Clarivate Plc

Next time, I'd like to welcome you to the Clarivate Q1 2025 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star, follow the number one on your telephone keypad. If you'd like to withdraw your question, press star once again. Thank you. I would like to now turn the call over to Mark Donahue, VP Investor Relations.

Thank you, Karen. Good morning, everyone, and thank you for joining us for Clarivate's first quarter 2025 earnings conference call. As a reminder, this conference call is being recorded and webcast and is copyrighted property of Clarivate. Any rebroadcast of this information in whole or in part without prior rating extent of Clarivate is prohibited. Company earnings call presentation is available on the Investor Relations section of the company's website. During our call, we may make certain forward-looking statements within the meetings of the applicable securities laws. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance, or achievements of the business or development 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 of performance, county, and county-based inquiries, and clarivates, and filing with the SEC and on the company's website. Our discussion will include non-GAAP measures or adjusted numbers. Clarivate believes non-GAAP results are useful in order to enhance understanding of wrong bearings, operating performance, what they are supplemented to and should not be considered in relation from or as a substitute for GAAP financial measures. Reconciliation of these measures to GAAP measures are available in our earnings release and supplemental presentation on our website. With me today are Mahdi Shentzadeh, Chief Executive Officer, and Jonathan Collins, Chief Financial Officer. After our prepared remarks, we'll open up the call to your questions. And with that, it's

a pleasure to turn the call over to Mahdi. So good morning everyone, and thank you for joining us. I'd like to start by thanking our colleagues around the world. Over the past six months, Clarivate has been undergoing transformation to optimize revenue, improve sales execution, and accelerate innovation. I'm proud and impressed by the dedication of our global team members as they rise to the occasion. Since implementing our value creation plan and shifting to more subscription-centric model, we are moving faster to deliver product innovation and sales execution. This is evident by our improved Q1 performance. Organic ACV grew sequentially from last year's fourth quarter, driven by an improvement in the subscription book due to higher renewal rates and new business wins. Total organic revenue in the first quarter grew for the first time in more than a year, and recurring organic revenue grew nearly 1%. The new rates across our subscription base also improved over the last year first quarter by a percentage point. The mix of recurring revenue to total revenue is now 83%, an improvement of 200 basis points compared to last year first quarter. Adjusted EBITDA margin increased more than a percentage point due to internal cost efficiency. Free cash flow continues to be strong as we generated $110 million. We performed well in the first quarter, and we are reaffirming our full year 2025 outlook. Today, I'd like to highlight three takeaways from the quarter. One, our offering continues to be mission critical for our customers around the world and an integrated part of research needs and workflow for users. Two, our solutions are competitive advantage and are translating into new logo wins and expansion within our existing customer base. Three, our value creation plan is on track despite the volatile macro environment as we continue to effectively execute our long-term strategy. On the call today, I will expand on each of these takeaways, and Jonathan will then cover the financial results in more detail. Across our segments, we are seeing some favorable trends including sequential acceleration in ATV growth and improvement renewal rates and new AI features utilization in key products. Over 3,000 customers across more than 90 countries are actively using Clarivate's AI-powered research assistant to enhance their research, learning, and library management. In A&G, we are seeing early success in our new wave of science commercial model, which has led to customers extending annual renewals into multi-year deals totaling over $80 million. Our sales team is also making progress with new wins in developing markets in Asia and Latin America. I want to address the recent events involving the U.S. government funding. We mentioned on the February earnings call that these sales represent a small portion of our total revenues. Specifically, less than 3% of our revenue is directly from the U.S. federal government. We also note that some portion of A&G's segment revenue flow indirectly from the U.S. government funding. We have completed a review, we have completed a revenue risk analysis for all U.S. government accounts as well as indirect risk through universities and state systems that might be impacted by future funding decisions. This includes speaking to our customer advisory groups. Based on this analysis, we believe the current risk is contained within our guidance range. In our IP patent annuity business, we are pleased to see a return to growth as organic products. Our revenue growth in the first quarter was 5% in the first quarter due to higher volumes. We are also pleased that the improvement made to the Derwent platform, including AI-powered search, shows early signs of strong user adoption with excellent customer feedback. In the first quarter, the launch of the new search capabilities within Derwent has driven a double-digit increase in search volume for the alpha cohort compared to the same period for the prior year. Finally, during the first quarter, the life science and health segment secured a cross-segment -million-dollar renewal and expansion with the Brazilian Academic Consortium. This was an exciting win that underscores the opportunities to expand our relationship with customers by collaborating across segments and touch more on this win in a moment. Additionally, subscription renewal rates in life science and health improved to 90% in the fourth quarter, an increase of C percentage point over the prior year. Next, I'd like to highlight key wins from the quarter across our segments that speak to our progress, executing our prescription-first strategy, strengthening our customer success, and sales execution.

