Clarivate PLC (CLVT) 2019 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the first-quarter 2019 Clarivate Analytics earnings conference call. Clarivate Analytics earnings conference call. (Operator Instructions). As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Anthony Gerstein, Head of Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone, and thank you for joining us for the Clarivate Analytics first-quarter 2019 earnings conference call. Let me start off by saying that it is our understanding that PRNewswire has been experiencing technical issues this morning, that none of its press releases were going out early this morning. We had intended our release to hit the wires at 6 AM, so our apologies. It is available on our website and I trust this won't happen again.

With me today are Jerre Stead, Executive Chairman of Clarivate Analytics; Jay Nadler, Chief Executive Officer; and Richard Hanks, Chief Financial Officer.

As a reminder, this conference call is being recorded and webcast and is copyrighted property of Clarivate Analytics. Any rebroadcast of this information in whole or in part without prior written consent from Clarivate is prohibited.

This morning Clarivate issued a press release announcing its first-quarter results for the period ended March 31, 2019. The release, as well as an accompanying presentation for this conference call, is available in the Investor Relations section of the Company's website, Clarivate.com, under Events & 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 or achievements of the business or developments in Clarivate's industry to differ materially from the anticipated results, performance, achievements or developments expressed or implied by such forward-looking statements.

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

Our discussion for the quarter will include non-GAAP measures or adjusted numbers including adjusted revenues, EBITDA and adjusted EBITDA. 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 in isolation from or as a substitute for GAAP financial measures.

After our prepared remarks we will open up the call for your questions. With that, it's my great pleasure to turn the floor over to Jerre.

Thank you, Anthony, and good morning, everyone. Thank you all for joining us today for our first earnings call as a public company. Many people have worked long and hard to get to this day and we look forward to the earnings calls to come.

Hopefully you have had the opportunity to see that earlier this week Churchill Capital completed the merger with Clarivate. Now we start the real fun part of working together to fully capture the potential, which is enormous, in front of us.

Our focus today will be on reviewing the results for the first quarter. I will keep my comments brief and will hand the call over shortly to Jay and Richard to cover the details. We will have many chances to be together again. In the near future we will talk in much more detail about all of the potential for this unique and high quality information service company.

As many of you know I've had lots of experience in the sector and I must say that I'm truly impressed with the collection of information assets that is Clarivate. I've followed this Company, formerly known as Thomson's intellectual property in science business, for a very long time. As we've learned more about the Company through our due diligence, we began to identify tremendous opportunities that will build upon the great work completed over the last two years.

We will improve the Company's organic growth trajectory and deliver more of that growth to the bottom line as we manage towards best-in-class margins and free cash flow conversion. Our plan is to build on the existing culture at Clarivate and bring an ever stronger focus on innovation and customer excellence.

A core tenet of our Company will be providing a great place for our colleagues to work and enjoy success with many opportunities for growth and advancement. By applying these foundational principles we will provide significant incremental value for our shareholders, our customers and our colleagues and for sure that will be our focus as we move forward.

We have many levers to improve organic growth and profitability. We will have much more detail to share with you in the weeks and months ahead, but let me touch on just a few highlights, all of which build upon the work that the team has done here.

First, we will further implement product and pricing enhancement strategies through modifications to our pricing models and service levels to shift from a product based sales strategy to a value-based strategy for our customers.

Second, there are opportunities to integrate additional content and capabilities into existing products and we will certainly increase our pipeline of new products.

Third, we look forward to continue building strength in Asia. We will capture significant opportunities in Asia-Pacific and therefore accelerate revenue growth in the region.

Fourth, there are many opportunities for inorganic growth and portfolio optimization. M&A will be and is an important part of our future.

In our January and March investor deck we included guidance for 2019 adjusted revenues and adjusted EBITDA. We are reaffirming that guidance today. In addition to the guidance we've provided you with our expectations for excess standalone costs and for pro forma cost savings to arrive at our standalone adjusted EBITDA range which remains unchanged. That range is $325 million to $345 million EBITDA.

