Clarivate Plc (CLVT) Earnings Call Transcript & Summary

Welcome to the William Blair Growth Stock Conference. So thank you both for being here. They're going to start us off with an overview of the business, use some slides up here, which you'll see, and then we'll wrap it up with some Q&A before I think staying in here actually for a breakout session once we're final.

Great. Thank you. It's good to be here. This, I will tell you, you can quote me, this is my favorite conference in the world. I've been doing this for 42 years, so I've got a pretty good judgment of what it is, but it's just a great one. We'll quickly go through the slides, Jonathan and I, a little on the Clarivate story, if you will. Quick background, in 2012, when I was Chairman, CEO of IHS, I had a handshake to acquire Clarivate. And long story short, the Thomson Board decided I wasn't going to pay them enough money. So we didn't get it. So I got it the second time around, and I'll talk about that in a minute. A great business that had been underinvested in. As after 17 years at IHS, I stepped down and actually did a SPAC in 2018. I raised $1.2 billion in 2 days, used $690 million of it and actually was able to acquire in a reverse transaction the 7 pieces that were called Clarivate. It had been bought by Onex-Barings late 2016. It was a platform that I admired and wanted, and that's what we were looking at. When I did the SPAC, if you will, I said several things. I was going to do: one, I'd never do another one, point one; point two, I would do it with a platform that we could make a big difference with for our customers, our colleagues and our -- particularly, our shareowners. Turned out to be as good as it could be. Back in 2012, I had looked at things we'd acquire if we got Clarivate at IHS to strengthen each of the key businesses. And that's why you see DRG and CPA Global, both high-potential businesses that complemented parts of the Clarivate products we've gotten. You can see, as we said here, the organic growth was just under 2%. It'd been underinvested in, and we saw a great potential. And we said what we'd do, and we did it. As you can see here, we increased the margins. We've taken -- now since we went public just over 3 years ago in May. In 2019, we've taken over $300 million out of the cost structure of the acquisitions and the original Clarivate basis, put it in place. Just for background, what I had laid out was that we would acquire DRG in 2020 and that we'd acquire, hopefully, CPA 2021 late, and we'd acquire ProQuest in '23. It turned out it was either doing them as we did, which was 2 in 2020 and then ProQuest in 2021 to be able to put it all together. We said that over time, this would be a 6.5% to 8% organic growth business. We'll talk more about that in a minute. We actually did 4.5% last year in 2021. The other comment I'd make, and it's been interesting for me, now that we're basically have COVID behind us, I see the things that would have happened quicker and better had I've never gone through, and I hope would none of us ever do again, a COVID situation. There's no question that some of the changes we made would have been smoother and quicker if we'd had the opportunity. You can see now where we are. We actually in September 2019, said we were going to move from the 7 businesses, 2 of which we sold that were part of Clarivate, to the 2 groups, IP on one side, great business, particularly with the addition of CPA Global, and then Science on the other side. So as we did that, we were able to start the effort to end up being the one Clarivate that we are today. It's the most exciting thing I've done over all these years because the assets that we acquired had the opportunity to sell into 4 global markets like I've never seen before because they were one-off businesses brought together. So as we rolled that out, we announced at the -- in early 2020 that we would build a very powerful inside sales organization, and we would go to 3 global centers of excellence to take care of the 43 different centers we had on customer care. So huge shift made, got that all done. We said we would do 6.5% organic, and Jonathan will talk more about that in a couple of minutes. During that period of time, we've gone through massive change. Very proud of the organization and everything that's been done. Today, where we're at today is that much of the infrastructure behind is done, we have the entire field sales force reorganized to the point where we want them. And I've now got the leadership team, a great leadership team in place. I replaced all the folks that were at Level 1 and Level 2 when I got there 3 years ago with the combination of people Jonathan and I was particularly pleased to get. Jonathan had been CFO at ProQuest 6.5 years ago for 4 years. It made a huge advantage for us as we came forward. And then he did his public stint to get ready for 6 years at Dana Corporation, now has joined as a great partner. Let's take it from there, Jonathan. You do this one, this is your favorite one.

