Clarivate Plc (CLVT) Earnings Call Transcript & Summary

Right. Thanks, everyone, for joining us at Bank of America's Annual Info Services Conference. I'm David Chu, and I help cover the U.S. business and information services stocks here at BofA. Joining me today from Clarivate are Jerre Stead, Executive Chairman and CEO; and Richard Hanks, Chief Financial Officer. Just a quick reminder, clients can ask questions through the Veracast system, and I'll try my best to get to them. So let's get started. First, thank you very much for both being here.

It's our pleasure, David. Great to see you again.

Great to see as well.

So if I can just start with your 2021 organic growth guidance. So I believe you guys are forecasting 5.5% to 6.5% organic growth for the year with an exit rate of 6% to 8%. This compares to about 2.5% growth in the fourth quarter of 2020. So can you just help us think through the levers that will drive acceleration over the course of the year? And just what are the most important factors here?

Yes. No, great question. I'm happy to, and I'll have Richard pick up on it, too. For a quick background, back in June of 2019, after we announced that we've done the reverse merger and CCC took Clarivate public, Richard and I said that we hope to exit 2020 at 4% to 6% organic growth in the last quarter and that we hope to exit 2021 at 6% to 8%. I'll get Richard to give more color in a minute. But I was so pleased, that was obviously, remember, June of 2019, long before COVID, et cetera. During the year, we gave guidance in the fall of 2019, including on organic growth. And then once during the year, in April, May, was the COVID set in, we reduced the midpoint of our revenue guidance by $30 million. I thought most of that would be transactions. It turned out it was more than that as this carried on throughout 2020. And we -- I was so proud of what we have accomplished. We delivered 3% subscription-based organic growth for the year, which felt great. And I'm going to have Richard talking just a second about the key measurement that we look at from this kind of business. We said and we reaffirmed actually the guidance -- and you're right, David, we said organic would be 5.5% to 6.5% for the year in 2021, and we reaffirmed that we expected to exit 2021 at 6% to 8%. Strong feeling about how that will get there. And Richard, just quickly carry the bridge through, and I'll wrap up on this question.

Yes. So we look at -- when we think about the 6% to 8% exit rate in Q4 this year, so firstly, we'll have -- the faster-growing assets that we acquired last year will anniversary into our Q4 comps. So DRG in the life sciences space, which we are expecting to be a double-digit grower this year, will be in our Q4 comps. And then also CPA Global, acquired the 1st of October last year, will be in our Q4 comps as well. That will be 6% to 7% grower. So those 2 faster-growing assets will obviously benefit our Q4 exit rate. And then when we think about our different revenue streams, being subscription, reoccurring and then transactional and professional services, on the subscription side, as Jerre said, we grew 3% organically in 2020. We're expecting an extra 1% on price yield this year, an extra 1% on retention. Our retention was up 100 basis points last year, even in a COVID year. So we're looking for an extra 100 basis points at least this year. So that should get subscription revenue into the mid-single digits this year. On the reoccurring side, this is a new revenue stream for us driven by the CPA Global transaction business, which is the -- it is core, say, patent renewal business. And that's growing at 6% to 7% per annum, 5% volume, 1% to 2% on price. And then on transactional, we have some really interesting assets around custom data sales, backfile sales. Some of the brand search that we do around trademark searches, that was obviously -- suffered some headwinds, in particular, in Q2 and Q3 last year with COVID, but we're seeing that business improve. So all in all, we're expecting transactional growth be in this about 7% exiting this year. So that's sort of sum of the parts that gets us to the 6% to 8% Q4 growth exiting this year.

Yes. Thanks, Richard. And I'd just add quickly to that, as I said recently, my confidence level, our confidence level is very high with our ability to execute that. We're off to a great start. A quick reminder for everybody, 50% of our annual subscription base book's up in Q1, 20% in Q2. I feel very good about where we're at now. If I think about entering 2020 before COVID, I'd say where we -- where I hope to be in 2021, we were probably a 3 out of 10. I'd say, as we enter 2021, we're 6.5 or 7 out of 10 of where we will be as we go into 2022. All the things we're doing, adding inside sales, new commission program, et cetera, et cetera, I feel really good about it. But thank you, David.

