Q4 2020 CLARIVATE PLC Earnings Call
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Good morning, and welcome to the clear feet fourth quarter 2020 earnings release, all participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation there'll be an opportunity to ask questions. Please note. This event is being recorded.
I'd like to turn the conference over to Mark Donohue. Please go ahead.
Yeah.
Thank you Jason and good morning, everyone. Thank you for joining us for declared a fourth quarter on full year 2020 earnings Conference call with me today are Gary debt Executive Chairman and Chief Executive Officer.
Richard Hanks, Chief Financial Officer, and Mukhtar Ahmed President of Science Group. Unfortunately, Jeff Roy President of IP group could not be with us today due to a personal conflict.
Gordon Samson head of APAC strategy and growth could stand in for Jeff Gordon is the former Chief operating officer CPA Global all will be on that we'll take your questions at the conclusion of <unk> per paired remarks.
As a reminder, this conference call is being recorded and webcast and is copyrighted property of clarity any rebroadcast of this information in whole or in part without prior written consent of <unk> is prohibited.
This morning, Clara issued a press release announcing our financial results for the period ended December 31 2020.
The release as well as an accompanying supplemental presentation is available on the Investor Relations section of the Companys Web site, <unk> dot com under events and presentations.
During our call we may make certain forward looking statements within the meaning of the applicable securities laws.
Forward looking statements involve known and unknown risks uncertainties and other factors that may cause the actual results performance or achievements of the business.
Elements and clarity <unk> industry to differ materially from the anticipated results.
Achievements or developments expressed or implied by such forward looking statements.
Information about the factors that could cause actual results to differ materially from anticipated results or performance can be found on clarifying filings with the SEC and on the company's website.
Our discussion will include non-GAAP measures or adjusted numbers, including adjusted revenue adjusted EBITDA Claret believes non-GAAP results are useful in order to enhance the understanding of our ongoing operating performance, but they are a supplement to and should not be considered in isolation from or as a substitute for GAAP financial measures.
Reconciliations 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 with that it's a pleasure to turn the call over to Jerry.
Thank you Mark and thanks to all of you for joining us this morning.
2020 was a year, we will never forget I've been leading public companies for more than 41 years and last year presented a whole host of new experiences and challenges. Fortunately clarity has an incredible leadership team, which is supported by an amazing global team on more than 8400 colleagues.
We will continue to go above and beyond the.
The contributions from all of these individuals' made it possible for us to deliver growth during uncertain times complete several acquisitions, including two transformative ones.
<unk> to make significant progress on strategic growth on sustainability objectives.
I'm very very proud of how swiftly our team migrated to almost 100% of our workforce working from home within a few weeks on the Covid pandemic swept across the globe. We're extremely pleased that we experienced no disruption to any of our services.
At our Investor Day last November we highlighted how we're re imagining the way we work going forward based on the success. We enjoyed last year, we used last year's disruptive events to chart a path to a more efficient way to run the business today and into the future.
We've seen significant benefits from these actions such as higher productivity and higher colleague engagement. Additionally, we will benefit from cost savings that can be invested back into the business to drive growth.
Richard will cover the financials in detail however, before I highlight some of our major achievements. Let me provide a brief overview of our results adjusted revenue for the fourth quarter increased 83% on a constant currency basis, adjusted EBITDA was up one.
37% and our adjusted EBITDA margin improved more than 900 920 basis points to be exact of 42% compared to last year's fourth quarter. The.
The transformative acquisitions of DRG in February on <unk>.
<unk> Global in October we're moving contributors to our growth. We're also very pleased to see a recovery in transactional revenue during the fourth quarter on both a sequential and year over year basis on.
On a full year basis 2020 was in line with our full year guidance and an improvement over 2019 on on organic basis. Despite the headwinds of the global pandemic adjusted revenue increased 31% organic revenue increased one 2% at constant currency due to a 3% increase.
<unk> subscription revenue, partially offset by a 7% decline on transactional revenue as a result of the Covid pandemic.
Adjusted EBITDA increased 66% and adjusted EBITDA margins for the year on increased to 38% almost 800 basis points over 2019, we continued to see the many benefits of the organization improvement initiatives. We've implemented during the last 18 months.
Actions were beneficial in helping to drive organic subscription growth in our subscriber retention rate of 91% during a year of economic and social confusion and disruption.
This is also a testament to the value of the products and information that we provide to our customers.
The benefits of the acquisitions are clearly paying dividends as we delivered strong adjusted free cash flow of $302 million in 2020, an increase of $201 million over the prior year. We expect another significant increase in adjusted free cash flow this year growing to the in a range.
Going to a range of 450 million to $500 million.
This will allow us to delever as well as we continued to invest in organic and external growth opportunities.
