Q2 2019 Earnings Call

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I would now like to turn the conference over to Anthony Gerstein, Vice President and head of Investor Relations for clarity. Please go ahead.

Thank you operator, and good morning, everyone. Thank you for joining us for the clarity to analytics second quarter fiscal 2019 earnings conference call.

With me today are Jerry said executive Chairman and Chief Executive Officer, and Richard Hanks, Chief Financial Officer.

As a reminder, this conference call is being recorded and webcast and is copyrighted by.

Claire Bean analytics.

Any rebroadcast of this information in whole or in part without prior written consent of clarity is prohibited.

This morning, Clearvale issued a press release announcing its second quarter fiscal results for the period ended June Thirtyth 2019.

The release as well as an accompanying investor presentation is available in the Investor Relations section of the company's website Claire base dot com under events and presentations.

During our call we may make certain forward looking statements within the meaning of the applicable securities laws.

Such forward looking statements involve known and unknown risks uncertainties and other factors that may cause the actual results performance word treatments of the business, we're developing Sinclair beats industry to differ materially from the anticipated results performance achievements.

Or developments expressed or implied by such forward looking statements.

Information about the factors that could cause actual results to differ materially from anticipated results or performance can be found and Clare Bates filings with the SEC or on the company's website.

Our discussion for the quarter will include non-GAAP measures or adjusted numbers, including adjusted revenue adjusted subscription revenues adjusted transaction revenue adjusted EBITDA and free cash flow.

We will also provide our required disclosure of Standalone adjusted EBITDA.

Clearvale believes non-GAAP results are useful in order to enhance the understanding of our ongoing operating performance.

But they are a supplement to and should not be considered in isolation from or as a substitute for GAAP financial measures.

After our prepared remarks, we will open up the call to your questions with that it's my great pleasure to turn the call over to Gerry. Thank you Anthony and good morning to everyone on our call. We very much appreciate you all joining US today, then about two months since I took the CEO position, we're moving very quickly to execute on the initiatives that will accelerate revenue growth and margin expansion I've said this before clariphy represents a unique pearl set of assets, our customers cannot operate effectively or efficiently without her products and solutions.

We are a trusted independent an indispensable partner to innovators everywhere delivering critical data information workforce solutions and deep domain expertise.

We have numerous opportunities to invest in the right initiatives leveraging our assets to help us realize this we've engaged the Boston consulting group to provide us with their objective evaluation of the best structure for clarity as a new public company. This will help us to accelerate our path to long term sustainable profitable growth.

And this quarter is the beginning of that Pat I'll provide an overview of our second quarter results share. Some of the progress. We've made on important initiatives and then Richard will provide more detailed financial commentary.

I'm very pleased with our results for this quarter, which were in line with our expectations.

Adjusted revenue increased 2.5% on a constant currency basis, and they were driven by solid adjusted subscription revenue growth of 5%.

Annual contract value of subscription based agreements increased 3.6% with Robin no revenue renewal rates approaching 92% for the six month period ending June thirtyth.

While we're pleased with 92% we will always be striving for a higher renewal rate.

Adjusted EBITDA increased 8.4% to $73.2 million in the second quarter and free cash flow of $18 million for the six months ending June Thirtyth was inclusive of approximately $30 million of merger related expenses.

We've also had some outstanding commercial wins tour, which I'll highlight in May we announced an exciting new distribution agreement with standard, Australia, including Australia and standards and other technical documents further expanding text breach library of industry codes and standards in July we expanded our strategic partnership with White rabbit, the leading domestic provider of trademark search and watch services in China.

Wafer Abbott is now deploying comping remarks, artificial intelligence and image recognition technology to dramatically simplify and streamline trademark image search and watch processes for Chinese trademark professionals.

I want to congratulate and thank all of my colleagues for their focus and hard work in achieving these results are not easy to work through the noise of a major merger. In addition to the completion of the separation from Thomson Reuters and I'm very very proud of our clariphy team and their commitment to serving customers with excellence and ensuring that we deliver against our goal.

