Clarivate PLC Q3 FY2020 Earnings Call

Good morning, and welcome to the Clarivate Analytics Third Quarter 2020 Earnings Conference Call. This event is being recorded. I would now like to turn the conference over to Mark Donohue, Vice President, Investor Relations. Please go ahead.

Thank you, Alisa, and good morning, everyone. Thank you for joining us for the Clarivate Third Quarter 2020 Earnings Conference Call. With me today are Jerre Stead, Executive Chairman and Chief Executive Officer; Richard Hanks, Chief Financial Officer; Mukhtar Ahmed, President, Science Group; and Jeff Roy, President of IP Group. All will be available to take your questions at the conclusion of prepared remarks. As a reminder, this conference call is being recorded and webcast and is copyrighted property of Clarivate. Any rebroadcast of this information in whole or in part without prior written consent of Clarivate is prohibited. This morning, Clarivate issued a press release announcing our financial results for the period ended September 30, 2020. The release as well as an accompanying supplemental presentation is available in the Investor Relations section of the company's website, clarivate.com under events and presentations. During our call, we may make certain forward-looking statements within the meaning of 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 will include non-GAAP measures or adjusted numbers, including adjusted revenue and adjusted EBITDA. Clarivate believes non-GAAP results are useful in order to enhance understanding of our ongoing operating performance. But they are supplement to and should not be considered in isolation from or as a substitute for GAAP financial measures. Reconciling of these measures to GAAP measures are available in the earnings release and supplemental presentation that's posted on our website. After our prepared remarks, we'll open the call up to your questions. So with that, it's a pleasure to turn the call over to Jerre.

