things. It's a great question as always. It will be one that already fits strategically because we know that. And two, it fits our culture. And three, if you think about what we're now doing, it's going to have to be growing at a 7% to 9% organic on its own. It's going to have to be one that with the synergies we could get would be accretive if it was EPS at the end of year 1 and 2, and it's going to have to be one that we can get it to an EBITDA, including synergies of at least the mid-40s or we won't do it. So that helps us focus -- and by the way, that's the way we thought about each of the tuck-ins that we're currently working on, that helps us focus on where we're going to go in the future. So don't be surprised if we do and don't be surprised if we don't because it's got to be preferred.

Got it. That makes sense. Richard, in just looking at DRG and CPA as examples, I understand on the revenue side, strategic growth, that seems fairly intuitive. On the cost side, can you just talk about where you typically look for the synergies and how they shake out today for DRG and CPA as well?

Yes, for DRG and CPA, we start with back office and systems integration, HR, finance, legal, that's our first port of call and we look at the facilities footprint. And then we look at product platforming. And then finally, the front office customer service. What we have done at Clarivate in terms of the front office is we had -- we've gone through a pivot where we have established 3 global business centers, Chandler Arizona [ at ] the Americas, London for EMEA and Penang Malaysia for Asia Pac, and those capabilities include inside sales, customer service and some back-office functions. So we're currently in the process of pivoting the sales organization, moving our long tail of accounts out of the field force into inside sales. So with those GPCs in place now, that's a really great platform for us to harvest further front office synergies, in particular, leveraging inside sales and that customer service capability. So there are no sacred cows. We look across the board, we deliver what we committed to deliver. So $30 million of savings for DRG over 18 months, we're ahead of schedule on that. And then we obviously committed $75 million for the CPA transaction, exiting 2021 going into 2022, which we'll deliver. So we have a very methodical integration process, and we're very thorough during due diligence of quantifying where we can take out costs. But at the same time, making sure that we're preserving growth and in fact, making sure we've got the investments in place to propel growth forward.

Got it. Jerre, you launched the [ lender ] presentation yesterday for CPA. And so maybe just a quick update for the benefit of the audience. What's left to closed the deal, I think, Richard just said early October. So what else should we be looking forward to?

Yes. No, thanks. We look forward to closing that refinancing hopefully, on September 22. We wait and hope to have clearance. We've gotten 3 of the 4 clearances we need. We've got one more to go, very much on schedule. We've had, as you know, this is always an interesting time because some things you can work hard on and some you have to wait until you get clearance, but we've had very good sessions of looking strategically, what we're going to do with the 2 companies, great sessions on looking at where those cost reductions come. By the way, we -- they -- our team at CPA looked, we looked independently and then in our case, we use BCG to help us benchmark. Each of us came back with a number equal to or bigger than the $75 million we committed on. So we feel really good about that. If everything played out, it would be great that we could get a full quarter in place in the fourth quarter, but we'll see. We are going to, though, Manav, and I'll mention it now, November 10, we'll do an Investor Day, which will include great product demos because I think it's so important for our current and future investors to see the amazing offerings that we have. And then we'll do an afternoon of that. We'll give guidance for 2021 at that point with the new company in total. We'll also give you a range of target as we exit 2022 of what we expect adjusted EBITDA to be and what we expect organic growth to be. And then I'll close the meeting with my view of what we're going to look like by 2023. If you remember last year, when we did our first Investor Day, I said our target was $1.5 billion of revenue in a couple of years, to be north of 40% organic and to be running 70% to 75% free cash flow of EBITDA. We've taken care of that. So now we'll go to the next one. And certainly, we're -- I'm just so proud of what we've done this year on cost take out. If you think about it, Manav, between what we've done internally at Clarivate, plus what Richard just covered, the number is about north of $180 million when we exit 2021 that we will have taken cost out of the 3 companies together and the tuck-ins and be operating better faster than ever before. So I'm really proud of that.