Q2 2024 Clarivate PLC Earnings Call
Good morning. Thank you for attending the Clarivate Q2 2024 Earnings Conference Call. My name is Alyssa and I will be your moderator today.
Alyssa: 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 Donohue, Vice President, Investor Relations. Please go ahead.
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 Donohue, Vice President, Investor Relations. Please go ahead.
Mark Donohue: Thank you. Good morning, everyone.
Mark Donohue: Thank you. Good morning, everyone. Thank you for joining us for the Clarivate Second Quarter 2024 Earnings Conference Call.
Mark Donohue: Thank you for joining us for the Clarivate Second Quarter 2024 Earnings Conference Call. As a reminder, this conference call is being recorded and webcast as its copyrighted property of Clarivate. Any rebroadcast of this information, all or in part, without prior consent of Clarivate is prohibited.
Speaker Change: As a reminder, this conference call is being recorded and webcast in its copyrighted property of Clarivate.
Speaker Change: Any rebroadcast of this information, all or in part, without prior consent of priority is prohibited. An accompanying earnings call presentation is available in the investor relations section of the company's website.
Mark Donohue: The accompanying earnings call presentation is available in the investor relations section of the company's website. During our call, we may make certain forward-looking statements within the meaning of the applicable securities laws. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors and may cause the actual results, performance, or achievements of the business or developments in the clarivates industry to differ materially from the anticipated results. However, performance, achievements, or developments expressed are implied by such forward-looking statements.
Speaker Change: During our call, we make certain follow-looking statements within the meaning of the applicable securities laws. Such follow-looking statements involve known, unknown risks, uncertainties, and other factors.
Speaker Change: and they called the actual results.
Performance or Achievements of the Business or Developments in Clarivate's Industry Differ Materially from the Anticipated Results. Performance, Achievements or Developments expressed are implied by such follow-looking statements.
Mark Donohue: Information about the factors that cause actual results to differ materially from anticipated results from performance chemists found in Clarivate's filings with the SEC and on the company's website. Our discussion will include non-GAAP measures or adjusted numbers. Clarivate believes non-GAAP results are useful in order to enhance an understanding of our ongoing operating performance, but they are a supplement to and should not be considered isolation from or as a substitute for GAAP financial measures. Reconciliations of these measures to gap measures are available in our earnings release and supplemental presentation on our website.
Information about the factors cause actual results to differ materially from anticipated results from the performance of ChemE found in Clarivate's filings with the SEC and on the company's website.
Speaker Change: Our discussion will include non-GAAP measures or adjusted numbers. Clarivate believes non-GAAP results are useful in order to enhance an understanding of our ongoing operating performance, but they are a supplement to and should not be considered 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.
Mark Donohue: With me today are Andy Snyder, Chairman of the Board, Jonathan Gear, Chief Executive Officer, Vandi Shemtov, our new and coming CEO, 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 Snyder.
Speaker Change: With me today are Andy Snyder, Chairman of the Board, Jonathan Gear, Chief Executive Officer, Vandi Shemtov, our new and coming Chief Executive Officer, and Jonathan Collins, Chief Financial Officer.
Speaker Change: 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 Snyder.
Andrew Snyder: Thanks, Mark. And hello, everyone.
Andy Snyder: Thanks, Mark, and hello, everyone. Thanks for joining us this morning.
Andrew Snyder: Thanks for joining us this morning. With today's news, I'd like to first take this opportunity to thank Jonathan Gear 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, but during his tenure, he has
Andy Snyder: With today's news I'd like to first take this opportunity to thank Jonathan Gear 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.
Speaker Change: Jonathan joined Clarivate during a challenging time for the business. 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.
Andrew Snyder: has been instrumental in restructuring and strengthening our organization.
Andrew Snyder: 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 at Clarivate. We're grateful that Jonathan has agreed to assist in the transition in a non-executive role after he steps down as CEO. I want to be clear about one thing.
Speaker Change: We've had many productive conversations, and Jonathan and the board have determined that now is the right time to transition leadership at Clarivate. We're grateful that Jonathan has agreed to assist in the transition in a non-executive role after he steps down as CEO .