First,

we signed a new strategic -a-service deal with the British Library, one of the largest most prestigious libraries in the world, which features more than 170 million printed books, manuscripts, sound recordings, maps, and digital archives. We have enjoyed a decades-long partnership with the British Library, and this award reflects our success in building deep relationships and expanding them over time by delivering solutions that help libraries achieve their goals. We will be working closely with the British Library to implement Alma and Primo as the next-generation service platform and patron interface. This is effectively a near-pitch system for the lobby, which will be used by hundreds of end-users on a daily basis, and a search system used by hundreds of thousands of patrons. The British Library will be the 43rd national and state library in the world to adopt Alma, our flagship library management system. This quarter, we also secured a significant expansion of long-term customer relationships with CAPES, the Brazilian Foundation for Coordination and Improvement of Higher Education. CAPES serves over 400 higher education research institutions across Brazil. This multi-year agreement is one of the largest subscription contracts we have signed in years. It is evidence that our subscription first strategy is working. In addition, this contract is cross-segment evidence of opportunities available to us to cross-tell across the business units. The consortium has continued to invest in more A&G, life science, and IT solutions, including Cortellis, Derwent, and Journal Citation Reports. Turning to slide 9, the strength of the first quarter is due to continued execution of our Value Creation Plan. As a reminder, our first pillar focuses on business model optimization and increasing the subscription and reoccurring revenue mix. As part of business model optimization, we launched an e-book subscription platform, our new DRG Fusion Real World Data subscription offering. While still early, there has been a positive interest in this platform, and we have signed the first handful of contracts for both of these new offerings. And as I mentioned earlier in my remarks, we have started to see an increase in recurring revenue mix, which grew to 83% in the first quarter compared to 81% last year. We expect this mix to continue to improve as we focus on our subscription first model. Based on customer feedback, we have extended the timeframe of the book's transition by six months. Our second pillar focuses on sales execution. The wins we talked about earlier with the British Library and Brazil are a terrific proof point of the actions to improve our sales leadership and processes. This action has also led to improvement in our organic ACV and retention rate. The third pillar involves accelerated product innovation. On page 10, you can see we have achieved several recent milestones with more to come in 2025. Over the past six months, we have launched AI-powered features, encompassing patent search for Derwent and new subscription-based platforms, including ProQuest eBooks, ProQuest Digital Collections, and DRG Fusion. We have a few upcoming product launch milestones in the second quarter with a focus on leveraging AI to deliver enhanced user experiences. This includes the release of eBooks Central AI-powered research assistant and enhanced AI-powered search functionality in Cortelis. This innovation enhances our competitive advantage. There is a significant excitement in the industry around the deployment of AI-enabled agents to enhance value for customers. I am pleased to share that in the second half of this year, we will be incorporating agentic AI into solutions across our segments. For example, in Q2, we are introducing AI agents in Web of Science for literature review capabilities, which helps simplify what is often a labor incentive and time-consuming process. Importantly, we are continuing to evaluate strategic alternatives to unlock value. We have engaged with our advisors to analyze options to maximize shareholder value. We will provide updates on this when appropriate. I am very pleased with the first quarter results and the progress we are making in implementing the DCP. I look forward to updating you on future calls. And with that, I will turn it over to Jonathan. Jonathan, please.

