Clarivate Plc (CLVT) Earnings Call Transcript & Summary

All right. Good afternoon from New York. Thank you for everybody for webcasting or dialing in to this session. We're very pleased to have with us the CEO and CFO of Clarivate, Jerre Stead and Richard Hanks. So thank you both for being here. Really appreciate your time.

Jerre, maybe I'd just like to start this conversation off with you. You've done a lot of M&A in your life in various different companies and various different sizes. And there's been a lot more activity broadly in the information services space. Maybe just some high-level thoughts from you on do you think this is -- is there something new going on in the industry or it just happens that COVID maybe accelerated the need to do these things? Just any thoughts there would help.

Great question, Manav. I think -- I thought about it a lot, obviously, following particularly the S&P Global and IHS Markit acquisition because that's one that's very dear to my heart. I think 2 or 3 things. We really were the first pure play back in our IHS days in 2006 when we went public, pure play, meaning information and analysis. And I think as the industry has matured and there's been a lot of acquisitions, that it was inevitable that bigger and bigger ones would happen. In our case, it's been really interesting for us because we now are getting more incoming calls than we've ever gotten before from people who would like to join our organization and why it should be. When we set out -- Richard and I and the Board, everybody, obviously, just set out to do what we did with the acquisitions thus far, we knew that to get to a scale that we're now starting to get to would allow us to do things ever better and ever quicker. So I think -- your question is a really good one. I think clearly, the impact of this last year basically, which is kind of hard to believe that it's almost a year now of COVID, et cetera, is it made people rethink a lot of things. In our case, if you had talked to me a year ago at this time and said, "You're going to do 2 big acquisitions remotely and never meet anybody," I'd have said, "Well, good luck with that." And yet we did. So I think we've learned to be much more efficient in -- when you make acquisitions. And doing it all remotely picks up the speed a lot, which is a good thing. I think we'll continue to see that revolution or evolution for time to come. Clearly, with time, I think we'll see some of the really successful but smaller ones, something will end up working out for them, too.

Got it. And Jerre, a year ago this time, I did ask you that question. And I think your answer was, you were focused on the organic. You were focused on tuck-ins. And then came these 2 big deals. So maybe just give us a flavor for now that you've done 2 big deals in each of your segments, you -- one's fully integrated, one's on its way. What's the appetite? What's the capacity and the appetite, I guess, to do things beyond just tuck-in?

Yes. Great question. Great question. My -- our appetite is bigger than it was before from a couple of standpoints. We are able to do integration as good as I hope we would. We've been blessed to add some critical people. We've got a great backroom. The progress we've made with lead to cash sets us up in really great shape. And Richard and I and Mark and Cliff Smith and others have all gotten in a rhythm. So that's a big confidence builder for us, point one. Point two, we can see things that we've now got the $1 billion scale and IP that would be very complementary to us. That will be coming from some of the larger companies that are now saying, "That's not our prime business. We need to do something with it if we're going to take advantage of it."

Got it. And Richard, maybe if I can just ask you here. Obviously, the build-versus-buy map that I guess you have to ultimately sign off on, can you just talk a little bit about if that's any different or how you think of that in terms of where the valuation seemingly have just gone up every year, every month, it seems like, this year?

I think the issue for us is that our strategy in both the 2 product groups we have, being the Science Product Group and the IP Product Group, is we saw our opportunities this year with the DRG transaction in life sciences and then, of course, more recently with CPA to build scale very quickly and to really establish that platform capability, which then will drive further margins both through organic purposes and also through further M&A. So it was really opportunities to add to that platform end-to-end capability, which has been our strategy from the very beginning. And we just have 2 opportunities to really propel that very quickly.

Got it. And just sticking to your M&A pipeline, Jerre. At the Investor Day, you talked about how there's massive amounts of white space. You could be 2 to 10x bigger. It'd still be white space. So in the context of CPA, DRG, those look very complementary. So is there just many more complementary such assets? Or is this now about buying out your competitors?

Great question. I'll put them in 3 categories. Set aside the small tuck-ins because you know how we do that, other companies do. We'll continue to do those, Manav: buy assets, buy data, bring it in, put it on platform, highly, highly accretive for our share owners. But the kinds I think about today is there are others that are adjacent to us in the existing markets that would allow us to expand even further our end-to-end solutions. And those are -- there are some out there that are quite good size. Some are private family businesses, and some are private investors. And those are there and it feels good. We've always got to be able to deliver. I'll come back on the one thing that's different today in a second. The second group is ones that are midsize, I would call them, that fill a regional need. An example would be if we can find things that would complement us in Japan more from where we're at, we would do those. And then the third category is one like when we did Darts-ip. That's not a big one, but that's incredibly important proprietary information. Those are the 3 kinds we see, but staying inside of our swim lanes, if you will, for years to come. I'm more enthused now with the potential that we've got than I even was a year ago because with the change that's going on in the world, I think our opportunity is the best I've ever seen. The other thing, and we've talked about it, you and I did a bit with Richard, we need to -- we're now -- we now have a higher bar. We're going to deliver 44%, 45% adjusted EBITDA, and we're going to keep that climbing. We're going to deliver 6%, 8%, 10% organic growth, and we've got to keep that climbing. So the ones we do in the future, the larger ones, they have to be global, for sure, but they have to be able to meet those bars as we move forward.

