Q3 2022 Clarivate PLC Earnings Call
Yeah.
Good morning. Thank you for attending today's clear the Q3 2022 earnings release call. My name is for them and I will be your moderator for today's call.
All lines will remain muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question. Please press star one on your telephone keypad. It is now my pleasure to pass the conference over to our host Mark Donohue head of Investor Relations Mr. Donnie.
Please proceed.
Thank you and good morning, everyone. Thank you for joining us for the declared a third quarter 2022 earnings Conference call with me today are Jonathan Gear, Chief Executive Officer, Jonathan Collins, Chief Financial Officer, Gordon Samson Chief product Officer, Dave Thomson Chief revenue Officer.
All will be available to take your questions at the conclusion of prepared remarks. As a reminder, this conference call is being recorded and webcast copyrighted property of clarity.
Any rebroadcast of this information in whole or in part without prior written consent of clarity is prohibited and accompanying earnings call presentation is available on the Investor Relations section of the company's website clarity dot com.
During our call we may make certain forward looking statements within the meaning of applicable security laws such forward looking statements involve known and unknown risks uncertainties and other factors that may cause actual results.
Performance or achievements of the business or developments in clarity industry to differ materially from the anticipated results performance achievements or developments expressed or implied by such forward looking statements.
Information about the fact that can cause actual results to differ materially from anticipated results or performance can be found in <unk> filings with the SEC and on the company's website.
Our discussion will include non-GAAP measures or adjusted numbers, including organic revenue and adjusted EBITDA Claret believes non-GAAP results are useful in order to enhance an understanding of our ongoing operating performance, but they are supplemental to and should not be considered in isolation from or as a substitute for GAAP financial measures.
Installation of these measures to GAAP measures are available in our earnings release.
The amount of presentation on our website.
After our prepared remarks, we'll open the call for your questions with that it's a pleasure to turn the call over to Jonathan.
Great. Thank you Mark it's great to join my first call as CEO of clarity I could not be more excited to be here.
So the story of the company in early July I spent much of my time traveling around the world meeting with thousands of my colleagues. The time I spent with them has reinforced my view of the strengths of our people the resilience and growth potential of our products and the power of our customer relationships.
Our many great things taking place declared rate, but we also have work to do to realize our full potential.
I look forward to covering this in great depth at our Investor Day in March 2023, I will touch upon some of my initial impressions and areas of focus in the next few minutes.
First I wanted to start with our third quarter financial highlights.
As a next quarter with us with both areas of great strength and pockets that did not perform as we had expected.
Our key financial metrics of revenue EBITDA and EPS were all up year over year as we continue to grow and expand the business even in these challenging economic times.
This growth speaks to the resiliency and criticality of our solutions.
Focusing on revenue we came in at $636 million, an increase of $5 million.
Organic basis over the prior year period. However, this was 4 million below the bottom end of the range, we provided and I will spend some time focused on this metric.
Peeling back these numbers well over 95% of our business, including our academia and government business, our IP business and the subscription portion of our life Science and health care business delivered as expected.
Total organic subscription revenues increased four 3% in the quarter, which is our best quarterly prescription performance this year.
We are pleased with the trajectory of these businesses.
And the early progress we are seeing our sales initiatives, we have put in place.
While we delivered positive gains in the quarter and the vast majority of our business our transactional revenues specifically in life Sciences health care onetime transactions came in light.
This was primarily driven by a low conversion of a real world data sales pipeline late in the quarter.
Jonathan Collins will provide some additional context here, but I would like to share my view on this business.
First our life Science and health care real World data is a great business critical assets with strong growth potential.
We have seen some quarters with strong performance for example, the first two quarters this year, our real world data and nearly doubled over the prior year. Similarly, the first half of 2021 experienced similar growth. So when this business performs well the results are exceptional.
But we've also had a couple of weak quarters included in last year's fourth quarter and now this year's third quarter, both of which were down significantly compared to the prior year.
As I have dug into our performance closing out Q3, I've come to realize that it is a very difficult business to predict for a few reasons.
First there are a small number of very large deals that can have a material impact on a quarter. So the organic growth never can swing on less and they have got some deals.
Second there is little we can do to speed up a close on these deals. It is all based on customer needs and the timing of those needs, which can move beyond our control. Additionally.
Additionally, we're often selling data aggregators, who are themselves dependent on and customers' decisions and the timing of those decisions.
As a result, we are doing the following.