Thank you, Mahdi. Slide 12 is an overview of our first quarter financial results compared with the same period from the prior year. Q1 revenue was $594 million. The first quarter change was largely inorganic as a result of the ScholarOne and ValleyPat divestitures, the Book's business disposal, and a stronger U.S. dollar as the business returned to growth organically. The first quarter net loss was $104 million. The change compared to the prior year was largely attributed to higher restructuring expense associated with the implementation of the Value Creation Plan. Adjusted diluted EPS, which excludes items like restructuring, was $0.14, flat versus the same period last year. Operating cash flow was $171 million in the quarter. The change compared to last year is almost entirely driven by slightly higher one-time cost associated with the Value Creation Plan. Please turn the screen out of page 13 for a closer look at the drivers of the first quarter top and bottom line changes from the prior year. I'm pleased to share this morning that we accelerated our profit margins by more than a percentage point in the first quarter as the business returned to organic growth and we managed our cost structure. This was driven by four primary factors. First, while last year our recurring organic growth was essentially flat, in the first quarter of this year it accelerated to nearly 1% as our patent renewal business, the primary component of our reoccurring revenue type, returned to healthy volume growth. Careful operating expense management amplified the $2 million of total organic growth, which includes the transactional revenue type, resulting in a $4 million increase in adjusted EBITDA. Second, during the first quarter, we began to experience the inorganic impact of the businesses we are disposing as a part of the Value Creation Plan. The top line change of $7 million was almost entirely attributed to the books business as there was a negligible impact in the digital collections and real-world data product lines. We're actively managing our cost structure and as a result the profit impact was insignificant. Third, similar to the fourth quarter of last year, we continued to see the inorganic impact of the ScholarOne and ValleyPat divestitures. And fourth, while for most of the first quarter the US dollar was stronger against a basket of foreign currencies, namely the Euro and Pound, which caused the foreign exchange translation headwind on the top line, late in the quarter the dollar weakened driving transactional gains resulting in a slight benefit to the bottom line. Please turn with me now to page 14 to step through the conversion from adjusted EBITDA to free cash flow. Free cash flow was $110 million in the first quarter, essentially unchanged compared to the same period last year. We incurred $23 million of one-time cost, which were largely restructuring related outflows associated with the implementation of the Value Creation Plan and were slightly higher than the same period last year. Cash interest was $33 million and was slightly lower than Q1 of last year as we recognized the benefit associated with the $200 million of debt we repaid last year. These outflows from adjusted EBITDA yielded operating cash flow of $171 million in the first quarter and after capital spending of $61 million, which was slightly lower than last year, delivered free cash flow of $110 million at a conversion of 47% on adjusted EBITDA, which is in line with Q1 of 2024. In the first quarter, we used nearly half of the free cash flow we generated, $50 million, to repurchase another 11.7 million shares of common stock. Please turn with me now to page 15 for a reminder of our full-year financial outlook for this year, which remains entirely unchanged from our last earnings call in February. This morning, we are reiterating the guidance ranges for all financial metrics. Beginning at the top of the page, we expect our annual contract value to accelerate by approximately 60 basis points to .5% at the midpoint of the range as we begin to recognize the benefits of our investments in product innovation. We've made good progress on this in the first quarter, where we delivered half of this acceleration, about 30 basis points. Recurring organic growth will likely remain flat this year at the midpoint of our range. As a reminder, the organic growth improvement associated with the strategic disposals will affect the transactional order type, which is excluded from this metric. We anticipate revenue will