Clarivate Plc (CLVT) Earnings Call Transcript & Summary

Hello. I'm Mark Donohue, Head of Investor Relations. Joining me is Jerre Stead, Executive Chair and Chief Executive Officer; and Jonathan Collins, Executive Vice President and Chief Financial Officer. This morning, we filed our restated Form 10-K for 2020 and Form 10-Qs for the first, second and third quarters of 2021 to correct the equity plan reporting for the CPA Global acquisition. We also provided some commentary around our 2021 performance and 2022 outlook. Before we get into a discussion of these items, this recording includes forward-looking statements. Such forward-looking statements involve known and unknown risks and uncertainties and other factors that may cause the actual results, performance or achievements of the business or developments in Clarivate's industry to differ materially from the anticipated results, performance achievements or developments expressed or implied by such forward-looking statements. Additional information regarding these factors are included in the slide entitled Forward-Looking Statements and Other Notices and under Risk Factors in our Form 10-Ks and 10-Qs. Our discussion will include non-GAAP measures or adjusted numbers, reconciliations of these measures to GAAP measures are available in today's presentation, which is available on our website.

Jonathan, welcome to Clarivate. Why don't we start with the restatements we filed this morning? Can you provide some additional color?

Sure. With the CPA Global acquisition, we inherited a phantom share plan that covered a broad group of employees. A portion of the stock consideration of the transaction was used to fund an employee benefit trust, or EBT. The original accounting established a receivable from the EBT for nearly $200 million and a corresponding liability for the future payout to the employees. The corrected accounting for the plan records the contribution of Clarivate stock to the EBT as contra equity and contemplates only a modest pre-closing liability as the majority should have been accrued as compensation expense over the remaining service period post-closing. The tax effect is negligible due to our existing attributes, but the impact on net income is significant over the last 4 quarters we reported. Importantly, the restatements did not affect any of our key financial metrics of revenue, adjusted EBITDA or adjusted free cash flow, and we're diligently working to remedy the control weakness that led to the restatement.

Okay. Thanks, Jonathan. Jerre, we faced some challenges in 2021, particularly late in the fourth quarter. Can you share your thoughts on how we're preparing for 2022?

Yes. Thanks, Mark. And Jonathan, this is a pleasure to do this first one with you. 2021 was a very challenging year for us than many other companies. We did not see some of the things that happened, particularly late at the end of this last year that had an impact on our final numbers. However, I want to make sure before we go into more detail that you know we're very much focused on delivering the kind of results that we've always planned to for years to come. We were disappointed with how the year ended. I believe we're in a better position today. I've been here now 30-plus months from May of 2019 when we took the company public, where we've commented where we are today, I couldn't be prouder of our team, what we are and where we're going to go. We're in a very good position with cost perspective due to the actions we have taken over the last couple of years. It's amazing how far we've come. We've implemented many operational improvements. These improvements can be seen in the significant expansion of our EBITDA margin over the past couple of years. We also implemented many revenue improvement initiatives, including the One Clarivate. I'll talk more about that later. The launch of the inside sales centers of excellence, which was critical for us to be able to move the One Clarivate program and to better serve our customers. And the realignment of our field sales force with a focus on far fewer accounts per rep in an effort to get ever closer to partner with our largest customers and their geographies. We'll see the benefits of these revenue improvements as the year takes place in 2022. It will take us a little longer than we originally anticipated because of what's going on in the last quarter or so of 2021. But I feel more confident than I've ever felt before.

Jonathan, in this morning's press release, you referenced some commentary around our preliminary 2021 performance. Can you please elaborate?

Sure. We now expect 2021 full year revenues to be well above the stand-alone Clarivate outlook as a result of the ProQuest acquisition, which closed on December 1. Excluding the ProQuest contribution, revenue for 2021 will likely be at the low end of the guidance range as a result of the COVID overhang and inflationary pressures our customers experience that Jerre just mentioned. Net income for the full year of 2021 will be well below the guidance due to the impact of the restatements that we filed today. And finally, adjusted EBITDA, which was not affected by the restatements, will likely be near the low end of the guidance range, including the contribution from ProQuest. This implies an adjusted EBITDA margin below the low end of the range, which is partially attributed to this business combination.

And Jerre, a couple of weeks ago, we announced that Mukhtar Ahmed would be leaving the company. Can you kind of add some rationale and frame timing for that change?

Yes. Thanks, Mark. This is critical to me. Mukhtar, the rumors that floated about him, being let go because of nonperformance is absolutely not true. He did a great job for us. I met him actually the day we announced in January 14th of 2019, and he's done everything he could. To put it in perspective, when I first met Mukhtar, he had $165 million business in life science. As he leaves, he's leaving over $1 billion business, 2.5 years later, done a wonderful job. He has a situation, both from a personnel standpoint and from a career standpoint, that he wants to make changes as he moves forward. And I will do everything I can to help those changes happen. With 2022 and particularly the move to One Clarivate, he felt, and I very much supported him, now is the right time to depart. I would say it's critical that if you read the 8-K and press release, you'll see that he's going to be here helping us through October as an advisory position. I couldn't be happier. And as you should also know, Gordon Samson, who we were delighted to have join us officially October 1, 2020. He was Chief Operating Officer at CPA Global, great experience, was going to move into our new Chief Product Officer later in 2022. So it's just a move that began earlier, and I couldn't be more happy with that. That's going to make a huge difference. The team we now have in place, Gordon working very closely with Steen, our Chief Revenue Officer, is driving revenue growth and continuing to improve the UI and the UX for our customers, so much good going on. So if I think about where we are versus where we were, the changes are miles ahead. Of all the years, I've gone into a new year as a CEO of a company. I've never felt better about where we are, nor am I more eager to prove how good we will be.