First we are addressing the structural volatility of this business by investing in new solutions designed to move our real world data products up the value chain and provide greater predictability.
I will cover details of these investments shortly.
Second for the foreseeable future, we will remove many of these larger binary deals smart guidance, which may result in burden, especially performance in this area to the certain quarters.
On our operational highlights there are six key areas, but I would like to expand on which I'll cover in the next few slides starting with the leadership transition.
I wanted to thank Gerry for the leadership and support he provided in creating declared rate up today, none of us would be here.
Were it not for his leadership and foresight.
As he moves into the role of chair Emeritus, we wish him and married toy all the best in the next chapter of their lives as they focus on their family and philanthropic efforts.
Through my travels I've had the opportunity to meet with thousands of our colleagues the care dedication they have to our customers and to the growth of Paraguay is inspirational.
Our assets are mission critical to our more than 45000 global customers. This leads to long term strong customer relationships with 90% plus retention rates.
I had a chance to visit one of our IP customers a month ago and sharing of the partnership in their own words with equally inspirational. These types of partnerships lead to a resilient business model and open opportunities for innovation driven growth. We have work to do that I will touch on but our starting foundation is strong.
My key priority remains focused on unlocking growth potential we will do this by continuing to drive scale internally unlock efficiencies investment dollars and drive a culture of innovation across all areas.
During the third quarter, we announced the divestiture of the monitor business, which we completed on October 31.
This business was not a core offering of ours and we can now allocate investments into our key product offerings with higher growth potential.
We used the net proceeds to pay down some of the term loan which helped to reduce our leverage Jonathan Collins will speak on this subject in a few minutes.
I would now like to share with you a new lens on how I look at the business.
On the lower right side of slide eight I think about our solution sets building from left to right at first and rich data. This is our starting point and our key right to play in our markets the aggregate enhanced public and private data to create proprietary enrich their steps.
Analytics and insights this is putting intelligence on top of our data and.
An example is our brand landscape analyzer, a tool, which helps professionals assess the viability of new brands.
Analytics and insights are further enhanced by driving workflow solutions. This is where we embed our software solutions into the daily workflow of our customers who.
For example, our online library management solution is a critical tool used by librarians to serve their communities.
Finally, we wrap these with expert services, including consulting and software implementation services. Our goal is to continually develop new solutions that move us from left to right, creating more value expanding our playing field and driving loyalty into our customers.
Second on the top right, our regional presence with growth opportunities across all three regions and finally and critically our segments. Starting this quarter, we will be reporting along three distinct segments. There is overlap and valued shared between segments, including content technology and commercial.
Channels. These.
These segments are the prime way in which I looked at our business and we'll be driving survey going forward.
With the second lens, let me share my view on how we're doing.
This is an important slide for us both internally and externally and will form a key foundation for our Investor day in March and I'd like to draw your attention to a few.
Key takeaways.
Today, we deliver approximately $2 6 billion of revenue and a serviceable addressable market approaching 25 billion.
In the past we have emphasized the total addressable market of more than $100 billion. However in the near term I will focus on how we are performing in the markets we serve.
Currently we are underperforming the market opportunities. This is driven by a small number of products. Much of these are from the legacy Thomson solutions, which while strong and often the gold standard. We're underinvested in four years, we are now pivoting and investing behind these and other opportunities.
By making focused improvements to product go to market and a relentless focus on customer delight, we see a new baseline and clear path to market growth.
This will be our main focus of the Investor day, as we share with you the path.
The path and timing to a 6% organic growth baseline and beyond.
All future initiatives will align to an expanded strategy based on strong business fundamentals. This expanded strategy is built on five priorities pillars that underpin all of our organic growth initiatives.
As we have discussed.
Previously our first pillar is the execution of our industry focused customer centric go to market model. Our second pillar is focused on bringing different content sets. Together. As example, we combined our copy Mark and darts IP to create a new solution for performing trademark litigation analysis.
Within pillar three we get insights and predictive analytics on top of our core content. For example, we recently launched a proprietary United Nations STG module on top of web of Science. This allows universities to analyze and track their research with their sustainability goals.
Moving to pillar four we enable customers business processes and decision support with our workflow solutions for.
For example, Rialto is our industry, leading library marketplace. It is critical as libraries build and enhance their content collections.
We wrap all the prior four pillars together and pillar five as we serve as a trusted partner by.