approximate $2.34 billion at the midpoint of the range due to the strategic disposals, the divestitures last year, and a stronger U.S. dollar, which has weakened recently, but given the volatility, we've maintained our outlook, which remains conservative in this respect. As a result of the strategic disposals, we expect our recurring revenue mix will improve by about 5 percentage points from 80 to 85% this year, which will improve predictability and profit margins going forward. Moving down the page, we expect adjusted EBITDA on the range of $940 million to $1 billion, and to maintain our profit margin of .5% due to aggressive cost actions. We anticipate diluted adjusted EPS between $0.60 and $0.70, as the inorganic driven change in adjusted EBITDA, which I'll detail on the next page, will be partially offset by lower interest expense, as well as the benefit of a lower share count resulting from last year's and the first quarter's stock repurchases. And finally, at the bottom of the page, we anticipate free cash flow of about $340 million at the midpoint of the range, as the adjusted EBITDA change will be largely offset by improved conversion from lower interest, working capital, and capital spending. Please turn with me now to page 16 for a reminder of the full year top and bottom line changes we are expecting compared to last year. The expected changes in revenue and adjusted EBITDA this year compared to last year are largely driven by three inorganic factors, and we're aggressively managing our cost structure to maintain our profit margin at about 41.5%. First, the strategic disposals are expected to lower revenue this year by approximately $140 million, but we're implementing $100 million of operating cost actions, which yield a profit impact of about $40 million. We expect the remaining $60 million revenue reduction will take place next year and will have a small impact on profit. Our revenue guidance range is intended to accommodate for the potential variability in the rate of decline of this revenue stream. Second, the divestitures of both ValleyPat and ScholarOne last year will lower revenue by $40 million and profit by $20 million. And finally, we conservatively anticipate a $25 million foreign exchange translation headwind on the top line and a headwind of $10 million on the bottom line given the recent volatility of the US dollar against other foreign currencies. These reductions to adjusted EBITDA will be largely mitigated in free cash flow, so let's turn to page 17 to step through the main drivers. One-time costs are expected to remain flat this year as we invest to achieve the cost efficiencies associated with the VC. We do expect cash interest to improve by about $20 million compared to last year, caused by the debt we prepaid in the fourth quarter and the outlook for base rates via the forward curve. Cash taxes are expected to remain in line with last year. We anticipate the change in working capital this year will be negligible, which will represent an improvement over last year of about $20 million. And while we remain committed to investing in product innovation, the strategic disposals and cost efficiencies will improve capital spending by about $35 million. The net impact of these changes is free cash flow of $340 million at the midpoint of the range and will result in an improvement in the conversion on adjusted EBITDA of about 1%. From a capital allocation perspective, we continue to have the flexibility between share repurchases and deleveraging. In closing, we continue to believe we have a strong foundation to build upon with -in-class data and workflow assets that we deliver as a trusted provider through a blue-chip customer base underpinned by robust free cash flow and powered by a talented team of 12,000 colleagues around the world. As Mahdi highlighted at the outset of the call, we're off to a solid start in executing against the VCP based on our first quarter results, but we remain cautious against the backdrop of a challenging and volatile macroeconomic environment, which we're monitoring carefully. It's worth noting that the recurring and mission-critical nature of our products and services positions us well on a relative basis in periods of uncertainty. I'd like to finish by thanking all of you for listening in this morning. I'm now going to turn the call back over to Karen to take your questions. And as a reminder, please limit yourself to one question and then return to the queue for any additional. Karen, please go ahead.

