Clarivate Plc (CLVT) Earnings Call Transcript & Summary

Good morning, everyone. I am Heather Balsky. I am the new information and business services analyst here at BofA Securities. On behalf of the bank, I'd like to thank you all for attending our Information Services Conference. Since I'm new to the space, I wanted to use this as an opportunity to first introduce myself to you all. Prior to taking on this coverage, I was briefly our cannabis analyst, but also followed the apparel and retail sector for about a decade. I have 15-plus years of Wall Street experience. That includes both research and banking, and I'm based in New York. It's been a pleasure to start speaking to you -- to all of you, and I look forward to meeting more of the business and information services investment community as we continue to cover the space. For the conference, in terms of logistics, we will take audience questions in some of our sessions, specifically Gartner, TransUnion, Thomson Reuters and Equifax. Please make sure to use the webcast feature to submit your questions. And we'll check to see what's in the queue around 20 minutes in. Lastly, I want to say thank you to everyone here at BofA who has helped us with the conference, including my research team as well as our Conferences and Corporate Access groups. So with that, I will hand it over to David Chu, who will be speaking with Clarivate's management team.

Thanks, Heather. All right. Thanks for joining us today at BofA's Annual Information Services Conference. I'm David Chu and I help cover the U.S. business and information services stocks here at the bank. So joining me today from Clarivate are Jerre Stead, Executive Chairman and CEO; and Jonathan Collins, who joined Clarivate as CFO in December of 2021.

So if we can just get started with the modest weakness we saw exiting the year. You guys originally had forecasted to exit 2021 at the upper end of 6% to 8% organic growth. However, fourth quarter grew about 4%. It sounds like weakness in transactional revenue was the main culprit. Can you just discuss this a little bit in more detail? And are these headwinds likely to persist into the first quarter and maybe even the second quarter given the macro?

David, thanks. It's great to be on. This is the first conference we have been able to do since we last week announced the Q4 and 2021 results. So it's great to be here. I'm going to turn it over to Jonathan as my partner that I'm very pleased to have. He's actually celebrated his third month anniversary after yesterday. And let's get his fresh eyes on the comp question because it's a great one.

Sure. Thanks, Jerre. Good morning, everyone. So in the fourth quarter, the miss that we saw late in the quarter was focused in on or was largely experienced in our transactional business for our health care data sets that we sell to the market, which are delivered and recognized in the period. So that's one of our products that can be a bit more lumpy. And what we saw late in the quarter, we outlined in earnings there are really 3 key factors that attributed to that. The inflation that was experienced in the quarter put some pressure on some of the onetime spending that our customers will usually make in the fourth quarter. So we heard that from a number of customers not that they didn't want to purchase, but were going to have to defer that until Q1. We certainly had some impact on getting some of these deals closed due to the Omicron outbreak in the quarter. And then we also saw higher-than-expected attrition in some of our go-to-market teams. And these are all things that won't necessarily go away overnight, but there are some things we can do about. So our customers have a better line of sight into planning for higher cost in 2022. We're also going to make sure that we take some actions to pull forward some of those deals, and that's something that we'll work with our sales teams and with our customers to look to reduce our dependency on getting these transactions closed all the way at the end of the year. And then the other factor is we are in an unprecedented level of attrition that we're seeing. It's a very tight labor market. So there are some things that we're doing, making sure that our recruiting efforts are beginning in earnest and that we're doing that proactively to make sure that we keep all of the folks that are in the field driving these sales and adoption of our products staffed at full level. So that's how we're thinking about some of the aspects of it that we can control and look to deliver a better outcome in 2022.

And let me just build on that for a second, David, because that's acts as our friends, if you will. We delivered -- it was spot on with our 4.5% organic growth in subscription base. And then we were actually overplanned at 8.4% on the reoccurring with above a plan almost 2 points. So felt so good about all that and then really very disappointed with the basically $20 million that we missed on the transaction. We -- as we looked at it, just for background, we looked at DRG's close on the transactions, their actual close of pipeline in 2019 and 2020, and that's what we were expecting in 2021. I was actually pushing as late as a week to go for the quarter trying to get an extra $3 million, which would have put us at a 7.9% organic growth. And then we just ran in exactly to what Jonathan talked about. So I feel really good about the moves we've made. Jonathan said it well, some of it is going to take a while. But I feel great about where we are. And we did, as you remember, David, take a fresh look at -- had Jonathan take a total fresh look at the guidance we gave for 2022. So feel good about that, too, and we'll just have to deliver.