By providing value added services and strategic guidance to help our customers realize their full potential.
I would like to share two new investments that also will address the volatility and our life science healthcare transaction revenue.
Our real World data solutions, despite quarterly volatility are among our fastest growing products in our position and a serviceable market of over $2 billion drone annually in the low to mid teens.
Our lives our life science customers already trust us to provide high quality data. However, today, we provided and data fees that our customers must then integrate and analyze themselves.
We are now investing in a web based platform and a set of intuitive self service analytics to convert our data into insights to drive decisions and actions faster.
This new platform will provide the following benefits first it will move us up the value chain with our clients second is product ties it will provide higher levels of recurring revenue.
Third it will expand our market reach with both existing customers and new logos and finally it serves as a scaled platform to drive additional use case, driven innovation and growth.
We have invested in a new pharmacovigilance platform to create a new enhanced regulatory compliance workflow solution.
Our life Sciences customers are struggling to manage both rising regulatory compliance mandates and an ever growing volume of data on potential drug safety events.
This new solution will further automate these resource intensive activities. This will reduce cost and drive deeper insights into drug safety by leveraging our scientific content and real world data with.
We plan to launch our first two products in the second half of 2023.
We believe these two investments alone have the potential to increase our revenue growth rates by well over 100 basis points in the medium term.
I look forward to sharing more on these and the other elements of our roadmap to growth at Investor Day.
Before I turn it over to Jonathan I wanted to reiterate once again, how excited I am to VA pyruvate in leading this great company. It starts with our dedicated global team, we go above and beyond every day.
Truly believe our future is bright and the best is ahead of US I will now turn the call over to Jonathan Collins.
Thank you Jonathan good morning, everyone.
<unk> 13 is an overview of our 2022 third quarter and year to date results compared with the same periods in 2021.
Third quarter revenue was $636 million, an increase of $194 million compared to the same period last year, driven primarily by inorganic growth from the <unk> acquisition as well as one 2% organic growth both of which were partially offset by a substantial foreign exchange translation headwind as the U S dollar strength.
<unk> significantly against primarily the pound Sterling and Euro. This brings year to date revenues of nearly 2 billion for an increase of $668 million for growth of just over 50%.
The third quarter operating and net loss of $4 4 billion is entirely attributed to the noncash goodwill impairment charges recorded primarily for the CPA Global and pro Quest acquisitions. The drivers of the impairment were deteriorating macroeconomic conditions, such as inflation and rising interest rates as well as the <unk>.
Recent sustained decline in our share price would.
Adjusted diluted EPS for Q3, which excludes the impact of the impairment was 20.
<unk> <unk> increase over Q3 of last year, bringing the year to date to 63, a 14% increase over the first nine months of last year.
Operating cash flow was $208 million in the quarter, an increase of $164 million over Q3 of 2021, bringing it to $372 million for the first nine months, which is an increase of $66 million over the same period last year.
Please turn with me now to page 14 for a closer look at the drivers of the third quarter top and bottom line growth over the same period last year on a consolidated basis.
When we refined our expectations for the third quarter in early September we indicated revenue would likely be in the range of $6 $40 million to $650 million as a result of the relative strength of the U S dollar and that we expected organic growth of about 3%.
As a result of the shortfall in transactional sales within our <unk> business in the month of September that Jonathan mentioned earlier organic growth was about 180 bps light of our expectation and about $4 million below the low end of the range our recurring business, both subscription and reoccurring revenues came in right in line with.
Expectations at more than 4% and 2% organic growth respectively.
Short fall was entirely in the transactional and products and services, which declined by more than 90% when we expected them to be flat.
When we look at the third quarter top and bottom line growth compared to the same period last year was driven by four key factors first organic growth of one 2% added $5 million for the top line and $4 million to the bottom line for our profit conversion of more than 75%.
Second inorganic growth contributed $220 million to the top line and $68 million to the bottom line for our profit conversion of more than 30% on a pre cost synergy basis. This growth is primarily attributed to the quest acquisition.
Third cost synergies net of certain operating expenses required to achieve them contributed $17 million of incremental profit from carryover savings due to the momentum on the <unk> cost actions. Finally, the translation impact of subsidiaries denominated in foreign currencies had a substantial impact in the quarter, reducing revenue by 31.
And profit by $8 million.
Profit conversion is lower than normal as the translation impact was ameliorated by transaction gains.