Thank you. I'd just like to remind everyone to ask a question, press star, then the number one on your telephone keypad. We'll pause just for a moment to compile the Q&A. And your first question comes from the line of Tori Kaplan of Morgan Stanley. Please go ahead.

Hey, thanks. This is Greg Parishon for Tony Kaplan. Thanks for taking our question and congrats on a very strong quarter. I'm going to start with maybe double clicking on A&G. I appreciate the color you gave on the government funding exposure. You said you talked to some customer advisory groups on the indirect impact from funding cuts and some of the pressure there. Can you talk about some of those conversations? Do they expect to tighten their budget and how cautious are they at the moment? And then you mentioned risk being contained there within the guidance range. But do you expect to see further deceleration in A&G? Thanks.

Maybe I'll start at NNS Johnson and complete the festival. We've always been enjoying a very collaborative discussion and relationship with our customers worldwide. We have an advisory group in each and every region. We've been talking to them and talking to them in details about what they expect and what the market is going through. Our business in Q1 in A&G, we hardly had any impact from the ongoing government actions. So we feel good about it. There's a minimal impact on the business so far. We've also managed to extend about half of the government contracts already. We believe that we're monitoring the risk. We've been, and just to remind ourselves, I've been in the academic environment for over 20 years. I've seen ups and downs. We managed to go through those changes. I'm pretty optimistic about the future of research in academia. Maybe Jonathan, want to talk further about the analysis that we've done?

Yeah, we really looked at this on a few levels, as Mahdi mentioned, and covered very specifically the direct contracts we have with the federal government. We've quantified what we think the potential impact there is with nearly half of the business already renewing so far this year. We looked at it on two additional levels. The next level is we looked at working with customers, impacts they could see based on funding they receive from specific federal agencies. So we've walked through and identified what we think the potential impacts could be for that. And then finally, a third layer we looked at is the overall impact of the grant funding environment and how that trickles down to academic research institutions. Talking with customers, we've looked at the estimated impact of what that could be. When we aggregate the direct and the indirect on both of those levels, as Mahdi indicated, we believe any potential impact is reflected in the guidance range. But we're off to a very good start in ANG, very strong renewal rate in the mid-90s, comparable with where we started last year. And a good line of sight with the renewals that are starting to...renewal notices for the summer have already gone out and we're already working with customers and seeing some of those come back. So that's how we've completed the analysis and our sense of what the impact will be. Great, thank you.

The next question comes from the line of Ashish Sabhadra of RBC Capital Markets. Please go ahead.

Hi, good morning. This is David Pajon for Ashish. Thanks for taking our questions and congrats on a really nice quarter here. I was wondering if you could comment on the recent Reuters article that was mentioning some PE interest for the IP segment. If you had any comments there, that would be helpful. Thank you.

Thanks for the question. We don't have any specific comments on that. As Mahdi indicated in the prepared remarks, we have continued to make progress on evaluating the strategic options, working very closely with our advisors. And once we start to get some clarity or have an update to provide, we'll be sure to share that. So not a lot additional to provide on that at this point, but appreciate the question. Thank you.

Just a reminder to ask a question, please press star followed by the number one on your telephone keypad. The next question comes from Owen Lau of Oppenheimer. Owen, you may ask your question.

Hi, this is Guru on for Owen and thanks a lot for taking our questions. I want to go back to the IP renewal volumes, which were kind of strong this quarter. Can you maybe walk us through the drivers behind the higher than expected renewal volumes? And also other than just the volumes, are there any other drivers behind the .3% increase in the organic pre-equiring revenues? Thanks.

Yeah, thank you for the question, Guru. So as you indicated, we saw mid single digit growth in the reoccurring revenue type. The vast majority of those more than 100 million of revenues in the quarter are associated with patent and trademark renewals. We did see a nice improvement in underlying volume in the quarter that drove most of the improvement. There were a couple of timing items that push that up just a little bit, but most of the improvement that we saw during the quarter was related to volumes. We indicated on the last call that based on patent enforce data and the lag that that takes to get through to renewals, that we're hopeful that we'd start to see some recovery in that market. And we are, we're encouraged by the volume increase that we saw in the first quarter. So primary driver is reasonable return to healthy growth. It was aided a little bit by some timing items, but positive signs there on the IP renewal business.

Thank you.

Great. Our next question comes from the line of Shlomo Rausenbaum from Stryfall. You may begin.

