Clarivate Plc (CLVT) Earnings Call Transcript & Summary

Good morning, everybody. Thank you very much for joining us. This is our first in-person Cross Sector Insight Conference in 3 years, and we're very grateful and thankful to be here in person. Welcome you all here. My name is Shlomo Rosenbaum. I am the business and information services analyst for Stifel. I've known Jerre Stead for many years. He was the former CEO of IHS and IHS Markit and before that, numerous other companies, although due to the age gap, it's only been recently that I've covered -- it's like 10 years.

I didn't realize you were that much older than I was.

So we -- Jerre has had a very highly successful career running numerous companies, has been CEO of how many public companies?

11.

11 public companies. And the latest go-round is Clarivate. And Clarivate was -- is a very interesting business, has very unique assets. And it's an interesting story, and I thought what I would do is spend just a couple of minutes, ask Jerre, maybe just give us a 2-minute brief overview. I'm going to jump in with a few questions, and then we're going to poll for the room and anything that you want to fire at both Jerre and Jonathan, I'm going to invite you to do so. So why don't you give us a 2-minute quick overview of where we are with the company and...

Happy to, Shlomo. We celebrated our third anniversary, May 14, of taking the company public. I did a SPAC back in September 2018. We raised $1.2 billion in 2 days. We used $700 million of that to do a reverse merger with what became Clarivate. And Clarivate was 7 small divisions of Thomson. I had looked at those -- actually had a handshake to acquire them in 2012 when I was running IHS. So I knew him well. We also had laid out acquisitions that we would expect to make over that period of time. What happened was we went public, as I said, on May 15, 2019, market cap of about $4 billion, $3.5 billion. We -- new 3 acquisitions we wanted to make. First one was DRG. We were able to make that one quicker than I expected. We started negotiations in December and closed February 29, 2020. 2 weeks later, I sent our entire company home. And as you all remember, it was a big change overnight that we learned to manage through. That business, the year before combined -- well, actually just for background, in 2018, the Clarivate company did $850 million of revenue, a little less than $200 million of EBITDA and almost no cash flow. This year, we're midpoint guidance, $2.8-plus billion, really great, about $1.2 billion or better of EBITDA and free cash flow in the next 2 years of about $1.5 billion. It's a great company. I'd say we had to do 2 other things quicker than I expected originally. One was we had the opportunity to acquire CPA, which is an outstanding intellectual property management business. We actually acquired that in late -- we closed in late September, also 2020, quicker by far than I expected. And then closed on ProQuest last year in December. That one we also had our eyes on, thought we would be able to acquire that late 2022, early 2023. Ended up reaching agreement with Andy Snyder when he chose not to go public and took it. So we went through an interesting time with the Federal Trade Commission. We got a second request on a company that had $2.5 million overlap of $1.2 billion, but we went through it. We provided them 7.1 million pages and got it done and closed on December 1. And actually, the day we announced that, we announced the addition of Jonathan as our CFO, which I've been delighted with. I'm really pleased with where we're at today as we move to the One Clarivate over that period of time. This company has, of all the ones I've led over the years, the most natural resources. I'm very proud of where we've come. I feel really good. We've taken over $300 million, about $320 million of cost out. Feel better about the top line today than I felt since we got there. Just for history, there was no growth historically. That was the bad news. The good news was, during recession time, there was no growth either, but no downtime. So that was it. We have put in place an entirely new leadership team's levels 2, 3 and 4, feel great about that. It's a company that we should see go from the $3 billion or thereabouts to $6 billion in another 3 or 4 years. It's in great operation expertise as we add to go forward, and we're on track with everything we said we'd do in 2022.

So I'm going to just throw out the -- I would say, from an investor perspective, the key focus metric for this year is achieving the organic growth targets that you've set out for 6.5%. So last year, it was about 4.5%. You're planning to increase it by 200 basis points. So maybe you could go through what are the levers to get there? What gives you the confidence you're going to get there? And how should we monitor that as we get -- go through the year?

Yes. Great question. I'll have Jonathan comment on that because, as I said, he joined us December 1. I ask him to take a fresh look at everything. And we actually reduced the guidance. Tell them what and then why we think we'll hit it this year, Jonathan.