Since going public less than two years ago, we simplified our organization structure, we have implemented cost efficiencies. We've realigned our sales structure, we've improved automation and optimization of data processing and we've added strategic on transformative acquisition all of these actions.
Low growth in 2019, and 2020 and will lead to even stronger growth in 2021 in fact by the time, we exit 2021, we will almost we will have almost doubled our revenue from the 202018 levels almost tripled our adjusted EBITDA.
And expanded our adjusted EBITDA margins more than 1500 basis points to 44% to 45% from less than 29% and we are far from being done in fact, we're just getting warmed up in 2020, our team made great progress across our four strategic goals and on many.
Sustainability initiatives.
Saw a significant increase in our colleague engagement score, which increased to 77 from 69 with the increase we move above the benchmark of seven before I'm very proud of the work the team has done to better connect with our colleagues.
Global colleagues, ensuring their voices are heard and that we continue to build an organization that is considered one of the very best places to work in the world.
This gave us even more confidence confidence that a digital workplace can be very effective at clarity without impacting our culture.
We also spent significant resources on continuing to improve our customer delight score our score increase from 70 not.
<unk> hundred 79 from 76 in 2019 best practice World Class is in the 82 and we're clearly moving in that direction. We continue to receive very high marks and positive comments about our products and our information quality.
Another key priority is focusing on top and bottom line growth.
At our Investor Day in November 2019, I announced my personal goal to achieve $1 $5 billion on revenue.
$650 million of EBITDA and $450 million of free cash flow exiting 2023, and 2020, we acquired DRG on CPA global two transformative acquisitions that have moved us beyond these financial targets by the end of the year two years ahead of that schedule.
By adding DRG to our science group and CPA global to our IP group, we created a true end to end platform to better serve our more than 30000 global customers and provides enhanced offerings to potential customers.
On the many appealing attributes of this addition to our industry leading portfolio of products is the abundant opportunities, we have for cross selling and up selling across our entire customer base.
We also completed several tuck in acquisitions last year, including income pack and handler, which provide additional IP offerings. Both in the high growth Asia region and to help us to continue to improve.
Customer engagement and delight scores.
<unk> customer first now.
We also pruned our portfolio the past year by divesting non core assets, we sold Mark monitor on January one of 2020 and this past November we divested the Tech Street business during.
During 2020, we launched 19, new products and implemented enhancements to numerous smaller product offerings to direct outcome on the investments we made as a premier provider of information and analytics to the science and IP industry worldwide.
At our last Investor day, Jeff and Mukhtar, who will be.
With us today outlined how our recent acquisitions and enhanced offerings are well positioned to capture a significant part of the growing addressable market across these industries. The realignment of our sales force and new global business centers will play a leading role in capitalizing on the upsell and cross.
Sell opportunities in front of us.
Since mid 2019, we've identified more than $80 million of permanent cost savings to improve efficiencies and drive future growth. Additionally, we realized over $100 million on cost synergies from these acquisitions were ahead of our plan for all cost savings and integrate.
<unk> activities, we exited 2020 with $118 million of cost savings implemented and expect to realize the remaining savings by the time, we exit 2021 at least three months ahead of schedule.
During 2020, we picked our sustainability initiatives with the goal to create a world leading sustainable company, we launched implemented and completed numerous ESG objectives.
Last year, we will be publishing our first sustainability report within the next few months, we have set a goal to be listed in the Dow Jones sustainability index and the FTSE for good index by the end of 2023. Please take a minute to review the supplemental fourth quarter earnings deck posted with them.
Our IR section on our website for a list of our progress on the sustainability initiatives.
Turning to 2021, the Covid pandemic is unfortunately still relevant.
<unk> the globe.
We expect the pandemic to gradually reduce during 2021 and our plans on that basis. This morning, we reaffirmed our full 2021 guidance revenue of $1 78 billion to $1 eight 4 billion adjusted.
Adjusted EBITDA of 785 million to $825 million adjusted.
Adjusted EPS of <unk> 73 to.
79.
And adjusted free cash flow of $450 million to 500 million on.
Now I'll turn the call over to Richard.
Thank you Jerry 2020 was clearly an interesting year while on.
A small segment of our business did not go on <unk>, we were able to successfully steer the company through a couple of turbulent quarters and deliver organic growth, we exited 2020 stronger than when the year began as a result of a series of strategic acquisitions and significant operational <unk>.
Improvements.
Fourth quarter, adjusted revenues were $471 million, an increase of $216 million or 83% constant currency compared to last year's same period.
Included within the $471 million.
$6 million of revenue from Tech Street, which free which we divested in early November.
So adjusting out the Tech Street, Standalone revenue would have been $465 million per quarter.
Adjusted revenues exclude the impact of a $16 million deferred revenue adjustment made as a result of purchase price accounting primarily stemming from the October 2020 acquisition of CPA Global.
The acquisitions of CPA global DRG in co packed and handling together added 91% to revenue growth this quarter.
