Clarivate Plc (CLVT) on Q2 2021 Results - Earnings Call Transcript

Operator: Good morning and welcome to Clarivate Q2 2021 Earnings Release Conference Call. Please note this event is being recorded. I would like to turn the conference over to Mark Donohue, Vice President and Investor Relations. Please go ahead. Mark Donohue: Thank you and good morning everyone. Thank you for joining us for the Clarivate second quarter 2021 earnings conference call. With me today are Jerre Stead, Executive Chairman and Chief Executive Officer; Richard Hanks, Chief Financial Officer; Mukhtar Ahmed, President, Science Group; and Gordon Samson, President, IP Group. All will be available to take your questions at the conclusion of the prepared remarks. Jerre Stead: Thank you, Mark and thanks to all of you for joining us this morning. We had a very busy, eventful and exciting first half of the year. I am very proud of what our team has accomplished. In addition to the positive financial results, we are well ahead of schedule on the integration of CPA Global. We have identified an additional $25 million in cost synergies, taking the CPA program to $100 million, which we will deliver. Our track record of success with quickly integrating acquisitions gives us the confidence and bandwidth to do more M&A. This certainly includes the proposed acquisition of ProQuest, an acquisition we are very excited about. We have also made excellent progress in our customer account transition to inside sales and the global business centers. And we launched several new and enhanced product offerings, including a new Web of Science platform. We also completed our first colleague engagement and customer delight surveys for 2021 and issued our first ever annual sustainability report. My colleagues continue to be highly energized in our pursuit to be the best information service companies and one of the very best places to work in the world. Richard Hanks: Thank you, Jerre. Our adjusted revenues for the second quarter were $447 million, an increase of $170 million or 57% at constant currency compared to last year’s same period. The increase was primarily driven by the acquisition of CPA Global last October and a 5% increase in organic revenue at constant currency. The gain was partially offset by the Techstreet disposal last November. Jerre Stead: Thank you, Richard. In conclusion, the first half was a really great start for us this year and we are eager to deliver even better results and achievements in the second half. Again, I want to thank all of our colleagues from around the world, who continue to do great things every day. We are now ready to take your questions. As a reminder, please limit yourself to one question, then return to the queue. Operator, please. Operator: We will now begin the question-and-answer session. The first question is from Toni Kaplan with Morgan Stanley. Please go ahead. Toni Kaplan: Thank you so much. Just wanted to delve a little bit more into the science organic growth, you grew 5% this quarter there. And embedded in that, you have DRG, which is growth accretive. So, is that implying the legacy business is growing roughly around, let’s say, 4% and mostly, all from pricing, just wanted to understand the different pieces going on within science? Jerre Stead: Great question, Toni. Richard will start and Mukhtar will pick up on it. Good question. Thanks. Richard Hanks: We acquired in February 2020 the DRG business, which we have now renamed HDS. As you can see from the 10-Q that we filed pre-market HDS grew 18% in the second quarter. It is a faster growing asset in that very attractive life sciences space. In the second quarter, the other elements of web of – the other elements of the science group, being Web of Science, in particular, didn’t have the same level of growth that we generated in the first quarter principally due to timing, because we obviously renewed our subscription base on a more timely basis in Q1 as compared to prior year. So, there was a lag effect into the second quarter. But all-in, we are very satisfied with the Science Product Group performance and as you said 5% growth for the quarter, impressive results. And most importantly, the pipeline for the life sciences business is looking particularly strong for the second half of the year. Jerre Stead: Once we get Mukhtar off of mute, we will have him comment too. But let’s go ahead to the next question. Toni thanks so much. Next question, please. Operator: The next question comes from George Tong with Goldman Sachs. Please go ahead. George Tong: Hi, thanks. Good morning. You touched on progress with transitioning to inside sales and new product launches made in the quarter such as the new Web of Science platform. Can you elaborate on these areas and other initiatives that you are working on that should help accelerate organic constant currency revenue growth over the remainder of this year and to the high single-digit range over the long-term? Jerre Stead: Yes, great question. And Richard, pick it up. We were talking