Clarivate Plc (NYSE:CLVT) Q1 2023 Earnings Call Transcript May 14, 2023

Operator: Good morning. Thank you for attending today’s Clarivate Q1 2023 Earnings Conference Call. [Operator Instructions] I would now like to pass the conference over to your host, Mark Donohue, VP of Investor Relations with Clarivate. Thank you. You may proceed.

Mark Donohue: Thank you, Joe and good morning, everyone. Thank you for joining us for the Clarivate 2023 earnings conference call. With me today are Jonathan Gear, Chief Executive Officer; and Jonathan Collins, Chief Financial Officer. Both will be available to take your questions at the conclusion of the prepared remarks. 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. An accompanying earnings call presentation is available in the Investor Relations section of the company’s website, clarivate.com. During our call, we may make certain forward-looking statements within the meaning of applicable securities laws and 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 industry to differ materially from the anticipated results, performance, achievements or developments expressed or implied by such forward-looking statements.

Information about the factors that could cause actual results to differ materially from anticipated results or performance can be found in Clarivate’s filings with the SEC on the company’s website. Our discussion will include non-GAAP measures or adjusted numbers, including organic revenue and adjusted EBITDA. Clarivate believes non-GAAP results are useful in order to enhance an 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. After our prepared remarks, we’ll open the call to your questions.

And with that, it’s a pleasure to turn the call over to Jonathan.

Jonathan Gear: Great. Thank you, Mark. Good morning, everyone and thanks for joining us. I’m going to start by briefly covering our first quarter results. Then I will provide an update on some key improvements and announcements as part of our commitment to accelerate our growth. As we discussed at our Investor Day in March, we are driving change and investing across our segments which will create a compounding cash generation machine for our shareholders. Turning to our financial results. The first quarter was in line with our expectations. And as a result, this morning, we reaffirmed our 2023 full year outlook. We continue to expect an improvement in our business throughout the year as we begin to realize the benefits of our growth initiatives and cost savings.

While there has been much external discussion about global economic challenges, we have not seen any impact to our outlook for the year. As a reminder, our business has proven resilient during prior recessions due to the critical nature of our products and services. Revenue in the first quarter was $629 million, down from the prior year’s first quarter because of the divestiture of the MarkMonitor business and the strengthening of the U.S. dollar. Organic revenue growth, as expected, was essentially flat in the first quarter. We did deliver 3% subs growth which was driven by the Academia & Government segment, including improved performance from Web of Science which I will cover in more detail shortly. The strength in our total subscription base helped to offset the difficult first quarter comparisons across reoccurring and transactional revenues compared to the prior year period.

We delivered strong free cash flow of $168 million in the first quarter which was used to prepay debt while still reinvesting in product development to accelerate growth opportunities. We are seeing the initial benefit of this focus and investment in the Academia & Government segment, where we made the earliest investments into growth. I will spend the next few minutes diving deeper in the progress we are seeing in this segment. We are off to a great start with Web of Science which is starting to yield benefits from last year’s investments. At the end of 2021, we completely overhauled the user interface of the platform to drive ease of use and customer engagement. We started to see positive development in 2022, with active usage up 78% versus the prior year.

As we turned the calendar to 2023 and the heavy renewal period in the first quarter, we saw a 350 basis point improvement in the Web of Science renewal rate. We also delivered a 16% improvement in new subscription sales growth. These 2 improvements in our subs base for Web of Science bode well for continued improvement, financial results the rest of the year. In addition, one of the value adds we delivered recently was the creation of the Preprint Citation Index. This utilizes information from pre-published content to accelerate discovery for academic research. This enhancement makes it even easier for researchers to include preprints in their existing research workflows. Thus, the Web of Science can be used as a single portal to search across journals, books, proceedings, data sets and now preprints, streamlining the research process and helping to make important connections faster.

That’s driving more customer value into this critical platform. Following the ProQuest acquisition, our teams have been working on exciting new integrations between our products to enhance value. We have integrated holdings data from our flagship library software platform, Alma, into our leading research analytical tool, InCites, to generate custom collection management reports. This allows universities to obtain unique insights into how faculty interact with publications, based on published papers, citation activity and other key indicators. This also helps customers identify journals that their researchers cite and helps locate titles that cite their organization’s research to help make purchasing decisions. This enhances value for both platforms.

