Clarivate Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 6, 2024

There are 11 speakers on the call.

Operator

Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Clarivate Third Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

I would now like to turn the conference over to the company to start the call. Please go ahead.

Speaker 1

Thank you, and good morning, everyone. Thank you for joining us for the Clarivate Third Quarter 2024 Earnings Conference Call. As a reminder, this conference call is being recorded and webcast and is the copyrighted property of Clarivate. Any rebroadcast of this information in whole or in part without the tie written consent of Clarivate is prohibited. The accompanying earnings call presentation is available on the Investor Relations section of the company's website.

Speaker 1

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 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 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. Our discussion will include non GAAP measures or adjusted numbers. Firebase believes non GAAP results are useful in order to enhance 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.

Speaker 1

Reconciliations of these measures to the most directly comparable GAAP measures are available in our earnings release and supplemental presentation on our website. With me today are Matti Shemtov, Chief Executive Officer and Jonathan Collins, Chief Financial Officer. After our prepared remarks, we'll open the call up to your questions. And with that, it is a pleasure to turn the call over to Matti.

Speaker 2

Good morning, everyone, and thank you for joining us today. Nona san is going to cover our quarterly results in details in just a few moments. Our financial performance has been disappointing and not what we aim to achieve at Clarivate. But I would like to take it away what I would like you to take away from today's call is that while Glidelberg has a lot to do to improve performance, we also have a lot of value levels and opportunities in front of us. And with that comes a possibility of a significant upside.

Speaker 2

I'd like to talk about how do we plan to reposition Clarivate to realize its potential. First, I would like to share a bit about myself and what brought me to this leadership role. I have 19 years of experience as CEO, including 14 years at Xfinity and 5 years at Gropos, now a meaningful part of cloud based. Under my tenure, Xfinity grew 6 times into a SaaS Education Technology leader. During this period, we accelerated our focus on innovation, transforming the company from an on premises technology to SaaS technology provider by introducing the AppZen Xlibris Alma Cloud solution.

Speaker 2

We expanded our offering beyond Labii and invested in strategic acquisition to deliver more value to our customers. As CEO of ProQuest, I continue to focus on driving growth through operational discipline, product innovation and strategic acquisitions. We introduced ProQuest 1, bringing together our deep connection of academic content, e books, videos into a single platform. We launched the Realtor content marketplace, the company's first homegrown solution in many years. We have acquired and integrated 5 companies including Innovative Interface, a public Labi Software Leader.

Speaker 2

We delivered strong sustainable growth with revenue increasing from 750,000,000 to more than $900,000,000 and substantially increasing our EBITDA. This led to the acquisition of ProQuest by Glanbia in 2021 for more than $5,000,000,000 Ultimately, my passion lies with people and products. I enjoy learning from colleagues, customers and partners. I see innovating and challenging the status quo as a key to our success. I take a lot of pride in bringing major product to market and I have a tremendous passion for what we do.

Speaker 2

These experiences will serve me well in my new role and will benefit Cloudbit and shareholders. Slide 6. I've been in Cloudbit CEO since the Cloudbit CEO since for 90 days now and I'm starting to form my view on current state of the businesses. First, I conducted detailed business reviews with over 100 leaders, including strategy, product management, sales, technology and customer service. I've spent time with our teams assessing our 3 segment operations and go to market strategy.

Speaker 2

I've engaged with 2,000 plus employees in Alamo, Kansas City, New York, Philadelphia, Jerusalem and London. I've also started to meet with our customers, including some of our largest around the world to strengthen my insights and learning. I've begun to better understand what we are doing well and where we need to improve. My comprehensive review was helpful to identifying and validating key strategic priorities leading to the development of an initial value creation plan, which I will discuss in a few minutes. As you see on Slide 7, Clariant has an exceptional foundation consisting of major critical solutions across the innovation value chain.

Speaker 2

Our FlexSim solution are underpinned by best in class data and workflow assets. This includes TopwestOne, Web of Science, Derwent, CompuMark, Contelis, Alma, IP Forio, just to name a few. We are recognized as a trusted provider in the market we serve and we have an impressive Blue Chip customer base, leading academic institution, top pharma companies, top tier corporates and leading law firm. Most importantly, we have experienced and talented team of the global police with strong expertise across segments and across disciplines. Our people know our markets, know our customers and our solution inside out.

