Clarivate Plc (CLVT) Earnings Call Transcript & Summary

All right. Good morning, and welcome. I'm very pleased to be joined by Matti Shem Tov, CEO of Clarivate; as well as Jonathan Collins, CFO. Thank you both for being here.

Thank you.

Good morning.

All right. So I want to start with a high-level discussion of Clarivate's strategy and transformation, specifically the value creation plan. So this plan was announced about a year ago. It has 4 pillars. The first pillar is to phase out transactional sales and -- in favor of subscription models. Can you provide us with an update on transactional products that you phased out and the subscription products you're hoping to phase in to replace them and also what the revenue mix is right now of subscription versus transaction?

Yes. So thank you for the question. Yes, shifting the business from transactional, volatile, unpredictable, not as profitable from transaction to subscription is one of the key fundamental of our value creation plan. We've been -- we put a plan in place in February when we presented. We are on track for the plan. And we are basically doing changes in A&G and in Life Science. In A&G, we are phasing out the print books and transactional e-books by June 2026. We are on track to complete it. We are also phasing out onetime digital collection sales. At the same time, we have introduced 2 new products, which are sold on transaction -- on a subscription basis. One is a focused e-books and the other one is digital collection. We are very proud of the fact that by now, after 6 months of this product being on the market, we sold already 70 new customers of this one, including some 2 recent wins in the U.K. market for top 2 prestigious universities in the U.K., which we cannot specifically name. So good progress on the A&G side on moving away from transactional to subscription. We're doing a similar exercise in life science, exiting the real-world data brokering business on the DRG side. We have told the market and told our customers that we are phasing out of this business by the end of 2026. We are on track to comply with this plan. At the same time, we've introduced few new subscription-based offering on the life science, DRG side of Clarivate. DRG Fusion is a modular subscription-based data analytics platform, replacing real-world data offering. Also on our MedTech business, we introduced Commercial Analytics 360. It's a first step towards transition -- MedTech from a transitional -- from a transactional reporting onetime business to a subscription base. It's taking off pretty well. It's progressing according to the plan. Other product that we've introduced in Life Science as well, it's a disease landscape and forecast reports, also transitioning this business from onetime to subscription, all in all, on plan. We are currently -- when we started the plan, we were 80% of the company was subscription -- was recurring. By now, if we exclude the disposal, we are talking about 88% of our business is on a subscription basis, and we aim to be at 90% over time.

That's a great update there. Now the second pillar of the value creation plan is to improve sales execution. Can you talk a little bit about what you're hoping to improve there and what steps remain to be done versus what you've already accomplished?

So sales execution is high on the agenda. It's important just to consistently meet our targets. We have implemented most of the changes we were planning around the sales execution. And you can tell by the numbers, the ACV number for H1 -- for Q1, Q2 and by us reaffirming the numbers for the rest of the year, the changes into our sales organization is impacting the business. We see greater momentum on our subscription base. We see a better retention rate. We've implemented changes to the sales organization in the 3 different segments, mainly around talent, organization, customer engagement, and sales force incentives. I can go into some further details around in terms of talent. We brought in a few external reinforcement from the respective industry. We've hired a new Senior Vice President for Sales in Life Science coming from the industry and already making an impact, a lady by the name Dana Edwards. We've just introduced a new sales lead for A&G from -- to the North American organization and few other reinforcement of the management team of the sales organization in different positions. That's on the talent side. Obviously, we have to take some people out when we introduce the new talent. We've also done some internal promotion with regard to the talent. So all in all, we are improving our talent base on the sales organization. We've done some reorganization, some organization changes, making sure that we are getting closer to our customers. We also improved our customer engagement. We are getting closer to our customers and increasing the number of the people are involved with sales success. And lastly, we've done some changes to the sales incentive plan to make sure that it's in line with the company objective and also with our desire and strategy to go stronger into subscription reoccurring. That's for the sales organization. We are largely done, but there's always more to do.

Makes sense. Now the third pillar of your value creation plan involves product innovation. And there's been a lot of emphasis recently on GenAI and what you're infusing into your products. In fact, you recently launched some new agentic capabilities in your Web of Science and DRG product lines. Can you give us an update on your product road map? And how much of your revenue mix contains some sort of element of GenAI?

