Clarivate Plc

Good morning and welcome to the Clarivate Analytics third quarter 2020 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mark Donahue, Vice President, Investor Relations. Please go ahead.

Thank you, Elisa, and good morning, everyone. Thank you for joining us for the Clarivate third quarter 2020 earnings conference call. With me today are Jerry Stead, Executive Chairman and Chief Executive Officer, Richard Hanks, Chief Financial Officer, Mukhtar Ahmed, President of Science Group, and Jeff Roy, President of IP Group. All will be available to take your questions at the conclusion of prepared remarks. As a reminder, this conference call is being recorded in 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. This morning, Clarivate issued a press release announcing our financial results for the period ended September 30, 2020. The release, as well as an accompanying supplemental presentation, is available in the investor relations section of the company's website, clarivate.com, under Events and Presentations. 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 a clarity-based 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 cause actual results to differ materially from the anticipated results or performance can be found in Clarivate's file at the SEC and on the company's website. Our discussion will include non-GAAP measures or adjusted numbers, including adjusted 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 earnings rates and supplemental presentation on That's posted on our website. After a pair of marks, we'll open the call up to your questions. So with that, it's a pleasure to turn the call over to Jerry.

Thank you, Mark, and thanks to all of you for joining us this morning. It was another very busy quarter for our company as we announced a transformative acquisition and delivered a very solid quarter of growth. What we're accomplishing this year in the face of a pandemic is simply amazing to me. I couldn't be prouder of our global team for driving improvement in our financial results, executing on business development, M&A opportunities, delivering enhanced product offerings, driving improved colleague engagement and customer delight scores, and rallying around social causes to make the world a better place. First, let's talk about our financial performance. Adjusted revenue for the third quarter was $286 million, an increase of 16% at constant currency as we benefited from recent acquisitions, including DRG and subscription growth. Excluding the vested businesses, adjusted revenue increased 22%. Organic subscription revenue grew 4%, driven by new business and annual price increase. Organic transactional revenue continued to feel the effects of COVID-19 as it was down 7 million or 16%. primarily due to reduced demand driven by short-term cutbacks. However, we are beginning to see the smaller segment of our business start to recover. Compared to this year's second quarter, transactional revenue increased sequentially almost 7%. We continue to deliver strong growth in adjusted EBITDA, up 40% over last year to $108 million, driven by the increase in sales and the cost efficiency net initiatives we have been and will continue to pursue. Our adjusted EBITDA margins approved at 38% compared to 32% last year. We said we expected to exit 2020 with margins in the upper 30% range, and we are delivering on that promise. Richard will cover the financial details in a few minutes. We were very pleased to quickly complete the acquisition of CPA Global two months after announcement. I'm so proud of both teams and how they've accomplished so much in such a short period of time and with everyone working remotely. This is a very big event for Clarivate and CPA Global, as well as our customers and the entire IP industry. Together, we're now positioned to offer a true end-to-end solution covering the entire intellectual property, science, and innovation lifecycle. We have a unique set of solutions that helps accelerate the pace of innovation and position us as the clear global market leader in this large and growing IP market. Bringing our two companies together is a big win for our customers. They now have access to a more comprehensive suite of IP-related products and services, and that's just the beginning. We're already working on several combined offerings that will be released as soon as possible. We swiftly kicked off integration activities that bring our people and products together and will deliver the $75 million in cost synergies, which was our commitment when we announced the acquisition at the end of July. We are moving quickly to harness the excitement and momentum that's been building across both companies and to unlock unique opportunities for our customers and our company moving forward. Clarivate is growing rapidly thanks to the many new colleagues who have joined us within the last 12 months from Darts IP, Customer First Now, DRG, and now CPA Global. With each acquisition, we benefit from their experience and talent, and we now have the opportunity to