Thank you, Mark, and thanks to all of you for joining us this morning. It was another very busy quarter for our company as we announced a transformative acquisition and delivered a very solid quarter of growth. What we're accomplishing this year in the face of a pandemic is simply amazing to me. I couldn't be prouder of our global team for driving improvement in our financial results, executing on business development, M&A opportunities, delivering enhanced product offerings, driving improved colleague engagement and customer delight scores, and rallying around social causes to make the world a better place. First, let's talk about our financial performance. Adjusted revenue for the third quarter was $286 million, an increase of 16% at constant currency as we benefited from recent acquisitions, including DRG and subscription growth. Excluding divested businesses, adjusted revenue increased 22%. Organic subscription revenue grew 4%, driven by new business and annual price increases. Organic transactional revenue continued to feel the effects of COVID-19, as it was down $7 million or 16%, primarily due to reduced demand driven by short-term cutbacks. However, we are beginning to see the smaller segment of our business start to recover. Compared to this year's second quarter, transactional revenue increased sequentially by almost 7%. We continued to deliver strong growth in adjusted EBITDA, up 40% over last year to $108 million, driven by the increase in sales and the cost efficiency in the initiatives we have been and will continue to pursue. Our adjusted EBITDA margins improved to 38% compared to 32% last year. We said we expected to exit 2020 with margins in the upper 30% range, and we are delivering on that promise. Richard will cover the financial details in a few minutes. We were very pleased to quickly complete the acquisition of CPA Global two months after announcement. I'm so proud of both teams and how they've accomplished so much in such a short period of time, and with everyone working remotely. This is a very big event for Clarivate and CPA Global as well as for our customers and the entire IP industry. Together, we're now positioned to offer a true end-to-end solution covering the entire intellectual property, science, and innovation life cycle. We have a unique set of solutions that help to accelerate the pace of innovation and position us as the clear global market leader in this large and growing IP market. Bringing our two companies together is a big win for our customers. They now have access to a more comprehensive suite of IP-related products and services, and that's just the beginning. We're already working on several combined offerings that we will release as soon as possible. We swiftly kicked off integration activities that bring our people and products together and will deliver the $75 million in cost synergies, which was our commitment when we announced the acquisition at the end of July. We are moving quickly to harness the excitement and momentum that's been building across both companies and to unlock unique opportunities for our customers and our company moving forward. Clarivate is growing rapidly, thanks to the many new colleagues who have joined us within the last 12 months from Darts-ip, CustomerFirst Now, DRG, and now CPA Global. With each acquisition, we benefit from their experience and talent. And we now have the opportunity to learn and expand our businesses and horizons together. In addition to the CPA Global acquisition, we continued to deliver new product offerings and enhancements across the IP and Science portfolio. Earlier this week, we acquired control of Beijing Incopat Technology Co., Ltd., a patent information services provider in China. Founded in 2011, IncoPat is a highly complementary investment and company to our property portfolio. IncoPat has strong Chinese language capabilities, such as Chinese search for Chinese patents and English content as well as machine translation of Chinese, English, and Japanese patent content. Having IncoPat within our portfolio will allow us to penetrate the fast-growing Chinese local IP market. Their primary customers include law firms, universities, government departments, and corporations. Our industry-leading patent products continue to expand their coverage universe, which has tripled full text patent coverage in the last 12 months. During the third quarter, we released an additional 10 new patent authority countries and now offer 75 authorities, making global patent data one of the most geographically comprehensive patent literature databases available. Our trademark customers now have access to the recently expanded industrial design coverage, which added 16 new registers. The collection now includes 43 registers covering approximately 15 million records and 56 million images. Within the Science Group, we're now collaborating with Open Access Monitor Germany, to provide Web of Science data across Germany, Switzerland, and Austria. We're providing customized Web of Science publications, grant, and funding data to increase the impact of scientific scholarship and to enable more equitable participation in research. The collaboration strengthens our continued commitment to support open research by investing in community-driven projects and enhanced open access data for our products. During the third quarter, we launched the coronavirus virology and infectious disease data lake to accelerate research and respond to future pandemics. This is the first of several disease-oriented data lakes from Clarivate, bringing together comprehensive information and insights that power the company's market-leading tools, analytics, and services. This includes real-world data from DRG's RWD product, scientific, clinical, regulatory, and commercial data from our life science business, and citing scholarly references indexed in Web of Science and both content and data from the award-winning news service, BioWorld, into one centralized source. We also launched our generics intelligence product to enable generic pharmaceutical companies and API manufacturers to make timely and more informed data-driven decisions as they seek to drive business growth and identify new markets, products, and partners. Now for an update on our COVID responses. Most of our colleagues continue to work from home. We recently made the decision to keep all offices in the Americas, Europe, and India closed through at least the end of this year. Our COVID response task force is working through our return-to-office planning. Throughout this pandemic, I continue to be very thankful for how well our team has adapted and overcome many challenges. This is clearly evident in the improved colleague engagement and customer delight scores from the surveys we ran this spring and this fall. We just completed our final surveys for 2020, and I very much look forward to sharing our progress with you at our upcoming Investor Day. While this pandemic has been a personal burden for many, we've used it as an opportunity to forge a very important new path forward. We're now accelerating our path into a new way of working and changing how and where we work together, creating an environment and culture that we can be very proud of. At Clarivate, we launched our together-and-apart strategy, and CPA Global launched their digital-first CPA program. Both programs have made good progress since they were launched. We have now fused these two programs together so we can accelerate our progress towards building a new and better way of working. With one program, we'll move faster and build on our collective learnings. Our more than 8,500 global colleagues are and will benefit. I'm very excited that Mel Fitzpatrick, who joined us from CPA Global, where she served as Chief People and Brand Officer, is leading us in this critical work. Please tune in again to our Investor Day, as Mel will be providing more details about our digital workplace initiative. This morning, we updated our full year 2020 guidance to include the fourth quarter results for CPA. We'll be providing our full year 2021 outlook at our Investor Day on November 10. Our 2020 outlook now, including CPA, is: adjusted revenue of $1.28 billion to $1.295 billion; adjusted EBITDA of $480 million to $495 million; and adjusted EPS of $0.55 to $0.61. For adjusted free cash flow, we now forecast $240 million to $260 million. Now, I'll turn the call over to Richard.

