Clarivate Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 9, 2023

There are 12 speakers on the call.

Operator

Morning. Thank you for attending today's Clarivate Q1 2023 Earnings Conference Call. All lines will be muted during the call. I would now like to pass the conference over to your host, Mark Donahue, VP of Investor Relations with Clarivate. Thank you.

Operator

You may proceed.

Speaker 1

The call. Thank you, Joel, and good morning, everyone. Thank you for joining us the Clarivate 2023 Earnings Conference Call. With me today are Jonathan Geer, Chief Executive Officer and Jonathan Collins, Chief Financial Officer. The call.

Speaker 1

As a reminder, this conference call is being recorded and webcast the and as copyrighted property of Clarivate. Any rebroadcast of this information in whole or in part without prior written consent of Clarivate is prohibited. The call. An accompanying earnings call presentation is available on the Investor Relations section of the company's website clarivate.com. During our call, we may make certain forward looking statements within the meaning of applicable securities laws.

Speaker 1

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 the Q4 of 2018. The company's earnings call is being recorded and recorded in the Q4 of 2018. The call. Information about the factors that could cause actual results to differ materially from anticipated results or performance can be found in Clarivate's filings with the SEC and on the company's website. The call.

Speaker 1

Our discussion will include non GAAP measures or adjusted numbers, including organic revenue and adjusted EBITDA. Clarivate believes non GAAP results are useful in order to enhanced understanding of our ongoing operating performance, but they are supplement to and should not be considered in isolation from or as a substitute for GAAP financial measures. Reconciliation of these measures to GAAP measures are available in our earnings release and supplemental presentation on our website. After our prepared remarks, we'll open the call up to your questions. The call.

Speaker 1

Great. Thank you, Mark. Good morning, everyone, and thanks for joining us. The call. I'm going to start by briefly covering our Q1 results.

Speaker 1

Then I will provide an update on some key improvements and announcements as part of our commitment to accelerate our growth. The call. As we discussed at our Investor Day in March, we are driving change and investing across our segments, which will create a compounding cash generation machine for our shareholders. The call. Turning to our financial results, the Q1 was in line with our expectations.

Speaker 1

And as a result, this morning, we reaffirmed our 2023 full year outlook. The call. We continue to expect an improvement in our business throughout the year as we begin to realize the benefits of our growth initiatives and cost savings. The call. While there has been much external discussion about global economic challenges, we have not seen any impact to our outlook for the year.

Speaker 1

The call. As a reminder,

Speaker 2

our business has

Speaker 1

proven resilient during prior recessions due to the critical nature of our products and services. The call. Revenue in the Q1 was $629,000,000 down from the prior year's Q1 because of the divestiture of the MarkMonitor business the strengthening of the U. S. Dollar.

Speaker 1

Organic revenue growth as expected was essentially flat in the Q1.

Speaker 2

The We

Speaker 1

did deliver 3% subs growth, which was driven by the Academia and Government segment, including improved performance from Web of Science, the call, which I will cover in more detail shortly. The strength in our total subscription base helped to offset the difficult Q1 comparisons the quarter. Across reoccurring and transactional revenues compared to the prior year period. We delivered strong free cash flow of $168,000,000 the Q1, which was used to prepay debt, while still reinvesting in product development to accelerate growth opportunities. The call.

Speaker 1

We are seeing the initial benefit of this focus and investment in the Academia and Government segment the where we made the earliest investments into growth. I will spend the next few minutes diving deeper in the progress we are seeing in this segment. The call. We are off to a great start with Web of Science, which is starting to yield benefits from last year's investments. The call.

Speaker 1

At the end of 2021, we completely overhauled the user interface of the platform to drive ease of use and customer engagement. The call. We started to see positive development in 2022 with active usage up 78% the quarter versus the prior year. As we turn the calendar to 2023 and the heavy renewal period in the Q1, the We saw a 3 50 basis point improvement in the Web of Science renewal rate. We also delivered a 16% improvement in new subscription sales growth.

Speaker 1

The call. These two improvements in our subspace for Web of Science bode well for continued improvement financial results for the rest of the year. The call. In addition, one of the value adds we delivered recently was the creation of the preprint citation index. The This utilizes information from prepublished content to accelerate discovery for academic research.

Speaker 1

This enhancement the makes it even easier for researchers to include preprints in their existing research workflows. Thus, the Web of Science can be used as a single portal the important connections faster that's driving more customer value into this critical platform. Following the ProQuest acquisition, the call. Our teams have been working on exciting new integrations between our products to enhance value. We have integrated holdings data the from our flagship library software platform Alma into our leading research analytical tool Insights to generate custom collection management reports.