Good. No, that's super helpful color. So just maybe one more on that. I mean so if I think about organic growth ex the contribution from DRG and CPA Global as they shift into organic, how should I think of that, so just the underlying organic growth ex those 2 assets?

Great question. We'll do two things we'll show you. We'll do pro forma and organic each quarter this year. I'd also suggest that you think about two things. We gave guidance that we'll do about 47% of revenue first half, 53% second half. Historically, with the base, David, we did 49-51. That drive is changed, particularly with DRG, but also somewhat with CPA heavier in the last half. But we're -- I think you should think of our core business, which is the historical, very strong web of science business, our Cortellis life science business, then our IP business of patents, et cetera, trademark, I think you can think very strongly about -- pick your number but 5% to 6% in for the midpoint of that 5% to 5.5% for all of 2021. That's why, as we said, and you did at the beginning, we've said 5.5% to 6.5% for the full year, all in. Great question. Thanks.

Okay. And so shifting a little bit toward pricing here. So I know a key lever of this organic formula -- growth formula comes from pricing. And you expect 4% to 5% in 2021 and beyond. I know clients pay for enhanced content through pricing, but it seems like a pretty high number to sustain. So how do you determine that this is the right level? And how sustainable do you think this is?

Yes. Great question. Two or three points, and Richard will pick up, too. One is we do have done it in every place, customer delight surveys, survey 800,000 to 1 million of our customers each year. I've never had what I've enjoyed here since we first benchmarked the third quarter of 2019. Our customers worldwide give us the highest value numbers I've ever seen, 81 to 82 out of 100 on the value of the product and the quality of the product, it's wonderful. We worked really hard for 15 years to get close to that at IHS. And IHS is great in this market. So that's point one. Point two, when we did the surveys, we always have open-ended questions: questions on what should we keep doing, what should we change, et cetera. Used to run anywhere from 15% to 20% what should we change comments at IHS. IHS Markit would be on pricing, you're at the top, et cetera. And that's how we kind of benchmark whether we were in good shape or not. Here, I literally read them all. There was less than 200 that commented at all about pricing. So that tells me we've got level. Third, we're investing about $100 million a year now, and we'll continue to, on new product development. And then fourth, the thing that was so interesting to me was highest scores I've ever seen in quality product, lowest scores I've seen in easy-to-do business with. And we've taken massive corrective actions to fix that. That's not one, as you know, you fix overnight. Even though we're miles ahead of where we were a year ago, we've got to prove that every day with our touch points with the customers. And we were pleased, we moved that from 56 to 59 last year. I expect to see that at 63 to 64, which is a direct correlation to renewals. So I think that's the way we see this play out, very high degree of confidence. The other thing I should have mentioned at the beginning, our pricing team's best I've ever worked with, really have done a great job on analytics. Last year, when Richard and I signed off, I think it was in August, at the 4.1% build in. From a price realization, it was by product, by customer, by usage, so much more sophisticated. Richard, to make sure, we're square on what's not in that price realization and what we'll see as we go forward in '22 and '23.

Yes, correct. I mean, so just following up on Jerre's points, we said that price equilibrium, we're looking at 4% to 5% 2022, 2023. A couple of items for 2021. Legacy Clarivate, 74% of our billing are U.S. dollar denominated, and this is -- half of our revenue is outside the U.S. So preserving the dollar currency profile is very important to us, even if we're selling into customers in Brazil, Turkey, Mexico, whose currencies are obviously devalued significantly against the dollar. So it's more important for us to preserve dollar invoicing structures rather than switching to local currency because I can lose that price increase overnight through devaluation. So we were very careful with respect to price increases in -- for customers in those countries. And we held back, as you would expect, number one. Then number two, multiyear contracts. Price increases will be implemented once those multiyear agreements re-up in 2022, 2023. So those are the 2 exceptions. On top of that, we've got CPA Global. As we renew the patent books, price changes occur during the course of the year. We see some upside there, and that will be layered in as we trade through each quarter.

Okay. That's very helpful. And then another big part of the growth strategy is, obviously, to target cross-sell opportunities. I think at your November Investor Day, you highlighted $150 million in potential cross-sell opportunity from your top 180 customers. How much of this do you expect to capture this year? And could you maybe highlight which products are most underpenetrated today?