Thank you, Jerre. It was another very solid quarter of growth. We continued to deliver improved quarterly results in 2020 on a year-over-year and sequential basis across many key financial metrics, including adjusted revenues, adjusted EBITDA, and adjusted EBITDA margin. We reported adjusted revenues of $286 million, an increase of $43 million or 16% at constant currency compared to last year's third quarter. The acquisitions of DRG and Darts-ip, which together added 22% revenue growth this quarter, were only partially offset by the MarkMonitor brand protection divested products, which reduced revenue by 6% compared to the prior year period. Excluding the divested product lines, total revenue increased 22% at constant currency in the third quarter. The foreign exchange impact on our revenues in the third quarter was favorable at nearly 2% due to dollar weakness as compared to last year's third quarter. Organic business revenue, excluding acquisitions, divestitures, and foreign exchange, was up slightly versus the prior year period as higher subscription revenue was offset by lower transactional revenue. On a reported basis, total subscription revenue was $222 million, an increase of 9% at constant currency. Acquisitions over the last 12 months added 12% of subscription revenue growth, which was partially offset by the divested product lines that decreased revenues by 7%. Excluding the divested businesses, subscription revenue increased 16% at constant currency. Organic subscription revenue increased by $7 million or almost 4%, driven by higher sales and price increases for the Web of Science, life science products, Techstreet, and CompuMark compared to last year's third quarter. Subscription revenue renewal rates were 91% for the first nine months of 2020, and we continue to enjoy strong renewal rates. We remain very focused on achieving world-class renewal rates in the mid-90% range. Subscription revenues accounted for 78% of adjusted revenues in the quarter, including CPA Global from Q4 onwards which will result in recurring and reoccurring revenues to approximate 83% of total revenues on a pro forma basis. Transactional revenue increased to $64 million, up $22 million or 52% year-over-year on a constant currency basis, driven by our acquisitions. Acquisitions added 68% of transactional revenue growth and the product line disposals lowered transactional revenues by less than 1%. Organic transactional business revenues decreased by $7 million or 16% due to lower Web of Science backfile sales and lower CompuMark search and Techstreet revenue. The Techstreet transactional decrease was due to prior year comparatives, benefiting from a large biannual standards release at the start of Q3 2019. As that is a biannual release, we did not enjoy that lift in Q3 2020. ACV growth was 9% for the third quarter, which includes acquisitions. Excluding divestitures, ACV growth was up 15%. And on an ongoing basis, ACV increased by 4% and was primarily driven by organic growth and annual price increases. Turning now to performance across our two product groups. In the Science Group, revenue increased by $53 million or 38% to $191 million at constant currency driven by the acquisition of DRG. Organic business revenue increased by 2%, led by higher subscription and services revenue within the Life Sciences product family, partially offset by lower transactional revenue. For the Intellectual Property Group, revenue for the third quarter, excluding the divestitures, increased 1% to $96 million at constant currency, driven by the Darts-ip acquisition. Organic business revenue for the IP Group decreased by less than 2% as subscription revenue growth was offset by lower CompuMark and Techstreet search volumes. On a reported basis, IP Group revenue declined 11% due primarily to the divested products. Adjusted EBITDA in the third quarter increased by $31 million or 40% to $108 million compared to the prior year period. This was driven by the increase in revenue and strong margin flow-through, contributions from acquisitions, portfolio rationalization, and the benefit of the cost-saving initiatives. Our adjusted EBITDA margin continues to move closer to the 40% range. Margin improved by 610 basis points to 37.8% as compared to 31.7% in last year's third quarter. Cash taxes in the third quarter were $12 million compared to $7 million in the prior year period. The primary driver of the increase was U.S. income tax payments that were deferred until July 15 this year due to the COVID pandemic. Adjusted net income increased by 23% to $59 million for the third quarter and adjusted diluted EPS was $0.14. The weighted average share count used to calculate adjusted EPS increased by 24% or 79 million shares since last year's third quarter, driven by the issuance of ordinary shares in conjunction with the exercise of the acquisition of DRG and the exercise of public warrants earlier this year. It's also worth noting that the share count in this year's third quarter increased by 13 million shares on a sequential basis compared to this year's second quarter. This increase is the result of the shares issued in the June 2020 primary offering being fully reflected in the current quarter calculation versus a weighted average number of shares used in the Q2 calculation. Capital expenditures increased by $35 million on a cash basis compared to last year's third quarter. Taking capital expenditure accruals into account, CapEx was up $26 million year-to-date September compared to prior year. With our remote working environment, we are seeing high levels of product application development across all of the portfolio, the higher content contracts, as well as some timing impacts from accelerated spend on laptops due to the digital-first initiative arising from the COVID pandemic. We ended the third quarter with $601 million in cash in connection with the closing of the CPA Global acquisition on October 1. We used $538 million of cash on hand and incurred an incremental $1.6 billion of borrowings under our term loan facility to fund the repayment of CPA Global's debt. Additionally, we issued approximately 217 million ordinary shares to former CPA Global shareholders. Our total gross debt at the end of September 2020 was $1.95 billion. With the incremental borrowing associated with the CPA acquisition, our total debt now stands at $3.55 billion on a gross basis, with net debt at approximately $3.4 billion. Stand-alone adjusted EBITDA, which we are required to report on a trailing 12-month basis pursuant to the reporting covenants contained in our credit agreement and indenture was $458 million. Please refer to our earnings release or 10-Q for a reconciliation from net loss to adjusted EBITDA and from adjusted EBITDA to stand-alone adjusted EBITDA. We ended the third quarter prior to the incremental borrowings with a net leverage ratio of 2.9x. Our current net leverage ratio on a pro forma basis, including CPA Global's adjusted EBITDA and the recent borrowings, is approximately 4.3x. Our goal is to be in the low 3x range in the medium term. With that, I'll turn the call back to Jerre.