Yes, about $65 million from the original indication. So about $2.84 billion at the midpoint of the range. Just for some perspective, if you go back a few years, if you average the growth rate of the business in 2019 and 2020, it was growing at about 2%. It accelerated from around 0 before that to that range. Last year, delivered 4.5%. So about 250 basis points of sequential growth over the prior 2-year average. As we indicated for this year, we think another 200 basis points is in reach, and the contribution comes in nearly equal parts from 4 things. The first is continued acceleration of pricing, which is really a function of helping to deliver returns on the value of the investments in the product that we've made and also the fact that costs are going up and keeping up with inflation. The second aspect is improved renewal rates, and this is largely attributable to our longer tail of customers that are starting to renew at a higher rate based on the implementation of an inside sales force, which took place last year. So starting to get that higher level of touch with tens of thousands of customers that didn't have a lot of direct contact with the company. The latter 2 parts are really about the One Clarivate go-to-market in the new account management model. And the first is enhanced cross or solution selling. So this is where these account managers have the ability to take the breadth of solutions that are relevant for our 4 customer verticals and help to add products and build out the portfolio of value that we're providing for those customers. And then the final is a recovery of our transactional business. So this is a business that disappointed us late last year. There are some continued investments we've made in new content and data coming into that product. And we've really restaffed up the teams that are helping to take that product to market. So we expect to get about 50 basis points of incremental growth rate improvement from last year to this year in each of those 4 categories. And in terms of tracking it, to your point, that's something that we'll talk about on a quarterly basis. So when we did the Q1 results, we gave you the progress on pricing is on track, renewals were a little bit behind due to some cancellations in Russia. We see opportunity as we accelerate with the smaller customers through the year to make that up. And then cross-selling, we started to see a small contribution in Q1. We're really pleased by that because the new sales force was largely being put in place in January and February. So the cross-selling and solution selling acceleration, which was over a 20% improvement in the examples Jerre gave us, selling traditional academic and government products to these other 3 customer verticals, we're really pleased to see that contribute to the growth rate in Q1. We expect that to improve through the year. Transactionally, the second and fourth quarter are really important for us from a seasonal perspective. So we're looking for a good performance here in Q2 in transactional, and we're looking for a stronger finish to the year as well in 2022.

So I just want to touch on one thing before I open it up. Just the trend -- the seasonality of the business has always been heavily weighted in the fourth quarter to transactional. Is that going to be that way perennially that the fourth quarter will be kind of a make or break quarter for the year? Or is there some way that you can try to shift some of that so that it's not everyone holding their breath for the fourth quarter, do we make the numbers or not?

Great question. You start, I'll pick up, Jonathan, because it's a good question.

It's something we can improve on over time. So a few changes that we've made this year is we're continuing to incent our sales folks to bring those deals in earlier in the year. So the earlier they get these deals closed, the more they can make. So that incentive is going to help, but also it's retraining our customers as well too that they don't have to wait until the end of the calendar year to get the value and helping to push on that value proposition that the products deliver for them and what they're missing out on by waiting. So on a combination of those 2 things, we think we can make some improvements. Seasonally, it's going to be important, there's no doubt, that the fourth quarter -- for corporate customers. And actually now with the -- bringing in ProQuest, the second quarter is really important for academic customers as well too as it represents a lot of their or very close to their calendar year-end. So we'll make some improvements over time. But in the near term, you'll still see those be important.

And I'd just add 2 things. Last year, we -- when I got there, we had no new products, nothing in the pipeline. Last year, we added 91 new products or enhancements. We're starting to see that, and we'll continue to. We spend about $140 million a year of CapEx on new product development. And all of that is focused on increasing the annual subscription rate and reoccurring to where we're consistently at the 80% level or thereabouts. Then the 20% that is transactional, you'll see us continue to shift to where more and more of that is data sales surrounded with -- consulting wrapped, which will take a lot of the question that you raise out of the way. But like Jonathan said, we'll see some of that this year more in 2023 and 2024. Great question.

