Clarivate Plc (CLVT) Earnings Call Transcript & Summary

Hi, everyone. Thanks for joining us today at Morgan Stanley's Technology, Media and Telecom Conference. I'm Toni Kaplan, Head of U.S. Business Services Research here at Morgan Stanley. And joining me today from Clarivate is Jerre Stead, Executive Chairman and Chief Executive Officer; and Richard Hanks, Chief Financial Officer. So before we begin, I need to read the following disclaimer. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. And if you have any questions, please feel free to reach out to your Morgan Stanley sales representative. Also, let me just mention that if you have a question during this session, you can type it into the box and I'll be happy to ask it, time permitting. So just some background on Jerre. Clarivate is the 10th public company that he has served as CEO or Chairman. And before Clarivate, he was Chairman and CEO of IHS Markit, which many of you know well. Richard joined Clarivate in 2017 as CFO and was previously CFO at BDP International. And regarding Clarivate itself, there was a SPAC back in the days when people were still asking me what a SPAC is. And Churchill Capital bought the old Thomson Reuters IP and Science asset from private equity in early 2019. And we've seen the beginning of the transformation of this business. And I say beginning because, Jerre, your personal targets are essentially doubling the business by 2023. So thank you so much, Jerre and Richard, for joining us today.

Thanks, Toni. It's great to be here. Richard and I are both pleased to give an update with you. Thanks a lot.

Absolutely. And to start, Jerre, you've talked a lot in the past about how highly you view the Clarivate assets. Maybe you could just talk about the main differentiators, tell us about the data quality, the technology, the brand and whatever else you want to go into just in terms of the quality of Clarivate here.

Thanks. It's a great question, Toni. I actually had a handshake to acquire this [indiscernible] in 2012. So I followed it almost 10 years now, the last 20 months being privileged to be the CEO of it. But the vast single set of data I've ever been involved with in rapidly growing markets, life science, pick your number of 12% a year, global, IP patent of 78%. And in the academic world that we also live in with science, that's a 4% to 6% grower. So that's great. What I give Thomson great credit for, they did an excellent job of acquiring proprietary data over the years, and they kept that data in great shape. So if you think about why I value it so much is that, you've mentioned, I've done this forever almost. This is my 41st year actually. By the way, 28% annual shareholder increase over that 41 years -- each year. So I say that only because it helps me say what I'm about to say. The upside with this company, as we bought it, it was managed only by basically equal organizations in a holding company. And as we brought together science and IP and then the 2 critical acquisitions plus bucket, we're now off to the races. Lots to get done. You're right. If you look back to 2019, if we take out the divestitures, we did $885 million. Last year, $1.250 billion. This year's guidance is at $1.810 billion. So we've doubled it. And you're right, my personal goal is after 2023 -- because these markets are the best in the world, and we make such a difference for customers and their customers that I've said I want to do $2.8 billion to $3 billion. So let's see if we get that, but we're off to a great start.

Great. I did want to spend a lot of time on the main question that I've been getting from investors, which is around getting to the organic growth targets. And we saw you accelerate growth in Q4 to 2.4% organic constant currency, excluding the deferred revenue adjustment. And I believe we're expecting 6 to 8 organic exiting 2021. Can you talk about your full year organic constant currency growth target for '21? And just help us out with the bridge for achieving that from where we are today.

Thanks, Toni. I'll start. Richard will pick up and close the bridge. What's built into our guidance, which we give the annual guidance, as you know, is 5.5% to 6.5% organic all-in for the year, and it's a combination of pieces. But Richard, pick up because it's so important that we get everybody square. The likelihood, in my view, Toni, just so you know, of making that happen is 80%, 85% in 2021. Richard?