I'd like to share with you some of the insights we've gained through our first in one of our first initiatives, we undertook a better understanding of the voice of our customers.

Those of you who know me will remember how strongly I believe in the importance of understanding the viewpoint of our customers and staying current with customer feedback on our performance without this insight no company can sustain long term profitable growth and risk becoming margin wise for obsolete.

One of the very first things we did after the merger closed was to bring in a world class customer experience service company to help us understand the customer's viewpoint and to identify a proven areas. We completed our first survey with many more to come in the future and I'd like to share some of the findings and our action.

Actions first our overall customer delight score was 76, which is quite strong best in class was 80, plus we have room for improvement, but a good start second our scores for information and insights and quality on products and services were 87%, 85% respectively. These two categories measure our customers opinions about our products and our content. These scores were very strong to put that in perspective, I've not seen scores and those categories. This high before these were the best scoring questions. What that means is that our customers see tremendous value in our products across all of our business units.

As investors and clarify this is important for all of US and is a very strong attribute for our company. If we don't have content solutions to customers value. It's hard very hard to fix that problem and grow a successful company. However, if customers value our products. Other issues are much easier defects. So these stores represent great news and a really good start for clarity as a new public company now moving onto our third score, which assess whether or not we are easy to do business with it was not surprising to many of US we scored 54% which is one of the lowest scores I've seen on this question best practices, while north of 60%.

If we put this all together what we heard in our first survey is that our customers highly value our product offerings, while telling us there that we are not an easy to do business with company. This insight highlights exactly what we need to do in order to improve and grow so about fixing processes simplifying things and execution all within our control and you can bet. We've already begun to get asked this by focusing on customer delight and executing on our other strategies, we will improve clarity organic growth trajectory.

We will deliver more of the growth to the bottom line will drive towards best in class margins and free cash flow conversion.

As we've analyzed the survey results were developing a roadmap of actions we will take to address the feedback. This includes adopting better product and pricing enhancement strategies by shifting from a product sales strategy to a value based strategy by integrating additional content and capabilities into existing products and increasing our pipeline of new products by continuing to build strength in Asia as we capture significant opportunities and APAC and therefore accelerate revenue growth in that region and then in our company and by pursuing opportunities for inorganic growth and portfolio optimization M&A is an important part of our plan.

Well high levels of customer delight are critical to our future. So our leaving levels of college colleague engagement and the establishment of a very strong corporate culture. One of my goals is to ensure that our company is recognized as a great place to work and a great place in which to invest a career.

Shortly after the close of the merger, we got right to work on putting in place a strong vision mission and values I'd like to share those with you today.

Our vision is we will improve the way the world creates protect and advances innovation.

Our mission.

Our purpose. Our mission is we believe human ingenuity and transform the world and improve our future and importantly, our values define the way we work with one another and all of our constituencies. The overarching idea of our values is that we will own our actions. We will act with integrity, we will be accountable to ourselves our colleagues our customers and our communities our values. Our aim for greatness value every voice and own our actions.

We've had a long career, leading companies and trying to spire tens of thousands of colleagues.

One of the things I've learned is that without a strong culture, an equally strong set of guiding principles, it's very hard to be a truly successful long term organization I'm very proud of this work will take this one of the best vision mission and values I've been part of I know it will serve us well as we move forward to a very successful future now moving to 2019 guidance. We are reaffirming our guidance for 2019 adjusted revenues in the range of $962 million to $995 million adjusted EBITDA in the range of $290 million to $310 million and adjusted EBITDA margins of approximately 30%. In addition to this guidance. We have provided you with our expectations for excess standalone costs and perform a cost savings, which will help you get to our standalone adjusted EBITDA range, which remains unchanged guidance wise between 325 and 300.

And $45 million to wrap it up it's been a couple of really busy month, but much progress made so far.

Im very proud as I said the team who stayed focused on serving our customers with excellence and delivering on our commitments and goals.

Im confident that by continuing to focus simplify and execute we will deliver on our stated goals for years to come before I turn the call over to Richard I want to share with you that our company will hold our first ever Investor Day in New York on Tuesday November 12. This will include presentations from our commercial leadership team and we will also feature product demonstrations that you can see how our products and solutions are used by our customers. We very much look forward to seeing you there and continuing to update you on our progress I'll now turn it over to Richard to discuss the financial results before we open up for your questions.