Andrew Snyder: The foundation of our businesses is strong, and our future remains bright. Over the past three years, I've had an up-close view of Clarivate'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 Shemtov will be joining Clarivate as our next CEO and will be an important driver of the long-term success of Clarivate.
Speaker Change: I want to be clear about one thing.
Andy Snyder: The foundation of our businesses is strong and our future remains bright.
Speaker Change: Over the past three years, I've had an up-close view into Clarivate'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.
Speaker Change: Looking ahead, we are very pleased that Matti Shemtov will be joining Clarivate as our next CEO and will be an important driver of the long-term success of Clarivate.
Andrew Snyder: I've had the privilege of working with Matty at ProQuest, where he was CEO for nearly five years. I've seen firsthand the positive impact he's had, the driving value across an organization. I'm certain Matty 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, increased product innovation, and drive value creation for all stakeholders. Given Matty's decades of leadership experience, the 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. To that end, it's my pleasure to turn the call to Matty.
Speaker Change: I've had the privilege of working with Matty at ProQuest where he was CEO for nearly five years.
Speaker Change: I've seen firsthand the positive impact he's had, the driving value across an organization.
Speaker Change: I'm certain Matty 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.
Speaker Change: Given Matty's decades of leadership experience, the 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.
Speaker Change: To that, it's my pleasure to turn the call to Maddie.
Matty Shemtov: Thank you, Andy. Good morning, everyone.
Maddie: Thank you, Andy.
Matty Shemtov: 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. As you may know, I ran both ProQuest and Exhibits for many years, and I left following the Clarivate acquisition of ProQuest in December 2021. Since then, I have been following Clarivate from afar, but I have been very, truly impressed with the team, and that played a large part in my decision to return to the company.
Maddie: Good morning, everyone.
Maddie: It is an honor to be back at Clarivate.
Maddie: 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 Change: As you may know, I ran both ProQuest and Exhibits for many years, and I left following the Clarivate acquisition of ProQuest in December 2021.
Matty Shemtov: I am pleased that Clarivate has reorganized into three segments to put extra attention and funding towards innovation and customer engagement. Equally important to me, Clarivate has developed great talent across the organization and has a rich portfolio of world-class, industry-leading products and assets. And 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.
Maddie: I am pleased that Clarivate has reorganized into three segments to put extra attention and funding towards innovation and customer engagement.
Speaker Change: Equally important to me, Clarivate has developed great talent across the organization and is a rich portfolio of world-class, industry-leading products and assets.
Speaker Change: Thank you very much.
Matty Shemtov: 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 adjustments, we can be on top of what Jonathan and the leadership team have accomplished and take Clarivate to the next level. I want to thank Jonathan Gear for his leadership while steering the company through the turnaround. And, as Andy stated, Clarivate is in a much better position today because of your leadership, Jonathan, and I look forward to working with you during the transition phase.
Speaker Change: I will also be engaging our customers and partners to understand their needs and how we can better serve them all.
Speaker Change: I'm confident.
Speaker Change: With some adjustments, we can build on top of what Jonathan and the leadership team has accomplished.
Speaker Change: and take Clarivate to the next level.
Speaker Change: I want to thank Jonathan Gear for his leadership while steering the company through the turnaround. And as Andy stated, Clarivate is in a much better position today because of your leadership, Jonathan, and I look forward to working with you during the transition phase.
Jonathan Gear: Great. Thank you, Marty, and good morning, everyone, and thanks for joining us today. On our last hearing of the college, we 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 objective. With its accomplishments behind us and the incredible opportunities Clarivate has, the board and I have mutually agreed that now is the right time for this change. Now, I do want to be clear: Clarivate is in a strong position today.
Speaker Change: And now I'll pass this over to Jonathan Gear. Jonathan, please.
Jonathan Gear: Great. Thank you, Madi, and good morning, everyone, and thanks for joining us today.
Speaker Change: On our last earnings call, it 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.
Speaker Change: I also reiterated our commitment to create a clear, executional plan to deliver on our long-term growth objectives.
Speaker Change: With these accomplishments behind us and the incredible opportunity to clarivate ahead, the board and I have mutually agreed that now is the right time for this change.