Great. That's super helpful. And is it possible to bridge that 4% organic growth in the quarter? So just more broadly, how much was driven by price and the impact of DRG and CPA, inorganic versus other?

Yes. Great question. Jonathan?

Yes. The impacts for us are we were as we expected with the pricing and the renewals. So as Jerre said, the subscription business, the price increases on those all came in as expected. As you mentioned, our reoccurring business, which is largely the patent renewal servicing business out of CPA, did better than expected. So really, the entire shortfall, which was just down slightly versus the prior period, were those transactional sales. So as we pivot to next year, what happened in the fourth quarter really gives us confidence on the first 100 bps of growth rate expansion that we're expecting on pricing and better retention rates. And really, the piece, as Jerre said, that we have to deliver on and focus on the execution is the cross-selling and the improvements in transaction. And that's really what's going to help drive us from that 4.5% full year growth rate in 2021 to that 6.5% that we're expecting at the midpoint of the range for this year.

And just them give you a little color on Q1, if we could, too.

Absolutely.

Yes, our view of on organic.

Yes. We indicated at earnings that we're expecting our growth rate to improve as we go through the year. For Q1, we expect our growth rate to be essentially flat sequentially with the fourth quarter, so around 4%. We expect that to improve as we move through the year. A couple of reasons. The first is big renewal period for us, so a lot of subscription and renewal sales during the quarter. So 4% growth is good. It's not a big transactional quarter for us typically. We will have some deals that we were expecting in December that have closed in the first quarter that are going to help a little bit. And this is also going to be a little bit challenging given the comp from the prior year. So I think we tried to remind everyone on the earnings call and during the Q&A, Q1 of 2021 had a very strong growth rate at about 8%. That was due to bringing some operational discipline to how we managed renewals. That kind of pulled forward some of those renewals in that revenue to help to drive a better performance. But we think 4% in Q1, give or take, and then we expect an acceleration as our new go-to-market strategy is now in place. Our account executives have their targets. They have their new territories, and they've really starting to make progress here in the month of March, and we expect that to accelerate through the spring.

Okay. Great. And then just, yes, shifting over to 2022 expectations. So you guys are thinking about a 200 basis point improvement from the 4.5% organic you saw in 2021. And on the fourth quarter call, you guys alluded to 50 basis points of via pricing, 50 basis points via higher renewals, same amount for cross-selling and transactional improvements. So the pricing component, I think, is quite clear. So just wondering if you can help discuss the other -- the main drivers of acceleration across the other 3 levers.

Yes. No, great question, David. Fresh eyes, Jonathan, for the group.

Yes. Just as a reminder on pricing, getting our attainment from about 3% to 4% across the entire renewal base will deliver that first 50 bps. To your point, on the better renewal rates, one of the big catalysts for this, we believe, was the implementation of the inside sales force last year. That's really going to yield benefits in the January renewal cycle as we move through this year. So our longer tail of customers, the smaller customers, about 25,000 of them that weren't necessarily getting the attention that we thought they should. That team has been doing a remarkable job, making sure they recognize the value, that they're seeing the new product feature enhancements and the content that's available there, and we expect that to help drive some of that improved renewal rate. The cross-selling is something Jerre has been speaking about for a while. And this we think is the real game changer for Clarivate in 2022, and that is for the first time in the company's history, the entire breadth of product portfolio will be available to all 4 of the customer verticals that we serve. So we see great opportunities to bring some of these flagship products that were primarily sold into other verticals, make that value proposition clear. We think we're going to have some really exciting traction to share on that here in the next few months. And then the final one is transactional. And just to be clear, we missed transactional in the fourth quarter by about $20 million late in December. We're counting on about half of that coming back in improved growth when we provide the guidance at the midpoint of the range, so about $10 million, and that will equate to about 20 basis -- or 50 basis points of a growth rate improvement just by getting about half of that back. And some of the things we're doing there are focused on closing earlier, working with our customers and their budgeting for this year to make sure that they gotten for these products that are going to create great value for their internal processes.