Great. I want to just open up if there's -- people have questions to -- it's your opportunity with Jerre and Jonathan under the bright lights and -- anything that anyone wants to ask them or just poll? None? Okay. So then I wanted to focus a little bit on the ProQuest acquisition and why that made so much strategic sense. And how does this have -- with CPA Global and the Derwent, you really put together the top 2 players in the industry. And like #3 is like so far down the line, it's hard to see them. And you covered both the attorneys and also the corporates a lot better. But talk about -- why did ProQuest make so much sense?

Yes. Let's let Jonathan pick that up. Just for background, the way I actually found out about Jonathan, when I was talking to Andy Snyder, I said, "Who was your CFO back when?" And Jonathan had been there now 6.5 years ago. He had left ProQuest to get his check mark for 6 years of public CFO. He's a great one to have. So he had been there for 4 years as CFO before, at ProQuest. And get his view because it was a done deal when he joined us. But -- so it wasn't his concept, but it's certainly your views. Jonathan?

Yes, what makes ProQuest such a powerful combination of businesses in academia, in particular, is the combination of breadth of content and the software and tools to help librarians and patrons manage and access that content in a very efficient way. And the legacy asset within Thomson Web of Science is just an incredibly powerful ANI file that provides access and as well rankings for the value and quality of the research that's being put out into the marketplace. So the combination of that content pulled together with the software that helps to manage librarian collections is just really powerful. So you take the Ex Libris suite of products that came with ProQuest, and this is a library management system that is built for the digital era. And the world's largest academic research libraries overwhelmingly have adopted this as the tool to manage growing digital collections. And the combination of analytics that we get from that platform with the great content we provide helps to surface greater levels of discovery for researchers and helps librarians really be able to understand and determine the value of the content that they are acquiring and what's being used. So really just a much better offering for our direct customers and the end users of those products. And just a great opportunity to weave those closer together and continue to drive better value and better sales into those customers is really compelling and exciting. And probably some of the early ones we're most excited about are the combination of web-scale discovery and Web of Science coming together. To surface that content in a greater way provide easier access to the full text files for these researchers, and these are a number of tools that we're continuing to deploy to drive better value for those customers.

And great answers, thanks. And I'd just add 2 quick things to that. Over the years, I've read -- led a lot of software-driven companies. This one has more potential with the software than any I've been involved with largely because the software inside of ProQuest acquired in 2016 has huge upside, particularly when we bring it together into the world where we have Web of Science presence in every large university in the world today and bring that in. Then the other part that's so exciting to me is that we've already integrated all of Web of Science data into the portal at ProQuest. So we're now seeing that provide opportunities for our customers they've never seen before. Last quick comment, there's always a lot of discussion about what's the real growth rate of academia and government. In the areas we go after, it's well north of 7% -- 6.5%, 7% annually on big dollars. So that's a great opportunity for us. And the last piece is that the strength we brought from the Clarivate standpoint into Asia particularly is one that we're just now starting to tap as we bring those products out of ProQuest. So it's going to turn out to be a great one.

Yes. So maybe that will segue into what I was just going to ask you to explain is, 2 -- maybe just on -- 2 on-the-ground examples. One of capability, ProQuest capability, Web of Science, putting it together, how does that make one product that is much more attractive? And then -- how is it -- can you explain the kind of sales process of, hey, I'm Web of Science. I'm in these major academic organizations. How natural is it for you to bring ProQuest in and make that sale? And is there something that you just -- you're doing at an annual renewal? Is there a technology upgrade cycle that you're working off of? Maybe touch on those 2.

Great question. I'll start, Jonathan, you pick up. The only good thing of the second request we got out of the Federal Trade Commission was we had 6 months to get ready to answer that question. Jonathan?