The growth was partially offset by the Tech Street disposal and the Mark on it to brand protection divested products.
The foreign exchange impact on our revenues in the fourth quarter was a favorable one 6% due to dollar weakness as compared to last year's fourth quarter.
Organic revenue grew two 6% on a reported basis and 1% at constant currency in this years fourth quarter compared to the prior year period, driven by the rebound in transactional revenues.
The organic revenue growth rate was negatively impacted by a one time $3 5 million deferred revenue adjustment in this year's fourth quarter, which was no comparable amount last year.
This adjustment is not related to the previously mentioned purchase price accounting deferred revenue adjustment to $16 million. This onetime adjustment of $3 $5 million low at the fourth quarter growth rates on a onetime basis by one 4%.
Total subscription revenue was $236 million, an increase of 11% constant currency driven by acquisitions, partially offset by divested products and a onetime $2 6 million reduction stemming from the previously discussed deferred revenue adjustment on.
<unk> subscription revenue growth in the fourth quarter, excluding the impact of the $2 6 million adjustment would have increased 3% on a reported basis and was up one 5% at constant currency.
As Jerry noted subscription revenue renewal rates were 91% for 2020 up from 90% reported in 2019, despite the impacts of the global pandemic.
Transactional revenue increased to $121 million.
$75 million or 163% year over year on a constant currency basis, driven by our acquisitions.
Organic transactional business revenues increased by $2 million or 4% at constant currency reversing the decreases we experienced in the second and third quarter of 2020 due to the Covid pandemic.
Transactional revenue growth was also reduced by $1 million on a onetime basis as a result of the deferred revenue adjustment.
Absent the onetime risk deferred revenue adjustment organic transactional revenue growth was 8%.
<unk>, the favorable impact of currency and up 6% at constant currency.
The improvement in transactional revenue was primarily driven by growth in web of science backfile in customer data sales life Sciences professional services and partly assisted by a return to growth income P. Mark search volumes.
Starting with this quarters report, we are breaking out reoccurring revenue within the supplemental revenue tables to distinguish it from subscription revenue.
Reoccurring revenue as the highly predictable revenue streams from the patent renewals business acquired as part of the CPA Global acquisition.
Reoccurring revenue in the fourth quarter was $115 million with no figure for the comparative period.
Subscription plus reoccurring revenue accounted for 75% of adjusted revenues in the fourth quarter, demonstrating a highly predictable revenue model and was 77% on a full year basis.
ACB growth was 14% for the fourth quarter, which includes acquisitions.
Excluding divestitures from both periods ACB growth was up 25%, while on an ongoing basis ACP increased by three 4% driven by organic growth and annual price increases.
Adjusted EBITDA in the fourth quarter increased by $116 million or 137% to $200 million compared to the prior year period.
This was driven by contributions from acquisitions strong margin flow through and the benefits of the cost saving initiatives.
Excluding a small contribution from Tech Street in the fourth quarter adjusted EBITDA was $199 million.
Our fourth quarter, adjusted EBITDA margin improved by 920 basis points to 42%.
Cash taxes in the fourth quarter was $7 million compared to $8 million in the prior year period and was <unk> $8 million per year.
Adjusted net income increased by $94 million to $136 million for the fourth quarter and adjusted diluted EPS increased to <unk> 22 per share compared to 13 per share in last year's fourth quarter.
The weighted average share count of 627 million shares used to calculate fully diluted adjusted EPS increased by 90% or 297 million shares since last year's fourth quarter, driven by the issuance of ordinary shares in conjunction with the acquisitions of CPA Global Dr. Qi.
As well as a primary offering in June and the exercise of public warrants.
On a full year basis, adjusted revenues were $1 $2 77 billion, an increase of $302 million or 31% at constant currency ex.
Excluding the divestiture of Tech Street, adjusted revenues were one to two $8 billion for the year.
Adjusted EBITDA for 2020 or $487 million.
Increased $193 million or 66%.
Excluding Tech Street fully adjusted EBITDA was $478 million with adjusted EBITDA margins for the year of 39% ex Tac Street.
Adjusted net income in 2020 increased $137 million to $289 million and adjusted fully diluted EPS increased to 64 cents per share compared to 53 per share in 2019.
The 2020, EPS was impacted by a 57% or $177 million increase in weighted average common shares used in the calculation.
Adjusted free cash flow for the full year 2020 increased by $201 million to $302 million driven by the growth in revenues and EBITDA. Additionally, in the fourth quarter, we benefited from a $45 million of cash benefit.
Benefit from CPA global that was a favorable working capital timing difference between the Q3 pre acquisition period on the Q4 post acquisition period.
Capital expenditures in 2020 were $108 million, an increase of $38 million over 2019. The increase was a combination of the addition of DRG and CPA global.