Thank you, Richard. Great job. Before we begin taking questions, I want to express my gratitude once again to our over 8,500 colleagues worldwide for their tremendous dedication and hard work this year. Their remarkable achievements continue to impress me, especially in light of the challenges posed by the pandemic and how it has changed our work environment. Our Virtual Investor Day is scheduled for Tuesday, November 10, and we hope you can attend as we will provide a detailed overview of our business, strategies, financial outlook for 2021, and future objectives. We are now prepared to take your questions. Operator, please proceed.

The first question today comes from Shlomo Rosenbaum of Stifel.

Jerre, I want to discuss how you're performing in terms of organic growth compared to your expectations in the core business. Excluding acquisitions and currency fluctuations, did the company see year-over-year revenue growth? How are you measuring up? Additionally, is the increase in guidance solely attributed to CPA Global, or is CPA Global compensating for any potential weaknesses in the core business? I'm trying to understand the current situation.

Yes, that's a great question, Shlomo. Let's take a step back. When we finalized the DRG acquisition on February 28 this year, we provided new guidance that reflected a $30 million reduction in the midpoint from our original expectations, which we believed was largely due to transaction-related factors. We also anticipated that we would see some stabilization in Q3, with Q4 showing year-over-year growth in transactions. Currently, there are a couple of important points to note. In hindsight, I would have presented things differently. For many years, I've provided annual guidance without offering quarterly updates. However, we did indicate that with DRG, 60% of their revenue is generated in the second half of the year, which leads to a significant increase. We also mentioned our intention to address that growth pattern in the future. We should have clarified that 60% of DRG’s second-half revenue is concentrated in the fourth quarter. Setting that aside, I can confirm that we are on track with our expectations for organic growth in our renewal business, and I feel positive about that. We anticipate finishing the year on a strong note. While we fell short of our transaction expectations, as mentioned in my previous remarks, there was a sequential increase from Q3 to Q4, and we hope that trend continues into Q4. I am very optimistic about our organic growth in the annual subscription base, and I see positive changes on the transaction side as well. The new guidance we provided includes contributions from CPA, which has performed well, and we look forward to sharing more details at our November 10 conference regarding our expectations for 2021. I will also outline our goals for exiting 2022 and my outlook for 2023. Richard, do you have anything else to add?

No. I think that's covered it.

The next question comes from Manav Patnaik of Barclays.

