Clarivate Plc (CLVT) Earnings Call Transcript & Summary

Good morning, everyone. Thanks for joining. We are really excited to have Jerre, CEO of Clarivate; and Richard, CFO of Clarivate, join us today.

Good morning.

Jerre, do you want to give a quick overview and then we'll jump into Q&A? Thanks.

No, I'm happy to. And thank you. We're delighted to be with you as always. If you look backwards, we just finished 0.5 hour ago our quarterly call with all of our hands worldwide and had the opportunity to talk about the amazing job that they've accomplished in the last 2 years almost, and including the Customer Delight scores that were excellent. We'll talk more about that. But it was essentially a good feeling. To reflect for a minute, we went public on May 14, 2019. We had 7 stand-alone businesses at that time with great potential. Richard and team were carrying a burden of 6.8x trailing debt. And I must say what was accomplished despite that was amazing. And so when we went public in 2019, this set of businesses I have watched since 2012 back in my days at IHS and was very excited about the potential of what we could do to help change the world. And we've done that, and we're just getting warmed up. If you had an opportunity to see the Investor Day, including the Monday demos, you'll see how far we've come. We've actually introduced 60 new products or improvements in 2021 period. And I just couldn't be happier with everything we've laid out to do and how well we've executed. We moved from those 7 businesses, divested off some pieces and moved to the 2 groups, the IP Group and the Science Group. But we've complemented those with several tuck-ins and then 2 large, very successful acquisitions, CPA and DRG. I just couldn't be happier with that. We're now moving very rapidly to what we intended to do way back May of 2019, where we're moving to what we call One Clarivate, which is a single system to open up all the potential we've got in 4 major global markets with all of our products rather than historically as we did selling them one-off. So huge opportunity, couldn't be happier in all the steps we completed to get there. I'm very thankful for everybody. So we're happy to be here and talk about it today.

That's a great introduction, Jerre. And then as you highlighted, we see very strong momentum in the business going into the fourth quarter. And the organic growth is expected to accelerate to 6% to 8% in '21. We've received a number of inbound questions from investors just trying to better understand the growth acceleration from 3% in the third quarter to 6% to 8%. And I was wondering if you could help -- if you or Richard could help us with the revenue bridge, how should we think about particularly the contribution from the acquisition, all of those things?

No, happy to do that. Just as a refresher, in 2019, the business was about 2.8% organic growth. In 2020, it was 1%, if you think about everything that was going on. In 2021 -- and I'll have Richard fill in the blanks because he's done a great job of that. If you think -- right now, actually, and I think people forget it a bit, we actually have grown organically 5% year-to-date for the 3 quarters, first 3 quarters. And there was a lot of peculiarities by quarter because of a lot of renewals, et cetera, being moved in and out with COVID last year. But take them, Richard, from where we're actually at, the 5% year-to-date, and what we expect to see happen in Q4.

Sure, yes. So the objective is, as we said consistently, to get to 6% to 8% organic growth in the fourth quarter. The pickup in Q4 is principally driven by transactional revenue growth, in particular in the Science Group. So that is custom data sales in life sciences. It is in academic and government. It is backfile sales, where we sell chronological slices of information and also in professional services and consulting as we close out delivery of projects naturally consistent with the end of the year. So it's very much driven by those elements of our revenue stream. And as a reminder, the business that we acquired in February 2020, being DRG in the life sciences space, that has a significant back-end loading of revenue into Q4, where 36% of their annual revenue was booked in Q4, driven by those custom data deals and consulting. So those are the drivers of Q4 growth in particular. I'd also add in absolute terms that CPA in the IP Group, the business that we acquired in October last year, Q4 from a seasonality perspective in absolute terms is always their strongest quarter, just simply due to the timing of patent book, patent renewals as we close out the calendar year. So those are the main levers that we're pulling on to get into that range of outcomes.

Great answer, Richard. And I'd just add one thing to it. We said early this year that we would see 48% revenue growth in first half, 52% in the second half. We're on target. That's where we reaffirmed the guidance, et cetera. And that actually will be a norm for us because of what Richard described so well, truly not a hockey stick of our business, it's a hockey stick of the industries we're in. Great job, Richard. Thanks.

This is very helpful color. And again, Jerre, as you mentioned, the Product Demo Day as well as the Analyst Day last week was really good, very insightful. One of the key things I want to focus on is the revenue growth. You called out organic revenue growth of 6.5% to 7.5% in the near term. We just wanted to understand, is that the expected organic revenue growth in fiscal year '22 as well? And if you could elaborate on what are your expectations when you gave out the fiscal year '22 guidance, what were the expectations for revenue and EBITDA contribution from ProQuest in fiscal year '22?