about it just before the call this morning. Richard Hanks: So, I think that structurally, the transition to One Clarivate and the focus on the five industry segments or customer segments that Jerre referenced earlier will ensure that our sales organization is really attuned to supporting our clients in those particular verticals and being a truly value-added solutions provider, number one. Number two, as we focus on price realization as we look into 2022, Jerre, Mukhtar, Gordon and myself have reviewed our pricing algorithms for next year. And we’re very confident that we will realize plus 4% across the portfolio next year. The transition to inside sales, structurally very important, we are moving approximately – we’ve moved approximately 25,000 client accounts into inside sales in our three global business centers: Chandler, Arizona; London/Belgrade for EMEA; and then Penang, Malaysia. That will generate a stronger interface with our clients, particularly in the long tail, which will drive improved retention rates. So those final pieces would then include professional services, particularly in the life sciences space. We also see some really attractive opportunities in IP. So I think professional services, which we’ve spoken on previous calls, not just being important transactional growth for us but also giving a vehicle for us to sell subscription products in – behind it is a really important interaction we have with our clients. So those would be some of the elements that we have that support second half growth, but also our expectations with respect to organic growth in 2022. Jerre Stead: Which we will talk more about at our November 9 virtual conference, Mukhtar, go back and pick up, if you would, Toni’s question and anything you’d like to add to George’s, too. Mukhtar Ahmed: Sure, happy to do so. I mean, I think, Richard just touched on most of the important elements here. But the key thing here is we continue to invest in our products. We continue to invest in our world-class data assets. And we’ve released a number of new versions of our products, particularly the new Web of Science platform, which really enhances the personalized experience here for both researchers and research practitioners. And I think this in combination to some of the investments that we’re making in the life sciences, discovery, in preclinical and pre-approval stage, I think all of those will pay dividend here is – as we roll those out and drive adoption in our long-standing customer bases. So we would expect – we expect to see some good growth there in the remainder of the year, and certainly, going into next year. Jerre Stead: Thanks, Mukhtar. Gordon, just pick up, if you would, on the efforts that are underway with you and Mukhtar of the consulting, if you will, professional services, as we bring that into IP. Gordon Samson: Sure. Thanks, Jerre. Mukhtar and I are looking across the organization to see where we have both strength and depth and capability, looking to see where we can look at those market verticals where we deeply understand the client requirements, and pull together both the consulting and professional services group that’s focused on client solutions. I think to quote Mukhtar from the past, professional services sells products, and that’s absolutely true. And I think we have a much greater opportunity across the IP and science business by acting as one in that space in both consulting and in professional services. So I’m pretty excited about that, Jerre. Jerre Stead: Thanks, Gordon. Just one other quick comment, we will go to the next question, please. We talked about the five global markets that we’re going head – forced with, that steam will be already off and running. It’s $102 billion total market potential for us through those five. Two of the largest are where we’re strong today at $26 billion and $33 billion, faster-growing. So that makes it a very exciting step forward. Great question, George. Thank you. Next? Operator: The next question is from Manav Patnaik with Barclays. Please go ahead. Manav Patnaik: Thank you. Good morning. I was just hoping you could just refresh us with the cadence of growth that we’ve seen at DRG and CPA versus last year, because I know they both were impacted, obviously, by COVID. And obviously, the acceleration is the reason for your kind of fourth quarter optimism as well. So I was just hoping that 18% you talked about for DRG, I guess, how has that changed and then maybe something similar for CPA? Jerre Stead: That’s a great question. I’ll have Gordon comment on CPA in a minute. We’re delighted with him leading IP with his years of experience from CPA. But Mukhtar gets the joy of sharing the great progress that we’ve made with DRG and where we’re at and where we will go in the second half. Mukhtar? Mukhtar Ahmed: Sure. I mean, last year, of course, we were in the throes of the pandemic. And I think we also – many of the economies kind of slowed down and shut down. Their decision-making was deferred to a large extent. So with