Good morning. Thank you for attending today's Clarivate Q1 2023 Earnings Conference Call. [Operator Instructions] I would now like to pass the conference over to your host, Mark Donohue, VP of Investor Relations with Clarivate. Thank you. You may proceed.

Thank you, Joe and good morning, everyone. Thank you for joining us for the Clarivate 2023 earnings conference call. With me today are Jonathan Gear, Chief Executive Officer; and Jonathan Collins, Chief Financial Officer. Both will be available to take your questions at the conclusion of the 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. An accompanying earnings call presentation is available in the Investor Relations section of the company's website, clarivate.com. During our call, we may make certain forward-looking statements within the meaning of applicable securities laws and 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 on the company's website. Our discussion will include non-GAAP measures or adjusted numbers, including organic revenue 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. Reconciliation of these measures to GAAP measures are available in our earnings release and supplemental presentation on our website. After our prepared remarks, we'll open the call to your questions. And with that, it's a pleasure to turn the call over to Jonathan.

Great. Thank you, Mark. Good morning, everyone and thanks for joining us. I'm going to start by briefly covering our first quarter results. Then I will provide an update on some key improvements and announcements as part of our commitment to accelerate our growth. As we discussed at our Investor Day in March, we are driving change and investing across our segments which will create a compounding cash generation machine for our shareholders. Turning to our financial results. The first quarter was in line with our expectations. And as a result, this morning, we reaffirmed our 2023 full year outlook. We continue to expect an improvement in our business throughout the year as we begin to realize the benefits of our growth initiatives and cost savings. While there has been much external discussion about global economic challenges, we have not seen any impact to our outlook for the year. As a reminder, our business has proven resilient during prior recessions due to the critical nature of our products and services. Revenue in the first quarter was $629 million, down from the prior year's first quarter because of the divestiture of the MarkMonitor business and the strengthening of the U.S. dollar. Organic revenue growth, as expected, was essentially flat in the first quarter. We did deliver 3% subs growth which was driven by the Academia & Government segment, including improved performance from Web of Science which I will cover in more detail shortly. The strength in our total subscription base helped to offset the difficult first quarter comparisons across reoccurring and transactional revenues compared to the prior year period. We delivered strong free cash flow of $168 million in the first quarter which was used to prepay debt while still reinvesting in product development to accelerate growth opportunities. We are seeing…

Thank you, Jonathan and good morning, everyone. Slide 14 is an overview of our first quarter results compared with the same period last year. Q1 revenue was $629 million, a decrease of $33 million or 5% compared to the same period last year, driven entirely by the MarkMonitor divestiture and foreign exchange, as organically, the business was essentially flat as we expected. Adjusted EBITDA margins expanded 60 basis points over the prior year to 40.2% in Q1 due to the cost synergies from the ProQuest acquisition. First quarter net income was $25 million, down $26 million due to a $100 million mark-to-market gain on the private warrants last year that did not recur this year which was partially offset by a favorable resolution of an international tax dispute worth $70 million. Adjusted diluted EPS which excludes the impact of both items, was $0.18 in Q1, a $0.03 decline over last year. $0.02 of the reduction was attributed to higher interest expense due to increases in base rates and $0.01 was attributed to the MarkMonitor divestiture. Operating cash flow was $228 million in the quarter, an increase of $160 million, largely due to the $141 million payment made last year from the employee benefits trust for the CPA Global equity plan. This also drove the entire increase in free cash flow as higher interest and capital spending was offset by lower working capital requirements. Please turn with me now to Page 15 for a closer look at the drivers of the first quarter top and bottom line changes from the same period last year. Our first quarter revenue came in exactly as we anticipated. The top and bottom line changes over last year were driven by 4 key factors. First, revenue was essentially flat organically. However, we began to invest in…

[Operator Instructions] The first question is from the line of George Tong with Goldman Sachs.

You mentioned that you're not seeing any currently macro impact to the business because of its resilience to recessions and the critical nature of its products. Historically, you've seen some macro sensitivity around trademarks and patent volumes. Has that dynamic changed? And if so, what's driven that change?

George, thanks for the question. So I mean, it's a couple of comments I would make. As we commented at Investor Day, we are extremely resilient, as you well know, to macroeconomic trends and downturns. I mean, certainly, when we built our outlook heading into this year, we expected there will be challenges. And so we've been able to say no, no surprises. On the biotech side specifically, there's been very little impact. As you know, the vast majority of our revenue comes from large biotech, large pharma which have not been impacted by funding. So really, we haven't seen any material impact.

The next question is from the line of Andrew Nicholas with William Blair.

This is Tom Roesch on for Andrew Nicholas. I just wanted to kind of get additional color and some -- and see if you could provide additional detail on kind of what happened on the transactional side of the business during the quarter.