Yes. So to your point on the first -- the account management model is really the powerful piece for the second part of your question. So the ability to have access to the right level of the organizations to more universities. There's some geographic presence that we pick up, as Jerre mentioned, in Asia to be able to make sure that our products are there for that next tier of institutions to see as they go through that upgrade cycle of switching out these ILS systems or integrated library software systems that were originally designed to manage a print collection, which are predominantly now acquired in digital. That's a great opportunity for us to be able to do that. And then I think the second piece to bring the products together, maybe one of the easiest examples that the team is focused on, we have leading web-scale discovery applications in the academic market in Summon and Primo. So this takes the library's entire collection, synthesizes, whether it's print, digital, into a single search box and helps the patrons access that. Being able to integrate that very quickly by putting the Web of Science index into those products for our customers is going to drive higher usage of the Web of Science product and drive cross-research between the products that we have when they look for a journal and find it in the full text aggregation products that we have in the ProQuest One or the ProQuest Central. So that's just an example of integrating those products early on in there. Many more of those to come in the coming years.

Okay. [indiscernible], go ahead.

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Great question. When we started 3 years ago at 0, that was a concern. I was able to bring in my former CTO out of IHS, Randy Harvey, then we were able to put together, with 2 or 3 other folks I brought in, a road map on technology driven, first; and a road map on customer needs, second. So -- because the concern was there. The concern was a little different. The comments we get back -- and as I think you all know, we run a Customer Delight Survey program twice a year. We just finished our first one this year. We do 2 a year. Those -- the feedback we got from those early was here's the kind of products you should have and don't have. Those are the ones we went after outside in with product. The other thing that was interesting, which was a massive job we had to do, Thomson operated with their development and maintenance software people.65% of those were contractors, 65%. And we've shifted that to where we have about 10% as contractor to handle the up and downs, but productivity is an enormous improvement. So I think we measure backwards, which is the way to do it. Did we hit the spot? And what's the growth rate of those new products? We're ahead of schedule on those today. And I feel good, the best I felt since on this company. I feel good about the gap we have, which if you don't have a gap, something's wrong, you're missing something. But we're in good shape with that today. I was able to bring in the guy, Stef, that runs our CTO worldwide, has about 2,000 people now in development, support and also business systems. Stef worked for us at marketing -- at Markit, at IHS Markit. And he's really put in place the discipline we needed going forward. Each of the acquisitions have brought good people in, and we've now got them operating across those 4 business vertical markets that we're operating on worldwide. Feel good about that. In our November this year, November, early November Investor Day, we'll focus on those 4 markets, the things that we are doing and how we're going to get there. Jonathan's had a team working together for 4 months now on exactly your question. Where are we? What do we got to do next? We'll cover that at our July Board meeting, strategic meeting and then share that with the world. But feel really good about that progress. One of the things that Jonathan and I were talking about this morning, the products that we got out of Thomson were world-class at the very top, the so-called gold standard. We've done our best to make sure that happens. But we've also done a lot of what I would call simplifying those products. The biggest negative feedback we got was great product but way too complicated and not easy to use. So we've spent a lot of money making sure the use is much improved over where it was 3 years ago. Great question. Thanks.

Other questions? Okay. So I'm going to go through some of the other ones that I had. In terms of the pricing, Clarivate talks more about pricing than I usually hear other companies talk about and sometimes mentions numbers like 4% to 5%. I don't usually hear that from other companies. I want to ask you, number one, is that a reasonable number to think going forward? And how do clients view that? What's the motion to try and get that pricing? And most of the time, when I think of healthy pricing, I think of inflationary type pricing, and I really want to see growth coming from volumes rather than pricing. And how do you think about that? And what -- should we see more volume growth versus pricing growth?

Well, I'll start, Jonathan, you can pick up. Great question. Let's work backwards. Over time, we'll get to a price realization. We're way below that today. One of the things we did during due diligence was use -- we actually used BCG to go out and do price valuation, and then we substantiated it with our Customer Delight Survey. I just finished reading the 19,000 inputs. I read them all because it helps me understand what we need to do from the customers. There was 4 on pricing, 4 out of 19,000 open-ended comments. In general, it's the highest scores I've ever seen, 82% to 83% for value of product and for being in the work streams, helping our customers make their decisions. There was 3 things, Shlomo, that we had to fix: one, same product, same number of users, as much as 35% differentiation because there have been no discipline on pricing at all; two, around the world, there have been no discipline on pricing; and then three, making sure we sold the value. Remember, just for facts, as our friend's background, we averaged 6 -- over 6% -- the last 10 years I was at IHS Markit, we averaged over 6% price realization every year. Didn't talk about it a lot, but that was a big piece, growing 10.5%, 11% organic. Here, I think you can see and will see us continuing at the 4.5% to 5% real price realization for years to come because we're teaching to sell on value for the first time. And pick up the things we're doing different this year, too, Jonathan?