learn and expand our businesses and horizons together. In addition to the CPA Global acquisition, we continue to deliver new product offerings and enhancements across the IP and science portfolio. Earlier this week, we acquired control of Beijing Incopat Technology Company Limited, a patent information and services provider in China. Founded in 2011, Incopat is a highly complimentary investment and company to our property portfolio. Incopat has a strong Chinese language capability, such as Chinese search for Chinese patents and Chinese search for English content and machine translation of Chinese, English, and Japanese patent content. Having Incopat within our portfolio will allow us to penetrate the fast-growing Chinese local IP market. Their primary customers include law firms, universities, government departments, and corporations. Our industry-leading patent products continue to expand their coverage universe, which has tripled full-text patent coverage in the last 12 months. During the third quarter, we released an additional 10 new patent authority countries and now offer 75 authorities making global patent data one of the most geographically comprehensive patent literature databases available. Our trademark customers, now have access to the recently expanded industrial design coverage, which added 16 new registers. The collection now includes 43 registers covering approximately 15 million records and 56 billion images. Within the science group, we're now collaborating with Open Access Monitor Germany to provide Web of Science data across Germany, Switzerland, and Austria. We're providing customized web of science publications, grant and funding data to increase the impact of scientific scholarship and to enable more equitable participation and research. The collaboration strengthens our continued commitment to support open research by investing in community driven projects and enhanced open access data for our products. During the third quarter, we launched the Coronavirus Virology and Infectious Disease Data Lake to accelerate research and respond to future pandemics. This is the first of several disease-oriented data lakes from Clarivate, bringing together the comprehensive information and insights that power the company's market-leading tools, analytics, and services. This includes real-world data from DRG's RWD product, scientific, clinical, regulatory, and commercial data from our life science business and citing scholarly references indexed in Web of Science and both content and data from award-winning new service BioWorld into one centralized source. We also launched our generic intelligence product to enable generic pharmaceutical companies and API manufacturers to make timely and more informed data-driven decisions as they seek to drive business growth, identify new markets, products, and partners. Now for an update on our COVID responses. Most of our colleagues continue to work from home. We recently made the decision to keep all offices in the Americas, Europe, and India closed through at least the end of this year. Our COVID response task force is working through our return to office planning. Throughout this pandemic, I continue to be very, very thankful at how well our team has adapted and overcome many challenges. This is clearly evident in the improved colleague engagement and customer delight scores from the surveys we ran this spring and this fall. We just completed our final surveys for 2020, and I very much look forward to sharing our progress with you at our upcoming investor day. While this pandemic has been a personal burden for many, We've used it as an opportunity to forge a very important new path forward. We're now accelerating our path into a new way of working and changing how and where we work together and creating an environment and culture that we can be very proud of. At Clarivate, we launched our Together in the Park strategy, and CPA Global launched their Digital First CPA program. Both programs have made good progress since they were launched. We have now fused these two programs together so we can accelerate our progress towards building a new and better way of working. With one program, we'll move faster and build on our collective learnings. Our more than 8,500 global colleagues are and will benefit. I'm very excited that Mel Fitzpatrick, who joined us from CPA Global, where she served as Chief People and Brand Officer, is leading us in this critical work. Please tune in again into our investor day as Mel will be providing more details about our digital workplace initiative. This morning, we updated our full year 2020 guidance to include the fourth quarter results for CPA. We'll be providing our full year 2021 outlook at our investor day on November 10th. Our 2020 outlook now, including CPA, is adjusted revenue of $1.28 billion to $1.295 billion, adjusted EBITDA of $480 million to $495 million, and adjusted EPS of $0.55 to $0.61. For adjusted free cash flow, we now forecast $240 million to $260 million. I'll now turn the call over to Richard.