Okay. Great. And just in terms of the timing or cadence of revenue improvements, I know the first quarter looks a little bit more like the fourth quarter. And so should we expect sequential improvements throughout? Or is there any reason why there might be some variability that we don't know about?

Great question. I'll start, David, and Jonathan will pick up. At the end of Q1, we will give you the closest I've ever given to quarterly guidance, which I've never done in my whole career, but we'll do that to kind of help Jonathan and I on the call for Q1 results. We'll give you a really good color on Q2, 3, 4. What's exciting to me is we announced in November of 2020 the move to One Clarivate. And as Jonathan said, we did an amazing job of transferring thousands of customers to an inside sales force that didn't exist until -- and then went live to build that in 2021. We're now in 2022, where very important part of everything we do is all of the smaller customers being inside sales, great account execs in those 4 global markets that Jonathan commented on. We'll be able to give everybody, obviously, starting with you, David, color because we'll give you an example only what you'll be able to see by region is how we did in each of the -- from a revenue standpoint in each of those 4 global markets. So for example, the academic and government market will tell you exactly what we did from a revenue standpoint by each of the regions, the 3 global regions and how that compares to the actual growth of those large markets in themselves. And so it's going to make it much easier to communicate what we do and do better every day, much easier to communicate on how we're progressing against the plan in 2022 and in the future. Great question. Thanks.

Yes. No, that will be super helpful. And Jerre, you have these aspirational goals of growing 8% to 10% organic over time, add a couple of points via M&A, getting you to like low double digits. Obviously, a bit short of that today. But just among the drivers we discussed, what is the most important lever to just meaningfully accelerate growth over time? Is it in the cross-sell component?

No, it's a great question. It's 2 things. The renewal increase that we plan this year will continue. In fact, I talked to Steen, our Chief Revenue Officer, again, yesterday about that. That will continue to improve in 2023 over 2022, and that will -- you can pick your number, but add about 1, 1.5 points when we hit the 95% target that we've laid out on renewals with upside from there, then the cross-selling actually will -- I think we'll -- what we will talk about in the future, it's really providing bundles of offerings to our customers on a worldwide basis so that it's, for the first time, being able to make, as Jonathan said, make great use of all the products we have. And just as a reminder, we were selling one-off products. And the simple way to think about that is that today, only 28% of our customers buy more than one product. So we'll grow into that, and that includes ProQuest. So we'll grow into that for years to come. And by the way, when we're with our customers with more than 1 product, 2, 3 or 4. We -- our renewals run 99% -- 98.5%, 99%. So that's the big 2 steps. I think we feel very good about the new products that we'll continue to introduce. We introduced 60 in 2020 despite the pandemic and actually 90-plus in 2022, and that will continue to carry forward. And we'll also do lots more wraparounds of the transaction business with our consulting business that Jonathan and I and everybody else on the executive leadership team feel very good about from a future standpoint. So it's pretty well spread across those. And then as we do that, we'll enjoy the increase in the margins because more and more -- the beauty of the model that we and other peer groups have is that when we get north of 5%, 5.5% organic growth each year, we'll be able to drop at least 100, 125 basis points to the bottom line for years to come. This business is one that because of the unique product offerings we have and what we do with them to help our customers help their customers have great potential there. So it's really pretty much across the board to get us to where we expect to be my aspirations, if you will. I think as we go out of 2023, you'll be seeing that happen. Last quick comment I'd make, we do not expect to make any significant acquisitions in size in 2022. We got a huge job. We've got a $900 million-plus business that we will integrate well, and that's a big job. And then frankly -- and we've got some tuck-ins that are critical to help us, but that's what we'll stick to. And frankly, I expect to see the reality to set back in with time on what's being paid today with acquisitions because right now, the acquisitions being made are being made at multiples that we just wouldn't do. So that -- we'll see that increase in 2023, I hope, but we'll have to wait and see.

Okay. That's great. And then just a quick one on DRG, CPA Global, what did they grow in the fourth quarter and just for the year as a whole?

So Jonathan, do you want to give color on that, please?