I'm very pleased to have reached the close this week. With our merger complete we will now focus on optimizing the way we operate and grow our Company for the benefit of our stakeholders. Next week we will have our first new Board meeting in London.

I want to thank all of the Clarivate and Churchill colleagues for running a business delivering results while at the same time managing enormous extra work that is brought on by a merger. Today is the beginning and our future looks incredibly exciting. Now I will turn the call over to Jay.

Thank you, Jerre, and good morning, everyone. I'm very, very excited that the merger with Churchill Capital is now closed and Jerre and I can turn our attention to growing Clarivate into an information services sector leader.

I am also thrilled that Onex and Baring Asia rolled over their entire equity and will continue to be our partners on this journey. And I'm especially looking forward to sharing our progress along the way with all of you.

As you know, Clarivate Analytics is a market-leading provider of trusted insights and analytics that accelerates the pace of innovation. We provide high-value products and services to corporations, law firms, universities and governments to support them throughout the intellectual property lifecycle from idea discovery to IP protection and commercialization. Our offerings are deeply embedded into customers' workflow processes.

The Company is financially strong, operates in large growing markets and has a long heritage that includes many leading product brands. We believe that our flagship products hold a number one or two global position across the respective markets they serve, including abstracting and indexing databases, life science regulatory and competitive intelligence, and intellectual property protection including patents, trademarks and brand protection.

Our key value proposition is the high quality set of curated databases that we've created over decades that are both broad and deep in coverage and are delivered to customers through a variety of cloud-based applications. The business has very attractive financial characteristics with more than 80% of revenue coming from recurring subscriptions with renewal rates in excess of 90%, giving us stable revenue and earnings, attractive margins, and high free cash flow conversion as we complete the carve-out from our former parent this year.

As I mentioned on our investor call in January after the merger announcement, the Company is at an important inflection point in its young history as an independent company. We spent the past two years carving out the Company from its former parent, which consumed a lot of management bandwidth and hundreds of millions of dollars of one-time costs.

During the first quarter we completed the carve-out six months ahead of schedule and can now focus exclusively on optimizing the business through a series of revenue growth and cost savings initiatives, generating significantly higher free cash flow, revenue growth and margins.

On the revenue side we've been planting seeds in the first two years to accelerate revenue growth through sales and marketing expansion, product development and improved pricing strategies. In addition, we've completed three small acquisitions to accelerate time-to-market for new products.

There are a number of drivers to accelerate revenue growth, including increasing subscription retention rates, improving pricing, expansion with existing customers, acquiring new customers, increasing penetration in high-growth markets such as Asia-Pacific, expansion into adjacent markets, launching new products. All these initiatives are expected to drive higher organic revenue growth into the 4% to 6% range exiting 2020.

During the carve-out process we also began rightsizing the cost structure. The business is not yet fully optimized given the tight timelines for the carve-out, but we've executed on a number of initiatives including streamlining organizational structures, expanding our presence in best cost locations, reducing contractor expenses, and reducing other nonessential expenses.

We have a large presence in favorable cost locations such as India, Lithuania, and Spain where 40% of our employees are located today and that proportion will continue to grow. There is a significant opportunity for us to remove additional costs by continuing to expand our presence in these locations, eliminating expensive contractors, and modernizing the technology and processes we use to create our products.

Now as a fully independent company with a new cloud-based infrastructure for both our products and our internal business systems, we have a very strong platform for growth that can support a larger business both organically and through M&A. A major benefit of the merger with Churchill was reducing our net leverage from 6.3 times to 4.2 times on a pro forma basis, which will give us the flexibility to pursue both organic and M&A growth opportunities.

Turning to Q1 results, Richard will provide more detailed commentary, but I will say that we are pleased with the results and we performed in line with our expectations. We achieved adjusted revenue growth of 2% on a constant currency basis. Revenue growth will continue to build each quarter this year as we grow the subscription base and benefit from the changes we've made to the sales force and our products.

