Clarivate Plc

Hello everyone, thank you for joining us and welcome to Clarivate's Q2 earnings conference call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. I will now hand the conference over to Mark Donohue, Head of Investor Relations at Clarivate. Please go ahead.

Thank you and good morning everyone. Thank you for joining us for the Clarivate second quarter of 2026 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 written consent of Clarivate is prohibited and the accompanying 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 meaning 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 developments in Clarivate's business to differ materially from the anticipated results, performance, achievements, or developments expressed or implied by such forward-looking statements. Information about the factors that cause actual results to differ materially from anticipated results performance can be found in Clarivate's filings 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 our ongoing operating performance, but they are a supplement to and should not be considered an isolation from or as a substitute for GAAP financial measures. Reconciliation of these measures to get measures are available on earnings release and supplemental presentation on our website. With me today are Mati Shem Tov, Chief Executive Officer, Jonathan Collins, Chief Financial Officer, and Michael Easton, Chief Accounting 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 Mati.

Good morning, everyone, and thank you for joining us. The key messages today are straightforward. We are delivering on our commitment, and now we have a building block in place to accelerate organic growth. During the quarter, we advanced our AI innovation roadmap, grew organic ACV year over year, maintained disciplined cost management, and strengthened our balance sheet through de-levering. These actions will deliver further long-term value to shareholders. In the second quarter, we drove continued progress across the business. Organic ACV growth improved to 1.5% and profit margin has expanded to more than 42%. At the segment level, academia and government and life sciences and health each delivered 2% organic ACV growth. A sign of continued progress here is the shift from transactional to recurring revenue. We expect to see this continue in coming quarter as we focus on subscription revenue. In the intellectual property segment, reoccurring organic revenue improved to flat in the quarter, and we continue to expect a return to growth in the second half. We advanced key innovation milestones, including introducing two new agentic AI products, Nexus Connect and IP1, which I will discuss in greater detail later. and in early July, we announced the agreement to sell life science and health segment, sharpening our focus on AI driven transformative intelligence and enhancing our financial profile. I will also share more here in a minute. These results reflect the steady execution of the value creation plan, which we launched in late 2024. We are moving forward with urgency. Our progress is clear. We are investing wisely, operating with more discipline and directing resources towards the highest value growth opportunities. What differentiates Clarivate in this industry is our ability to apply AI to highly curated proprietary datasets that have been built and refined over decades. As a result, we believe that we are on a path towards accelerating our growth rate over the next couple of years. Turning to ANG segment. Our strategy is to be the trusted layer between AI and research. That means using Clarivate's proprietary data, domain expertise, and workflow solution to help institutions make better decisions with confidence and transparency. This quarter, we launch Web of Science Research Intelligence globally. This is an AI native platform for research strategy, impact, and funding. It is shaped by more than 50 development partners and early adopters across 20 countries. Its insights are grounded in publisher-neutral web of science data, and it provides full editorial provenance. It has already generated a multi-million dollar ACV pipeline, and we have secured 77 paying customers to date. This is a great example of incremental pipeline resulting from new AI-driven products. We also introduced Nexus Connect, an AI-native gateway that provides a single university connector within AI chat agents such as ChatGPT and Cloud. It allows students and researchers to access scholarly resources and services seamlessly integrating with various AI platforms to enhance the research experience. The important point is that we are embedding Clarivate proprietary intelligence into existing research workflow for the academic community. It is leading to new revenue streams. We are applying the same innovation approach to the IP segment. We announced the development of IP1, A unified AI platform that combines purpose-built AI agents with private, trusted proprietary assets and unique expertise. This platform's agentic AI capabilities allow IP professionals to efficiently solve both patent and trademark intelligence questions as well as simplify daily complex workflow across the entire IP lifecycle. IP1 is being developed in close collaboration with leading corporate IP teams and law firms. We look forward to discussing this in coming quarters. We are seeing much market validation for our IP innovation. Recently, RiskMark was named the best AI tool for lawyers at the 2026 CODI Awards. It was recognized for its use of predictive and generative AI to lower trademark risk assessment from hours to minutes. This marks the product's second industry recognition following its 2025 LegalTech Predictive AI Solution of the Year Award. In June, we were pleased to welcome Simon Webster as president of our IP segment. Simon is a proven leader in the global IP ecosystem with more than two decades of experience, including as CEO of CPA Global, which Clivate acquired in late 2020. During his time at CPA, the organization delivered compounded annual organic growth in the mid single digits. Our priorities in IP are to improve customer focus and retention across annuities and software, increase commercial intensity and accelerate AI innovation supported by our proprietary data assets. Importantly, our IP business has meaningful differentiators, scale, trusted relationship with leading law firms and blue-chip corporate IP teams, a strong reoccurring annuity and renewal engine, and differentiated proprietary content. We believe this strength combined with disciplined execution under Simon's guidance position IP to improve its performance over time. As mentioned before, in early July, we announced an agreement to sell our life science and health segment to Alteros. This marked an important step in our portfolio rationalization effort and is a clear example of the BCP in action. This transaction creates a more focused company as a subscription-first provider, simplifying our operating model and allowing us to make more targeted investments in organic growth. It also improves the quality of Clarivate's revenue base. On a pro forma basis, recurring revenue mix increases from 89% to approximately 92%, improving predictability, retention, and cash flow visibility. We plan to use the net proceeds to reduce debt, which extend our average maturity, strengthen our balance sheet, and enhances financial flexibility, enabling further shareholder value creation. Let me bring to your attention slide 12. I will walk you through the progress we have made since launching the value creation plan in late 2024. It starts with business model optimization. We have meaningfully shifted our revenue towards recurring subscription-based model. This gives us greater visibility, greater predictability, and higher quality base to build on. We have also improved our go-to-market. By sharpening how we sell and how we serve customers, we have improved the momentum of our recurring business and set a stronger foundation for future bookings. At the same time, we have accelerated our AI innovation. Across the business, we have a robust and growing portfolio of new AI-powered products, deepening the value we deliver to customers and reinforcing our competitive position. We have rationalized the portfolio. We have taken deliberate action to divest non-core assets, announcing several disposals so that our capital and our attention are concentrated on our two major markets. Which brings me to what is next, accelerating organic growth. With a more focused portfolio, a higher quality recurring revenue base, a stronger go-to-market engine, exciting new product, and a healthier balance sheet, we expect sequential improvement in recurring organic growth in the second half of 2026 and continued momentum into 2027. We are investing in the right opportunities and we are more confident than ever in our ability to execute, accelerate organic growth and deliver long-term value to shareholders. I will turn it over to Jonathan to discuss this quarter results in more detail.