Page 15 illustrates the consolidator in top and bottom line results for the three segments, Jonathan outlined earlier for the past seven quarters. This historical information was made available in a separate 8-K, we filed this morning.
The change effectively bifurcate the segment, we previously referred to life science into Academia, and government and life Sciences and healthcare. The A&D segment includes the legacy Thomson products web of science insights and note in scholar one as well as the <unk> acquisition.
And each segment now includes the legacy Thomson product or tell us along with the DRG acquisition and the intellectual property segment remains essentially unchanged, including legacy Thomson product Darwin in the CPA Global acquisition.
On the left of the page you will note that the <unk> and <unk> products had led organic growth at about 6% both last year and so far this year. However, this business is clearly more volatile with double digit growth in quarters like Q1 of this year as well as quarters that are essentially flat rate this past quarter.
This was caused by the Lumpiness of the transactional data sales and we're making the investments to gradually move this business towards a more recurring revenue stream.
The IP segment has consistently delivered organic growth around 3% and AMG, which excludes protest has grown organically in the 2% to 4% range. While both of these businesses have a level of seasonality on transactional sales. They are much less variable than Allison H and we expect further stability in amg's organic growth.
As the <unk> business is included in the metric next year.
On the regular page you will note that A&D prior to the protest acquisition delivered the highest profit margins. We do expect that as we realize the cost synergies in 2023. The margins in this segment will improve towards before these IP has steadily improved margins over the past two years as the cost synergies from the CPA Global acquisition Hasnt been.
<unk> achieved our smallest segment as Alison nature and its margins are reflective of its relative size.
We believe this change to our segment reporting will provide greater transparency into our operating results moving forward.
Please turn with me now to page 16 to see how the third quarter profit converted to cash flow.
Free cash flow was $140 million in the third quarter, an increase of $120 million over last year's third quarter and $216 million in the first nine months, which was essentially flat compared to the same period in 2021 <unk>.
Adjusted free cash flow, which excludes the impact of onetime costs was up $100 million in the quarter and the first nine months is the growth in adjusted EBITDA was partially offset by higher interest taxes and capital spending all of which are largely attributed to the <unk> acquisition.
Can you move with me now to slide 17 for a look at our revised full year guidance for this year.
As a result of the increasing strength of the U S. Dollar the divestiture of our Markmonitor business that closed last week and the volatility in our <unk> and <unk> transactional business, we revised our outlook for the balance of the year, we're lowering the midpoint of our revenue guidance by $100 million and nearly half of its about $45 million is due to.
Foreign exchange, we've assumed the U S dollar will strengthen another 5% sequentially against the pound and euro in the fourth quarter.
The Mark monitor the sale lowest revenue by about $15 million as a result of excluding this business in November and December .
Lowering the outlook for our organic growth rate by about 200 basis points accounts for about $40 million and about a third of this transpired in the third quarter and we expect about two thirds will occur in the fourth quarter as Jonathan highlighted nearly all of this variance in the transactional products and services, we deliver within our life Sciences and healthcare segment given the volatility.
Over the past few quarters, we market to provide a quite conservative outlook for this area of the business in the fourth quarter.
We now expect our organic growth rate to be about two 5% and revenue of $2 $63 billion at the midpoint of the ranges through strong cost discipline, we expect to maintain our profit margin at the low end of the prior guidance range at about 41%, yielding an adjusted EBITDA of approximately $1.075 billion.
Midpoint of the range adjusted free cash flow is now expected to be $525 million at the midpoint of the range for a conversion of nearly 50%.
$100 million decreased compared to the prior guidance is attributed to the lower profit and slightly higher capital requirements. Adjusted diluted earnings are now expected at <unk> 80 per share at the midpoint of the range. Please turn with me now to page 18 for the drivers of the expected revenue and profit growth for the full year compared to last year.
As with the comparisons providing for the third quarter top and bottom line growth. We expect the full year will be driven by the same four factors first organic growth is now expected to deliver approximately $45 million of incremental revenue and about $20 million of added profit for a conversion of about 45%.
Second inorganic growth is expected to contribute an additional $830 million of sales and $250 million of profit in actual exchange rates for our profit conversion of approximately 30% as a result of the <unk> acquisition on a pre cost synergy basis third cost synergies associated with the CPA and probe such transactions are.
<unk> to add $70 million of profit and finally as I just noted a moment ago. We've assumed the U S. Dollar continues to strengthen in the fourth quarter, causing $120 million headwind to revenue and a $70 million flow through to profit for a conversion of about 55%.
