Clarivate Plc

Hello, everyone, and welcome to the Clarivate second quarter 2023 earnings conference call. My name is Nadia, and I'll be coordinating the call today. If you would like to ask a question, please press star followed by one on the telephone keypad. I will now hand over to your host, Mark Donahue, Vice President, Investor Relations to begin. Mark, please go ahead.

Thanks, Nadia. Good morning, everyone. Thank you for joining us for the Clarivate second quarter 2023 earnings conference call. This conference call is being recorded and webcast on the 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 the applicable securities laws. Such forward-looking statements involve known and unknown risk, Uncertainty, 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 Fonds at the SEC and on the company's website. Our discussion will include non-GAAP measures or adjusted numbers, including organic revenue and adjusted EBITDA. Clarie believes non-GAAP results are useful in order to enhance an understanding of our ongoing operating performance, but they are supplement to and should not be considered in isolation from or as a substitute for GAAP financial measures. Reconciliations of these measures to GAAP measures are available on our earnings release and supplemental presentation on our website. So with me today are Jonathan Gier, Chief Executive Officer, and Jonathan Collins, Chief Financial Officer. Ruth will be available to take your questions at the conclusion of the prepared remarks. And now with that, it's a pleasure to turn the call over to Jonathan.

Great. Thank you, Mark. Good morning, everyone, and thanks for joining us today. Having just completed my one-year anniversary at Clarivate, my belief in our company and the direction of our travel have never been greater. Like all great companies, it begins with the mission-critical nature of our products, the strength and loyalty of our customer base, and our incredible colleagues who display passion in their work every day. My learnings in the first year have given me a deeper appreciation of our company, our culture, our assets, and a vision of product innovation that remains steadfast. We have implemented many operational improvements over the past year, which I believe places us in a better position to achieve our long-term objectives. For example, back in November, we established three intuitive operating segments, academia and government, intellectual property, and life science and healthcare, each with its own leadership and P&L. We moved quickly and began our organizational restructuring to implement this new model and reporting structure in January. Then fast forward to March, we held our Investor Day event where we outlined our revamped strategy for the next three years, including our primary financial objective to reaccelerate organic growth in each end market by investing in product innovation and in underperforming areas. I remain confident that this action will result in higher profits and cash flows, give us more optionality for capital allocation, and drive significant shareholder value. In April, I was excited to announce presidents for our operating segments, each with deep expertise in their end markets. I believe our new model is foundational to help us execute on our growth strategy and will ultimately help us better serve our customers by ensuring we have the right product offerings in each end market. Turning to the quarter, we did not achieve the results that we wanted, and we still have much work to do. I am disappointed with this, but I'm also fully confident in our longer-term strategy and believe we're making progress towards our goals. Revenue in the second quarter was $669 million. Organic growth was essentially flat for the quarter and for the first half of the year, which was below our internal targets. As a result of the first half performance and expectation for the second half of the year, We are lowering our revenue, organic growth, and adjusted EBITDA outlook for the full year while maintaining our outlook on margins as we expect to stay disciplined on cost. We are also tightening the range on EPS and free cash flow. Jonathan Collins will elaborate on all this later. The lower guidance is disappointing, and we take our reduced outlook seriously. Our underperformance in the second quarter was specifically attributed to three product areas our patent annuities business and IP, and our real world data and consulting businesses in the commercial subsegment of life science and healthcare, where we delivered lower than expected organic growth. We expect performance in these areas to also impact the second half of the year. On a positive note, our A&G segment is delivering improved results following recent product enhancements and commercial focus. Revenue continues to be a bright spot and grew 3% both in Q2 and in the first half of 2023. This is underpinned by continued improvements in Web of Science, where new business grew 8% faster than first half 22, and