Yes. So I'm a product person by -- kind of my passion is product. So I'm very involved in product innovation. I was pleasantly surprised when I took over the role in Clarivate to see the fast-moving AI innovation in the A&G segment. They have created a center of excellence in A&G. And using this center of excellence has created some unique capabilities around AI innovation in academia and information and services. And by this center of excellence, we -- it now serves more and more, is becoming the center of excellence for AI innovation in the entire company. Officially, it still sits within A&G, but we are using the methodologies, the technology. And the concept is, yes, we have a center of excellence in the company for AI innovation. And yes, we do also -- and we're going from just doing AI -- GenAI, we're going to Agentic AI in different products. I'm going to talk further about this one. And this is -- the notion is to have a center of excellence, but also to build the team in all the different product area to be able to handle AI innovation themselves. And we're turning the entire R&D organization into 3 different segments to feel comfortable and to do AI innovation within the respective products with the support of the AI center of excellence. I can talk a little bit about a few projects. So not only GenAI, more and more and Agentic AI in the 3 segments. Life Science, Cortellis systematically going through AI enablement of the different component of Cortellis. Derwent -- on the Derwent AI Research, AI enablement of the Derwent AI Search. We're talking about Web of Science. And basically, each and every product of ours is going through a process of AI enablement of the product. And here, I want to give a little bit of some more details and a bit more flavor about the way we go about AI innovation and it's tying up to the revenue model as well. So we have 3 types, 3 categories of product. One and very important because we have a large book of renewals and existing products serve 80%, 90% of our business. The notion of AI enablement of existing products like Cortellis, like Web of Science, like Alma, like any other product on the company, systematically AI enablement, it helps us to on the retention side to retain the customers, and this is one. It also help us to go and acquire or to win new customers. This is one angle, going to the existing product lines and AI enablement and providing those as part of the ongoing subscription, no additional cost. This is one category. The other category is where we go to existing products and we create an extension, which is chargeable of the product that we go to a customer. A good example is Web of Science Research Assistant. So you don't get this specific functionality because you're just paying the subscription fee. You get it when you pay some extra. So the monetization opportunities for existing product by the AI empowerment. So some product will decide case to case that we give -- we provide the customers with the AI capabilities as part of the ongoing payment -- subscription fee and some is coming from additional fees. The third option is that we provide also products that are completely born AI. There were AI out of the gate. Two examples are MarkRisk (sic) [ RiskMark ]. MarkRisk (sic) [ RiskMark ] is a product we've introduced in the IP segment, which is completely born AI. It has some extended AI functionalities around the trademark. And a better example, and we'll hear more about this one is Web of Science research intelligence, which is completely brand-new product that we're introducing using AI. For the record, we have 10,000 Web of Science customer. Web of Science is a monster product for us. Like we go to most of the prestigious universities worldwide, they will have Web of Science. And we are constantly selling more and more web of science to lower-tier institutions. And news here that with the introduction of Web of Science Research Intelligence, which is an AI-enabled GenAI interactive platform for researcher, we can go and monetize further and upsell into our existing customer base. This product is now in development. We signed about 15 to 20 development partners -- chargeable development partner. And we'll see more -- we'll hear more and more about our capabilities around this Web of Science Research Intelligence. So that's what we have to say about our AI innovation and monetizing AI as well. There's a question that I constantly asked about the internal cost of AI. It is manageable. It's not an extreme cost. In fact, it's much cheaper. In terms of what we pay third-party AI vendors, it's very economical. We find a very economical way to deal with the AI -- the third-party calls for AI -- for the AI that we pay in terms of companies.

Yes. That's great. That's a very helpful update on products. So the last pillar of your value creation plan involves portfolio rationalization. And you've talked about conducting a strategic review of noncore assets and you're expecting to announce findings of your review in February of 2026. Can you talk a little bit about factors that you're considering as you conduct this portfolio rationalization, what you're looking for, what you -- what's really top of mind as you think about assets to keep or dispose off?