Please turn with me now to page 19 for more detail on how we expect our full year adjusted EBITDA of nearly $1 billion $75 million will convert to free cash flow.
Our full year outlook for adjusted free cash flow is now $525 million at the midpoint of the range and represents an increase of $65 million compared to last year. We anticipate the profit growth of approximately $275 million will be partially offset by higher interest to service the debt used to fund the <unk> acquisition higher cash taxes on the <unk>.
Asset growth and higher capital requirements and increased capital spending will be partially offset by lower working capital.
This outlook contemplates that nearly 50% of every dollar of profit will convert to adjusted free cash flow.
Please turn with me now to page 20 for a look at how we plan to utilize this cash as well as the proceeds we received from the Mark monitor sales to strengthen our balance sheet.
In the upper left quadrant of the page you can see that through a combination of more than a half a billion dollars of adjusted free cash flow more than a quarter billion dollars of cash proceeds from the markmonitor sale and about $100 million of cash on hand, we will pay down about a half a billion dollars of debt between the term loan and the revolver repurchased $175 million of our stock.
Integrate the <unk> acquisition service, our preferred stock with the cash dividend and satisfy other minimal obligations in the upper right. You will see that this will leave us with 5 billion of debt at year end and we expect to utilize a large portion of next year's free cash flow to continue to pay down debt as we prosecute our plan to reduce our leverage to less than four.
Thanks.
In the lower left you will note that during the quarter, we entered into an interest rate swap on about three quarters of $1 billion of our floating rate term loan. This action combined with the anticipated deleveraging in the fourth quarter will result in a reduction of our floating rate debt from 45% to 25% of our annual coupon and.
And finally in the lower right you will note two important features about our debt stack first with the current interest rate projections via the forward curve, where base rates peak at about 5%. Our total weighted average cost of debt will peak at about five 5%, which remains very low by historical standards and second we have no debt maturities of mandatory.
For the next four years.
Please turn with me now to page 21 for some high level comments on the major drivers of our top and bottom line trajectory as we approach 2023.
In a few months, we plan to provide specific guidance for next year as well as the timeline for accelerating organic growth from the current levels to the market growth rates. However at this point, we want to highlight a few major factors that are developed in the second half of this year that will have a material impact on our outlook for next year.
First if the dollar remains strong as it is today, we will have a significant top line headwinds due to FX translation that will be most evident in the first half of 2023 second the sale of our Mark monitor business will also lower our revenue in the first three quarters of next year, it's worth noting that neither of these factors will affect our organic growth and finally.
We do expect organic growth to improve next year as we execute the strategy GE Jonathan outlined earlier. However, we do not anticipate the dollar impact of the FX and divestiture headwinds will offset the impact of the organic growth, leaving our revenue relatively flat next year.
As a result, our profit margin expansion will be relatively modest next year aided by the completion of the <unk> cost synergies, leaving EPS relatively flattish level, we do expect our free cash flow conversion to nearly double in 2023 inch the onetime cash outflows associated with the CPA equity plan and the <unk> integration cost will be behind us.
Please turn with me now to page 22 for a reminder of why we believe this is a great business that's positioned to generate value for shareholders, even during times of economic uncertainty.
I want to Echo jonathan's enthusiasm for the prospects of our business in this page helps to highlight a half a dozen regions for our sanguine outlook, our three business segments AMG Ellis and agent IP are replete with mission critical products full of enrich data delivering analytics and insights to an expanding range of user for settlements we enable our.
<unk> workflows and we also act as a trusted partner providing value added services across a broad range of industries around the globe and these products and services are highly recurring in nature. So far this year, 78% of our revenues are subscription and reoccurring in nature and collectively have delivered organic growth of four 5%.
Our transactional business has been more variable than we would like over the last few quarters, but the investments we are making in new product innovation within our <unk> business will migrate more of the revenues towards recurring sales, providing additional stability and predictability.
Because our products are mission critical our subscribers have renewed at 92% this year, which includes a headwind from our decision to suspend our operations in Russia. This demonstrates the share resilience of our subscription products. These commercial attributes provide a solid foundation to drive substantial operating leverage as evidenced in our profit margins, which are in excess.
With 40% so far this year.
It's important to note that the content technology and commercial channels that our three segments share had led to a quarter billion dollars of cost synergies over the course of the past few years as we've integrated the DRG CPA and <unk> acquisitions. This is a major contributor to the strong profit margins we're delivering.
