Clarivate Plc

Hello all and welcome to Clarivate's fourth quarter and fall year 2023 earnings call. My name is Lydia and I'll be your operator today. If you'd like to ask a question during the Q&A session, you can do so by pressing star followed by one on your telephone keypad. We kindly ask you to ask one question and return to the queue if you have any follow-ups. I'll now hand you over to Mark Donoghue, Head of Investor Relations, to begin.

Thank you, Lydia. Good morning, everyone. Thank you for joining us. for the Clarivate fourth quarter and full year 2023 earnings conference call. As a reminder, this conference call is being recorded and webcast and 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 follow-looking statements within the meaning of applicable securities laws. such forward-looking statements about known and unknown risks, uncertainties, and other factors that may cause the actual results, performance, or achievements of the business or developments in Clarivate's industry to differ materially from the anticipated results, performance, achievements, or developments expressed or implied by such forward-looking statements. Information about the factors that could cause actual results to differ materially from the anticipated results of performance can be found in Clarivate's funds with the SEC and on the company's website. Our discussion will include non-GAAP measures or adjusted numbers. Collaborate 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 an isolation from or as a substitute for GAAP financial measures. Reconciliations of these measures to GAAP measures are available in our earnings release and supplemental presentation on our website. With me today are Jonathan Gier, Chief Executive Officer and Jonathan Collins, Chief Financial Officer. Both will be available to take your questions at the conclusion of the prepared remarks. After prepared remarks, we'll open the call. With that, it's a pleasure to turn the call over to Jonathan Gere.