Hi, this is Adan for Shlomo. How much of Kermit's revenue came from large universities where the U.S. government has frozen or canceled some funding?

Yeah, so with respect to the business, obviously, A&G is our largest segment and the majority of the business that we do in that segment is with higher education or academic institutions. As we touched on earlier and we've indicated before, it's less than half of our business in the A&G segment that is here in the U.S. to give some additional dimensioning. And within that, we've already seen a meaningful portion of that renew this year. So that risk analysis that Mahdi referenced in his prepared remarks and we just gave some additional color on focuses on the balance of what we expect to see and to come in through this year. And we went through that process with customers and that's what's giving us the confidence that any potential impact that we'll see in the balance of the year will be contained within the guidance range.

Thank you for the question.

Our next question comes from the line of George Tong of Goldman Sachs. You may ask your question.

Hi, thanks. Good morning. You continue to expect transactional revenue to be down on a full year basis. Can you talk a little bit more about what you expect transactional revenue to inflict a positive growth and what the catalysts should be?

Yeah, thank you for the question, George. So as you highlighted, we saw transactional revenues on an organic basis down a couple percentage points. So that excludes the businesses that we are disposing of it ultimately will go to zero. So you're right, we are de-emphasizing that part of the business. We improved the revenue mix, the recurring over the total revenues by two percentage points. It's our view that that is a part of the business that will continue to be a bit softer, particularly in the current macro environment. So we are heavily focused on accelerating the ACV growth. We're encouraged by the progress we've made on the reoccurring order type, which is leading to that improved performance in recurring organic growth in Q1. So our expectations for the transactional business remain relatively conservative for the balance of this year as we continue to focus on what's really going to drive performance, the recurring revenues.

Very helpful. Thank you.

And our final question comes from the line of surrender signed of Jeffries. You may ask your question.

Thank you. Maddie, could you perhaps talk about the changes that you've made to the sales incentive model and how quickly and if there's any kind of a reset there in how big those changes are, I guess.

So thank you for the question. I am very proud of the changes and I'm pleased with the changes we've done so far with the to the sales organization. I'll talk about a few of them. First of all, we've upgraded our leadership in three different segments. We've done, we've implemented the new as vice president for sales in IP. We've done some changes, including production, new vice president in the A&G. And we also done something in in life science as well. So changes across the three segments, sales organization. We also empowered and enlarged and changed the customer success organization. And this has been reflected by the improved renewal rate going by one percentage point, which we pay extra attention to the success to the success to customer success organization. And we also part of the rather question plan, the AI enhancement that we're doing is helping us both on the retention and also in customer, new customer wins. So the acceleration innovation is helping us a lot to push our product and to return our product into a customer base. And lastly, we looked at incentive plans models across the company, just in making sure that we are rewarding the sales organization for success, rewarding them more for on the subscription we are carrying revenue growth and also some rebalancing between retaining the customers and winning you new logos and your products. So all in all, I'm very pleased with the changes we've done so far in the sales organization.

Great. Thank you. I think we have one more question.

We do. George Tong from Goldman Sachs.

Hi, thanks. Just a quick follow up question. You saw a healthy rebound to positive growth in reoccurring revenue because of patent renewals. Can you talk about how cyclical patent renewals are and if a macro slowdown could dampen patent volumes.

Yeah, thanks for the question, George. We certainly have seen over the course of the past few years that the rate at which customers choose to renew IP over longer periods of time has been quite durable, but we can see some movements quarter to quarter. And and from year to year. So there's certainly some impact there that will continue to watch carefully. And it's part of the reason that we remain cautious on the balance of the year. So to your point, we can see some movement from quarter to quarter and from year to year. But over the long term, we think that the trend is likely headed back in a healthy direction.

Got

it.

Very helpful. Thank you.

Thanks,

George. So that concludes our call. I want to thank everyone for joining us today. We look forward to speaking to you again soon. Thank you.