Speaker 1

The call. This allows universities to obtain unique insights into how faculty interact with publications based on published papers, citation activity and other key indicators. This also helps customers identify journals that their researchers cite the call and helps locate titles that cite their organization's research to help make purchasing decisions. This enhances value for both platforms. The call.

Speaker 1

In Q1, we announced the expansion of our journal impact factor into new content areas and journal coverage. This will increase appeal to parse the market that we currently underserved. These improvements increase the combined value proposition the and is an enabler of getting customers to add the product. Additionally, with an enhanced and improved product, there the opportunity to sell the Web of Science to corporations that are heavy investors in R and D. In the coming quarters,

Speaker 2

the call. As we accelerate

Speaker 1

investments in the IP and Life Science and Healthcare segments, I look forward to sharing details of additional areas of progress with you. The call. Our products and services are used by thousands of people daily to direct and guide the work. Put simply, we help people and organizations think forward the call. By bringing together enriched proprietary data across our three segments, we leverage the power of our insights and analytics the call to identify the world's top innovators and spot key future trends.

Speaker 1

For example, in Q1, we revealed our 2023 list of top 100 global innovators and our Drugs TO Wasp report. These are just two examples of our thought leadership programs and depth of expertise in our markets the designed to create demand and build customer advocacy to support our growth initiatives. Another exciting development in Q1 has been our the adoption of AI to enhance and value propositions of our solutions. As I'm sure you're all aware, the outputs generated by AI are the Q1 of 2019. As you can see on the bottom left, at Clarivate, we have billions of proprietary best in class data assets, the conference call, which are expertly curated and interconnected.

Speaker 1

These proprietary assets feed our machine, deep learning the call and large language models to enrich our data and power our insights, our services and our workflow solutions. The call. I'd like to share a few examples of how we are currently leveraging AI across our solutions. In academia and government, the we're using this technology to identify and remove questionable academic journals from our journal Impact Factor. The This is critical to enhancing Web of Science as the continued gold standard for academic research content.

Speaker 1

The call. In intellectual property, we are leveraging large language models to instantly translate and summarize patents. The call. We're also using image recognition and deep learning for faster and accurate classification of trademarks. The call.

Speaker 1

For example, Brand Landscape Analyzer combines AI with human expertise and Clarivate proprietary trademark and IP litigation content the call to assist clients in making informed trademark risk decisions. Specifically, the DARS IP litigation data is utilized the call to develop an automatically generated risk score, which can be used to identify which potential trademark oppositions are most likely to succeed. The call. Finally, in Life Science and Healthcare, we are drawing upon our connected data lake to generate predictors of future success the call relating to clinical trials progressions, regulatory approvals and even valuations on M and A candidates. The call.

Speaker 1

As these examples demonstrate, we are actively using AI, including large language models to ensure we provide our customers with the highest quality, the integrated public and proprietary content and insights. We strongly believe the use of generative AI represents a significant opportunity for our business to the Q3. We will accelerate our expansion into Predictive Analytics as we discussed at Investor Day, leveraging our proprietary enriched data and content.

Speaker 2

The call.

Speaker 1

The team continue to develop ways to enhance our overall offerings with generative AI and engage with our customers the call to prioritize critical use cases. I look forward to sharing more examples with you in the future. Moving on to our organization, I announced at the end of Q4, our new segment structure to drive agility, innovation and accountability. I am very pleased the We have now completed the hiring and appointment of leaders for each of our segments. Barb Weinstein, who brings more than 25 years of leadership experience, the is leading our Academia and Government segment.

Speaker 1

He previously spent 11 years with Exeliva's and ProQuest. He was initially responsible for the transformation of Ex Libris products and business to a cloud based SaaS model with the release of Alma. And later as President of Exeliv Risk, he led the organization toward a new era of growth with the launch of innovative products such as Exploro and Rapido. The call. Most recently, he was Chief Executive Officer at Taranis, an AI powered agricultural intelligence provider, the call, where he drove significant business growth and accelerated the company's AI strategy.

Speaker 1

With his vast experience in the industry, the Existing connections to customers and in-depth knowledge of our products and drive innovation bar is the ideal leader for our A and G segment. The call. Gordon Sampson, who most recently served as our Chief Product Officer, has been appointed President of the Intellectual Property segment. The quarter. Gordon has made many significant contributions to Clarabaz since joining us through the acquisition of CPIC Global in October of 2020.