Speaker Change: Now, I do want to be clear, Clarivate is in a strong position today. During my time as CEO , we restructured the company into three end market segments and reinvigorated our product innovation investments and commitment to our customers.
Jonathan Gear: During my time as CEO, we restructured the company into three 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 stronger than ever that Clarivate's future is bright, and the best is yet to come.
Jonathan Gear: The changes we made at the company ran to the core of how we operate and included a focus on our colleagues and talent.
Speaker Change: 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 stronger than ever that Clarivate's future is bright and the best is ahead.
Jonathan Gear: If 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 full confidence in his ability to lead the company.
Speaker Change: If 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 Marty this coming Friday. The board and I have full confidence in his ability to lead the company.
Jonathan Gear: I look forward to continuing to work with Monty to help ensure a seamless transition so the company does not miss a beat. Turning to our second quarter results, 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 first quarter. We continue to focus on efficiently managing the business during the 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 statements, starting with academia and government.
Marty: I look forward to continue to work with MAHDI to help ensure a seamless transition so the company does not miss a beat.
Speaker Change: Turning to our second quarter results, 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 first quarter.
Speaker Change: We continue to focus on efficiently managing the business during the 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.
Jonathan Collins: We're now moving on to a review of our standards, starting with academia and government.
Jonathan Gear: For the first half of this year, A&G subscription growth increased more than 3%. This was driven by an improvement in our renewal rates to more than 96%, a best-in-class level, driven by improvements and investments in Web of Science. Transactional sales within A&G have encountered 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.
Speaker Change: For the first half of this year, AMG subscription growth increased more than three percent. This was driven by an improvement of our renewal rates to more than 96 percent, a best-in-class level, driven by improvements and investments in Web of Science.
Jonathan Collins: Transactional sales within A&G have made some headwinds across digital collections and books due to softer one-time budgets in the recent academic fiscal year.
Jonathan Collins: 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.
Unknown Executive: Our commercial team is working closely with our customers to maximize the value they receive without impacting their budget needs. On the product development front, we recently launched Trademark Watch Analyzer, a next-gen protection solution that brings together global trademark and case law, combined with our IP expertise and cutting-edge AI technology for greater efficiency and accuracy.
Jonathan Collins: We are driving new product innovation and AI functionality by leveraging our deep knowledge and expertise across the AMT marketplace. This will help us to win new business and deliver better performance in the future.
Jonathan Collins: Our goal is to drive soft 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.
Jonathan Collins: We strengthened our research offerings with the recent launch of AI-powered Web Science Research Intelligence. 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.
Jonathan Collins: We also launched two new software solutions, Collecto and Specto. Collecto enables librarians to more effectively and efficiently manage collections with improved analytics, unified platform, and AI.
Jonathan Collins: While SPECTO showcases all library digital collections through generative AI, improved workflows, and guaranteed long-term access.
Jonathan Collins: Our focus on enhancing products and creating new solutions is beginning to translate into wins across the marketplace. For example, we won a large, statewide, multi-year content aggregation deal which displaced a key competitor.
Jonathan Collins: We were also awarded a library software deal covering 2,000 plus school libraries in Europe .
Jonathan Collins: Moving to the IP segment, on our last earnings call, I talked about the turnaround within this segment. I am very pleased that we are starting to see improved performance following a challenging year in 2023.
Jonathan Collins: 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.
Jonathan Collins: Our IP and management software win rates 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.
Jonathan Collins: The macro environment has also improved, which has helped to stabilize trademark search volumes and deliver on a few large-scale project wins.
Jonathan Collins: The improved performance is expected to drive organic growth across the segment in the second half of this year.
Jonathan Collins: We are encouraged by the early signs of a turnaround for Dermin, our path intelligence product. The product refresh and enhancements are beginning to deliver improvement rates, which increased more than 250 basis points compared to the same period last year.
Jonathan Collins: 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.
Jonathan Collins: Our commercial team is delivering new business wins. We've recently awarded two multi-year government contracts totaling approximately $10 million U.S. dollars. This includes the U.S. and an Asian passive trade office to provide AI-enabled path design, search, and classification.