In Q1, we announced the expansion of our Journal Impact Factor into new content areas and journal coverage. This will increase appeal to parse the market that we currently under-serve. These improvements increase the combined value proposition and is an enabler of getting customers to add the product. Additionally, with an enhanced and improved product, there are opportunities to sell the Web of Science to corporations that are heavy investors in R&D. In the coming quarters, as we accelerate investments in the IP and Life Science & Healthcare segments, I look forward to sharing details of additional areas of progress with you. Our products and services are used by thousands of people daily to direct and guide the work. Put simply, we help people and organizations think forward.

By bringing together enriched proprietary data across our 3 segments, we leverage the power of our insights and analytics to identify the world’s top innovators and spot key future trends. For example, in Q1, we revealed our 2023 list of top 100 global innovators and our Drugs to Watch report. These are just 2 examples of our thought leadership programs and depth of expertise in our markets designed to create demand and build customer advocacy to support our growth initiatives. Another exciting development in Q1 has been our continued adoption of AI to enhancing value propositions of our solutions. As I’m sure you’re all aware, the output generated by AI are only as good as the input data. As you can see on the bottom left, at Clarivate, we have billions of proprietary best-in-class data assets which are expertly curated and interconnected.

These proprietary assets feed our machine, deep learning and large language models to enrich our data and power our insights, our services and our workflow solutions. I’d like to share a few examples of how we are currently leveraging AI across our solutions. In Academia & Government, we are using this technology to identify and remove questionable academic journals from our Journal Impact Factor. This is critical to enhancing Web of Science as a continued gold standard for academic research content. In Intellectual Property, we are leveraging large language models to instantly translate and summarize patents. We’re also using image recognition and deep learning for faster and accurate classification of trademarks. For example, Brand Landscape Analyzer combines AI with human expertise and Clarivate proprietary trademark and IP litigation content to assist clients in making informed trademark risk decisions.

Specifically, the Darts-ip litigation data is utilized to develop an automatically generated risk score which can be used to identify which potential trademark oppositions are most likely to succeed. Finally, in Life Science & Healthcare, we are drawing upon our connected data lake to generate predictors of future success relating to clinical trials’ progressions, regulatory approvals and even valuations on M&A candidates. As these examples demonstrate, we are actively using AI, including large language models, to ensure we provide our customers with the highest-quality integrated public and proprietary content and insights. We strongly believe the use of generative AI represents a significant opportunity for our business to accelerate our expansion into predictive analytics, as we discussed at Investor Day, leveraging our proprietary and rich data and content.

The team continue to develop ways to enhance our overall offerings with generative AI and engage with our customers to prioritize critical use cases. I look forward to sharing more examples with you in the future. Moving on to our organization. I announced at the end of fourth quarter our new segment structure to drive agility, innovation and accountability. I am very pleased that we have now completed the hiring and appointment of leaders for each of our segments. Bar Veinstein, who brings more than 25 years of leadership experience, is leading our Academia & Government segment. He previously spent 11 years with Ex Libris and ProQuest. He was initially responsible for the transformation of Ex Libris products and business to a cloud-based SaaS model with the release of Alma.

And later, as President of Ex Libris, he led the organization toward a new era of growth with the launch of innovative products, such as Esploro and Rapido. Most recently, he was Chief Executive Officer at Taranis, an AI-powered agricultural intelligence provider, where he drove significant business growth and accelerated the company’s AI strategy. With his vast experience in the industry, existing connections to customers and in-depth knowledge of our products and drive for innovation, Bar is the ideal leader for our A&G segment. Gordon Samson, who most recently served as our Chief Product Officer, has been appointed President of the Intellectual Properties segment. Gordon has made many significant contributions to Clarivate since joining us through the acquisition of CPA Global in October of 2020.

In the last 3 years, he has held a number of executive leadership roles around the company, including leading the transformation of our APAC region and successfully bringing together our entire portfolio — product portfolio with a very — for the very first time as our Chief Product Officer. His experience and knowledge of both Clarivate and the IP industry is second to none. As we pivot our operating model to align with our core customers and end markets, he is perfectly placed to accelerate growth across the IP segment. Henry Levy, who I’ve appointed as President of the Life Sciences & Healthcare segment, is a well-respected life sciences expert and the author of multiple articles on drug development and technology trends. Henry has an excellent track record in the industry with more than 25 years of experience helping life science companies use data and technology to transform their business.

