Clarivate Plc (CLVT) Earnings Call Transcript & Summary

Hello, everyone. Thank you for joining us, and welcome to Clarivate's Q2 earnings conference call. After today's prepared remarks, we will host a question-and-answer session. [Operator Instructions] I will now hand the conference over to Mark Donohue, Head of Investor Relations at Clarivate. Please go ahead.

Thank you, and good morning, everyone. Thank you for joining us for the Clarivate Second Quarter 2026 Earnings Conference Call. As a reminder, this conference call is being recorded and webcast and is copyrighted property of Clarivate. Any rebroadcast of this information in whole or in part without prior written consent of Clarivate is prohibited, and the accompanying earnings is available on the Investor Relations section of the company's website. During our call, we may make certain forward-looking statements within the meaning of the applicable securities laws. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the business or developments in Clarivate's business to differ materially from the anticipated results, performance, achievements or developments expressed or implied by such forward-looking statements. Information about the factors that cause actual results to differ materially from anticipated results and performance can be found in Clarivate's filings with the SEC and on the company's website. Our discussion will include non-GAAP measures or adjusted numbers, Clarivate believes non-GAAP results are useful in order to enhance understanding of our ongoing operating performance, but they are a supplement to and should not be considered in isolation from or as a substitute for GAAP financial measures. Reconciliation of these measures to GAAP measures are available in our earnings release and supplemental presentation on our website. With me today are Matti Shem Tov Chief Executive Officer; Jonathan Collins, Chief Financial Officer; and Michael Easton, Chief Accounting Officer. After our prepared remarks, we'll open up the call to your questions. And with that, it's a pleasure to turn the call over to Matti.

Good morning, everyone, and thank you for joining us. The key messages today are straightforward. We are delivering on our commitment, and now we have a building block in place to accelerate organic growth. During the quarter, we advanced our AI innovation road map, grew organic ACV year-over-year, maintained disciplined cost management and strengthened our balance sheet through delevering. These actions will deliver further long-term value to shareholders. In the second quarter, we have continued progress across the business. Organic ACV growth improved to 1.5%, and profit margin has expanded to more than 42%. At the segment level, academia and government and life sciences and health each delivered 2% organic ACV growth. A sign of continued progress here is the shift from transactional to return revenue. we expect to see this continue in coming quarters as we focus on subscription revenue. In the intellectual property segment, reoccurring organic revenue improved to flat in the quarter, and we continue to expect a return to growth in the second half. We advanced key innovation milestones, including introducing two new agentic AI products, Nexus Connect and IP-One, which I will discuss in greater detail later. And in early July, we announced the agreement to sell life science and health segment, sharpening our focus on AI-driven transformative intelligence and enhancing our financial profile. I will also share more here in a minute. These results reflect the steady execution of the value creation plan, which we launched in late 2024. We are moving forward with urgency. Our progress is clear. We are investing wisely, operating with more discipline and directing resources towards the highest value growth opportunities. What differentiates Clarivate in this industry is our ability to apply AI to highly curated proprietary data sets that have been built and refined over decades. As a result, we believe that we are on a path towards accelerating our growth rate over the next couple of years. Turning to AMG segment. Our strategy is to be the trusted layer between AI and research. That means using Clarivate's proprietary data, domain expertise and workflow solutions to help institutions make better decisions with confidence and transparency. This quarter, we launched Web of Science research intelligence globally. This is an AI-native platform for research strategy, impact and funding. It is shaped by more than 50 development partners and early adopters across 20 countries. Its inside are grounded in publisher neutral Web of Science data and it provides full editorial provenance. It has already generated a multimillion-dollar ACV pipeline, and we have secured 77 paying customers to