I think our top of mind in this process is to create shareholder value. We -- I said it all along right from the beginning, yes, we do subscription. We're going to go AI innovation. We can improve sales execution, but top of mind for us is to create shareholder value. And we've gone through some process, and we're still going through some process of creating value through potential divestiture of some of the assets. The key factor for us is creating value to shareholders, either by -- by creating value for shareholders by making the right divestiture if we come across this divestiture, which creates value to the shareholder, either by divesting an inferior asset that will help us grow faster or by selling a certain asset in an accretive multiple to our existing multiple. So I cannot share more and we will be providing some further news by end of -- in our February call.

Got it. Now the ultimate goal of your value creation plan is to accelerate organic revenue growth. Can you talk about what goal you have for organic revenue growth and by when you hope to achieve your target?

So I'm being here for just about a year in my job. I believe we can run -- we can get the company to grow in market growth rate. And our understanding, the market growth is slightly different between the segment: A&G, 3%, 4%; IP, 4%, 5%; Life science, even further. I think we are on the right track, and we can get into the market growth rate in years to come. I don't know that I can give you a specific date, but we should -- I believe that we are well positioned and well on the way to get into the market growth rate.

Right. So hitting market growth, of course, a very good goal. Do you think there is opportunity to surpass market growth for any of the segments over the longer term as you gain share or perhaps penetrate...

I think we have to be a little bit modest and the company, we were kind of trading behind. Our ultimate goal, and I think -- I believe we are getting there to go into market growth rate. For now, once we get there, we'll have another separate discussion.

Okay. Yes, that's prudent. Let's dive into some of the individual segments. So within the academic and government segment, what would you say are the most significant product development initiatives that are currently underway that you think can really help drive a further acceleration in growth there?

So as we -- so we are currently -- you talk about A&G. In A&G, we are now running the A&G with 3 business units. One is the software business unit. This is where I come from, the Lab Automation, Alma, Polaris. This is the software business, there is a content business. That's a traditional ProQuest business. And then there is the Web of Science analytical division, all doing well, all strong, highly recurring business, and we are investing in all the 3 concurrently. On the software side, we see -- we continuously update. We AI-enabled most of the product with constant innovation. In AMG as a whole, we have the notion of working very, very closely with the customer, customer collaboration is key. Maybe I can call out on the software side, 2 specific products that we don't talk about too much and they are up and coming. One is called the Vega platform. It's a new platform we introduced 2, 3 years ago. It's to do with the Libris community customer engagement. It's not a discovery product, but it's more like we do customer interaction or customer engagement with Libris platform using Vega. It's an up-and-coming product. We have about 100 customers, including the New York Public, and we are now taking this into the academic as well. That's one product innovation. The other upcoming product around software is Alma Specto, which is further enhancement to provide some universities, some opportunities to shine and present their research work and also the different digital collection that they have. It's a product that -- again, it's being developed with -- as always, with some key development part of ours. So Vega, Community Engagement and Alma Specto, which is a digital collection management product. We will hear more about this. This is in a way, business as usual. We develop the product, to upsell the existing customer and to help us sell the other basic product if it's Alma, Polaris is other software product into our customer base, and we are doing this is quite well. The other thing that we are doing on the content side -- this is the software piece. On the content side, constant innovation around content. I think the 2 products that we are now pushing strongly is the ProQuest e-Books offering since, I mentioned already, we were phasing out of the -- or we are phasing out of the onetime business, both on the data collection and on onetime e-Book sales. This is an opportunity for us to push those 2 products. I mentioned 70 customers signed already. So that's the new -- the up-and-coming product that we sell in the content side of A&G. And lastly, Web of Science. Web of Science, I don't know that Web of Science has got enough attention in the press or in the investment committee. It's a mega -- it's a monster product of ours. We have 10,000 customers and many more to come. I'm here to talk today about the new addition or the new component or the new additional product in the Web of Science family, Web of Science Research Intelligence. This is the born AI product that I mentioned before. It helps researchers do the research and it helps the research offices of the different universities to explore and to analyze their standing, provide direction, Web of Science Research Intelligence. I mentioned already 20 development partners paying development partners and we will come -- general availability is May 2026. It's a major development of ours, but it's a breaking news. We'll hear more about Web of Science Research Intelligence. That's on an A&G side.

That's helpful. You mentioned earlier that the Life Sciences and Healthcare business has the potential to grow faster than the other segments because the market is growing faster. Can you talk about what you're seeing in the health care market broadly that gives you confidence that the growth there can be faster than the other end markets and provide us an update on what you're seeing currently with the biotech or pharma subsegments?