Speaker 1

The call. In the last 3 years, he has held a number of executive leadership roles around the company, including leading the transformation of our APAC region the conference call and successfully bringing together our entire portfolio product portfolio with the very for the very first time as our Chief Product Officer. His experience and knowledge of both Clarivate and the IP industry is second to none. As we pivot our operating model to align with our core customers and markets, the conference call. He is perfectly placed to accelerate growth across the IP segment.

Speaker 1

Henry Levy, who I've appointed as President of the Life Sciences and Healthcare segment the call. Is a well respected life sciences expert and the author of multiple articles on drug development and technology trends. The call. Henry has an excellent track record in the industry with more than 25 years of experience helping life science companies use data the call and technology to transform their business. He joined us from Veeva Systems, a global leader in cloud software, the conference call, where he most recently served as President of Global R&D and Quality.

Speaker 1

Previously, he was Chief Commercial Officer for PPD, the call. Where he defined new models for biopharmaceutical companies to partner with contract research organizations to drive down cost and improve the speed of drug development. The call. We also spent time as a consultant leading Accenture's life sciences R and D practice. I also want to thank and acknowledge leadership of Steen Lomhold Thompson, our Chief Revenue Officer, who will be leaving us in July.

Speaker 1

Steve was instrumental in elevating our commercial and go to market processes and culture across the business. The call. I wish him all the success in his future endeavors. In addition to improving our leadership team, we recently enhanced our governance through changes to our Board of Directors. With the transition of our board composition, our board size is now 11 members compared to 14, which will help improve efficiency.

Speaker 2

The call.

Speaker 1

On behalf of the Board and myself, I wish to thank Sheryl Von Blucher, Kasse Gilles, Paula Iyer and Roxanne White for their valuable service on our Board. The call. They have been instrumental in helping to guide the company forward since its public offering a few years ago. We are very pleased to welcome Doctor. Shriram Saha to our Board.

Speaker 1

The call. Doctor. Saha is a physician scientist, pharmaceutical executive and biotech entrepreneur dedicated to discovering the and developing novel life changing medicines. He will bring a great deal of experience in the pharmaceutical and biotech industries the call, and this guidance will provide valuable insights and perspective, especially as we continue to execute on our growth strategy in the Life Sciences and Healthcare segment.

Speaker 2

The call. Before I turn the call over

Speaker 1

to Jonathan Collins, I want to update you on one of our near term financial initiatives, which we outlined at our Investor Day in March. The call. We are generating strong cash flow and currently expect to deliver between $450,000,000 $550,000,000 of cash this year. The call. At our Investor Day, we discussed the importance of getting our leverage level to where it needs to be, under 4 times net leverage this year the past under 3 turns by 2025.

Speaker 1

In the Q1, we prepaid $125,000,000 towards the term loan B, the call, which creates a clear path to achieve our 2023 net leverage objectives. Importantly, this will not impact our ability to invest in R and D the call to drive greater performance across our business. In closing, I want to thank my colleagues for their dedication, hard work and the strong collaboration as we continue to build Clarivate into a leading information services company. We are moving in the right direction the conference call. I will now turn the call over to Jonathan Collins.

Speaker 3

Thank you, Jonathan, and good morning, everyone. The quarter. Slide 14 is an overview of our Q1 results compared with the same period last year. Q1 revenue was the $629,000,000 a decrease of $33,000,000 or 5% compared to the same period last year, driven entirely by the MarkMonitor divestiture and foreign exchange, the call. As organically, the business was essentially flat as we expected.

Speaker 3

Adjusted EBITDA margins expanded 60 basis points the presentation over the prior year to 40.2 percent in Q1 due to the cost synergies from the ProQuest acquisition. 1st quarter net income was $25,000,000 the Down $26,000,000 due to a $100,000,000 mark to market gain on the private warrants last year that did not recur this year, the call, which was partially offset by a favorable resolution of an international tax dispute worth $70,000,000 Adjusted diluted EPS, which the quarter. Excludes the impact of both items was $0.18 in Q1, a $0.03 decline over last year. $0.02 of the reduction was attributed to higher interest expense due to increases in base rates and $0.01 was attributed to the MarkMonitor divestiture. Operating cash flow was $228,000,000 in the quarter, an increase of $160,000,000 largely due to the $141,000,000 payment made last year from the employee benefits trust for the CPA Global Equity Plan.

Speaker 3

This call. This also drove the entire increase in free cash flow as higher interest and capital spending was offset by lower working capital requirements. The call. Please turn with me now to Page 15 for a closer look at the drivers of the Q1 top and bottom line changes from the same period last year. The call.

