Clarivate Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 6, 2024

There are 13 speakers on the call.

Operator

Good morning. Thank you for attending the Clarivate Q2 2024 Earnings Conference Call. My name is Alyssa, and I will be your moderator today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the call to our host, Mark Donahue, Vice President, Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, and good morning, everyone. Thank you for joining us for the Clarivate's Q2 2024 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 all or in part without prior written consent of prior written 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 unknown risks, uncertainties and other factors and 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 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.

Speaker 1

Clarivate believes non GAAP results are useful in order to enhance an understanding of our ongoing operating performance, but they are supplement to and should not be considered in isolation from or as a substitute GAAP financial measure. Reconciliations of these measures to GAAP measures are available in our earnings release and supplemental presentation on our website. With me today are Andy Snyder, Chairman of the Board Jonathan Geer, Chief Executive Officer Mahdi Shemtov, our new incoming Chief Executive Officer and Jonathan Collins, Chief Financial Officer. After our prepared remarks, we'll open up the call to your questions. And with that, it's a pleasure to turn the call over to Andy Schneider.

Speaker 2

Thanks, Mark, and hello, everyone. Thanks for joining us this morning. With today's news, I'd like to first opportunity to thank Jonathan Geer for his leadership at Clarivate. I know I'm speaking for the entire Board when I say we are grateful for Jonathan's many contributions to the company. Jonathan joined Clarivate during a challenging time for the business.

Speaker 2

During his tenure, he has been instrumental in restructuring and strengthening our organization, laying the foundation for the next phase of Clarivate's value creation journey. We've had many productive conversations and Jonathan and the Board have determined that now is the right time to transition leadership of Clarivate. We're grateful that Jonathan has agreed to assist in the transition in a non executive role after he steps down as CEO. Want to be clear about one thing. The foundation of our businesses is strong and our future remains bright.

Speaker 2

Over the past 3 years, I've had an up close view in declarivate's operations, strategy and growth opportunities as a member of the Board. It's clear to me that we have a tremendous senior leadership team and that there are many growth opportunities ahead. Looking ahead, we are very pleased that Matti Shimtov will be joining Clarivate as our next CEO and will be an important driver of the long term success of Clarivate. I've had the privilege of working with Maddie at ProQuest where he was CEO for nearly 5 years. I've seen firsthand the positive impact he's had, the driving value across an organization.

Speaker 2

I'm certain Matti will leverage his deep expertise and people first leadership style to build on Clarivate's many successes by driving execution and performance to deliver profitable growth, increase product innovation and drive value creation for all stakeholders. Given Matti's decades of leadership experience, Board and I are confident that he is well suited to partner with our senior management team to lead Clarivate during the next phase of its growth. With that, it's my pleasure to turn the call to Matti.

Speaker 3

So thank you, Andy. Good morning, everyone. It is an honor to be back at Clarivate. I want to thank Andy and the Board of Directors for the opportunity to lead Clarivate during the next phase of this growth cycle.

Speaker 4

As you may know,

Speaker 3

I ran both ProQuest and Exhibits for many years and I left following the pair of acquisition of ProQuest in December 2021. Since then I have been following Claravit from a far, but I've been very truly pressed and played a large part in my decision to return to the company. I'm pleased that Xelodivate has reorganized in 2, 3 segments to put extra attention and funding towards innovation and customer engagement. Equally important to me, Clivate has developed great talent across the organization and has a rich portfolio of world class industry leading products and assets. As I rejoined the company, I plan to spend time immersing myself back into the business and speaking with colleagues from around the world to gain feedback on how we can become an even better and more effective company.

Speaker 3

I will also be engaging our customers and partners to understand their needs and how we can better serve them all. I'm confident that with some adjustment, we can build on top of what Jonathan and the leadership team has accomplished and take the and take ClariVate to the next level. I want to thank Jonathan here for his leadership while steering the company through the turnaround. And as Andy stated, Klaviyo is in much better position today because of your leadership, Jonathan, and I look forward to working with you during the transition phase. And now I'll pass the call to Jonathan Guillaume.

Speaker 3

Jonathan, please.