Got it. And Richard, maybe I can ask you this question. But we get a lot of questions on -- the brands that you guys have are seemingly very #1; in some cases, #2. There isn't a pure-play public or maybe private competitor to point at necessarily. So who is the competition in the broad segments? I guess maybe if you could just help us understand that.

Yes. Sure. So starting with the IP. There are 2 product groups, starting with the IP Product Group, which is a -- as we look into 2021, that's a $1 billion revenue stream now given the combination of CPA Global. So nice just in terms of growth characteristics and some very nice underlying growth characteristics that are associated with the pace at which patents are being renewed and also new patents being released. The other players in that space would be companies like -- much smaller than Clarivate, I would hasten to add. So Questel in France, which is a VC-backed company; Anaqua, which is a U.S.-based company out of Boston. Then you have PatBase and PatSnap with some presence in Asia Pacific. So those are some examples of competition in the IP space or companies we come up against in our space. And then on the Science Product Group space, starting with the academic business, which we have significant heritage within given our prime mover advantage in those -- in that sector. Competition there would be divisions of public companies, such as Scopus, which is an Elsevier asset would be an example there. Then the life sciences space, which is a very large growing space for us. The underlying dynamics of that space are double-digit growth. You've got divisions of public companies who compete with us in certain parts of the market. We are end to end, from discovery right the way through to -- in market commercialization. But you've got some companies like the life sciences division of Informa, which is a particular niche in the preclinical and clinical areas, and then companies like IQVIA in the commercialization space with data.

Got it. All right. That's helpful. And Jerre, maybe let's take a step back. I think when you first took over Clarivate via this pact, you talked about how this is one of the best assets that you've seen in a long time. So can you just talk about what data do you guys own? Why is that so valuable? And it's not just about data, right? It's the platforms and the processes as well. So maybe if you could just break those apart and let us know why Clarivate has got such a solid foundation sitting here.

Yes. No. It's great. It's in -- for openers, it's in 2 very large, rapidly growing global markets. If you think about science, particularly life science, it's growing 12%, 13% a year. And it's going to, I think, forever, maybe more. And IP is growing 6.5% to 7%, the market itself, a year. So the very nature of those 2 big markets on a global basis gives us a big leg up. And what we own, if you will, is a large amount of proprietary data that gives our customers a great way to help their customers. I've not been any place in all the things that I've had the pleasure of leading over the years that there is, to your point a minute ago, Manav, more white space. And that white space is because we as a company have never done cross-selling. This is the first year, as you know, we've even thought about it or talked about it. And we're just getting started. So as we went into those 2 units that Richard did such a good job of describing, as we roll now into 2021, the upside of selling solutions packages is enormous for us. And we -- one of the benefits that's so good here is that the carve-out was expensive and very hard to do. But it gave us one of the greatest backrooms of modern technology. And that's a huge leg up. And then finally, the presence we have in Asia, about 22% of total revenue. It's the fastest-growing part of life science in the world, fastest-growing part of actually academic science and the fastest-growing part of IP. That presence is a really big deal for us. So it feels really good. The last part that I'm so pleased with, we've been able to implement the changes we're making with very brand-new technology, including 80% of our -- when I arrived on the same -- May or June of last year, including so much in the cloud. So that gives us big legs up that most companies just don't get.

Got it. And maybe that's a good segue into the pricing aspect of your story. A big part of your organic growth improvement has just been the lack of pricing before. And I think you said you had maybe 4 points assumed in the 6 to 8 points. So can you just talk about that journey and what gives you confidence in this environment to raise pricing 4% and if there's upside to that?

Yes. No. Great. Thanks for asking. One of the things I've always done is a lot of customer data collection. And I happen to call it customer delight. As you may remember, in fact, we just announced last week that every colleague in the company this year earned shares because of the improvement we made with customer delight. Critical in that world, though, is to get an understanding of how our customers value our products, what they want to see done different and what is the reflection of price rotation. The value the customers place by region, by product across the board is north of 80% on how they value and how they consider us inside their work stream. I've never had the pleasure of that starting point. So equally important, though, was that when we do the open questions of what should we do better and what things aren't we doing you'd like to see us do, price is not an issue. Price is not even talked about. Historically, IHS and IHS Markit is an example. If I heard more than 20% chatter, negative chatter, that meant we were probably on thin ice. There -- here, it's a nonissue. And then we've gone further to talk to customers about the value. Second point is we've introduced more new products and solutions this year than any of the businesses have ever done in the last 20 years. And then third, as we offer more and more, the one opportunity we must improve on is easy to do business with. And as we offer more and more there with the 3 global centers we've set up, that's why we feel really good. Now we've put in place -- and it's already in its 4.1% price increase in total. But I call it value increase because that's what it is for 2021. First time we've had the ability to price by customer, by product and we've done that. And I feel very, very good about it. The price realization that we've got and the ability to help our customers help their customers is nobody has touched it. So we'll see that rock-solid 4% plus for years to come. And then the rest is built on all the other things we're doing with the product to get us to the north end of the 6% to 8% organic.