Yes. So as we think about Q4 '20 and going into Q4 2021, as you said, 2.4%, Q4 '20 going to 6% to 8% Q4 2021. I think just at a strategic level, we've got 2 high-growth assets, which will anniversary into our Q4 comps, being CPA Global, which is a very consistent 6% to 7% grower, driven by natural tailwinds in terms of the increases in the patent book that we enjoy each year of approximately 5%. And then there'll be some additional price yield on top of that and some volume -- natural volume growth. Secondly, DRG, which is the business that we acquired in February 2020, that will also be in our Q4 comps, of course, for the first time from an organic perspective. That will be a double-digit grower in 2021. So strategically, in terms of the algorithm, that -- those are 2 principal drivers. If we break the revenue streams down into subscription, reoccurring and transactional, we're expecting and planning for subscription growth 3% in 2020 to be mid-single-digit growth in 2021, driven by price and volume growth and also some of those higher growth assets coming into the portfolio. Secondly, in terms of reoccurring, which is primarily the CPA Global business we acquired, which at the core is the patent renewal business, very, very good margins, very, very predictable growth rates. We expect that to grow 6% to 7% in that reoccurring product line. And then in transactional, with this focus on custom data sales, particularly in life sciences, continuing to enjoy strong backfile sales in the academic product line and then really driving our professional services business in life sciences, where we've got real tenure deep relationships at the top of the house, across the top 30 pharmaceutical companies, there's a rich vein of growth there as well, driven off the DRG and Cortellis assets we have in life sciences. So those are the -- when you break it down by revenue component, that's the bridge from -- to 6% to 8% in Q4 '21.

Can I just add one thing? Because it's such a critical question, Toni. Thanks, Richard. If you think about the traditional Clarivate business, if you will, excluding DRG and CPA, both great assets, think about price realization, think about moving us -- last year, we introduced 19 new products, most of them in the second half. Last year, we introduced ease-of-use product changes of over 50. All of those get live and well in 2021. And then the last piece is, that I feel so good about, as we shift -- 80% will exit -- of our customers into inside sales will exit 2021. It's a huge upside for us as we move to global account bundling, all of our products into global markets that we're focused at. So that's why Richard and mine and our whole team's confidence level of the 5.5% to 6.5% organic for the year is as strong as it is. I couldn't feel better about where we're at because it -- people ask me, Toni, what's the biggest issue that I get concerned about, one thing: execution. All the pieces are there. And when we execute as I know we will, in 2021, we'll look back and say, "Well, that was a good step forward." Thank you.

Great. I do want to get into the drivers that you mentioned as well. So maybe we could start with pricing. I guess you've mentioned before that pricing isn't something that your customers have been complaining about in the past. In fact, like you think that there's a very high probability that you can achieve price increases without there being any impact on retention. I guess I imagine some of those pricing conversations have already started to happen. Has there been any pushback from clients or just as expected that you'll be able to get the 4% to 5% this year?

Great question. I'd just add a little more background because it's so important, Toni. There actually was no real price realization in 2017, again in 2018, 2% roughly in 2019, close to 3% last year. We loaded that 4.1% in for 2021. I think the realization of that will be 3.5% because, one, we've got multiple year of course so those don't come in. And then two, there are currency issues -- where we're dollar debased, which is great news, 77%, 78%. But if you look at Mexico, their currency devaluation against the dollar, those people were not gouging for sure. What I would tell you is that we believe we're spending almost 5% of our revenue on new product and product enhancements, and we'll continue to do that for years to come. So if you think about investment standpoint, even at 4%, 4.5%, that's not even breakeven. But what we're providing our customers is truly new product. By the way, for the first time, we're listening outside in to our customers about what they need. So no, I feel really good, and your question's a right one. How do we feel so far this year? Really good.

That's great. Wanted to ask about DRG and CPA. I know you mentioned that being a driver to organic growth as those anniversary. I guess, first, how are the integrations going? Have their growth rates been trending? Have they accelerated since you acquired them? Have they stayed pretty constant? And someone from the audience would also like to know what their organic constant currency growth rate were -- both of them were in 2020, if you can share that.