Speaker 4

Great. Thank you, Mady, and good morning, everyone, and thanks for joining us today. On our last earnings call, I spoke about our success in making the necessary operational and product progress to revitalize our business and set a clear path to achieve our plan. I also reiterated our commitment to create a clear executional plan to deliver on our long term growth objectives. With these accomplishments behind us and the incredible opportunity Theravate ahead, the Board and I have mutually agreed that now is the right time for this change.

Speaker 4

Now I do want to be clear, Clarivate is in a strong position today. During my time as CEO, we restructured the company into 3 end market segments and reinvigorated our product innovation investments and commitment to our customers. The changes we made at the company ran to the core of how we operate and included a focus on our colleagues and talent. We have built a tremendous and talented team that is well positioned to steer the company to the next level. I'm incredibly proud of all the work all our colleagues have done to get us to this point and I feel strong for the network.

Speaker 4

The Clarabix future is bright and the best is ahead. As I step down from my role as CEO and transition into a non executive role within the company, I will be handing the reins over to Mahdi this coming Friday. The Board and I have the full confidence in his ability to lead the company. I look forward to continue to work with Mahdi to help ensure a seamless transition the company does not miss a beat. Turning to our 2nd quarter results.

Speaker 4

For the quarter, we delivered slightly better results compared to our previously announced expectations with organic revenue growth down less than 1%. This represented a sequential improvement compared to this year's Q1. We continue to focus on efficiently managing the business during this turnaround period at Clarivate, which has resulted in solid profitability and strong free cash flow. Jonathan Collins will cover the quarterly results in more detail shortly. We're now moving on to a review of our segments starting with academia and government.

Speaker 4

For the first half of this year, A and G subscription growth increased more than 3%. This was driven by an improvement of our renewal rates to more than 96%, a best in class level driven by the improvements and investments in Web of Science. Transactional sales within A and G have faced some headwinds across digital collections and books due to softer one time budgets in the recent academic fiscal year. As you remember, we began seeing the softness in Q4 of last year and it has continued now through the first half of this year. Our commercial team is working closely with our customers to maximize the value they receive without impacting their budget needs.

Speaker 4

We are driving new product innovation and AI functionality by leveraging our deep knowledge and expertise across the AMG marketplace. This will help us to win new business and deliver better performance in the future. Our goal is to drive subs growth above 4% by launching new products in the research intelligence and software space. And I'm pleased to share that we've made great progress within these areas this quarter. We strengthened our research offerings with the recent launch of AI powered web science research intelligence.

Speaker 4

This is a transformational AI native software solution that will empower researchers to accelerate innovation and research institutions to better measure and showcase the impact of their research. We also launched 2 new software solutions, Colecto and Specto. Colecto enables librarians to more effectively and efficiently manage collections with improved analytics, unified platform and AI. While Specto showcases all library digital collections through generative AI, improved workflows and guaranteed long term access. Our focus on enhancing products and creating new solutions is beginning to translate into wins across the marketplace.

Speaker 4

For example, we won a large statewide multiyearcontent aggregation deal, which displays a key competitor. We were also awarded a library software deal covering 2,000 plus school libraries in Europe. Moving to the IP segment. On our last earnings call, I talked about the turnaround within this segment. I am very pleased that we're starting to see improved performance following a challenging year in 2023.

Speaker 4

For example, year to date, we have delivered high single digit revenue growth within IP management software. This includes a greater than 80% win rate and large competitive corporate software deals in Japan, which is a key IP market. Our IP management software win rate is an important early indicator for us on future revenues and I'm thrilled to see our win rates improve in the last 12 months based on the changes we have made in our organization and commercial model. The macro environment has also improved, which has helped to stabilize trademark search volumes and deliver on a few large scale project wins. The improved performance is expected to drive organic growth across the segment in the second half of this year.

Speaker 4

We are encouraged by the early signs of a turnaround for DIRMIND or Path Intelligence product. The product refresh enhancements are beginning to deliver improved mineral rates, which increased more than 2 50 basis points compared to the same period last year. On the product development front, we recently launched Trademark Watch Analyzer. This is a next gen protection solution, which brings together global trademark and case law combined with our IP expertise and cutting edge AI technology for greater efficiency and accuracy. Our commercial team is learning new business wins.