The onetime costs to integrate these businesses and deliver these cost synergies have created a significant drag on our free cash flow conversion. However, these are now largely behind us as I mentioned, just a moment ago, we expect our free cash flow conversion to double next year, so about half of our adjusted EBITDA.
Combined these factors highlight that our business is a scale of information services compound are poised to accelerate organic growth via our refined strategy and deliver outsized returns for our shareholders moving forward. Thank.
Thank you all for listening in this morning, I'll now turn the call back over to form to take your questions and as a reminder, please limit yourself to one question and then return to the queue for any additional.
Foreign please go ahead.
Absolutely if you would like to ask a question. Please press star followed by one on your telephone keypad.
If for any reason you would like to remove that question. Please press star followed by two okay.
To ask a question press star one.
A reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question.
Our first question comes from the line of Manav Patnaik with Barclays Manav. Your line is now open.
Thank you good morning.
Wanted to touch on you know Jonathan.
Jonathan Gear, you pointed out obviously the.
Youll growth versus the market growth in the gaps and I know, you'll give us more color on the Investor day, but when you look at your <unk>.
2023, I guess implied organic growth it has improved but still kind of in that 3% comp for next year. So I was hoping just give more color on how long or how much do you really need to do to get it.
To be able to go penetrate that white space. It sounds like maybe 23 won't show that.
Sure Manav. Thanks for the question. So in a couple of comments to your question is firstly, we certainly expect and will make progress on our organic growth in 2023, and we will come out with a very precise number is at at our guidance call. It end of the Q4 I think your second part of your question to be the timing. If you go to the market rates of 6%.
Overall and it's.
The way, we're thinking about it and again I will have much more precise views on the timing of this manav and also importantly, the past so that you can pressure test our assumptions, there, but I think that will be measured.
I'll call. It a few years and a few could be it could be measured in a couple of tough years think of it in terms of that that being the timing, but again, let me come back to you Manav at Investor day with some more precise.
Timing on this.
Hi.
Next question please.
Our next question comes from the line of Toni Kaplan with Morgan Stanley Tony Your line is now open.
Thanks, so much.
I wanted to circle back to September it seemed like you had some idea that you know the quarter wasn't going well essentially lower the guide.
I know transactional has less visibility, but I guess down sort of a big delta versus flat. So.
Like I guess are you able to monitor the transaction intra quarter or was September really a lot worse than July and August 10, just how should we think about for Q and next year for the transactional business.
How do you get that.
To recover basically.
Sure Yeah, I'll add my comments and John you can add if I Miss anything.
So so first of all as I mentioned in my comments, it really came down to really a half dozen very very large deals and we certainly obviously our lifetime health care sales team led by Tom We are very involved myself, Steve Jonathan Remarketing. These on a really daily basis, given the size of them and it's really gets to the crop to what ive made in <unk>.
Comments to kind of my discovery here being you might like first quarter on the role. These are just very hard to predict.
And what's interesting is we didn't lose these the competition they just decisions were delayed or postponed.
I've come to realize is that the nature of the product is you have a small number of very large deals that we feel very good about and they just don't convert and it's something that is I'll say.
We need to be Tony in terms of my experience and it's a key lever for US here. So as we think about next year I think is the divestment. Johnson also mentioned his remarks, our view on this is first speak lead to structurally change it and the investments, we're making which I'm incredibly excited about which we actually okay and greenlighted before the end of the quarter.
Feel very good about what that will do to really smooth out both by adding more value to our clients. So moving up the value chain as I mentioned, but also really smoothing out the predictability of this of this important important revenue chain.
And the second piece is both John and I mentioned it is given the volatility here I think the prudent thing to do is take some of these large deals out of our guidance and that of our view and the result of that might be we may have a couple of quarters will be come in surprised the upside when that happens we will call. It out so youll have the visibility and know what happened, but thats how were thinking about.
Jonathan anything like that that's great. Thanks.
Thanks, Tony.
Thank you. Thank you for your question.
Our next question comes from the line of Andrew Nicholas with William Blair. Andrew Your line is now open.
Hi, good morning.
I appreciate you taking my question I wanted to ask on profit margins for next year I think.
Slide 21 in your in your prepared remarks, you talked about modest expansion.
Primarily on quest cost synergies, so I just wanted to clarify.