Speaker 2

A key learning for me is that Clariant's decision to reorganize into 3 segments was the right one. It leverages our talented by aligning our people deep domain expertise to our customer and as a result we are better able to partner with our customers to develop products to meet their evolving needs. Unfortunately, the company has become disrupted over the last few years. We have grown through acquisitions, which is an important value creation tool, but this represents challenges in terms of integrating different solutions and people at the same time. Additionally, it is easy to lose focus on product innovation and organic growth.

Speaker 2

We have also taken on product initiatives that were overly dependent on transactional revenue, which can be under predictable and less profitable with weak cash flow conversion. This revenue is susceptible to macro headwinds. Our Q3 results clearly reflect some of the challenges and inconsistency from this unpredictable source of revenue. Also the sales model and ultimate execution has been sub suboptimal. We have combined Generali's account management motion with an extensive portfolio of products, which undermines the ability to sell expert solutions.

Speaker 2

We have also underinvested in customer success, leading to lower renewal rates in some segments. In addition, we have suffered from product technology debt, which hinders the pace of product innovation, distracted focus away from new development. Certain non core legacy solutions have led to insufficient management of product lifecycle and aging product requiring significant level of investment to refresh. While near term charges have impacted our ability to execute effectively and deliver results, we see meaningful opportunities to renew our focus and improve performance. Put simply, we have fundamental elements to significantly grow our business.

Speaker 2

We need to improve on execution. I have been down this road before at Acuvis and ProQuest. I have a clear understanding on the steps and process required to accelerate growth along with passion, strong passion to deliver and execute for success. So Slide 9, in keeping with that spirit, the executive team and I developed an initial value creation plan focused on improving execution and accelerating revenue growth. I plan to go into more detail on each of these initiatives on our earnings call in February, but thought it would be important to provide you with a preview of our plans.

Speaker 2

First, we must optimize our business model by focusing on core subscription and reoccurring revenue. To achieve that, we plan to rationalize certain transactional product lines that are declining and have low profit margin and cash characteristics. We will also continue to look for opportunities to convert transactional sales to subscription to building through business model innovation. For example, we have an initial success converting our life science disease landscape and focus reports from transactional to subscription revenue By focusing on subscription facts first model across the business, we will improve revenue profitability and profitability and better be better positioned against market elements. We must improve sales execution.

Speaker 2

We plan to achieve this by strengthening our sales organization, putting in place regulatory alignment, reviewing our incentive plans and enhancing customer engagement. We will invest further and put more focus on customer success to ensure improvements in renewal rates. This will create more time for each expense rate to focus on smaller number of products and better align their domain expertise with the customers' needs. I believe this will increase our ability to grow the pipeline and sales and revenues. I will be working closely with the sales leadership on this effort and I'm confident we will improve receive the improved results.

Speaker 2

From product perspective, we will encourage a build versus buy mentality. We will work closely with our customers to validate interest and clear business use cases through more formalized development partnership methodology. I've used this model successfully before. It will help ensure investing in the right places and being responsive to our customer needs. This includes accelerating innovation and leveraging AI as key enabler.

Speaker 2

For example, our proven success introducing academic research assistance in both Web of Science and Primo is currently being replicated in additional AMG product like PQIS and books. We are also extending IP and lab sciences capabilities utilizing various AI technologies. Furthermore, our forthcoming Web of Science Research Intelligence platform is next generation software solution powered by AI. This product will empower researchers to accelerate branches and research institution to better measure and showcase the impact of their research. And finally, we will seek to carefully rationalize our portfolio.

Speaker 2

This will likely involve divesting non core solution that decrease our probability of success. The company has taken steps to simplify the organization as seen with the divestment of ScholarOne and Valleypart this year. My experience has taught me that a simplified and focused organization is a first step to creating exceptional excellence to creating operational excellence. I also see great opportunity to drive future further cost rationalization to find more product innovation and protect and expand our margin. Going forward, our goal is simply.