I think we see -- I'll let Jonathan chime in, in a bit, but we see a growth -- we see a sustainable environment in the R&D side of the pharma, especially for us when we -- Cortellis is a leading product in this environment and for us doing better execution and AI enablement around Cortellis. I think the business is coming back. DRG, the commercial environment is a bit more challenged, but we continue the journey to introduce new products around DRG, and I think it's going to pay off when the commercial environment will come back. Jonathan?

Yes. Within Life Sciences, we see a strong and sustained demand for digital research and advanced data analytics. Our pharmaceutical customers and biotech customers in this space are dealing with personalized medicine, genomics, adopting AI into their drug discovery and launch process, and we see a great opportunity for the capabilities that we have to aid that. So that gives us a really good feeling about the growth potential in this market. To touch a little bit more on what Matti highlighted, within the R&D space, we've made investments in the last year to incorporate the research assistant that was incubated in the A&G segment that we've brought to our Cortellis suite of products. We've got great feedback from R&D users across the stack there on the capabilities this brings. We saw a really nice improvement in our renewal rates in these products in the first half of the year. Almost all of the company's renewal rate improvement performance of about 1% that we saw was driven by improvement in the life sciences area. So very encouraging to see early investments to bring AI technology into the products and solutions, already starting to generate returns and improvements in the marketplace. I think separately, there's continued pressure in the market to incorporate real-world evidence into the development and the regulatory compliance and then certainly in the commercialization and market aspect -- market access aspects of that market. So we really believe this investment that Matti highlighted in DRG Fusion is an important way to do that, stepping away from selling large amounts of data and getting back to what DRG was really well known for, and that is a deep understanding of the markets, our disease landscape reporting, our epidemiology intelligence, these great products where we drive insights, and we think we have the capability to deliver much better patient insights through the Fusion platform, using that real-world data and evidence to provide more advanced analytics to help our customers get those treatments into the hands of the people that need them the most. So those are a couple of areas where we've made investments. We're excited to see the progress that Fusion will make, particularly here in the second half of the year and as we go into next year. But that -- those are things that give us the confidence that it's an attractive growing market and that we can really partner with our customers and provide value with the things that we do particularly well.

Right. And then within the IP segment, can you talk a little bit about how GenAI could potentially change the competitive landscape, either make it easier or more difficult? And then talk about perhaps patent activity that you're seeing with respect to AI?

Yes. Matti gave a great example earlier with the launch of our RiskMark project, which is our product that is an AI-native solution that we develop to help manage the potential infringements and the room to create new brands and trademarks. So that's a great example. We think we're early to market with that solution, getting great early feedback from early development partners and customers. I think about also not just in the trademark intelligence, but on the patent intelligence side. Over the last year or more, we've made meaningful investments in AI-powered search for our Derwent product that went into general release towards the end of last year, early this year. And as we mentioned earlier this year, we've seen a very nice uptake in searches within the key cohort that use that platform. So we've seen double-digit increases in search activity. It's the first time we've seen that in quite some time. So that's an opportunity to take this unparalleled data set, the Derwent World Patent Index and provide analytics and intelligence for prior art searching, freedom to operate some of the key use cases for patent intelligence. We're also very excited, and you'll hear more about this in the coming months at our Ignite conference with respect to the launch of the Derwent patent watch product. So we have a group of key customers here where we're building infringement investigation, workflow capabilities with some AI native modules or enhancements in that platform that will help customers to manage the process of dealing with potential infringements and determining where to spend money to protect. And this is a really exciting new product, and this is -- AI is enabling that. So those are a couple of examples on the intelligence side. When we think about our workflow software and our services business, undoubtedly in the coming years, building agentic capabilities into these solutions are going to help make our customers more efficient and more effective through these workflow processes. So we think there's some opportunities, not just on the intelligence front, but also on the software and services side of IP. And this is a market that we're starting to see some signs of recovery from an overall demand standpoint as well, which is encouraging.

Great. And stepping back and looking at all 3 segments, how would you think pricing could evolve as a potential contributor to growth? Where is it now? And how much additional pricing increases can you achieve in the coming years?