Speaker 4

We were recently awarded 2 multi year government contracts totaling approximately US10 $1,000,000 This includes the U. S. And an Asian Path and Trade Office to provide AI enabled path design, search and classification. We continue to strengthen our IP portfolio with the recent acquisition of Brolin, a leading patent drafting and prosecution provider. This tuck in acquisition supports our focus of providing IP attorneys AI enabled tools to automate parts of the filing and prosecution process.

Speaker 4

At our Investor Day in March 2023, we piloted specific products requirement investments to reinvigorate growth. Since then, we have made tremendous progress within the IT segment on product refresh and the development of new solutions. These new offerings deliver embedded use case specific intelligence to customers, which opens us up to new sales opportunities and a greater share of budgets. I mentioned this positive turnaround at Dermid following the investments we have made. German search is a premier quality product in the market and search has moved beyond the core legal use cases into other departments.

Speaker 4

Our product engineering efforts have focused on creating solutions that address these growing needs. We are excited about the development of a new patent watch solution and a suite of R and D solutions, which will be fully available to customers in the first half of twenty twenty five. These two new intelligence offerings assist not only IT professionals, but also R and D professionals with improved tools and functionality. This includes proactively pushing the material customer needs to monitor specific items such as competitor activity and infringements. Understanding the path of landscape is becoming more important within the R and D departments globally.

Speaker 4

With our new R and D tool, which includes conversational AI chat and AI results, we are improving efficiency and delivering better outcomes, which enables companies to maximize ROI on R and D spending. Turning to the Life Sciences and Healthcare segment. Externally, we have been impacted by macro headwinds due to tighter customer budgets. Internally, the needs product refresh and our decision a year ago to shift our go to market strategy with real world data sales has led to a reduction in our revenue. However, we are starting to see the benefits of our product overhaul with improved performance in international markets and across midsize pharma.

Speaker 4

We recently closed a large $1,000,000 plus consulting deal focused on diabetes and obesity. We were also awarded our 3rd sale this year, our pharma grade data via our new platform to another top 20 pharma company. On the product development front, we launched Epidemiology Intelligence, a unified platform enabling precise forecasting and evaluation across 5,000 patient populations and over 1200 diseases and procedures. To drive continued improvement, we implemented a 2 releases a year model for key R and D products to revitalize our portfolio around customer needs and return to the Lifetime and Healthcare segment to growth. This includes building a growth engine in variable data and sell them directly to pharma and medtech customers with a focus on the highest quality of data in the market.

Speaker 4

We have identified opportunities to expand on the enhancements, the quality of the data and our relationships with customers. With new releases coming later this year, we are starting to see the benefits of our work with the recent wins I just highlighted. We're also building up analytical modules on our RWD platform for around 10 to 20 disease areas that will have high market needs such as Parkinson's, osteoporosis and COPD. During the Q2, we launched an out release of the product. We will continue to enhance the platform based on customer feedback and are targeting a general release in this year's Q4.

Speaker 4

We're also building out franchises where we are combining our highly enriched patient data with 3rd party curated genetic data to specifically focus on rare diseases. By integrating the genomic and prototype data, we enable our pharma and biotech customers to develop new therapies to patients with rare diseases. We're just getting started on this product offering and I expect it will be available for general release in 2025. In closing, I want to thank my colleagues for their loyalty, their hard work and dedication over the past 2 years. I also want to thank our customers, shareholders and our Board for their support.

Speaker 4

I believe Clarabeat is on the right trajectory forward and the efforts to improve the business will begin to be rewarded in the coming years. With that, let me now turn the call over to John Collins to walk you through our financials.

Speaker 5

Thank you, Jonathan, and good morning, everyone. Slide 15 is an overview of our second quarter and first half financial results compared with the same periods from the prior year. Q2 revenue was $650,000,000 a decrease of $19,000,000 compared to the prior year, bringing the first half to $1,270,000,000 Most of the 2nd quarter decline was due to the Valley Pass divestiture and the stronger U. S. Dollar.

