Clarivate Plc

Good morning, ladies and gentlemen. Welcome to the ClaraVet first quarter 2024 earnings call. My name is Jaquita. I will be your moderator for today's call. All lines will be muted on the presentation portion of the call with the opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to your host, Mark Donahue, Vice President of Investor Relations with ClaraVet. Mark, please go ahead.

Morning, everyone. Thank you for joining us for the Clarivate First Quarter 2024 Earnings Conference Call. As a reminder, this call is being recorded, webcast, and is copyrighted property of Clarivate. Any rebroadcast of this information at all, or without prior written consent of Clarivate is prohibited. And accompanying earnings achievements of the business or developments that clarifies 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 bonds with the SEC and on the company's website. Our discussion will include non-YAC measures or adjusted numbers. on our website. With me today are Jonathan Gere, Chief Executive Officer, Jonathan Collins, Chief Financial Officer. Both will be available to take your questions at the conclusion of prepared remarks. And 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. On our last hearing's call, I talked about how we set the foundation for growth in 2023 with significant operational changes. These changes were required so we could advance to the next phase of our growth plan in 2024 and 2025, which is focused on investing and innovating to drive organic growth. Today, I will update you on some of our accomplishments this year against our plan. This includes progressing on key growth initiatives across the intellectual property and life sciences and healthcare segments. These two segments are important growth drivers and our pursuit to achieve market growth rates within the next few years. But first, turn to the quarter's financial performance. Our results were in line with our expectations. Organic revenue growth was slightly better than the more than 2% decline we had anticipated. But we still have work to do. We are encouraged to see improvements driven by the operational changes from last year, as well as investments in innovation to drive accelerated future year growth. Subscription revenue continues to perform well, growing at over 2% in the first quarter. As we progress through the investment phase of our growth plan, we are pleased we continue to see steady renewal rates of 93% at the end of the first quarter. This is a testament to the value customers place on our products and services. Jonathan Collins will cover the first quarter results in more detail shortly. This past March, we released a series of webinars covering each of our three segments. These presentations, led by our segment presidents, highlighted our product investments, including our GNI strategy to reach our long-term growth potential. We hope everyone has had the opportunity to view the presentations and product demonstrations, which are available on the Clarivate website. Within the academia and government segment, We are leveraging our best-in-class content and technology to drive innovation while incorporating generative AI. Our strategy is to turn generic GenAI into academic-specific GenAI by leveraging our trusted industry-leading solutions and data to assist researchers in accelerating the pace of innovation and help students learn more effectively every day. We are investing in research and analytics including delivering more actionable research insights through our new research intelligence solution. We are looking to further grow our content aggregation business by expanding our content marketplace and aggregation portfolio internationally with non-English content. Lastly, our workflow software business continues to pursue a broader set of customer tiers and expand into new geographies. We are constantly expanding our online software capabilities so users can access more advanced decision analytics and maximize their library experience i am pleased with the progress we are making and we're currently on track to deliver approximately four percent growth for the ang segment exiting 2026. clarivate is deeply entrenched across the global ip ecosystem supporting some of the most critical non-discretionary tasks in the IP process. We are working on several initiatives that are designed to realize our growth opportunity across the IP portfolio. We expect to re-accelerate growth within this segment and return to market growth rates of approximately 5% as we exit 2026. I am very excited with the progress of our commercial focus. Under our new operating model, we are winning in the marketplace with our leading solutions, including IP Folio, Foundation IP Management Systems, and Unicom IPMS. The commercial and competitive success we have realized the last few quarters will be a key contributor to growth as we onboard these customers over the remainder of the year. While AI has always been a part of our IP business, we now have a dedicated and concerted effort to develop AI-based solutions. We have integrated data science expertise into the IP business be more agile, and deliver use case-specific intelligence that is embedded in decision-making processes to help customers gain competitive advantage. We are expanding patent and trademark