Yes. I think a big piece of the prominence in the discussion is a function of, given we have such a large recurring business both in subscription and the reoccurring portion that a lot of the return on the investment that we're getting from the significant product enhancements we've made over the last couple of years is going to come in the form of continuing to see that value in a higher price, in particular, focus on the investment in the product and also the reach and the touch to customers. A lot with the long-tail customers and what the inside sales force is doing, continuing that conversation of the value that's being provided every year, the incremental value, the additional usage that's being seen by researchers, additional content, new features and solutions that are provided by the product, all of that, in many ways, manifest itself in the higher pricing and the higher retention rates that we've been talking about.

And your question is critical, Shlomo, because that gets us to an equilibrium point of getting the "volume" equal to or bigger over time than the price realization. But those 2 together should be good to go for the next 3 to 5 years. We are also -- as you would expect, with the inflation world that we're living in right now, we have shortened the -- normally, we did price announcements September of each year because the renewal level was so high in fourth and first quarter. We've now shortened that where we're making appropriate price increases as fast as we can, 90 days ahead.

Coming -- only a few minutes left. I want to just see if there's any other questions in the audience before I went to the kind of the last one or 2.

[indiscernible]

A couple of things. You start, Jonathan, about -- give them a little view of what we'll be sharing with the Board in July at a high level because it's a great question. The answer is yes.

Yes. To Jerre's point, over the course of the past few months, we've really been focusing on the organic growth investments that we should disproportionately focus on to best serve the 4 customer verticals that we're now addressing or really wanting to make sure that we bring a broader set of solutions. So as Jerre mentioned, at the July Board meeting, we're going to be bringing forward what some of those more major investments are that bring together the broad capabilities that we have to really package a solution and how we want to underwrite those investments in the next year or 2. So that's something that will really start to put further wind in our sales behind some of these near-term improvements that we're making with go-to-market, moving us towards some of those categories within those markets that are growing at higher rates. That's something that we're going to feature at the Investor Day later this year, as Jerre mentioned just a few moments ago.

And I'd add 2 things. We spend a lot of time on culture because this was a combination of pieces inside of Thomson with 3 great acquisitions and 5 -- 6 tuck-ins. So that culture today of becoming a customer delight, outside in-focused, I'm very pleased with that progress. And we spend a lot of time, I always have, on talent. I've never felt better about a team that we now have in place at the levels 2 and 3, and that's critical. We're about halfway done with level 4. Because at the end of the day, I've been blessed with 66 people I know of that have worked with me, that are or have been CEOs, and they've modeled what we've done over all these years. We're at that point today with the team we've got in place. And as we continue to improve the outside in culture, we'll see in the next 4 to 5 years. We grew from $800 million to $3 billion in 3 years. That same potential only better is $3 billion to $6 billion down the road. And most important is that this company has the opportunity to provide the most free cash flow of any company I've ever run or led. And that's what's exciting to me. I've always tried to drive cash flow as the true indicator. And this one is the best I've ever had, thanks to the very effective situation we've got with tax and thanks to the very effective management situation we've got with CapEx. So that's the thing that we spend a lot of time talking about today.

We're just about out of time, but I got to have one little question left, which is should we be worried about the lockdowns in China in terms of your business?

Yes. No, great question. You start, Jonathan, I'll end.

Yes. It's something we're watching carefully. It's a market for us that is not our largest but is important. So we're watching it carefully. We are seeing some indication that certain reoccurring business has taken a little bit longer. There are some processing issues, but we're watching it carefully, and we can give you some more color on that when we're out in a couple of months with earnings.

And well -- and the best way I measure it is, are they still paying us, and they are. And that's not an easy thing in China. Thank you. It's great to be here.

Thank you very much. Appreciate it. Thank you for coming.