Speaker 2

We plan to deploy both human and capital resources to work towards our most attractive opportunities that will grow our subscription and reoccurring revenue. We are committed to implement this growth initiative as quickly as possible as we embark on a multiyear turnaround. As we optimize the business, enhance sales execution, advance our product offering and align our portfolio to core products, we are setting the stage for predictable long term organic growth. That said, as I mentioned at the beginning of the call, we are disappointed with the 3rd quarter top line results, particularly the revenue decline in certain transactional products. As part of my transition and the strategic work we are currently focused on the value creation, we have decided to remove our full year and long term and long range guidance.

Speaker 2

Our entire focus needs to be planning and executing the valuation plan, which is expected to deliver shareholder value. In summary, I have reviewed the entire portfolio and I plan to reduce private exposure to more volatile transaction product lines that have been affecting our business. When we complete the initiative that I have laid out assuming nothing has changes, we expect that we will improve our organic revenue growth, have a revenue mix skewed even more with subscription and reoccurring and higher EBITDA margins and have a better free cash flow conversion. I want to emphasize that I'm very confident in the initiatives underway. Our team is energized for this January journey and we are excited to see this effort come to life in quarters ahead.

Speaker 2

I look forward to sharing more details on our next clinical discovery. And with that, I will turn it over to Johnson.

Speaker 3

Thank you, Matti. Slide 11 is an overview of our Q3 year to date financial results compared with the same periods from the prior year. Q3 revenue was $622,000,000 a decrease of $25,000,000 compared to the prior year, bringing the year to date to $1,900,000,000 The 3rd quarter decline was largely organic, but was also impacted by the ValleyPath divestiture. The 3rd quarter net loss was $66,000,000 $59,000,000 lower than last year, largely attributed to a $40,000,000 increase in FX losses due to the weakening of the U. S.

Speaker 3

Dollar and a $14,000,000 non cash goodwill impairment charge recorded in the IP segment. Adjusted diluted EPS, which excludes the impact of one time items like the impairment was $0.19 in Q3, a $0.02 decline over the same period last year due to lower adjusted EBITDA. Operating cash flow was $203,000,000 in the quarter, an increase of $40,000,000 over the Q3 last year, taking the year to date to over $500,000,000 which is down $48,000,000 over the prior year. The decline is almost entirely driven by lower adjusted EBITDA as higher working capital requirements were offset by lower work time costs. Please turn to page 12 for a closer look at the drivers of the Q3 top and bottom line changes from the prior year.

Speaker 3

We previously anticipated the business would return to slightly positive organic growth in Q3. However, our results came in below those expectations at a decline of 2.6%, lowering revenue by $17,000,000 versus the Q3 of last year. Our subscription business grew at just under 1%, which was slightly below our expectations, but in line with the prior quarter. SUNS's growth in A and G remains strong at 3% so far this year, but we continue to experience headwinds in our LS and H and IT segments as customer budget pressures persistent head of our new product reversals. The vast majority of the shortfall of our expectations was in our transactional lines of business, which declined by 14% and was concentrated in our A and G and LSNH segments, where we experienced more market headwinds than anticipated, causing a lower pipeline conversion.

Speaker 3

In the case of A and G, transactional sales of books and digital collections are off to a slow start in the new fiscal year in North America and research and analytics back file sales were lower than expected in Asia. Our LS and H project driven sales and services that support drug commercialization were lower than expected as budget pressures persisted at our top partner customers. Operating expenses were reduced by $6,000,000 to mitigate the revenue shortfall resorting to an $11,000,000 decline in adjusted EBITDA on the organic revenue change. We experienced an inorganic decline of $9,000,000 on the top line and a $6,000,000 decline on the bottom line due to the Valuepad divestiture, which was nominally affected by the acquisitions of Motion Hall, Global Q and Rowan. Foreign exchange had a negligible impact on the top and bottom line compared to the same period last year.

Speaker 3

Page 13 provides an overview of the drivers of the year to date top and bottom line changes from the prior year. Our Q3 results brought our year to date organic change to a negative 1.5 percent lowering revenue by $30,000,000 Our subscription business growth was at just over 1%, which is in line with our organic ACV growth at the end of September. Our transactional lines of business have declined 9% and while the declines in our A and G and LS and H segments are at or slightly below this level, driven largely by market headwinds, we did see growth in Q3 in IP driven by a recovery in our trademark services, bringing a year to date decline in this segment to mid single digits. Operating expenses for the 1st 9 months of the year were essentially flat with the same period in the prior year as cost inflation was largely offset by cost efficiencies. The Valley Pad divestiture net of a small offset by the acquisitions of Motion Hall, Global Q and Rowan caused an inorganic decline of $17,000,000 on the top line and a $10,000,000 decline on the bottom line.