Yes. So obviously, the DRG business in Q4 was down. That was the transactional, so a slight decline. CPA, on a full year basis, did better than what we had expected on a strong reoccurring growth that Jerre highlighted in the fourth quarter, which was over 8%. So that business outperformed expectations. So I think when we step back and look at both of the acquisitions, certainly, DRG has had some lumpy quarters. But I think to Jerre's point, with the focus on the wrapping with our consulting and services offering, that's going to be an important component to driving high single digits and approaching double-digit growth in 2022. And in the CPA business, we expect to continue to be strong in the mid-single digits or low to mid-single-digit category as we move into next year. Both of those will put us in a position where we can achieve the 6.5% growth that we've outlined for this year.

Okay. Great. And then just in terms of revenue synergies for those 2 deals, has there been much captured to date? And if you can remind us what expectations are over time.

Yes. No, great question. Just as a refresher for everybody. Valuation-wise, when we make large acquisitions, we never include the cross-selling, if you will, our revenue synergies. We do build them into our internal plans, and I'll have Jonathan comment particularly on ProQuest because we're blessed that Jonathan -- some Jonathan's previous experience as CFO was with ProQuest. CPA is spot on to where we expect it to be. And as we -- with the synergies, that was small, comparatively small in 2021. We'll see improvement with that with changes we've made with product offerings, again, for the first time now having that sales team focused on those bundlings, and we'll see improvement from price realization in 2022 as CPA. So feel really good about that. ProQuest, please, Jonathan?

Yes. We're -- as Jerre said, the -- in the valuation of the underwriting of the transaction, these weren't included, but they represent a great upside. For example, Web of Science has a spectacular presence in global academia around the world, as does ProQuest One. And there are peripheral offerings that we can bring into those or upsells of those collections. It can be driven by having a stronger presence at either of those customers. And the product teams under Gordon's leadership are working hard on identifying ways that the platforms can work better together, create a better user experience, not only for the librarians but also for the patrons or the research groups that are using this. So we're really excited about the content play and also the interplay between our software applications as well, too. So our discovery services for the library, how that can enhance the user experience, not only for the librarians, but importantly, the researchers that are using that. So great opportunities there. And I think this is one where we believe the modest upside that we indicated is something that we can really overdrive on as we move from getting the acquisition completed through the integration in 2022 and then into 2023.

Great. And yes, just on ProQuest, I know it's very early, but how has the integration process been going so far? I'm just wondering what type of feedback you've been getting from customers?

I'll start. Jonathan will pick up. The only good thing of the length that took us to get that closed, we originally expected to close at July 1, closed November 30, was we had a lot of time to prepare. And so Jonathan has got a great view of that with his new looks, Jonathan.

Yes. I was quite surprised by the progress that was made. So the team was very thoughtful. They've got a great playbook and that wasn't a surprise to me. I knew they had a very clear outline, but the amount of work that was done by the time I got here in December, only 2 weeks after the transaction closed, was quite impressive. I feel very good, very confident in the cost synergies, very pleased with the progress that's been made culturally in aligning the teams and getting to a common set of objectives. It's a great group of people on both sides. There's been a tremendous amount of clarity from early on, which helps a lot to give people a perspective on what it is that's important to us. So feel really good about that and the opportunity to continue to deliver those and work towards outperforming on that.

Okay. Great. And then moving on to One Clarivate. Jerre, I know super excited about the strategy. I mean can you just give us a summary of the initiative and why you're confident that this will really help accelerate growth?