Thank you, Mati. Slide 14 is an overview of our second quarter and first half results compared with the same periods last year. Q2 revenue was $587 million, bringing H1 to nearly $1.2 billion. The change in the quarter over the prior year was due to the inorganic disposals, lower organic transactional revenues, and a modest foreign exchange impact partially offset by organic recurring revenue growth. The second quarter net loss was $269 million. The change over the prior year was driven entirely by the non-cash impairment charge triggered by the definitive agreement we reached to divest the LSNH segment. Adjusted diluted EPS in the second quarter was up a cent over the prior year to 19 cents, bringing the first half to 38 cents, which is a 19% increase over the same period last year. Operating cash flow was 99 million in the quarter. The change compared to last year was driven by lower adjusted EBITDA from the disposals and foreign exchange as lower interest expense was offset by higher working capital requirements, due to timing of receipts and disbursements. Please turn with me now to page 15 for a closer look at the drivers of the second quarter top and bottom line changes from the prior year. The changes over the prior year were driven by three primary factors. First, organic revenues declined by $9 million as recurring growth of about a half a percent only partially offset lower transactional revenues. We mitigated the revenue impact through cost efficiencies, leaving a negligible impact to profits. Second, the businesses we are disposing decreased revenue by $24 million, but was largely offset by cost reductions due to the wind downs, yielding a net $7 million reduction in adjusted EBITDA. And finally, while the top line was essentially unchanged due to foreign exchange, we experienced an adjusted EBITDA headwind of $7 million due to the appreciation of a basket of foreign currencies compared to the U.S. dollar. In total, disciplined cost management allowed us to maintain our adjusted EBITDA margin over the same period last year, despite the revenue decline. Please turn with me now to page 16 for the same analysis for the first half. While organic revenues are down 5 million over last year, cost discipline has completely mitigated the impact and contributed 8 million to adjusted EBITDA. The strategic disposals have lowered revenue by 49 million, but have expanded profit margins, yielding only a 10 million reduction in adjusted EBITDA. For the comparable period in the prior year, the US dollar was weaker against the basket of foreign currencies, which caused a foreign exchange tailwind of $12 million on the top line, but resulted in a profit headwind of $5 million due to transaction gains last year that did not recur this year. Overall, the strategic disposals and disciplined cost management drove margin expansion of nearly a full percentage point in the first half of the year, an improving trend we expect to continue in the second half of the year. Please turn with me now to page 17 to see how our adjusted EBITDA converted to free cash flow and how we continue to allocate our capital in a disciplined manner to further strengthen the balance sheet. Free cash flow was $44 million in the second quarter, which was $6 million lower than the same period last year. The change was due to higher working capital, largely due to the timing of collections and payments, partially offset by lower interest and capital spending. We use free cash flow and excess cash on hand to repurchase another $75 million of bonds due in 28 at a modest discount of about 3%, bringing the first half debt reduction to $218 million. Please turn with me now to page 18 for a look at our full year financial guidance ranges, which remain unchanged from the guidance we initially provided in February, affirmed in April, and then refined a few weeks ago when we announced the agreement to sell the LSNH site. Today, we're further refining our indications within these ranges, largely to reflect the impact associated with the divestiture of the LSNH business, which we expect to close by the end of the year. For modeling purposes, rather than estimating the closing date, we've assumed the transaction will close at year end. If it closes prior, we will modify the guidance accordingly at the time to reflect the impact. We now expect our organic annual contract value to be in the lower half of the range entirely due to the fact that LS&H will be excluded