Speaker 3

Similar to the Q3, foreign exchange had a negligible impact on the top and bottom line compared to the same period last year. Please turn the screen now to Page 14 to step through the conversion from adjusted EBITDA to free cash flow. Free cash flow was $126,000,000 in the 3rd quarter, an increase of $24,000,000 over the same period in the prior year, driven largely by timing differences in working capital. This brings year to date free cash flow to $298,000,000 a conversion of 39% on adjusted EBITDA and a decrease of $77,000,000 over the same period in the prior year on lower adjusted EBITDA due to the top line headwinds and elevated capital spending aimed at accelerating product innovation. One time cost, interest and taxes for the quarter were generally in line with Q3 of last year.

Speaker 3

Working capital was essentially flat in Q3 versus a $64,000,000 use in the same period last year, primarily due to timing differences in receipts from customers and raised the year to date timing impact of $23,000,000 compared to $15,000,000 compared to $15,000,000 as we continue to invest in product integration to drive organic subscription growth. We used most of our free cash flow in Q3 to repurchase 15,000,000 shares of common stock and to complete the Rowan acquisition. As we move into the Q4, we're working diligently to finalize our new value creation plan and are eager to share the more detailed roadmap and the impact it will have on our outlook for the business when we report our Q4 and full year results in February. Thank you for listening in this morning. I'm now going to turn the call back over to Regina to take your questions.

Speaker 3

And as a reminder, please limit yourself to one question and then return to the queue for any addition. Regina, please go ahead.

Operator

Our first question will come from the line of Owen Lau with Oppenheimer. Please go ahead.

Speaker 4

Thank you for taking my question. Could you please talk about the actual organic growth for

Speaker 3

Hey, Polan, I'm sorry there. The connection was poor. I had we had a hard time making out. Oh, sorry.

Speaker 4

Yes, let me try again. Could you please talk more about why the actual organic growth was so far or from the expectation? And I know you talk about transactional revenue and some weakness in all three key segments, but where was the disconnect and how do you plan to change it? Thanks.

Speaker 3

Sure, Noel. I'll start with a little more color on the quarter and then I suspect Moti will want to touch on how the value creation plan will help to address this. So as I mentioned in the prepared remarks, the transactional performance compared to expectations in Q3 was largely concentrated in our A and G business and in our life sciences segments. IP was reasonably close to what we were expecting on transactional, on recovery and our trademark services business. Within A and G, you'll recall we have a few different lines of transactional services.

Speaker 3

We're providing digital content and historical research and analytics information. In particularly, in North America, we saw less spending on the digital content that is transactional in nature. The pipeline development and conversion was lower than is anticipated and would be normal for those lines of business. And then additionally in Asia, where we still see significant market opportunity for historical research and analytics content, sales were lower there, the pipeline conversion was particularly low. In addition to that on the Life Sciences side of the business, as we touched on where we support our large pharmaceutical customers in commercialization products and services, a number of those products that are from projects that were anticipated did not materialize or push during the quarter as well too.

Speaker 3

So those are the reasons I'll maybe let Mahdi touch on the things we're focused on.

Speaker 2

Basically, this is a great segue to what we're actually doing and as part of my 3 months journey talking to internal people, sales organization products and some of our customers, the volatility and exposure to one time revenues. And also, we can see that during the last quarters and going forward, we are going to take away some of the volatility and rationalize some of the one time transaction business. We're looking further into the one time businesses, low margin, low profits, it's low growth, it's expensive, it's very hard to predict. And part of the while the operation trend we are currently contemplating is taking away this volatility and making moves to focus to help us focus more on product innovation, subscription, reoccurring, predictable profit, we are in the same. That's where we're going.

Speaker 3

Thanks for the question, Ron. Next question?

Operator

Our next question comes from the line of Ashish Sabadra with RBC. Please go ahead.

Speaker 3

Hi, good morning. This is David Page on for Ashish. Thanks for taking our question. I was wondering maybe you could just parse out some of the weakness that was driven by just general macro headwind? Or I know in the initial value creation plan, you have to improve sales execution and get more focused on product portfolio.