Thank you, Jerry. It was another very solid quarter of growth. We continue to deliver improved core key results in 2020 on a year over year and sequential basis across many key financial metrics, including adjusted revenues, adjusted EBITDA and adjusted EBITDA margin. We reported adjusted revenues of $286 million, an increase of $43 million or 16% at constant currency compared to last year's third quarter. The acquisitions of DRG and Darts IP, which together added 22% to revenue growth this quarter, was only partially offset by the Mark Monitor brand protection divested products, which reduced revenue by 6% compared to the prior year period. Excluding the divested product lines, total revenue increased 22% at constant currency in the third quarter. The foreign exchange impact on our revenues in the third quarter was favorable at nearly 2% due to dollar weakness as compared to last year's third quarter. Organic business revenue, excluding acquisitions, divestitures, and foreign exchange was up slightly versus the prior year period as higher subscription revenue was offset by lower transactional revenue. On a reported basis, total subscription revenue was $222 million, an increase of 9% at constant currency. Acquisitions over the last 12 months added 12% of subscription revenue growth, which was partially offset by the divested product lines, which decreased revenues by 7%. Excluding the divested businesses, subscription revenue increased 16% at constant currency. Organic subscription revenue increased by $7 million, or almost 4%, driven by higher sales and price increases for the Web of Science, Life Science Products, TechStreet, and CompuMark compared to last year's third quarter. Subscription revenue renewal rates were 91% for the first nine months of 2020, and we continue to enjoy strong renewal rates. We remain very focused on achieving world-class renewal rate in the mid 90% range. Subscription revenues accounted for 78% of adjusted revenues in the quarter, including CPA global from Q4 onwards will result in recurring and reoccurring revenues to approximate 83% of total revenues on a pro forma basis. Transactional revenue increased to $64 million, up $22 million, or 52% year over year on a constant currency basis, driven by our acquisitions. Acquisitions added 68% of transactional revenue growth, and the product line disposals lowered transactional revenues by less than 1%. Organic transactional business revenues decreased by $7 million, or 16%, due to lower Web of Science backfired sales and lower CompuMark search and TechStreet revenue. The TechStreet transactional decrease was due to prior year comparatives benefiting from a large biannual standards release at the start of Q3 2019. As that is a biannual release, we did not enjoy that lift in Q3 2020. ACV growth was 9% for the third quarter, which includes acquisitions. Excluding divestitures, ACV growth was up 15%, and on an ongoing basis, ACV increased by 4% and was primarily driven by organic growth and annual price increases. Turning now to performance across our two product groups. For the science group, revenue increased by $53 million, or 38%, to $191 million at constant currency, driven by the acquisition of DRG. Organic business revenue increased by 2%, led by higher subscription and services revenue within the life sciences product family, partially offset by lower transactional revenue. For the intellectual property group, revenue for the third quarter, excluding the divestitures, increased 1% to $96 million of constant currency, driven by the Darts IP acquisition. Organic business revenue for the IP group decreased by less than 2%, as subscription revenue growth was offset by lower CompuMark and TechStreet search volumes. On a reported basis, IP group revenue declined 11% due primarily to the divested products. Adjusted EBITDA in the third quarter increased by $31 million or 40% to $108 million compared to the prior year period. This was driven by the increase in revenue and strong margin flow through, contributions from acquisitions, portfolio rationalization, and the benefit of the cost saving initiatives. Our adjusted EBITDA margin continues to move closer to the 40% range. Margin improved by 610 basis points to 37.8% as compared to 31.7% in last year's third quarter. Cash taxes in the third quarter were $12 million compared to $7 million in the prior year period. The primary driver of the increase was U.S. income tax payments that were deferred until July 15th of this year due to the COVID pandemic. Adjusted net income increased by 23% to $59 million for the third quarter, and adjusted diluted EPS was 14 cents. The weighted average share count used to calculate adjusted EPS increased by 24% or 79 million shares since last year's third quarter, driven by the issuance of ordinary shares in conjunction with the acquisition of DRG and the exercise of public warrants earlier this year. It's also worth noting that the share count in this year's third quarter increased by 13 million shares on a sequential basis, compared to this year's second quarter. This increase is the result of the shares issued in the June 2020 primary offering being fully reflected in the current quarter calculation versus a weighted average number of shares used in the Q2 calculation. Capital expenditures increased by $35 million on a cash basis compared to last year's third quarter. Taking capital expenditure accruals into account, CapEx was up $26 million year-to-date September compared to prior year. With our remote working environment, we are seeing high levels of product application development across all of the portfolio, higher content contracts, as well as some timing impacts from accelerated spend on laptops due to the digital first initiative arising from the COVID pandemic. We ended the third quarter with $601 million in cash. In connection with the closing of the CPA Global acquisition on October the 1st, we used $538 million of cash on hand, and we incurred an incremental 1.6 billion of borrowings under our term loan facility to fund the repayment of CPA Global's debt. Additionally, we issued approximately 217 million ordinary shares to former CPA Global shareholders. our total gross debt at the end of September 2020 was $1.95 billion. With the incremental borrowing associated with the CPA acquisition, our total debt now stands at $3.55 billion on a gross basis, with net debt at approximately $3.4 billion. Standalone adjusted EBITDA, which we are required to report on a trailing 12-month basis pursuant to the reporting covenants, contained in our credit agreement and indenture was $458 million. Please refer to our earnings release or 10Q for a reconciliation from net loss to adjusted EBITDA and from adjusted EBITDA to standalone adjusted EBITDA. We ended the third quarter prior to the incremental borrowings with a net leverage ratio of 2.9 times. Our current net leverage ratio on a pro forma basis, including CPA global suggested EBITDA and the recent borrowings, is approximately 4.3 times. Our goal is to be in the low three times range in the median term. With that, I'll now turn the call back to Jerry.