from this metric in the second half as it will be moved to discontinued operations. Importantly, we expect A&G to approach 3% and the IP segment to return to growth by year end to blend to about 2.25% growth. We still expect recurring organic growth of about 1.5% near the midpoint of our range, which remains an improvement of nearly a percentage point over last year. Our revenue is now expected just below the midpoint of the range at $2.35 billion to entirely to foreign exchange, and our organic recurring revenue mix will be above the high end of the original range at about 92% as LS&H moves to discops. Adjusted EBITDA should remain at just over $1 billion for a profit margin of nearly 43% at the midpoint of the range. We still expect adjusted diluted EPS will grow about 9% at the midpoint of the range to 75 cents. Finally, free cash flow is now likely to be at the low end of the range as we have contemplated the full transaction cost to close the LSNH divestiture and have also incorporated additional restructuring costs to achieve incremental cost savings to recognize the full benefit next year. Please turn with me now to page 19 for a reminder of the full year top and bottom line changes we're expecting compared to last year. We continue to expect adjusted EBITDA margin will expand by about 200 basis points, driven by a return to organic growth, continued cost discipline, and completion of the strategic disposals. We anticipate organic growth of about 1%, led by subscription revenue growth from continued ACV acceleration. We have plans in place to achieve cost efficiencies to fully offset inflation, driving 25 million of profit growth. This will account for about a third of the profit margin expansion. The inorganic disposals are expected to lower revenue this year by approximately 125 million, and we are reducing operating expenses by about 100 million, which yields a profit impact of about 25 million, delivering the remaining two-thirds of the profit margin expansion. As a reminder, our guidance assumes we will own the Allison H. business until year end, and if the transaction closes earlier, a revision to our guidance will be made at that time. We now anticipate foreign exchange will be essentially flat compared to last year, comprising the only change to our revenue and adjusted EBITDA indication within their respective ranges. Please turn with me now to page 20 to step through the expected seasonality of our revenue and profits this year, which we have refined based on our first half results. We continue to anticipate the business will accelerate organically in the second half of the year, led by improved retention and new business sales. The organic growth, further cost efficiencies, and the benefit of the strategic disposals should inflect profit margins as we move through the balance of the year. Revenue should be seasonally lower in Q3 and then higher in Q4 due to the normal cadence of patent and trademark renewals and transactional revenues. Please turn with me now to page 21, to review how we expect the more than $1 billion of adjusted EBITDA will convert to free cash flow and how we plan to allocate this capital alongside the proceeds from the LSNH divestiture to reduce our debt this year by about $900 million. Due to the transaction costs we will incur at the closing of the LSNH divestiture, we now expect free cash flow will be flat compared to last year, but the vast majority of the one-time cost of nearly $70 million will not recur next year. We continue to expect cash interest will improve by about $20 million over last year due to the debt we repaid last year and this year. Cash taxes are still expected to be $5 to $10 million higher than last year, due largely to the new corporate tax in Jersey. We anticipate the change in working capital this year will be a use of approximately $25 million, primarily due to incentive compensation payments. We're also expecting a $10 million benefit associated with lower impaired contractual costs reflected on the other row. and while we remain committed to investing in product innovation, the disposals and cost efficiencies will improve capital spending by about 20 million. From a capital allocation perspective, we plan to use the free cash flow we generate in the second half of the year and the proceeds from the LSNH divestiture to retire nodes due in the next few years. I will now turn the call back over to Madi for some closing remarks before Q&A.