Is the intention or the messaging here that youre planning to reinvest the organic kind of margin expansion that you'd expect from from this business back in Q and H or other growth initiatives is that how we should think.
Thinking about next year.
Yeah, Andrew it's Jonathan comps.
As we think about next year, the big things, we wanted to highlight where the top line just to be clear that the FX headwind, we're going to see in the divestiture of Mark monitor will offset even may improved organic growth on a dollar basis to your point when we think about the profit margins. We do believe we'll have some margin expansion as Jonathan said when we're out in.
February with our year end results, we will give more specifics around that.
With organic growth in the range that it has been the margin expansion as a result of that is not going to be significant but we will have the <unk> cost synergies next year that will complete which will help bolster margins. So those are the big pieces that we wanted to point to and highlights for next year as we think about the bottom line.
Okay.
Thanks next question please.
Our next question comes from the line of Shlomo Rosenbaum with Stifel.
Your line is now open.
Alright, Thank you for taking my question.
I'm trying to understand a little bit more what is the impact of removing the large deals from real world data from your guidance in other words.
Im looking at 'twenty three over 'twenty, two and you're talking about working kind of flattish how.
How much revenue are you excluding from big deals that you would normally exclude there could be potential upside because I'm trying to.
Get a baseline.
What kind of organic growth, we're looking at because it seems like you're introducing this kind of conservatism, but it's hard for us to really get a bead on how much how much revenue are we talking about.
Yes.
Thematic than have to answer the specifics so again to 'twenty three we will of course Shlomo come back with more details of the at the end of the Q4 call, but <unk> had a couple of things and Jonathan will comment on this we did want to highlight that the impact of some of the.
The big impact Mark monitor FX et cetera, and the total revenue revenue numbers. When we think about this then I'll call out as I mentioned on my in my earlier comments.
Well over 95% of our business performed as expected and so the bulk the vast majority of this business is quite predictable as you would expect as everyone. On this call with respect for business of this nature. We do have this one aspect of our business, which can have.
Great quarter, and not not so great quarters, and so when we look forward next year, what I would expect maybe IP.
<unk> comment on it and keep in mind, we have not finalized our plans for next year, but I would expect kind of no <unk> whatsoever in our real World data base decline for next year that Jonathan do you want to add to that yes, I think that characterization is fair and Shlomo since we haven't given a specific number for next year I'm not going to be able to answer it.
With with a lot of detail, but I would point to our guidance for the fourth quarter, what we've effectively done here with saying that Q4 is going to be flat organically is heavily discounted all these deals so.
That's a pretty significant impact in the fourth quarter as that's typically the largest quarter. These deals so as Jonathan said as those.
We hopefully get some of those closed during the quarter I will provide some upside, but that's how we've approached the fourth quarter more details on Q.
2023, when we guide to that early next year.
Next question please.
Our next question comes from the line of George Tong with Goldman Sachs. George Your line is now open.
Hi, Thanks, I wanted to stick with the life Science and healthcare transaction revenue performance. You mentioned that you didn't lose any of the deals the decisions were delayed and postponed. So can you talk a little bit more about the dynamics of what happened there are these truly delays.
And where are they due to macro factors or other factors that cause.
The Bill is not to go through and then separately what are you doing to improve the predictability in terms of translating these revenues into recurring revenue streams are you looking to restructure contracts.
And how your go to market any color there would be helpful. Thanks.
Sure Yeah, let me comment on all of those.
So first let me describe the nature of some of these larger deals and <unk> mentioned, we have large deals. We also have a tail of smaller deals on the real world data. So as not all but what happened is you have these series of larger ones cutting basically not close and a couple of takeaways, which I'll share with you in terms of learning.
So first in some cases, we're going direct to the end user but in many cases, particularly with these larger ones. We are selling to other data aggregators who themselves to bring other datasets. Other content that they may have or may have to to provide a more comprehensive solution for the for the ultimate end user and so that they are complex deals.
Very reliant on the timing and specific need of the end customer, which is a moving target.
That's number one on the second thing you asked me about any economic pressures answer is no I don't believe any of these deals were materially impacted based upon what we're seeing in the slowdown of the economy and maybe a little a little more governance. If you will for some from boards and whatnot of smaller companies have a dispute and is this the land.
The database, they do and if they postponed decisions than they did they just postpone disease needs for those decisions. So doors that did not see really any macroeconomic pressure on this are really <unk>.
