Good morning, and welcome to the Clarivate Analytics Third Quarter 2020 Earnings Conference Call. [Operator Instructions]. Please note, 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 in 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. Reconciliation of these measures to GAAP measures are available in 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 rolling 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 increase. 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, 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 2…

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, was 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, which 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 9 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…

Thanks, Richard. Great job. Before we open the line for questions, I want to thank, once again, our more than 8,500 colleagues around the world for their amazing dedication and hard work this year. They continue to truly impress me with their incredible accomplishments despite the challenges of the pandemic that has been introduced to the way we all work. Our Virtual Investor Day as mentioned earlier, is scheduled for Tuesday, November 10. We really hope you can join us as we will be providing an in-depth look at our business, our strategies, 2021 financial outlook and future goals. We're now ready to take your questions. [Operator Instructions]. Operator, please.

[Operator Instructions]. The first question today comes from Shlomo Rosenbaum of Stifel.

Jerre, I just want to get into a little bit of how you're tracking on your organic growth versus your expectations in the core business. If you were to exclude all the acquisitions and the currency and everything, did the company grow revenue on a year-over-year basis? And how are you tracking? And I guess a follow-on would be, is the increase from CPA Global -- is increase in guidance completely from CPA Global or the CPA Global offsetting any potential weakness in the core business? Just trying to gauge how things are going right now.

Yes. No, great question, Shlomo. 2 or 3 things. Let's just step back. When we closed DRG in February -- on February 28 this year, we gave new guidance, which we then adjusted from the standpoint of the original guidance we reduced by $30 million midpoint -- $30 million. That was we felt mostly transaction. We also said we thought we'd see Q3, the beginning of stabilization that Q4 start to increase year-over-year on transactions. So where we're at today is 2 or 3 things. One thing that's really important and in hindsight, I wish I'd have done it differently. We've always given -- I've given annual guidance for many years, as you know, don't give quarterly. We did say that with the acquisition of DRG, that 60% of their revenue came in the second half, which results in the hockey stick. We also said that we were working on that book chart and others to reduce that hockey stick in the future. The thing we probably should have made clearer in hindsight is that 60% of that second half, 60% of DRG, comes in the fourth quarter. So if you set that all aside, what you'll see is that we're spot on of where we expected to be on a global basis with the organic growth for our renewal business and our -- and the subscription base couldn't feel better about that. Expect that to wrap up a good year. We're below our expectations on the transaction. However, as I mentioned in my call, we were sequentially up in Q3 over Q4, and we'll be hopeful that, that plays out for Q4. So we feel very good about where we're at with the organic growth on the annual subscription base. That will continue to play out and feel very good about what's starting to change from a transaction standpoint. The new guidance we gave you, obviously, includes 1/4 of CPA. CPA has done a good job, too. And as you'll hear a lot at our November 10 conference, what we're expecting to see in 2021. And I'm going to give you my views. 2 things, Richard, and I will tell you what our goals are to exit 2022 with and my views of where we'll be in 2023. So we look forward to doing that. Richard, anything else on that?

No. I think that's covered it.

The next question comes from Manav Patnaik of Barclays.

Jerre, maybe just a follow-up on that. Could you remind us of the moving pieces in that transaction bucket? Like, what did it -- what all is in there and why perhaps it was below your expectations. And I guess it's probably early for you to see it, but it sounds like the fourth quarter lockdowns are coming. So do you think that, that Q-over-Q sequential improvement might not show up in the fourth quarter?

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 3 pieces we look at with transaction business. No, I think we're feeling fine about fourth quarter. And that 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 base, huh?

Yes. So they were essentially -- there are essentially 3 components. The first component of the transactional backfiles and customer data -- custom data sales, a bit lighter this quarter compared to prior year. Then we have the CompuMark search business. Improved performance as we progress through the quarter. So we're starting to see some -- definitely some improvements from that seen earlier in the year when the pandemic really impacted that CompuMark search component. And then the third piece would be Techstreet. And as I mentioned in my script, Techstreet had a significant biannual standards release last year in the third quarter, which lifted the prior year comps. And we obviously didn't enjoy that this year. And then the final piece is on the professional services side. That's holding up well, particularly in the life sciences vertical, which is one with -- which is one what you would expect.

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. Q - Toni Kaplan 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 time line 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 be -- let's help because Toni's question's a good one on Q3 and Asia Pacific.

Yes. I mean, year to -- you're right. 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.