Speaker 3

Our Q1 revenue came in exactly as we anticipated. The top and bottom line changes over last year were driven by 4 key factors. The call. 1st, revenue was essentially flat organically. However, we began to invest in earnest to accelerate organic growth through product innovation, the call, which led to a nearly $10,000,000 increase in operating expenses and lowered profit by the same amount.

Speaker 3

2nd, inorganic activity, namely the divestiture of the MarkMonitor the business, lowered revenue $19,000,000 and profit $9,000,000 3rd, cost synergies from the ProQuest acquisition contributed $13,000,000 of incremental profit. The call. And finally, the translation impact of subsidiaries denominated in foreign currencies lowered revenue by $13,000,000 as the U. S. Dollar remains the quarter.

Speaker 3

This caused a profit decline of $3,000,000 and the impact was muted as the translation effect was ameliorated by a couple million of transaction gains. Please turn the call now to Page 16 to step through the conversion from adjusted EBITDA to free cash flow the call and how we use these proceeds to continue prosecuting our plan to deleverage as Jonathan touched on just a few minutes ago. The call. Free cash flow was $168,000,000 in the Q1, an increase of $142,000,000 over the same period last year. The quarter.

Speaker 3

The conversion from adjusted EBITDA improved by 56 percentage points to 66%. We incurred $33,000,000 of onetime cost in Q1 to the quarter. We will be able to

Speaker 2

substantially complete the integration of

Speaker 3

the ProQuest business, culminating in $100,000,000 of annual cost synergies going forward. These costs were down $133,000,000 as a result last year's payments for the CPA Global Equity Plan. Interest payments were $41,000,000 in the quarter, up $13,000,000 over the prior year the quarter. Base rates have increased and about a quarter of our debt remains floating. Cash taxes were negligible in the Q1 just as they were last year due to the seasonal nature of our payment the cycle.

Speaker 3

Working capital was a source of cash of $51,000,000 in Q1 when it was relatively flat last year, the quarter,

Speaker 4

leading to a

Speaker 3

significant improvement driven largely by the timing of payments within our patent renewal business in our IP segment. The quarter. And finally, capital expenditures were $59,000,000 in the quarter, an increase of $18,000,000 over last year as we ramp up our investments in product innovation the conference call and experience the timing of payments as well. We still expect to increase our full year capital spending by between $35,000,000 $40,000,000 the call. We used the Q1 free cash flow to continue servicing our preferred stock with a cash dividend of $19,000,000 and to prepay $125,000,000 of our term loan B, the quarter.

Speaker 3

Please move with me now to Slide 17 for our perspective on the remainder of this year. The call. Our first quarter results place us squarely on track to deliver a full year outcome within our guidance ranges, which remain unchanged from what we outlined back in March. We continue to expect organic growth will improve sequentially in 2023 to about 3.25% at the midpoint of our range. The quarter.

Speaker 3

Assuming exchange rates remain relatively flat, this would deliver revenue of about $2,680,000,000 at the midpoint of the range. The call. The year over year organic revenue comps will remain relatively challenging in the Q2 of this year, so we expect the first half organic growth to approach 1% and second half growth of about 5%. There are a few factors driving this phasing. The Q1.

Speaker 3

First, we'll lap the revenue impact of ceasing our operations in Russia in the Q2. So this remains a headwind in the first half of the year, largely in our A and G segment. The 2nd, the consultancy within our LS and H segment began to improve late last year. And while our utilization rates continue to progress, our revenue will be lower the first half of last year. And finally, in our IP segment, we had some significant accelerations of renewal payments

Speaker 2

the call.

Speaker 3

In March June of last year, leading to H1 organic growth of 8% in the reoccurring order type. The call. These accelerations will not recur this year and as a result, we expect an organic decline in our reoccurring revenue in the first half, the call, but expect full year organic growth for reoccurring revenue to be in line with last year's results. We also started to see a downturn in our cyclical trademark business in this segment the quarter, but will lap the higher comps towards the end of the second quarter. We anticipate adjusted EBITDA and profit margin at $1,100,000,000 to 1 point 6 the $1,160,000,000 and 42 percent to 42.5 percent at the midpoint of the ranges, respectively, resulting in $0.80 the quarter of adjusted diluted EPS at the midpoint of the range.