Great. Thank you, Mark. Good morning, everyone, and thanks for joining us today. As I begin my second full financial year as CEO of Clarivate, I would like to provide an update on our turnaround journey, including the timing and actions required in the years ahead. 2023 was a critical year for Clarivate, as we executed significant changes. These changes allowed us to set the foundation for future growth. I will cover some of these changes on the next slide. It also was a year where we were impacted by macro pressures that, to varying levels, impacted each of our segments and contributed to lower organic growth than originally expected. Nonetheless, these changes were required to set us up for the next phase of Clarivate where we innovate for growth. Beginning on prior investments and changes, we expect to see continued progress in academia government and new success in our focus areas in intellectual property and life sciences and healthcare. This will accelerate in 2024 into 2025. We expect new product introduction to lead to increased renewal rates, new sales, better ability to capture pricing, and drive revenue growth. I now fully expect us to exit 2025 positioned to drive value as we couple mid single digit organic growth with our scale business model to accelerate our ability to be a cash generation machine for investors. I should acknowledge that this revised outlook is a year longer than the plan I set forth at investor day last year. The macro environment hampered us in 2023, and we pivoted our strategy in life science and healthcare under a new leader. Nonetheless, with one year under my belt and the changes complete, I am more confident than ever in the potential for Clarivate's success and growth. 2023 was a foundational year for Clarivate. It was a year where we drove significant changes in three areas to position us for growth. Prior to 2023, our operating model was primarily aligned by function, and this allowed us to rapidly realize cost synergies from the three large acquisitions completed over the prior few years. However, there were tradeoffs, namely less accountability and a fragmented key account management strategy. I recognize that we needed to drive more accountability and build a more effective way of operating closer to our customers. From this view, we created our segment operating model to tighten our customer focus, accelerate decision-making, and bring innovations to market faster. The result was an organizational alignment into three segments, academia and government, intellectual property, and life sciences and healthcare. In May 2023, I appointed presidents to lead each segment. I hired two external industry leaders, Barr-Weinstein to run academia and government, and Henry Levy to run life science and healthcare. I reassigned Gordon Sampson from his role as chief product officer to run the IP segment, an industry in which he's had nearly a decade of experience. With new experienced leadership in place that has full accountability for their respective segment P&Ls, including sales, go-to-market, product leadership, technology, and operations, we are in a better position to drive improved performance across the organization. At our investor day, we highlighted the lack of investment in flagship products and innovation over several years, which we needed to reverse. We commenced a significant level of investment and executed against a roadmap to reinvigorate our portfolio. This includes creating new products, enhancing existing solutions, and accelerating the use of artificial intelligence to move faster, be more agile, and bring solutions to market more quickly. Starting in 2023, we increased our annual capital investment by around $40 million, an increase of around 20% to propel product innovation across all segments. We are seeing early evidence that these investments are paying off. The reinvigoration of Web of Science, where we made the earliest investments, is our first example, as that platform has returned to growth with further growth acceleration expected. Packed Intelligent Services NIP is our second example. We hired a new product team in late 2022. They engaged deeply with our customers in the first half of 2023 and began executing against a roadmap to reinvigorate this platform. We plan to take it to market in the first half of 2024 and look forward to sharing KPIs with you in future calls. In life science and healthcare, we made a major pivot on our real-world data platform after the arrival of Henry Levy. We invested in a new focus strategy in the second half of 2023 and expect to share initial customer wins later in the year. Finally, and related to our new org structure, we renewed a focus on aligning with our customers and supporting their success. I myself hosted nearly 100 customer meetings in 2023 and learned what we're doing well and what we can do better. As a result, we realigned our customer-facing teams, including sales, marketing, customer care with the product teams, ensuring our differentiated industry expertise is front and center in every customer interaction. With the foundation now built, Over the next two years, we will focus on specific organizational and segment priorities to improve organic growth to a low single-digit range. First, with our organizational-wide priorities, with our segment model now in place for a year, we are better equipped to drive excellence across Clarivate to build a winning culture focused on innovation, customer centricity, and accountability. We will continue to pursue operational efficiencies, including utilizing AI and its many benefits to further enhance productivity. This will help us maintain and improve our operating margins while still investing in innovation. It will also help us generate even stronger cash flow to reduce our leverage to the low three times range. Finally, we are actively evaluating opportunities to prune the portfolio of smaller diluted products. This will sharpen our focus on core growth markets and generate cash to reinvest in our business and reduce our debt. Moving on to our segment priorities, our prior year investments in the Web of Science have delivered improved usage and renewal rates. With additional product innovation, we are targeting enhanced performance across content aggregation within the A&G segment. In addition, we continue to pursue advancements in AI as well as in business development opportunities, such as our acquisition of Aletheia, an AI student engagement solution. In 2023, our IP segment experienced some of the most challenging economic and budget pressures in years. This has now stabilized, and we expect improvements in second half of 2024 as we lap the prior year comps. Last year, we launched two new AI-powered workflow solutions, the brand landscape analyzer, and an IP forecast tool. We look forward to launching our new IP intelligence platform this year and extend our current IP management system win rates through service integration with AI-enabled workflows. Our life sciences and healthcare segment, which has the greatest upside potential, has been our most volatile business over the last two years. While this segment also experienced macro headwinds last year, We believe the growth potential far exceeds our other two segments. With a change in leadership and the change in our go-to-market strategy it has brought, we are now better positioned to optimize the long-term success of the analytics platform. In addition, on prior earnings calls, we discussed the investments we're making to drive innovation across our wearable data platform supported by generative AI functionality. The increase in capital spending in 2024 is primarily targeted to accelerate innovation within this very important high growth segment. Each of our presidents looks forward to sharing more details on these growth strategies over a series of upcoming investor webinars. We will be sharing more details of the timing of these events soon. As we exit this year, we will be well on our way in our transformational journey. Under our updated outlook, we believe we can achieve our mid-single-digit organic growth target in 2026. This is approximately one year longer compared to the targets we provided last March. We, of course, will continue to look at every opportunity to accelerate this timeline. I'm confident that we have the people, customer relationships, products, and solutions to succeed. By achieving a mid-single-digit growth rate, we will be well-positioned to deliver margin accretion stronger cash flows, capital allocation optionality, and deliver significant value for our shareholders. I now want to briefly discuss our 2023 financial results. Even in a challenging growth year, we improved on our underlying financial position. Organic subscription revenue grew more than 2% in 2023, and we achieved record renewal rates of 92%. We generated our highest free cash flow ever at more than $500 million, of which $300 million was allocated towards accelerated debt repayment, dropping our leverage ratios below four times. We also repurchased $100 million of our ordinary shares. With an improving balance sheet and strong cash generation, we continue to invest in CapEx spending to drive additional product innovation. We will continue to be disciplined in capital allocation and currently expect to use approximately $400 million primarily for deleveraging in 2024. I want to thank all of my colleagues for their ongoing dedication in helping Clarivate achieve its full potential. I'm confident that the significant structural and operational changes we made last year have created the path to accelerate and sustain organic revenue growth. I look forward to updating you on the progress in the quarters ahead. With that, let me now turn the call over to Jonathan Collins to walk you through our financials.