Thanks, Richard. Great job. Before we open the line for questions, I want to thank once again our more than 8,500 colleagues around the world, for their amazing dedication and hard work this year. They continue to truly impress me with their incredible accomplishments, despite the challenges of the pandemic that has been introduced to the way we all work. Our Virtual Investor Day, as mentioned earlier, is scheduled for Tuesday, November 10th. We really hope you can join us as we will be providing an in-depth look at our business, our strategies, 2021 financial outlook, and future goals. We're now ready to take your questions. As a reminder, please limit yourself to one question, then return to the queue. Operator, please.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. The first question today comes from Shlomo Rosenbaum of Stiefel. Please go ahead.

Hi, good morning. Thank you for taking my questions. Hey, Jerry, I just want to get into a little bit of how you're tracking on your organic growth versus your expectations in the core business. If you were to exclude all the acquisitions and the currency and everything, did the company grow revenue on a year-over-year basis, and how are you tracking that? And I guess a follow-on would be is the increase from CPA global, is increase in guidance completely from CPA global or is CPA global offsetting any potential weakness in the core business? Just trying to gauge how things are going right now.

Yeah, no, great question, Shlomo. Two or three things. Let's just step back. When we closed on DRG on February 28th this year, we gave new guidance, which we then adjusted from the standpoint of the original guidance we reduced by $30 million. That was, we felt, mostly transaction. We also said we thought we'd see Q3, the beginning of stabilization, and Q4 start to increase year over year on transactions. So where we're at today is two or three things. One thing that's really important and in hindsight, I wish I had done it differently. We've always given, I've given annual guidance for many years, as you know, don't give quarterly. We did say that with the acquisition of DRG, that 60% of their revenue came in the second half, which results in a hockey stick. We also said that we were working on that boot car and others to reduce that hockey stick in the future. The thing we probably should have made clearer in hindsight is that 60% of that second half, 60% of DRG, comes in the fourth quarter. So if you set that all aside, what you'll see is that we're spot on of where we expected to be on a global basis with the organic growth for our renewal business and our subscription base. Couldn't feel better about that. Expect that to wrap up a good year. were below our expectations on the transaction. However, as I mentioned in my call, we were sequentially up in Q3 over Q4, and we'll be hopeful that that plays out for Q4. So feel very good about where we're at with the organic growth on the annual subscription base. That will continue to play out and feel very good about what's starting to change from a transaction standpoint. The new guidance we gave you obviously includes one quarter of CPA. CPA has done a good job too. And as you'll hear a lot at our November 10th conference, what we're expecting to see in 2021, and I'm going to give you My views, two things, Richard and I will tell you what our goals are to exit 2022 with and my views of where we'll be in 2023. So we look forward to doing that. Richard, anything else on that? No, I think that's coming in. Thanks, Loma. Next question.

The next question comes from Minov Patniak of Barclays. Please go ahead.

Thank you. Jerry, maybe just to follow up on that, could you remind us of, you know, the moving pieces in that transactional bucket, like what all is in there and why perhaps it was below your expectations? And, you know, I guess it's probably early for you to see it, but, you know, it sounds like, you know, the fourth quarter lockdowns are coming. So do you think that that Q over Q sequential improvement, you know, might not show up in the fourth quarter?

Let's work backwards. Great question. Thanks. I'll take the second part. Richard, you take the first part and break out for them the three pieces we look at with transaction business. No, I think we're feeling fine about fourth quarter. And as the lockdowns continue, we're seeing, as I said, the pickup and pieces of the transaction business. And part of that is there's a significant pickup in Q4. as I said, with DRG in their repetitive business and their transaction business. But, Richard, give them the play out of about the 17% that is not subscription-based.

Yeah, so there are essentially three components. The first component is actual back files and custom data sales, a bit lighter this quarter compared to prior year. Then we have the CompuMark search business. improved performance as we progress through the quarter. So we're starting to see some definitely some improvements from that scene earlier in the year when the pandemic really impacted that company market search component. And then the third piece would be TechStreet. And as I mentioned in my script, TechStreet had a significant biannual standards release last year in the third quarter, which lifted the prior year comps. And we obviously didn't enjoy that this year. And then the final piece is on the professional services side. That's holding up well, particularly in the life sciences vertical, which is one what you'd expect.