The year has started well with strong subscription retention rates and growth in the annualized contract value of subscriptions. At the end of Q1 ACV stands at $765 million growth of nearly 5% over the past year. More than half of the ACV base came up for renewal in Q1 and we had a good quarter with 93.4% retention on a dollar basis, 20 basis points higher than last year. Full-year retention in 2018 was about 91%, so retention rates may change as we proceed through the year. Retention rates remain very high in the Web of Science product line.

In the first half of 2018 we expanded the sales team principally in North America and Europe to improve our ability to acquire new customers and service existing customers. We saw good contributions in first year sales from these new hires and expect a further ramp up this year.

In the second half of 2018 we launched a sales expansion in Asia-Pacific as well, particularly in the Web of Science and Life Sciences product line. Asia is an attractive market as the region is increasing its investment into R&D and innovation. The region generates more than 20% of our revenue and has historically grown at 4% to 5% per year. And in Q1 Asia generated continued strong growth in subscription revenue.

Q1 was also quite active with a number of announcements regarding important commercial developments in the Company. You can see the detail in the earnings press release and on our website.

It's very exciting for me to see the great work my colleagues are doing with our customers. We launched three new products, announced a series of go-to-market partnerships and fantastic new business wins and continue to demonstrate our thought leadership with the publication of some influential studies.

We've been very busy with our Life Sciences product line launching a predictive analytics tool within the Cortellis product suite that improves the accuracy of drug pipeline forecasting and R&D investment decisions, launching Cortellis Cloud to provide easier access to our content sets, and kicking off and alliances program to broaden our distribution channels with key partners such as Accenture.

Sticking with the theme of analytics and artificial intelligence, our CompuMark product line is using image recognition technology in a new product to simplify the process of researching industrial designs. And in the Web of Science product line we are very proud to announce the relationships with the education ministries in Norway and Egypt.

Norway will use our Web of Science data for a national research evaluation initiative, which follows on from similar recent wins we had for national evaluations in the UK and Australia. In Egypt we initially announced a partnership a year ago to create the world's first Arabic language research citation index. And now we are expanding that relationship further to provide them with a research information system. These are all examples of how we are transforming the Company with improved go-to-market strategies and a commitment to enhancing our product portfolio.

During the quarter we reached a very important milestone completing the carve-out from our former parent six months ahead of schedule. This is a major undertaking involving many people in the Company for 2.5 years to create standalone functions such as accounting, tax, and a technology support capability. We migrated nearly every product to the cloud and modernized the search technology in many of the products simultaneously. And we implemented all new cloud-based business systems. This gives us a modern and flexible infrastructure on which we can operate the Company.

2019 therefore will be the last year with one-time cost to execute on the carve-out and for TSA fees. And finally, during Q1 we also launched a new initiative to modernize the systems and processes we use to curate our world-class content. This will provide benefits to customers in that we'll be able to provide more content more quickly, it will enable us to add even more value to the content, and it will generate cost efficiencies through the use of automation and AI in the retirement of older systems.

This project will deliver customer benefits and cost savings incrementally over the next three years. This is another way for us to create competitive advantages by enhancing our offerings to provide a great customer experience.

The team and I are excited about transforming Clarivate Analytics into a sector leader and look forward to updating you on our progress. I will turn it over to Richard to discuss the financial results in more detail before we open it up for questions.

Thank you, Jay. As mentioned, our first-quarter 2019 results were in line with our expectations. Revenues decreased by $3 million or 1%, $234 million in the first quarter 2019 from $237 million in the prior year quarter. The decrease is because prior revenue included the results of IP management of $6.7 million. This business was sold in the fourth quarter 2018 and therefore the results of that business are no longer included in our first-quarter 2019 earnings.

Adjusted revenues, which excludes the revenue from the IPM product line from the prior year quarter, and the impact of purchase price accounting deferred revenue adjustments, increased $2.4 million or 1% to $234.2 million in the first quarter 2019, up from $231.8 million in last year's first quarter.

