Clarivate Plc (CLVT) Earnings Call Transcript & Summary

Thank you both for being here.

Great, Manav. Well, thanks for the invitation. Great to be up on stage with you. So thank you.

Good. So maybe, Jonathan Gear, just to start off, it's been less than 6 months now since you took over as CEO, I guess. And so just some first initial reactions as you've gotten to know the business better? Any surprises? Just some broad comments to start off there.

Sure. Let me kick it off. It's actually been since September 1. So far less than 6 months. But I mean, my observations coming in, and Manav, as you know, I come from an information services background. So I certainly knew the model coming in, the recurring revenue nature of the model, the margin accretion nature. So I knew the model very well. I think the big positive surprise to me has been just the strength of our positions in the 3 core segments that we serve, Academia and Government, IP and Life Science/Healthcare. It's -- the products we have there, both on the content side and some of the software products are extremely embedded in the workflows of our customers. So we're starting from a position of deep customer relationships and knowledge.

Got it. And how about the 3 segments that you called out. Like how about the interconnectivity or interaction between those 3 segments? What have been your observations there?

So there's a couple of things. You know the history of Clarivate very well, about how we've come together really the last 30 months or so going from $1 billion to almost [ $2 billion ] of revenue through really the core Clarivate group, then the acquisitions of DRG, CPA and then, finally, ProQuest. And so as you bring these segments together, and we still have some knitting to do together, both on the technology side, product side and a few other pieces. But there's great synergies as I look through on a couple of key areas. One is on the go-to-market. And part of that is an operational model of creating a consistent operational model that is just excellent at cross-selling both within the segment. So take a DRG customer, who's buying -- during the R&D segment of a drug life cycle, making sure that DRG customer is also -- we're selling to them the legacy Cortellis products, which came from the original Clarivate piece. So there's a very heavy lifting from those pieces as well as selling products across the segments. Web of Science is a great example. Web of science, as you know, Manav, it came from the legacy, originally Thomson Scientific business. Great research tool, sits -- and has been very core to our Academia and Government segment. But it's equally as important to people doing patent research, as they search for patents, to understand what's the research in that area as people doing life science and health care, drug discovery, understanding again, what is the other drug discovery research in that area. So we have a great opportunity to leverage across the -- off the patch. Beyond the cross-selling, we have technology we can leverage across the patch, different analytics tools and every piece like that. So we're in the early innings of being able to do all this.

Got it. And I want to come back to that. But maybe, Jonathan Collins, just for the benefit of the audience. You made a comment around the recurring nature of the business. Can you just remind us of the mix of what's subscription, what's recurring, what's transaction?

You got it. We report in 3 order types. So about 60% of the business is subscription. So that's renewals and new subscriptions every year. About 20% is what we call reoccurring. So that is entirely within our IP segment, where we are providing renewal services for our customers' patents and PTOs around the world. Very predictable. We think of that as being subscription-like. And then about the remainder, about 20% is transactional. So these are customers that buy from us every year, but it may be a different type of content or a different step that we're providing to them during that period. That also includes our services revenues for consulting as well, too, is in the transaction order type. So it's about a 60-20-20 split across all 3 segments.

Got it. And maybe just to hone in on the transactional piece a bit because it seems like a lot of the recent guidance revisions have -- seem to be centered around that area. So maybe perhaps what's going on in there? How much visibility do you have into that 20% of the business? And I guess, how much volatility should we expect more?

No, I think you're spot on. Our subscription business has performed really well this year. So we got over 4% organic growth in the third quarter on the subscription business. So we've been very encouraged by the trajectory of that. I think that's likely to hold up on a full year basis. The reoccurring business can tend to be a little bit lumpy. So we've had some timing issues. We highlighted the fact that the first half of the year was going to grow a bit faster. Second half would be a bit slower, and that's just due to the timing of some of the renewals that we saw around the world. The last piece that's had more volatility has been within the transactional business. We've drawn attention to a couple of areas. The first that we highlighted in the summer was our trademark business. So we do a lot of work for -- helping companies identify and protect trademarks and issue new trademarks. That business tends to be a little bit of a leading indicator of where the economy is heading. So we saw that softening in the summer, and it's been soft in the second half of the year as we expected. The second area has been our consultancy, as I mentioned, is also in our transactional. Jonathan and I were a bit conservative in the second half of the year given the macro appeared to be a little bit soft. But we had some internal issues we were dealing with in building back up some areas of that practice, so it's been softer in the second half of the year. The final area that's actually been the most challenging for us to predict is some of our data sales in the Life Sciences and Healthcare area. So one that was a little bit challenging at the end of last year and in the third quarter of this year. We've taken a little more of a conservative approach in the outlook going forward. So we'll be in a position where when that business does well, will surprise to the upside versus surprising to the downside. But that's been the spot that we both have been getting more familiar with and trying to get more predictable. We have highlighted the fact we're going to make a pretty significant product investment over the course of the next few quarters to help them make that part of the business more recurring in nature. So Jonathan talked about that real-world data platform that we're going to bring to market in the course of the next year that will provide the opportunity to sell inside of that ecosystem that our customers are using to make that more recurring and less episodic.