Thank you Gerry.

As mentioned our results for the second quarter were in line with our expectations.

Reported revenues decreased by $1 million for 0.4% to $242.3 million in the second quarter of 2019 from $243.3 million in the prior year quarter.

Recall the prior year revenue includes the results of IPO NIM of $5.8 million, which accounts for the decline.

Hi PM was sold in the fourth quarter of 2018.

Adjusted revenues increased by $4 million, a 1.7% to $242.4 million in the second quarter of 2019 from $238.4 million in last year's second quarter. As a reminder, this excludes revenue from ITM from the prior year quarter as well as the impact of purchase price accounting deferred revenue adjustment.

Foreign exchange was approximately $2 million of headwind in this year's quarter, mainly arising from euro and Sterling weakness.

On a constant currency basis, adjusted revenues increased by 2.5% in the second quarter compared to the second quarter 2018.

Please note that approximately 83% of our revenues in the second quarter of 2019, where U.S. dollar denominated.

When looking at revenue by geography, we have a nice balance of revenue across the regions with 46% of our revenues from North America, 25% from Europe , 22% from eight.

And 7% from emerging markets. This geographical mix is similar year on year.

Moving on to revenue by type.

Adjusted subscription revenues adjusted for the sale of ITM grew $9.6 million or approximately 5% at constant currency for the quarter.

We realized subscription growth across all product lines in both our science and IP groups.

The largest dollar increase in the quarter was within the weapons science product line.

The increase in subscription revenues is driven in part from the effect of price increases as well as new business.

Adjusted subscription revenue accounted for 84% of total adjusted revenues in the quarter compared to 82% in the prior year period.

This reflects our ongoing strategy of growing our recurring subscription revenue base.

At the end of the second quarter, the annual contract value HCV of subscription based contracts increased 3.6% at constant currency compared to the same period last year.

This should lead to further improvements in subscription revenue growth in subsequent quarters.

As Jerry mentioned retention rates were approximately 92% for each of the six month period ended June 32019, and June Thirtyth 2018.

Adjusted transactional revenues, which represent approximately 16% of total revenues in this year's second quarter declined $4.1 million or 9.4% to $39.7 million.

This is down 8.4% on a constant currency basis.

The decline in transactional revenues is partly the result of both claiming as transactional vet revenues very more by quarter and a generally more difficult to predict and secondly, our strategic initiatives as we continue to shift more product offerings to customers under subscription agreements rollup on transaction agreements, particularly in the IP product group.

Our fourth quarter is traditionally the strongest reporting transactional revenues.

Looking now at the fullness by product group.

Adjusted Science group revenues grew $3.6 million or 2.7% to $136.1 million from $132.5 million in prior year up 3.3% on a constant currency basis.

The increase in Science group revenues were driven by subscription revenue growth.

Offset by lower transactional revenues.

Science group accounted for 56% of total adjusted revenue, which again is consistent with the prior year period.

The web fonts put line continues to achieve very strong renewal rates.

Adjusted intellectual property group revenues increased slightly to $106.3 million.

And by 1.5% on a constant currency basis.

Intellectual property group revenues were driven by subscription revenue growth offset by the aforementioned lower transactional revenues.

Adjusted EBITDA increased 8.4% to $73.2 million in Q2, 2019, compared with $67.5 million in the prior year period.

The increase was primarily due to higher revenues combined with relatively flat year over year expenses, excluding the impact of currency.

Adjusted EBITDA margins were 30.2% in the second quarter.

Compared to 28.3% in the second quarter of 2018.

We are required to report Standalone adjusted EBITDA on a last 12 month basis pursuant to the reporting covenants contained in our credit agreement and indenture.

Standalone adjusted EBITDA takes adjusted EBITDA and includes two committed capex.

Firstly, an adjustment for excess standalone expenses.

And secondly, it includes the impact of pro forma cost savings we have implemented.

