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.