Speaker 3

And finally, we continue to expect free cash flow of $500,000,000 at the midpoint of the range. The call. Please turn with me now to Page 18 for the major drivers of the expected revenue and profit growth for the full year compared to last year. The call. The drivers of the expected full year top and bottom line growth compared to last year are the accelerating organic growth, the inorganic impact of divesting the MarkMonitor business, the carryover impact of the ProQuest cost synergies that are nearly complete and foreign exchange.

Speaker 3

The quarter. Organic growth of 3.25 percent should add about $85,000,000 to the top line and convert to profit at 30%, the quarter, contributing about $25,000,000 to the bottom line. As we've indicated before, organic growth will need to accelerate to the 4% to 5% range the quarter in order to expand margins. We're making a conscious choice to fund investments that will deliver the product innovation that will catalyze accelerating organic growth to these levels by next year as we outlined in detail at our Investor Day in March. And the And as Jonathan highlighted earlier, we're off to a great start in the Research and Analytics group within our A and G segment, and this performance in Q1 increases our confidence in our full year the quarter.

Speaker 3

Inorganic actions will be a headwind to our results this year. We closed on the divestiture of MarkMonitor in the Q4 of last year And this will create a $65,000,000 headwind to revenue and a $30,000,000 decline in adjusted EBITDA. The team is wrapping up the integration of the ProQuest the acquisition enabling us to deliver the remaining $40,000,000 of cost synergies this year. We do not anticipate a meaningful foreign exchange impact to the top line on a full year the call. However, we expect to continue to experience a revenue headwind in the next few months that should be offset by tailwinds in the second half.

Speaker 3

The call. We also do not expect to repeat the transaction gains we saw late last year, which will cause a nearly $15,000,000 profit headwind. The Please turn with me now to Page 19 to walk through how we expect the more than $1,100,000,000 of adjusted EBITDA will convert to about $500,000,000 of free cash flow the quarter and our plan to allocate this capital. Last year, we incurred more than $200,000,000 in cash outflows associated with one time costs related to the acquisitions. The call.

Speaker 3

The majority of this came from restricted cash from the CPA Employee Benefits Trust that was funded at closing of the acquisition back in 2020. The call. We expect an improvement in one time cost of about $165,000,000 this year as we incur about $50,000,000 largely to complete the ProQuest integration. The quarter. Most of the improvement was recognized in the Q1, so the balance of the year will be more in line with last year.

Speaker 3

We do expect a cash interest increase of about 20,000,000 the quarter as base rates in the forward curve have moved up meaningfully compared to late last year. Most of the increase occurred in the Q1, so the balance of the year will be more the quarter. Our working capital requirements are expected to level off this year, yielding an improvement of about $65,000,000 the quarter. Much of this improvement incurred in the Q1, so we anticipate a modest enhancement in the balance of the year subject to normal seasonality. The We intend to increase CapEx by about $35,000,000 to $40,000,000 to accelerate organic growth.

Speaker 3

The impact of all of these changes is a nearly $200,000,000 improvement free cash flow to $500,000,000 at the midpoint of the range. As we indicated in March and have reiterated today, we plan to use the majority of this year's free cash flow the call to continue to prepay debt on our term loan B to deleverage to a level of less than 4 turns by the end of the year. The Please turn it to Page 20 for our perspective on how our near term results position us to achieve our long term financial objectives. The call. Our 2 run results are a step in the right direction towards delivering the financial objectives we outlined at our Investor Day in March.

Speaker 2

The call. As you'll recall, our primary aim

Speaker 3

is to accelerate organic growth. The first area we committed to improve was the Research and Analytics sub segment within AMG the And our first quarter top line metrics, namely the 4 percentage point improvement in the renewal rate and the double digit new subscription sales the quarter that delivered 3% revenue growth, bode very well for delivering the improvement in this area in 2023. The Our second goal was to maintain durable profit margins as we invest to accelerate our growth. We executed on this objective in the Q1 as our margins the quarter. We expanded by 60 basis points even as we increased our operating and capital expenditures to drive product innovation.

Speaker 3

The call. The 3rd objective we outlined was to significantly improve our free cash flow, which we delivered in Q1 as our conversion reached 66% the call. And finally, we committed to allocate our capital in a disciplined manner. In the near term, we were clear it's imperative for us the quarter to lower our leverage to below 4 terms, and we continue that journey by prepaying $125,000,000 of term debt in the Q1. The call.

Speaker 3

The entire Clarivate team remains laser focused on unleashing the product innovation that will connect our the call. I the call. I want to thank all of you for listening in this morning. And I'm now going to turn the call back over to Joel to take your questions. And as a reminder, please limit yourself the one question and then return to the queue for any additional.

Speaker 3

Joel, please go ahead.