Speaker 5

The 2nd quarter net loss was $317,000,000 $175,000,000 lower than last year due to the non cash goodwill impairment charge recorded in the LS and H segment. This was also the primary driver of the first half net loss of CAD 411 1,000,000 down CAD294 1,000,000 over last year as the higher impairment was amplified by favorable legal and tax settlements in Q1 last year that did not recur this year. Adjusted diluted EPS, which excludes the impact of one time items like the impairment and these settlements, was $0.20 in Q2, a $0.01 decline over the same period last year, bringing the first half to $0.34 down $0.05 over the prior year due to lower adjusted EBITDA and higher depreciation and amortization expenses from our increased investments in product innovation. Operating cash flow was $126,000,000 in the quarter, a decrease of $36,000,000 over the Q2 last year, taking the first half to $302,000,000 which is down $88,000,000 over the prior year. The decline is almost entirely driven by timing differences in working capital as the lower adjusted EBITDA was offset by lower one time costs.

Speaker 5

Please turn with me now to Page 16 for a closer look at the drivers of the 2nd quarter top and bottom line changes from the prior year. On our Q1 earnings call in early May, we indicated the business would decline organically by about 1% in Q2. However, our results came in slightly above those expectations at a negative 0.6%, lowering revenue by $4,000,000 Our subscription business grew at just under 1% compared to growth of more than 2% in the prior quarter. This sequential decline is largely driven by 1st quarter renewals that were on time this year that were renewed late and came in during the Q2 of last year in our A and G segment. Our first half subs growth of 1.5% accounts for this timing difference and is in line with our organic ACV growth.

Speaker 5

Our non subscription products declined 2.5%, which was a sequential quarterly improvement of about 600 basis points. Operating expenses were essentially flat yielding a $4,000,000 decline in adjusted EBITDA on the organic revenue change. We experienced an inorganic decline of $9,000,000 on the top line and a $4,000,000 decline on the bottom line due to the Valley Pass divestiture, which was nominally offset by the acquisitions of Motion Hall and Global Q. Foreign exchange lowered revenue by $6,000,000 and profit by $3,000,000 as the U. S.

Speaker 5

Dollar was stronger than a basket of foreign currencies, namely the euro and the pound compared to the same period last year. Please turn with me now to Page 17 to step through the conversion from adjusted EBITDA to free cash flow. Free cash flow was $60,000,000 in the second quarter, a decrease of $44,000,000 over the same period in the prior year, driven largely by timing differences in working capital. This brings first half free cash flow to $172,000,000 a conversion of 34% on adjusted EBITDA, which is about 5 percentage points lower than our full year expectation due to the timing of our working capital requirements. Onetime cost decreased by $8,000,000 in the quarter, nearly offsetting the adjusted EBITDA decline as acquisition integration activity has abated.

Speaker 5

Interest and taxes were generally in line with the last year. Working capital was a use of cash of about $30,000,000 in Q2 versus a $7,000,000 source in the same period last year, primarily due to timing differences in receipts from customers. Capital expenditures were up about $8,000,000 as we continue to invest in product innovation. We used most of our free cash flow in Q2 to pay the final dividend on our preferred stock, which converted to common stock on June 3rd and to complete the Global Q acquisition. Please move me now to Slide 18 for a look at our guidance ranges for the full year, which remain unchanged.

Speaker 5

We are reaffirming the guidance ranges we initially provided at our year end earnings call in February and then affirmed in our Q1 results call in May. Beginning at the top of the page, we now expect full year organic growth will likely be below the midpoint and in the lower half of the range. In Q3, we expect a return to growth in the range of flat to 1%, representing a sequential quarterly improvement of about 50 to 150 basis points. We still expect revenue near the midpoint of the $2,570,000,000 to $2,670,000,000 range as the lower organic growth will likely be offset by improved foreign exchange due to the recent weakening of the U. S.

Speaker 5

Dollar that we anticipate will remain for the second half of the year. Moving down the page, we still expect adjusted EBITDA and profit margin near the midpoints of the ranges at about $1,085,000,000 41.5 percent respectively. We continue to anticipate diluted adjusted EPS near the midpoint of the $0.70 to $0.80 range. And finally, on the bottom of the page, we anticipate free cash flow will likely come in towards the lower end of the range, primarily due to modestly higher working capital requirements as we return to organic growth in the second half of the year driven by our non subscription revenues as well as slightly higher capital spending as we invest to accelerate organic growth. Please turn now to Page 19 for a closer look at our expected organic growth trajectory as we move into the second half of the year.

