Clarivate Plc (CLVT) Earnings Call Transcript & Summary

Hello, everybody. My name is Manav Patnaik. I'm Barclays' Business and Information Services analyst. Thank you for joining us here again at our TMT conference. Unfortunately, it is virtual again. I'll say it again. I said it all year, but hopefully, next year, we're in person. But until then, we'll do with the Zoom sessions. But I'm very pleased to have with us, back again this year, Clarivate, and we have Jerre Stead, who's obviously the CEO and Chairman of the company. And perhaps 2 new faces for some of the audience, but Gordon Samson, who leads the IP Product Group; and Mukhtar Ahmed, who leads the Science Group. So thank you all for being here. I really appreciate your time.

It's good to be here, Manav. Someday, we'll see each other again. You may not know this, but I've yet to meet Gordon. So I'm looking forward, and I haven't seen Mukhtar, probably, for 23, 22 months. It's amazing.

Yes, quite fascinating. Well, just for the audience, I'm going to have a few questions prepared for the 3 gentlemen here. But if you have any questions, feel free to type it in the box or e-mail me, and if I can, I'll squeeze them in. But otherwise, let's just get right to it. So Jerre, maybe just to start with you. Obviously, last week, we had a big announcement. You closed your ProQuest acquisition. It was an annoying weight, if that's the right phrase. But maybe just some thoughts on your end, now that it's closed, just some quick reactions on how positive you are on the deal.

Yes. No, Manav, great comments. Thanks. I couldn't be happier. The only good thing that I think Mukhtar and Gordon and the rest of us would agree, we had 5 months to be over ready. I mean -- so on day 1, day 1 was off to the races, couldn't have been better. We got great feedback. We did a town hall. We closed at midnight and did a town hall the next day. We'll get Mukhtar to comment in a minute. But the energy level and the excitement with our friends at ProQuest were enormous, and we look forward to this one. It's one we laid out. I think you remember, Manav, I had hoped that we would close this mid- to late 2022. But it became clear actually in February of '21, this year, I had Andy at my house, Andy Snyder, the CEO of the holding company, for 4 hours, that's when he told me that they were looking at doing an IPO. And I spent the next 2, 3 months with Mukhtar and others, very active, helping them understand why it would be much better to do what we were able to accomplish, just couldn't be happier. Mukhtar, you might just comment because Mukhtar has been on the face with them now for 5 -- 4 days, 5 days?

Yes, 5 official days, for sure. And in general, we -- the response has been phenomenal, not just from within our organization. The new ProQuest colleagues, our Clarivate colleagues, lots of excitement there. But what's really interesting is the response and feedback that we've had from customers. It's just quite phenomenal, in terms of the response we've had there, not just from the traditional buyers and decision-makers in academia, in the educational sector, across research, publishers and so forth. But it's also the true end customers, the actual end users. And it's fabulous for us to, kind of, see just a wave of enthusiasm and, sort of, positive sentiment towards this union of our companies. And we're especially excited here because what we bring now into that educational sector, primarily from all of our expertise in the research and innovation space. It's just so complementary here. And it means that we can just serve all of those customers with just even better value and give them access to just terrific resources, over time.

Got it. And maybe, if you can just take a step back a bit, Mukhtar. In terms of ProQuest, the deal itself, I know -- maybe, just help the audience appreciate what ProQuest is, and how it's complementary to what Clarivate already have? Because there were a few questions because of the second review by the FTC, whether there was some kind of overlap or issues there, which we know it wasn't. And so maybe, if you could just help the audience appreciate that.