continued acceleration in Alma, our leading SaaS workflow solution for libraries. While our turnaround is taking longer than expected in the short term, we continue to take actions to accelerate our performance. We remain committed to bridging the gap in market growth rates across each segment, and the recent appointments of our three new segment presidents have increased my confidence in our plan. I believe that the new leadership team will drive additional insights and result in accelerating performance in the coming years. Turning to the academia and government segment, I'm excited to see improved performance as prior year investments are helping to drive new subscription business and account upgrades driven by increased usage and higher retention rates in the first half. With Bart Beinstein leading A&G, his deep expertise in software, AI, and analytics will be instrumental to delivering progress. Importantly, in the second quarter, we signed several key wins across our workflow software solutions, including two top 10 U.S. universities who selected our flagship library software, Alma. We are building further integrations between ProQuest and our leading flagship products to enhance value for users. In response to user feedback, Last month, we announced the integration of ProQuest dissertations and thesis global with our renowned Web of Science platform. This integration enables researchers to gain quick access to a vast, multidisciplinary collection of early career scholarships of more than 5.5 million global dissertations and theses. Moving to the IP segment, I announced in March that Gordon Sampson, our former chief product officer, would be assuming the role of president of the IP segment. As a former Chief Operating Officer at CPA Global, Gordon is well-versed in the patent renewal business and other segments of the market. His leadership will be instrumental in improving our performance. Very late in the second quarter, we began to see lower performance in our annuities business, primarily in the market segment related to our law firm customers who service small and medium-sized clients. This segment began to return lower volumes of patent renewals driven by confluence of macro issues, Specifically, four specific items have caused a negative impact. First, in Europe, we have seen an acceleration of adoption of the unitary patent. While we estimate overall the total impact for us is modest at less than $10 million annually out of a $400 million annuity's business, the pace of adoption has occurred faster than the industry expected. Second, in Japan, the weakness in the yen has caused clients to dramatically manage and reduce costs and cull their patent portfolio. Third, in a couple of other countries in Asia, national governments, driven by post-COVID budget challenges, have redirected their financial support investments in IP protection. The reduction in subsidies has impacted patent renewals, again, primarily in small and mid-sized businesses. Finally, in northern and eastern Europe, the prolonged war in Ukraine has caused a further pullback of patent protection in the region. Though I acknowledge our prior comments of low risk in our patent annuity business have been incorrect this year, we view the confluence of these factors as an exceptional and very unusual event, which our leadership team and IP with a decade plus of experience has not previously seen. We are responding to support our customers to maintain their IP rights, but expect economic pressure to remain sustained as a result in the near term. The short-term impact is an approximate $20 million shortfall in our projected revenue for the second half of this year. While disappointing, I am confident that the slight pullback in organic growth in IP is only a short-term event and currently expect to return to normal growth in 2024. On a positive note and evidence of our future growth, we recently signed our largest new business patent annuities deal in memory, which will commence next year. This is an example of how we provide value to our customers in any environment. Turning to life science and healthcare, we are fortunate that Henry Levy joined us as president in May as his deep knowledge of the life sciences space has been instrumental. His early assessment has reinforced our view that we have tremendous assets and even more potential to lead and grow. He also is adjusting some of our product and go-to-market strategies in light of his experience. While performance continues to be strong in research and development and regulatory and safety, our commercialization subsegment, which includes real-world data and consulting, experienced lower growth than expected. We are seeing a couple of macro factors pressuring our results in the short term in this commercialization subsegment. First, we believe lower biotech funding is having an impact on data aggregators and their demand for our data. Second, a lower drug approval pipeline last year is leading to lower commercialization