Great question. Just one thing. Actually, 2, DRG integration is done. In fact, we internally announced that this week. So that feels good. We're ahead of schedule on CPA. I couldn't feel better. And we said on our call when we gave guidance in November that we had $185 million cost to take out with all the different programs, 30% out of DRG -- $30 million out of DRG, $75 million on CPA. That's happening and it's well ahead of schedule. So feel really good about that. We have benchmarked, too, Toni, our cultural comparisons to make sure we're focused together. That came out really well. Richard, give them -- it's a great question. Give them the history of organic growth with both of those businesses and what happened last year versus that and this year.

Sure. So DRG in the life sciences space, 2019 pre-acquisition grew 9.5%, so call it 10%. In 2020, we grew low single digits, definitely impacted by COVID with some deals being pushed out of Q4 into 2021. I would add this, that in terms of DRG, Jerre and I get the -- what we call the in-the-bag report each Sunday night, which shows what have we sold and contracted for delivery for rev rec purposes in 2021. And we obviously compare that each week to same period prior year. The proof point is up very, very nicely on same time prior year. So what we have to do, of course, is continue to execute well this year to get to double-digit growth. The market is growing at 12% per annum in terms of the provisioning of data and analytical tools to pharmaceutical life sciences sector, including medical devices. So we're very focused on getting to that -- at least the market growth rate this year. Turning to CPA Global, a very consistent 6% to 7% grower, which is what we expect to deliver in 2021. Very, very highly predictable subscription and reoccurring revenue streams.

Again, I just -- thanks, Richard. That's great. And great question, Toni. I'd add one thing. As you remember, I never include -- we don't include revenue synergies when we make the acquisitions. There's a lot of revenue synergies that we'll see play out mostly as we prepare into 2022, but it's better than we had expected. So that's an upside for us with time.

That's great. Wanted to also ask, there's -- one of your initiatives is getting to 95% retention from 90%. Just talk about what are the big growth drivers that will help you get to that level?

Yes, great question. So I actually was -- to be real straightforward, surprised that we went from 90% to 91% last year. Because if you think about everything we were living through and learning how to live through with customers, that felt quite good. There's 4 pieces that are critical. One is inside sales, as I mentioned, will move 80% of our customers. Out of the 30,000 customers, about half of them have now moved into inside sales. And by year-end, 80% of those -- 25,000 will be inside sales, much better performance and responsive. We're redoing the entire backroom. We lead through cash, significantly reduce the time it takes us to respond to customers. And so that's one piece. Then we're moving to 3 global centers, 24/7 support centers from a customer care -- customer service standpoint, that's the second piece. Third piece that's critical is that all of the work that's gone in the last couple of years to enhance our user interface, that's all in place now. And that's the one place that we get huge marks, high marks when we do the surveys with our customers on the value of our product, not rig marks, and we fixed that now with user interface. That always takes a couple of years or so. If you're like me, I read it, I hear it. Let me see it. So I think we'll see more of that in 2022, but some of that in 2021. Then the other piece, because just as a reminder, the way we count renewals, if you and I had a deal last year, $100 for the renewal last year, and you negotiate with me and it's $99, that's a miss for us. So that's the way to think about it. And as we do a much better job with our field salespeople focused for the first time, without all of the thousands of customers they had to worry about with lead through cash, they're now focused on selling bundles, which will make a significant difference for us. There's 2 statistics, Richard, if you got them handy. What's so interesting is the huge increase in retention, Toni, when we've got more than one product in place. So have you got those handy, Richard?

Yes. I mean they're -- once you've got a client that has more than one product, the renewal rates are 95% plus. I think the other interesting feature is that there's a significant cross-sell opportunity available to us when we look at the stratification of the client base in terms of just the percentage of clients that are still taking one product today. So it comes back to the heritage of the business, which were these 5 silos, which have obviously now collapsed into 2 product segments. And so we're seeing much more cross-sell opportunity across the portfolio, which will obviously raise retention rates as well.