Jerre, could you provide a reminder of the components involved in that transaction bucket? What does it include, and why was it perhaps below your expectations? It might be premature to tell, but with the potential lockdowns in the fourth quarter, do you think we might not see the quarter-over-quarter improvement?

Let's work backwards. Great question, Manav, thanks. I'll take the second part. Richard, you take the first part and break out for them the three pieces we look at with transaction business. No, I think we're feeling fine about fourth quarter. And as the lockdowns continue, we're seeing, as I said, the pickup on pieces of the transaction business. And part of that is there's a significant pickup in Q4, as I said, with DRG in their repetitive business and their transaction business. But Richard, give them the play out of about the 17% that is not subscription-based.

Yes. There are essentially three components. The first component is the transactional backfiles and customer data, which saw lighter custom data sales this quarter compared to the previous year. Then we have the CompuMark search business, which showed improved performance as we progressed through the quarter, reflecting some recovery from earlier impacts of the pandemic. The third component is Techstreet, which had a significant biannual standards release last year in the third quarter, boosting the prior year comparisons that we did not experience this year. Finally, on the professional services side, performance is holding steady, especially in the life sciences vertical, which aligns with expectations.

Thanks, Richard. I'd just add a bit to that because it's so important. Historically, Clarivate did not invest in the services business, professional services, and we look forward to the progress. Mukhtar and Jeff, both have done a great job in moving that forward. And it's really not one-off bids. What it is, is pulling through our annual subscription base, which gives us a unique situation. So I feel very good about that part as we move forward.

The question comes from Toni Kaplan of Morgan Stanley.

I was hoping you could give some additional color on APAC. Just looking at the 10-Q, organic growth there was basically flat in the third quarter, but that followed second quarter organic growth of 6.7%. So it seems like it's driven by transactional, but could you just talk about what got worse in 3Q versus 2Q in APAC? And how are you thinking about the recovery there? And also maybe just with IncoPat. Does this help accelerate your timeline for capturing the growth that you're seeing in China? And anything to add on that growth in that region?

That was a great question. Great question, Toni. I'll work backwards and Richard will pick up the first part of your question, which is the why flat, Richard, in Q3 in Asia Pacific versus the 6.5%, 7% we saw in the first half and what we expect, as you'll see, for the full year. IncoPat is a great addition for us and it gives us a unique situation of being able to sell their product around the world and also to sell even more of our products into China. So it's a good one. Very pleased with it. We won't see a big pickup in Q4. We'll see that as the year evolves in 2020 and 2021. Jeff and David Liu, our Head of Asia Pacific, did a great job in getting that one put in place. Richard, let's help because Toni's question's a good one on Q3 and Asia Pacific.

Yes. I mean, year-to-date growth for Asia is 4.5%, but it was flat in Q3 with growth in Q1 and Q2. What we saw in Q3 is backfile sales in the quarter for Asia Pac were lighter than prior year, and that's the primary driver. I would add this, that the fourth quarter from a transactional perspective, and this comment applies to not just Asia Pac but the other regions as well, Americas and EMEA, is the largest quarter for us in terms of absolute transactional revenue growth. That's driven by a number of different drivers. One of them is backfile sales in Asia Pacific. So we are expecting to see good growth in fourth quarter in Asia Pac in that transactional revenue stream. So it's partly timing in terms of those backfile sales and when in the year they actually come in. But we're expecting a solid fourth quarter performance from Asia Pacific.

Thanks, Richard. Just one other comment I'd make. In the third quarter, we went in and out of some offices. Tokyo opened and closed, and we kept it closed. Same thing was true in South Korea. So that impact was, I think, caused us to see some of the transactional business postponed into the fourth quarter.

The next question comes from Andrew Nicholas of William Blair.

The merger with CPA significantly enhances your solution in the IP market, providing you with an end-to-end platform. I'm curious if there are still opportunities, such as IncoPat, to expand that segment through mergers and acquisitions. Are there specific capabilities you wish to add, or are there consolidation transactions that could help boost your market share? I'm trying to understand if we might see additional deals in that area in the near to medium term and what those deals would aim to achieve.