Yes. Just maybe a couple of things to highlight the changes last year. So the transactional and reoccurring order types, the non-subscription parts of the business, were down versus last year. The reoccurring order types were entirely due to the acceleration we saw in March of last year for patent renewal payments. So that was intentional and was supporting our customers by providing them the best value there. That did not recur this year. As I mentioned in the comments, we expect that to unwind in the second half of the year and that the full year results for reoccurring order type revenue growth organically will be pretty comparable to last year. On the transactional side, I'll point to a couple of areas by segment. I highlighted in some of the prepared remarks that we have the consultancy which is transactional within life sciences. Where that business was declining in the first half of last year, it started to improve late in the year. So the comps for Q1 are pretty challenging there. So that drove some of the decrease in the life sciences category. We had very strong real world data sales towards the end of Q1 of last year and they were pretty decent this year but a little bit of a headwind there. And within our IP segment on the transactional side, as we just touched on a moment ago, the one part of our business that sees some impact related to the macro is our trademark business. That started to turn down late in the second quarter of last year, so we still had really tough comps on that part of business in the first quarter of this year. So when you package all of those, you get to a place where we had a headwind in Q1 on the non-subscription order types compared to last year.

The next question is from the line of Toni Kaplan with Morgan Stanley.

Jonathan, you mentioned the inflection in Web of Science this quarter. I know you talked about having the overhaul in late '21. So I wanted to understand, do you view this positive trend in Web of Science as sustainable? Or was there anything that we should know about? Like in terms of was it an easy comp or some other factor that led to positive growth this quarter? But like good trajectory but maybe not continuing? So just wanted to see your confidence there.

Sure. Thanks, Toni. Yes, no. We're very confident this is a turning point within Web of Science. We -- and I'll kind of walk through the litany list. First, the pickup we're seeing is in subs. And we saw it first in increased usage last year. And as you know, Toni, usage drives value. That shows we're driving value into the product. We saw that in the -- in some of the highlights I mentioned in my prepared remarks around both renewal rates as well as new sales in our subs base. And the subs base is what's going to be driving and lifting the product that -- this year and heading into next year. So we're feeling very, very good about that. I mean, last year, we were impacted by Russia, that we're getting no benefit in Q1 of that. As Jonathan Collins mentioned in his remarks, that will be an issue through Q2. So the turnaround we're seeing, we're feeling great about it. The team has done a phenomenal job. The customers are reacting with their wallets in the subs base. So it's certainly sustainable and we feel it is the turning point we were expecting.

The next question is from the line of Peter Christiansen with Citi.

The 96% renewal rate, was that just for Web of Science or total subscriptions? And then I just want to dig into that number a little bit. Like how should we think about like what areas where you saw -- like end markets or end users, did you see the most improvement in renewal?

Yes, you got it. So the 96% is for the research and analytics subsegment within A&G. The vast majority of that is the Web of Science product but it also includes products like InCites that Jonathan referenced, that's being integrated with Alma, our ERP for the library, if you will; and other small products, like EndNote as an example. But that category improved. So that 96% is calculated based on the ACV, so that's a great leading indicator for how the subscription revenue will play out for the balance of the year. We've said in the past that, in this category, a significant majority of the renewals occur early in the year and in particular, in the first quarter. So it bodes really well for how the revenue will play out in this area on a subscription basis for the balance of the year.

The next question is from the line of Seth Weber with Wells Fargo.

I wanted to go back to the transactional discussion for a second. I think on the fourth quarter call, you talked about having a bigger pipeline or a bigger backlog of transactional on data services, data sales and stuff like that. I guess my question is, has that changed at all? And when would you expect transactional comps to turn positive?

Yes. Great point, Seth. So the answer is yes, that is giving us. And the way we highlighted that in the commentary was, it increases our confidence in the stability of those sales. So we have better line of sight. So the fact that our first quarter results came in right where we expected was enabled or supported by the fact that we had a nice backlog for some of our transactional business. In terms of when the comps improve, I'll just go by area. In the consultancy, the comps get better in Q2. So we'll start to see some progress there in life sciences. Real world data comps for Q2 are still going to be pretty challenging within life sciences. We had one of our best quarters ever at the time. It was our best quarter ever in that area, so they'll still be a little bit tough. So broadly, in life Sciences, they'll get a little bit better but still some pressure from real world data. On the IP side, we start to see some of the pressure alleviate, particularly in the trademark business. So as we mentioned, that business started to see a downturn in -- towards the end of Q2 of last year. So towards the end of the second quarter, we'll start to see a little bit of relief. However, on the reoccurring order type, we had high single-digit growth in Q2 of last year within the renewals servicing business in the IP segment, so that comp is still going to be really tough. So that's why we indicated that we think that first half organic growth is probably going to be approaching 1%, because we're still going to see some challenges in the second quarter with the comps. But certainly improve significantly as we move into the second half of the year which is why we think we'll see mid-single-digit growth in H2.

Okay. But you're not seeing anything kind of leak out of that backlog or order book that you kind of referenced on the fourth quarter?

No, not materially. No. We're encouraged by how that's held up and the predictability it affords us. We obviously had some challenges last year with predicting some of that and that's helping as we move into 2023.

The next question is from the line of Shlomo Rosenbaum with Stifel.