Yes, great question, David. I'll start, and again, we'll get Jonathan to pick up. When I arrived and became CEO, we closed this, you'll remember, with our SPAC on May 14, 2019, less than 3 years ago, and I took over on June 1 as CEO. We had 7 stand-alone businesses. And I mean standalone business which clearly didn't make sense to me on where we could go. So in September 1, so between June and June 1 and September 1, we laid out a plan that would get us to the arrival point that we're at today. We said that we would move to 2 groups, which we did, to integrate the businesses. We divested of 2 of the businesses that didn't fit that model. And on September 1, 2019, we moved to a science group and an IP, intellectual property group. Great work done there, but it was always an interim step to get us to where we wanted to be, which was outside in, focused with our customers, great portfolio of products and services, and we needed to get them integrated away from the one-off sales organization that we had them out selling products instead of true solutions to our customers. In early 2020, we closed on DRG, and also announced, despite COVID shutting all of our offices down, that we would set up 3 regional centers of excellence, which we did. One to put in place our inside sales organization. We start -- actually went live with that in June of 2021 and continue to add to the people. So we transferred thousands of products into those inside sales areas, just great organizations, and then went live in total, with them taking over the -- all of the subscription work for those customers we transferred. In parallel with that, we made a lot of changes, including adding Steen, who has worked for me 3, 4 times over many years, is a great CRO. And we also were at a point to move towards Gordon becoming the Chief Product Officer. And we also had staff organizing our CTO, our entire group to be focused on those 4 global products we just talked -- 4 global businesses we just talked about. So that was all going on in parallel. We went live in total on January 1 with it. I should comment that Gordon came with us from CPA, Chief Operating Officer, they're incredibly talented leader, as is my entire leadership team now. And we had him in the first half of 2021 test our One Clarivate by leading Asia Pac, and we put that all in place. So in August of -- sorry, July of 2021, we made the next moves with Steen adding -- coming on board officially August 1, and I so feel really good about it. And I think what Jonathan described is -- by the way, on October 1, 2021, we acquired -- closed and acquired CPA. Then on December 1, 2021, we -- 2020, I should say, for CPA. October -- December 1, we closed on ProQuest. So during that whole period, we built those 3 into our plan. We knew that if we could get those 3 great additional acquisitions and move to the One Clarivate, we'd be in a position to really excel. We would have scale, which we've got. Of course, we expect to exit with $3 billion run rate, hope to, out of 2022 into 2023, meet the margin goals. I'm very proud of our company, by the way, we've increased margin. And to put it in perspective, if you look at 2019, between there when we went public at where we'll exit in 2022, we've increased margins more than any place I've ever been. And so the ability to deliver those margins is great, and that's so critical because with the One Clarivate, we'll maximize delivery of free cash flow, which has been our point from the very beginning. That's why we were able to announce the $1 billion share buyback that we're active on. So all on point at this period of time for 2022, 2023. Great question. Thanks.

Great. And then just one on cross-sell. So at the November 2020 Investor Day, Jerre, you highlighted the ability to capture about $150 million in upsell, cross-sell. Just where are you to date? And does this still seem like a reasonable target?

The answer is yes, especially when we define it as we intended to, David, where we sell into those 4 global markets that we've talked about and introduced loud and clear at our November 2021 Investor Day. So we'll see that play out. By the way, if you think about it out in '23, '24, $100 million, $150 million is less than 5% of our total revenue. So that's really the way to think about it. Are we delivering the additional revenue 4% to 5% each year as we actually go to bundling it. Jonathan, just comment for a minute with a couple of examples including with services unbundling.

Yes. So great targets that the team are working on, for example, is bringing Web of Science not just to academic customers but also to the other 3 end verticals. So great opportunities, particularly in the Life Sciences and Healthcare segment to package that alongside of the existing offerings of Cortellis and of the legacy DRG products, HDS, even in the consumer products companies that spent billions on R&D, great opportunity to identify the right research to be looking at to make sure that the investments and the choices that they're making are going to help deliver the outcomes that they're expecting. Certainly, one of the ones we're really excited is about wrapping content sales from all of the different product categories with our consulting services. Jerre touched on that earlier. With the realignment of that team, we're going to be optimizing their efforts to deliver broader content sales for the organization and software and not just maximizing billable hours. So with the realignment with our CRO organization under Steen's leadership, we think we'll be able to continue to drive that across the enterprise. So those are a couple of the early targeted ones. And we're looking for as we get to the Q1 earnings release. In Q2, we'll start sharing some great examples of the traction that, that team is going to see as really March is the month where that's starting and we really expect that to accelerate into April, May and June.

Great. And then just shifting over to margins for a minute. 2022 is going to be impacted by ProQuest. But as we think beyond that, is the original target of the high 40s to low 50s adjusted EBITDA margin still attainable? And besides ProQuest synergies, what are the key levers to get you there?

Great. Go ahead, Jonathan, please.