Well as a higher level of product application development as we accelerated the delivery of new products to our clients and drive improvements across the product portfolio.
We ended 2020 with $258 million in cash gross debt of $3 5 billion with.
With the incremental borrowing associated with the CPA acquisition and DRG acquisition, our total debt increased by $1 $9 billion in 2020 as compared to 2019.
Stand alone adjusted EBITDA, which we are required to report on a trailing 12 month basis pursuant to the reporting covenants contained in our credit agreement and indenture was $762 million for 2020. This includes the benefits of the CPA global on DRG acquisitions.
Please refer to our earnings release for a reconciliation from net loss to adjusted EBITDA from adjusted EBITDA to Standalone adjusted EBITDA.
We ended 2020 with a net leverage ratio of four three times compared to four seven times at the end of 2019 on.
Our goal is to be in the low three times range in the medium term.
Turning to the 2020 on outlook.
Gerry highlighted our 2021 financial guidance metrics, let me add some additional color around the year.
You think about the quarterly cadence of our growth throughout 2021, a few things worth reiterating.
As we've previously stated DRG revenue is much more heavily weighted to the back half of the year.
Approximately 60% of its revenues occur in the second half with about 60% of the facts occurring in the fourth quarter or said differently more than 35% of <unk> revenue for the year. It comes in the fourth quarter.
Transactional revenue typically have seasonality within the portfolio with the fourth quarter historically being the strongest budget resets at the beginning of the year. So when you only see a pullback in backfile sales and volumes at the start of the year and then it picks up this week.
As we transition through 2021.
We expect organic revenue growth to be back half weighted as the operational improvements really start to take hold and we begin to realize the benefits of the strategic acquisitions. Additionally, we currently believe we will start to see some economic recovery from the Covid pandemic later in 2021.
Taking all of these factors into consideration and including the recent addition of CPA global.
<unk> revenue profile is weighted at approximately 47% first half and approximately 53% second half with that I'll now turn the call back to Jerry.
Thank you Richard we're really pleased about the changes we made in 2019 and 2020 and the new additions to our portfolio of industry, leading IP and science products and we're very optimistic that 2021 will be an ever stronger year as we continue our pursuit of excellence.
Our team at Clara bet is laser focused on delivering stronger growth this year and maximizing the many many benefits of the improvements, we're making and we'll continue to make and our recent acquisition. We're now ready to take your questions.
Minder, please limit yourself to one question and then return to the queue operator please.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
Using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
First question is from George Tong from Goldman Sachs. Please go ahead.
Hi, Thanks, Good morning, Gerry you outlined several initiatives.
You outlined several new initiatives to accelerate organic growth in 2021, including new product introductions and realigned sales force can you elaborate on what you believe will be top drivers of organic growth acceleration this year and what your latest expectations are for organic growth exiting 2021, yeah. Great question George So just.
As a reminder, if you would look at Q4 exit.
Use current exchange rates and then take out the deferred adjustment that's required with acquisitions, we actually delivered three 9% almost 4% organic growth in Q4. So thats why were taking off zone, which is a great place to leg back in 2019.
When we did our first on Investor day, Richard and I, representing our entire team said, we expected to operate between six and 8% organic growth in 2021, and we feel very good today.
Particularly if you think about pro forma because we'll only have one quarter of Av.
Organic growth.
Of of <unk>.
CPA, because we didnt closed on the fourth quarter, but if you think about that were reported by the way. So you can see it I feel very good about the upside of.
That 6% to 8% range I also im really pleased with when I look back at <unk>.
What happened in the pandemic when I look back that a lot of our customers I couldnt be more pleased with where we're at from a growth standpoint, two huge things Richard said, we would see organic growth increase in the second half, which we well a big piece of that of course is being able to have a day.
<unk> on for 10 months and have CP in for three months of our organic growth in the second half of the big pieces, where we'll also see the inside sales effort, taking place I couldnt be happier.
On our call yesterday, our weekly call move.
<unk> emphasized along with Mike Morehart.
And Jeff how critical it was that we use debt inside sales organization. We're in the process really important to understand we will exit 2021 with about 75, almost 80% of our total worldwide customers existing $30 on base that will be managed.
By inside sales.
Perhaps not all of that we're going to see including putting hunters and insight sales. We're also going to see our ability to focus much better on.
External global market, So just couldnt feel better about it it's a great question George.
Hang on and you'll see that happen as the year goes on.
Thank you next quarter. Thank you.
You bet.
Next question is from Manav Patnaik from Barclays. Please go ahead.
Thank you good morning.
Just wanted to ask just broadly.
I understand the impact from Covid, obviously, you will continue for some time.
On a high level can you just talk about your customer is in.
In terms of how these how that proud of into net debt by Janssen businesses and perhaps also used to rely on some comments on how the.
The competitors held up as well as you the debt create opportunity zone.