Jonathan Collins: We continue to strengthen our IP portfolio with the recent acquisition of Roland, a leading patent drafting and prosecution provider.
Jonathan Collins: This Tuck & Acquisition supports our focus of providing IP attorneys AI-enabled tools to automate parts of the filing and prosecution process.
Jonathan Collins: At our Investor Day in March 2023, we highlighted specific products requiring investments to reinvigorate growth. Since then, we have made tremendous progress within the IT segment on product refresh and the development of new solutions.
Jonathan Collins: 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.
Jonathan Collins: I mentioned this positive turnaround at Durban following the investments we have made. Durban serves as a premier quality product in the market and SURGE has moved beyond the core legal use cases into other departments.
Jonathan Collins: Our product engineering efforts have focused on creating solutions that address these growing needs.
Jonathan Collins: We are excited about the development of a new patent watch solution and a suite of R&D solutions which will be fully available to customers in the first half of 2025.
Jonathan Collins: These two new intelligent offerings assist not only IT professionals, but also R&D professionals with improved tools and functionality.
Jonathan Collins: This includes proactively pushing the material customer needs to monitor specific items such as competitor activity and infringements.
Jonathan Collins: Understanding the patent landscape is becoming more important within the R&D departments globally. With our new R&D tool, which includes conversational AI chat and AI results.
Jonathan Collins: We are improving efficiency and delivering better outcomes, which enables companies to maximize ROI on R&D spending.
Jonathan Collins: Turn to the Life Sciences and Healthcare segment. Externally, we have been impacted by macro-admins due to tighter customer budgets.
Jonathan Collins: Internally, the need for product refresh in 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.
Jonathan Collins: However, we are starting to see the benefits of our product overhaul with improved performance in international markets and across mid-sized pharma.
Jonathan Collins: We recently closed a large, million-dollar-plus consultant deal focused on diabetes and obesity.
Jonathan Collins: We were also awarded our third sale this year of pharma grade data via our new platform to another top 20 pharma company.
Jonathan Collins: On the product development front, we launched Epidemiology Intelligence, a unified platform enabling precise forecasting and evaluation across 5,000 patient populations and over 1,200 diseases and procedures.
Jonathan Collins: To drive continued improvement, we implemented a two releases a year model for key R&D products to revitalize our portfolio around customer needs and return the life science and healthcare segment to growth.
Jonathan Collins: This includes building a growth engine in variable data and selling directly to pharma and medtech customers with a focus on the highest quality of data in the market.
Jonathan Collins: We have identified opportunities to expand on the enhancements, the quality of the data, and our relationships with customers.
Jonathan Collins: With new releases coming later this year, we are starting to see the benefits of our work with the recent wins I just highlighted.
Jonathan Collins: 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.
Jonathan Collins: During the second quarter, we launched an alpha 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 fourth quarter.
Jonathan Collins: We're also building out franchises where we are combining our highly enriched patient data with third-party curated genetic data to specifically focus on rare diseases.
Jonathan Collins: By integrating the genomic and phenotype data, we enable our pharma and biotech customers to develop new therapies to patients with rare diseases.
Jonathan Collins: We are just getting started on this product offering and I expect it will be available for general release in 2025.
Jonathan Collins: In closing, I want to thank my colleagues for their loyalty, their hard work, and dedication over the past two years.
Jonathan Collins: I also want to thank our customers, shareholders, and our board for their support. I believe Clarivate 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 call over to Jonathan Collins to walk you through our financials.
Jonathan Collins: 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.
Unknown Executive: Q2 revenue was $650 million, a decrease of $19 million compared to the prior year, bringing the first half to $1.27 billion. Most of the second quarter decline was due to the Valley Pack divestiture and the stronger U.S. dollar. We also lack tougher transactional comps in Q4 in our LS&H segment. And in IP, we've been awarded key projects that are expected to deliver in Q4 and anticipate stronger demand and trademarks.
Jonathan Collins: Q2 revenue was $650 million, a decrease of $19 million compared to the prior year, bringing the first half to $1.27 billion. Most of the second quarter decline was due to the Valley Path divestiture and the stronger U.S. dollar.