Sure. We intimated on the earnings materials that we shared that we'll be solidly into the mid-40s next year. So we still believe that moving from the mid- to the upper is achievable beyond next year. The big levers there are the strong conversion on the organic growth. So you'll note from last year, over $0.50 of every dollar of inorganic growth fell through to the bottom line. We're anticipating that again for this year, and we would expect that trend to continue and accelerate, as Jerre highlighted, as the growth continues to move up from the lower to mid to the mid to upper organic growth profile. The other big driver is going to be the cost synergies. So as we've demonstrated in the past, while we're shooting for $100 million, we've done better than what we've shot for in the past. So we'll continue to focus on that. That will continue to be another meaningful lever as we move into next year, that improvement that we would expect and then beyond.

Okay. So we shouldn't expect another, let's say, cost savings exercise that we -- like we saw in 2019?

We'll do that forever. If you look at my history, I -- that's a great question, David. Thank you. My view is that we can always get better. As we increase and improve the systems that we provide -- we just hired a great new CIO that will help us continue that effort. As we figure out how to do things much easier -- I talk a lot, David, and always have since I've been here, focus, simplify and execute. There's a lot we can still simplify and will. I'm very proud of what we've done from a customer delight standpoint with our company. We get the highest marks I've ever been part of from the quality and performance of our products, which is great news. As we've talked about before, one of the things we're working really hard on is becoming an easy to do business with company. And that's 2 things. That's why I talked about it. Productivity is improving as we speak today in that world as we have gone to those 3 regional centers of excellence, but there's a lot of room yet to continue to improve. Our customer care people touch our customer 5.5 million times a year. And every one of those will become more efficient. And when you do that at the front end, you'll get it at the back end because you clean out a lot of redundancy, a lot of bureaucracy. So no, you'll see us continue year after year after year to build in productivity as we move forward. And again, a huge part of what was so important, David, was the ability to get to the scale that we're now at that lets us leverage our service centers, I mean like finance, like HR, et cetera. So lots done, but lots to do with that. And we'll continue to enhance our margins with top line organic growth and complemented by ever-increasing simplifying our company.

Okay. That's helpful. And then on the staffing trends, and obviously, similar to most companies out there, Clarivate is currently facing higher attrition. Just wondering, are you guys meaningfully below optimal levels today? And if you can just give us a little bit more insight on what you're doing to address these issues.

Yes. Jonathan is very current, please. Great question.

Yes, we have more open positions than we ever have. That's absolutely true. And certainly, seasonally, Q1 typically runs higher than some other periods. So we're faced with that. We have the advantage of as we bring these businesses together and identify synergies, there's opportunities for redeployment to help to address some of those. So I would say that's one advantage that we have that we won't on a stand-alone basis that we're really looking to take advantage of. But Julie, who leads our HR organization globally, has done a fantastic job with developing some new ways to recruit and some approaches, as we mentioned, to try to get ahead of the curve of attrition. And I think there's a lot we have to offer that makes us very compelling as an employer. So that's something we expect to make some meaningful progress here in the coming months, and we'll continue to talk about that when we're all back together for Q1 earnings.

Okay. And Jerre, you touched on this a bit, but like no major M&A for 2022 as you guys integrate ProQuest. But as we look out a couple of years, how should we think about the M&A strategy? Is it more kind of tuck-ins to add capabilities to your current verticals? Or could we see something more transformative, possibly adding a third vertical over time?

Yes, no, no, great question. We've got a team that's -- including using BCG right now, reporting into Jonathan that will lay out -- is laying out our priorities as we you look at those total it's over $100 billion of potential market that we have on a global basis with those 4 global markets. Our -- and part of the reason I'm so excited is we've got far more opportunities, both internal new product development, partnering and then larger acquisitions in those markets. But we'll present the numbers and the plan, et cetera, at our July Board meeting to our Board members. And then in this fall, in November when we do the -- our annual Investor Day, we'll cover that in great detail because it's -- we've never been in a position where there's more total potential, and what we've got to do is pick the top priority. So yes, there will be more to come with that. But it's an exciting time as we look at the opportunities.

Okay. Great. I think we've hit the bottom of the hour. Jerre, Jonathan, thank you so much for your time. This was super helpful. And everyone, have a great day.

Thank you, David. We're happy to be here with you.

Thanks, David.

Thank you.