Thank you, Jonathan. Good morning, everyone. Slide 12 is an overview of last year's fourth quarter and full year financial results compared with the same periods from the prior year. Q4 revenue was $684 million, an increase of $9 million versus 2022, bringing the full year to $2,629,000,000, a decrease of $31 million compared to the prior year. The decline was entirely due to the mark monitor divestiture and was partially offset by favorable foreign exchange. The fourth quarter net loss was $863 million due to the non-cash goodwill impairment charge related to the legacy businesses in the IP and LS&H segments. This was also the primary driver of the full year net loss of $987 million, which was an improvement of $3 billion over 2022, as this year's non-cash goodwill impairment charge was lower than the one recorded in the prior year. Adjusted diluted EPS, which excludes the impact of one-time items like the impairment, was $0.23 in Q4, a $0.01 improvement over the same period last year. The full year result was $0.82, $0.03 lower than 2022, stemming from the MARC monitor divestiture. Operating cash flow was $191 million in the quarter, an increase of $54 million over the prior year's fourth quarter, As the working capital timing issue from the third quarter unwound full year operating cash flow improved 235 million or 46% over 2022 and nearly three quarters of a billion dollars on lower one time cost and working capital requirements. Please turn me now to page 13 for a closer look at the drivers of the full year top and bottom line changes from the prior year. On our Q3 earnings call, we indicated Q4 organic growth was expected to approach 1%. However, it came in slightly below those expectations, closer to flat. Q4 has historically been the largest transactional sales quarter of the year for our A&G segment, and the outcome for this area was modestly lower than not only our expectations, but also the prior year's results. Adjusted EBITDA was right in line with our expectations despite the modestly lower revenue. The full year changes to the top and bottom line were driven by the four key factors highlighted on this chart. First, revenue was up $7 million on organic growth of 0.3%. Despite the softer year-end transactional sales, A&G accelerated growth on the back of the research and analytics subsegment as we reaped the benefits of the investments in the Web of Science product. Our LS&H segment declined, led by a double-digit drop in transactional revenues, due to the challenges with our legacy strategy of selling our real-world data that we discussed in prior calls and is in the process of being addressed. Finally, our IT business was down slightly in our patent intelligence solutions, which is also being reinvigorated in 2024, as well as previously discussed macro-related softness in our patent renewals and trademark services offerings. The adjusted EBITDA impact was negligible as we were able to achieve efficiencies that offset most cost inflation. Second, inorganic impacts, namely the divestiture of the Mark Monitor business in 2022, lowered revenues $63 million and profit $32 million last year. Third, cost synergies from the ProQuest acquisition contributed $40 million of incremental profit and not only buoyed profit margins, but were completely responsible for the expansion over the prior year. And finally, the foreign exchange translation impact of non-US dollar denominated subsidiaries increased revenue by $25 million compared to 2022. The profit increase was negligible as transaction gains were lower than the prior year. Please turn with me now to page 14 to step through the conversion from adjusted EBITDA to free cash flow at the highest rate we've seen since the IPO in 2019. Free cash flow was $127 million in the fourth quarter. an increase of 36 million over the same period the prior year, bringing the full year amount to more than a half a billion, growth of nearly 200 million over 2022, which represented an 18 percentage point improvement in the conversion on adjusted EBITDA. The majority of the improvement, 155 million, was caused by lower one-time cost as we completed the integration of the acquisitions. Interest payments were up 22 million over the prior year, as the impact of base rate increases was partially offset by the lower debt quantum due to the deleveraging in Q4 of 2022 and H1 of 2023. Cash taxes were $21 million lower than the prior year as we recognize the benefit of planning initiatives, jurisdictional mix, and the timing of payments. Working capital was a $5 million source of cash compared to a $73 million use the prior year. The timing of payments within our patent renewal business in our IP segment was a meaningful contributor to the year-over-year improvement. Capital expenditures rose $40 million to nearly a quarter billion or 9% of revenue as we ramped up our investment in product innovation. We used our free cash flow to service our preferred stock with a dividend, prepay $300 million of term debt, and repurchase 14 million shares of our common stock. This balanced capital allocation brought our net leverage ratio to our year-end target of less than four terms. Please move with me now to slide 15 as we turn the page on 2023 and provide our guidance for 2024. Beginning at the top of the page, we expect organic growth to improve over last year to about 1% at the midpoint of our range. From a segment perspective, we anticipate A&G's growth will continue to improve modestly, LS&H to improve to about flat, and IP to return to low growth. In terms of revenue types, we expect the subscription file will grow between 2 and 3% in line with last year, reoccurring to grow about 1%, and transactional to decline about 2%. It's worth noting that we expect to be off to a slower start in Q1 with a decline of more than 2%. While we anticipate the subscription file will continue to grow, we're likely to see high single digit declines in both the reoccurring and transactional order types, driven by tougher comps in our IT segment, namely patent renewal and trademark servicing volumes. We expect organic growth to be modestly positive, excluding these product areas, and our full year guidance predicts positive organic growth for each of the remaining quarters of this year. 1% organic growth for the full year would yield revenue of about $2.62 billion, at the midpoint of the range. Moving down the page, we expect adjusted EBITDA on the range of $1,055,000,000 to $1,115,000,000, resulting in a profit margin of about 41.5% at the midpoint of the range. We anticipate diluted adjusted EPS between 70 and 80 cents, down 7 cents from last year at the midpoint. The adjusted EBITDA decline, which I'll detail on the next page, will account for about 4 cents, and higher DNA from increased capital spending to drive growth will cause three cents. And finally, at the bottom of the page, we anticipate free cash