date. This is a great example of incremental pipeline resulting from new AI-driven products. We also introduced Nexus Connect, an AI-native gateway that provides a single university connector within AI chat agents such as ChatGPT and Claude. It allows students and researchers to access scholarly resources and services seamlessly integrating with their AI platform to enhance the research experience. The important point is that we are embedding Clarivate's proprietary intelligence into existing research workflow for the academic community. It is leading to new revenue streams. We are applying the same innovation approach to the IP segment. We announced the development of IP-One, unified AI platform that combines purpose-built agent with private scholarly assets and unique expertise. This platform agentic AI capabilities allow IP professionals to efficiently solve both patent and trademark intelligence question as well as simplified daily complex workflow across the entire IP life cycle. IP-One is being developed in close collaboration with leading corporate IP teams and law firms. We look forward to discussing these in coming quarters. We are seeing much market validation for our IP innovation. RiskMark was named the best AI tool for lawyers at the 2026 CODiE awards. It was recognized for its use of predictive and generative AI to lower trademark reassessment from hours to minutes. This marks the product's second industry recognition following its 2025 LegalTech predictive AI Solution of the Year Award. In June, we were pleased to welcome Simon Webster as President of our IP segment. Simon is a proven leader in the global IP ecosystem with more than two decades of experience including as CEO of CPA Global, which Clarivate acquired in late 2020. During his time at CPA, the organization delivered compounded annual organic growth in the mid-single digits. Our priorities in IP are to improve customer focus and retention across annuities and software, increased commercial intensity and accelerate AR innovation supported by our proprietary data assets. Importantly, our IP business has meaningful differentiators: scale, trusted relationship with leading law firms and blue chip corporate IP teams, a strong recurring annuity and renewal engine and differentiated proprietary content. We believe this strength combined with disciplined execution under Simon's guidance position IP to improve its performance over time. As mentioned before, in early July, we announced an agreement to sell our life sciences and health segment to Altaris. This marks an important step in our portfolio rationalization effort and is a clear example of the VCP in action. This transaction creates a more focused company as a subscription, simplifying our operating model and allowing us to make more targeted investments in organic growth. It also improves the quality of Clarivate's revenue base. On a pro forma basis, recurring revenue mix increases from 89% to approximately 92%, improving predictability, retention and cash flow visibility. We plan to use the net proceeds to reduce debt, which extend our average maturity, strengthen our balance sheet and enhances financial flexibility, enabling further shareholder value creation. Let me bring to your attention, Slide 12. I will walk you through the progress we have made since launching the value creation plan in late 2024. It starts with business model optimization. We have meaningfully shifted our revenue towards recurring subscription-based model. This gives us greater visibility, greater predictability and higher quality base to build on. We have also improved our go-to-market by sharpening how we sell and how we serve customers we have improved the momentum of our recurring business and set a stronger foundation for future bookings. At the same time, we have accelerated our AR innovation. Across the business, we have a robust and growing portfolio of new AI-powered products, deepening the value we deliver to customers and reinforcing our competitive position. We have rationalized the portfolio, we have taken deliberate action to divest noncore assets and nothing several disposal so that our capital and our attention are consolidated on our two major markets, which brings me to what is next, accelerating organic growth. With a more focused portfolio, a higher quality recurring revenue base, a stronger go-to-market engine, exciting new product and a healthier balance sheet, we expect sequential improvement in recurring organic growth in the second half of 2026 and continued momentum into 2027. We are investing in the right opportunities, and we are more confident than ever in our ability to execute, accelerate organic growth and deliver long-term value to shareholders. I will turn it over to Jonathan to discuss this quarter's results in more detail.

