Hello, everyone, and welcome to the Clarivate Second Quarter 2023 Earnings Conference Call. My name is Nadia, and I’ll be coordinating the call today. [Operator Instructions] I will now hand over to your host, Mark Donohue, Vice President, Investor Relations, to begin. Mark, please go ahead.

Thanks, Nadia. Good morning, everyone. Thank you for joining us for the Clarivate second quarter 2023 earnings conference call. 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 on 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 the applicable securities laws. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that could 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 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 supplement to and should not be considered in isolation from or a substitute for GAAP financial measures. Reconciliations of these measures to GAAP measures are available in our earnings release and supplemental presentation on our website. So 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. And now 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 today. Having just completed my 1-year anniversary at Clarivate, my belief in our company and the direction of our travel have never been greater. Like all great companies, it begins with the mission-critical nature of our products, the strength and loyalty of our customer base and our incredible colleagues who display passion in their work every day. My learnings in the first year have given me a deeper appreciation of our company, our culture, our assets and a vision of product innovation that remains steadfast. We have implemented many operational improvements over the past year, which I believe places us in a better position to achieve our long-term objectives. For example, back in November, we established three intuitive operating segments, Academia & Government, Intellectual Property and Life Science & Healthcare, each with its own leadership and P&L. We moved quickly and began our organizational restructuring to implement this new model and reporting structure in January. Then fast forward to March, we held our Investor Day event, where we outlined our revamped strategy for the next 3 years, including our primary financial objective to reaccelerate organic growth in each end market by investing in product innovation and in underperforming areas. I remain confident that this action will result in higher profits and cash flows, give us more optionality for capital allocation and drive significant shareholder value. In April, I was excited to announce presidents for our operating segments, each with deep expertise in their end markets. I believe our new model is foundational to help us execute on our growth strategy and will ultimately help us better serve our customers by ensuring we have the right product offerings in each end market. Turning to the quarter. We did not…

Thank you, Jonathan, and good morning, everyone. I’m going to start with a quick programming note. I apologize, but our third-party service provider is having a technical issue with the live slide presentation. Please refer to the presentation that we posted on our Investor Relations website. And I’ll reference the page numbers as I step through the rest of the deck. Slide 15 is an overview of our second quarter results compared with the same period last year. Q2 revenue was $669 million, a decrease of $18 million or 3% versus 2022, driven entirely by the MarkMonitor divestiture as organically the business was essentially flat, an outcome almost 2% lower than we expected. Adjusted EBITDA margins expanded 270 basis points over the prior year to 42.6% in Q2 on the cost synergies from the ProQuest acquisition. Second quarter net loss was $142 million, down $186 million due to $135 million impairment of intangible assets related to a small business in our IP segment that we plan to divest and larger net losses from foreign exchange of $35 million. Lower mark-to-market gains on the private warrants were offset by an income tax benefit largely from the asset impairment. Adjusted diluted EPS, which excludes the impact of one-time items like the impairment, was $0.21 in Q2, a $0.01 decline over the same period last year as higher adjusted EBITDA of $0.01 was offset by a $0.01 decline due to higher interest expense and a $0.01 decline from the MarkMonitor divestiture. Operating cash flow was $162 million in the quarter, an increase of $65 million, largely due to lower working capital requirements as was caused in nearly equal parts by lapping the large accelerations of patent renewal payments in the second quarter of last year that did not recur this year and improved…

Thank you. [Operator Instructions] And our first question today goes to Manav Patnaik of Barclays. Manav, please go ahead. Your line is open.

Thank you. Jonathan Gear, I guess, I just wanted to ask you, I think since you took over, you’ve obviously looked through the portfolio. I think you’ve tried to reset numbers a few times, including Investor Day. And it seems like every time, there’s something incremental getting worse. So what is, I think, the areas, I guess, where you have that low visibility that keeps surprising yourself and us, I guess?