Operator

Absolutely. The the

Speaker 2

the

Operator

call.

Speaker 2

The

Operator

The first question is from the line of George Tong with Goldman Sachs. You may proceed.

Speaker 5

The Hi, thanks. Good morning. You mentioned that you're not seeing any currently macro impact of the business because of its resilience to recessions and the critical nature of its the quarter. Historically, you've seen some macro sensitivity around trademarks and patent volumes. Has that dynamic changed?

Speaker 5

And if so, what's driven that change?

Speaker 2

The call.

Speaker 1

Hey, George. Thanks for the question. So I mean, a couple of comments I would make. The call. As we commented at Investor Day, we are extremely resilient, as you well know, to macroeconomic trends and downturns.

Speaker 1

The I mean, certainly, we build our outlook heading into this year. We expect that there will be challenges. And so there's been, I would say, no surprises. On the biotech side specifically, the There's been very little impact. As you know, the vast majority of our revenue comes from large biotech, large pharma, which have not been impacted by funding.

Speaker 1

The So really, we haven't seen any material impact. Thanks, George. The Next question please.

Operator

Thank you. The next question is from the line of Andrew Nicholas with William Blair. You may proceed.

Speaker 6

The Hi, good morning. This is Tom Rochon, Frangi and Nicolas. I just want to kind of get additional color and ask some the Yes. Hi. And see if you could provide additional detail on kind of what happened on the transactional side of the business during the quarter?

Speaker 3

Yes. Just maybe a couple of things to highlight the changes from last year. So the transactional and reoccurring order types, the non subscription parts of the business were down the quarter. The reoccurring order types were entirely due to the accelerations we saw in March of last year the call for patent renewal payments. So that was intentional and was supporting our customers by providing them the best value there that the Did not recur this year.

Speaker 3

As I mentioned in the comments, we expect that to unwind in the second half of the year and that the full year results for reoccurring the order type and revenue growth organically will be pretty comparable to last year. On the transactional side, I'll point to a couple of areas by segment. The highlighted in some of the prepared remarks that we have the consultancy, which is transactional within life sciences, where That business was declining in the first half of last year. It started to improve late in the year. So the comps for Q1 are pretty challenging there.

Speaker 3

So that drove some of the decrease the Life Sciences category. We had very strong real world data sales towards the end of Q1 of last year, and they were pretty decent this year, but a little bit of a headwind there. And then within our IP segment on the transactional side, the quarter. And then within our IP segment on the transactional side, as we just touched on a moment ago, the one part of our business that the See some impact related to the macro is our trademark business that started to turn down late in Q2 of last year. So we still had really tough comps on that part of the business in the Q1 of this year.

Speaker 3

So when you package all of those, you get to a place where We had a headwind in Q1 on the non subscription order types compared to last year.

Speaker 6

That was very helpful. Thank you.

Speaker 7

Sure.

Operator

Thanks. Thank you. The next question is from the line of Toni Kaplan with Morgan Stanley. You may proceed.

Speaker 2

The call.

Speaker 7

Thanks so much. Jonathan, you mentioned the inflection in Web of Science this quarter. The I know you talked about having the overhaul in late 2021. So I wanted to understand to the View this positive trend in Web of Science as sustainable or was there anything that we should know about like the In terms of was it an easy comp or some other factor that led to positive growth this quarter, but like the Good trajectory, but maybe not continuing. So just wanted to see your confidence there.

Speaker 1

Sure. Thanks, Tony. We're very confident this is a turning point within Web of Science. We and I was going to walk through the litany list. First, the The pickup we're seeing is in subs and we saw first an increased usage last year.

Speaker 1

And as you know, Tony, usage drive value that shows we're driving value the quarter. We saw that in some of the highlights I mentioned in my prepared remarks around both renewal rates as well as new sales in our subspace. And the subspace is what's going to be driving and lifting the product that this year is heading into next year. So we're feeling very, very good about that. I mean last year we were impacted the by Russia.

Speaker 1

We're getting no benefit in Q1 of that. As Jonathan Collins mentioned in his remarks, that will be issued through Q2. So the turnaround we're seeing, we're feeling great about it. The team has done a phenomenal job. The customers are reacting with the Wallace and the subspace.

Speaker 1

So it's certainly

Speaker 2

the

Speaker 1

Great. Thanks, Tony.

Operator

Thank you. The next question is from the line of Peter Christiansen with Citi. You may proceed.