Yes. So just as a reminder, this slide just provides an overview of how attractive the platform that we have is to continue to accelerate the organic growth. So we've got well over 3/4 of the business that is recurring in nature. We've got the subscription products. And then in addition to that, the Evergreen business where we renew patents for the CPA customers. As we continue to make investments in our products, these are the types of investments that we can build additional feature functionality and add new content once and sell it many times, which is a really attractive path to the operating leverage. So if you look at Jerre's comment from the prior page is the ability to expand margins from the 20s into the 30s and now into the 40s. This is fundamentally how the business is set up and structured. The cash flow profile of this business is also very compelling. Currently, this year, we've got some unique or episodic items that have the operating cash flow less CapEx or the free cash flow looking a bit lower. But when you look past both of those items that were associated with transactions that recently closed and have been integrated, we're on a path to generate free cash flow of more than $1 a share within about the next 12 to 18 months. So that's a really exciting model. It also gives us the capacity to reuse some of that cash flow and capacity to reinvest in the business. You've seen us, as Jerre said, grow inorganically, but also introduced 90 new products and major feature sets across the entire portfolio as our innovation ramps up. And that's going to continue to drive that increased growth rate.

Keep going. You're doing great.

Yes. So the way that the new One Clarivate model looks at the business is really an intense focus on providing broader solution sets for all 4 of the major customer verticals that we serve. And as you can see on the page, this is an overall addressable market in excess of $100 billion. We're clearly a scaled player now in the academic and government space. The combination of the legacy business that came with Clarivate, Web of Science and EndNote, combined with all the great products that came through the ProQuest acquisition, give us an incredible content and software platforms to help academic research institutions around the world grow and expand their digital collections and manage that effectively to get the best research outcomes for their patrons. The life sciences and health care space, the combination of legacy assets like Cortellis combined with the IP management in this segment, moving into the commercialization that we offer via the real-world data and the high-touch consulting services, give us a really compelling offering there. And then professional services and consumer products and manufacturing and technology, the bedrock there is the CPA business where we help companies not only research and discover where to develop IP, but also how to maintain that and we provide great services there to build on. So we're really excited later this year, continuing to talk more about where we'll continue to make organic investments across each of these areas to build out that end-to-end solution set that we can provide across the innovation life cycle for academia, government and a broad range of corporations.

Little talk about sustainability. I've done this for many years. We were the fourth company at IHS to get into the Dow Jones Sustainability Index and also the U.K. one. And this allows us -- it's really interesting. The product portfolio we have today, interesting statistics, 48% of the products we sell to our customers help them meet the ESG goals that they've set. I didn't know it until we mapped that out, but really a great effort underway. I've always used sustainability. By the way, I think sometimes people get confused. Sustainability starts with building a long-term, profitable, ever more profitable fast-growing company for years to come, and that's where it starts. I've used sustainability inside of what we call our virtuous circle of colleague engagement, customer delight, top and bottom line growth and share -- cash per share that it fits -- it is the glue that drives everything together for us. But in this case, it turns out to be a wonderful package for our sales folks to have in their bag, helping our customers in their goals for the future.