Yes. Great. I'll start. Richard can pick up. This is the first year that we've had full commissions with a pop, with our sales team to indeed sell, cross-sell. I'll give you examples in just a moment. We started training last year with our field sales team. We put the commission -- a light commission in second half of 2020 so we could check it out. Now it's full commission with a lot of upside. It's interesting, just as a refresher, when Clarivate was spun out, it was 7 relatively independent businesses and never -- actually didn't -- had no reward system for cross-selling. So this is a big culture change and training change. Second point, inside sales, huge difference. Just to put it in perspective, today, including CPA, we've got about 30,000 customers. 80% of those by midyear will be on inside sales. So simple way to think about that, there'll be 5,500, 6,000 with our 350-plus field sales people and their support teams, and they'll focus entirely on the 5 global markets that we're going after, example, government and academic being one of those. And as we move forward, we've given them bundles that they can sell, and there's some real low-hanging fruit. A couple of examples only, we never sold a trademark together with patent lookups, as an example only. CPA never sold into academic where we have great strength having web of science in every major university in the world. Richard give a couple more because this is so fun to see.

Yes. I think that's really interesting. Only 30% of Clarivate's clients buy more than one product. And when a client buys more than one product from Clarivate, they spend approximately 16x what they do as a single product purchaser. So the drive for us to facilitate cross-sell, whether it's using tools such as changing commission plan or structure, is really valuable to us. We see significant opportunities across the portfolio. Jerre and I have been speaking to each of our individual top sellers over the last quarter as we focus on organic growth in 2021. And just giving them the capabilities, if I'm a government academic salesperson, I can now sell life science products into that portfolio, it's just terrific. Broadens the portfolio, they can see their cross-sell opportunities. And what we're down to now is just really good execution, and we get a biweekly report to measure our progress against that objective because we consider it to be significant opportunity.

In that $150 million, our top 180 was actually done by our pricing team, statistically relevant. I think that will -- we'll see that potentially be delivered in 2023, 2024. I think you should be thinking about this being our first year, with momentum picking up as the year goes. We've been very pleased. As Richard said, we track it now biweekly. Feel good as a start. This will not be the driver for the growth we get in 2021, but it's a great start for us. Thank you.

Okay. Great. And then just shifting over to the new products. So I know recently there has been the 2 transformative deals. But you also launched 19 new products in 2020. So how should we think about the revenue opportunity across the new offerings? And just when will they start to be a meaningful contributor to the overall growth?

Great question. You're right, 19 major new products in the second half introduced in 2020 plus dozens of enhancements. When Richard arrived just over 4 years ago, a couple of years before I did, there was no new product portfolio, no new product pipeline. So take -- give him some examples, Richard, because this is the most fun that's going on with us. We've built a really great development team. As I said, we're spending about $100 million a year on new product and product enhancements. But give you some examples, Richard, please.

Sure. And that $100 million is 5.5% of revenue, so we think that's a good number. So in the case of major enhancements for our platform products, the revenue contribution should be pretty quick because it will come through enhanced retention levels. So that's number one. Number two, completely new products that we're bringing to market, if they're subscription products, there's a natural build period. Contrast that with some of the data assets we're bringing to market, some of the data pools that we're constructing, for example, around 5G, of particular relevance to our clients today, or virology and infectious disease databases in our life sciences space. To the extent that we're taking slices of data and customizing that data for particular client use, those can be sold on a transactional basis, often with professional services wrapped around them. And that would be immediate point-in-time revenue recognition. And we think we can get some velocity around that as we trade through each quarter this year. So it varies by the application we're bringing to market and also the type of revenue that it relates to but continuing to increase the velocity with which we bring new product to market. And I'll just add that, 4 years ago, when I joined the business just 5 months after the carve-out from TR, since that time, we have done a lot of product renovation. The fidelity and the quality and the heritage of our content assets and analytical tools are second to none. What we've really focused on is UI and UX and improving the user experience. And that's where the real focus has been. And now with our platform capabilities, the end-to-end value chaining we have in life sciences with the DRG transaction, we've always been strong in academic and government with our web of science portfolio and now end-to-end value chaining in our IP business with the CPA Global transaction, some of the dollars are going to be on harmonizing the user experience as you migrate from one product to the next, as you go through the value chain. So that's -- integrating these capabilities is a focus now.