Yes, absolutely. I mean, what ProQuest brings is, it's just market leadership in the educational space. So think about the K-12 educational space, think about early research. So particularly, undergraduate studies in academia. Think about all of the libraries across the globe, both public libraries as well as private libraries, which typically are knowledge centers. What ProQuest do is, they serve all of that space. They have some really, really wonderful, wonderful assets, books, workflow systems that serve those libraries, dissertations, just a wealth of data in content and then, of course, the software to support that. And essentially, it's a business with some really, really good cloud and software as a service-based offerings, of course, then coupled with the content that, of course, they curate. And so it's that capability now fused with the Clarivate capabilities, which really serve the research and innovation community. So typically, academic research, corporate research, corporate innovation. And this is not just our science portfolio, but all of our intellectual-property capabilities because it's all about protecting innovation and ideas. So what it's allowed us to do is very much served right across the continuum of what we're calling learning and knowledge. So when you think about knowledge acquisition and learning, it's the core of what research is founded upon. And what we can now do is really serve that value chain from its first stage, which is typically in that K-12 educational sector, all the way through research into the corporate sector. We can fuse that together in that experience, and that's why this is so exciting.

Got it. That makes sense. Jerre, just in terms of talking about synergies, I know you don't bake in revenue synergies in -- when you make these deals. But can you just, maybe, round up what Mukhtar just told us, in terms of how we should think about, if there are any revenue synergies because I think ProQuest was growing about 6%, which is -- it sounds like around where science is growing now, too. So just thoughts there.

Yes. No, that's great. Just as a reminder, Manav, we said when we announced the deal, we saved $100 million of cost, and we'll do that, plus some, and that's great. This one probably has more short-term cross-selling because it's really not cross-selling, if you think about what Mukhtar just said. It's really taking their products and ours and bringing them together. And that's what makes this one really exciting example, only the software that they've built in the last few years and acquired is outstanding, and it's just great. They, I think -- Mukhtar, I believe I'm right, they're on about 2,000 campuses around the world. We're on 6,400. So that's just a good example of what we'll be able to do with selling and complement for the universities in particular, the software will provide significant cost reductions for the universities. And that's a bit special for. So I couldn't feel better about that. We complement each other really well in the back room, et cetera. So we're feeling, I'd say, in total, upfront, this one is as strong as I've had in a long time, for bringing the 2 together and partly because, even though painful, we've had 5 months to be ready on day 0. So it just couldn't feel better.

Got it. So maybe, just to wrap up on the ProQuest side, 2 follow-ups. Jerre, first for you, the $100 million you talked about cost savings and more. I think you said, post that, your margins would be 47%. So can you just talk about the timing and cadence around when we should expect that? Because I guess, next year's guidance is 42.5% or so.

Yes, that -- when we exit our run rate at the end of 2022, we'll be well on the way to that 47%, 48%, all in for the entire company. I think Mukhtar would agree with me. It cost -- we're 5 months behind the original schedule. I think we'll make up at least 2, maybe 3 of those months going forward, because the team have just done a great job. So what you should think of, as in your savings, $42 million; exit savings, $85 million to $87 million, which means the [ staff ], if you will, I think Mukhtar and the rest of the team, in the first quarter 2023.

Got it. And Mukhtar, in terms of just the combined, top line organic growth, how do you look at the potential of the business now?

Yes. I think the way to look at this is -- and excluding the adjacent markets, and I think Jerre alluded to this, where we can take some of these offerings, for example, into some of our adjacent corporate markets, so particularly, kind of the retail, consumer markets, where we can take, for example, some of the library offerings and sell into those. So excluding those but purely focusing on, what we call, our academic and government vertical, the addressable market, just through this, is -- it's risen to about $30 billion for us, as an addressable opportunity. So within that, there's lots of opportunity for us to continue to grow and expand these assets, take those to market, look at geographical opportunities, where we can expand. And of course, we're going to continue to grow and develop these offerings as well, over time. So I'm very optimistic here that we can achieve good -- sort of good growth there, with all of these offerings.

Got it. Okay. Maybe just to switch a bit to the IP segment. Gordon, you obviously came from CPA Global. That was the acquisition right before this, I guess, of size. So maybe, Jerre, if you want to kick it off, lead it off, in terms of how that integration is going or has gone? And perhaps, Gordon, if you could just help us appreciate, if that integration can help us look into what ProQuest could -- probably could do here as well.