Standalone adjusted EBITDA was $315.9 million for the 12 month period ended June 32019, compared to $305.8 million for the 12 month period ended June 32018.

Turning to cash flow.

For the six month period ended June 32019 cash flow from operations increased nearly 38% to $42.9 million up from $31 million in the prior year period.

Within cash from operations, we experienced certain working capital component changes in the six months ended June 30th including a change in cash flows for cash receivable, reflecting the collection of receivables related to annual renewals.

And a decrease in the change of accrued expenses related to timing of the receipts and payments have been to bills.

Capital expenditures for the six months ended June 32019 were $24.9 million slightly above last years same period.

Free cash flow improved to $18 million for the six month period ended June 32019 up from 6.8 million in the prior period prior year period.

It is important to note that the current period includes approximately $30 million of merger related cash expenses.

Turning to the balance sheet cash and cash equivalents totaled $43.1 million at June 32019, compared to $25.6 million at December 31st 2018.

Total debt outstanding net of cash was approximately $1.3 billion at June 32019, compared to $2 billion at December 31st 2018.

Our net leverage ratio at June 32019 was 4.1 times compared with 6.4 times at December 31st 2018.

Outlook Jeri covered our outlook for 2019, which remains unchanged.

Adjusted revenues in a range of $962 million to $995 million.

Adjusted EBITDA in a range of $290 million to $310 million.

And adjusted EBITDA margins of approximately 30%.

I'll remind you that earlier this year the company provided clarity lenders in church, they invest as an outlook for Standalone adjusted EBITDA outlook is unchanged as well at between $325 million and $345 million.

You will notice in the appendix of the Investor presentation that we've included a slide with both historical quarterly adjusted revenues by product line and group.

And consolidated adjusted EBITDA for 2018 to help you with your financial modeling.

We've also included a slide explaining the diluted share count to assist you with your analysis.

With that I'll now turn the call back over to Gerry.

Good job Richard Thanks, This wraps up our discussion of the second quarter, we look forward to sharing the many exciting opportunities ahead with you. Thank you for your time, we're now ready to take your questions. As a reminder, please limit yourself to one question and then return to the queue operator, let's open.

We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw from the question queue. Please press Star then too.

So first question is from Tim Mchugh.

William Blair. Please go ahead.

Thanks.

Just wonder if you could elaborate on the feedback from that first customer survey.

I know you said the big conclusion was that you realized.

You should make it easier to do business with Claire bake.

Was that not known was it surprising I guess.

And as you got into the details.

How is that perception is different than people thought previously.

Great question, Tim Thanks.

What wasn't known was high how call highly value our customers place with our products and.

In all that we provide that was like I said is high as we've seen what I said in the script and it holds true.

It was not a surprise to us that we were not perceived at all.

With being an easy to do business with the company.

You may remember some of you that I actually back to my I just days look very hard at acquiring clarity and that was true then and I would say the difference between 2012 and the into 2018. It was even more so so we're I feel really good about it we've got a dozen things were under do growing Wolfe Wolfe effects that thats, a 100% in our control I think the thing that it's great question, because it's critical I talked to about call important to culture as I can tell you that operating with a sense of urgency being externally focused looking.

Outside in making sure that we operate with.

Great sense of urgency and clarity and getting rid of bureaucracy every place were app.

Will help us do that and we'll do it quickly. While also we've also done a lot of other things internally because it's critical that we remember I think of the world as inside customers and outside customers with line of sight to the outside customers. So I will tell you I look forward to the next survey.

As you probably know is consumers it'll take up you're probably to prove how good we can bait and we'll be with easy to do business, but we'll see improvements in we'll cover those each quarter. So no surprises at all other than a good news surprise.

From how they value us one last comment I will make.

We scored very high.

In fact, I felt very good about it with the value that our customers look at us.

So as we facts and we must crack the issues, including ease of use with our products et cetera, as we fixed those it's clear that selling as I said, one of our key strategies value Sally.

Gives us a lot of room for the future. Thanks, Tim.

The next question is from Zach Cummins of B. Riley FBR. Please go ahead.