Thanks, Richard. I'd just add a bit to that because it's so important. Historically, Clarivate did not invest in the services business, professional services, and we look forward to the progress. Mukhtar and Jeff both have done a great job and moving that forward. And it's really not one-off bids. What it is is pulling through our annual subscription base, which gives us a unique situation. So feel very good about that part as we move forward. Thank you, Manof. Next question, please.

The next question comes from Tony Kaplan of Morgan Stanley.

Thank you so much. I was hoping you could give some additional color on APAC. Just looking at the 10Q organic growth there was basically flat in the third quarter, but that followed second quarter organic growth of 6.7%. So it seems like it's driven by transactional, but could you just talk about what got worse in 3Q versus 2Q in APAC, and are you thinking about the recovery there? And also maybe just with INCOPAT, you know, does this help accelerate your timeline for capturing the growth that you're seeing in China? And, you know, anything to add on that growth in that region?

No, great question. Great question, Tony. I'll work backwards, and Richard will pick up the first part of your question, which is the Y-flat, Richard, in Q3 in Asia Pacific versus the 6.5%, 7% we saw in the first half. and what we expect, as you'll see, for the full year. Incopact is a great addition for us, and it gives us a unique situation of being able to sell their product around the world and also to sell even more of our products into China. So it's a good one. Very pleased with it. Won't see a big pickup in Q4. We'll see that as the year evolves in 2020 and 2021. Jeff and David Liu, our head of Asia Pacific, did a great job in getting that one put in place. Richard, let's help because Tony's question is a good one on Q3 in Asia Pacific.

Yeah, I mean, you're right. I mean, year-to-date growth for Asia is 4.5%, but it was flat in Q3 with growth in Q1 and Q2 What we saw in Q3 is backfile sales in the quarter for Asia-Pac were lighter than prior year, and that's the primary driver. I would add this, that the fourth quarter from a transactional perspective, and this comment applies to not just Asia-Pac but the other regions as well, Americas and the EMEA, is the largest quarter for us in terms of absolute transactional revenue growth. That's driven by a number of different drivers. One of them is back file sales in Asia Pacific. So we are expecting to see good growth in fourth quarter in Asia Pac in that transactional revenue stream. So it's partly timing in terms of those back file sales and when in the year they actually come in. But we're expecting a solid fourth quarter performance from Asia Pacific.

Thanks, Richard. Just one other comment I'd make. In the third quarter, we went in and out of some offices. Tokyo opened and closed, then we kept it closed. The same thing was true in South Korea. So that impact was, I think, caused us to see some of the transactional business postponed into the fourth quarter. Thanks, Tony. Next question.

The next question comes from Andrew Nicholas of William Blair.

Hi, good morning. Good morning. Obviously, the merger with CPA goes a long way in rounding out your solution, the IP market. You have an end-to-end platform now. I'm just wondering if there are still opportunities, Incopat being one example, to add to that segment still via M&A. Are there certain capabilities you'd still like to add or even consolidating transactions that could help you increase share in that market? just trying to get a sense of whether we could see additional deals in that area in the near to medium term and what those deals might be seeking to address.

Thanks. Great question. I'll start and I'll ask Jeff to pick up. Just in general, first, our portfolio has made great progress this year with the addition of DRG, some of the tuck-ins that have done very well, and then, of course, CPA. So we're feeling good about that. However, there are opportunities, both tuck-ins and larger acquisitions, that may become available for us. Let's just remember we're always patient, persistent. We do not participate in auctions. However, we do want to be always the preferred acquirer, as we have been in each of these cases. So feel very good about that. I'll just open up – for Jeff in just a second with one comment. We feel very good in both our science business and in our IP business with having all of the critical assets that are needed. And what we look forward to with acquisitions is complementing them, both geographically, like we just did with China, more of those to come, and then also in adjacent markets. Jeff?