Got it. And then, Jerre, I was always curious with many companies that you have this fine balance of, "I'm going to charge you 4% price and you're getting all these enhancements," and then there's also these new products which you sell on top of that. So how do you decide like what's in that 4% and what needs to be sold separately?

That's a great question. Richard, you answer it because he's worked that really well, please. Great question, Manav.

Yes. So when we look at the price increases for next year, the 4.1% is on the existing product portfolio. We -- it's not a one-size-fits-all sort of generic across the board 4.1%. We look at it by -- we look at our value proposition by customer cohort and also by product. And so that's how we've stratified the client base and stratified the product base to arrive at that average increase of 4.1%. Some products have more, some products have less, but that's the average. It doesn't -- as new product comes to market, that will be a propellant of growth for us in 2021 and 2022, absent price.

Got it. And Richard, maybe I'll just stick with you from the margin front. You guys have already done a tremendous job of getting margins where they are. Maybe you can just remind the audience of your guidance next year, your long-term targets. And the question beyond that is just more how do you balance 6% to 8%? You should have a pretty good drop-through. But then how much do you choose to reinvest into the business?

Yes. So in terms of guidance for next year, we look -- EBITDA guidance is $785 million to $825 million, with $805 million at the midpoint, which would be 45% margin. So the margin range is between 44% and 45%. In terms of our long-term objectives, Jerre's guide -- Jerre's personal goals for exit 2023 were margins in the high 40s, very high 40%. And just the way that we execute our platform strategy, the way in which we have clearly demonstrated to the market that we can manage and drive costs down, very effectively drive margins up, we're very confident of delivering that. In terms of investment, we have said that our medium-term guidance on essentially our investment is around product. It is around CapEx and application development spend. 5% to 6% would be our burn after 2021. We do have some onetime capital spend next year associated with the integration, in particular, of CPA into Clarivate. So if you take out the onetime spend, our burn next year will be around 6.5%. But as the business scales, we expect that to come into the 5% to 6% target range from 2022 onwards.

Got it. Jerre, just a quick question on the environment we're in today. Hopefully, this gets better with all the positive vaccine news out there. But has the -- maybe has the timing been good in the sense in March, people were scared, but now they feel like things are getting better. So maybe there wasn't enough time for the budgets to really react and cut some of the subscription.

Great question. Again, think about the global markets we're in. And the race, of course, on -- in life science continues and will continue for years to come. Clearly, the COVID issue has spurred more life science investment than what we've seen and will continue to see. It's been the reverse this year because if you remember, before COVID, everybody wanted less cost for medicine, right? So that's a good shift. The focus on the academic world is trying to figure out how to optimize remote. Some of the remote is going to stay there forever. That's very advantageous for us because it lets us increase the number of users we have. In an IP, it's really amazing to me that the IP, intellectual property, is going to grow again this year, Manav, of about 6.5%, 7%. And I think your point is critical. It was short enough that people did not stop in those markets that we're in. And I think the optimism is there. The one thing I would add, in our case, we've learned a ton. We've still got almost everybody at home and it worked out. And the significant additional cost reduction we're getting is where we're doing our commercial real estate platform entirely around the world. And we spend a lot of time, I do, every other week, all-hands meeting with Q&A. And one of the things we ask about is how are we doing to take care of you at home. And the feedback has been enormous. And as we move to a digital world that's different than ever before, I think we've got more productivity in place in our company than I would have ever expected.

Got it. And Jerre, in the few minutes that we have left, there's obviously the company guidance. And then there's always the Jerre personal goals of the poster, which are always very exciting. Just curious, how do you come to that? Like what's the process? Like what's the vision? Is it just your organic growth profile plus some targets you really want to have? Or is there more to it?

No. There's -- I always start with, again, facts are friends. What's going to happen in the markets we're in? Point one. Point two, what do we have to execute to get somewhere close to 8% to 10% organic? And if you think back, I ran 10% for 16 years, every year organic at IHS. So we know we can do that. And then point three is a critical one, which is, where can we provide the best return for our share owners with acquisitions that will give us the high upside with organic growth? And I can even tell you -- which I won't, obviously. But I can tell you there's the 2 out of the 5 that we're working on that we got to get, and that's how I build it. And I -- as you know, over the years, I've never missed in total of what I said we were going to do. Last year, I said $1.5 billion. So we'll do the -- and that was at the end of 2021. In '22, we'll do $1.8 billion this year. And I can go on and on and on. And so it's not guesstimate, it's logic. And it's our ability -- the biggest thing I put in it is critical, it's a great question, Manav, is do I have the team in place that can continue to double our business every 2 to 3 years. And that's my confidence level here is very high of that.

Got it. We're just about out of time. So I think we'll leave it there. I mean, obviously, I can ask you questions for hours here. But thank you so much for your time. Really appreciate it.

Thank you.

Thank you.

Thank you very much, Manav. Take care.