budgets this year in our clients. While drug approval has picked up this year, we now do not expect a turnaround in clients' budgets until 2024. This is specifically impacting our RWD and consulting solutions. In addition, we have previously discussed our strategy of developing our own platform to deliver therapeutic RWD solutions directly to end users. Henry has endorsed this strategy. As a result, we're being more selective of which data aggregators we license data to by focusing on those that provide value to our data that increases the overall value of our offerings. In the short term, these two items will result in a $40 million reduction in our 2023 revenue outlook. However, this new strategic direction described previously will be beneficial in optimizing the long-term success of our analytics platform and the investments we are making in new and enhanced offerings. While we are being more selective with data aggregators, we continue to deliver real-world data analytics across our pharma customers in line with a longer-term strategy and recently completed a multi-million dollar deal extension with a top five pharma company. Regarding consulting, the uptick in new projects has been slower than expected, driven by the macro environment, resulting in a $10 million reduction to our 23 revenue forecast. We believe we have built a strong, experienced team that can build a backlog of opportunities that will benefit us in 2024 and beyond. Last quarter, I shared with you several examples of how we have been leveraging AI across our solutions, including to remove questionable academic journals to enhance web of science, and using large language models to instantly translate and summarize patterns in intellectual property. In June, we were pleased to announce a new strategic partnership with AI21 Labs, which is a pioneer in generative AI with state-of-the-art large language models. I had the pleasure of meeting with AI21 in my recent visit to our Jerusalem office and was impressed by their capabilities and the opportunities to partner to accelerate advanced AI solutions. This new collaboration will further integrate LLMs into solutions from Clarivate to enable intuitive academic conversational search and discovery, which will help our customers get more accurate answers. In IP, we released the first of a series of new AI products with Clarivate Brand Landscape Analyzer. This will be followed later this year by Clarivate Trademark Wash Analyzer. Together, these releases will enable users to assess brand risk from every angle as they make trademark intelligence more actionable. To deliver these products, we leverage both AI and machine learning on our rich proprietary content, which is enhanced by Clarivate internal search experts. The result is users are able to analyze and gain insights in minutes rather than in days. In life science and healthcare, we're drawing on our connected data lace in Cortellus and using machine learning to predict clinical trial progression, regulatory approvals, and even valuations on M&A candidates. We launched a proof of concept with select customers where we are fusing LLMs, our proprietary structured data from Cortellus, and unstructured data from legacy DRG solutions to make informed decisions faster. Once ready for commercialization, which we expect later this year, it will underpin our conversational discovery across broader Clarivate life sciences and healthcare datasets. In May, we issued our third annual sustainability report where we demonstrated how we are advancing towards the United Nations sustainability goals in partnership with our customers. The report shows how far we have progressed, increasing our score from 11 to 56 and reaching the 90th percentile in the S&P corporate sustainability assessment for the professional services industry in just two years. We have further to go and we will be updating you on our progress. In closing, I want to reiterate a few key points. First, over the past 12 years, we have taken important steps towards our strategic vision and aligning an operating model that is best suited for that vision. Second, with the recent appointments of our segment presidents, we now have the right leaders in place to execute on our long-term strategy of re-accelerating organic growth to industry levels while delivering large expansion and strong cash flows. Third, while we're seeing near-term headwinds in three specific product areas, our business is largely acyclical as our products remain mission critical for decision makers and the majority of our revenue is subscription-based. And fourth, we remain focused on accelerating our revenues. We are doing this methodically through initiatives that we have discussed as well by accelerating our product innovation cadence to enhance value for our customers. The announcements you heard today are just the beginning And we're looking forward to sharing all of this with you over the coming months. And with that, I'll turn it over to Jonathan Collins.