Hi, good morning, Gerry and Richard.

Hi.

Hi, Yes, just based on actually building off here a little bit of commentary at the end can you talk about the switch from a product base sales strategy to now have a more value based strategy for the sales team and what that really means and implications going forward.

Yes, Great question, just as a reminder for everybody. This was managed as five silos.

Actually reporting to different parts of the Thomson Reuters over the years, bringing these silos together and consolidating into two groups.

Our science group and our IP group well is already a huge step underway to make sure that we start cross selling as I make sure that we start bundling and to make sure that when we go forward, we don't sell a product we sell a solution to customers.

Im very pleased with the work that.

Is underway by our top execs to do that in both places.

I mean I can give you example, after example, but.

For example, a net and moved tire when they first started talking about bringing a web of science and a life science together they quickly identified about $5 million of potential cross selling revenue, we've never touch theres a lot more of that to come.

And that includes your questions. So critical that includes a lot of training for our sales force.

Thats underway Ive been speaking every other week.

Since I've been here to the different training programs that are underway and their leadership, so and we and I think it's important to know this is the first year that we've been organized for our businesses and the two groups I was talking about have the salesforce inside of their organization to put it bluntly there was a real disconnect historically.

It's not a way to run a railroad when you've got someone in charge of sales that's not inside of the business. So we'll see the progress of that comment it's a great question. Thanks.

The next question is from Ashwin Shirvaikar of Citi. Please go ahead.

Hello, Ashwin the issuer.

My muted.

Oh, sorry about that yeah, I was on mute hi, Jerry how to attract good morning, Hi, Ashwin. How are you. Good. Good. Thank you questions on the science group growth seems to have stepped up now is that a function of sales capacity being added.

You're already seeing some benefits from product improvements, if you could break that down a bit and what what milestones should we not expect save in the next 12 months in that in that good.

Yeah. That's a great question I'll start and have Richard picked up on it some of the programs that have been put in place a sense Oh, not look to our hub and leaving the two science businesses are kicking off and are paid to starting to pay off and I feel very good about those I'll be even more excited as we said a minute ago as we merge the two in the years ahead, but Richard give a little detail on that.

The quarter was was particularly strong in the science group the subscription growth.

I think the the work the nets and look to I've done on their product strategy and having no end to end offerings for the community space. This really started to pay dividends and we also get an attractive price yields as well on from the signs groups. So those are the principal drivers.

Great question Ashwin. Thanks next question.

The next question is from Peter Christiansen of Citi. Please go ahead.

Good morning, Thanks, guys.

Richard I know I noticed that the.

The projection for excess Standalone costs went up this quarter by a bit.

22% to 31 million can you just talk about some of the delta that you're seeing there and and and should we think of a current estimate kind of staying steady for the remainder of this year.

Yes, no Greg Great question, we reaffirmed that guidance Richard given the particulars on it.

Yes, so we did increase it.

Given the fact that Weve just come out of the SEC out of the first quarter. We completed all the transformation and separation from T. are what we're now doing is we're optimizing that cost space, we have Boston consulting group with us working across the business looking at structure and looking at our run rate costs not exercise will result in our general costs coming down and also a standalone costs being optimized as well so something we'll be working very aggressively on over the next two quarters with more to come on at the end of this quarter into Q3 on that subject. Thank you next question.

Again, if you have a question. Please press Star then one.

There are no other questions at this time. This concludes our question and answer session I would like to turn the conference back over to Gerry Stead for closing remarks.

Thank you very much we've got a lot going on we're very eager to share with you. The last comments that were made by Richard and I will give you a little fore sight. What you can expect that into Q3, which is us giving you an update on the progress we've made with our leadership team on streamlining the business of becoming much more efficient much more effective and then that will be November I get it wrong. The benefit I always think fourth November fab.

And on November 12, we look forward to having all of you together to give us.

An opportunity to share with you for the first time, the great products and solutions that we provide for our customers. So I'll wrap up by saying. Thank you all very pleased with the progress and we're just getting started or going to gogo goal for the future. Thank you all very much.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.