Speaker 5

As Jonathan mentioned just a few moments ago, subscription revenue growth in A and G, our largest segment, was strong in the first half of the year at more than 3%. However, in both the LS and H and IP segment, subscription revenues declined slightly in the first half as they faced market and product pressures that we've previously discussed such as the real world data channel strategy change and the patent intelligence replatforming. While we originally expected full year subscription revenue growth would be greater than 2%, we now anticipate it will be less than 2% as these two segments are tracking slightly behind the projected pace of recovery. Given we expect the first and second half subscription growth to be relatively consistent, the anticipated inflection in organic growth will be driven by our non subscription revenues. Recurring revenue is expected to return to growth of about 3% in the second half of the year, bringing the full year to flat.

Speaker 5

This is driven by lower volume comps, onboarding new customers, improved retention of existing customers and patent renewals in Q4 driven by the announced price increases at the USPTO in Q1 of next year. We originally expected this revenue type would grow by about 1%. However, lower FX volatility, slightly lower industry volumes and the delay of the PCT award at the US PTO have lowered our expectations to about flat for the full year. We continue to anticipate that our transactional revenues will return to low single digit growth in the second half of the year, trimming the decline to

Speaker 1

low single digits for the full year.

Speaker 5

A and G's transactional growth is expected to improve in Q4 as we see lower comps as demand softened in the same period last year. We also lapped tougher transactional comps in Q4 in our LS and H segment. And in IP, we've been awarded key projects that are expected to deliver in Q4 and anticipate stronger demand in trademark search. The chart on Page 20 outlines the drivers of the expected full year top and bottom line changes from the prior year. Organic growth of less than 1% would add closer to $10,000,000 to the top line, but will not fully offset higher operating expenses, leading to modestly lower profit dollars and margin as we remain committed to investing in product innovation that we believe will accelerate organic growth in the coming years.

Speaker 5

The inorganic impact from selling ValleyPath, which closed in April, net of the small impact from the MotionHall, GlobalQ and Rowan acquisitions, will deduct about $30,000,000 of revenue and about $15,000,000 of profit this year. We now anticipate foreign exchange translation will be neutral on the top line, but it will be a headwind of about $10,000,000 on the bottom line as last year's transaction gains are not expected to recur this year. These changes to adjusted EBITDA account for nearly half of the expected change in free cash flow compared to last year. And I'll now turn the page to 21 to step through some of the other items. One time costs are expected to continue to decline this year to $40,000,000 an improvement of $20,000,000 over last year as the large acquisition integrations are behind us.

Speaker 5

We expect cash interest to decrease by about $10,000,000 on last year's deleveraging and the refinancing of our term loan B in the Q1. Taxes will increase by about $15,000,000 due to timing of payments and jurisdictional mix. We now expect the change in working capital this year will be a modest use of cash, which will fund the non subscription revenue growth weighted towards the Q4. We are investing in product innovation and plan to raise capital spending by about $30,000,000 this year to fuel organic growth over the next couple of years. The net impact of these changes is that free cash flow will likely come in near the low end of the guidance range.

Speaker 5

As we look towards the second half of the year, we now intend to take a more balanced approach towards capital allocation, where we'll look to opportunistically repurchase shares at attractive prices and execute bolt on M and A that will help accelerate growth as opposed to primarily deleveraging. In closing, Page 22 provides a brief reminder of our financial priorities. Our primary aim is to accelerate our organic growth to mid single digits in the coming years. In order to achieve this objective, we remain committed to our capital spending, which is elevated to about 10% of revenues in order to fund a new level of product innovation.

Speaker 3

Our

Speaker 5

second goal is to maintain durable margins as we make the investment to accelerate growth. We are committed to providing the resources to drive product innovation in all of our businesses, while keeping our margins in the low 40s. The 3rd objective we outlined was to become an attractive free cash flow engine, which we've progressed by maintaining a conversion on adjusted EBITDA near 40%. And finally, we remain to commit allocate our capital in a disciplined manner. We shifted our near term focus from primarily deleveraging to a more balanced approach where we'll look to utilize a portion of the Board's existing authorization to repurchase shares opportunistically at attractive prices and to execute bolt on M and A like the recently announced Rowan acquisition that will provide new organic growth vectors in our existing markets.

