Clarivate PLC Q2 FY2025 Earnings Call

Thank you for your patience. My name is Jordan, and I will be your conference operator today. I would like to welcome everyone to the Clarivate Second Quarter 2025 Earnings Conference Call. I will now hand the call over to Mark Donohue, Vice President of Investor Relations. Please proceed.

Thank you, Jordan, and good morning, everyone. Thank you for joining us for the Clarivate Second Quarter 2025 Earnings Conference Call. As a reminder, this 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, and the accompanying earnings call presentation is available on the Investor-Relations section of the company's website. During our call, we may make certain forward-looking statements within the meaning of the applicable securities laws. Such forward-looking statements involve known and unknown risks, uncertainties and other factors 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 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. Clarivate believes non-GAAP results are useful in order to enhance understanding of our ongoing operating performance, but they are supplemental and should not be considered in isolation from or as a substitute for GAAP financial measures. Reconciliation of these measures to GAAP measures are available in our earnings release and supplemental presentation on our website. With me today are Matitiahu Shem Tov, Chief Executive Officer; and Jonathan Collins, our Chief Financial Officer. After prepared remarks, we'll open the call up to your questions. And with that, it's a pleasure to turn the call over to Matitiahu.

Good morning, everyone, and thank you for joining us. We reported solid second quarter financial performance and delivered growth in our key metrics. We also made progress on the Value Creation Plan, including the AI-led product innovation improving sales execution and enhancing operational efficiency. In the second quarter, we demonstrated our strategic positioning within the market. Organic ACV grew 1.3% compared to the prior year period and improved 40 basis points from the end of last year. This was driven by an important improvement in the subscription book due to higher renewal rates and new business wins. Total organic revenue in the second quarter grew 50 basis points, and recurring organic revenue grew almost 1%. Adjusted EBITDA margin for the first half of the year increased 50 basis points to 41%, driven by internal cost efficiencies. Free cash flow continued to be strong as we generated $50 million in the second quarter and $161 million for the first 6 months of this year. I'd like to highlight that all of our segments showed improvement for the first half of the year. Our A&G business delivered 2% organic ACV and subscription revenue growth. IP returned to organic growth in patent annuities and is well positioned to benefit from the AI tailwind, and Life Science and Health returned to organic ACV growth. With a solid first half, we are reaffirming our full year 2025 outlook. Jonathan will cover the financial results in more detail shortly. Our Value Creation Plan was launched in the fall of 2024, and it is on track with measurable progress across all key initiatives and KPIs. We have launched all major business optimization programs to increase core subscription and recurring revenue, which is enhancing sales predictability. We have completed most of the major operating model changes within our sales organization to improve new business generation, customer engagement, and retention. Since the launch of the VCP plan last October, we have delivered 10 cutting-edge product and AI-powered capabilities while focusing on developing AI-enabled world-class subscription-based solutions in partnership with customers, and we are undertaking strategic reviews to assess alternatives across the business. Our proactive business model optimization, coupled with decades of experience in delivering data and analytics solutions to our clients, has strategically positioned us to anticipate and adapt to current market dynamics. We are on track to discontinue transactional sales of digital collections and books over the next year. This shift away from transactional sales is increasing recurring revenue growth by transitioning some of the business to the new progress e-Books product and other content solution subscriptions. We are pleased with the early adoption with over 70 wins to date and hundreds of customers currently evaluating this new model. Following this A&G strategy, A&G subscription revenue now constitutes 93% of the total segment revenue, excluding disposals, up from 79% in the prior year period. In the first half of 2025, we achieved a 96% renewal rate in A&G. This is impressive results considering the macro backdrop characterized by a reduction in U.S. federal agency contracts, increased constraints on higher education research funding, and potential additional university budget cuts. It is also noteworthy that as of the end of July, 75% of global A&G subscriptions for the full year have successfully renewed. We continue to successfully invest in innovation across the A&G product portfolio with a focus on AI. We are very pleased by our success so far in product launches and customer adoption. More than 4,800 institutions have already adopted our AI tools to strengthen research support, increase operational efficiency, and enhance student engagement. Our partnership within A&G continued to grow, including a recent multiyear agreement with the Canadian Research Knowledge Network that will provide 55 universities greater access to Web of Science, fostering enhanced research collaboration and impact. We are also accelerating progress with next-generation Agentic AI solutions. AI agents can independently play and execute multistep processes by interacting with users, data sources, and tools. The expansion of our Agentic AI platform marks a significant milestone as we implement responsible Agentic AI to accelerate research and learning workflows. Our initial launch of the literature review agent in Web of Science exemplifies this pioneering approach. Finally, we are very pleased that Outsell, a leading research advisory firm in B2B technology, data, and information services recognized Clarivate's AI leadership among major scholarly research organizations, underscoring our position at the forefront of developing user-facing AI Agentic tools.