Thank you, Matti. Slide 14 is an overview of our second quarter and first half results same period last year. Q2 revenue was $587 million, bringing H1 to nearly $1.2 billion. The change in the quarter over the prior year was due to the inorganic disposals, lower organic transactional revenues and a modest foreign exchange impact, partially offset by organic recurring revenue growth. The second quarter net loss was $269 million. The change over the prior year was driven entirely by the noncash impairment charge triggered by the definitive agreement we reached to divest the LS&H segment. Adjusted diluted EPS in the second quarter was up $0.01 over the prior year to $0.19, bringing the first half to $0.38 which is a 19% increase over the same period last year. Operating cash flow was $99 million in the quarter, the change compared to last year was driven by lower adjusted EBITDA from the disposals and foreign exchange as lower interest expense was offset by higher working capital requirements due to timing of receipts and disbursements. Please turn with me now to Page 15 for a closer look at the drivers of the second quarter top and bottom line changes from the prior year. The changes over the prior year were driven by three primary factors. First, organic revenues declined by $9 million as recurring growth of about 0.5% only partially offset lower transactional revenues. We mitigated the revenue impact through cost efficiencies, leaving a negligible impact to profit. Second, the businesses we are disposing decreased revenue by $24 million, but was largely offset by cost reductions due to the wind-downs, yielding a net $7 million reduction in adjusted EBITDA. And finally, while the top line was essentially unchanged due to foreign exchange, we experienced an adjusted EBITDA headwind of $7 million due to the appreciation of a basket of foreign currencies compared to the U.S. dollar. In total, disciplined cost management allowed us to maintain our adjusted EBITDA margin over the same period last year despite the revenue decline. Please turn with me now to Page 16 for the same analysis for the first half. While organic revenues are down $5 million over last year, cost discipline has completely mitigated the impact and contributed $8 million to adjusted EBITDA. The strategic disposals have lowered revenue by $49 million, but have expanded profit margins, yielding only a $10 million reduction in adjusted EBITDA. For the comparable period in the prior year, the U.S. dollar was weaker against the basket of foreign currencies which caused a foreign exchange tailwind of $12 million on the top line, but resulted in a profit headwind of $5 million due to transaction gains last year that did not recur this year. Overall, the strategic disposals and disciplined cost management drove margin expansion of nearly a full percentage point in the first half of the year, an improving trend we expect to continue in the second half of the year. Please turn with me now to Page 17 to see how our adjusted EBITDA converted to free cash flow and how we continue to allocate our capital in a disciplined manner to further strengthen the balance sheet. Free cash flow was $44 million in the second quarter, which was $6 million lower than the same period last year. The change was due to higher working capital, largely due to the timing of collections and payments partially offset by lower interest and capital spending. We use free cash flow and excess cash on hand to repurchase another $75 million of bonds due in '28 at a modest discount of about 3% and bringing the first half debt reduction to $218 million. Please turn with me now to Page 18 for a look at our full year financial guidance ranges, which remain unchanged from the guidance we initially provided in February, affirmed in April and then refined a few weeks ago when we announced the agreement to sell the LS&H segment. Today, we're further refining our indications within these ranges largely to reflect the impact associated with the divestiture of the LS&H business which we expect to close by the end of the year. For modeling purposes, rather than estimating the closing date, we've assumed the transaction will close at year-end. If it closes prior, we will modify the guidance accordingly at the time to reflect the impact. We now expect our organic annual contract value to be in the lower half of the range entirely due to the fact that LS&H will be excluded from this metric in the second half as it will be moved to discontinued operations. Importantly, we expect AMG to approach 3% and the IP segment to return to growth by year-end to blend to about 2.25% growth. We still expect recurring organic growth of about 1.5%, near the midpoint of our range, which remains an improvement of nearly 1 percentage point over last year. Our revenue is now expected just below the midpoint of the range at $2.35 billion due entirely to foreign exchange and our organic recurring revenue mix will be above the high end of the original range at about 92% as LS&H moves to discons. Adjusted EBITDA should remain at just over $1 billion for a profit margin of nearly 43% at the midpoint of the range. We still expect adjusted diluted EPS will grow about 9% at the midpoint of the range to $0.75. Finally, free cash flow is now likely to be at the low end of the range as we have contemplated the full transaction cost to close the LS&H divestiture and have also incorporated additional restructuring costs to achieve incremental cost savings to recognize the full benefit next year. Please turn with me now to Page 19 for a reminder of the full year top and bottom line changes we're expecting compared to last year. We continue to expect adjusted EBITDA margin will expand by about 200 basis points, driven by a return to organic growth, continued cost discipline and completion of the strategic disposals. We anticipate organic growth of about 1%, led by subscription revenue growth from continued ACV acceleration. We have plans in place to achieve cost efficiencies to fully offset inflation, driving $25 million of profit growth. This will account for about 1/3 of the profit margin expansion. The inorganic disposals are projected to lower revenue this year by approximately $125 million, and we are reducing operating expenses by about $100 million, which yields a profit impact of about $25 million delivering the remaining 2/3 of the profit margin expansion. As a reminder, our guidance assumes we will own the LS&H business until year-end, and if the transaction closes earlier, a revision to our guidance will be made at that time. We now anticipate foreign exchange will be essentially flat compared to last year, comprising the only change to our revenue and adjusted EBITDA indication within their respective ranges. Please turn with me now to Page 20 to step through the expected seasonality of our revenue and profits this year, which we have refined based on our first half results. We continue to anticipate the business will accelerate organically in the second half of the year led by improved retention and new business sales. The organic growth, further cost efficiencies and the benefit of the strategic disposals could inflect profit margins as we move through the balance of the year. Revenue should be seasonally lower in Q3 and then higher in Q4 due to the normal cadence of patents and trademark renewals and transactional revenues. Please turn me now to Page 21 to review how we expect the more than $1 billion of adjusted EBITDA will convert to free cash flow and how we plan to allocate this capital alongside the proceeds from the LS&H divestiture to reduce our debt this year by about $900 million. Due to the transaction costs we will incur at the closing of the LS&H divestiture, we now expect free cash flow will be flat compared to last year, but the vast majority of the onetime cost of nearly $70 million will not recur next year. We continue to expect cash interest will improve by about $20 million over last year due to the debt we repaid last year and this year. Cash taxes are still expected to be $5 million to $10 million higher than last year, due largely to the new corporate tax in Jersey. We anticipate the change in working capital this year will be a use of approximately $25 million, primarily due to incentive compensation payments. We're also expecting a $10 million benefit associated with lower impaired contractual costs reflected on the other row. And while we remain committed to investing in product innovation, the disposals and cost efficiencies will improve capital spending by about $20 million. From a capital allocation perspective, we plan to use the free cash flow we generate in the second half of the year and the proceeds from the LS&H divestiture for retired notes due in the next few years. I will now turn the call back over to Matti for some closing remarks before Q&A.