Materially in any part of our business that continues to be a very resilient business as it historically has shown now to the second part of your question. What are we doing about it I've pulled back those two examples I showed in my prepared remarks, we're building out a platform for real world data and this platform as.
It is the future.
What we're doing with this data there will always be a need for data data in its pure form by certain end users and certain customers based upon their use models and requirements and aggregating with other information and that's great. But we're prepared with thing to know is this the creation of a real world data platform, which then creates specific use case based Andy.
<unk> and it has a couple of benefits from it first it's easier to consume our data number one secondly could they can combine our data with proprietary information that the end user may have to really create some enhanced solutions.
<unk>, two and the third element, which I know everyone. On this card call cares about it becomes much more predictable. These will be recurring type revenues. It will move us up the value chain and to meet George's what <unk> typically seen in my history that with great information businesses do as they start with core information and they lay on top of analytics.
Inside to create much more as higher value more predictable and sticky content. So.
That's our plan to continue to migrate and improve this business and again I'll comment.
My business is great. The data is must have the issue we have right now with the real World data is it's just very unpredictable the investments we're making in prototyping much of it will help address those issues.
Great next question Peter Thank you.
Our next question comes from the line of Seth Weber with Wells Fargo. Your line is now open.
Hey, good morning, guys.
Wondering if you could just comment on the pricing environment.
Sure.
What's your what Youre seeing here in the back half of the year and maybe just.
What youre expecting for 2023.
The company had previously spoken to something in the mid single digit growth for pricing.
Can you talk about whether thats still the right way to think about it.
Just any kind of early view to conversations for next year. Thanks.
Yes, Jonathan Collins on the pricing front, that's one area that continues to perform as we would expect that it's been a bright spot for us in the first nine months. It is one of the key contributors towards the strong subscription growth, it's been improving as we move through the year. So those conversations.
<unk> has gone well, we've talked quite a bit about the fact that this is really about an exchange of incremental value. So we've made meaningful investments in the products over the course of the past couple of years and now we're able to to be able to recognize it.
Economic benefit associated with that as we look to next year, we're cognizant of the overall environment I will be very thoughtful and careful as we move forward in all of these product categories, but we think this will continue to be an area that helps to bolster the strength of our recurring business, which as Jonathan highlighted earlier, it's been a real bright spot for us so far this year.
Yes.
Our next question comes from the line of Pete Christiansen with Citi. Peter Your line is now open.
You may have the opportunity to repackage the product maybe introduce it into subscription maybe.
How should we think about product repackaging is as a potential means of smoothing out some of the volatility from the transactional business.
Thank you.
Sure Yes.
And with that I think it's a great great opportunity and I'll highlight a couple of things firstly.
The end market in this area as a high growth market is a market that grows on average 7% to 10% and so its the right neighborhood to be in is the right area to be to be playing in and we've had as I mentioned in my remarks, some quarters of incredible performance in that real world data.
First half of this year was great first half of last year was also great.
But it's the unpredictably visibility, which is painful it pains me frankly that we had 95% of our business perform great and as expected.
This volatility caused by this one piece so to address it we are doing exactly as you suggested.
The prioritization of our real world data and call attention to those two investments that we called out which we do believe will have a significant impact on our total company organic growth rate. Once it's rolled out we will do just that use. It suggests they are taking the platform packages being it create a more use case based products inside based product, which has the <unk>.
Benefit of AP more predictable b being stickier and seed these banking easier to use and we frankly control the channel with the end user a quite a bit better with that so we do think that will help with that significantly.
There will always be some ongoing demand for data and its native form and Thats, just the nature of the business and the nature of the consumption, but by prioritizing anatomy insight and analytics on top of the data to create new products. It will smooth out the revenue and the growth in our lifetimes healthcare division significantly.
Question comes from the line of Stephanie Miller with Jefferies. Stephanie Your line is now open.
Taking my question can you just talk a little bit about the appropriate integration kind of a little more specifically kind of what youre seeing within the web of science product again, how that.
Okay sure. So maybe I'll make a comment then have Jonathan Collins come in come in and add some additional color.
So first on the broke with acquisition integration has gone exceptionally well, it's always hard and one thing I commented when I.
Really struck me was if the pace of change that has taken place.
Thank the success of the integration of progress really is a success story, we didn't clear right and a lot of credit goes to the teams both on the pro side and the legacy nonprofit.
As one of those.
Other pruning yes.