Thanks, Manav. I mean, it’s undoubtedly been transactions. And when you look at the performance of our business, first, subs, which represents, as you know, Manav, 60% of our business, continues to incrementally get better as we’ve been innovating in the products. And the nature of that business model, we have very good visibility there. So I’m feeling very good about that portion of our business across all three segments. Certainly, the thing which has been a challenge since day 1, since I joined, even before I joined, has been transactions, and specifically in Life Science & Healthcare, where we have these lumpy big deals in RWD and also in consulting. And certainly, the macro impact, which we and others have seen this quarter in particular, has been very unhelpful in transactional decisions. And then frankly, we were – like I mentioned in my remarks, Manav, we were caught by surprise, our entire leadership team was, around what happened with these small- and medium-sized businesses through our law firm channels and the impact of those four items I talked about in annuities. That last piece, I view very much as temporal. It’s an unusual confluence of events that we haven’t seen before. But the challenge is transactions. And the revised forecast significantly takes out any variability in transaction in the second half of the year.

Thank you. The next question goes to Toni Kaplan of Morgan Stanley. Toni, please go ahead. Your line is open.

Thank you so much. Wanted to just unpack real-world data, the DRG business. You called out the strategy changes there. How long should the process take? How much work needs to be done? And also, last quarter, you had highlighted the Web of Science inflection, and so wanted to get an update there as well.

Sure, great. Thanks, Toni. And I’ll maybe do it in reverse. So first, Web of Science, the inflection we called out in Q1, we continue to see progress there. And I called a couple of points in my earlier comments today. But new business, for example, continues to increase at a faster pace. We’re going to be continuing to invest in that product. I just came back from a 2-week trip to Asia. And being out in China, Korea, Japan, you see the impact of Web of Science out there. It is just so critical to the workflow of universities and researchers. So we feel very good about the investments that we made and the turnaround and continued progress we’re going to see there. In RWD, as we talked about, the channels have been historically directly to the end user, the pharma companies or life science companies directly, and secondly, to data aggregators. The strategy that we outlined at Investor Day was to increasingly pivot and focus on building out a platform that allow us to serve at a therapeutic level directly to the end users. And that – I mean, the benefits are numerous there. First, we’re capturing more of the value by building the analytics on top of the underlying data. Second, we’re selling directly to the end users. And third, it’s a much more predictable, recurring-type revenue model. So we’re still very committed to that path. We are going to be pushing out some initial therapeutic areas later this year, early next year kind of in a brute force-type manner with the platform not being completely complete to be able to begin to take advantage of some of the market feedback that we have received. So we’ll begin to see some of that showing up early next year. Thanks, Toni.

Thank you. And the next question goes to Ashish Sabadra of RBC. Ashish, please go ahead. Your line is open.

Thanks for taking my question. Just wanted to focus down further on the transactional weakness in the quarter. Just the macro weakness, I would think, was very well-known, like the macro concerns have been very well communicated. And so the question was, was there some certain deals in the quarter that got – that was lost or got pushed out or there was just more optimism in the – going into the quarter that didn’t pan out? And then as we think about the back half, I guess, the fact that comps are easier, but even with a flat growth, like how much visibility do you really have? And is there a potential risk of further downside to that transactional revenue?

Sure. So in the transactional within Life Science & Healthcare, the two elements of it. First, there’s consulting, second is real-world data. On the consulting side, which we pulled out, I think, as we called out $10 million for the year versus our prior forecast, it is primarily in commercial. And the line of sight we have on consulting deals is limited. We have maybe 60 days, 90 days at most, in terms of pipeline. And we did see just a slowdown in demand as we went through the quarter. So on the back of that, we pulled that out for the year to derisk that. On RWD, it was a mix. But there were several large deals we were hoping to pull in which didn’t come in. And in light of that and in line with the strategic refocus that we said, we’ve essentially pulled all large deals now out of second half. If they come in, if it strategically makes sense for us and is aligned with our longer-term strategy of building value in the sector, we’ll do them. But we’ve essentially pulled all those out in the second half. So in terms of surprises, with our new range we have, we have essentially derisked the transaction sales in the second half of the year, which has been the cause of challenge – of forecasting challenge in Q2. So we feel very good about the downside risk in the new revised forecast.

Okay.

Okay, next question.

Thank you. And the next question goes to Andrew Nicholas of William Blair. Andrew, please go ahead. Your line is open.

Hi, good morning. I wanted to ask a bit more on the patent renewal business. I guess, competitively, are there any metrics you can provide on kind of renewal rate, the client retention rate there? Just wanted to understand how much confidence you have that this isn’t a market share issue. And then also maybe relatedly, if you could spend a bit more time talking about the patent annuity deal that you signed for ‘24, what drove that win? And if there’s any sizing you could put on that, that would be great, too.