Obviously, the merger with CPA goes a long way in rounding out your solution in the IP market. Your -- you have an end-to-end platform now. I'm just wondering if there are still opportunities, IncoPat being one example, to add to that segment still via M&A? Are there certain capabilities you'd still like to add or even consolidating transactions that could help you increase share in that market? Just trying to get a sense of whether we could see additional deals in that area in the near to medium term and what those deals might be seeking to address.

Great question. I'll start, and I'll ask Jeff to pick up. Just in general, first, that 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. And then also in adjacent markets. Jeff?

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, 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, our -- 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, absolutely. So we are very pure in measuring our retention rates, and we only include in the calculation, what's up for renewal as the year progresses. So to that degree, it's only cancellations that have an impact on the calculation and cancellations were slightly higher year-to-date September compared to prior year. However, new business was stronger year-to-date compared to prior year, but new business doesn't go into the equation nor the price increases. So the cancellations being slightly higher year-to-date September compared to PY. But I think what's really important to measure is the ACV growth because that is the more holistic, complete view of what's actually happening to the underlying revenue base of the company in terms of that recurring annual revenue stream. And that was up 4% year -- up 4% at the end of the quarter compared to PY for the organic -- for the base business. So that's in line with our expectations. So I think that's the key factor there.

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.

[Operator Instructions]. 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.

Just a reminder. All the things we've laid out that will get us that organic growth are in place today and being executed. We'll cover those in great detail on November 10, and I feel very good about it. But great question, George. Please, Richard.

Yes, sure. So in terms of subscription revenue growth, absolutely, slightly higher tick in Q2 compared to Q3. Now Q2 did include the benefit of us closing out some annual contracts that we mentioned on the call, but had Q1 renewal dates that did slip into Q2 because that was the -- that was sort of when we're in the eye of the storm at the end of March with the pandemic really impacting all companies. So we did have some slippage of renewals from Q1 into Q2, and we picked those up in Q2. So we had a bit of revenue lift by recognizing revenue for the 6-month period, for example, in some contracts in that second quarter period. And that's sort of -- that impact has normalized as we traveled into Q3. So Q3, nevertheless, still very solid performance, 3.5%, which obviously includes price increases. I would say the -- this -- tying this question also back to the previous question from Seth around renewal rates. We are pivoting the sales organization currently, where we're moving a significant corpus of accounts from the field organization into our 3 global business centers into inside sales in Chandler, Arizona; London in EMEA -- London for EMEA; and of course, Penang, Malaysia for Asia Pacific. The expectation is that, that will increase the velocity of new business because we'll have a broader interface with the market. And we'll also have more regular touch points with the long tail of those -- the long tail in the account base, and that will hypothesis that will absolutely improve the retention rate as well, simply because we'll have more frequent interactions with our clients. So that pivot will drive organic subscription growth, and it also complement our renewal rates as well.

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. No, great question. Thanks. A couple of things. CPA is spot on with the -- excluding DRG, with the split that Clarivate's had, which is 49%, first half; 51%, second half. If you remember, this has been an amazing year. We said we thought first half, second half split would be 48-52 rather than 49-51, excluding DRG. And I think we feel very good about that. We're off and running. I couldn't be prouder of our CPA team and where we're at with that. So you'll see. I think the best way to explain that, and then I'm going to ask Mukhtar to just comment on DRG and what we are doing and how he's feeling about where they're at versus our expectations. I think what you'll also see as we move forward into 2021 is a balance that's probably for 48-52 or thereabouts, including DRG, because of some of the things we're doing. But we'll give you that real clear update in November 10. Mukhtar, please.

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 pipeline 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 time line 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. And let me just add to that. I welcomed on Monday the last 21 that we will be hiring in Penang, which puts us well over our original goal because what's already happened, a lot of our support organizations are moving skills into that area. And if you think about where we'll be at as we go into 2021, all 3 of those are fully staffed. By the way, an addition that we'll talk about again on November 10 is where we'll end up with our global center for the EMEA region going forward, which is a big pickup and a big plus for us for CPA. So feeling really good about that. But I would make two comments. I've had the opportunity to see, not meet personally, but see all the new hires in all of the global centers. And we're getting great talent. I would say we're probably the -- one of the good things with the pandemic is we've gotten really great talent as we go forward. So feeling very good about the job Mike Morhardt has done with David, Jeff and Mukhtar, and we're really well set up for that. So what you'll see us going forward is more and more best cost centers, offshoring, if you will, and think about the ability to 24/7, which is the other thing we've arranged. In other words, with the 3 business centers, where it'll be live 24/7 for customers everywhere in the world. So feeling very good about it.

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 at what we've accomplished. Wonderful additions with the -- from the M&A standpoint. And I would just say we'll close, 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.