Thank you, Jonathan, and good morning, everyone. I'm going to start with a quick programming note. I apologize, but our third-party service provider is having a technical issue with the live slide presentation. Please refer to the presentation that we posted on our investor relations website, and I'll reference the page numbers as I step through the rest of the deck. Slide 15 is an overview of our second quarter results compared with the same period last year. Q2 revenue was $669 million, a decrease of $18 million, or 3%, versus 2022, driven entirely by the mark monitor divestiture, as organically the business was essentially flat, an outcome almost 2% lower than we expected. Adjusted EBITDA margins expanded 270 basis points over the prior year to 42.6% in Q2, On the cost synergies from the ProQuest acquisition, second quarter net loss was $142 million, down $186 million due to $135 million impairment of intangible assets related to a small business in our IP segment that we plan to divest, and larger net losses from foreign exchange of $35 million. Lower mark-to-market gains on the private warrants were offset by an income tax benefit largely from the asset impairments. Adjusted diluted EPS, which excludes the impact of one-time items like the impairment, was 21 cents in Q2. A one-cent decline over the same period last year, as higher adjusted EBITDA of one cent was offset by a one-cent decline due to higher interest expense and a one-cent decline from the mark monitor divestiture. Operating cash flow was $162 million in the quarter, an increase of $65 million, largely due to lower working capital requirements, as was caused in nearly equal parts by lapping the large accelerations of patent renewal payments in the second quarter of last year that did not recur this year and improved collections from customers. Please turn with me now to page 16 for a closer look at the drivers of the second quarter top and bottom line changes from the same period last year. Our second quarter revenue came in about 10 to 15 million below our expectations. About two-thirds of this was caused by lower product and services revenue in the commercialization area of our LS&H segment, and one-third by the patent renewals area of our IP segment. Our real-world data sales to the indirect channel have been well below our expectations, driving most of the myths in the commercialization subsegment. The patent renewal subsegment, which grew about 5% last year and has durably grown at about 3% to 4% historically, is experiencing lower industry volumes in the short term, driving the shortfall in our reoccurring revenues. We do expect these headwinds to persist in the second half of the year, and they are driving the lowering of our organic growth rate guidance, which I'll come to in a few moments. The top and bottom line changes in the quarter over the same period last year were driven by four key factors. First, revenue was essentially flat organically and had a negligible impact on profit and revenue. Second, inorganic activity, namely the divestiture of the Mark Monitor business, lowered revenue by $21 million and profit by $10 million. Third, cost synergies from the ProQuest acquisition contributed $15 million of incremental profit. And finally, the translation impact of subsidiaries denominated in foreign currencies increased revenue by $6 million as the U.S. dollar remains weaker than a basket of foreign currencies compared to the same time last year. The profit increase of $9 million was enhanced by transaction losses incurred in the second quarter of last year that did not recur this year. Please turn with me now to page 17 to step through the conversion from adjusted EBITDA to free cash flow and how we allocated this capital in Q2. Free cash flow was $105 million in the second quarter, an increase of $55 million over the same period last year. The conversion from adjusted EBITDA improved by 19 percentage points to 37%. Interest payments were $96 million in the quarter, up $10 million over the prior year, as base rates have increased and about a quarter of our debt remains floating. Working capital was a slight source of cash of about $7 million in Q2, when it was a use of $54 million in the same period last year. This significant improvement was driven largely by the timing of payments within our patent renewal business in our IP segment and improved collections from customers. This drove almost all of the $65 million improvement in operating cash flow. Capital expenditures were $58 million in the quarter, flat sequentially, but an increase of $10 million over last year's second quarter as we continue to invest in product innovation. We still expect to increase our full-year capital spending by about $40 million. We used a portion of our second quarter free cash flow to continue servicing our preferred stock with a cash dividend of $19 million and to prepay $25 million of our term loan B in April, lowering our leverage to an even four terms and reducing our interest rate risk exposure. Our cash balance increased by over 70 million as we opted not to continue to pay down debt in May and June in anticipation of the approval of the shareholder authorization to repurchase stock under the revised approval from our board of directors that we announced in May. Please move me now to slide 18 for our current view on the remainder of 2023. Our second quarter results have caused us to lower our full year outlook towards the lower end of our original guidance ranges with a notable exception of organic growth, which we expect to be about 175 basis points below the low end of our original range. We now expect organic growth of approximately 1% at the midpoint of the revised range. This represents a 60 million reduction from the midpoint of the original range to the midpoint of the revised range. Similar to our second quarter results, the full year revision is about two-thirds attributed to the commercialization products and services within LS&H, and approximately one-third is attributed to the patent renewal service within the IP segment. This organic growth would translate to $2,635,000,000 of revenue at the midpoint of the revised range, which is near the low end of the prior range. The organic growth reduction is expected to be partially offset by a weaker U.S. dollar than we expected, net of small divestitures that we anticipate closing in Q4, the small divestiture that we expect. We anticipate adjusted EBITDA of $1,115,000,000 plus or minus $25,000,000. Our profit margin range remains unchanged at 42% to 42.5%, and we continue to expect adjusted diluted EPS at $0.80, but have tightened the range to plus or minus $0.03. And finally, we now expect cash flow of $475,000,000 at the midpoint of the range and have lowered the top end of the range to a half a billion. Please turn with me now to page 19 for a closer look at the organic growth outlook for the full year