Great question. I'll start, and I'll ask Jeff to pick up. Just in general, first, our portfolio has made great progress this year with the addition of DRG, some of the tuck-ins that have done very well, and then, of course, CPA. So we're feeling good about that. However, there are opportunities, both tuck-ins and larger acquisitions that may become available for us. Let's just remember, we're always patient, persistent. We do not participate in auctions. However, we do want to be always the preferred acquirer as we have been in each of these cases. So I feel very good about that. I'll just open up for Jeff in just a second with one comment. We feel very good in both our Science business and in our IP business with having all the critical assets that are needed. And what we look forward to with acquisitions is complementing them, both geographically, like we just did with China. More of those to come.

Yes. Thanks, Jerre. It's a great question. I mean, we're always looking to groom our portfolio. So we always see opportunities out there in the market. I think you kind of hit it on the head, Andrew, in that when we look at the CPA acquisition, it definitely improved our product mix. And we think that helps us create better packages to solve customer problems. So we're very excited about that, and a big part of our strategy is cross-sell and upsell as we move forward. But the other thing that we're really focused on is really how do we make investments in our portfolio to leverage our data assets. And as Jerre said before, we're definitely focused on our analytics capabilities and the advisory services that we have, as we think that, that's a nice add-on and CPA creates a nice channel for that as well. So all in, we're always looking at opportunities. And as Jerre said, there's plenty of opportunities in the market for us, and we're going to continue to evaluate them.

And we feel very good about the teams we have in place on integration. We're getting better every day with that and are ready for more if and when they become available. So thank you for the question.

The next question is from Seth Weber of RBC Capital Markets.

I wanted to ask about the renewal rate for the quarter. I think it was up a little bit year-to-year, 91%, but it slipped from, I think, the 92.5% or 93% that you talked about in the second quarter. Can you just give us any color as to what's going on there?

You bet. I'll have Richard give you that in just a second. As a reminder to everybody, because it's really important, we have a severe and appropriate measure for renewal. If I had a $100 contract in 2019, and I have a new contract before pricing of $99, that's a mess. Very few report that way. I'm very pleased that we do report that way. So make sure we just keep that in mind. And the other thing, and then over to Richard, we're feeling very good about our goal to get with all the things we're doing with our global business centers, our inside sales, et cetera, about getting to the 95% plus retention as we move forward. But Richard, let's give them the color. It's a great question on Q3.

Yes, we are very diligent in measuring our retention rates, including only those accounts that are up for renewal throughout the year. Therefore, only cancellations affect the calculation, and we noticed that cancellations were slightly higher year-to-date as of September compared to the previous year. On the other hand, new business has shown stronger performance year-to-date compared to last year, but it is not included in this calculation, nor are price increases. Even though cancellations have increased slightly year-to-date, what's crucial to focus on is the growth in Annual Contract Value (ACV), which provides a more comprehensive view of the company's recurring annual revenue stream. This ACV grew by 4% year-to-date at the end of the quarter compared to the previous year for our base business, aligning with our expectations. I believe that’s the key point to highlight.

Thanks, Richard. And I'd just add one thing to that because it's so important. You're going to get good details on our November 10 Investor Day about what we've done with the global business centers. We're ahead of schedule there. And the other thing we're learning, including with the addition of CPA, our opportunity to handle more customers inside than ever before is huge, and we'll continue to do that. Feeling really good about that progress. Mukhtar and I were talking about just before the call. We've got a lot of things that we'll be able to do to focus our outside sales folks better than ever before as teams on global markets. So we're going to win on both sides, and I feel, best I felt about our ability to see the kind of organic growth we talked about. We said we expected to exit 2021 at 6% to 8% organic growth. And you'll see guidance, as I said, on November 10, but feeling very good about that despite the pandemic.

The next question comes from George Tong of Goldman Sachs.

I wanted to dive deeper into organic revenue growth performance. Subscription revenue was up 3.5% organically in 3Q. This compares with 3.6% organic subscription growth in 2Q. Can you elaborate on the puts and takes that caused subscription organic revenue growth to moderate and some specific initiatives that will help reaccelerate subscription organic revenue growth next quarter?