He joined us from Veeva Systems, a global leader in cloud software, where he most recently served as President of Global R&D and Quality. Previously, he was Chief Commercial Officer for PPD, where he defined new models for biopharmaceutical companies to partner with contract research organizations to drive down cost and improve the speed of drug development. He also spent time as a consultant, leading Accenture’s Life Sciences R&D practice. I also want to thank and acknowledge the leadership of Steen Lomholt-Thomsen, our Chief Revenue Officer, who will be leaving us in July. Steen was instrumental in elevating our commercial and go-to-market processes and culture across the business. I wish him all the success in his future endeavors. In addition to improving our leadership team, we recently enhanced our governance through changes to our Board of Directors.

With the transition of our Board composition, our Board size is now 11 members compared to 14 which will help improve efficiency. On behalf of the Board and myself, I wish to thank Sheryl von Blucher, Kosti Gilis, Bala Iyer and Roxane White, for their valuable service on our Board. They have been instrumental in helping to guide the company forward since its public offering a few years ago. We are very pleased to welcome Dr. Saraubh Saha to our Board. Dr. Saha is a physician-scientist, pharmaceutical executive and biotech entrepreneur dedicated to discovering and developing novel life-changing medicines. He will bring a great deal of experience in the pharmaceutical and biotech industries and his guidance will provide valuable insights and perspective, especially as we continue to execute on our growth strategy in the Life Sciences & Healthcare segment.

Before I turn the call over to Jonathan Collins, I want to update you on one of our near-term financial initiatives which we outlined at our Investor Day in March. We are generating strong cash flow and currently expect to deliver between $450 million and $550 million of cash this year. At our Investor Day, we discussed the importance of getting our leverage level to where it needs to be, under 4x net leverage this year with a path to under 3x by 2025. In the first quarter, we prepaid $125 million towards the Term Loan B which creates a clear path to achieve our 2023 net leverage objectives. Importantly, this will not impact our ability to invest in R&D to drive greater performance across our business. In closing, I want to thank my colleagues for their dedication, hard work and strong collaboration as we continue to build Clarivate into a leading information services company.

We are moving in the right direction and I look forward to sharing our progress with you. I will now turn the call over to Jonathan Collins.

Jonathan Collins: Thank you, Jonathan and good morning, everyone. Slide 14 is an overview of our first quarter results compared with the same period last year. Q1 revenue was $629 million, a decrease of $33 million or 5% compared to the same period last year, driven entirely by the MarkMonitor divestiture and foreign exchange, as organically, the business was essentially flat as we expected. Adjusted EBITDA margins expanded 60 basis points over the prior year to 40.2% in Q1 due to the cost synergies from the ProQuest acquisition. First quarter net income was $25 million, down $26 million due to a $100 million mark-to-market gain on the private warrants last year that did not recur this year which was partially offset by a favorable resolution of an international tax dispute worth $70 million.

Adjusted diluted EPS which excludes the impact of both items, was $0.18 in Q1, a $0.03 decline over last year. $0.02 of the reduction was attributed to higher interest expense due to increases in base rates and $0.01 was attributed to the MarkMonitor divestiture. Operating cash flow was $228 million in the quarter, an increase of $160 million, largely due to the $141 million payment made last year from the employee benefits trust for the CPA Global equity plan. This also drove the entire increase in free cash flow as higher interest and capital spending was offset by lower working capital requirements. Please turn with me now to Page 15 for a closer look at the drivers of the first quarter top and bottom line changes from the same period last year.

Our first quarter revenue came in exactly as we anticipated. The top and bottom line changes over last year were driven by 4 key factors. First, revenue was essentially flat organically. However, we began to invest in earnest to accelerate organic growth through product innovation which led to a nearly $10 million increase in operating expenses and lowered profit by the same amount. Second, inorganic activity, namely the divestiture of the MarkMonitor business, lowered revenue, $19 million; and profit, $9 million. Third, cost synergies from the ProQuest acquisition contributed $13 million of incremental profit. And finally, the translation impact of subsidiaries denominated in foreign currencies lowered revenue by $13 million as the U.S. dollar remained stronger than a basket of foreign currencies compared to the same time last year.