Speaker 5

I want to thank all of you for listening in this morning. I'm now going to turn the call back over to Elisa to take your questions. And as a reminder, please limit yourself to one question and then return to the queue for additional. Elisa, please go ahead.

Operator

Thank you. We will now begin the question and answer session. The first question is from the line of Toni Kaplan with Morgan Stanley. Please go ahead.

Speaker 6

Thank you so much. You talked about life science and healthcare needing to improve in the second half and there's a backlog of larger projects. In the current environment where you've seen these tighter budgets, I guess, how should we think about the confidence in delivering on these projects versus maybe them getting pushed out to next year? And any color on sort of the win rate you're expecting with these versus what's needed in the guide? So win rate on large projects within LSNH now versus what's needed to meet the guide?

Speaker 6

Thanks.

Speaker 5

Sure. Thanks, Tony. This is Jonathan. Yes, in the second half of the year, from the areas that we've seen some pressure, actually our consulting practice has held up pretty well. We have pretty good line of sight in there to the project backlog through the balance of the year.

Speaker 5

And the fact that Q4 of last year was a bit softer certainly helps on the comps. So I think that's an area where we have a pretty decent line of sight and feel pretty comfortable that even in an environment where budgets are tighter, that's a part of the business that's going to hold up reasonably well in the second half of twenty 24.

Speaker 1

Thank you, Tony. Next question please.

Operator

The next question is from the line of Manav Patnaik with Barclays. Your line is now open.

Speaker 7

Thank you. Good morning. Firstly, Maggie, welcome back. Looking forward to talking again. And Jonathan, hopefully parts will cross again.

Speaker 7

But I was just hoping, Andy, if you could maybe just help us a little bit more with the CEO change. I think all of you have said in your prepared remarks that Clariate is in a very strong shape, ready to grow, seems like everything is looking upwards. And clearly, Maddy has a strong G segment given its history. But just a little bit more color and what does this say about the other two segments going forward, please?

Speaker 2

Yes. Thanks, Manav. Thanks for the question. Good to connect again. Look, I think, first I'd say, Matti's background, while it is, he's got great familiarity with the A and G segment.

Speaker 2

He's also demonstrated just a proven ability to drive execution and performance across businesses. And while we're I think we spent a lot of time with Jonathan just talking about what's next for the business and came to a mutual agreement that this was the right time for a transition. And really we're focused on exactly that, which is driving execution and performance across the businesses, across each of the businesses. And we think Maddie is really well positioned to help drive that across the company.

Speaker 1

Thanks, Matt. Next question, please.

Operator

The next question is from the line of Surinder Thind with Jefferies. Your line is now open.

Speaker 8

Thank you. In terms of just strategically as we look ahead, is the idea to be more product focused, faster product cycles? And then just maybe any color on the fact that it sounds from the commentary that there's a lot of product coming in 2025, and how we should think about that translating to growth?

Speaker 4

Maybe I'll comment on the first piece. Yes, I actually feel very good about the let's take a step back, Sreedhar. One of the key things coming here 2 years ago when I came was the need to focus more on innovation and invest ahead of growth. We've been doing that across all three segments as Steve and I discussed last 2 years here. What we're seeing now is that innovation begin to bear fruit in terms of new product launches.

Speaker 4

We saw as we know first, we did the Web of Science improvements and the impact of the investments there showing up the turnaround of that product. We're seeing it now that some of the examples I gave in the presentation today in IP and in Life Science and Healthcare. And I think of it as a building wave. And this wave has been building the last couple of years. We saw early wins in AMG.

Speaker 4

G. We're beginning to see the improvement in terms of derwent renewal rates this first half of the year again built on this. So I would expect this wave to continue. And on the back of innovation is going to be higher customer engagement, and as a result, increasing revenues. And this is core certainly to the improvement in the long term plan we've talked about in the past.

Speaker 4

You want to add Jonathan? That's great. Okay, that's great. Thanks so much.

Speaker 1

Thanks, Surinder. Next question please.