Yes. Just we did give guidance, and I'll just quickly spin through it to remind people that didn't hear it. I do need to preface a subject, this is guidance including ProQuest. And we're consistently hopeful that we'll close ProQuest before the end of this year. So assuming that all plays out, the guidance we gave for 2022 was $2.875 billion to $2.935 billion revenue. By the way, if you look back to 2018, that revenue was $830 million. So the progress, I couldn't be prouder of a team that's done what they've done. Adjusted EBITDA, $1.2 billion to $1.260 billion. We're growing and growing and growing. If you go all the way back to 2018, our adjusted EBITDA for the end of 2021 will be 44.5% to 45% and be 47% in 2022 as we exit after we take the cost out for -- which we'll do when we announce it at the time we announce the planned acquisition of ProQuest, so feel really good. If you go back to 2018, we've increased almost 17 -- actually 1,800% from where we were to where we're at today with EBITDA. And I'm so proud of the team and it just couldn't be better. Important, adjusted diluted EPS, we said this year, $0.70 to $0.74. And we said next year, $0.90 to $0.96. I'll come back on that in a minute. Actually, we'll be on a $1.02, a magic $1.02 with run rate cost savings as we exit 2022. What I've always done, and it really feels great here, when we acquire a large acquisition, this will be 3, we have to, at the end of the first year, increase all-in our adjusted EPS by at least 10% and by 15% or better at the end of year 2. It's just critical that we do that because that gives us the payback. And so I'm feeling really good about that. And of course, I've always focused on cash, period, cash per share. And the adjusted free cash flow unlevered will be $950 million to $1 billion in 2022, again assuming we get the approval to get ProQuest closed. So that gives us great flexibility going forward. And we'll balance off what gives shareowners best return, if it's more M&A, if it's share buyback or if it's a reduction in debt. And we're now going to be in the position to use all those levers when we go forward. So it's a great place to be as we move into 2022.

That's very helpful color, Jerre. Maybe just can you also talk about -- and again, I'm sorry if I've missed it. But what's the expected organic growth for fiscal year '22? Is it going to be in that 6.5% to 7.5%?

Yes. But I'd like to wait to really lock that up after we get ProQuest closed.

Okay. That's very helpful color. And Jerre, maybe switching gears, if you can talk about the One Clarivate initiative. And in particular, you identified $1 billion of targeted revenue opportunity over the next 3 years. So I was just wondering if you could provide some more color on that front. Can you talk about the key up-sell, cross-sell opportunities?

Yes, great question. And it's so exciting because we'll go live on January 1 with having rebuilt the entire company to be focused into those 4 global markets. Those global markets in total -- not splitting each of them out but in total are growing about 7% each year, anywhere from 14% in life science and medical science to about 5.5% to 6% if we didn't take share, just the businesses growing, 5% to 5.5% to 6% in academic and government. The upside potential we've got is a combination of share. But most importantly, what you asked, we've got great products that we've sold in these, my words, silos historically. What we now are doing is bringing those together into solutions. And I'd love for anybody that didn't have the opportunity to see Investor Day to at least see the 3 factual living examples that we gave with Mukhtar, Gordon and Stef on the solutions that we'll sell -- that we did sell and we'll sell in. The upside is huge because nobody has the total combination that we do in those 4 markets. So it feels great. We have a lot we had to get done first, including going from 0 inside sales to world-class inside sales well north of 80% of our customers now and very specific goals as we go into 2022 for higher retention. Richard and I could talk about that all day. But we would expect retention in our whole team in 2022 to be 92.5% to 93%, up from way back when 89%. And then we expect to see in a couple of more years, so let's just say 90 -- 2024, some were approaching 95%. That's a very big deal for us. A lot of that comes from inside sales. The great job Steve did on Investor Day, showing the pyramid of how we're split up, the one thing to remember is that the people on the street and the account execs on average will now have 16 customers. At one point before inside sales, et cetera, they had as many as 80, so a huge difference. And we spent a lot of time and money, and we'll continue to, to enhance our back room to make that even smoother, too. So it's really exciting. It's interesting, in September 2019, there was a meeting of several of us actually in London, where we laid out 5 global markets that we thought -- with help from outside consultants, that could make the best use of all of our product offerings. And so we've gone to 4 of those. Eventually, we'll split off to that fifth one as we grow. But there is room to grow for many, many years to come, including we'll look from an acquisition standpoint of what tuck-ins and larger ones that will complement us in those 4 global businesses. So it's exciting. Steen, last week, had our entire top sales team from around the world together, which was great that we could finally do that in London. And I've got to tell you, the energy of where we're at and all the training we've done and the recruiting, et cetera, it's exciting to be at that point compared to where we were in May of 2019.