This caused a profit decline of $3 million and the impact was muted as the translation effect was ameliorated by a couple millions of transaction gains. Please turn with me now to Page 16 to step through the conversion from adjusted EBITDA to free cash flow and how we use these proceeds to continue prosecuting our plan to deleverage, as Jonathan touched on just a few minutes ago. Free cash flow was $168 million in the first quarter, an increase of $142 million over the same period last year. The conversion from adjusted EBITDA improved by 56 percentage points to 66%. We incurred $33 million of onetime costs in Q1 to substantially complete the integration of the ProQuest business, culminating in $100 million of annual cost synergies going forward.

These costs were down $133 million as a result of last year’s payments for the CPA Global equity plan. Interest payments were $41 million in the quarter, up $13 million over the prior year, as base rates have increased and about 1/4 of our debt remains floating. Cash taxes were negligible in the first quarter, just as they were last year, due to the seasonal nature of our payment cycle. Working capital was a source of cash of $51 million in Q1 when it was relatively flat last year, leading to a significant improvement, driven largely by the timing of payments within our patent renewal business in our IP segment. And finally, capital expenditures were $59 million in the quarter, an increase of $18 million over last year, as we ramp up our investments in product innovation and experience the timing of payments as well.

We still expect to increase our full year capital spending by between $35 million and $40 million. We used the first quarter free cash flow to continue servicing our preferred stock with a cash dividend of $19 million and to prepay $125 million of our Term Loan B, lowering our leverage and reducing our interest rate exposure. Please move with me now to Slide 17 for our perspective on the remainder of this year. Our first quarter results place us squarely on track to deliver a full year outcome within our guidance ranges which remain unchanged from what we outlined back in March. We continue to expect organic growth will improve sequentially in 2023 to about 3.25% at the midpoint of our range. Assuming exchange rates remain relatively flat; this would deliver revenue of about $2.68 billion at the midpoint of the range.

The year-over-year organic revenue comps will remain relatively challenging in the second quarter of this year, so we expect first half organic growth to approach 1% and second half growth of about 5%. There are a few factors driving this phasing. First, we’ll lap the revenue impact of ceasing our operations in Russia in the second quarter. So this remains a headwind in the first half of the year, largely in our A&G segment. Second, the consultancy within our LS&H segment began to improve late last year. And while our utilization rates continue to progress, our revenue will be lower than the first half of last year. And finally, in our IP segment, we had some significant accelerations of renewal payments in March and June of last year, leading to H1 organic growth of 8% in the reoccurring order type.

These accelerations will not recur this year. And as a result, we expect an organic decline in our reoccurring revenue in the first half but expect full year organic growth for reoccurring revenue to be in line with last year’s results. We also started to see a downturn in our cyclical trademark business in this segment last year but will lap the higher comps towards the end of the second quarter. We anticipate adjusted EBITDA and profit margin at $1.1 billion to $1.16 billion and 42% to 42.5% at the midpoint of the ranges, respectively, resulting in $0.80 of adjusted diluted EPS at the midpoint of the range. And finally, we continue to expect free cash flow of $0.5 billion at the midpoint of the range. Please turn with me now to Page 18 for the major drivers of the expected revenue and profit growth for the full year compared to last year.

The drivers of the expected full year top and bottom line growth compared to last year are the accelerating organic growth, the inorganic impact of divesting the MarkMonitor business, the carryover impact of the ProQuest cost synergies that are nearly complete and foreign exchange. Organic growth of 3.25% should add about $85 million to the top line and convert to profit at 30%, contributing about $25 million to the bottom line. As we’ve indicated before, organic growth will need to accelerate to the 4% to 5% range in order to expand margins. We’re making a conscious choice to fund investments that will deliver the product innovation that will catalyze accelerating organic growth to these levels by next year, as we outlined in detail at our Investor Day in March.

And as Jonathan highlighted earlier, we’re off to a great start in the research and analytics group within our A&G segment and this performance in Q1 increases our confidence in our full year outlook. Inorganic actions will be a headwind to our results this year. We closed on the divestiture of MarkMonitor in the fourth quarter of last year and this will create a $65 million headwind to revenue and a $30 million decline in adjusted EBITDA. The team is wrapping up the integration of the ProQuest acquisition, enabling us to deliver the remaining $40 million of cost synergies this year. We do not anticipate a meaningful foreign exchange impact to the top line on a full year basis. However, we expect to continue to experience a revenue headwind in the next few months, that should be offset by tailwinds in the second half.