flow between $420 million and a half a billion. Please turn with me now to page 16 for a closer look at the full year top and bottom line changes we're expecting compared to last year. Since the benefit of the cost synergies from the ProQuest acquisition are completely embedded in last year's results, The full year change to revenue and adjusted EBITDA this year is driven by three key factors. First, organic growth at the midpoint of our guidance range will add about $30 million to the top line, but will have no impact on the bottom line, leading to a modestly lower profit margin as we remain committed to investing in product innovation that we believe will accelerate organic growth in the coming years. Second, the inorganic impact from selling a small business line in the IP segment will will remove some revenue this year compared to last year. We expect the transaction will close this quarter and will deduct about $30 million of revenue and about $15 million of profit this year. As Jonathan highlighted earlier, pruning the portfolio of small growth dilutive products to improve execution is a priority to accelerating our organic growth, and this is another step in this direction. And finally, we anticipate a $10 million foreign exchange translation headwind on the top line, and a slightly higher headwind of $15 million on the bottom line, as last year's transaction gains are not expected to recur this year. These changes to adjusted EBITDA account for three-quarters of the change in free cash flow compared to last year, but let's turn to page 17 to step through some of the other items. One-time costs are expected to continue to decline this year to $40 million, an improvement of $20 million over last year, as the ProQuest integration is completely behind us. We do expect cash interest to decrease by about $15 million, caused in part by the debt we prepaid in Q4, the rate benefit from refinancing our term loan B earlier this month, and the expectation that base rates will fall later this year. Taxes will increase by approximately $15 million due to timing of payments and jurisdictional mix. We expect the change in working capital this year will be negligible, just as it was last year. and we remain committed to investing in product innovation and plan to raise capital spending by about $20 million, taking it to about 10% of revenue. The net impact of these changes is free cash flow of $460 million at the midpoint of the range. From a capital allocation perspective, the free cash flow reduction of $40 million will be largely offset by lower dividend payments on our preferred stock. We have two more coupon payments to make before they convert to common shares in the second quarter, freeing up an additional $35 million of cash in the second half of the year. As a result, we expect to have $400 million available to prepay debt or repurchase shares, just as we did last year. We intend to use most of this to prepay debt and close in on our long-term net leverage target of about three terms. Please turn with me now to page 18 for a look at how last year's results and this year's guidance affect the trajectory of our organic growth acceleration in the form of our revised long-term targets. As Jonathan acknowledged at the onset of the call, it's going to take us longer to reach our mid-single-digit organic growth target with a lower starting point than originally anticipated. When we outlined our recovery path at the Investor Day last March, we expected to reach about 6% in 2025, and we now believe it will take us another year to touch this level of growth. We now anticipate making steady progress towards the range of 4% to 6% in 2026. A key driver of this progression includes modestly pruning small, lower growth assets that are distracting our teams focused on core product innovation. As a reminder, to reach our market potential in each segment, we must modernize platforms and enhance our solutions in one key sub-segment in each. First, we expect to build on last year's momentum in research and analytics within A&G. lifting growth to mid-single digits in this category through expanding platform capabilities and breadth of content. Second, within LS&H, we plan to launch our new pharma-grade real-world data product in H1 and two specific therapy area-aligned products in H2. Combined with AI-enhanced capabilities in our commercialization products, these investments will drive the growth acceleration in the highest potential business in our portfolio. And third, we're targeting to deliver four enhanced solutions this year in our patent intelligence subsegment with NIP, built on our unparalleled data that we expect will lead to double-digit monthly active usage growth by the end of this year, setting us up for a meaningful improvement in organic growth in this subsegment next year. As our organic growth accelerates, we expect profit margins will return to last year's levels over the next few years, and will compound to accrete 15 cents of EPS from this year's expectation, lifting free cash flow conversion to 50% over the same time horizon. Please move me now to page 19 to put these long-term targets in the context of the financial objectives that we outlined last year. Our primary aim is to accelerate our organic growth, lifting us from last year's level of essentially flat to mid-single digit growth in a few years. Our second goal is to maintain durable profit margins as we make the investment to achieve the primary goal. We are committed to providing the resources to drive product innovation in all our businesses and are finding operating efficiencies to fund some of these, but are also willing to modestly lower our profit margins in the near term to benefit the long-term health of the enterprise. The third objective we outlined was to significantly improve our free cash flow, which we've done by reaching a half a billion last year, but we see room to continue to expand our cash flow conversion to 50% as we improve our top-line growth. And finally, we remain committed to allocate our capital in a disciplined manner. We've demonstrated balance in this area by using about three-quarter of last year's available free cash flow to prepaid debt, bringing our net leverage below four turns, and also used about a quarter of it to repurchase stock. We see a clear path to bringing leverage below three turns in the next few years, maintaining a similar balance. I'd like to use this opportunity to thank my more than 12,000 teammates here at Clarivate for your tireless work to get us to this point and your commitment to executing our plan to help us achieve these objectives. I want to thank all of you for listening in this morning. I'm now going to turn the call back over to Lydia to take your questions. And as a reminder, please limit yourself to one question and then return to the queue for any additional. Lydia, please go ahead.