in the context of the first half results. Our revised guidance reflects a modest improvement in organic growth in the second half of the year compared to the first half, from essentially flat to growth of just over 2% at the midpoint of the range. We expect the subscription portion of our business, which accounts for nearly 60% of our total revenues, to remain stable at about 3% growth. We do anticipate a modest sequential decline in the second half as a result of the performance in our commercialization business within LS&H, but we do still expect to approach 3% on a full-year basis. Our reoccurring revenues, comprised almost entirely of our patent renewal service within the IP segment, are expected to improve from a 2% decline to 2% growth. Despite the lower industry volumes we are seeing in the short term in this portion of the business, We did have some significant accelerations in patent renewal payments in the first half of last year, and these accelerations did not recur this year, driving the sequential improvement. And finally, we expect our transactional revenues to be essentially flat in the second half of the year, where they declined high single digits in the first half. This sequential improvement is driven almost entirely by softer comps in the second half, as our guidance does not contemplate improved performance from a seasonally adjusted run rate perspective. Please turn with me now to page 20 for the major drivers of the anticipated revenue and profit growth for the full year compared to last year, which are modest organic growth, the inorganic impact of divesting the mark monitor business, the carryover impact of the ProQuest cost synergies that are essentially complete, and foreign exchange. Organic growth of 1% will add about 25 million to the top line, and fund a comparable amount of incremental cost aimed at reigniting product innovation, leaving the product impact for this component to be flat. From a segment perspective, we anticipate A&G will grow, remaining on track towards accelerating their growth from historical performance to the market rate we outlined at the Investor Day. IP will remain essentially flat, and LS&H will decline slightly this year due to the macro issues we've outlined. Inorganic actions will remain a headwind to our results this year. The Mark Monitor divestiture completed in Q4 last year accounts for most of this decline, with a small impact from the divestiture we plan to complete in Q4 this year. We've substantially completed the integration of the ProQuest acquisition, enabling us to deliver the remaining $40 million of cost synergies this year, with most of the impact recognized in the first half. We anticipate a $20 million foreign exchange tailwind on the top line, with the assumption that the U.S. dollar remains relatively flat for the remainder of the year compared to a basket of foreign currencies. The headwind to the bottom line is caused by transaction gains realized later last year that we do not expect to recur this year. Please turn with me now to page 21 to walk through how we expect the more than $1.1 billion of adjusted EBITDA will convert to nearly a half a billion of free cash flow and our current thinking with respect to allocating this capital. All of the $170 million improvement in free cash flow projected for the full year, which is largely due to lower one-time cost and augmented by improved working capital, has been delivered in the first half of the year. We effectively anticipate second half free cash flow will be roughly in line with the same period last year. As a reminder, last year we incurred more than $200 million in cash outflows associated with one-time cost related to the acquisitions and expect an improvement of about $155 million this year as we incur about $60 million to largely complete the ProQuest Act integration. We do expect a cash interest increase of about $25 million as base rates are up considerably over last year. Our working capital requirements have leveled off this year and will yield an improvement of about $65 million. We remain on track to increase capital spending by about $40 million to accelerate the organic growth. The impact of all of these changes is about $170 million improvement in free cash flow to approximately $475 million at the midpoint of the revised range. So far this year, we've used the majority of our free cash flow to prepay debt on our term loan B. In light of the recent board and shareholder authorizations to repurchase stock, we have the flexibility to take a more balanced approach towards allocating capital between buybacks and deleveraging, but still expect to reach our leverage target of just under four turns by the end of the year. Please turn with me now to page 22 for a look at how we're tracking through our long-term financial objectives. As Jonathan acknowledged at the outset of the call, we're undoubtedly disappointed with the second quarter organic growth and the implications this is having on our outlook for this year. You'll recall that when we outlined the financial objectives for our business back in March, our primary aim was to accelerate our organic growth. The first area we committed to improve was the research and analytics sub-segment within A&G, and this segment, which represents about half of our total business, remains on track to achieve its growth plans with a solid start in the first half of the year. However, the market headwinds we've outlined in our LS&H and IP segments leave us behind the pace we expected. But we remain laser focused on the product innovation that will help us improve from the lower starting point in the commercialization subsegment as we ride out the short-term volume decline in the patent maintenance subsegment and innovate our patent intelligence offering to accelerate growth. But despite the challenge on this objective, we've made solid progress towards the other three that we outlined. Our second goal was to maintain durable profit margins as we invest to accelerate our growth. We executed on this objective in the first half as our margins expanded by 160 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 H1 as our conversion reached 51% on lower one-time cost and improved working capital. And finally, we committed to allocate our capital in a disciplined manner. In the near term, we prioritized lowering our leverage to below four terms, and we prosecuted that plan by prepaying $150 million of term debt in the first half and brought our leverage to an even four terms. The entire Clarivate team is completely focused on the solid execution required to achieve all of these financial objectives. I want to thank all of you for listening in this morning. I'm now going to turn the call back over to Nadia to take your questions. And as a reminder, please limit yourself to one question and then return to the queue for any additional. Nadia, please go ahead.