management by creating a connected ecosystem of data, workflow solutions, and expertise. The IP Collaboration Hub will enable IT professionals to collaborate with external agents and service providers in a structured environment which will improve productivity, simplify operations, and reduce cost and risk. We are also making great progress to further deepen the connections with our customers and strengthen our position as a trusted advisory and partner. With leading patented trademark maintenance solutions, we are well positioned to build an IP consulting practice to create a strong link between our customers' challenges and all that Clarivate has to offer. Turning to the life sciences and healthcare segment, we are pursuing growth through scalable platforms and AI-driven workflow solutions. Last year, we refined our operational focus and implemented innovative, forward-thinking strategies designed to fuel organic growth acceleration towards the high single-digit exit 2026. To achieve this, we are pursuing three key strategies. First, we are modernizing our intelligence platforms which will enable us to translate our rich market data and analytics into predictive insights and recommended actions. We will focus on a core set of scalable platforms that leverage AI to deliver exceptional user experiences and advanced analytic capabilities. This will enable us to drive higher degrees of cross-product connectivity, such as linking Fortelis Drug Discovery Intelligence with OpEx Drug Safety Intelligence to accelerate insights for users. Secondly, we are invigorating product innovation across the organization by leveraging our differentiated assets and broad capability to unlock and expand market white space. We are focusing on increasing our scale in attractive segments and developing new subscription-based products to reach new customers and expand our existing business. For example, Cortell CNC, and Drug Safety Triageur have achieved strong footholds in R&D, regulatory, and pharmacovigilance departments with plenty of room to grow. And lastly, we are building enriched, pharma-grade, subscription-based, real-world data solutions focusing on differentiated therapy areas and indications. We will deliver tailored solutions directly to our core customers across pharma, biotech, and medical technology. While a large component of our R&D plan to target towards these key strategies, we recently acquired a couple of startup companies within the LSA space to accelerate and enhance our internal investments in innovation. Motion Hall serves the life sciences industry with vertical artificial intelligence solutions. Global QMS is a provider of cloud-based solutions that enable life sciences clients automate regulatory reporting and compliance management the combined expertise data and technologies of clarivate and these companies will help to address customer needs for connected data to support complex analyses and evidence-based decisions in the life sciences ecosystem i mentioned earlier that we have made great progress on reviving a few of our path intelligence and rwd products we recently launched a beta version of Derwent Innovation Search Management, which streamlines the path and search process. This new feature, coupled with our strategic roadmap, has been positively received by our customers and are reflected in the 180 base point improvement in our product renewal rate year over year. We also recently released an alpha version of a new R&D collaboration tool, and later in the quarter, We'll release additional alpha releases in AI-driven search and patent monitoring. Coupled with our leading patent intelligence database, these new features will launch Clarivate to the leading solution in patent intelligence and search in the industry. Earlier, I touched on our RWD strategy. We recently released a new data framework, which is positioned around higher quality, comprehensively mastered medical claims data. We are already seeing the benefits of our work. our team secured commercial success with two top 10 global pharmaceutical customers in closing we are making the necessary operational and product progress to revitalize our business and set a clear path to achieve our plans we are committed to successfully delivering on the growth objectives and driving greater financial performance thank you for your time this morning with that let me turn the call over to jonathan collins for walking through our financial

Thank you, Jonathan, and good morning, everyone. Slide 12 provides an overview of our first quarter financial results compared with the same period from the prior year. Q1 revenue was $621 million, a decrease of $8 million compared to the prior year. The decline was largely organic and was partially offset by a small acquisition and favorable foreign exchange. The first quarter net loss was $94 million, $119 million lower than last year's net income of $25 million. The decline was attributed to favorable legal and tax settlements recognized last year that did not recur. Adjusted diluted EPS, which excludes the impact of one-time items like these settlements, was $0.14 in Q1, a $0.04 reduction over the same period last year, due in roughly equal parts to lower adjusted EBITDA and higher depreciation and amortization expenses from our increased investments in product