Before we transition to Q&A, I want to touch on our other announcement today. Michael Easton has been appointed as our next chief financial officer effective August 8th. Many of you already know Michael. He serves as our chief accounting officer and he's a member of our senior leadership team. He is well regarded and brings more than 25 years of finance and leadership experience. Michael has a deep understanding of our business and has been key to strengthening financial discipline, governance, and operational execution across Clarivate. He will be focused on accelerating growth, improving profitability, strengthening free cash flow generation, and maintaining disciplined capital allocation. I want to thank Jonathan for his leadership. He has made many meaningful contributions to our company over the years. He oversaw the successful integration of the three acquisitions that today comprise Clarivate, setting up the segment operating structure we have today and transforming the finance organization. Personally, in the last two years, he has been an important partner to me in advancing the VCP, working to improve profitability and strengthening our balance sheet. I wish Jonathan every success in the future. Operator, we will turn to Q&A now.

We will begin the question and answer session now. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you're muted locally, please remember to unmute your device. Please stand by now while we compile the Q&A roster. Your first question comes from the line of Scott Wurzel with Wolf Research. Your line is open. Please go ahead.

Hey, guys. Good morning and thank you for taking my questions. Just wanted to touch on you guys cited some timing around renewals that may have impacted the growth during the quarter. Is anything around that due to longer sales cycles and anything we should expect to persist at all in the second half of the year?

Hey, good morning, Scott. Thanks for the question. We believe that our results for Q2 and the first half are in line with our original expectations. If I remind everyone, we pointed the equivalent of page 20 in Q1 indicated we expected to see a pullback in recurring organic growth in Q2. Subscriptions were a part of that. So ACV, we continue to make progress over the last six quarters. It's not always going to be linear, but we continue to see strong renewal rates and good opportunities for the new products to convert to sales. So the timing of renewals is something we see in the business from time to time. So we don't think it's an elongation of the renewal cycle and the Organic ACV growth of about a percent and a half in the end of June is generally in line with our first half organic growth versus subscription revenues at about 1.2%. So we're generally where we expected. And as we indicate also on page 20 in this quarter's tech, we expect the ACV and the organic recurring revenue to inflect in the second half of the year. We have good line of sight to that. At this point in the year, The A&G business as of the end of July has 75% of this year's business in the bag. Very similar to what we saw at this point last year. The fall is an important renewal cycle, but we're already well on our way and we have good line of sight for the second half of the year. Thanks for the question, Scott.

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

Thank you. Thanks so much. I was hoping you could talk more about the MCP opportunity, where you think which client types are going to more gravitate towards utilizing your data over MCP, which segments, et cetera. and just how you're thinking about how it could contribute to growth. And is it included in the subscription or is there enough charge for it? And also just Jonathan, congratulations on your new opportunity. Thanks.

So I'll take this one. Thank you. Thank you, Tony. I think maybe take a broader view on the AI innovation we are doing. We are very much focused. And since I joined, since we started and also VCP. We are delivering on 19 different initiatives regarding external and new products that we are delivering. We are very, very pleased with the progress so far. We see the AI enablement of our existing product is a source for revenue for new logos, new products, and improving retention. And I think also to allow us to have some AI specific pricing for new products. So new New Revenue Generation or New Revenue Stream, for example, Web of Science Research Intelligence, definitely a revenue stream. Arma Spector, a new revenue stream. IP1, and I've been talking about and we are very excited about IP1, definitely a new revenue stream. StumbleComp, Nexus Connect, another product from ANG which involves MCP. And we see the customers in the three segments, including the life science, they want to consume our data our proprietary data so either directly to us with our UX or a new AI enabled product or using their own customers is a tendency in some the bigger customer we would like us to embed our capabilities MCP capabilities into their respective you know corporate AI product and this is why you see more of our product whether it's embedded into Anthropic, ChatGPT and other generic LLMs. By and large, a bigger customer would like to be able to embed this through MCP. Smaller customers may want to use it in our environment but this is just early days overall. We are very pleased with the momentum that we're having Thank you. Your next question comes from the line of Manav Patnak with Barclays. Your line is open. Please go ahead.