Thank you. If you would like to ask a question today, please press star, fill it by one on a telephone keypad. If you choose to withdraw your question, please press star, fill it by two. When preparing to ask your question, please ensure your phone is unmuted locally. And our first question today goes to Manav Patnaik of Barclays. Manav, please go ahead. Your line is open.

Thank you. Jonathan, dear, I guess I just wanted to, you know, ask you, you know, I think since you took over, you've obviously, you know, looked through the portfolio. I think you've tried to reset numbers a few times, including Invest Today, and it seems like every time there's something incremental getting worse. So what is, you know, I think the areas, I guess, where you have, you know, that low visibility that, you know, keeps surprising, you know, yourself and us, I guess?

Thanks, Manav. It's undoubtedly been transactions. And when you look at the performance of our business, first, you know, subs, which represents, as you know, Manav, 60% of our business continues to incrementally get better as we've been innovating in the products. And the nature of that business model, we have very good visibility there. So I'm feeling very good about that portion of our business across all three segments. Certainly the thing which has been a challenge since day one, since I joined, even before I joined, has been transactions And specifically in life science and healthcare, where we have these lumpy big deals in RWD and also in consulting. And certainly the macro impact, which we and others have seen this quarter in particular, has been very unhelpful in transactional decisions. And in fact, we were, as I mentioned in my remarks, we were caught by surprise. Our entire leadership team was around what happened with these small and medium-sized businesses. through our law firm channels and the impact of those four items I talked about in annuities. That last piece I view very much as temporal. It's an unusual confluence of events that we haven't seen before. But the challenge is transactions, and the revised forecast significantly takes out any variability in transactions second half of the year.

Next question, please.

Thank you. The next question goes to Tony Kaplan of Morgan Stanley. Tony, please go ahead. Your line is open.

Thank you so much. I wanted to just unpack real-world data, the DRG business. You called out the strategy changes there. How long should the process take? How much work needs to be done? And also, last quarter, you had highlighted the Web of Science inflection, and so I wanted to get an update there as well. Thank you so much.

Sure, great. Thanks, Tony. And I'll maybe do it in reverse. So first, Web of Science, the inflection we called out in Q1, we continue to see progress there. And I called a couple points in my earlier comments today. But new business, for example, continues to increase at a faster pace. We're going to continue to invest in that product. And if I just came back from a two-week trip to Asia and being out in China, Korea, Japan, you see the impact of Web of Science out there. It is just so critical to the workflow of universities and researchers. So we feel very good about the investments that have been made and the turnaround and continued progress we're going to see there. In RWD, as we talked about, the channels have been historically directly to the end user, the pharma companies or life science companies directly, and secondly to data aggregators. The strategy that we outlined at Investor Day was to increasingly pivot and focus on building out a platform. It allowed us to serve at a therapeutic level directly to the end users. And the benefits are numerous there. First, we're capturing more of the value by building the analytics on top of the underlying data. Second, we're selling directly to the end users. And third, it's a much more predictable recurring type revenue model. So we're still very committed to that path. We are going to be pushing out some initial therapeutic areas later this year, early next year, kind of in a brute force type manner with the platform not being completely complete to be able to begin to take advantage of some of the market feedback that we have received. So we'll begin to see some of that showing up early next year. Thanks, Tony.

Thank you. And the next question. goes to Ashish Subhadra of RBC. Ashish, please go ahead. Your line is open.

Thanks for taking my question. Just wanted to focus down, drill down further on the transactional weakness in the quarter. Just the macro weakness, I would think, was very well known, like the macro concerns have been very well communicated. And so the question was, was there some certain deals in the quarter that got that was lost or got pushed out, or there was just more optimism in the going into the quarter that didn't pan out. And then as we think about the back half, I get the fact that comps are easier, but even with the flat growth, like how much visibility do you really have? And is there a potential risk of further downside to that transactional revenue? Thanks.

Sure. So in the transactional within Lyons Science and Healthcare, there are two elements of it. First, there's the consulting. real world data. On the consulting side, which we pulled out, I think as we called out 10 million for the year versus our prior forecast, it is primarily in commercial. And the line of sight we have on consulting deals is limited. We have maybe 60 days, 90 days at most in terms of pipeline. And we did see just a slowdown in demand as we went through the quarter. So on the back of that, we pulled that out for the year to de-risk that. On RWD, it was a mix, but there were several large deals we were hoping to pull in, which didn't come in. And in light of that, in line of the strategic refocus that we've said, we've essentially pulled all large deals now out of second half. If they come in, if it strategically makes sense for us, and it's aligned with our longer-term strategy of building value in the sector, we'll do them. But we've essentially pulled all those out the second half. So in terms of surprises, with our new range we have, We have essentially de-risked the transaction sales the second half of the year, which has been the cause of the forecasting challenge in Q2. So we feel very good about the downside risk in the new revised forecast.

Okay, next question.

Thank you. And the next question goes to Andrew Nicholas of William Blair. Andrew, please go ahead. Your line is open.