DRG, what we saw was low single-digit growth last year. And this year, our growth has been certainly in line to the industry, a lot of demand certainly in the post-approval space. And as a consequence of that, our real-world solutions, particularly in that healthcare space, have performed extremely well, and we expect those to continue to do so. And then the other area is really in the medical technology space. That market is certainly quite buoyant. So we’ve had really good success there. And again, the growth there is in line to what we’re seeing by way of market dynamics, and also in response to just customer demand here. And as I said earlier, this also revolves around the investments that we’ve made in terms of enriching the analytics, the experience, the data and, ultimately, the value that we’re creating through our assets for our customers. Jerre Stead: So great start, much more to come. Please, Gordon, on CPA. Gordon Samson: Thanks, Jerre. Thanks, Mukhtar. So on CPA, a similar story during the COVID-intensive period, where there were impacts on some of the transactional business, which, of course, is the smaller part of the legacy CPA business, and some impact by pruning our portfolio, so reducing some portfolio numbers in the core annuities business. Those factors have changed as we’ve been emerging from COVID. We’ve seen a very strong performance so far this year. We expect CPA coming towards the end of this year to be in the historic growth range that you’ve seen before, in the 5%, 6% range. And the other thing which is making that feel good is we’re focusing on integrations between products. So not just with CPA, but with Clarivate and CPA, where the combination of our products gives us a much greater opportunity to penetrate new parts of the market. So those two dynamics together make you feel good about legacy CPA performance, but more importantly, positive about the IP group performance in H2. Jerre Stead: Thank you. Thanks, Manav. Just I’d add one thing to that because what we’ve tried to point out is that fourth quarter is the way this model plays out, our strongest quarter will be. That’s why we’ve got the high confidence in ending – exiting 2021 at the upper end of the 6% to 8% organic. We’re tracking that by the day, and confidence increases each day. And then the other thing I’d just add is that as we leave 2021 into 2022, the changes that we are making, particularly when you think about the inside sales and all the efforts there, we will see that reflected in Q1 and Q2 as a large percentage of our renewals, particularly on the very long tail that we have of smaller customers comes up. That’s where the weakness has been historically. And that’s why we’re so pleased with the progress on inside sales. Thanks, Manav. Next question, please. Operator: The next question is from Shlomo Rosenbaum with Stifel. Please go ahead. Shlomo Rosenbaum: Hi, good morning. Thank you for taking my questions. I noticed there is a change in kind of the one half, one half fallout of the EBITDA. It was supposed to be at 42-58. It is now moving to 44-56. Is there something changing operationally in the business that’s making it that you are having more of the EBITDA in the first half of the year than expected? Or is there just some kind of timing issues that are happening? I’m trying to understand, because like the strong EBITDA in the quarter, it implies a little bit on the forward basis that maybe things would go down a little bit. I’m trying to understand if there is a pull forward or a shift or just what the dynamics are there. Jerre Stead: No, great question. Just as a refresher, in my script, I said you should think about it. This is as close in my 42 – soon to be 42 years leading public companies I’ve ever gotten to giving quarterly guidance. And we need to do that with everything that’s going on. What you should have heard from my comments was Q3 will be pretty close to where we are – with where we were with Q2. And Q4 will be very strong as we exit. And actually part of it, Shlomo, is timing only from the standpoint of all of the cost savings that we’ve got. Remember, we increased another $25 million with CPA, etcetera. Great question. Well, pick it up, Richard. Richard Hanks: Yes. So on the revenue profile, we are held to the 48-52 H1-H2 split, which we explained in the first quarter results. You’re right that we did say 42-58 on EBITDA. We’re now at 44-56. We’re slightly ahead of where we were expecting to be, which is a positive feature of our results for the year. And as Jerre said, we’ve executed flawlessly on the integration of CPA Global into the portfolio. As Jerre referred to in his script, we’ve increased our run rate cost savings target for that business from our commitment of $75 million exiting this year to $100 million exiting this year. And we will, as we have done in the second quarter, you will continue to see sequential quarterly margin EBITDA improvement in Q3, and then, obviously, peak margin in Q4, where we get the superior revenue results