That's very helpful color, Jerre. Maybe just if we can focus on the technology transformation, you talked about how when you took over, there were 7 different businesses. And obviously, under your leadership, Clarivate has been at the forefront of cloud migration with the implementation of Research Intelligence Cloud, selling at it as a service. Also the singularity, it's been pretty phenomenal. But I'm just wondering if you could add additional color on how this technology transformation is really helping drive new product innovation and improving your vitality index?

Yes, I'll start. And Richard deserves a lot of that credit because he was -- when he arrived, there was 0 pipeline of new products, improvements, et cetera. And if you look -- I can still remember the second day I took the lead as CEO and I met Armughan, who was leading -- just starting the singularity effort. And I stayed particularly heavy on top of that to support, make sure they got all of the tools they needed and all of the expenses they need. Because we were 100% manual. And today, Richard, tell them where we are with artificial intelligence, machine learning, et cetera.

Yes. In terms of the core architectures, Ashish, the overwhelming majority of our technology platforms are in the cloud. We've introduced, as you said, artificial intelligence and machine learning to all of our content ingestion processes. That facilitates timely delivery of content and data to our clients. But above all, the re-architecting of the platform enables us to share our content much more seamlessly across our products than we've been able to previously. And so that adds velocity to the rate in which we bring new product to market because we can move our data around much more dexterously. And then in terms of release protocols, a number of our -- in life sciences, for example, we can now release it well. So we're able to push through upgrades to our products much more seamlessly than previously. So we're delighted with the architectural upgrades that we've engineered and also the introduction of more contemporary technologies to drive the business forward. And just back to Jerre's earlier remarks around the product innovation, absolutely right, we've got a -- in terms of our product platforming, our product road maps, it is absolutely night and day compared to where we were 3 years ago, 4 years ago. So we've got extensive road maps to drive growth, good road maps to drive improved retention rates up to that 92.5%, 93% level that Jerre quoted earlier. And our ambition, of course, is to get to 95% retention rates, which some of our products are already ahead of. But we've got to have all the boats lift across the portfolio up to that 95% level, which we consider then best in class. So that's our objective over the next 2 years.

And Richard, if I could just add to give them a little color on the data lake we provided for all of the people that we're doing with vaccine research, that we couldn't have done even a year before.

Yes. I think the -- in terms of stimulating growth, the monetization of our data assets, both in the Science Group and the IP Group, is a real -- is a central tenet for our strategy. So we have the Research Intelligence Cloud that we quoted earlier, Ashish, which has all of our scientific data assets. And then we have the IP data hub, which have all of our IP assets. We have cross-pollination of data assets across those 2 main pools. And so Jerre's references to the pandemic and what we did at the outset of the pandemic is pool all of our data assets into the -- into a separate cloud-based data lake that housed all the viral infectious disease and vaccine data and clinical trial data. And that was made available on a pro bono basis to not-for-profit organizations, who are involved in developing the vaccine programs, but also made available to our existing clients as well. In the life sciences space, we're selling to the top 50 life sciences companies. So you -- we all know who the leaders were in bringing those vaccines to market in the last few quarters. And we made our data assets available to those companies to facilitate their research and bring vaccine solutions to the pandemic. And we absolutely had a major role to play in accelerating that program.

That's what's so fun about this company. Not only has it got great potential for all of our shareowners and our customers, but it helps change the world for many years to come.

That's great, Jerre. It is truly inspiring. Maybe switching to a less -- a topic around margins and margin expansion, can you just talk about the key drivers for margin expansion, the guidance, maybe both the near-term as well as the mid-term guidance from 40% to 43% in '22 to 47% to 48% in the near term and 50% in the mid-term?

Yes, I'll start, Richard will pick up. Because I'm so proud of our teams that the 2 comments I'd make. We -- our investors should think of this business being one that will operate at the 50% EBITDA margins or higher over time. And what -- where we'll exit 2021 is very close to that number, for sure, a bit above or below. But once we complete the cost takeout, and I give again Richard and everybody else great credit, we'll have taken out, as we exit 2021, over $215 million of savings from the day we started. We've got another, pick your number, and that will be a full run rate for the first time in 2022, but another $35 million to $40 million we're working on now inside of our company plus the $100 million as we merge ProQuest and us together. So we'll be well north of $320 million, $325 million in 3.5 years. Most people can't do that. We did it because we have a great team of people. We did get help from the outside. But I just couldn't be happier. And we've got the best integration machine I've ever been pleasure -- had the pleasure to be involved with. We review everything every week, upside-down and backwards. Richard?

Yes, so I think what's really -- I'd add to that is the apparatus that we've built over the last 2 years to facilitate the integration of both tuck-ins but also more transformational acquisitions into the Clarivate platform. So 3 centers of excellence, which house customer care and inside sales in the Americas, Europe and Asia Pacific. All the good work that we've spoken about around the technology transformation of the company, including the management of the back office, the investment in the front office to drive growth. As Jerre said, we've got a terrific integration management team. They have a repeatable playbook that we apply to all of our acquisitions. It's a very consistent methodology. And we've got a demonstrated track record in delivering and exceeding the commitments we give The Street with respect to transformational acquisitions and the cost-saving targets that we set. So we've done very well and we'll be moving on to the next program, of course, in 2022.