Yes, I'll kick it off. Couldn't be more pleased. We said, originally, $100 million, we'll end up at $125 million. It's 85% done. We've got back-room work to add, but just a great one, all the way around. And one other quick comment because it's helped us so much, when Gordon joined us a year ago in October, we asked him to head up Asia Pacific, for 6 -- actually, 9 months and put in place the one Clarivate effort that we've now moved to. So that gave us a great opportunity to look at what we're doing. He stepped out of that -- wonderful job, I couldn't be more pleased and then took over all of IP. IP, just for a second was now -- we're north of $1 billion in the IP world. Our next closest competitor is $250 million, maybe, giving them the benefit of currency or something. So that's the huge step we've had. And take it from there, Gordon, please.

Sure. Thanks, Jerre, and thank you for the question, Manav. For those hearing echo, I've moved house, but not moved furniture yet, as the story that Manav and I shared, just so you understand.

That's okay. But we will give you enough money to get the furniture.

Get some bit of quality carpets after the year end. Look, the CPA integration, Jerre is right, is more than 85% done. What's really good about, I think 2 or 3 things. So let me try and pick out some highlights. First of all, the go-to-market organization, led by Steen Lomholt-Thomsen, has brought together our sales organizations and rather than selling bundles or cross-selling, we move to solution-based selling, really quickly. So we're ready to '22. And I think that combination of the Clarivate structures with CPA's solution sale into the renewals and IP&S world is really critical to that. So it's a real success for me. I think what I would say, and Mukhtar knows this very much, is that we did a very, very good lessons learned around what went well and what we could do better in the CPA integration. And those lessons I can see being applied, frankly, from before the deal was closed with ProQuest. So we're building each time we do one of these on what we did well and what we can always do better. And there's always a bit more you can do. But I would say, we're in terrific shape for the ProQuest integration based on that. And I think finally, just to bring it down to sort of basic -- let's think about the customer here. We very quickly integrated some of our software and workflow products with CompuMark data. We have Darts-ip litigation data, one of the best data sets in the world in the space, probably the best, if I can say that, integrated across not only the IP software suite, but also in the Science business, as Mukhtar knows. So I think our focus on delivering to the customer has been the thing that's been most pleasing, which is to integrate our data sets to bring our solutions or our products into solutions. And of course, that job is never done. It almost never ends, but that's been our focus, I think, delivering for them is what the [indiscernible] measure is on as opposed to doing the internal things that, frankly, we know we'll do. But I think Mukhtar would agree that, I think the learnings from CPA, I think, make the ProQuest integration. We're even more confident about timing and outcomes.

Got it. And Jerre, just a similar question on the revenue synergy side. I think -- can you just remind investors again of the overlap or lack of overlap and what opportunity that it presents, especially since you've had CPA in your portfolio for some time now? How should we think about -- if we get more than 6% growth here?

Yes. No, that's a great question. And the answer is the selling of solutions -- Manav, when we did -- November 9 this year, when we did our Investor Day, actually, Mukhtar, Gordon and Stef, our Chief Technology Officer, gave great examples of what the solutions do as we move to One Clarivate. There, you'll see there's incredibly good examples of how we pull those pieces together and are doing it as we speak; both in science, historically, and very much in the IP. It's just -- it couldn't be better. And I think what we're learning -- I don't think -- I know what we're learning is our ability to go outside in versus inside out is opening platforms for our customers that they've never had the opportunity to use before in the businesses that we're now in. So it just couldn't be better. We'll see the full impact of that in 2022. And the other thing is, what's exciting to me, just as an example, you can pick places like universities, as an example, where Mukhtar explained what a great advantage ProQuest has with our Clarivate business, that same -- as we move to those 4 global businesses, that same thing applies for life science, selling into the research universities. And for sure, the same thing applies into our IP business, where we can sell and save the universities a great deal of money by us managing all of their intellectual properties and particularly the patents. So if you think about it, and again, if you spend 5 minutes on our November 9 Investor Day site, you'd see that living, and we'll see more and more of those. So you should be thinking about how those products all come together into solutions in those 4 global markets.