flowing through to improved margins. So we see it as a positive feature of our results. Jerre Stead: And thanks for asking because that shift in place is one that will really reflect in Q4. You’re going to see what this business model can do when we get the kind of top line growth that we expect to get. And you’ll see very significant improvement with the margins as we exit 2021. Then we’re going to continue basically with that same effort first half, second half, as you’ll see as we go into 2022. But we will clear that up with guidance that we will give on November 9. Thanks, Shlomo, great question. Next, please. Operator: The next question is from Hamzah Mazari with Jefferies. Please go ahead. Mario Cortellacci: This is Mario Cortellacci filling in for Hamzah. Could you just talk about how your contract renewals work? And specifically, how you think about annual contracts switching to multiyear, and maybe the pricing that’s associated with that? Correct me if I’m wrong, but I think that maybe 70% of your contracts are annual today. And just maybe you can give us an update on that figure if there is any change. Jerre Stead: Yes, great question. Thanks. Pick it up, Richard. You’re spot on, on the 70%. Richard Hanks: Yes, your profile is correct. I’d also add that with respect to multiyear contract renewals, we are much more disciplined now in ensuring that we have annual price increases baked into those multiyear contracts and what we’ve done with our – historically, what we, as a team, have done collectively in our different experiences is also give a commission bonus to a sales colleague that delivers a multiyear contract with an annual price increase baked into it, and that is expected to be – that is essentially our policy. So as you know, studies done on the book we used in the first half of the year, we said we got 30% of the book still to renew in H2. But what you will see in the second half of the year is a real focus on driving net installations into H2 and driving that entry rate going into the first quarter of 2022 to drive that year-on-year growth. But yes, it’s a good question. Annual contract is about 70% of the book and a very, very strong focus on delivering price increases into our multiyear agreements. Jerre Stead: I’d just add one thing. Thanks, Richard. What he said is, in general, we’re much, much more disciplined on everything we do from a selling standpoint today than we were, including particularly what Richard just touched on. I’m very pleased with the progress. And with the addition of Steen to partner with Richard, Gordon, Mukhtar, myself, the rest of the team, we will continue to see that discipline improving everything that we do from an organic standpoint for years to come. Thanks. Nest question, please. Operator: Your next question is from Andrew Nicholas with William Blair. Please go ahead. Andrew Nicholas: Hi. Thank you for taking my question. I was hoping you could just spend a bit more time on – or provide a bit more color on the client loss impacting renewal rates. Just curious kind of what the driver of that decision was the nature of that relationship? And maybe how we should think about that revenue impact on a net basis? Because if I heard you correctly, I think you said that you expect some of that hit to come back in the form of transactional revenue, so any additional color on what happened there would be great? Jerre Stead: Yes. No, it’s a good learning lesson for sure. Richard will start, and Gordon will close it up. Good question, thanks. Richard Hanks: Yes. Thanks, Andrew. So it was a relationship in Asia, April 1 renewal. There was a change in scope of the client. And so we will be working with them going forward in terms of what additional data and services we can provide to meet their needs. We do have an ongoing transactional relationship with them that we need to, in fact, frankly build upon. But it was essentially the change in scope and – that we obviously need to now respond to. But Gordon can provide some more color. Jerre Stead: And just as a refresher for everybody, Gordon has done a great job for us leading Asia Pac for the first 6 months. That’s the first place we set up the One Clarivate. He’s got a great job. Now he continues to have that and of course, very pleased that he has got IP. Gordon, please. Richard Hanks: You are on mute. Jerre Stead: Gordon, you are on mute. Gordon Samson: So I failed the intelligence test completely there. Thank you for the summary, Richard, which is spot on. A couple of things I would add to that. We do indeed have an ongoing relationship. So, this is a longstanding client and remains a longstanding client. The change of scope and process within their operation is what principally drove our inability together to find a way to make our existing product and service in that part of our relationship work for them. We are actively servicing them elsewhere. And indeed, we are participating in a couple of RFPs, which are in the market for them, so a very active relationship. We have