Operator

Next question is from the line of Shlomo Rosenbaum with Stifel. Your line is now open.

Speaker 9

Hi, thank you very much. I just wanted to talk a little bit about Derwent and just the whole overall IP growth trajectory. And it seems like at least the private companies in the space seem to be having more success based on at least some comments that I've heard from them. And I'm wondering if you feel that you're just losing ground competitively over there. And if so, do you feel like that's being turned around?

Speaker 9

And then I just thought I would ask Matti to just comment a little bit about his confidence in being able to execute on the growth plan or whether he thinks there's going to be a complete strategic review and maybe come out with a different plan to The Street?

Speaker 4

Great. So again, this is Jonathan. I'll go ahead and comment on it. So, I mean, your comments on IP are great. I feel unbelievably confident in the turnaround of the IP business in particular.

Speaker 4

I think your comment on losing grounds, that was certainly true 2 years ago. And in my comments today I talked about our improved win rate on IPMS, the 80% competitive win rate in Japan. Frankly, 2 years ago, we were on our back heels, now we're on our toes. And that is a critical early indicator for us in IP. When you win an IPMS system, you implement that for 12 months, then you get back to revenue, but then it gives you a far greater likelihood of winning the much larger annuities on back of that.

Speaker 4

So this is something which frankly hurt us 2 years ago, when we were losing some of these IPMS systems. We're now winning more than our fair share. It does take 12 to 18 months to convert into revenue in the totality of the opportunity. But I feel this unbelievably confident in what Gordon and the team have done leading IP with more to come there. And then I'll probably intercept your question for Mahdi.

Speaker 4

Let's give Mahdi 90 days to kind of get his head around the business and then he can come back in his call and kind of comment on his views. Thank you.

Operator

Next question is from the line of Heather Balsky with Bank of America. Please go ahead.

Speaker 10

Good morning. It's Wahir Amin on for Heather. I want to dial in on ACV. As you're adding more products, seeing new client wins, what level do you expect ACV to grow and what more can you do in this space to grow that metric?

Speaker 5

Yes, it's great for me, he. This is Jonathan Collins. As we move into next year, and we touched on this just a moment ago, the investments that we're making in product that are coming into general release in the second half of this year are products that should generate subscription revenue. So we do expect to see the benefit in ACV as we move into next year. And just as a reminder, Jonathan walked through the 4 different applications or personas that we'll be serving in Patent Intelligence going forward.

Speaker 5

The first of those will go into general release this year. We expect that to start to help our renewal rates create great opportunities for upselling of those products as we move into next year. And then also, he did a little bit of a double click or a deep dive on the real world data offering. So as we have the platform available, as we exit this year with over 10 different disease indications that we'll be serving on that platform, that'll be a great opportunity to drive subscription sales as we move into next year as well too. So the acceleration of our organic growth will be led by the subscription business and the investments that we're making in those types of products.

Speaker 1

Thank you. Next question please.

Operator

The next question is from the line of Owen Lau with Oppenheimer. Your line is now open.

Speaker 1

Good morning and thank you for taking my question. So on the more balanced approach to use free cash flow, could you please add more color on how much do you expect organic growth, M and A tiebacks and how much would be leveraging? And do you have a new target for your leverage in the near and longer term? Thanks.

Speaker 5

Thanks, Owen. This is Jonathan. So what we really want to intone here is that over the course of the past couple of years, deleveraging has been our primary objective within our capital allocation. Now that we've got leverage under 4 turns, we are pivoting a bit and we see a greater opportunity to repurchase our stock at lower levels. But also it's really important to highlight that we're starting to see green shoots in each of our three segments, where there's an opportunity to put capital to work to acquire new capabilities that we think will also help to catalyze organic growth in the next couple of years.

Speaker 5

So I don't have specific numbers for you for the second half of the year, but we want to make sure that it's clear that that objective that we've had to get our leverage under 4 terms, we've really achieved and now we see ourselves being in a more flexible position to either buy back stock or acquire smaller businesses that will help to accelerate our growth.

Speaker 1

Thanks, Alan. Next question please.

Operator

The next question is from the line of Andrew Nicholas with William Blair. Please go ahead.