Thank you. Please press star followed by the number one if you'd like to ask a question and ensure your device is unmuted locally when it's your turn to speak. Our first question today comes from Owen Lau of Oppenheimer. Your line is open. Please go ahead.

Morning and thank you for taking my question. So both Jonathan, you talk about some of the investments for future growth in 2025 and 2026. Could you please add more color on kind of like what kind of product you expect to invest into, when do you expect to launch this new product, and the return on these investments? Thanks a lot.

Jeroen, we'll do this. This is Jonathan Jeroen. I'll go ahead and go first. And maybe I'll walk around just through each of the segments to give a complete picture. So as I mentioned in my remarks, Owen, in A&G, that's the segment where we made the earliest innovation investments around Web of Science, and that's where we see the initial returns from that. As we discussed in Q1 of last year, we saw the uptake of Renewal Race, and that really was on the back of a complete refresh of that platform. Now, that was the beginning of that journey. We continue to invest in Web of Science primarily by creating additional analytic tools to drive value and increase in the workflow of our researchers there. That'll drive usage, allow us to capture price, and knowledge of price differentially. We're also seeking ways to expand our pricing model to move into different segments of the market that we typically haven't been able to address with our existing pricing model. All that is to say, with an A and G, I think the path is the most advanced of the three segments in terms of the innovation and the results we're seeing from that. In IT, the biggest area of focus is around our patent intelligence and search analytics platforms. And that is the group that includes Derwent, Enography, Encopat, and related services around patent search. This is an area, Owen, I think as you know, that we've been underperforming in the past. The team has done a phenomenal job of getting close to the customers, having customer user groups drive this innovation. And we expect to launch the first two of a series of additional new modules in this area in the first half of this year. So we expect that to launch. And then, as you know, given our revenue model, these would be subscription products. If we launch it then, sales happening more the second half of the year, the revenue will appear more next year. But we feel very good about the path there. Then in life science and healthcare, I would call out two areas. One is the real-world data analytics platform. And this is the area which, as you know, we pivoted substantially middle of last year, where we pulled back on the previous strategy of selling our data to competitors. As I shared ad nauseum in the past, it was a flawed strategy, and we continued to accelerate exiting that as a channel. And at the same time, with Henry's arrival and his industry experience, we've really refocused the investments on that product. to create pharma-ready data, which we have largely achieved at this point. So that's largely done. And then we're going to be rolling out some therapeutic areas in the first half of this year. So that's one big area. And then we also, the other areas around R&D, which is kind of the second element or the second portion of our life science and healthcare offerings, And there we've had incredible content, but very, very dated platforms. And we've been investing in refreshing those platforms and adding more analytics to really unlock the value of our underlying data. So all of those are, again, web of science, I would say, is we kind of launched the first phase of it and we continue to improve against it. That will be ongoing improvement. The other two areas in both IP and life science and healthcare expect some major product launches this year. Thank you.

Our next question comes from Manav Patnaik of Barclays. Your line is open.