So I'll just touch on here an update on our outlook or affirming our guidance for 2022. On the page in front of you, you can see the shaping of the quarterly outlook for this year that we've provided in the near term, given a lot of the sensitivity and volatility as of late. We want to try to give a clear outlook for what's going to happen in the coming months and in the quarter. So as a reminder, at earnings a little over a month ago for Q1, we provided an outlook in Q2 that said we expect to grow in the 5.5% to 6% range organically in Q2. That would represent at least 100 basis points of growth rate expansion sequentially over Q1, where we were about 4.5%. We also indicated that we expected revenue to be about $690 million to $700 million for the second quarter. The volatility or the variance in that range at the high end, if rates stayed pretty close to where they were as we exited Q1, we'd be closer to $700 million. After the months of April and May and watching, particularly the pound and the euro strengthened pretty dramatically against the dollar, we expect the revenue to be in the range of about $690 million for the second quarter. So we wanted to provide that update. We do expect to see continued improvement in the organic growth rate as we move through the year. Just as a reminder, last year, we did about 4.5%, as Jerre said. This year, we're targeting about 6.5%. It's really driven in equal parts by 4 accelerators, and the first is continuing to harvest and reap the returns on the investments we've made in the products in the form of higher pricing. So over the past couple of years, we've made those major investments, I said, the 90 new products last year, major feature functionality enhancements and upgrades. As we move through the renewal cycle, we did really well in Q1. We highlighted that, so about 50 bps of improvement we expect there. We've also made a substantial investment that Jerre highlighted on starting last year and developing an inside sales force, which is now heavily focused on our longer tail of customers. We have tens of thousands of customers that are smaller from a dollar perspective that didn't get as much focus as we continue to work with them. We're starting to see them renew at a higher rate, particularly in the first quarter of this year compared to last year. That was muted by the decision to suspend our operations in Russia in Q1. But on a go-forward basis, we expect that continue to be a driver. The 2 other categories are really on the new go-to-market motion with our account management model, where we take every product that is relevant for these verticals and bring it to bear for these customers to create a broader solution set. So we expect to see about 50 bps of improvement in the growth rate associated with cross-selling or solution selling a broader package to these customers. And then finally, our transactional business, which was softer than we expected late last year due to some of the things we've talked about over the past few months. We expect that to pick up and contribute about another 40 basis points. But as we move through the year, we expect to move from 4.5% into the 5.5% to 6% range and above that in the second half of the year. It is worth noting transactionally, we're particularly sensitive in Q2 and Q4. So those are higher quarters due to the academic calendar year-end and Q2 and the corporate calendar end for many of our customers in the other 3 verticals. So the next page just highlights -- Page 10 gives you a perspective of the guidance range. The one comment I would make here, if rates stay where they are, just due to the translation of our foreign-denominated ledgers in pounds and euros, I would expect the revenue to be towards the lower end of the range. That $10 million move in Q2 could be here in Q3 and Q4 if that remains unchanged. We'll provide more color on that and take a more firm outlook on the second half of the year when we're out with earnings in late July or early August. We are targeting adjusted EBITDA approaching $1.2 billion. And then the adjusted free cash flow of $700 million provides a really attractive conversion on that adjusted EBITDA, and we expect adjusted EPS at $0.90, could be as high as $0.95 on a full year basis. So I just want to take a second here and highlight on Page 11 our key metrics and how they've progressed over time. As Jerre said, we're on track for this business to triple or more than triple over the 5-year period from when the company went public to next year. That elevated growth from last year to what we expect this year, if that remains consistent next year depending on what happens with the dollar, we could see sales in excess of $3 billion. We would expect our margins to move up pretty appreciably next year, think a few hundred basis points, as we go from the 42% and grow as we convert on the organic growth, but also as we get the cost synergies associated with the ProQuest acquisition built into the business. So great opportunity for margin expansion in the near term. We would expect the EPS to grow next year, again, share count come down a little bit based on the buybacks that we've commenced this year, the $1 billion program that was put in place, and we highlighted in earnings, we've already bought back $175 million of stock in March and April. And then I think one of the most attractive metrics about the business is really this adjusted free cash flow profile. So if you look in the lower hand, we highlight here the adjustments we've made because there's been so much activity with acquisition. But as you look to next year, we're illustrating here for the first time that we've said we expect adjusted free cash flow to be in excess of $800 million next year. However, we're highlighting here for you, we're talking about a very small portion of adjustments that we would expect. So you can look at that as basically $800 million of free cash flow, just operating cash flow minus the CapEx that we put back into the business. And with the share count being in the low 700 million range, we would expect to have well over $1 a share of adjusted or regular free cash flow at the end of next year. Final point I'll leave you with is just in an environment of macro uncertainty, maybe to put it a little bit lightly, the -- this business has got a great profile to continue to grow. These legacy businesses fared very well from the information we have in kind of the 2009, 2010 time frame, the academic market, the life sciences and health care and where we sit in IP and corporates have demonstrated that they're quite insular from movements in overall economic growth. And that's really because we have mission-critical products that are deeply embedded in the workflow. And we have such a global and atomized customer base, tens of thousands of customers around the world using the products. And that creates a great platform for growth because the markets we serve are very large, well over $100 billion. And 80% of the business is subscription and reoccurring as well too, which puts us in a great position that already the business renews at more than 90%. We've talked about the operating leverage and the cash flow and Jerre has highlighted the great team that we have in place. So all these things together, we think, put us in a position that will continue to increase our growth from an organic perspective as we move through the next few quarters based on this great business model.