Speaker 3

But maybe you could just parse out like what was a macro headwind versus what was an internal product portfolio that needs

Speaker 4

to be fixed? Thank you.

Speaker 3

Yes. Thanks for the question, David. So we certainly believe that it's a combination of both. We think a meaningful portion of what we experienced in the quarter where market headwinds being higher than we expected. But as Monty touched on in his remarks, we certainly acknowledge that there is significant opportunity to improve our sales execution.

Speaker 3

There

Speaker 2

are several factors which relate to sales reduction. I'm going to actually mention, we're all aware of the story of Drive H1 and the reversal of Drive H1. Some of the sales the sales set up within the different segments. And I'm going to reiterate the smart and right decision by previous management to bring back the 3 segment approach. But still there are some work to be done on the specific sales organization of the different segments and there are the concept of the sales generalist approach doesn't really work in some of the segments.

Speaker 2

So what we actually want to do is actually introduce the sales. We're going to emphasize further on the sales specialist and trying to rely the customer buying the customer actually buying our product with our sales experts. This is one of the drivers for the improvement on the sales organization. There are some other elements of the sales that we sales improvement we are doing. The company somehow was under invested in customer success in some of the segments, making sure that people are actually using our product to the fullest and understand the new functional features coming on.

Speaker 2

And we are we have identified some shoulders of staff that we will maneuver from other places of the valuation to be closer to be closer with our customers and close engagement to make sure our radio rates are actually going up and they are going up in some of the segments.

Speaker 3

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

Operator

Our next question comes from the line of George Tong with Goldman Sachs. Please go ahead. Hi, George. Your line might be on mute. We'll take our next question from the line of Toni Kaplan with Morgan Stanley.

Operator

Please go ahead.

Speaker 5

Thanks so much. And I appreciate the information on the value creation plan. I wanted to just ask, I think when you think about moving transactional to subscription, improving sales execution, accelerating product innovation, makes total sense. But I think a lot of these were items that prior management had tried to work on as well. And so just wanted to understand, I guess, what's going to be different this time?

Speaker 5

And also, should we expect a higher level of investment going forward? Does that mean that maybe we see a little bit of a hit to margins to try to drive some of the growth? Just wanted to understand those two aspects. Thank you.

Speaker 2

So maybe I'll start with the first question. So I'm not here to comment on the previous management. I actually reiterated already. I think the previous management has done a good decision to realign the company with having 3 segments. They also started the investment into product innovation.

Speaker 2

I'm simply different. I come from a different background. I have my strong passion for people, product and sales. So I'm going to invest myself in making sure we have the right talent and we do have the right talent. We need to do some final alignment with our talent and I got to focus a lot into product.

Speaker 2

Some of you look at my bio, I've been a product person since my early my career. So I'm going to be put a much stronger effort and go deeper into the product innovation lifecycle I developed during my long career with the service and progress methodology that's what we release our customers to develop product and then making sure that we align our product development with customers' needs and its evolving needs. And lastly, the sales execution. I've been involved in Ever during my career, I was focused a lot in sales execution and delivery the product. So I'll bring my 3 passions: people, products and sales into the climate environment.

Speaker 2

And I'm sure this experience has been worked well for growth putting better company on an organic growth trajectory, great value for our customers and obviously great value for our shareholders

Speaker 3

as well. Thank you for the question, Tom. Next question.

Operator

Our next question will come from the line of Andrew Nicholas with William Blair. Please go ahead.

Speaker 6

Hi, good morning. Thank you for taking my question. There's a lot of experience with turnarounds and people product sales. Just kind of curious and I'm not asking for specific guidance. I know you're going to talk a little bit more about the plan next quarter.

Speaker 6

But based on your experience, how long do some of these different pieces tend to take? I'm just kind of curious how quickly some of these go to market motions, for example, can be revitalized, based on what you've seen within the business to this point?

Speaker 2

So based on my experience, I've been around for 90 days. I don't want to jump ahead of myself. I've been investing my time meeting our people and meeting some of our customers and trying to see what's working, what can be further improved. I have some very clear ideas about the way forward. Some of the changes will be up and coming pretty quickly.