Got it. And maybe, Jonathan, if you could just elaborate on that. I think on paper, it's great to make things more reoccurring, but how long does it typically take? And you've done some of this in your prior life at IHS Markit and so forth. But like just walk us through a couple of quarters of investments and then how feasibly how long before it becomes more steady?

Sure. I mean it does -- as you know, Manav, it does take a while. That's not turn on the dime because of the nature of our revenue earn-out. So if I take the 2 examples that Jonathan mentioned, the investments we made on pharmacovigilance, as well as the real world data platform, we made that -- the green light of that investment in September; teams are building up that product. And let's say, as we kind of move down a couple of quarters, we have a product we're going to start selling latter half of next year, we start selling it next year. As that buildup of sales takes place, it's a lagging kind of 12-month period, and we see that revenue being recognized. So there's a stage of things. I always view our type of business model as like a big ocean liner. And it's cruising and you're trying to tweak it every time on investments. Now the good news is, as it moves, the momentum just continues to build over time. But it will take -- and it will take multiple quarters to see the results of some of these product initiatives.

Got it. One other area that we focused on a lot in any in service companies is the retention. And I think you guys are in the low 90s range. Clearly room for improvement. So how do we -- how does Clarivate get better with that number?

Sure. So I mean, I also find different companies measure retention differently. I think we have a very pure way of looking at it. In Q3, our retention rate was around 92%, and that's an improvement. And you will see quarter-to-quarter, you will see us -- it's like a wobbly walk, but it's heading the right direction. One comment I'll make is, how do you improve retention, you do it in really 2 key ways. It's a higher level of touch with customers. Particularly, you tend to see higher retention rate at the smaller customer size that get less attention traditionally. The improvements we've done there is we launched a whole inside sales channel beginning of this year. That inside sales channel is now touching customers multiple times a year where they weren't touched but maybe once a year before. And then you continue to make also make improvements on the products -- you're trying to drive value in the products. You drive value of the products, demonstrate that value, that's how you drive retention. Now in terms of absolute numbers, just for the audience, I mean, why does someone attrit? They'll leave because they'll go to competition. The company goes bankrupt. They exit this product line or they -- there's a merger that takes place. Those are typically the 4 reasons. So it's very hard to get to my definition of attrition. You can't get to 100% because some things are out of your control. The thing you can't control is competition. To a degree, you can't control the other 3 pieces. Now if you look at our core segments, I think there's a certain amount of difference in how they're going to behave from that perspective. Academia and Government, universities tend to, at least the ones we serve, they don't go out of business. They don't acquire other universities. They don't drop research, right? So we're going to tend to have a better retention rate in that area. You move to like Life Science and Healthcare, a bit more competitive, you can have lower attrition there. But the goal is to continue to drive this piece up. Now I will say on my historical benchmarks, 92% is not a terrible place to be. It really isn't. But every percent that we can increase just flows right to the bottom line. So we're very focused on that.

Got it. And talking about your customers and maybe it's a good time to go through each of the segments firstly, and that key slide you guys had last quarter on market growth and your underlying growth and the opportunity there. So maybe let's just start with the academia side, where I think you said the market growth was 4% and your underlying growth was 2%. So what is the disconnect there? Like why do you guys -- because -- and maybe this is -- you can bring in competition to the question, like maybe someone else has more share or like why you have to go to the market?