Thank you, Matti. Slide 18 is an overview of our second quarter and first half financial results compared with the same periods from the prior year. Q2 revenue was $621 million, bringing the first half to $1.2 billion. Second quarter change from last year was entirely inorganic as a result of the ScholarOne divestiture and the A&G and LS&H business disposals, partially offset by organic growth in foreign exchange. The second quarter net loss was $72 million. The improvement over Q2 of the prior year is driven by the noncash impairment charge recorded last year that did not recur this year. Adjusted diluted EPS, which excludes items like the impairment, was $0.18. The change over last year is entirely attributed to the divestiture and disposals. Operating cash flow was $116 million in the quarter; the change compared to last year is entirely driven by adjusted EBITDA, as an improvement in working capital was offset by higher payments of one-time costs associated with implementing the value creation plan. I'm pleased to share this morning that the business grew organically for the second quarter in a row and margins remained at approximately 42%. This was driven by four primary factors: First, our recurring organic growth increased 20 basis points sequentially in the second quarter to nearly 1% as our subscription business returned to growth following the inflection in our ACV in the first half of this year. Careful operating expense management amplified the $3 million of total organic growth, which includes the transactional revenue type, resulting in a $6 million increase in adjusted EBITDA. Second, during Q2, we continued to experience the inorganic impact of the businesses we are disposing of as part of the Value Creation Plan. The top and bottom line changes of $32 million and $17 million, respectively, impacted both the A&G and LS&H segments. Third, as we've seen in the last couple of quarters, we continue to experience the inorganic impact of the ScholarOne divestiture, lowering revenue by $9 million in adjusted EBITDA by $4 million. And fourth, the U.S. dollar weakened against a basket of foreign currencies, which caused a foreign exchange translation tailwind on the top and bottom lines.

Moving to Intellectual Property segment. After a challenging few years, our patent renewal business returned to growth this year, with organic recurring revenue rising by about 1.5% in the first 6 months of 2025. The market-wide surge in AI innovation across the industry is driving sustained growth in registered IT. We believe this trend will create favorable conditions for our patent renewal business. As an example, in the past year alone, patent filings for AI inventions have grown fivefold compared to pre-ChatGPT levels. In addition, AI has the potential to double innovation output and build a more defensible IP portfolio for industry powered by IP and scientific research. The takeaway is that this strong market tailwind driven by the proliferation of AI innovation and technology adoption is fueling our work with customers, empowering them to achieve higher levels of efficiency and IP creation. Our IP segment is well positioned to capture this growth as we continue to lead at the intersection of technology, innovation, and IP. During the second quarter, IPfolio, our industry-leading cloud-based IP management platform designed for corporate intellectual property teams, grew new clients and partnerships over 50% year-over-year across global markets, including South Korea and Japan. We're now broadening and accelerating our portfolio adoption across multiple industries, including pharmaceuticals and large law firms. Our expertise and comprehensive solutions have enabled clients such as Winbond to enhance their IP management practices and gain meaningful insights into emerging trends in IP management. So this morning, we have announced that Maroun Mourad will join Clarivate as President of the IP segment, effective September 8, 2025. He joins us from Verisk Analytics, where he was the president of the Claims Solution division. We are confident that his leadership abilities and expertise will further drive the IP business commitment to fostering innovation and growth. I would like to express my gratitude and appreciation to Gordon Thomson for his dedication to the industry and his significant contribution to Clarivate's success. In Life Sciences, we are encouraged that the VCP efforts have resulted in a return to organic ACV growth during the first half of this year. We have been expanding our strategic reach, fostering innovation through subscription-based platforms designed to support Life Science & Health customers. Our commitment to developing robust partnerships is demonstrated by the recent extension of a long-term multimillion-dollar agreement with 15 global pharmaceutical companies. This achievement validates the importance of our Cortellis and DRG product services to customers. Additionally, we continue to drive advancements in MedTech by introducing next-generation commercial Analytics, the launch of DRG Commercial Analytics 360, a dedicated subscription platform that empowers MedTech organizations to enhance their commercial strategy and execution capabilities.