Speaker 2

Some will take more time and evolve all the time. Obviously, some changes in the middle in different levels of of the management on product innovation, if they come to a new product. So I would be expecting to give you more details in February, but it will evolve like improvement will evolve over time. And one of the ideas that we have that we actually going to give you some KPIs and some KPIs at some point that will allow you to track our progress against the plan. So this will come in February, Andy.

Speaker 2

They're not going to give a specific before February. But we understand that you need to be able to track our progress and we will address this in February and call. Great.

Speaker 3

Thank you for the question, Ian. Next question, please.

Operator

Our next question comes from the line of Manav Patnaik with Barclays. Please go ahead.

Speaker 7

Thank you. Good morning. Matti, you talked about all the time and effort you put into ProQuest to fix it and kind of turn it around. I think there you had the benefit of it being a private company and a lot of kind of time and cover if you call it. From what you're describing, it sounds like all three of these segments that most of us don't think belong together have issues as well.

Speaker 7

And it's probably best done private versus public if you're not going to split it apart, it sounds like you aren't. So just curious, your discussions there with the Board, like why isn't that something that's part of this effort that you're going through right now?

Speaker 2

First of all, let's talk about whether these three businesses belong together or not. So all these three segments have some very similar characteristics, right? They're all in a rich data, provide analytic insight, they need a workflow solution via SaaS to provide some expert services. This is one. There's also the 3 businesses that have the same abilities and the same technology infrastructure, we're talking about content, we're talking about technology and we're talking about share commercial channels to deliver efficiency and scale.

Speaker 2

And at the same time, I recognize what you're saying. We have some our current thinking, it's too early to comment on what you said, but there are no secret accounts.

Speaker 3

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

Operator

Our next question comes from the line of Shlomo Rosenbaum with Stifel. Please go ahead.

Speaker 8

Hi. Thank you for taking my question.

Speaker 3

Matti, I just want

Speaker 8

to ask you between some of the stuff that you were talking about in terms of getting rid of products that are marginally profitable and simplifying the business and potentially looking at areas to get out of. Should we expect a substantial kind of shrink to grow strategy over here where the business has to actually be decently smaller than what it is today, particularly on that transactional side of the business? Or is that really that's not really a huge factor, it's just kind of marginally making sure that the business is not so volatile and you're in a more a better position to sell the products? I'm just trying to think of strategically how we should be thinking about this in terms of trying to layer things into our thinking.

Speaker 2

So we have identified thank you for the question, Shlomo. We've actually identified some potential businesses that we want to divest wind down and maybe shrink in different ways. And we're still deliberating on which what should we do and how do we go about this because if we divest the business and we are staying in a certain segment, we want to protect our reputation, we want to protect our other business as we said with that respective segment. So there are currently different teams are working on the different ideas and opportunities and they are for real. But you have to be bear with me, 1st 90 days and you have to be patient till February, we will lay down in February.

Speaker 2

We have some good idea. It will be much more concrete and specific in February.

Speaker 3

Okay. Thank you for the questions. Next question.

Operator

Our next question comes from the line of Peter Christiansen with Citi. Please go ahead.

Speaker 3

Good morning. Thanks for the question. Mary, I think one of the original full thesis on Claravit over the years has been driving revenue synergies either within segment by expanding the value chain presence along the value chain or across segments. Obviously, the company has done a decent job in driving cost synergies there. But just curious on your assessment on whether you think there are potentials for revenue synergies between the 3 various businesses and likewise within segments where the company has add capabilities?

Speaker 3

Thank you.

Speaker 2

So I think we all know the history went one like the pendulum go one way with one driver base, you brought it back to the other side. I believe as for my initial view that there is some revenue synergies between the 3 organizations. There's something I still need to check and dive in and come back with some specific the potential Easter, the concept of putting the 3 together was a sound concept, execution, we can argue about the execution. There is some definitely there is cost synergies and this was taken to an extreme in our situation. There should be also some revenue synergies and now some cross selling between some customers of the different segments are buying from other segments as well.

Speaker 2

But I want to wait some more time before I give you some complete answers about revenue synergies between the different segments. Is this definitely something there?

Speaker 3

Thank you for the question, Pete. Virginia, let's go to our last speaker next and final question, please.

Operator

Our final question comes from the line of George Tong with Goldman Sachs. Please go ahead.