Got it. And Jerre, in terms of the -- so it sounds like there's obviously a lot of good things going on in science and IP here. But in terms of the 2022 guidance, I think there was 5% to 7% organic growth. Is there any difference between the 2 divisions in terms of one growing faster than the other?

No, great question. We actually didn't give -- I'm sorry, if we created confusion. We didn't really give organic growth because remember, for the year, that -- let me say it differently, that organic growth will only have 1 month of ProQuest in it. So you're really looking at where we were in the base before we added ProQuest. So think of the -- and I would be thinking, and we'll give you much crisper, Manav, in the next few days, we'll give you an 8-K that describes exactly what we'll see coming out of the nonorganic until December of next year, and what we'll expect to get. And you would see the guidance that we would give if it was stand-alone Clarivate without ProQuest, it would be 6% to 8%.

Okay. Got it. Jerre, the other question we get a lot about, and perhaps you can help -- with the help of Gordon and Mukhtar, help us appreciate it, is the big fourth quarter ramp that's required to meet the guidance that you set for this year, for 2021. And part of that obviously is the heavy weight to fourth quarter or second half from DRG, part of that is, I think, the transaction business from CPA Global. But maybe, if you can just give us the high level, and if I could just ask Gordon and Mukhtar, from their perspective, to help us appreciate why -- or at least appreciate the visibility that you guys have for that.

Yes. That's a great comment, Manav. So the business itself, before those major acquisitions, and then we can close on that part in a minute, about what it will do adding ProQuest. So the business itself, before CPA and before DRG, was about 48.5% to 51.5%, 48.5% first half, 51.5% second half. That's the base. We're always going to see that because they're spending on transactions in both science, and that comes in late September and all of October, November, December. And then, we see the same thing, on a historical basis, with pre-CPA, so that's the base. And I'll just set the other 2 up, and then Mukhtar and Gordon can talk about it. Then, on top of that, DRG, historically, has been 36% of the total revenue, on a historical basis, has come in the fourth quarter. So that's the -- Mukhtar can expand on that in a minute. And CPA is always about 4 points higher in the fourth quarter than the third quarter is, and that's because -- and Gordon can comment on that. It's because so many of the annual renewals and patents are required to be renewed annually that we manage for so many people, they come in the fourth quarter, but Mukhtar start with -- and by the way, a quick comment when you're doing that, what we're trying to do to take a bit of that hockey stuck out with DRG.

Sure, happy to do so. I think, Manav, the way to look at this is, traditionally, in life sciences and health care, if you look at the companies that operate in that space and particularly, the pharma companies, they operate on a calendar year, not necessarily a fiscal year, when it comes to budgeting. So typically, what happens in Q4 is when they need access to data to drive decision-making so that they can then determine their portfolios for the subsequent calendar year. That's what typically happens. That's why Q4 is a time when there's a lot of demand for data, for reports, for expertise. And that's why with DRG, historically, you've seen that Q4 ramp up. It all happens in Q4. And what we've done here since we've acquired them is we've invested in particularly the data assets. So rather than onetime at the end of the year, we move them more into a Data-as-a-Service offering. We've laid on analytics. So it's not a one-time transactional deal in Q4 to meet that budgeting cycle, but we try and provide that intelligence through the form of our software, which -- as a service and to the Data-as-a-Service. So that means that we can bring that forward. It becomes equalized through the year so that we are part of the strategy planning in pharma. And so when it comes to the budget allocation -- well, we've done all of the work beforehand. That's how we are flattened out, over time. In addition to that, what we've laid on is a lot of our data science and expert health-care consulting. So rather than being a point-in-time projects, we've moved more towards volume commitments, where customers can use that expertise in conjunction with the data, in conjunction with the software that we've built for the analytics. So it means that over time, we'll level that out during the course of the year.

Just before you start, Gordon. Mukhtar, I should have mentioned, just given a quick -- the other onetime events that are the heavy transaction and Web of Science in fourth quarter.