That's very helpful color, Richard. And maybe just if I can follow up on the free cash flow, Jerre, you mentioned the unlevered free cash flow guidance. You also guided to a minimum of 60% EBITDA conversion in the mid-term. And Jerre, you also mentioned available -- the cash available for delevering but also accretive M&A. And you've done the large acquisition in such a short period of time and several tuck-ins. How should we think about your M&A strategy going forward? Do we take a breather on the larger acquisition? Or how do we think about M&A over the next 3 years?

No. Thanks very much. Three things, first, let's just get facts as our friends. Before debt payment of our interest, there's the following, let's say, it is $1 billion just to make it easy because that's the guidance unlevered we gave. So -- and this is one thing I'm so proud of, $65 million cash tax in 2021 -- 2022, sorry. And we'll spend about 6% of revenue. A simple way to think about that is on CapEx because 90%-plus of that CapEx is product development. So those 2 pieces, you can just do the math. That leaves really about 80% of the EBITDA as available to make the decisions. So one decision could be reduce quickly and further the outstanding debt and bring that down to where we're paying far less interest. Another decision is more likely is a combination of doing that, doing some share buyback for a long time to come to make sure there's no concerns by anybody about overhang. And then using what makes sense going forward, the rest for larger acquisitions. I would say one thing that we're -- it's a bit unique for us, I think, but we have 0 overlap with each of the acquisitions we've made. And we'll continue to do that 0 overlap, meaning no competitive environment because the markets are so big, and we're able to complement what we've done and will continue to do. So as we move forward, we'll look at those. And again, 2 rules that are critical. Most important is for the larger ones, we won't do them unless we're sure with cost takeout. And by the way, we do not include revenue growth cross-selling, always keep that separate. So with cost takeout, we have to deliver at least 10% at the end of year 1 of the acquisition, a minimum of 10% adjusted EPS all-in, by the way. It's not just on that acquisition, it's for everything we do. So that's the critical piece. And some of the pricing right now is pretty high. So we'll wait and see how that plays out. Patience -- what I've always done is patience, persistence and preferred. I will not participate in auctions.

Yes. No, Jerre, that's been -- and you've had a great track record with your M&A obviously. Maybe just a quick question on ProQuest. Can you just remind people what's really pending for the ProQuest acquisition and your expectation when to close -- when you'll be able to close the acquisition?

Well, we look forward, as I said, hopefully that we'll get it approved before year-end. And we'll be off to the races on day 1 in a very complementary business that's roughly $900 million of revenue just approximately and where again no overlap, all complementary in the academic and the government world, where we could cross-pollinate what ProQuest does. They're a wonderful company. They do it so well with what we do to give customers -- actually give customers a better opportunity to save money with us helping them reduce cost and have better information than they've ever had before. So it's really exciting. ProQuest is a 51-year-old company that was started as a family company, has just done a wonderful job. And we look forward, especially the great software they've created, to help our customers for years to come. It's just a lot of great people around the world.

That's great. Maybe just in the minute remaining, I was wondering if I can ask you quickly on the China opportunity, if you can just elaborate on everything that's happening there. How does that represent an opportunity or a challenge for you?

Yes. No, great. Richard, you pick it up because we look at it every week.

China is business as usual. We have a terrific academic and government customer segment in China. We obviously sell to the most prestigious universities in the world across the portfolio. But in the case of China, the Chinese Academy of Sciences, as quoted in our research report yesterday, where we cover Highly Cited Researchers. And these are sort of scientists who advance their particular discipline. And the Chinese Academy of Sciences is always in the top 5 ranking. So we have a very, very important footprint in China. We see terrific medium-term, long-term growth opportunities there across the portfolio. I think life sciences and professional services and obviously consumer products and tech, the other 3 segments, we see just an abundance of opportunity. We'll continue to invest there, of course.

That's very helpful color, Richard. Thanks. Thank you very much. Jerre, I was just wondering if you had any closing thoughts, closing comments?

Thanks. No, just 2 things. Thank you so much for the time today. I'm very, very proud of the people we have in the company and look forward to adding the folks from ProQuest soon. Because what we do, do is a wonderful thing for the world, and I'm proud to be able to do that. But the potential that we've started to deliver on is as much fun as I've ever had. And I'm very thankful for that. And we'll continue to do our very best to meet or exceed our shareowners' expectations. So thanks very much for the time.

Thank you, Jerre. Thanks, Richard. Thanks.

Thank you.