Foreign exchange was approximately a headwind of $2.5 million in the quarter, mainly arising from euro and GBP weakness compared to prior year. On a constant currency basis adjusted revenues increased 2% in the first quarter compared to prior year.

Please note that 83% of our revenues in the first quarter of 2019 were US dollar denominated. And turning to revenue by geography we have a nice balance of revenue across the regions with 46% of our revenues from North America, 26% from Europe, 22% from Asia-Pacific, and 6% from emerging markets. This geographical mix is unchanged year on year.

Subscription revenues declined to $192.3 million in the first quarter of 2019 from $194 million in the first quarter 2018, again due to the sale of IPM. However, adjusted subscription revenues adjusted for the sale of IPM increased by 1.5% to $192.5 million, up from $189.6 million in prior period, and up 2.5% on a constant currency basis.

The increase in adjusted subscription revenue was driven by subscription growth in the science product group, in particular the Web of Science product lines. The increase in subscription revenues is driven in part from new subscription business as well as the impact of price increases.

Adjusted subscription revenues accounted for 82% of total adjusted revenues in the quarter, again consistent with the same period prior year. We continue to execute our strategy of building and growing our recurring subscription revenue base.

At the end of Q1 2019, as Jay described, the annual contract value, or ACV, of subscription-based contracts increased 4.6% compared to the same period last year and was higher than reported subscription revenue growth. This should lead to improvements in subscription revenue growth in subsequent quarters.

Retention rates were 93.4% in the quarter, 20 basis points higher than in the same quarter prior year and, as already discussed, 50% of our annual book came up for renewal in Q1.

Turning to transactional revenues, which accounted for 18% of total revenues in both periods, these declined to $41.7 million in the first quarter from $42.9 million in the first quarter 2018. Adjusted transactional revenues accounting for the sale of IPM declined $0.5 million or 1.5% and were flat on a constant currency basis.

Looking at revenue by product group, Science Group revenues increased by $3.2 million, 3%, to $129.1 million in the first quarter up from $125.9 million last year. Adjusted revenues increased by $4 million or 2.5% to $129 million and were up 3% on a constant currency basis. The increase in Science Group revenues were driven by subscription revenue growth with transactional revenues remaining relatively flat.

Science Group revenues adjusted -- Science Group adjusted revenues accounted for 55% of total adjusted revenues compared to 54% in the same period prior year. So there's been a very slight change in the product group weighting. The Web of Science product line in particular continues to enjoy market-leading renewal rates.

The Intellectual Property Group revenues declined by $0.8 million to $105.1 million in the first quarter, down from $105.9 million in last year's first quarter. Adjusted revenues declined by less than 1% and increased by 1% on a constant currency basis. Intellectual Property Group revenues were again driven by subscription revenue growth, but were partially offset by lower transactional revenues.

Adjusted EBITDA was $59.3 million in the first quarter 2019 compared with $63.3 million in the same period prior year. The decline was primarily due to higher standalone expenses in the first quarter 2019 as we completed the separation from our former parent. With the separation now behind us we shall be working to optimize our standalone expense base. Adjusted EBITDA margins were 25.3% in this year's first quarter compared to 27.4% in last quarter same period -- late last year same period.

Standalone adjusted EBITDA, we are required to report standalone adjusted EBITDA pursuant to the reporting covenants contained in our credit agreement and indenture and are prepared on a last 12-month basis. Standalone adjusted EBITDA takes adjusted EBITDA and includes two permitted add backs: firstly, an adjustment for excess standalone expenses; and secondly, it includes the impact of pro forma cost savings that we have implemented. Standalone adjusted EBITDA increased 2% to $312 million for the 12-month period ended March 31, 2019 compared to $305.9 million for the 12-month period ending March 31, 2018.

Our cash flow from operations increased 11% to $42.5 million in the first quarter of 2019, up from $38.2 million in the first quarter of 2018. Cash from operations improved primarily due to an improved operating loss, partly offset by an increase in receivables due to the timing of collections. Capital expenditures in the quarter were $12.1 million, flat on prior year.