Sure. So let's talk about Academia and Government, it's a little under half of our total revenues. And they're serving, we call it Academia and Government, it is primarily academia and some government. So we're serving the large research universities around the world. So places that all of you went to in your audience, I'll make a leap of faith here. So great universities. And in that target segment, we're selling library management systems. We're selling Web of Science and we're selling book collections -- so we're managing kind of the research process and research life cycle for our core clients there. Now in what I would call our historical target clients of the top research universities, very high retention rate. They don't leave us. If they do, they'll tend to come back very, very quickly. Where we've been losing market share is a little more down market on the universities which are less researchery -- when I say less researchery, that means they're relying less on federal grants to fund their research, and that's one key element of value we provide for our clients, is help them provide the evidence to prove to the government that they're providing great research for grants. So we are losing market share -- obviously, we're not gaining market share in that lower end of the market, and that's what's holding us back. So our strategy here, Manav, is we have one product, Web of Science. It is the gold standard product, came from legacy Clarivate, a bibliometric information product that, again, is the gold standard in large clients. And what we need to do is product and package it in a way that makes it, on a cost basis, attractive as you move down the food chain a little bit. We get that piece right, we're now growing at market in that segment.

Got it. And the 4% market growth, how would you break that out? Like is that the budgets of these big universities growing 4%? Or is it just -- is there an element of just more research penetration?

We did -- it's a bit of both. It's a bit of both. And Jonathan led this effort. We -- it's a very -- the -- our market growth in all 3 segments are what we call -- it is a target -- it is our target addressable market. So it's not a theoretical market. It's how -- what's the growth rate of us and our competitors who are competing against in that market. So certainly, there's an element of budget growth, there's an element of usage, being able to capture usage. Now as we stack rank within librarians, which are our core users or buyers in this element, of their needs, the needs of our product versus others is very, very high on their list. So we're very well protected. And again, I sometimes get questions as people see declining university rates, what are the implications for us. The core university that we sell into are not declining. I have a high school senior right now. I can tell you it's hard as ever to get into these colleges. So when we sell, we're not seeing that attrition rate that some, maybe the smaller colleges, are seeing.

Okay. And then just last question before we move on to the other segments. So to, I guess, take more share on that lower end or who aren't getting a lot of federal grants, does that require product innovation for you guys? Does that require a sales force execution? Or what is the gap there?

It's less sales force, it's more product and more packaging. We'll get to one in a second, which is more product. In this area, we need to package and price our products in a different way that makes it attractive down market.

Got it. Okay. So let's try and do the same thing on the IP side, which I think is the next big segment. So I think there -- I believe it was the same thing, 4% market growth, 2% underlying, if I remember.

We're growing 3% to 4%. Market is growing 6%. I think.

6%, apologies. So yes, so again, maybe just what's the gap there?

Sure. So let me just describe what the segment is for us. It is 2 types of IP, primarily patent. That's the largest piece. We're the largest provider of patent research and management services in the world. And then we're selling into law firms, so patent law firms who focus on this, as well as large corporations who are large enough -- think of your large pharma companies, high-tech -- they have such a volume of patents that they manage it in-house. So that's kind of our core market. Then we also do it, and Jonathan mentioned [ CompuMark ] around trademarks, we've managed trademarks, same type of process, a smaller part of our total portfolio there. Now if I break up the pieces, think about 3 pieces there. One is, and I'll talk a little bit about our legacy and heritage. One is the legacy CPA business, which was a patent search and patent management company that we acquired a little over 2 years ago. And that's the bulk of our business. Then we have the CompuMark business that came from legacy Clarivate. Again, it's a great business. It is the one piece of our entire portfolio, which is we feel the economy. So we mentioned this in June in our Q2 call. We began in June to see that business begin to slow down, and we anticipate it would slow down in the second half, which it will. And that's because as companies pull back on investments, as they themselves pull back on innovation, they don't need to register new products. And so we kind of feel that, that's the one piece we feel. And then the third element is a product called Derwent, which is a patent search tool that came from legacy Clarivate. So we look at those 3 pieces, again, CompuMark can go up and down a little bit, but assuming that's a steady state, to get to 6%, there's one thing that we need to fix, and that's Derwent. Now Derwent is a great solution if you are a high-end intensive user of IP search. It's, again, the gold standard. And if you're one of those big law firms that focus on this or you're a big corporation that focuses on this, you have teams that know how to use it. But it is a workflow-intensive tool. It's not something that, Manav, you and I naturally would be able to naturally pick up today and start fiddling with. So where we've lost share here is, again, downmarket. It's amongst the corporations that -- they don't live in Derwent. They may be doing searches once a week, a few times a month, and there are far simpler lower-priced tools out there that are available and they've gravitated towards that. So we have lost share in that low end market. And here, unlike the other one in Web of Science that is more of a packaging and pricing, here, we actually need to create a simpler product. We can create a simpler, easier to use, more intuitive, priced differently. We get that piece right, because we have the underlying content, we are the global leader in patent management if this is positioned to win.