Great. Thank you very much. So we got about 10 minutes here. I'll ask a few follow-up questions. I want to start with kind of the ProQuest-Web of Science combination. I know that there are other auxiliary products in there but at its core, the 2 major products. Can you kind of talk about the rationale for the Pro Quest deal? And maybe some examples of how having both of those products are going to unlock additional value for the company?

Yes, great question. You start.

Yes. So the ProQuest business really had 2 key components, providing digital content and then the software applications to manage that for librarians and also enhance the researcher experience for the patrons of the libraries, largely within academia. Really powerful combination with ProQuest's main product, ProQuest One, which is a combination of aggregation of full text journals, newspapers, video and as well a broad range of other research publications. You combine that with Web of Science and our web-scale discovery within that market, and we're already cross indexing content, creating greater discovery for researchers, driving higher usage of both products and create a great platform to continue to offer additional content sets within those databases to the customers. So really excited about the early wins we're seeing there. The team is doing a great job of bringing forward that combined value proposition. We think that's going to continue to improve growth organically within the A&G segment.

And I'd add just a couple of things to it. Back in September 2019, when we took it to the 2 groups from the 7 small businesses, we looked -- we actually used BCG to help us what were the global markets that we could sell all of our products into, and this one happens to be $29 billion market. There's a misnomer, and I'll get Jonathan to comment on it in a second, a concern about it growing 3% to 4% a year. That's true in total, excluding government. Government's growing much faster than that. But more importantly, our piece of that business is -- and Jonathan will give a couple of examples, growing far, far north of that. But that gave us the scale, if you think about future acquisitions, where we need to be with the academic and government. We'll do tuck-ins, but most of that will be developing and selling now as we are across the board in the sales organization. But give them a couple of examples.

Yes. This is a category, as Jerre said, that's broadly thought of being in the 3% to 5% range. However, the primary headwind in that growth rate is physical or print content, which is not where we participate. So the digital content and the software to manage those collections is growing at a rate higher than that. So we've got confidence in the coming years that this business can perform at a level that punches at its weight class within the business in the 6% to 7% range.

And I'd just add one thing as an example. Many of the universities today manage their own patents. We can do that for 1/3 of the cost they are today. We guarantee the management of those patents. That's a business that CPA was never into that we've got the entree into with the academic side. That's just an example. And actually, Life Science is another good example for the research universities that include medical. So that gets -- gave us the portfolio and the profile we wanted. Great question.

Yes. So you kind of set me up there, Jerre, to talk about the next of the 4 major markets, which is Life Sciences, health care. You had legacy Cortellis under Thomson that you optimized and updated over the last several years. You brought in DRG that has a little bit more maybe variability than you would have thought given the higher transactional component, but both kind of targeting this single platform along the entire spectrum. So with that preamble behind me, two questions that I kind of want to ask there. One would be, do you still feel like that market as a whole is one that is kind of within all of the TAMs, maybe the fastest growing? Where do you think the TAM is growing? And then talk about your ability to kind of grow with that market now with the new combined product?

Great question. Yes, it's 12% to 14% grower in the available market to us. And give a couple of examples, Jonathan.

Yes. This is an area where we think as we round out the broader solution offering, it's going to be quite compelling. So as you noted, the main areas of development within these companies is to innovate and create IP, maintain and protect that IP and then ultimately commercialize that technology with the legacy assets we have with Cortellis, with the CPA presence to help manage the IP component and with the DRG and our consultancy and the commercialization. We've got a very great offering in a high-growth category. There are great opportunities for us over time to be able to augment that offering, both organically and inorganically. And as we move later into this year, I think we're going to come -- provide some really interesting examples and specifics around some growth opportunities that we'll pursue here, but great category and great opportunity to make this a larger component of the business.