Speaker 9

Hi, thanks. Good morning and sorry for the technical issues earlier. In each of your segments, can you talk a little bit more about some of the end market trends that you're seeing? What would need to improve externally to help support some of the internal initiatives you have to transform the business?

Speaker 2

First of all, it's a given that we are operating in 3 different segments, very good segments to be in. And I believe that the midterm growth of those segments and I'm talking about I'm being very careful. I'm talking about these segments themselves. I'm not talking about the company at the moment. I think those segments grow 4, 5, maybe even more on the Life Science side.

Speaker 2

That's our belief that those segments are growing. We have different characteristics or different situation in the 3 segments themselves. We see that on the I'll start with the A and G, the current situation with the university. We have we see less of an appetite to invest in capital expenses. That's why we see some softness on the digital collection front.

Speaker 2

This is why we're also talking this is seen already in the we keep talking about the softness of capital expenditure on the A and G side, which impact our one time revenue. That's on the A and G side. On the IP side, we've seen again it's a 4%, 5% growth on the market side itself. We do see some currently some softness on the annuity side, not only from us. If you take the Dutch PTO as an example, we see from the Dutch PTO because the indication is our annuity is suffered the entire industry is suffering on annuity and we do expect this to come back.

Speaker 2

And certainly, the Life Science is that seems to be the most promising in terms of growth, but we see headwinds, especially on the commercial side of the Life Science where we see that R and D is still doing well on the commercial side of R and D of Life Science. We see some top end at the moment. But as I said at the beginning, they are all good segments to be in, 4%, 5% growth as an industry, Dineshond is maybe even more.

Speaker 3

Got it. Thank you for that question. And Regina, I think we have one final question.

Operator

And that question will come from the line of Colton Feldman with Jefferies. Please go ahead.

Speaker 4

Hey, this is Colton on

Speaker 10

for Surinder. One quick question I just wanted to ask. You guys had mentioned, seeing some lower renewal rates in some areas of the business. Just wanted to ask kind of what you're seeing there and kind of if there's any certain segments you're seeing higher churn or if you can generally just kind of talk about what you're seeing from kind of a churn perspective if it's quantitative or qualitative,

Speaker 4

just kind of generally? Thank you.

Speaker 3

Yes. Thanks for that Colton. So in our prepared remarks, we've highlighted the fact that the subscription growth for A and G remains solid. So renewals in A and G continue to be very strong. Where we saw renewal pressure in the Q3 that had a small impact or smaller impact was within the Life Science and the IEP segment.

Speaker 3

So as we touched on, we know there's pressure on spending even for recurring revenues in the Life Sciences space, particularly in our large pharma customers. And then as Mahdi touched on, we do continue to see some pressure on spending in IP on our recurring business, but also within subscriptions ahead of the new derwent launch that's happening as we speak. So those are the two areas that we were a bit softer on in the Q3. And obviously, the things that we discussed in the VCP between sales execution, being closer to the customers, making sure that we're driving a strong usage of the product through training will help to alleviate that in addition to the product innovation investments we've made. So thank you for that question, Colton.

Speaker 3

Regina, I think that's our last question. So I want to thank everyone for joining in this morning.

Operator

Ladies and gentlemen, that will conclude today's call. Thank you all for joining and you may now disconnect.

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Key Takeaways

  • Clarivate reported Q3 revenue of $622 million, down 4% year-over-year, driven by a 2.6% organic decline and a 14% drop in transactional lines, while subscription revenue grew just under 1%.
  • The company recorded a net loss of $66 million (including a $14 million goodwill impairment) and adjusted EPS of $0.19, but generated $203 million in operating cash flow despite lower adjusted EBITDA.
  • New CEO Matti Shemtov introduced a value creation plan to pivot to a core subscription and recurring revenue model, rationalize low-margin transactional products, and enhance sales execution and customer success.
  • The strategy calls for a build-over-buy product approach leveraging AI to accelerate innovation, plus potential divestitures of non-core solutions to simplify the portfolio and expand margins.
  • Clarivate has withdrawn its full-year guidance to focus on executing this multiyear turnaround, aiming for stronger organic growth, higher EBITDA margins, and improved free cash flow conversion.
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Earnings Conference Call
Clarivate Q3 2024
00:00 / 00:00