Please turn with me now to Page 22 for a reminder of our full year financial guidance ranges for this year, which remain entirely unchanged from the initial guidance we provided in February and affirmed in April. We continue to expect our organic annual contract value to accelerate by approximately 60 basis points to 1.5% at the midpoint of the range as we begin to recognize the benefits of our investments in product innovation. We've made good progress on this in the first half, where we've delivered more than half of the acceleration, about 40 basis points. Based on our performance in the first half, recurring organic growth will likely be in the upper half of our range. The improved organic performance, combined with a weaker U.S. dollar and slower-than-anticipated attrition in the business disposals will likely yield revenue near the top end of the range. As a result of the strategic disposals, we expect our recurring revenue mix to improve by about 400 basis points from 80% to about 84% this year. It's worth reiterating what Matti indicated earlier in the call. Our organic recurring revenue mix, which excludes the disposals, is already at 88% in the first half of the year. Moving down the page, we expect adjusted EBITDA slightly above the midpoint of the range and our profit margin at approximately 41% due to higher revenues from the disposals and foreign exchange, which have lower profit conversions.

I had a question on the IP business. I know you talked about a rebound in the IP and annuity market. I think you also talked about being excited about the AI opportunities there. So just a few parts to that, just the timing of that rebound and how you can capitalize on that AI opportunity? And I think I read somewhere that a lot of the, at least GenAI and new patents, all that kind of activity seems to be more weighted towards China. So just wondering your exposure and capabilities there as well?

Sure, Manav. Thanks for the question. So in principle, as new filings and new patents are awarded, on average, it takes a couple or a few years to work their way into the renewals. It varies by jurisdictions, but on average, it's a couple to a few years. So this is a trend that we've started to see over the last year or two and think that it's something that could help put some wind in our sales as we move into next year and the following year. So certainly, there's a clear trend that more patents are being filed related to AI. Overall, this is a good thing for our business. That's what we wanted to highlight and note. To your point, the quantity of patents that have been filed related to AI are a bit disproportionate. Our IP center for innovation research noted that in some of its recent reports, and we've seen more of it in Asia, particularly in China, but we've certainly seen an uptick in most of the major regions. So we think we'll start to see that benefit around the globe over the course of the next few years.

I think earlier this week, we saw a headline that the Department of Commerce is considering changes to the fee structure and filing patents in the U.S. And I know there's a lot of moving parts, and it's not totally settled yet, but I just wanted to understand maybe the potential impacts to your business from sort of the potential change in fee structure and how that plays out?

It is still early in the process, and we don't have a concrete decision or viewpoint at this stage. However, it's important to remember that we've been part of the intellectual property ecosystem for over 20 to 30 years. We play a crucial role in this ecosystem by working with patent offices, law firms, and companies globally. We are positioned at the center of these collaborations. Any changes that occur, we are well-equipped to adapt to and even leverage. While the market might be shifting, our longstanding presence gives us insights. We will monitor these developments and continue to engage with our customers and partners during this transition.