Thank you. Firstly, congratulations Jonathan and Michael both for your new roles. I just had a question on the expectation for acceleration of organic growth. I think you said sequentially 100 basis points. Can you flush that out a bit if it's different between academic and government and then the IT side as well? And I think just going into 27, I guess,

you maybe just you know is that 100 basis points for the full year as well in 27 or how we should think about that I think we are pretty positive on both segments we have a line of size and certain momentums building up in IP as IP as well we are back to recurring reoccurring flat in qt in q2 we believe that we're going to improve uh reoccurring in in the second half of the year for IPA as well with a great new momentum and he is you know here to re-mention the introduction of all the rejoining of Simon to Clavis he's been in the industry for 20 years he was kind enough always to come to come back and support us he will utilize all his IP knowledge and expertise and accelerating the progress on the IP So we do believe IP will be turned around faster with Simon in place and with the great assets and software intelligence that we have and with the AI innovation that I've mentioned. You know, I've mentioned RiskMark as a product that's won three awards and I'm also happy about IP1. IP1 is not just intelligence. IP1 is in fact an agentic environment Enriched IP professionals. Basically, we're taking a different route. So we all know about the Derwent and the other one which has been a little bit contracting. And basically, we are going to disrupt the market using both our agentic capabilities and expertise and our proprietary data. That's on the IP side. On the ANG side, Momentum is also building with the new Web of Science Research Intelligence, with a few, with a new, you know, Alma Spector and with obviously Nexus Connect and some of the new innovation coming out from the A&G product house. So optimistic on both sides.

Your next question. Your next question comes from the line of George Tong with Goldman Sachs. Your line is open. Please go ahead.

Good morning. Thank you. I wanted to dive more into transactional revenue performance. To what extent would you say the transactional revenue declines are due to industry factors versus idiosyncratic execution factors? And what gives you confidence that there's a path for transactional revenue performance to improve?

Let me start and I will end over to Jonathan. The idea that we are moving is part of my playbook or the playbook we've used in the VCB is to move away from transactions. So going into this VCB, there was certain business that we divested completely, like the one-time books, the one-time piles, the real world data. We divested this business completely. But the divestiture of life science, we're also giving away, you know, some of the life science was a little bit higher. on transactional. There's still a portion of transactional business that will stay with us and is supporting the one-time business that we have. But still within this transactional business, there are still business that we have the ambition to transform to subscription. Just one example is the spec files of Web of Science. This will gradually improve our Subscription rates going even beyond 94, 92%. I'll hand it over for Jonathan to talk about some more specifics about the quarter.

Yeah, thanks, Monty. Just a little bit of an additional color on the quarter, George. You know, the life sciences business is still in our organic results in Q2. We didn't reach the agreement until after the end of the quarter. But that business saw some headwinds in the quarter on transactional in particular. As Monty said, we are have been looking to migrate some of those things to subscription. That's a piece in it, but also we just saw some add-ons in life sciences. And the other two businesses, the business can be lumpy quarter to quarter. We knew we lapped a couple of things in Q2 in both of those businesses that were going to be a bit of an add-on, but we do expect that to ameliorate in the second half of the year. I think we have a better line of sight into that. Our full year guide does contemplate that transactional will be down slightly year over year. but I think we'll see some improvement on that in the second half. Make sure the questions are heard.

Thank you.

As a reminder, if you would like to ask a question, please press star one now to raise your hand and join the queue. Your next question comes from the line of Shlomo Rosenbaum with Stiefel. Your line is open. Please go ahead.

Hi, this is Adam on for Shlomo. Was there any client losses that might have impacted the life sciences business that drove the revenue climb in addition to the transactional movement?

Yeah, thanks for the question. No, there's nothing discrete or specific. As I mentioned, Madi talked about the fact that we've had an emphasis over the last year or so of really providing food subscription alternatives to migrate some of the transactional business away from. So certainly that is an item, but nothing specific that we would highlight on an individual basis other than just some headwinds in that area on the transactional side.

and the buyer of the Life Sciences Division knows the performance in the second quarter when they announced the deal. I just want to verify what potentially triggered it, like a MAC clause or anything like that.

No, certainly this is nothing to that level and that process is moving exactly as we would expect. We worked through the process to reach an agreement and all of the approvals that are required are customary and we expect those Thank you.

We have reached the end of the Q&A session. I would now like to turn the call back to Mati for closing remarks. Please go ahead.

As we close, I want to just repeat the key takeaways today are very, very clear. We have a building block in place to accelerate organic growth, and we will continue to deliver on our commitment Thank you for joining us.

This concludes today's call. Thank you for attending. You may now disconnect.