Turning to the balance sheet, we had cash and cash equivalents at the end of the quarter of $28 million compared to $25.6 million at the end of the first quarter 2018. Long-term debt was $1.928 billion at the end of the first quarter 2019 compared to $1.93 billion at the end of the first quarter 2018.

With the Churchill merger closing on May 13 we have used net proceeds of $650 million to reduce our existing term loan and also repay our revolving credit facility. This reduces our net leverage ratio at March 31, 2019 from 6.3 times net to 4.2 times on a pro forma basis.

Turning now to our outlook for 2019 which remains unchanged. For the year ending December 31, 2019, Clarivate expects adjusted revenues in a range of $962 million to $995 million, adjusted EBITDA in a range of $290 billion to $310 million, and adjusted EBITDA margins of approximately 30%.

Earlier this year the Company provided Clarivate lenders and Churchill investors an outlook for standalone adjusted EBITDA. This was covered by Jerre in his opening remarks. The outlook is unchanged.

We expect that annualized run rate cost savings net of actual cost savings realized related to restructuring and other cost savings initiatives undertaken during 2019 will approximate $12 million.

Additionally, we expect the difference between our standalone -- our actual standalone company infrastructure costs and our estimated steady-state standalone operating costs for 2019 to approximate $23 million. I will now turn the call back to Jerre.

Thank you, Richard. This wraps up our discussion of the first quarter and, as I said earlier, we look forward to sharing the many exciting opportunities ahead with you. Today is day one and we're off and running. Thank you for your time and we're ready to take your questions now. Please permit yourself to one question and then return to the queue. Operator?

(Operator Instructions). Zach Cummins, B. Riley FBR.

Congrats on finally closing the merger just a few days ago. And in terms of your TSA agreement with Thomson Reuters, it sounds like that's done six months ahead of schedule. Just kind of closing the loop on that, are there any final payments that need to be made or any still -- any additional services that need to be transferred over over the remaining six months of the agreement?

Great question, Zach. Richard will be happy to respond to that one.

There are no further services to be provided by TR into the TSA. We exited all of those arrangements at the end of Q1 2019, six months ahead of schedule. In terms of our income -- our OpEx expenses to the TSA, there will be $10 million this year of which $5 million was accounted for in the first quarter. And on a cash basis the expenses are $15 million and they will be completed this year. And the TSA will -- there will be no further payments under the TSA from 2020 onwards.

Tim McHugh, William Blair.

Just wanted to ask about margin expansion, I guess the LTM standalone EBITDA growing at about the same pace as revenue here. Yet I know you've got strong ambitions for margin expansion in the next couple years. Can you talk about what's been happening and why we didn't see that versus -- and maybe what's holding it back as we look at the near-term results versus what will be seen going forward? Thanks.

Yes, no, excellent question. I'm happy to and, just for a side comment, on the Q2 call we will spend most of the time going through the great of detail of all the things underway. But Jay, pick it up now.

Yes, appreciate the question, Tim. Good morning. It's a function really of timing. As we exit the TSA this year essentially we can turn our attention to optimizing our expenses. And so, it was a pretty tight timeline in 2.5 years to separate the Company. And so, some of the things we had to do in the interest of speed, but didn't necessarily set ourselves up for long-term optimization.

So, we are turning our attention to optimization now and expect, as we progress throughout the rest of this year and into next year, that we'll start to see some of that margin expansion, both from a reduction in our costs and an increase to the revenue growth rate.

Richard?

Yes, I think Jay is absolutely right. The separation from TR has been a big lift. It has been consuming a lot of management time. Now that's completed, we can really train our sights on optimizing the cost base of the business in terms of the back office systems that we've implemented. But up and down the organization we've got terrific opportunities to take overhead out of the business and drive margins.

And one other thing I will add, Tim, is that next quarter we will share with you some plans that we have that are all technology related with some medium-term projects that will remove a significant amount of costs and improve the customer experience and efficiencies. And we're just kicking those initiatives off now that we've finished the carve-out. So there's ample opportunity. We've got good plans in place and we'll be able to share more of that with you next quarter.