Jonathan Collins: The second quarter net loss was $317 million, $175 million lower than last year due to the non-cash goodwill impairment charge recorded in the LS&H segment.
Jonathan Collins: This was also the primary driver of the first half net loss of $411 million, down $294 million 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.
Jonathan Collins: Adjusted diluted EPS, which excludes the impact of one-time items like the impairment and these settlements.
Jonathan Collins: 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.
Jonathan Collins: Operating cash flow was $126 million in the quarter, a decrease of $36 million over the second quarter last year, taking the first half to $302 million, which is down $88 million over the prior year.
Jonathan Collins: The decline is almost entirely driven by timing differences in working capital as the lower adjusted EBITDA was offset by lower one-time costs.
Jonathan Collins: Please turn with me now to page 16 for a closer look at the drivers of the second quarter top and bottom line changes from the prior year.
Jonathan Collins: 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 million.
Jonathan Collins: Our subscription business grew at just under 1% compared to growth of more than 2% in the prior quarter.
Jonathan Collins: This sequential decline is largely driven by first quarter renewals that were on time this year that were renewed late and came in during the second quarter of last year in our ANG segment.
Jonathan Collins: Our non-subscription products declined 2.5%, which was a sequential quarterly improvement of about 600 basis points.
Jonathan Collins: Foreign exchange lowered revenue by $6 million and profit by $3 million, as the U.S. dollar was stronger than a basket of foreign currencies, namely the euro and the pound, compared to the same period last year.
Jonathan Collins: One-time cost decreased by $8 million in the quarter, nearly offsetting the adjusted EBITDA decline as acquisition integration activity has abated.
Jonathan Collins: Please move me now to slide 18 for a look at our guidance ranges for the full year, which remain unchanged.
Jonathan Collins: We still expect revenue near the midpoint of the $2.57 to $2.67 billion range, as the lower organic growth will likely be offset by improved foreign exchange due to the recent weakening of the U.S. dollar that we anticipate will remain for the second half of the year.
Jonathan Collins: We continue to anticipate diluted adjusted EPFs near the midpoint of the $0.70 to $0.80 range.
Jonathan Collins: 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.
Jonathan Collins: 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.
Jonathan Collins: Please turn to page 19 for a closer look at our expected organic growth trajectory as we move into the second half of the year.
Jonathan Collins: However, in both the LS&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.
Jonathan Collins: 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.
Jonathan Collins: Reoccurring revenue is expected to return to growth of about 3% in the second half of the year, bringing the full year to flat.
Jonathan Collins: 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.
Jonathan Collins: We originally expected this revenue type would grow by about a percent, however, lower FX volatility, slightly lower industry volumes, and the delay of the PCT award at the USPTO have lowered our expectations to about flat for the full year.
Jonathan Collins: 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 low single digits for the full year.
Jonathan Collins: A&G's transactional growth is expected to improve in Q4 as we see lower comps, as demand softened in the same period last year.
Jonathan Collins: We also lack tougher transactional comps in Q4 in our LS&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.
Jonathan Collins: The chart on page 20 outlines the drivers of the expected full year top and bottom line changes from the prior year.
Jonathan Collins: Organic growth of less than 1% would add closer to $10 million 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.
Jonathan Collins: The inorganic impact from selling Valley Pat, which closed in April , netted with small impact from the Motion Hall, Global Q, and Rowan acquisitions, will deduct about $30 million of revenue and about $15 million of profit this year.
Jonathan Collins: We now anticipate foreign exchange translation will be neutral on the top line, but it will be a headwind of about $10 million on the bottom line, as last year's transaction gains are not expected to recur this year.
Jonathan Collins: One-time costs are expected to continue to decline this year to $40 million, an improvement of $20 million over last year, as the large acquisition integrations are behind us.
Jonathan Collins: 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 fourth quarter.
Jonathan Collins: We are investing in product innovation and plan to raise capital spending by about $30 million this year to fuel organic growth over the next couple of years.
Jonathan Collins: The net impact of these changes is that free cash will likely come in near the low end of the guidance range.