Go ahead, Richard. Thanks, George. Just a reminder...

Yes, certainly. Regarding subscription revenue growth, there was a slight increase in Q2 compared to Q3. Q2 included the advantage of closing some annual contracts that we previously discussed, as some Q1 renewal dates extended into Q2 due to the pandemic's impact at the end of March. This resulted in some renewals slipping from Q1 to Q2, which we captured in that period, leading to a revenue boost from recognizing revenue for some contracts that covered a six-month duration. However, this impact has normalized as we moved into Q3. Nonetheless, Q3 still showed strong performance at 3.5%, including price increases. Relating back to the previous question about renewal rates, we are currently restructuring the sales organization. We are transferring a significant number of accounts from the field organization into our three global business centers that include inside sales in Chandler, Arizona; London in EMEA; and Penang, Malaysia for Asia Pacific. The expectation is that this will boost new business velocity due to broader market engagement. Additionally, this will allow for more regular interaction with the long tail of our account base, which is expected to improve retention rates through more frequent client interactions. This change will drive organic subscription growth and enhance our renewal rates.

The next question comes from Pete Christiansen of Citi.

Jerre, thanks for the added clarity on the DRG second half cadence, but I was hoping you could talk to what's the typical seasonality that you see in the CPA business. And perhaps also, how do you think about Clarivate's overall exposure to potential budget flush activity year-end and thoughts ahead given the current environment? That would be helpful.

Yes, that's a great question. Thank you. A couple of points to note. The CPA performance is on track, with the split for Clarivate being 49% in the first half and 51% in the second half. This has been an incredible year, and we initially anticipated a 48-52 split, excluding DRG. We are feeling very positive about our progress. I couldn't be more proud of our CPA team and what we've achieved. As we move forward, I think you'll see a balance closer to 48-52, including DRG, due to our ongoing initiatives. We'll provide a clear update on November 10. Mukhtar, please go ahead.

Yes. Thank you, Jerre. Yes, just a few comments on DRG. I mean we fully integrated DRG into our business. That's really allowed us to really start operating as a combined and cohesive business. And we're starting to see the fruits of that certainly in the field and in some of the pipelines and deals and so forth that we're creating. And we're starting to just realize some of that pickup. So we feel very good going into Q4 and responding and meeting our growth targets there.

The next question comes from Zach Cummins of B. Riley FBR.

Just more clarity on the three global business centers. I mean, do you have a timeline on when you expect all three of these to be fully operational?

They are now. That's...

Perfect. Got it. I thought there was still like a hiring ramp for some of them where they need to be filled out for...

Great question, Zach. I welcomed our last 21 hires in Penang on Monday, exceeding our original goal. Many of our support teams are moving their skills to that region. As we head into 2021, all three centers will be fully staffed. We will also provide updates on November 10 regarding our global center for the EMEA region, which is a significant advantage for CPA. I feel very positive about this. I've had the chance to see all the new hires in our global centers, and we are attracting excellent talent. One silver lining of the pandemic is that we've secured really good talent going forward. I'm pleased with the efforts of Mike Morhardt, David, Jeff, and Mukhtar, and we are well-prepared. Moving ahead, we will focus more on best cost centers and offshoring, enhancing our ability to operate 24/7 for customers around the globe. Overall, I'm feeling very optimistic about our direction.

There are no further questions. This does conclude our question-and-answer session. I would like to turn the conference back over to Jerre Stead for any closing remarks.

Thank you very much, and we look forward to continuing to deliver what I feel is really great progress in this pandemic, and in fact, continuing better than ever before. Last comment I'll make is we really hope you all spend the time on November 10. I'm eager to do the program. We've got a lot to cover, and we'll make sure that we've got plenty of time for questions there, too. So thank you all very much. As I said, I'm incredibly proud of our team about what we've accomplished. Wonderful additions from the M&A standpoint. And I would just say we'll close, with the fact we're just getting warmed up. Thanks, everybody.

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