Before we transition to Q&A, I want to touch on our other announcement today. Michael Easton has been appointed as our next Chief Financial Officer effective August 8. Many of you already know Michael, he serves as our Chief Accounting Officer, and he is a member of our senior leadership team. He is well regarded and brings more than 25 years of finance and leadership experience. Michael has a deep understanding of our business and has been key to strengthening financial discipline, governance and operational execution across Clarivate. He will be focused on accelerating growth improving profitability, strengthening free cash flow generation and maintaining disciplined capital allocation. I want to thank Jonathan for his leadership. He has made many meaningful contribution to our company over the years. He oversaw the successful integration of the three acquisitions that today comprise Clarivate, setting up the segment operating structure we have today and transforming the finance organization. Personally, in the last 2 years, he has been an important partner to me advancing the VCP, working to improve profitability and strengthening our balance sheet. I wish Jonathan every success in the future. Operator, we will turn to Q&A now.

[Operator Instructions] Your first question comes from the line of Scott Wurtzel with Wolfe Research.

Just wanted to touch on -- you guys cited some timing around renewals that may have impacted ACV growth during the quarter. Is there anything around that due to longer sales cycles and anything we should expect to persist at all in the second half of the year?

Scott, thanks for the question. We believe that our results for Q2 in the first half are in line with our original expectations, if I remind everyone, we pointed the equivalent of Page 20 in Q1 indicated we expected to see a pullback in recurring organic growth in Q2. Subscriptions were a part of that. So ACV, we continue to make progress over the last 6 quarters. It's not always going to be linear, but we continue to see strong renewal rates and good opportunities for the new products to convert to sales. So the timing of renewals is something we see in the business from time to time. No, we don't think it's an elongation of the renewal cycle and the organic ACV growth of about 1.5% in the end of June is generally in line with our first half organic growth versus subscription revenues at about 1.2%. So we're generally where we expected. And as we indicate also on Page 20 in this quarter's tech, we expect the ACV and the organic recurring revenue to inflect in the second half of the year. We have good line of sight to that. At this point in the year, the A&G business as of the end of July had 75% of this year's business in the bag, very similar to what we saw at this point last year, fall is an important renewal cycle, but we're already well on our way, and we have good line of sight for the second half of the year. Thanks for the question, Scott. .

Your next question comes from the line of Toni Kaplan with Morgan Stanley.

I was hoping you could talk about -- more about the MCP opportunity, where you think the -- like which client types are going to more gravitate towards utilizing your data over MCP, which segments, et cetera? And just how you're thinking about how it could contribute to growth? And is it included in the subscription? Or is there an up charge for it? And also just Jonathan, congratulations on your new opportunity.

Yes. So I'll take this one. Thank you, Toni. Maybe take a [indiscernible] on the AI innovation we are doing. We are very much focused. And since I joined us since we started the VCP, we are delivering on 19 different initiatives regarding external -- a new product that we are delivering. We are very, very pleased with the progress so far. We see the AI enablement of our existing product, it's a source for revenue for new logos, new products, improving retention. And I think also to allow us to have some AI specific pricing for new products. So new revenue generation or revenue stream, the Web of Science Research Intelligence definitely a new revenue stream, [indiscernible] to a new revenue stream, IP-One, and I've been talking about and we are very excited about IP-One, definitely a new revenue stream. Sam will come Nexus Connect and another products from LNG, which involve MCP. And we see the customers in the three segments, including a large science, other want to consume our data, our proprietary data, so either directly to us with our UX or new AI-enabled product or using their own customers is a tendency in some bigger customer we would like us to embed our capabilities [indiscernible] into their respective corporate AI product, and this is why you see more of our product are embedded into Anthropic, ChatGPT and other generative LLMs. By and large, a bigger customer would like to be able to embed through MCP, smaller customer, we want to use it in our environment, but this is just early days overall. We are very pleased with the momentum that we have in introducing AI either our own native or embedding our proprietary data into MCP environment of the customer [indiscernible] corporate AI infrastructure.

Your next question comes from the line of Manav Patnaik with Barclays.

Thank you congratulations, Jonathan, and Mike both for your new roles. I just had a question on the expectation for acceleration of organic growth. I think you said sequentially 100 basis points. Can you flush that out a bit if it's different between academic and government and in the IP side as well. And I think just going into '27, I guess maybe just -- is that 100 basis points for the full year as well in '27? Or how we should think about that?