Yeah, thanks, Jerry. It's a great question. I mean, we're always looking to groom our portfolio, so we always see opportunities out there in the market. I think you kind of hit it on the head, Andrew, in that when we look at the CPA acquisition, it definitely improved our product mix, and we think that that helps us create better packages to solve customer problems. So we're very excited about that, and a big part of our strategy is cross-sell and up-sell as we move forward. But the other thing that we're really focused on is really how do we make investments in our portfolio to leverage our data assets And as Jerry said before, we're definitely focused in our analytics capabilities and the advisory services that we have, as we think that that's a nice add-on, and CPA creates a nice channel for that as well. So all in, we're always looking at opportunities, and as Jerry said, there's plenty of opportunities in the market for us, and we're going to continue to evaluate them.

And we feel very good about the teams we have in place on integration. We're getting better every day with that. And are ready for more if and when they become available. So thank you for the question. Next question, please.

The next question is from Seth Weber of RBC Capital Markets.

Hey, guys. Good morning. I hope you're doing well. I wanted to ask about the renewal rate for the quarter. I think it was up a little bit year to year, 91%, but it slipped from, I think, the 92.5% or 93% that you talked about in the second quarter. Can you just give us any color as to what's going on there? Thank you.

You bet. I'll have Richard give you that in just a second. As a reminder to everybody, because it's really important, we have a severe and appropriate measure for renewal. If I had a $100 contract in 2019 and I have a new contract before pricing of $99, that's a mess. Very few report that way. I'm very pleased that we do report that way. So make sure we just keep that in mind. And the other thing, and then over to Richard, we're feeling very good about our goal to get with all the things we're doing with our our global business centers, our inside sales, et cetera, about getting to the 95% plus retention as we move forward. But Richard, let's give them the colors. Great question on Q3.

Yeah, absolutely. So we are very pure in measuring our retention rates, and we only include in the calculation what's up for renewal as the year progresses. So To that degree, it's only cancellations that have an impact on the calculation. And cancellations were slightly higher year-to-date September compared to prior year. However, new business was stronger year-to-date compared to prior year. But new business doesn't go into the equation, nor do the price increases. So the cancellations being slightly higher year-to-date September compared to PYD, But I think what's really important to measure is the ACV growth because that is the more holistic, complete view of what's actually happening to the underlying revenue base of the company in terms of that recurring annual revenue stream. And that was up 4% at the end of the quarter compared to PY for the organic, you know, for the base business. So that's in line with our expectations. So I think that's the key point. key factor there.

Thanks, Richard. And I just add one thing to that because it's so important. You're going to get good details on our November 10th investor day about what we've done with the global business centers. We're ahead of schedule there. And the other thing we're learning, including with the addition of CPA, our opportunity to handle more customers inside than ever before is huge. and we'll continue to do that. Feeling really good about that progress. Mukhtar and I were talking about just before the call, we've got a lot of things that we'll be able to do to focus our outside sales folks better than ever before as teams on global markets. So we're going to win on both sides, and I feel best I felt about our ability to see the kind of organic growth we talked about We said we expected to exit 2021 at 6% to 8% organic growth, and you'll see guidance, as I said, on November 10th, but feeling very good about that despite the pandemic. Thanks, Seth. Next question.

As a reminder, if you do have a question, you can press star then one. The next question comes from George Tong of Goldman Sachs.

Hi, thanks. Good morning. I wanted to dive deeper into organic revenue growth performance. Subscription revenue was up 3.5% organically in 3Q. This compares to a 3.6% organic subscription growth in 2Q. Can you elaborate on the puts and takes that caused subscription organic revenue growth to moderate and some specific initiatives that will help reaccelerate subscription organic revenue growth next quarter?

Go ahead, Richard. Thanks, George. Just a reminder. Yeah. just a reminder, all the things we've laid out that will get us that organic growth are in place today and being executed. We'll cover those in great detail on November 10th, and I feel very good about it. But great question, George. Please, Richard.