Speaker 8

The Good morning. Thanks for the question. The 96% renewal rate good morning. The The 96% renewal rate, was that just for Web of Science or total subscriptions? The And then I just want to dig into that number a little bit.

Speaker 8

Like how should we think about like what areas where you the Saw like end markets or end users, did you see the most improvement in renewal? Thank you.

Speaker 3

The Yes, you got it. So the 96% is for the research and analytics sub segment within ANG. The The vast majority of that is the Web of Science product, but it also includes products like Insights that Jonathan referenced that's being integrated with Alma, our ERP for the library, if you will, and other small products like EndNote as an example. But That category improves. So that 96% is calculated based on the ACV.

Speaker 3

So that's a great leading indicator for how the the subscription revenue will play out for the balance of the year. We've said in the past that in this category, the call. A significant majority of the renewals occur early in the year, and in particular in the Q1. So it bodes really well the call for how the revenue will play out in this area on a subscription basis for the balance of the year.

Speaker 6

The Thank you.

Operator

The next question is from the line of Seth Weber with Wells Fargo. You may proceed.

Speaker 9

Hey guys, good morning. I wanted to go back to the transactional the discussion for a second. I think on the Q4 call, you talked about having a bigger the pipeline or a bigger backlog of transactional on data services, data sales and stuff like that. I guess my question is, has that changed at all? And the When would you expect transactional comps to turn positive?

Speaker 9

Thanks.

Speaker 3

Yes. Great point, Seth. So the answer is yes. The That is giving us the way we highlighted that in the commentary was it increases our confidence in the stability of those sales. The So we have better line of sight.

Speaker 3

So the fact that our Q1 results came in right where we expected was enabled or supported by the fact that we had a the nice backlog for some of our transactional business. In terms of when the comps improve, I'll just go by area. In the consultancy, the The comps get better in Q2. So we'll start to see some progress there in life sciences. Real world data comps the Q2 are still going to be pretty challenging within Life Sciences.

Speaker 3

We had one of our best quarters ever at the time. It was our best quarter ever in that area. So They'll still be a little bit tough. So broadly in life sciences, they'll get a little bit better, but still some pressure from real world data. On the IP side, we start to the see some of the pressure alleviate particularly in the trademark business.

Speaker 3

So as we mentioned, that business started to see a downturn in towards the end of Q2 of last year. So towards the end of Q2, we'll start to see a little bit of relief. However, on the reoccurring order type, We had a high single digit growth in Q2 of last year within the renewals servicing business in the IP segment. So that comp is still going to be really tough. So that's why we indicated that we think that first half organic growth is probably going to be approaching 1% the Because we're still going to see some challenges in the Q2 with the comps, but certainly improve significantly as we move into the second half of the year, which is why we think we'll see mid single digit growth in H2.

Speaker 9

Okay. But you're not seeing anything kind of leak out of that the backlog or order book that you kind of referenced on the Q4?

Speaker 3

No, not materially. No, we're encouraged by how that's held up the And the predictability it affords us. We obviously, had some challenges last year with predicting some of that and that's helping as we move into 2023. Right.

Speaker 5

The Got it. Okay. Thank you.

Speaker 3

Yes. Thanks, Seth.

Operator

Thank you. The next question is from the line of Shlomo Rosenbaum with Stifel. You may proceed.

Speaker 10

Hi. This is Adam Parenting on for Shlomo. Could the Could the increased use in AI potentially result in increased competition in the trademarks part of the business as AI becomes more widely accessible?

Speaker 1

Yes, Tayna. I'll go ahead and tackle that one. We're feeling very good about our position. When we look at the The leverage of AI, which as you know, we've been using that ourselves for years, companies have been using it for years. And as I highlighted in my remarks, it's something we're leaning into very heavily.

Speaker 1

The If you take specifically our trademarks, we launched a product last year called Brand Landscape Analyzer, which is precisely about leveraging our enhanced proprietary content, our knowledge in the marketplace, our knowledge of the customer workflows and we're using advanced AI to generate that product the And it's about creating new opportunities within our customer base. So we actually see it ourselves as an opportunity. We're leveraging it ourselves and we'll continue to do so going forward.

Speaker 2

The Thank you.

Operator

Thank you. The the next question is from is a follow-up from the line of George Tong with Goldman Sachs. You may proceed.

Speaker 2

The call.

Speaker 5

Hi, thanks. To follow-up on the comment you made earlier, you expect the first half organic revenue growth the In 3Q, 4Q. In other words, should we see a significant jump going from 2Q to 3Q or should it be linear? What are your expectations there? And what are the presentation there and what are the key drivers of improvement over the remainder of this year?