And one last quick comment I should have made at the beginning, rules of my road are we never introduce a product until it's live through beta test, the whole bit and real. I've never preannounced because that's just not a good thing to do. So these are real products being sold as we speak today.

Got it. That's super helpful. So just on your product portfolio. So obviously, in 2020, you added DRG and CPA Global. And you've also divested a number of assets. So how would you characterize your portfolio today? And just wondering if you're happy with the construct or should we expect further transformation?

Great question. This is such a great portfolio of customer offerings. And like Richard said, end-to-end, nobody in the world can do what we do for innovations and researchers today. We feel pretty good. We're always going to look every year are there products that don't fit long term with us, and we'll continue to do that examination. But the ones that are doing I hope really well elsewhere just in fit with us. You should think of -- we also did 4 high tuck-ins last year actually. You should think of us doing 3 to 5 each year for the foreseeable future. Those will be complementary, like the ones we did last year, $25 million or less of revenue but ones that we can make global, ones that we can get proprietary information from and ones that we can bundle together to become an ever better presence for our customers. So think of those, we've got a good pipeline of those. One of the things that's been fun for me is I've always spent time where a lot of the acquisitions we made, for example, IHS was -- customers said you should do this for us, that for us. That's now started here, and I'm really pleased, and we'll continue to do that. There are larger ones that would fit in the markets we're in today. We don't -- we're so -- we have so much potential to grow in the markets we're in. Not looking for a different leg of the stool or anything like that, we -- there are larger ones out there. I'd say two things quickly with that. They're not -- they're complementary. They're in the markets we're in, but they're adjacent to where we're at. I always, if you remember, never do an auction, never will do an auction. It's always got to be -- we need to be the preferred acquirer. So patience, persistence and preferred, we'll see how all that plays out. There is -- it won't surprise you, but there's a lot of discussion in the market with SPACs right now. There's over 400, as you probably read or no. So I think there's some interesting discussions going on about those SPACs and how that fits with people that we would like that are private that we'd like to acquire. We'll see how that goes. Our advantage, obviously, is you go with us and you're instantly part of a public company with a great future, point one. Point two, if you do it as stand-alone, you'll never have the opportunity to enjoy the synergies we can provide from a cost standpoint going forward. We said we take $30 million out of DRG. We exceeded that. We said we'd take $75 million out of CPA and us. Obviously, it's always best athlete. We are exceeding that. We said in September of 2019, we take $75 million out of the base cost. So that's $185 million-plus runway as we exit 2021, and that's a great value. So patience and persistence, and we'll see how that all plays out.

Great. That's super helpful. So just moving on to your sales strategy. So you're in the process of realigning the sales force, that focus on inside sales. And it's supposed to improve retention, with the goal of getting to 95% versus the 91% where you are today. How far are you in this realignment process?

Great question. I'll start, Richard will pick up. I was actually quite pleased. In 2020, we had a higher target, as you can imagine, increasing from 90% to 91% when we went into 2020. But I was very pleased, thinking with COVID and the fact that we were -- we had everybody working from home almost all of last year, to actually improve it by 1%. Richard, pick up, though, because this is such a critical part of our place -- play game. And make sure, Richard, cover where we're at. Richard and I have always had inside sales, but cover those two.

Sure. So the background to inside sales was that when we looked at the stratification of our client base that Pareto applies, in that 80% of our revenue comes from just 20% of the accounts. So those big accounts will remain with the field organization boots on the ground, physically visiting clients, executing large transactions, large deals. So then we're left with the 80% of the client base that accounts for 20% of the revenue, and that's the piece that we're moving -- have moved into inside sales in our 3 global business centers: Chandler, Arizona at the Americas; London/Belgrade for EMEA; and Penang, Malaysia, of course, for Asia Pacific. So that's progressed very well. We would say that we're approximately 80% complete on getting those accounts transitioned to inside sales, to their respective inside sales manager. And by the half year, that process will be 100% complete. My personal experience, having had inside sales teams for my 25 years in information services, is that it's always interesting to see the size of deals that can be done through inside sales, the velocity with which deals can be completed and also the improvements that you garner in retention, simply because, as a thought leader in the spaces that we sell into, we have lots of opportunities to have regular interactions with our clients. And when you have a more balanced coverage model through inside sales, you just improve the interactions with the clients, you get better customer experience, easier to do business with and retention rates will improve. So it's a mechanism, it's the apparatus that we're using to increase sales velocity, improve account coverage and also, ultimately, improve retention rates. So we're really enthusiastic about those.