Yep, sure. So in terms of subscription revenue growth, absolutely slightly higher tick in Q2 compared to Q3. Now Q2 did include the benefit of us closing out some annual contracts that we mentioned on the call that had Q1 renewal dates that did slip into Q2 because that was sort of when we were in the eye of the storm at the end of March with the pandemic really impacting all companies. So we did have some slippage of renewals from Q1 into Q2 And we picked those up in Q2, so we had a bit of revenue lift by recognizing revenue for the six-month period, for example, in some contracts in that second quarter period. And that impact has normalized as we traveled into Q3. So Q3, nevertheless, still very solid performance, 3.5%, which obviously includes price increases. I would say that tying this question also back to the previous question from Seth around renewal rates, We are pivoting the sales organization currently where we're moving a significant corpus of accounts from the field organization into our three global business centers, into inside sales in Chandler, Arizona, London for EMEA, and of course, Penang, Malaysia for Asia Pacific. The expectation is that that will increase the velocity of new business because we'll have a broader interface with the market. And we'll also have more regular touch points with the long tail of those, the long tail in the account base. And that will, hypothesis is that will absolutely improve the retention rate as well, simply because we'll have more frequent interactions with our clients. So that pivot will drive organic subscription growth and it will also complement our renewal rates as well.

Thanks, Richard. Thanks, George. Next question, please.

The next question comes from Pete Christensen of Citi.

Good morning. Thanks for the question. Jerry, thanks for the added clarity on the DRG second half cadence. But I was hoping you could talk to, you know, what's the typical seasonality that you see in the CPA business and perhaps also how do you think about Clarivate's overall exposure to potential budget flush activity year-end and thoughts ahead given the current environment? That would be helpful. Thank you.

Yeah, no, great question. Thanks. A couple things. CPA is spot on with the excluding DRG with the split that Clarivate's had, which is 49 first half, 51 second half. If you remember, this has been an amazing year. We said we thought first half, second half split would be 48.52 rather than 49.51, excluding DRG. And I think we feel very good about that. We're off and running. I couldn't be prouder of our CPA team and where we're at with that. So you'll see. I think the best way to explain that, and then I'm going to ask Mukhtar to just comment on DRG and what we are doing and how he's feeling about where they're at versus our expectations. I think what you'll also see as we move forward into 2021 is a balance that's probably 48-52 or thereabouts, including DRG, because of some of the things we're doing. But we'll give you that real clear update in November 10th. Mukhtar, please.

Yeah, thank you, Jerry. Yeah, just a few comments on DRG. I mean, we fully integrated DRG into our business. That's really allowed us to really start operating as a combined and cohesive business. And we're starting to see the fruits of that certainly in the field and in, you know, some of the pipeline and deals and so forth that we're creating. And we're starting to just realize some of that pickup. So we feel very good going into Q4 and, you know, responding and meeting our growth targets there.

Thanks, Mukhtar. Next question, please.

The next question comes from Zach Cummins of B. Reilly FBR.

Yeah. Hi. Good morning. Thanks for taking my question. Just more clarity on the three global business centers. I mean, do you have a timeline where you expect all three of these to be fully operational?

They are now.

Oh, perfect. Oh, got it. I thought there was still like a hiring ramp for some of them where they need to be filled out.

Great question, Zach. And let me just add to that. I welcomed on Monday the last 21 that we will be hiring in Penang, which puts us well over our original goal because what's already happened, a lot of our support organizations are moving skills into that area. And if you think about where we'll be at as we go into 2021, all three of those are fully staffed. By the way, an addition that we'll talk about again on November 10th is where we'll end up with our global center for the EMEA region going forward, which is a big pickup and a big plus for us for CPA. So feeling really good about that. But I would make two comments. I've had the opportunity to see, not me personally, but see all the new hires and all of the global centers, and we're getting great talent. I would say we're probably one of the good things with the pandemic is we've gotten really great talent as we go forward. So feeling very good about the job Mike Mokart has done with David, Jeff, and Mukhtar, and we're really well set up for that. So what you'll see us going forward is more and more best cost centers, offshoring, if you will, and think about – the ability to 24 by seven, which is the other thing we've arranged. In other words, with the three business centers, we'll be live 24 by seven for customers everywhere in the world. So feeling very good about it. Thanks, Zach. Next question.

There are no further questions. This does conclude our question and answer session. I would like to turn the conference back over to Jerry for any closing remarks.

Thank you very much, and we look forward to continuing to deliver what I feel is really great progress in this pandemic and, in fact, continuing better than ever before. Last comment I'll make is we really hope you all spend the time on November 10th. I'm eager to do the program. We've got a lot to cover. And we'll make sure that we've got plenty of time for questions there, too. So thank you all very much. As I said, I'm incredibly proud of our team and what we've accomplished. Wonderful additions from the M&A standpoint. And I would just say we'll close. In fact, we're just getting warmed up. Thanks, everybody.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.