I think Matti touched on this a bit before. Our approach has been there are certain new products and capabilities where we will price discretely. Research or intelligence that we're building on the Web of Science platform is a great example of that. But there are other capabilities that we embed to enhance the user experience and deliver more value. And one of the ways of monetizing that is improve renewal rates, which we've talked about. But we do believe pricing is a part of the equation. As we deliver more value and we provide greater capabilities when we come to that renewal discussion, there's a potential for us to monetize that through pricing. I think over the last few years, we've kept up with the rate of inflation. We certainly think there's an opportunity to do more as we've invested in capital spending to deliver some of these capabilities. So we'll be looking at that carefully across all of our markets and business units within the segments.

Let's talk a little bit about margins and profitability. So this year, you're guiding for EBITDA margins to contract around 50 bps to 41%, mainly because of disposals. Can you talk about where you think margins will evolve or how they're going to evolve after these disposals come to an end? And what are the key drivers you see for margin expansion going forward?

Yes, it's a great point. There are 2 things. You hit on a big one for this year that affect us. The other factor is with organic growth being relatively modest, we're going to be in a time where we believe it's important to continue to spend to bring these capabilities into the market. So that's pressuring our margins as well, too. As the disposals get behind us, that's actually going to help us. So when we model pro forma what the business would look like without these disposals, they'll actually help to improve our margins. So we expect to see that come into the business as we get past those next year. And then this is the type of -- we operate the types of products where we build these products one time. We provide enhancements and maintenance, but we can sell them many times around the world. So the incremental margin profile for organic growth is very attractive. So once we get back to that healthy market growth that Matti described, we're going to make steady continued progress on that over the next few years. We certainly think there's opportunity for profit margins to expand just based on that organic growth. And then the ability to reevaluate the level of capital spending as we move forward and optimize there to help to continue to improve our cash flow conversion.

Right. You talked about investing back into the business. Can you maybe speak to some examples of productivity or cost management initiatives where you're taking out costs to help drive margins?

Yes. I mean, certainly, as we brought each of these businesses together, we leveraged the great footprint that we have around the world and the talent and capabilities we have in many of our centers of excellence. We continue to optimize there to drive efficiencies in the business. Our teams are adopting AI-based tools for many of the processes we do, whether that's software development. More and more of our code is obviously being generated by AI, making our teams more efficient, the opportunity to have greater throughput in the development process. Another big area for us is content ingestion. We continue to develop new tools to help our editorial enrichment and content ingestion teams bring that into our solutions in a much more effective way. So these are a couple of the key areas and new technology is helping us to improve and become more efficient there as well, too.

So you laid out a framework for where you hope organic revenue growth will improve to. How are you thinking about margins? So longer term, where do you think margins can expand to? And how much margin expansion per year do you think is reasonable over the medium to longer term?

Yes. I mean within the last few years, our margins were in the 42.5% range, about 150 basis points better than where we'll be this year. We outlined that we think we can get between 0.5 and a full percentage point of improvement through the disposals. And once we get back to organic growth -- we haven't laid out the exact algorithm for that, but once you get to approach 2% to 3%, there's certainly an opportunity to start expanding margins. So we haven't given a specific number, but have indicated that we think that there's room to grow here from where we are at about the 41% this year.

Makes sense. And then with respect to the balance sheet, your gross leverage right now is 4.3x. Can you talk about how you plan to balance debt paydown, share buybacks and M&A and what your broader capital allocation priorities are?

Yes, it's a fair point. We've built up a little bit of cash in the first half of the year. As you noted, we repurchased about 100 million share -- $100 million worth of shares in the first half of the year and we built up some cash. So on a net leverage basis, we're still at about 4 turns at the end of the second quarter. When we think about the go forward, we'll continue to do a bit of both, some debt paydown and some buybacks. Last year, we were nearly balanced. We may skew from that just a little bit. But I think the important part is we have flexibility. We have a patient and very efficient debt stack. Over time, we've certainly indicated that we want to see that leverage come below 3 turns, and we'll continue to prosecute against that over the course of the next few years.

Great. Well, we're just about out of time. Thank you both, Matti and Jonathan, for the great discussion. Please join me in thanking them both.