We also do not expect to repeat the transaction gains we saw late last year which will cause a nearly $15 million profit headwind. Please turn with me now to Page 19 to walk through how we expect the more than $1.1 billion of adjusted EBITDA will convert to about $0.5 billion of free cash flow and our plan to allocate this capital. Last year, we incurred more than $200 million in cash outflows associated with onetime costs related to the acquisitions. The majority of this came from restricted cash from the CPA employee benefits trust that was funded at closing of the acquisition back in 2020. We expect an improvement in onetime cost of about $165 million this year as we incur about $50 million, largely to complete the ProQuest integration. Most of the improvement was recognized in the first quarter, so the balance of the year will be more in line with last year.

We do expect a cash interest increase of about $20 million as base rates in the forward curve have moved up meaningfully compared to late last year. Most of the increase occurred in the first quarter, so the balance of the year will be more comparable to last year. Our working capital requirements are expected to level off this year, yielding an improvement of about $65 million. Much of this improvement incurred in the first quarter, so we anticipate a modest enhancement in the balance of the year, subject to normal seasonality. We intend to increase CapEx by about $35 million to $40 million to accelerate organic growth. The impact of all of these changes is a nearly $200 million improvement in free cash flow to $500 million at the midpoint of the range.

As we indicated in March and have reiterated today, we plan to use the majority of this year’s free cash flow to continue to prepay debt on our Term Loan B to deleverage to a level of less than 4x by the end of the year. Please turn with me now to Page 20 for our perspective on how our near-term results position us to achieve our long-term financial objectives. Our Q1 results are a step in the right direction towards delivering the financial objectives we outlined at our Investor Day in March. As you’ll recall, our primary aim is to accelerate organic growth. The first area we committed to improve was the research and analytics subsegment within A&G. And our first quarter top line metrics, namely the 4 percentage point improvement in the renewal rate and the double-digit new subscription sales growth that delivered 3% revenue growth, bode very well for delivering the improvement in this area in 2023.

Our second goal was to maintain durable profit margins as we invest to accelerate our growth. We execute on this objective in the first quarter as our margins expanded by 60 basis points, even as we increased our operating and capital expenditures to drive product innovation. The third objective we outlined was to significantly improve our free cash flow which we delivered in Q1, as our conversion reached 66% on significantly lower onetime costs. And finally, we committed to allocate our capital in a disciplined manner. In the near term, we were clear it’s imperative for us to lower our leverage to below 4x and we continued that journey by prepaying $125 million of term debt in the first quarter. The entire Clarivate team remains laser-focused on unleashing the product innovation that will connect our customers to intelligence with the power to transform the world, enabling us to achieve these financial objectives.

I want to thank all of you for listening in this morning and I’m now going to turn the call back over to Joel to take your questions. [Operator Instructions] Joel, please go ahead.

Q&A Session

Operator: [Operator Instructions] The first question is from the line of George Tong with Goldman Sachs.

Operator: The next question is from the line of Andrew Nicholas with William Blair.

Operator: The next question is from the line of Toni Kaplan with Morgan Stanley.

Operator: The next question is from the line of Peter Christiansen with Citi.

Operator: The next question is from the line of Seth Weber with Wells Fargo.

Operator: The next question is from the line of Shlomo Rosenbaum with Stifel.

Operator: The next question is from — is a follow-up from the line of George Tong with Goldman Sachs.

Operator: [Operator Instructions] The next question is from the line of Stephanie Moore with Jefferies.

Operator: Thank you. There are no additional questions waiting at this time. I would like to turn the call back over to Jonathan Gear, CEO, for concluding remarks.

Jonathan Gear: Okay. Great, Joel, thanks so much. And everyone, thanks much for joining our call this morning. This is obviously a very important quarter for us as it demonstrated the turning point in the first of our 3 segments which had to turn which was A&G. So we feel very good about the progress being made there. And again, it’s a very — this was a critical quarter for us for delivering the year. And really, we look forward, in future quarters, of coming back and sharing additional progress in the other areas. So with that, we’ll wrap up. And thanks so much for everyone’s time this morning. Thank you.

Operator: That concludes today’s conference call. Thank you for your participation. You may now disconnect your lines.