Jonathan Collins: 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&A that will help accelerate growth as opposed to primarily deleveraging.
Jonathan Collins: In closing, page 22 provides a brief reminder of our financial priorities.
Jonathan Collins: Our primary aim is to accelerate our organic growth to mid-single digits in the coming years.
Jonathan Collins: Our second goal is to maintain durable profit margins as we make the investment to accelerate growth.
Jonathan Collins: We are committed to providing the resources to drive product innovation in all of our businesses while keeping our margins in the low 40s.
Jonathan Collins: The third 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%.
Jonathan Collins: And finally, we remain to allocate our capital in a disciplined manner.
Jonathan Collins: We've 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.
Jonathan Collins: And to execute both on M&A, like the recently announced Rowan acquisition, that will provide new organic growth factors in our existing markets.
Jonathan Collins: I want to thank all of you for listening in this morning. I'm now going to turn the call back over to Alyssa to take your questions. And as a reminder, please limit yourself to one question and then return to the queue for additional.
Melissa: Melissa, please go ahead.
Melissa: Thank you. We will now begin the question and answer session. 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 withdraw from the queue, you may press star two.
Jonathan Collins: As an additional reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question.
Speaker Change: The first question is from the line of Toni Kaplan with Morgan Stanley . Please go ahead.
Unknown Executive: Thank you so much. You talked about life science and health care 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, you know, 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 LS&H now versus what's needed to meet the guide. Thanks.
Tony Kaplan: Thank you so much.
Tony Kaplan: You talked about life science and health care 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,
Speaker Change: I guess, how should we think about the confidence in delivering on these projects?
Speaker Change: 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 LS&H now versus what's needed to meet the guide. Thanks.
Speaker Change: Thanks, Toni. This is Jonathan. Yeah, 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 a pretty good line of sight in there to the project backlog through the balance of the year.
Tony Kaplan: 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 2020.
Speaker Change: Thank you for your time. Thank you.
Speaker Change: Thank you, Tony. Next question, please.
Speaker Change: The next question is from the line of Manav Patnaik with Barclays. Your line is now open.
Manav Patnik: Thank you. Good morning. Firstly, Maddy, welcome back. Looking forward to talking again, and Jonathan, hopefully our paths will cross again, but I was just hoping, you know, 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 Clarivate is in a very strong shape, ready to grow. Seems like everything's looking upwards.
Speaker Change: And, you know, clearly Maddy has a strong background in the A&G segment, given its history. But, you know, just a little bit more color. And what does this say about the other two segments going forward, please?
Andy Snyder: Yeah, thanks Manav. Thanks for the question. Good to connect again.
Speaker Change: Look, I think, you know...
Speaker Change: First I'd say Maddy's background, while it is, you know, he's got great familiarity with
Manav Patnik: BNG Segments.
Manav Patnik: You know, he's also demonstrated just a proven ability to drive execution and performance.
Manav Patnik: across businesses. And, you know, while we're
Manav Patnik: I think, you know, we spent a lot of time with Jonathan just talking about what's next for the business.
Unknown Executive: for a transition. And really, we're focused on, you know, exactly that which is driving execution and performance across the businesses, across each of the businesses. And we think, you know,
Manav Patnik: came to a mutual agreement that this was the right time.
Manav Patnik: for a transition. And really we're focused on, you know, exactly that, which is driving execution and performance, you know, across the businesses, across each of the businesses. And we think, you know, Maddie's really well positioned to help drive that across the company.
Manav Patnik: Thanks, Manav. Next question, please.
Speaker Change: The next question is from the line of Surinder Thind with Jeffreys. Your line is now open.
Surrender Bind: Thank you. In terms of just strategically, as we look ahead, is the idea to be more product focused, faster product cycles?
Surrender Bind: 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 Change: Maybe I'll comment on the first piece. Yeah, I actually feel very good about the, let's take a step back, surrenders. One of the key themes coming here two years ago when I came was the need to focus more on innovation.
Manav Patnik: and Invest Ahead of Growth. We've been doing that across all three segments as Keith and I have discussed last.
Jonathan: What we're seeing now is that innovation is beginning to bear fruit in terms of new product launches. As 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.