Got it. Okay. And the 3 pieces, Derwent, CompuMark and CPA, like do they interact with each other a lot? I guess, I'm getting to the point where you guys divested MarkMonitor. Are any other of these kind of smaller brands that are maybe a challenge at the moment potential review candidates?

So let me answer both questions. So first answer, they interact together tremendously well. So Derwent, which came from legacy Clarivate, is a search tool that searches IP. And so it searches both the CompuMark piece -- it's a great search tool for that. It also is a natural pairing between that and the legacy CPA content. So they fit like a glove together. It made all the sense in the world when we brought those pieces together. Now your second -- I'll maybe broadly answer your second question of divestitures. So we did divest from MarkMonitor, which we announced. And to me, it was a great divestiture because it's a great business. but it wasn't strategic for us. It didn't have those elements that you just asked me about. It also didn't have the financial elements too. It wasn't a subscription recurring revenue type product. If it's more of a BPO type product. And we love being able to divest that because it wasn't core and allowed us to free up cash to focus on debt paydown, which is a priority for us on our capital policy right now. Jonathan continues to lead a look across our enterprise on where else can we find additional assets, which again, fit the profile, that's not strategic, so both from a strategic and a financial lens. I don't think we're going to find another one that as -- a MarkMonitor, that was an obvious one. But we're always looking to prune where we can.

Got it. Okay. And then let's touch on the last segment, the healthcare, life sciences piece of it. And maybe just remind us what the market growth was versus underlying growth? And again, just what the gap there is?

Sure. So this is an exciting market. It's one that has the most tailwinds. It is the smallest of our 3 segments. And this market is growing around 10%. We're growing kind of 6-ish to 7-ish, something like that. It is for us probably the most volatile market. Again, I love this market. It's exciting. It has most tailwinds. It's the most dynamic. And here, if you think -- we're selling into drug manufacturers, pharmaceutical companies, biotech. That's who we're selling into. And if you think about the life cycle of a drug from a -- we help a company assess where there's a strategic market opportunity for them, matches their skill sets, their capabilities against a market opportunity, then we help -- once they decide to invest in it, we help -- we help their scientists develop the drug. We have molecular information, drug interaction information to help the scientists develop it. Then we provide them with content to help get through regulatory approval. I mean if you can imagine it, if you're launching a drug globally, every different regime has a different regulatory process. We help them navigate that, understanding what's required. And then once that's approved, we help move into market access, which basically means in the U.S. approval by insurers, to ensure that insurance companies will cover the drug, and then we help with the commercialization. So it's a full life cycle, very dynamic market, lots of players in there. We're not the biggest. There are companies bigger than us. We're probably 3 or 4. But in the particular content areas that we serve, we're typically 1 or 2. So it's a great segment. And here, the opportunity for us is some of the legacy products that came from Thomson Scientific, growing under market there, this is the area where I think there's the greatest innovation opportunity for us across our portfolio. Again, Jonathan mentioned 2 of them, which we greenlighted earlier this fall, if you will. And our goal there is just leverage the content sets we have, take us up the food chain, and you'll recognize this from IHS Markit, from data and content into analytics, capture the value and help our clients capture more value and have us share in that value capture going forward. So that's our goal there.

Got it. So if academia was about packaging, IP was about product, so how would you describe healthcare -- just about more kind of aggressive selling and a mix of both?

It also is a product play here, but what I would call more of an analytics play. It's an analytics play. So the product we need to do with Derwent is more of a software tool. It's a software tool. What we're going to do here, and I'll give a parallel, which you'll be familiar with. At IHS Markit, as we acquired R.L. Polk, as they were acquired, there was the Polk database, the vehicles and operation database. It was a phenomenal database. But it was just data. And we sold it as just data to our clients, and we were in a race to commoditization, as I would call it. We shifted that to create a platform, an analytics platform, where we began kicking analytics products off the back of that, selling at $1 million type sales to OEMs. I see that exact same model we have here with our life science content sets, where today, we typically sell those content sets, we don't sell analytic solutions on the back of that. So that's the direction we're taking it.

Got it. Okay. Jonathan Collins, maybe for you. Just obviously, there's a lot of organic investment that seems to be required to catch up. But so beyond that, can you just talk about the capital allocation priorities. You had a buyback, but you're slowing that down for a bit. So just walk us through that.