opportunity to regrow business there. It may not be in the same product line, but there is substantial opportunity within that client and some of their subsidiary organizations. So we’re very focused on that in H2 as we enter 2022. Jerre Stead: And the last thing I’d add to that – thanks for the question, we’ve built in any loss of revenue from that annual, biannual actually, subscription base into the numbers that we’re talking about today. Thank you. Great question. Next question, please. Operator: The last question is a follow-up from Shlomo Rosenbaum with Stifel. Please go ahead. Shlomo Rosenbaum: Hey, Jerre, thanks for taking my questions again. Hey, I’m the last guy in here, are you still going to hold me to just one? Jerre Stead: I’ve – never have held you successfully. So let’s try. Shlomo Rosenbaum: Alright. I just wanted to start a little bit with – just on the ProQuest, a couple of different questions there. Number one, it looks like regulatory-wise, this is slipping a little bit. It seems like that’s what’s happening just in general. Are there any significant concerns about achieving the regulatory approvals to actually get this deal done? And then just as a second thing, just on the regulatory-wise outside the U.S., there is been a big China crackdown on all kinds of verticals. And a big point from ProQuest is your ability to take ProQuest into the clients that you have here in China. Are you anticipating any issue from what’s going on in China in terms of potentially impeding the cross-sell on that side? Jerre Stead: Yes. No, great question. I’ll just start with the first part of – your part a), Shlomo. The – I think to say I’m just going to reread because I want to stick to the script with it. We received the second request from the FTC yesterday to help them analyze this transaction further. We’re cooperating with them. We’re very well prepared for that. We remain very confident that after conclusion of the process, antitrust concern should not interfere with our acquisition of ProQuest in any significant way. And as I said, we’re hopeful we can complete the proposed acquisition in the second half of this year. So I think we’re in great shape. We will cooperate with them in every way we can, and look forward to getting that really exciting addition to our company done. Good question. I am going to start, and then I’m going to have Mukhtar and Gordon, both comment on China. I was delighted, by the way, if you’ve not read, you should, at the new ambassador from China, who was appointed and appeared yesterday for the first time. Read what he said, it’s interesting. It’s first thing I’ve seen really positive in the last couple of months, very conciliatory. So that’s always welcome to see. But Mukhtar, you start, and then Gordon, you close it up, because it’s an important question for us. Mukhtar Ahmed: Sure. Happy to do so. Hey, Shlomo, listen, I think the way to look at this is that there will be no change to how we do business in China. We have fabulous relationships there, long-standing customers. We’re very strong in academia. We’re strong in life sciences and across the corporate sectors. And we value those relationships. Now in terms of how we operate, we have strong governance in place. We’ve got strong business and corporate controls. And we abide by a set of values in terms of how we operate as a business. And we will continue to operate against those, and we will continue to work in China or in that part of the world. So we, at this stage, don’t foresee any issues in terms of how we act, behave and operate in that part of the world. Jerre Stead: Thanks, Mukhtar. Gordon, wrap it up. Gordon Samson: Mukhtar has all the right tones, all the right notes. I would just add a couple of things. I think our approach to monitoring both locally as well as how we manage, monitor and govern regulations all over the world, China, obviously, is the topic of the question, is very strong. And I think our local team are very well connected to the marketplace. And as Mukhtar said, no change in our approach to doing business, which we feel is well placed. In fact, very excited by the ProQuest acquisition, which we feel fits very well with our approach in the Chinese market. Jerre Stead: Thanks, guys. And I’m going to close just thanking you all. Just two quick comments. I am feeling really good about our progress. We’ve done so much, made so many changes, all of which are now starting to bloom or are blooming. So as we exit 2021, and I think back to when we went public on May 14, 2019, progress is huge. We will continue to make that. We will deliver the kind of numbers that you, as sell side investors, deserve, and we expect to see that to come for years to come. But I’m just so pleased with the progress. Thank you all very much. Mark Donohue: And that concludes our call. Thank you very much. Operator: The conference call has just concluded. Thank you for attending today’s presentation. You may now disconnect.
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