Manav Patnik: We're seeing it now with some of the examples I gave in the presentation today, and IP.
Manav Patnik: [inaudible]
Manav Patnik: And as a result, increasing revenues, and this is core, certainly, to the improvement in the long-term plan we talked about in the past.
Manav Patnik: Okay, that's great. Thanks so much. Thanks, Surinder. Next question, please.
Speaker Change: Next question is from the line of Shlomo Rosenbaum with Steeple. Your line is now open.
Shlomo Rosenbaum: Hi, thank you very much. I just wanted to talk a little bit about Gerwent and just
Shlomo Rosenbaum: You know, the whole overall IP growth trajectory, it seems like
Shlomo Rosenbaum: And then I just thought I would ask Mati 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.
Mati: 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. I think your comment on losing grounds, that was certainly true two years ago.
Speaker Change: And in my comments today, I talk about our improved win rate on IPMF, the 80% competitive win rate in Japan.
Francie: Francie, two years ago we were on our back heels, now we're on our toes.
Manav Patnik: [inaudible]
Manav Patnik: [inaudible]
Speaker Change: But I feel just 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. 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.
Manav Patnik: Enjoy my next question, please.
Speaker Change: Next question is from the line of Heather Balsky with Bank of America. Please go ahead.
Waheed Amin: Good morning, it's Wahid 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 in? What more can you do in this space to grow that metric?
Jonathan Collins: Yeah, it's a great point, Wahid. 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,
Speaker Change: in the second half of this year are products that should generate subscription revenues. 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 four different applications or personas that we'll be serving in Patent Intelligence going forward. 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.
Manav Patnik: 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.
Jonathan Donohue: and I'm Jonathan Donohue.
Speaker Change: Thank you. Next question, please.
Speaker Change: The next question is from the line of Owen Lau with Oppenheimer. Your line is now open.
Unknown Executive: Good morning and thank you for
Owen Lau: 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 for authentic growth, M&A, type X, and how much for deleveraging? And do you have a new target for your leverage in the near and longer term? Thanks.
Manav Patnik: 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.
Manav Patnik: Now that we've got leverage under four terms, 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. 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 four 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.
Manav Patnik: [inaudible]
Manav Patnik: Thanks, everyone.
Speaker Change: Next question, please.
Speaker Change: Hi, good morning. Thank you for taking my question. I wanted to ask a little bit more on guidance. I think on the fourth quarter call, Jonathan, you
Speaker Change: Gay segment level growth expectations. Curious if those have changed meaningfully from earlier this year, and then also, if you could just kind of outline what you're thinking about or embedding in guidance in terms of of macroeconomic conditions, whether it's
Unknown Executive: 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 for subscription revenue are really going to come from the life sciences and IP business, and the macro within life sciences is the real driver there. Certainly, the recurring revenue change, we think we're going to be flat now instead of up a percent; that's essentially all in IP.
Unknown Executive: And then our transactional expectations for 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 a few months as we complete the third quarter. Thank you.
Jonathan: 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 a few months as we complete the third quarter. Thank you.
Operator: The next question is from the line of Ashish Sabadra with RBC Capital Markets. Your line is now open.
Speaker Change: 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 slower adoption of some of these newer products being launched, any color on those fronts? Thanks.
Speaker Change: Yeah, 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 Derwin's renewal rates,
Speaker Change: Use cases are getting the investment first, and inauguraphy 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 yeah, 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 inauguraphy and INCOPAT that we're seeing in Derwent.
Speaker Change: Thank you. Thanks, Ashish. Next question, please.
Speaker Change: Our last question comes from the line of George Tong with Goldman Sachs. Please go ahead.
George Tong: Hi, thanks. Good morning. Jonathan, you mentioned that lower industry volumes and the USPTO contract delay were partly responsible for the full-year organic growth coming in the bottom half of the range. 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?
Jonathan: Here, George. You know, when 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 a percent. We think it's going to be about flat. It's widely publicized. We had won a contract at the USPTO referred to as the PCP. 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 Change: Thank you for your time. Thank you.
George: Thank you, George.
George: Thank you, George.
Speaker Change: This concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.