Richard, so can you quantify? So roughly, what does each point of retention improvement mean for revenue?

Great question.

Yes, great question. So approximately, in the subscription revenue stream, it's approximately $9 million, so it's meaningful.

Okay. Great. I mean, just shifting over to margins. So obviously, you guys have done a great job on margins, 900 basis points of expansion in the past 3 years. You expect another, like, phenomenal year in 2021, calling for over 600 basis points of expansion. So longer term, where can margins go?

Great question. That's the beauty, and I feel so privileged to have been part for the last 20-plus years of information analysis in analytics companies. But think of this one -- we gave guidance this year of 40% to 45% adjusted EBITDA. Think of us getting well north of 5%, 6% organic growth. Like we said, take the midpoint of 6% that we've got built into the model in 2021. That will drop 125 basis points, 150 to the bottom line. Build it once, keep it current, sell it over and over. So I -- Richard can certainly say this to all of our leadership team, we have to make sure we don't think of there being any ceiling at all, if you think about what we can do over time and think of us consistently delivering that 100, 150 basis points, including all investments in for years to come. So when we first -- in June of 2019, we said we hope to exit 2020 at 40% of EBITDA. Obviously, we're going to outperform that. Now it's at 40% to 45%. And you should think about us with the ability to continue that level, increasing 100, 150 basis points a year. We still got cost takeout. We're making enormous improvements. So proud of every person in the company, more to come to get that done. We work really hard on focus, simplify and execute. And we've come miles, and we have miles to go there. So think of that being a really good milestone when we hit the 40%, 45% in 2021 with more to come.

Great. So -- and then just back on your product portfolio. So at the Investor Day, you mentioned the goal of simplifying the portfolio as well. How many products are in the market today? And what do you see as an optimal number?

Great question. Richard is the best I've ever had at thinking through that answer.

So last year, we divested the lower-margin brand protection business, the lower-margin Techstreet business. So that was the appropriate pruning there. In terms of our existing portfolio, I'm actually -- I think it's in a really good place. I think that where the opportunity is for us now is in the interconnectivity from -- across some of our platforms, in the academic and government space, in life sciences and in IP, and continuing to execute against our data strategy. So I think, strategically, the data lakes, the data pools we're bringing to market is important for us in terms of transactional growth, professional services growth, the services we can wrap around those data assets is really important to us. And what's really critical there is it then we find that with professional services engagements, it leads to, ultimately, product pull-through on the back end of those engagements. So at the moment, I think the portfolio is in a really good place.

100% agreed. And think of us -- as we said, we talked about that in November at Investor Day, 5 global markets that we're really focused on outside in, and we'll be providing bundling of effort, products to each of those global markets as we move forward. And our field sales people will -- are being and will be organized to sell specifically into those markets with all of our products, including all IP and science products. So yes, I feel really good about it.

Okay. Got it. And we're coming up on the end of the time. But Jerre, as the godfather of info services space, I just wanted to ask you there's been a lot of large transformative deals in the space, S&P with INFO and LSE with Refinitiv. So what do you think about all this consolidation amongst large players? And could you possibly see Clarivate coming together with a publicly traded peer?

That's a great question. I don't see that for the foreseeable future. I do think we're going to see more and more consolidation. And what that -- and it's because if really powerful, with us included, thinking through the customer base and can we provide everything that's needed to that customer with one-stop shop, that's the way it needs to be thought about. We've got miles to go, David, before we think about that. But thank you.

Great. Already up on our time here. Thank you very much, gentlemen. It was very informative.

Our pleasure. Thank you very much.

Thank you.

Thanks, guys.

Bye-bye.