So for university funding cuts, which is still a hot topic, I saw that 75% of your 2025 subscriptions have already been renewed in July, which is good. But could you please give us more color on your conversation with your clients about the current situation so far and the outlook for renewal in the second half and going into 2026?

I'll start and then Jonathan may continue. We are looking good on A&G despite all the concerns that we collectively have. So 93% of the A&G revenue is now recurring. We have a 96% renewal rate. As you mentioned, 75% of the book is already in-house. We don't have anything out of the ordinary with our customers, but let's just remind ourselves a few things. One, our A&G products are central and mission-critical to the organization. I cannot imagine a decent university today without Web of Science and some of the surrounding solutions. Any university will need to have an Alma-type solution, so we're in pretty good shape on the Web of Science and the ERP Alma things. With regards to the content, as I mentioned in my discussion, we were forward-looking, taking away the discretionary one-time expenditure, and this served us very well these days, and we see the uptake of customers who were initially complaining about taking away the one-time purchases are now buying more and more of our subscription businesses, the PQ eBook, the PQ Digital Collection, which actually serves them very well in this kind of economic climate. So we are pretty confident that going ahead, we will continue to see good and decent renewal rates and uptake of the different A&G offerings.

This is Will Qi on for Ashish Sabadra. Congrats on the quarter. Last quarter you guys initiated a new sales incentive plan with a refocus on subscription and recurring revenue. It's been great to kind of see that progress with the real tick-up. Curious if you could provide any updates on how that sales momentum has been continuing and any outlook from here?

I think we've taken away a lot of hassle from the sales organization. We are very focused these days on subscription, recurring revenue, and bringing back new business. I attended a sales meeting last week in London, and people are very excited. They are very focused on just two subscription recurring goals as opposed to doing subscription, one-time, one-time eBooks; it's just complicated. We took away a lot of complexity from the organization, focusing the sales organization. We have a great sales organization. We have made some changes which I have spoken about. I am very upbeat about going forward for the rest of the year and for next year as well.

Your Life Sciences & Healthcare business saw organic revenue growth positively inflect. Can you give a little bit more color around end market dynamics that you're seeing and how conversations with pharma and biotech companies have evolved?

Yes. Thanks for the question, George. And to be clear, what we saw in the second quarter is that the subscription business within Life Sciences & Healthcare returned to positive organic ACV growth, which is a really good leading indicator for where we would expect subscription revenue for that business to be in the second half of the year. To your point, just a little color on the market. We primarily serve R&D and then the commercialization efforts of our life sciences customers. On the R&D side, that market continues to be stable. Spending on our types of solutions has been solid. We attribute the improvement largely to the investments that we have made, primarily in the Cortellis suite of products. Over the course of the last 6 to 12 months, we've made some really nice strides. Matti touched on a couple of those new capabilities that have gone into the products. We've embedded AI, made investments in the workflow capabilities of those solutions, and we've seen nice usage and nice retention improvements on those products. We attribute that to the improvement that we've seen in this area. The commercialization part of that market continues to be relatively soft, and that's reflected in the results of our commercialization business. But certainly, stable in R&D. That's where we're really starting to see the traction based on the investments that we've made.

Why are disposals taking longer than expected? Is this a customer service focus, shift towards trying to sell some of the assets, or something else?

It's pretty straightforward. I mean there's one out of the three disposals. One is taking longer because we simply had some interaction with our customers, and they asked us to extend because it took them longer than we expected to get settled with alternative offerings. So we just extended by six months, and it reflects on the selling that specifically on the one-time eBooks. They asked for more time to get organized, and that's the reason. Nothing behind this.

Thank you very much. That concludes our call for today. If you have any follow-up questions, you can reach out to Investor Relations. Thank you very much.

Your first question comes from the line of Manav Patnaik from Barclays. Your next question comes from the line of Toni Kaplan from Morgan Stanley. Next question comes from the line of Owen Lau from Oppenheimer. Your final question comes from the line of Shlomo Rosenbaum from Stifel. Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.