Good morning, gentlemen. My question is, you know, the pruning of the portfolio that you talked about, can you just help us size how much of the portfolio is up for pruning? And also, you know, just what is the board's aversion to doing something bigger? You know, it sounds like you have three disconnected segments. Life science is the smallest and the most volatile. So why not do something bigger?

Yeah, thanks for the question, Manav. This is Jonathan Collins. I'll touch on the portfolio pruning and let Jonathan take the second part. So the small business that we are exiting in the IP segment that I mentioned in the prepared remarks that we will likely close on in Q1 and that'll in effect Qs two through four, that's about the size that we're looking at. So the focus here is identifying areas that are growth dilutive and distractive to the teams. to help improve the probability of success in execution and product innovation by focusing the team. So that is about the size. They could be slightly larger, slightly smaller, but there are opportunities in all three of our segments to winnow down the areas that we are really focusing on and investing in to drive the organic growth acceleration.

Great, and I'll just, I'm on opposite John here. I'll touch on your second question on kind of a larger move. I mean, certainly the board and myself are completely aligned that we are here to drive value for shareholders. As I've described in the past with you and others, we certainly see value of these segments being together, and the value has been driven by shared content, shared technologies, in particular around IP and life science and healthcare, some shared customers, and certainly on the significance of cost synergies we have been able to drive over the last few years as we brought these four large platforms together. That being said, we will always optimize what's in the best situation for our shareholders and for our customers. And to do that right now where the board has me focused and what I have the team focus is on operating and improving every single segment as we described. Thank you.

Thank you. Our next question comes from Heather Hrabowski of Bank of America.

Hi, this is Heather Hrabowski. Thanks for taking my question. I was hoping you could talk a little bit more about the increase in CapEx spend and the investment spend you're doing, and just help us understand how much of it is GenAI initiatives, how much of it is other investments in the business, and how you talked about investing to drive growth, just how we should think about spend over the next few years and how you're thinking about if there's incremental opportunities to invest, just balancing that with the margin growth and cash flow growth. Thanks.

Yeah, thank you for the question, Heather. So with respect to our CapEx increase, most of that is adding development capacity. which we capitalize at a relatively high rate when we're enhancing and improving products. So maybe I'll just touch on a couple of the areas that Jonathan mentioned a bit ago in the A&G segment. We continue to ramp up the investment in the web of science to stay ahead of adding features to the platform and ingesting new mediums of content to make it a great experience. And there certainly is an AI overlay there All of our businesses are starting to move towards conversational discovery, which is an example of embedding AI in the products. And it certainly comes with a development effort in all of those areas. Web of Science is certainly doing that as well. As we move into life sciences, it's a combination of development capacity and some content or data for the real-world data offering. As Jonathan highlighted, we've spent a lot of effort in the past couple of quarters building out pharma-grade data. and the technology investment there. And then the next step for us is start to build these therapy area platforms or offerings that will take meaningful development efforts. So that's really how we're spending within the life sciences segment. And then on the IP side, the four new platforms or modules that will be put on top of the Derwent data set for search, for watch, for strategy, and for R&D. Those applications have pretty meaningful technology developments that will happen over the course of this year and into next year. Just in terms of the time horizon, we indicated last year and the cash flow guidance that we highlighted today, getting to that greater than or about 50% conversion in a couple of years, does contemplate CapEx being at a reasonably steady dollar level over the next few years. As revenue grows, that margin on CapEx should drop a bit, but we do expect that we'll need to continue to make that investment over the next few years. Thanks for the question.

Next question, please.

Our next question comes from Tony Kaplan of Morgan Stanley. Your line is open.

Hey, good morning. This is Greg Parrish. I'm for Tony. Thanks for taking our question. I just wanted to dig into the change since yesterday in March. What really drove the difference in the turnaround trajectory that you were targeting? You're ramping up investment here, so is more investment required than you thought back then, or is it really just macro, or is the end market more of a challenge maybe than you thought, if you can kind of help bridge the gap there? Thanks.