So we feel really good. I think you should be thinking about at least 1.5%, Toni, retention improvement in 2021, another 1.5% in 2022. So that will get us close to the 95% target we have. If we continue to execute the way we should, you'll see us more to that 95%, north of it by 2023. I will say 2 things. Retention with CPA is very, very high. It's in the high 90s. And that's because once you're in there and you're managing Apple's or Samsung's or Microsoft's worldwide patent control, that's a huge and critical job. And we save an enormous amount of money for them.

Got it. I wanted to ask you about Asia Pac as well since that's a significant growth area for you. Can you just talk about your strategy for growing in Asia? Do you see any issues about growing in China? What's your relationship like there? Will acquisitions be a key part of your growth strategy there? Does it make sense to partner? I guess -- and how much could APAC be accretive for you?

Yes. No, great questions. So 3 or 4 things there. One, we made our first acquisition in history in China last year and had to be approved by the government, as you would expect. That's proprietary data on IP that nobody else in the world has inside of China because that's a critical way to grow there. That particular acquisition is not a large one, but a very fast-growing one. We also did a tuck-in, in Korea late in the fourth quarter. So we will do those where it makes sense. They won't be large. When we look at partnering, what we -- I would say, what you'll see us as we move forward, example, right now, the CPA has a very good traditional partner in Japan. One of the things we'll do there and are doing is helping complement them with all the products that we now have available in the core Clarivate business. So -- and you're right, 2 acts as our friends. About 70% of the patents in the world, the new patents are coming out of Asia. And that's true in the last 3, 4 years. So we've got to get that growth. Every acquisition we've made within the tuck-in is focused on our ability to either sell into or create products with what we've acquired to go into Asia. So that's on track, and I feel good about that. And then last, you should see us -- we're just over -- all in with CPA, we're just over 21% of our total revenue. That should grow to 24%, 25% out of total in the next 3 years. DRG is a great example, a wonderful product, almost no business in Asia. So that's the place that we'll penetrate. Had a good start last year, a better start this year. And it is important. Your question's a really critical one. We do have excellent relationship in each of the Asian countries, and we'll continue to work that. And we do pay specific attention. For example, the Chinese government uses our product offerings in Web of Science today to make their decisions on how much they're going to grant to each of the Level 1 and Level 2 universities. So that's a great quarter goal. We need to and we will continue to invest in the growth there just because of the business that we've got, complements so well Asia.

That's great. Wanted to move on to the subscription part of the business. So following the 4Q results, I've gotten a number of questions from investors about it. During COVID, it was really stable, sort of mid-3s kind of range. And then in 4Q, it decelerates 1.5% organic, excluding the deferred revenue adjustment. There was a much harder comp in there. So maybe help us understand why 4Q '19 was so strong in subscription and why that didn't continue into 4Q '20.

Yes. Please, Richard. That's a great question, Toni.

Yes. First, 2 drivers of the 4Q '19 income. So there was a -- there were some contracts that pushed from Q3 into Q4. So we had significant revenue pickup in Q4, which ordinarily, in a typical year, would have been in Q3. And secondly, in the subscription business, there are some countries where we recognize -- even though their subscription agreements, we actually recognize revenue on a cash basis, in particular countries like Azerbaijan, Turkestan, Uzbekistan. And so we had more cash receipts from those countries in Q4 '19 relative to Q4 2020. So that's really the pinch that we saw in Q4 2020 to that 1.5% range. If you normalize that, would be sort of 3% growth rate in the subscription book of business in Q4 and as you see for the full year, subscription growth was 3%. And the growth in the book of business, the annual contract value, as we referred to, was up 3.4% point-to-point Q4 ended December 2020 compared to ended December 2019. It was very, very consistent with that experienced in 2019.