Hi, good morning. I wanted to ask a bit more on the patent renewal business, I guess competitively. Are there any metrics you can provide on the renewal rate, the client retention rate there? Just want to understand how much confidence you have that this isn't a market share issue. And then also maybe relatedly, if you could spend a bit more time talking about the patent annuity deal that you signed for 24, what drove that win, and if there's any sizing you could put on that, that would be great too. Thank you.

Okay, great, Andrew. Yeah, so let me just kind of walk through how we think about the annuities business. Think about it as two broad channels. There's us selling directly to corporates, large corporates with large portfolio patents, and second, us selling to our law firm partners who serve the longer tail, the small and medium-sized businesses globally. On the surprise we saw was in the second channel where we again, we sell through a service to law firms where we saw this degradation very, very late in the quarter. And that was certainly a surprise. Now, as we dug into it and spoke to our law firm partners, find out what were the underlying drivers, spoke to some of the PTOs around the world, see what they were seeing in terms of their inbound renewals. We feel very confident we're not losing share. There has been just a reduction driven by those four factors that I mentioned. particularly impacting this small and medium-sized business. On the corporate side, there's always give and take. You always win some clients, lose some clients. There's natural turnover. There's a little bit of timing where clients we've won haven't come on stream yet compared to we've lost, but that certainly is the minority. The much larger impact has been this long tail served by our law firm partners. Now, in terms of the new business sale, yeah, it was a great sale. Actually, we actually had a great Q2 sales within our our IP sales team. But the sale has come pre-revenue. And one of the highlights was indeed this sale to a law firm. This will be a law firm partner. And they're going to ship their portfolio over to us starting in January next year. We won't give out the exact number other than to say it's a big deal for us, which will certainly help us next year. Thank you.

Thank you. And the next question goes to Stephanie Moore of Jefferies. Stephanie, please go ahead. Your line is open.

Hi. This is Hans Hoffman on for Stephanie. You know, just kind of wanted to come back to, you know, the transactional piece and kind of, you know, unpack, you know, what's going on in the back half of the year. You know, just kind of curious, you know, how your updated guidance kind of compares to your original expectations. And, you know, if I looked at the back half of the year on transactional, you know, it sort of implies that, you know, the back half on a two-year stack basis relative to the first half, you know, actually deteriorates a bit. So, you know, I guess just, you know, kind of wanted to better understand, you know, what's sort of driving the deceleration there and kind of the incremental weakness.

Great. Again, thanks for the question. It really comes down to our RWD big, big sales because we have in both of the last two years, both in 22 and 21. We have had quarters in their weakness, but also quarters of very strong sales, of very, very large RWD sales to data aggregators. So if you do a multi-year stack, what you'll see is that we have now assumed we're not going to get those in the second half of the year. Again, they could come in, but in terms of our commitment to the forecast, we've assumed those come out. So that's the math you're seeing there.

Thank you.

And the next question goes to Owen Liu of Oppenheimer. Owen, please go ahead. Your line is open.

Good morning, and thank you for taking my question. Could you please give us an update on the timeline of launching new functionalities in the life science and healthcare space? Do you expect revenue impact to come in maybe in 2024 and 2025? How should we think about these incremental revenue in the subscription revenue line? Thanks.

Sure. Great. Thanks, Owen. Yes, the stack in terms of the improvements, maybe I'll kind of broadly answer the question. I'll get specifically to life science and healthcare. In terms of us getting back to the market growth brace that we discussed at Investor Day, step one was A&G and web of science. We had to see that improvement. We saw that improvement in Q1 and see that continued improvement now. So we feel we're well on the path towards 4%. In IP, the key area there was improving Derwent and our path and search tools there. This is the building year of getting that done. I started the mapping out of Q4 of last year, the customer engagement. As I've mentioned before, we don't expect a revenue impact this year. We expect to see it begin to impact the sales end of this year, early next year, and kind of leaking out into revenue improvement next year. That gets us to life science and healthcare. So there are several areas, and this is one where, and I'll reiterate what I said in my remarks, it's tremendous to have Henry Levy on board with the industry experience that he has in life science and healthcare, with SAS and revenue models, with data. He's already brought a lot onto our view of the business, and he's found areas where both He's having us pivot faster. He's also found areas which, frankly, we hadn't focused on, but he said, listen, there are gems here we need to double down on. And so you're going to hear more from him as we kind of expose him more to you in the future. In terms of when we expect to see then the improvements, we are making incremental improvements across our product lines. I mentioned a few of them in my prepared remarks. We will begin to see the impacts of that again next year also, but I would stack the timing of A&G improvements first, IP with Durham second, And then in live science, there are two or three areas. And so you'll see those begin to come out again sometime mid next year. Thank you.