Sure, Greg. And the way I think about it, and I'm encouraged you to think about it, is really two different things. First is Macro certainly impacted us far more than we were anticipating in 2023. Primarily in IP, and we talked about that in our Q2 call. Also in life science and healthcare with commercial markets there. Those are the most impacted. And to a lesser degree with some on the margin within AMG with some discretionary transactional items. But primarily, again, in life science and healthcare and IP. So macro was part of it. So it ended up impacting kind of our starting point, if you will, on the three-year plan. And the other element of it really was around, as we brought in more, brought back in more industry expertise back into the business, as we reestablished some of the teams that we'd had before, we began to slightly modify and change some of our go-to-market product strategies, particularly around life science and healthcare. And with Henry coming on board middle of last year, spending time with him, again, we really made a decision to change our life science and healthcare RWD platform strategy. Absolutely the right thing to do, and it makes me even more confident in the future. But that did pull us back a year in terms of the timing around that platform. So those are really the two kind of key areas I would call out. Thank you.

Great. Thank you. Next question, please.

Next question is from George Tong of Goldman Sachs. Please go ahead.

Hi, thanks. Good morning. It looks like in your guide you're expecting improved organic growth this year in subscription and reoccurring. It's really the transactional piece that's going to be the offset. So can you talk a little bit more about how much of the transactional revenue headwinds are cyclical versus structural? and steps that you're taking internally to drive improved performance here?

Sure, George. Yeah, just to reiterate what this year's guidance range contemplates on organic growth. So we do believe that the subscription business will be relatively consistent with last year. We grew about 2.5% last year. I think we'll be in that 2% to 3% range. As Jonathan highlighted, those investments that we are making this year in life sciences and in patent intelligence within IP should start to improve usage in the second half of this year and help the LIPS subscription growth next year. And we should continue to see some traction in A&G as the Web of Science product continues to improve. Most of the impact in reoccurring, which we think will grow modestly this year, is going to come from a modest improvement in the second half of the year on volumes within that market. We'll have tough comps early in the year, which is why I indicated growth will be lower, particularly in Q1. But to your point on transactional, we continue to expect and are conservative around commercialization budgets in 2024. We do think there is some opportunity in the second half for things to improve modestly, but we've been pretty conservative on the rate of improvement in that market. On the IP side, from a transactional search and watch, we've been relatively consistent there. It's been lower than in the past couple of years. And then on the A&G side, which is the only place that we were a bit softer in the fourth quarter, we've been a bit conservative about the expectation there. So that's what's leading to the anticipation that transaction will be down a couple of percent. In terms of what we are doing about it and the things that we can control, the primary area to focus on is within life sciences. So the investment that we are making in these therapy area focused offerings for our real world evidence and the pharma grade data will lead to opportunities to sell this in a subscription model. So that's a place where the headwinds we've seen in transactional the last couple of years, we expect to see come back to us in the form of subscription growth. so that's a little bit more color on how we're seeing 2024's growth expectations by order time next question please the next question comes from seth weber of wells fargo please go ahead uh hey guys good morning um i was wondering if you could just touch on the pricing environment

where it sits today and kind of what you're contemplating for pricing as you ramp into 2026, like how much better do you think, or how much of a bigger contributor do you think pricing will be as you get, you know, further down the road with more products and, you know, better, you know, more cross-selling, things like that. If you could just sort of talk through where pricing is today and how you see that trending over the next couple of years. Thank you.

Sure, Seth. Yeah, I'm going to go ahead and comment on that to see if JC has any additions. I mean, in general, pricing has been a net contributor for us across all three product lines with our subscription products. Now, certainly if you unpack that and look at specific products, where we have innovated in the past, where we are creating new updates to the products, That's where we're able to capture more price in areas where we've done less so, and I will call out Durbin, for example, not able to capture price. There's a direct correlation between our ability to innovate, drive that innovation to impact customer workflows and our ability to capture price. When I look forward to the plan this year, we've been fairly modest in terms of assuming any improvement on price capture. for our plans for 2024. That being said, we are amping up our rate of innovation. Henry Levy has announced that he's going to be, every product's going to have an update this year in terms of its portfolio, and that will be able to capture price. But I think we're going to take a wait and see in terms of when we actually see that coming through. JC, anything you want to add to that?

Yeah, I think the indication, we would expect 2024 to be pretty consistent, as Jonathan highlighted. In 2025 and 2026, as we launch these new offerings, we certainly think that this will be an area that will help contribute towards the growth acceleration as we move up a bit in those key product areas that we haven't been able to price meaningfully in the last few years.

Thanks for the question, Seth. Thanks, Seth. Next question, please.

The next question comes from Ashish Sadabra of RBC Capital Markets. Please go ahead.

Thanks for taking my question. Maybe just following up on an earlier question around the revenue growth trajectory in 2024, the visibility historically has been pretty low. So I was just wondering what gives the confidence in that back half acceleration in second half 24 and in order, like what could drive upside or downside risk there? Is it mostly macro or are there certain Client wins, which are ramping up, that can provide further confidence on that growth improvement. Thanks.