Speaker 5

Thanks.

Speaker 3

The Yes. Thanks for that, George. So we'll give a little bit more color on that as we report our Q2 results. But in principle, We're going to expect a pretty significant step up sequentially from Q2 to Q3. Comps in Q3 are going to be pretty soft.

Speaker 3

You'll recall Q3 of last year the was pretty soft, but we'll be giving a little bit more color, but in principle, we'll see a pretty meaningful sequential improvement from the second to the third quarter. More to come on that in a few months.

Speaker 5

Got it. Thank you.

Speaker 1

Yes. Thank you.

Operator

The call. The next question is from the line of Stephanie Moore with Jefferies. You may proceed.

Speaker 11

The Hi, good morning. Thank you. I think it was helpful

Speaker 7

the Hey there. I think it was helpful at your Analyst Day where you kind of talked about some of the different areas and the progress as we thought the Through 2023 to 2024. I think academia and government had the most progress in 2023. So I would love to get the An update on kind of where that stands, if that's still on track in terms of kind of the renewal cycle, particularly for Web of Science. And then as you think of the call.

Speaker 7

Maybe the opportunity within life sciences and IP, is there any opportunity for some of that, some of those investments start the to fruition a little bit earlier or are those still a 2024 event? I would love to get your updated thoughts there. Thank you.

Speaker 1

Sure. I'll go ahead and dive in there, Stephanie. So first, if I go through the segments within A and G, the area which we have to get right to turn around within research and analytics, the which is Web of Science. As Jonathan mentioned at the beginning of his earlier remarks, our big renewal period is in Q1, the And so we have to get that right. And the results we saw in Q1 that identified both our renewal rate, improve that dramatically, improve our new sales dramatically the It's to me the proof point we've been both expecting, but really it had to happen to say, okay, we feel very good about the trajectory there.

Speaker 1

So the I put a big check mark by A and G in terms of doing what we need to do. I feel very good about that segment. Now on the next 2, within IP, the the period. The piece we have to get right is around patent and trademark intelligence that includes our Derwent product, which is the one we've highlighted over years. The call.

Speaker 1

We're making great progress about that with our product new product leadership we have there. We actually had a review of that with our Board the last week. So I feel very good about the path there. We have the strategy in place. We're executing against that plan.

Speaker 1

Do I expect that impact 'twenty three revenues? I don't. The I don't. So if that happened, that would be a positive surprise. We don't require that to happen, and we expect that to really impact in 2024.

Speaker 1

The call. And in life science and healthcare, again, the key second we have to get right was around commercialization. I feel just the Incredibly excited to have Henry on board. I'm looking forward to getting him in front of you along with Barr, our new Head of A and G. The He is a great industry leader.

Speaker 1

He's diving in there. We are executing against plans again there to create new products innovation. The But similar to what we're seeing in IP, I don't expect nor do we require to have a revenue impact in 2023 to hit our 'twenty three plans. So at this point, we expect that to be 'twenty four and later. If it happens earlier, that will be a nice surprise.

Speaker 1

We'll call it a surprise if that happens.

Speaker 7

The Okay, understood. And just as

Speaker 11

a follow-up, can you talk

Speaker 7

a little bit about the pricing environment and if you've Seeing any maybe acceleration from historical levels and kind of your expectations of pricing contributing to growth in the back half? Thank you. The

Speaker 3

Yes. I would say our Q1 pricing was as expected. So we had generally indicated the quarter that we were able to move our effective price increases across the board closer to about 4%. The And that's generally where we see them in the near term. It's not a meaningful lever of the improvement from 2022 to 2023.

Speaker 3

As Jonathan highlighted, That's really coming in the A and G category within research and analytics. So broadly pricing across the board is in line with expectations. The environment is pretty consistent with what we saw last year.

Speaker 11

Okay. Thank you so much.

Speaker 1

The Thank you.

Operator

There are no additional questions waiting at this time. I would like to turn the call back over to Jonathan Geer, CEO for concluding remarks.

Speaker 1

Okay, great, Joel. Thanks so much. And everyone, thanks so much for joining our call this morning. This is obviously a very important quarter for us as it demonstrated the turning point in the first of our three segments, the We feel very good about the progress being made there. And again, this was a critical quarter for us for delivering the year.

Speaker 1

The Everybody, we look forward in future quarters of coming back and sharing additional progress in the other areas. So with that, we'll wrap up and thanks so much for everyone's time this morning. Thank you.

Operator

The

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Earnings Conference Call
Clarivate Q1 2023
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