Thank you. And the next question goes to Seth Weber of Wells Fargo. Seth, please go ahead. Your line is open.

Hey, good morning, guys. I wanted to ask about the deceleration in ACV in the quarter to 2.8. I think it was 3.3 in the first quarter. Can you just talk about... I saw the retention numbers for the academic government business, but can you just talk about retention broadly across the segments and then the pricing environment? Thank you.

Yeah, you got it, Seth. Good morning. So the deceleration we saw in ACV and Q2 is largely attributed to our life science business, and in particular, real-world data. So while we've highlighted most of the volatility in this area has been in transactional, as we don't get some of those larger deals building that growth of the updates of the data becomes a headwind. So that's the primary driver in the quarter. As Jonathan said, and as I mentioned in the remarks, there'll be a slight headwind on that, we think, in the second half of the year for revenue. So just a slight deceleration. We'll still be pretty close to 3% on a full-year basis, but most of the pressure is coming from the life science space and the impact that the lower real-world data deals has on the subscription file in that business.

Thank you, and as a reminder, if you would like to ask a question, please press star, followed by one on your telephone keypad. And our next question goes to Peter Christiansen of Citi. Peter, please go ahead. Your line is open.

Good morning. Thanks for the question. I'm trying to figure, I mean, the visibility predictability kind of issue sounds, you know, it stems from SMB transactional. I'm just curious, what's the go-to-market strategy there? And do you think some of these areas where you're seeing weakness deserves a little bit more of a higher touch kind of sales approach? Thank you.

Great. Thanks, Peter. Interesting question. The answer is yes. And I'll pull back to September 1st will be my 12-month anniversary as CEO. It's been an eventful 12 months, to say the least. But certainly internally, we have really pivoted the organization around these three segments. And that's just more than just on paper. It's actually realigning our sales, our customer care team, our marketing teams to really be aligned much more tightly around these three segments and aligning very, very closely around our customers. So there's been certainly a very heavy renewed focus. And I'll point to an example of where I'm seeing some great green shoes from there. In Q1 in IP, which was kind of the middle and early stages of this turnaround, we had kind of a tough sales in terms of what we're expecting. In Q2, with three months under our belt of this new model, we had a great sales quarter. And we're seeing those green shoots now across the business as we've now done this alignment. So I'm actually feeling very good about the changes that we've made and the cadence and results we're seeing from it. Now, we know in the model that we have, you make these changes, You can rebuild the pipeline. You convert them to sales. Revenue is the last kind of the dominoes to fall there. But the early indicators are very strong. But I couldn't agree more than what you said. It really is around aligning and accelerating our sales motion around the customers. Thank you.

Thank you. And our final question goes to George Tong of Goldman Sachs. George, please go ahead. Your line is open.

Hi, thanks. Good morning. I wanted to follow up on the transactional piece. You're assuming improvement in performance in the second half, which mainly you're attributing to softer comps or easier comps. And acknowledging you're not baking in large deals in the outlook, how are you thinking about the puts and takes within LS&H and IP around transaction revenues? Are you assuming excluding these large deals trends get worse, trend stabilize, or are you seeing some degree of improvement?

Thanks, George. So on the IP segment, we lapped some pretty challenging comps in our trademark business of IP. So that's part of the downdraft for last year. That business had been performing quite strong in the first half of last year. We started to see the search and watch in particular soften early in the economic downturn. So that's going to be the big driver of it. within the life sciences space. A&G, we expect to be strong in the second half, so that is going to have some softer comps towards the end of this year compared to the academic calendar year end in Q2. And then I would say, you know, we do expect a headwind on life sciences, as highlighted by taking out the larger deals, we are expecting to have a a down draft or a headwind on the transactional within life sciences. So the mix of those three gets us to a place where, from a run rate perspective, we're not expecting a lot of improvement, but on a year-over-year basis, we'll be closer to flat rather than the decline that we saw in the first half of this year.

Thank you. We have no further questions. I'll now hand back to Jonathan Gere for any closing comments.

Okay, great. Well, thanks so much. And thanks, everyone, for joining our call this morning. We look forward to kind of further updating you on our progress going forward. Again, thanks for your time, and please feel free to reach out to us with any questions. Thank you so much. Goodbye.

Thank you. This now concludes today's call. Thank you all for joining Human Elders Connect Your Lines.