Hey, thanks for the question. This is Jonathan. On the expectations and the gains for this year, it's mostly driven by the comps from the prior year. So we have not built in, to your point, because of visibility challenges the last couple of years, a meaningful improvement in the markets in the second half of the year. But you'll recall, for example, in our patent renewal business, we started to see the softening in the second quarter, late in the second quarter. So we have tougher comps in the first part of the year. That's also true with the trademark business within IP. That's the reason we expect that growth will be slightly negative in the first quarter. We'll return to growth in the second quarter and have better growth in the second half of the year. It has less to do with the run rate improving and more about the comps. And we have expected the transactional business to decline by a couple of percent, as I indicated. So we think we've been a bit more conservative with our outlook on those sales that have been a bit more challenging to predict. over the last couple of years. Thanks for the question.

Thank you. As a reminder, if you'd like to ask a question or register a follow-up, please press star followed by 1 on your telephone keypad. Our next question comes from Shlomo Rosenbaum of Stiefel. Please go ahead.

Hi. Thank you very much. Some of the players in life sciences like Acuvia and Viva are talking about improved optimism amongst the client base, and they're thinking that we should see a second half improvement. Is that square with what you guys are expecting in your numbers? Are you not seeing that? Are you not expecting that? And then just, Jonathan, I want to touch on one thing that At the analyst day, the 2025 target was 6% growth, and you're now pointing to 26 at 4 to 6. Can you just address that, you know, lowering the growth expectation even in the next year?

Sure, Sean. This is Jonathan here. I'll go ahead and address the first question and have JC address the second. So on live sciences, I think what others are seeing, we are seeing renewed optimism within our within our life science customers. The commercialization budgets appear to be higher. And we're seeing it kind of across the board, both on large pharma, large biotech, and even small biotech. So there is renewed optimism coming back into it. That being said, we're going to want to wait and see in terms of how quickly that converts into really increased demand for our products and services and consulting. So we've, while we are seeing that certainly in the macro environment, we've been cautious about putting that optimism into our guidance in second half. J.C., do you want to address some of those other questions?

Yes. In that conservatism around the macro, SHLOMO is the other factor that's really driving the change in the last year of the guide we gave. So, to your point, we had previously indicated in the 5.5% to 6.5% range, or six at the midpoint, We're now in the four to six range, so we'd have to get to the higher end of that to touch the prior midpoint. That is primarily due to our conservatism around the rate of improvement in the end markets. What could cause us to be to the higher end is faster acceleration, for example, in the commercialization market that Jonathan just highlighted. A better outlook on the patent renewal front would be another example. So that is the primary difference in the change between the two.

Thank you. Thank you. Last question, please.

Next question comes from Andrew Nicholas of William Blair. Please go ahead. Your line is open.

Thanks, and good morning. I just had a small question on A&G. Jonathan Collins, I think you mentioned It's the largest transactional quarter. I think that's mostly back file sales within Web of Science, but just if you could confirm that's where the weakness was, and then just any color on the drivers of that. Is that also budget-related, typical pressures, or is it just a timing issue, and you'd expect some of that to come back next year? Thank you.

Yeah, thank you for the question, Andrew. So, as a reminder, we have multiple types of transactional sales within the A and G segment. You touched on one of them where we're selling the back file of Web of Science, which makes the analytics of the platform much more valuable to the users. Other examples are digital collections, historical collections that we've digitized and preserved, and also our books business. So it's a combination of those. Q4 usually is the largest quarter for us. What we saw a bit later in the quarter is our customers in that space pausing a bit. What we heard from them is that they want to wait and see on some other spending factors. Most of our customer base is in North America within that part of the business, and their budget years run similar to the school year. So their budget year will end in the second quarter. So we'll see how that plays out in the coming quarters. But that's most of the feedback that we heard from that market, and those were the sales that were affected.

Thanks, Andrew.

Thank you, Andrew.

Great. Thank you, Andrew. I think that was our last question. Just as I wrap, I just want to thank everyone for joining our call today and listening with our remarks, engaging with us. As we look forward to next year again, as we said in the call, 2023 was a foundational year for us as we made the changes that we needed to make to really propel Clarivate. And I look forward to sharing with you over the ensuing quarters coming up of the results of the investments we're making in innovation as we drive this company to grow. Thank you very much, everyone. Goodbye.

This concludes today's call. Thank you for joining. You may now disconnect your line.