Okay, great. Yes, so let me just kind of walk through how we think about the annuities business. Think about it as two broad channels. There’s us selling directly to corporates, large corporates with large portfolio of patents; and second, us selling to our law firm partners who serve the longer tail, the small- and medium-sized businesses globally. The surprise we saw was in the second channel, where again we sell through and service to law firms, where we saw this degradation very, very late in the quarter. And that was certainly a surprise. Now as we dug into it and spoke to our law firm partners, find out what were the underlying drivers, spoke to some of the PTOs around the world, see what they were seeing in terms of their inbound renewals, we feel very confident we’re not losing share. There has been just a reduction driven by those four factors that I mentioned particularly impacting the small- and medium-sized business. On the corporate side, there’s always give and take. You always win some clients, lose some clients, there’s natural turnover. There’s a little bit of timing, where clients we’ve won haven’t come on stream yet compared to clients we’ve lost. But that certainly is the minority, that the much larger impact has been this long tail served by our law firm partners. Now in terms of the new business sales, yes, it was a great sale. Actually, we actually had a great Q2 sales within our IP sales team. But the sales come pre revenue. And one of the highlights was indeed this sale to a law firm, which is a good law firm partner. And they’re going to shift their portfolio over to us starting in January next year. We won’t give out the exact number other than to say it’s a big deal for us, which will certainly help us next year. Thank you.

Thank you. And the next question goes to Stephanie Moore of Jefferies. Stephanie, please go ahead. Your line is open.

Hi, this is Hans Hoffman on for Stephanie. Just kind of wanted to come back to the transactional piece and kind of unpack what’s going on in the back half of the year. Just kind of curious how your updated guidance kind of compares to your original expectations. And if I look to the back half of the year on transactional, it sort of implies that the back half on two-year stack basis relative to the first half actually deteriorates a bit. So I guess, just kind of wanted to better understand, what’s sort of driving the deceleration there and kind of the incremental weakness?

Great. Thanks for the question. It really comes down to our RWD big, big sales. Because we have – both the last two years, both in ‘22 and ‘21, we have had quarters in there with weakness but also quarters of very strong sales – of very, very large RWD sales to data aggregators. And that’s – so if you do a multiyear stack, what you’ll see is that we have now assumed we’re not going to get those in the second half of the year. Again, they could come in. But in terms of our commitment to the forecast, we’ve assumed those come out. So that’s the math you’re seeing there. Thank you.

Thank you. And the next question goes to Owen Lau of Oppenheimer. Owen, please go ahead. Your line is open.

Good morning, and thank you for taking my question. Could you please give us an update on the timeline of launching new functionalities in the Life Science & Healthcare space? Do you expect revenue impact to come in maybe in 2024 and 2025? How should we think about this incremental revenue in the subscription revenue line?

Sure, great. Thanks, Owen. Yes, the way the stack in terms of the improvements, maybe I’ll kind of broadly answer the question and I’ll get specifically to Life Science & Healthcare. In terms of us getting back to the market growth rate that we discussed at Investor Day, step one was A&G and Web of Science. So we had to see that improvement. We saw that improvement in Q1, see that continued improvement now. So we feel we’re well on the path towards 4%. In IP, the key area there was improving Derwent and our patent search tools there. There – this is the building year of getting that done. I started the mapping out of Q4 of last year with customer engagement. As I’ve mentioned before, we don’t expect a revenue impact this year. We expect to see it begin to impact the sales end of this year, early next year and kind of leaking out into revenue improvement next year. That gets us to Life Science & Healthcare. So there are several areas. And this is one where – and I’ll reiterate what I said in my remarks. It’s tremendous to have Henry Levy onboard with the industry experience that he has in life science and health care, with SaaS and revenue models, with data. He’s already brought a lot on to our view of the business. And he’s found areas where both he’s having us pivot faster, he’s also found areas which frankly we hadn’t focused on, which he said, "Listen, there’s gems here we need to double down on." And so you’re going to hear more from him as we kind of expose him more to you in the future. In terms of when we expect to see then improvements, we are making incremental improvements across our product lines. I mentioned a few of them in my prepared remarks. We will begin to see the impacts of that again next year also. But I would stack the timing of A&G improvements first; IP with Derwent, second; and then in life science, there are two or three areas. And so you’ll see those begin to come out again sometime mid-next year. Thank you.