Yes. I mean, very similar there as well. A lot of customers, historically, have come to us, very much for the same reason, and this is typically in academia, universities that have asked for a snapshot of the Web of Science data files, very same thing there. I think, earlier this year, we launched our new, next generation of Web of Science. We've launched our research cloud, a whole heap of new products, including EndNote. And again, the same thing there is to shift customers towards not this onetime give us the data in a structured, onetime format, but again, get access to the same capabilities, Web of Science, Data-as-a-Service, the next generation of analytics that we now have embedded into that platform. So again, we'll see the same effect there as well.

Thanks. Gordon, please.

Thanks, Jerre. The IP team are always very jealous of Mukhtar's quarter 4 big one-off deals. We're delighted, but we're very envious of those big one-off deals. But for some reason, Manav, quarter 4, it has an uptick in transactional business in the IP business. It's about budgets, a bit like Mukhtar said, but it's about spending the money you have because if you don't, then you're not guaranteed that will roll into the next year. And that does affect our transactional spend, not in every service line, but overall, it has a positive effect. And our software sales, equally, have a natural December-is-coming cycle. So deals that are in the pipe that are dragging out, we often find will close out in Q4. So it doesn't impact Q4 revenue but it sets you up nicely for the new year. And the thing which really drives the, sort of, 4 points that Jerre described is the recurring or annuity payments business for trademarks and the patents. Why is it like that? Well, it goes back about 20 years at a time because these things roll 10 to 20 years. But historically, we've always enjoyed a big Q4. It's a very big quarterly payment cycle, round about November, December time. And 75% of that business, Manav, is highly predictable most months in advance. And the 25% is less predictable for most businesses, would still be considered highly predictable. So our confidence level in Q4 is generally pretty high, frankly, a long way out from Q4. But those are the general factors that come into play.

And the last thing I'd add to all of that, Manav, for 2022, you should think about ProQuest being about 49% first half, 51% second half. And it's because of what Mukhtar was describing with academic and also what Gordon talked about. So all in, next year, I think, if I were planning the budget like we have, it's -- I'd use 48-52.

Got it. All right. And so Jerre, we have a few minutes left here. So I got to ask on M&A, of course. I think, in each of the last 3 TMT events like this one, I asked you the question about the next big deal. And each time, you told me you're not ready yet, and each time, you did it way quicker than we expected. So tell me now that ProQuest is closed, your leverage is elevated at the moment. When do we see the next big deal?

Yes, that's a great question. I'd say 3 things about that. We really weren't ready for any of those, but the team has executed better than I could have ever expected. Like I said, if we could have done it, Manav, it would have been first quarter 2020 for DRG, second quarter 2021 for CPA and third quarter, probably fourth quarter 2022. So that -- but I'm delighted where we are because that puts us at $3 billion run rate, certainly, 47% to 48% EBITDA when we exit 2022. And what's really exciting to me, to answer your question, is that we're going to have free cash flow of $1 billion a year. And that then lets us make the decisions of acquisitions. And I think what you should be seeing in 2022, we'll continue the tuck-ins. That pipeline is great. We will wait to see how things play out with the Federal Trade Commission, et cetera, and probably be thinking about the next larger one second half 2023. That would be the more logical way to think about it. I would also say a couple of other things. We've -- I've been -- I've done about 230 acquisitions, we've never held a better teams. Like for example, with Mukhtar leading the integration right now, he's got great support team, and I just couldn't be more pleased. Integrating $1 billion business that's 51 years old, that's -- and by the way, we're adding a lot of incredible talent, too, with it. So we want to make maximum use of that, 2022 should be the year that we button down everything, get it ready to go and have the gun power, if you will, as we go into 2023.

Got it. All right. Well, Jerre, I think we're right about on time here. So let's end it there. But I just want to thank Gordon, Mukhtar for making an appearance here as well. But thank you as well, Jerre, as always.

I'm delighted to always be with you, Manav. And I'm very pleased to have Gordon and Mukhtar because they're just a great set of great executives that we're now excited about what we're going to do in the years to come. Last comment I would make, we've got better views today of where we are with what we've got to accomplish each quarter than we've ever had. We started with none in 2019. Today, I'm very proud of where we're going and what we've done to execute better and better in 2022. Thanks very much.

Thank you, Jerre.