[Dimitri Genove], Magnetar.

Congratulations on closing the deal. Just a quick question on 2020. I know in the road show presentations you had some expectations for next year in terms of EBITDA you were targeting. Maybe if you can comment on that and when you will be providing guidance for 2020.

Yes, let me start with that and then both Jay and Richard will pick up. You're right, on the road show deck, page 23, we gave you an exit -- expected exit rate. Jay actually referred to it this morning on the 4% to 6% organic growth; the standalone adjusted EBITDA margin was 35% to 38%. Those two are consistent and we expect to see that as we exit 2020. Richard?

Well, I think that you covered it. As we discussed in the presentation in April, we have the range of $325 million to $345 million of standalone adjusted EBITDA for this year, and we're looking to drive margins up exiting 2020 in the 35% to 38% range. That will come obviously from a combination of some revenue expansion on the top line and also very, very close attention to the costs of the business.

I should've mentioned earlier that we have some really nice scale in best cost locations such as India and Lithuania and Spain -- in particular in India. And we see we shall be executing projects to really leverage that capability and manage our costs through that mechanism. So, revenue expansion; very, very strong attention to cost management driving bottom-line margin growth.

And I think the other part of your question Dimitri was around 2020. And we'll give 2020 calendar year guidance once we get into the fourth quarter of 2019.

And in fact our discussion now is that we'll probably do an Investor Day late November or early December where we give that guidance and a lot of other information by the entire team. Thank you.

Marlane Pereiro, Bank of America.

Just a quick one, on adjusted EBITDA, the year-over-year change is about 6%. So, can you discuss the factors that impacted this quarter and how you expect to see that improve as the year progresses?

The principal change, whilst we had higher standalone costs in the first quarter of this year compared to last quarter of about $6 million, that's the principal driver of the change. So, going forward we see referencing cost savings opportunities and, of course, as we stood up the independent functions as we separated from our former parent we had to move very, very quickly.

What we are now doing is optimizing the functions and the systems that we implemented over the last two years and bring down our standalone operating expenses. Both in terms of our systems data and facilities.

The other thing I would add Marlane is that -- the way -- there's a little bit of seasonality in our revenue and so there's a little bit more revenue in the back half of the year than the front half of the year. What's the split, 49/51?

Correct.

So, 51% of revenues in the second half. And we are expecting to see, as am I mentioned in my remarks, sequential quarterly expansion in the revenue growth rate as we proceed throughout the year. So, adjusted EBITDA margins will continue to grow as we move through the year.

(Operator Instructions). Daniel Albornoz, GoldenTree.

I was actually going to ask on the EBITDA as well. So you mostly answered it. But just as a follow-up, does the EBITDA that you reported normalize for IPM in both the 1Q 2019 and 1Q 2018 periods?

Yes, it is.

Yes, good question.

So, the debt pay down, is that already -- that's already been done as of 3/31 you said?

No, actually we completed the merger with Churchill on Monday, which was May 13, and we executed the debt pay down yesterday, May 14.

And it was a joy to do that. I must say, as we finished the shareowner meeting Monday morning, released the funds, money disappeared everyplace quick. And as Richard said, yesterday [laid] it down. So that's very exciting.

We've talked about what we're going to do as we move forward with that kind of EBITDA -- much, much improved but trailing EBITDA at 4.2, that will come down significantly with time. Because this business, particularly with the great work being done on increasing annual subscription base, etc., this business will become a wonderful cash machine as we move forward. Other questions?

(Operator Instructions). We have no further questions at this time. I would like to turn the conference back over to Jerre Stead for any closing remarks.

Thank you. Thank you all very much for the participation today. As we said, this has been a great week for us. And now, as we talked about, the real fun begins as we focus on providing great returns for shareowners for many years to come. I have a huge amount of confidence in our ability to do that with our team. So, thank you all and we look forward to talking to you soon. Thanks, operator.

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