Speaker 11

Hi, good morning. Thank you for taking my question. I wanted to ask a little bit more on guidance. I think on the Q4 call, Jonathan, you gave segment level growth expectations. Curious if those have changed meaningfully from earlier this year?

Speaker 11

And then also if you could just kind of outline what you're thinking about or embedding in guidance in terms of macroeconomic conditions, whether it's patent volumes, budget constraints, any expected recovery that's baked in or would you need to see deterioration for there to be risk to the bottom end of the guide? Thank you.

Speaker 5

Yes, you got it, Andrew. So maybe I'll start with a macro first. I think the area that we've seen a bit more softness than maybe we anticipated at the beginning of the year is within Life Sciences and Healthcare. As Jonathan touched on in his prepared remarks, we continue to see budget pressures at some of our largest customers, which are very important for this segment. So from a macro standpoint, that's really the only change that we've seen from the beginning of the year.

Speaker 5

When we think about it from a segment perspective, I really focused the comments on Page 19 around the revenue type, but maybe I'll just give some additional color there. A and G's subscription growth is generally going to be in line with what we originally expected. As I mentioned, the slightly lower expectations on subscription revenue are really going to come in the Life Sciences and IT business and the macro within life sciences is the real driver there. Certainly, the reoccurring revenue change, we think we're going to be flat now instead of up 1%. That's essentially all in IP.

Speaker 5

And then our transactional expectations on the full year really haven't moved meaningfully. But that's a little bit of shaping and color on each of the segments and we'll of course give more of an update in

Speaker 1

a few months as we complete the Q3. Thank you. Thanks, Andrew. Next question please.

Operator

Next question is from the line of Ashish Sabadra with RBC Capital Markets. Your line is now open.

Speaker 12

Thanks for taking my question. I just wanted to drill down further on the subscription growth, which is now expected to be below 2% due to that softness in the Life Sciences and IP. I was just wondering how much of that has been driven by some of the macro headwind like the budget pressure and how much of it potentially is due to a slow like a slower adoption of some of these newer products being launched? Any color on those fronts? Thanks.

Speaker 5

Yes. Thanks for that question, Ashish. Within life sciences, it is we believe it's mostly the macro. We think we accommodated for some of the product challenges and investments that we're making there. I think on the IP side, while Jonathan highlighted real strength in Derwent's renewal rates, which is a good leading indicator, the Patent Intelligence segment is softer than we would have expected products like Innography and Incopat.

Speaker 5

And as you'll recall, as Jonathan laid out the investment we're making there, Derwent, the search and watch use cases are getting the investment first and Enography and Incopat are coming second or a bit later. So that's probably a product area that we're focused on moving into next year. But yes, really the macro on the life sciences side and then continued work that we need to do in patent intelligence to get the same leading indicator swings from endography and Inco Path that we're seeing in derwent.

Speaker 1

Thank you. Thanks, Ashish. Next question please.

Operator

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

Speaker 8

Hi, thanks. Good morning. Jonathan, you mentioned that lower industry volumes in the U. S. PTO contract delay were partly responsible for the full year organic growth coming in the bottom half of the range.

Speaker 8

Can you unpack these a little bit more and whether there were other factors causing you to update your full year outlook for organic growth?

Speaker 5

Sure, George. We think about intoning towards the lower end versus the mid, the subscription business we talked about. You're touching on the reoccurring order type. We originally thought that would be up about 1%. We think it's going to be about flat.

Speaker 5

It's widely publicized. We had won a contract at the USPTO referred to as the PCT. That has been delayed until next year. That's really the primary driver of why we think that the reoccurring order type is going to come in. Just a little bit lower industry volumes and lower FX volatility have had a small impact, but the big driver is the delay of that contract.

Speaker 1

Thank you, George. Thank you, George.

Speaker 4

Okay. Well, everyone again, thanks so much for joining the call this morning. We really appreciate the interest that you have in Clarivate and our remarks. And again, look forward to certainly engaging more with the team and with Monty, again, congrats Mike for taking over as CEO. It's a great company with a lot ahead of it.

Speaker 4

Look forward to talking with all of you soon. Take care now. Bye bye.

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Earnings Conference Call
Clarivate Q2 2024
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