And this will be the first year where all those pieces play together. Again, there's no question, in hindsight, some of the things that we would have done quicker didn't get done just because of COVID. I was with our top 120 sales folks a few weeks ago and particularly the new sale for the very large piece of this market didn't happen naturally during COVID. We're now seeing, I wouldn't call it low-hanging fruit, but it was there always. Now we're picking it up. And what Jonathan said is with the business projects we got underway, they're long term. They're 1-, 2-, 3-year projects, large ones, and we'll add to them as we help partner with the customers. So feeling really good about that.

Over the past several quarters, you've kind of migrated your capital allocation strategy a bit to be a little bit more internally-focused, organic growth oriented. I don't get the sense that that's the long-term plan. You've talked about tuck-ins here and there. But can you talk about kind of capital allocation both near term and long term, where your leverage is today, where you expect it to be and kind of hit on all that?

Yes. You start, Jonathan, I'll pick up the piece on acquisitions.

So from major acquisitions, as Jerre said before publicly, not much is going to happen in the coming quarters. We're going to be very focused on integrating and delivering the value proposition on ProQuest, not just on the cost synergies, but on the expansion of the commercial offering. That puts us in a position where we can choose to use the substantial amount of cash flow that we generate to buy back stock or to delever. What we've indicated is we'd like to see this business in the 3 to 4x range for leverage. We're on a path to get there next year. And obviously, at our current stock price, quite obvious to us, it's a very compelling investment opportunity. So we did start to do that. So you'll see us do more in both of those areas on some balance in the coming quarters compared to deploying it towards inorganic growth. There'll be some small tuck-ins, but [indiscernible] big place for it.

And I'd just add, I've done 250 acquisitions. I've never seen a situation like this one today where more private to private, very high, in my words, payments or things that I would like to buy, but I'm not about to. I won't -- that's not sustainable. And I've always been patient and persistent, and that will come with time. What this does do with those 4 vertical markets, like I said, is allow us to acquire adjacent product families and products inside of those markets. We're assuming since I got to go through that last year with Ms. Khan, I was her first victim. I was the first one that -- we had an agreement to close ProQuest July 1. And she asked for a second request, and so we did it. We provided 7.1 million pages and got it done and closed on December 1. We're assuming that will continue. So as we look forward to the larger acquisitions to complement those markets, we'll also assume that we'll go through a second request, et cetera, and we'll plan that as part of the cost. I have never made a large acquisition that doesn't deliver at least 10% adjusted EPS at the end of year 1, net adjusted, and 15% at the end of year 2. The multiples of the businesses that we're seeing right now are ones that even with the synergies we get, we wouldn't be able to. So patient, persistent, those that are getting overpaid for, they'll be available in 3, 4 years. You just wait. Yes.

Fair enough. We have like a minute -- a little bit over a minute left. So I'll ask a very, very open-ended question here to wrap up, which is what have we not talked about yet that you're really, really excited about that you feel like the investment community either under appreciates or should spend more time on realizing that we've hit on a lot of the tough ones already?

You start, I'll close.

Yes. I think the resilience of the business model and the cash flow profile is something that's going to be much more appreciated in the coming quarters. So our crystal ball may not be working perfectly, but I think we're probably headed into more headwinds than we were expecting. And I think how well the business performs from a growth perspective and a cash flow conversion is going to be pretty compelling in the coming months and quarters.

And not only is it going to be compelling, this is my last of 10, 11 public companies I've led over 42 years. This is actually the best set of assets. And we did a lot in 3 years, more than we'd even originally projected to be able to get those acquisitions done. This is a great quality business, we have the best set of people in total, and we'll just deliver on it going forward.

Perfect timing. Thanks to both of you for joining us and everyone in the room. Thank you very much.

Good questions.