This is Adam Parrington on for Shlomo. Could increased use in AI potentially result in increased competition in the trademarks part of the business as AI becomes more widely accessible?

Yes, I'll go ahead and tackle that one. We're feeling very good about our position. When we look at the leverage of AI which as you know, we've been able to use that ourselves for years, companies have been using it for years. And as I highlighted in my remarks, it's something we're leaning into very heavily. But if you take specifically our trademarks, we launched a product last year called Brand Landscape Analyzer which is precisely about leveraging our enhanced proprietary content, our knowledge in the marketplace, our knowledge of the customer workflows. And we're using advanced AI to generate that product. And it's about creating new opportunities within our customer base. So we actually see it ourselves as an opportunity. We're leveraging it ourselves and we'll continue to do so going forward.

The next question is from -- is a follow-up from the line of George Tong with Goldman Sachs.

To follow up on the comment you made earlier. You expect the first half organic revenue growth to be about 1%, second half organic revenue growth to be about mid-single digits. Can you elaborate on the cadence of what organic revenue growth should be in 3Q, 4Q? In other words, should we see a significant jump going from 2Q to 3Q? Or should it be linear? What are your expectations there? And what are the key drivers of improvement over the remainder of this year?

Yes. Thanks for that, George. So we'll give a little bit more color on that as we report our Q2 results. But in principle, we're going to expect a pretty significant step up sequentially from Q2 to Q3. Comps in Q3 are going to be pretty soft. You'll recall, Q3 of last year was pretty soft. But we'll give a little bit more color. But in principle, we'll see a pretty meaningful sequential improvement from the second to the third quarter. But more to come on that in a few months.

[Operator Instructions] The next question is from the line of Stephanie Moore with Jefferies.

I think it was helpful at your Analyst Day where you kind of talked about some of the different areas and the progress as we thought through 2023 through 2024. I think Academia & Government had the most progress in 2023, so I would love to get an update on kind of where that stands. Is that still on track in terms of kind of the renewal cycle, particularly for Web of Science? And then as you think of maybe the opportunity within life sciences and IP, is there any opportunity with some of that -- some of those investments start to come to fruition a little bit earlier? Or are those still a 2024-ish event? I would love to get your updated thoughts there.

Sure. I'll go ahead and dive in there, Stephanie. So first, if I go to the segments, within A&G, the area which we have to get right to turn around within research and analytics which is Web of Science. As Jonathan mentioned, I think, in his earlier remarks, our big renewal period is in Q1 and so we had to get that right. And the results we saw in Q1, that I identified both our renewal rate, improving that dramatically, improving our new sales dramatically is, to me, the proof point we've been both expecting. But really, it had to happen to say, "Okay, we feel very good about the trajectory there." So I put a big check mark by A&G in terms of doing what we need to do. I feel very good about that segment. Now on the next two, within IP, the piece we have to get right is around patent and trademark intelligence. That includes our Derwent product which is the one we've highlighted over years. We're making great progress about that with our product -- new product leadership we have there. We actually had a review of that with our Board last week. So I feel very good about the path there. We have the strategy in place. We're executing against that plan. Do I expect that to impact '23 revenues? I don't. I don't. So if that happened, that would be a positive surprise. We don't require that to happen. And we expect that to really impact in 2024. Then in Life Science & Healthcare, again, the key segment we have to get right was around commercialization. I feel just as incredibly excited to have Henry on board. I'm looking forward to getting him in front of you, along with Bar, our new Head of A&G. He is a great industry leader. He's diving in there. We are executing against plans, again, there to create new products innovation. But similar to what we're seeing in IP, I don't expect nor do we require to have a revenue impact in 2023 to hit our '23 plan. So at this point, we expect that to be '24 and later. If it happens earlier, that will be a nice surprise. We'll call it a surprise if that happens.

Okay. Understood. And just as a follow-up, can you talk a little bit about the pricing environment? And if you've seen any maybe acceleration from historical levels and kind of your expectations of pricing contributing to growth in the back half?

Yes. I would say our first quarter pricing was as expected. So we had generally indicated before that we were able to move our effective price increases across the board closer to about 4%. And that's generally where we see them in the near term. It's not a meaningful lever of the improvement from 2022 to 2023. As Jonathan highlighted, that's really coming in the A&G category within research and analytics. So broadly, pricing across the board is in line with expectations. The environment is pretty consistent with what we saw last year.

Thank you. There are no additional questions waiting at this time. I would like to turn the call back over to Jonathan Gear, CEO, for concluding remarks.

Okay. Great, Joel, thanks so much. And everyone, thanks much for joining our call this morning. This is obviously a very important quarter for us as it demonstrated the turning point in the first of our 3 segments which had to turn which was A&G. So we feel very good about the progress being made there. And again, it's a very -- this was a critical quarter for us for delivering the year. And really, we look forward, in future quarters, of coming back and sharing additional progress in the other areas. So with that, we'll wrap up. And thanks so much for everyone's time this morning. Thank you.

That concludes today's conference call. Thank you for your participation. You may now disconnect your lines.