innovation. Operating cash flow was $176 million in the quarter, a decrease of $52 million over the first quarter last year, driven by timing differences in working capital. Please turn now to page 13 for a closer look at the drivers of the first quarter top and bottom line changes from the prior year. On our Q4 earnings call in late February, we indicated the business would decline organically by more than 2% in the first quarter. However, our results came in slightly above those expectations. at a negative 1.7%. The first quarter changes to the top and bottom line were driven by three key factors highlighted on this chart. First, revenue was down 10 million organically. While our subscription business grew more than 2%, our non-subscription products declined 8.5% as we expected. The adjusted EBITDA impact was 6 million more than the top line headwind as we continued to invest to drive future growth. we experienced a very small inorganic benefit to the top line associated with the acquisition of Motional. And finally, foreign exchange had a small impact to our top and bottom lines. Please turn with me now to page 14 to step through the conversion from adjusted EBITDA to free cash flow at our normal rate in the mid-40s. Free cash flow was $112 million in the first quarter, a decrease of $56 million over the same period the prior year, driven almost entirely by timing differences in working capital. One-time costs decreased by $14 million, nearly offsetting the adjusted EBITDA decline, as the acquisition integrations are behind us. Interest and taxes were generally in line with last year. Working capital was essentially flat compared to a source of cash of more than $50 million in the prior year due to timing differences in both receipts and disbursements. Capital expenditures increased by $5 million as we continued to invest in product innovations. We used our free cash flow to service our preferred stock with a dividend, to prepay nearly $50 million of term debt, and to pay fees associated with refinancing of our term loan fee. Please move with me now to slide 15 for another look at our guidance for the full year, which remains entirely unchanged. Today, we are reaffirming the guidance we provided at our year-end earnings call in February. Beginning at the top of the page, we continue to expect organic growth of about 1% at the midpoint of our range. We now expect Q2 to be a decline of about 1%, representing a sequential improvement of about three quarters of a percent. 1% organic growth for the full year should 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 $1,015,000,000, resulting in a profit margin of about 41.5% at the midpoint of the range. We continue to anticipate diluted adjusted EPS between 70 and 80 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. As with our first quarter results, the full year expected changes to revenue and adjusted EBITDA will be driven by three key facts. 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 Valley Pack, which closed on April 1st, will deduct about 30 million of revenue and about 15 million of profit this year. As we discussed back in February, pruning the portfolio of small growth dilutive products to improve execution is a priority to accelerating our organic growth, and this is a first 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 iteration is completely behind us. We do expect cash interest to decrease by about $15 million as we continue to deleverage and benefit from refinancing our term loan B in the first quarter. Taxes will increase by approximately $15 million due to timing of payments and jurisdiction payments. We expect the change in working capital this year will be negligible similar to last year. And we remain committed to investing in product innovation and plan to raise capital spending by about $20 million. The net impact of these changes is free cash flow of $460 million at the midpoint of the range. We intend to use most of this to prepay debt and close in on our long-term net leverage target of about Please turn with me now to page 18 for a look at how this year's outlook continues our trajectory towards 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. In order to achieve this objective, we've increased capital spending to 10% of revenues in order to fund a new level of product innovation. Our second goal is to maintain durable profit margins as we make the investment to achieve our primary goal. We are committed to providing the resources to drive product innovation in all of our businesses while keeping our margins in the low 40s. The third objective we outlined was to become an attractive free cash flow engine, which we've progressed by delivering a conversion on adjusted EBITDA well above 40%. And finally, we remain committed to allocate our capital in a disciplined manner. We're now operating at a leverage level of less than four terms, providing us the ability to execute bolt-on M&A to catalyze growth, as we did last month with the announcement of the global Q acquisition in our LSFH segment. I want to thank all of you for listening in this morning. I'm now going to turn the call back over to Jaquita to take your questions. And as a reminder, please limit yourself to one question and then return to the Q for any questions. Jaquita, please go ahead.