Jonathan, this would be a great time to turn transition to what brought you to Clarivate?

Well, I'll start with the big picture. I'm aligned with our foundational belief captured in our purpose, human ingenuity can change the world. Our products and services are accelerating integration around the globe, and I'm thrilled to be a part of this team. And then there's the business model, which is remarkable, a strong subscription base with over 90% retention rates that leverages the build it once, but sell it many times, is an excellent foundation for growth. I also believe that cash flow potential of this business is staggering. This will provide us the opportunity to continue to invest to drive higher growth and deliver attractive returns for shareholders.

So Jerre, while the financial earnings of 2021 was not what we had hoped. It was a very busy year for Clarivate, and we continue to execute on a long-term growth and transformation plan. So what are some of the highlights you'd like to share with investors?

There's a lot. I'll just stick with the top 4 or 5. Obviously, the acquisition of ProQuest was a very big one. That's 3 large acquisitions since we went public, all critical to our future as we move to the global markets with One Clarivate. So that was a big one. Acquiring ProQuest gave us a wonderful opportunity for multidisciplinary curated content. And one of the world's largest collections and best-of-breed SaaS software solutions, all coming together as part of us today to help our customers help their customers better than ever before. If you recall, we thought we would close on July 1, 2021, we had plenty of things ready to go. And however, we received a second request from the FTC. So we went to work, and we got it all wrapped up. And during that interim period, we were probably better prepared than we've ever been before, when the day we closed, which we did December 1. So very proud of everybody's activities. We've had an amazing year from a product development standpoint. We actually launched over 90 new product offerings and enhancements, including a wonderful new Web of Science platform. So we'll continue to do all the things we said what we're going to do since May of 2019 with new products. We'll continue to focus on making it easier to do business with us. We actually increased on our customer delight in 2021 over most companies not increasing at all in 2021. So I felt very, very good about that. We've moved, which was critical. We had to get the inside sales centers of excellence done in 2021, so we could make all the rest happen. We transferred over 24,000 customers to our centers of excellence now. And now as we move into 2022, we're serving our customers far better than ever before. What's so important to think about is that we've now got our outside sales Street folks walking on the Street for us, so to speak. They're doing far fewer number of customers than before. And we delivered -- we've done a great job. We've delivered over $235 million of run rate cost savings since we started it in May of 2019. In this last year, we overperformed CPA by $25 million. Lots more to come on that, but I'm very proud of that.

Jonathan, let's transition to 2022. This morning, we provided some update to the 2022 outlook. So please discuss what's changed?

So the revised full year guidance we provided today for 2022 continues our trajectory towards the near-term financial targets we outlined at our Investor Day in November. We revised our 2022 guidance based on the Q4 2021 indication I provided earlier, and we continue to closely monitor the impacts of the pandemic and inflation. Revenues at the midpoint of the range represents an increase of nearly $1 billion over 2021 as a result of the ProQuest acquisition and implies an improved organic constant currency growth rate that we will outline in detail on our earnings call in about a month. Adjusted EBITDA is now expected to grow nearly $400 million at the midpoint of the range for a profit conversion of approximately 40%. The midpoint of the revenue and adjusted EBITDA ranges implies a slight margin compression to about 42% in 2022 compared to the 2021 indication due to ProQuest's margin profile before we fully recognize the cost synergies by the end of 2023. We expect almost 60% of the adjusted EBITDA to convert to adjusted free cash flow at the midpoint of the ranges. And finally, adjusted EPS is expected to increase approximately $0.20 per diluted share on higher earnings.

Thanks, Jonathan. Jerre, any final thoughts?

Yes, several. We finished our first sustainability effort in 2021. Great progress, couldn't be happier. Secondly, as we move from $830 million of revenue in 2018 to approaching in 2023, if not exceeding $3 billion. We've also made a lot of organization moves, and I feel great about the team we now have in place, just critical. And if we went from $830 million to $3 billion, this team will take us from $3 billion to $5 billion or $6 billion. So I feel really, really good about that. Obviously, like I said at the beginning, I'm disappointed that we went through, particularly the late Q4 issues of the world, if you will. However, I'm more convinced than ever before that we're on track, and we'll do exactly what we need to do for years to come. We are very much, as Jonathan said, a great cash flow machine, and it will become better and better with years to come. And then finally, I want to thank all of our colleagues, 11,500, around the world today and all of our stakeholders for their support. We look forward to delivering great results in 2022.

Thank you, gentlemen.