Thank you. And the next question goes to Seth Weber of Wells Fargo. Seth, please go ahead. Your line is open.

Hey, good morning, guys. I wanted to ask about the deceleration in ACV in the quarter to 2.8%. I think it was 3.3% in the first quarter. Can you just talk about – I saw the retention numbers for the Academia & Government business. But can you just talk about retention broadly across the segments and then the pricing environment?

So the deceleration we saw in ACV in Q2 is largely attributed to our life science business, and in particular, real-world data. So while we’ve highlighted, most of the volatility in this area has been in transactional. As we don’t get some of those larger deals, building that growth of the updates of the data becomes a headwind. So that’s the primary driver in the quarter. As Jonathan said, and as I mentioned in the remarks, there will be a slight headwind on that, we think, in the second half of the year for revenue, so just a slight deceleration. We’ll still be pretty close to 3% on a full year basis. But most of the pressure is coming from the life science space and the impact that the lower real-world data deals has on the subscription file in that business.

Thank you. [Operator Instructions] And our next question goes to Peter Christiansen of Citi. Peter, please go ahead. Your line is open.

Good morning. Thanks for the question. I’m trying to think here, I mean, for the visibility, predictability kind of issues, it stems from SMB transactional. I’m just curious, what’s the go-to-market strategy there? And do you think some of these areas where you’re seeing weakness deserves a little bit more of a higher touch kind of sales approach?

Great. Thanks, Pete. Interesting question. The answer is yes. And I’ll pull back to – September 1 will be my 12-month anniversary as CEO. It’s been an eventful 12 months to say the least. But certainly, internally, we have really pivoted the organization around these three segments. And that’s just – more of this on paper is actually realigning our sales, our customer care team, our marketing teams to really be aligned much more tightly as these – around these three segments and aligning very, very closely around our customers. So there’s been certainly a very heavy renewed focus. And I’ll point to an example of where I’m seeing some great green shoots in there. In Q1, in IP, which was kind of in the middle and early stages of this turnaround, we had a kind of a tough sales in terms of what we’re expecting. In Q2, with 3 months under our belt of this new model, we had a great sales quarter. And we’re seeing those green shoots now across the business as we’ve now done this alignment. So I’m actually feeling very good about the changes that we’ve made and the cadence and results we’re seeing from it. Now we know in the model that we have, you make these changes, you kind of rebuild the pipeline, you convert them to sales, revenue is the last kind of the dominoes to fall there. But the early indicators are very strong. But I couldn’t agree more in what you said. It really is around aligning and accelerating our sales motion around the customers. Thank you.

Thank you. And our final question goes to George Tong of Goldman Sachs. George, please go ahead. Your line is open.

Hi, thanks. Good morning. I wanted to follow-up on the transactional piece. You’re assuming improvement in performance in the second half, which mainly you’re attributing to softer comps or easier comps. And acknowledging you’re not baking in large deals in the outlook, how are you thinking about the puts and takes within LS&H and IP around transaction revenues? Are you assuming, excluding these large deals, trends get worse, trends stabilize? Or are you assuming some degree of improvement?

Thanks, George. So on the IP segment, we lapped some pretty challenging comps in our trademark business of IP. So that’s part of the downdraft for last year. That business had been performing quite strong in the first half of last year. We started to see the search and watch, in particular, soften early in the economic downturn. So that’s going to be the big driver of it within the life sciences space. A&G, we expect to be strong in the second half. So that is going to have some softer comps towards the end of this year compared to the academic calendar year-end in Q2. And then I would say we do expect a headwind on life sciences. As highlighted, by taking out the larger deals, we are expecting to have a downdraft or a headwind on the transactional within life sciences. So the mix of those three gets us to a place where, from a run rate perspective, we’re not expecting a lot of improvement. But on a year-over-year basis, we’ll be closer to flat rather than the decline that we saw in the first half of this year.

We have no further questions. I’ll now hand back to Jonathan Gear for any closing comments.

Okay, great. Well, thanks so much. And thanks, everyone, for joining our call this morning. We look forward to kind of further updating you on our progress going forward. But again, thanks for your time, and please feel free to reach out to us with any questions. Thank you so much. Goodbye.

Thank you. This now concludes today’s call. Thank you all for joining. You may now disconnect your lines.