And Toni, you know this so well. The ACV is really the best way to benchmark how we're doing. I was delighted that we came out at the 3.4% when you think about everything going on last year. So that says that book of business is in the bag now moving forward. And you should see that as it increases during 2021. And remember, 50% of our annual subscription base renews in first quarter of 2021, 20% in the second quarter. So we'll know and we track it very closely. We'll know by the end of the first quarter really how good that organic growth is going to be. We did build in 5.5% to 6.5% all-in, as I mentioned earlier, for 2021, all-in organic growth with the guidance we provided.

That's great. And Jerre, I can't have you at the conference without asking an M&A question. I'm going to try to bundle a few of my questions into here. So you've made 2 substantial acquisitions so far. Do you think that there's any gaps or opportunities for further large M&A? Any tangential verticals that could make sense with your existing ones? And in terms of timing, like, I guess, how much of a priority is deleveraging versus if there's an asset that's for sale, like you really need to count on it?

Yes, great question. Let's work backwards. We were at 4.3% trailing at the end of 2020. I've always operated more comfortably at the 3% level, 3.5%. So we can go up and back down if we see the right acquisition. So that's a big focus for us. Secondly, we're busy finishing critical integrations. So that would be something else we will do. You should think of us doing 3 to 5 tuck-ins. That means $25 million of revenue or less every year for the foreseeable future, certainly in '21, '22, '23. So that will happen, and those are good. I would say 2 things. We don't -- the larger ones that I track carefully are adjacent to existing, not a new -- I don't think we need at all any new verticals. Our penetration opportunities are so big. 2 things are going on. Won't surprise you, Toni, but the way the market has been, a lot of people think that their value is in the high-20s EBITDA of multiples. We don't. The way we do large acquisitions always have, always will is, it's got to be at least 10% accretive adjusted EPS at the end of year 1 and should be 14% to 15% at end of year 2. That's on one side of the coin. The other side is, we're not going to go above the 4.5% unless it was for a quarter or something. So those are the 2 bookings. So we see people with very high multiples. I don't worry about multiples if I can get the cost reductions out like we have. Right now, I think that multiple expectation is higher than a lot of the cost reductions we'd be able to put in place. Then the other thing, and it's so interesting because in June of 2018, when I first heard that was -- because I had no clue. That was a different world. Today, Toni, I think there's 260 like that. Because of our success, half of those have written in, they're looking for companies like us. They don't say that, but they're looking for data and analytics. So there's 130 SPACs chasing potential things that would be interesting to us. I think we've got to work through -- that's a double today. We'll work through that. So patience, persistence and preferred. And if the right large one came along, we'll figure out how to do it. I would not expect to see that unless the multiple world changes in the meantime. Great question.

I wanted to ask you one last one because we're coming up on time, but someone was asking from the audience about, I'll just paraphrase, growth sustainability. So you have a lot of drivers that we've talked about in terms of organic growth. Just talk about post 2021, how confident you are in the sustainability of the growth drivers you have.

Great question. In May of 2019, when we announced the goals, Richard and I said we'd grow -- we'd exit 2021 6% to 8%. That's going to happen. And then you should think about us at that upper end of that 6% to 8% for years to come. It's there. Our penetration that -- what Richard commented on with the cross-selling, which has never been done and our upselling is huge. So the ability to do that and continue to complement it with new product is as good as at any place I've ever seen. It's a different world, but we grew all-in 18% compounded a year from 2006 through 2017 at IHS when I stepped down. 10.3% of that was organic. This business has that kind of potential. We've got things we've got to get done, but the sustainability is a great question. I feel really good each year, for the foreseeable future, it's going to get better. Thank you.

That's great. We are up on time. These are always so short. Thank you so much for coming to the conference. This was great. And we will talk to you next time. Thank you for -- everyone, for listening.

Great to be here, Toni. Thank you.

Thanks, Toni.

Thank you.