Yes. I mean we're encouraged by where the cash flow profile is headed into next year. When we turn the page to 2023, most of the integration work for the large acquisitions will be behind us, and some of the other things we had to address is the part of that, that have affected our cash flow conversion will be in the past. So we indicated on our last call, we think we're going to see a free cash flow conversion next year on adjusted EBITDA approaching up 50%. And our intent in the near term is to use most of that cash to deleverage. So the share repurchase program that we put in place earlier this year is going to take a little bit longer to satisfy than we originally expected. We'd like to see our leverage get a 3 handle here as quickly as we can. And I think you'll see us be a bit more balanced between buybacks and between deleveraging. But that will all be after continuing to fund a lot of this growth. A lot of things Jonathan just highlighted will take some disciplined prioritization within our operating expenses, we'll continue to have to invest in the CapEx to bring those products to market as well, too. We'll dimension all of that early next year to give specifics. But that's how we're thinking about using our cash flow next year, which will be some of the highest available cash flow we've generated so far.

Got it. And maybe just on the leverage level, can you just remind us where you are today, where we should be by year-end? Like I guess how long before we get to this 3 handle?

Yes, we think we'll probably be under 4.5 turns by the end of this year, somewhere in that range. And then we think we'll be able to be to a 3 handle before the end of next year.

Got it. We have about 5 minutes. I don't know if anybody has any questions in the audience. I'll continue here. Okay. So I guess to your point on CapEx you made and also what we talked about is a lot of product packaging, a whole bunch of investments done. I guess should we be expecting kind of a big pickup in the CapEx? Or is it doable within the ranges that you guys have?

It will be in the range of what we have. I mean we did pick up our CapEx a little bit, we signaled in our Q3 call a little bit for this year. When I look forward to next year at least, it's my aspiration is to keep it on a percent of revenue basis, roughly the same as this year. It may have to pick up a little bit. But it will be -- certainly, if it has to go up a little bit, it will be a marginal increase.

Got it. Okay. And then maybe you guys can tag team. But you give us some preliminary kind of outlook on what 2022 might look like. So if you could just reiterate what you said there?

We only gave 2 key messages. The first is we think the organic growth will improve modestly next year. We had some headwinds this year exiting our operations in Russia. Some challenges with our consulting practices that we think those types of items will help us next year improve the organic growth rate. And we did want to indicate that we do believe despite the fact that organic growth will still be not quite the where we want to be in the medium term or catching up with the market, that we're still going to have the opportunity to expand our margins modestly. We'll have the balance of the ProQuest cost synergies that will help to drive that. So those are the things that we wanted to intone, in addition to the cash flow conversion that I highlighted. A lot of those onetime costs will be gone next year and we'll have a much better conversion on our profit.

Got it. And then maybe, Jonathan, just to end, in terms of that integration, the cost synergies, I mean, there's been 3 big deals done fairly quickly in the past year. You're used to that kind of stuff from IHS and from IHS Markit as well. But any compare and contrast in terms of the opportunity or the ease of execution here relative to what we've, I guess, witnessed before?

It's something I think about a lot, as you can imagine. I'll tell you what's similar and what's maybe different, but I think we get the same arrival point. So first, what's similar. I mean, what's remarkably similar is that at IHS Markit, we have 3 segments. Here, I have 3 segments. Very, very similar. And as we said before, the sales motion is very similar. The product motion is very similar. In a way, the product portfolio here is simpler. And I contrasted with the financial services segment we had in IHS Markit. It was a big segment for us. You peeled on the onion, there were dozens of products. Dozens of sub segments there. Here, our business is -- I mean it as a compliment to our business, it's very simple. When I describe to you the Academia and Government and describe you what we do in IP, that's it. I mean, it's a very simple, easy-to-understand model that our clients understand very well. Now what is different, I would say, in terms of our evolution as a company is the pace that we have grown here through acquisitions. We did tons of acquisitions at IHS Markit, but it was over a dozen years. This business has grown triple in size almost in 30 months during the COVID when people couldn't get together. So I do think the arrival point is very, very similar. And that -- certainly, the model that I learned at IHS Markit I'm impressing here at Clarivate is -- the focus right now on the team is execution. I told the team, don't bring me any more M&A targets, don't talk about all these wild and woolly ideas. We're going to focus right now on executing with the great portfolio we have right now.

Got it. All right. That makes sense. Well, I think we're just about out of time. So we'll leave it there. Looking forward to Investor Day to peel back the onion on a lot of these things more.

Great. Manav, thanks for the opportunity.

Yes. Thank you, everybody.