CLARIVATE PLC Q3 2025 earnings call

Thank you, Greg. Good morning everyone. Thank you for joining us for the Clarivate third quarter 2025 earnings conference call. 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, 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 a supplement to and should not be considered in isolation from or as a substitute for GAAP financial measures. Reconciliations of these measures to GAAP measures are available on our earnings release and supplemental presentation on our website. With me today are Moty (Matti) Shem Tov, Chief Executive Officer, and Jonathan Collins, Chief Financial Officer. 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 Matti.

Good morning everyone. Thank you for joining us today as we review Clarivate's performance for the third quarter 2025 on slide six. I am pleased to share that our results this quarter reflect continued progress in our value creation plan, improved operational and financial results, and strong commitment to deliver value for our shareholders. Our forward-looking metrics such as annual contract value continued to improve to 1.6%, making a 30 basis point sequential improvement driven by 2% ACV growth across academia and government. In Life Sciences and Health, our renewal rate of 93%, an important indicator, was up 100 basis points year-over-year. Our free cash flow generation continues to support our balanced capital allocation, including $150 million of opportunistic share repurchases year-to-date as well as $100 million of debt paid down.

These results are a testament to our team's dedication and the ongoing progress of our value creation plan. Jonathan will cover the quarterly results in more detail shortly. On slide seven, our VCP is driving improved focus, growth, and innovation across the business. We are accelerating product and AI development by investing in proprietary assets and collaborating very closely with our customers. Over the past year, we have launched 12 product and AI-powered capabilities across our segments. We expect this R&D investment to result in higher organic growth and improved renewal rates in the future. Our sales execution has improved support, stronger customer engagement, and revenue retention, helping us achieve our organic growth outlook through the first nine months of 2025.

We remain committed to optimizing our business model with a focus on increasing our core subscription and recurring mix to improve predictability, as evidenced by the 8% improvement this year compared to last year, and our portfolio rationalization is enhancing our execution focus and capital allocation, which is expected to unlock greater value. Turning to the A&G segment, positive sales performance, including 2% ACV growth, is a contributor to predictable top line results driven by our transition from transactional sales of digital collections and looks to subscription-based revenue streams. This transition has resulted in our A&G subscription mix now at 93% compared to 81% last year. I believe this was clearly the right decision and I want to acknowledge our teams for the great work in assisting our customers through this transition.

We are pleased with the progress to date as we have secured more than 100 contracts for our new content subscription framework driven by the new offerings such as ProQuest data collection and ProQuest eBooks. We continue to see strong renewal patterns with 90% of global A&G subscription for the full year successfully renewed through October 27. We are also pleased to share with you that we have completed a multimillion dollar renewal of Web of Science with the largest library consortium in the United States. Considering the increased constraint on higher education research funding, especially in the U.S., this renewal underscores the continued value that our solutions deliver to major research institutions nationwide. Our global reach is unmatched, as evidenced by just some of the large international deals we have shared with you this year, including the British Library, Canadian Research Knowledge Network, and CAFES in Brazil.

Recently, we finalized an agreement with University of Melbourne, Australia's premier university. The deployment includes Library Workflow solution, which provides comprehensive support for library management, resource discovery, resource sharing, and reading list creation. Moving to the Intellectual Property segment, for the first nine months, the patent and trademark maintenance services recurring revenue was flat compared to the same period last year. We are encouraged by this as it represents 3% improvement in the organic growth rate relative to the full year of 2024. While these results show improvement, we are committed to returning the segment to sustainable growth. With Maroun Mourad as our new President of IP, we are confident we will drive continued progress across the business by increasing agility and streamlining processes as well as market recovery. We continue to invest in AI-based product and service innovation while maintaining a leadership position in the global IP ecosystem.

For instance, IPfolio introduced an AI-powered product taxonomy that automates product patent mapping. It enables companies to better identify which product corresponds to the patent, a valuable tool for large patent holders making strategic portfolio decisions. We continue to make improvements to the Darwin platform with cutting-edge AI innovation, which is being integrated throughout the patent management workflow. An exciting addition is the Derwent Patent Monitor, an AI threat rating feature empowering clients to identify potentially high-risk competitor filings. This achievement allows users to proactively safeguard their intellectual property portfolio and help mitigate risks. During the third quarter, we were chosen to supply China Petrochemical Corporation, Mainland China's largest oil and petrochemical supplier, with intellectual property solutions and the Web of Science platform. This cross-sell collaboration is a testament to our ability to leverage expertise and provide customers with solutions that meet all IP and research needs.

Moving to the Life Sciences and Health segment, I am personally excited it has returned to 2% ACV growth this year. The business has demonstrated strong performance by introducing new products and advancing AI integration through improved offerings and specialized expertise within our life sciences platform. We recently launched DRG Commercial Analytics 360, a data analytics tool aimed specifically at the medtech sector. We were pleased to partner with Bioventus, a global autobiologics leader, to leverage this new offering. This comprehensive analytics platform will assist Bioventus in making more informed decisions to enhance product adoption, improve patient outcomes, and strengthen its position as a global leader. In September, we introduced our AI-powered Regulatory Assistant in Cortellis Regulatory Intelligence to help professionals manage global requirements more efficiently.

Developed with customer feedback and tested by industry partners, it meets the needs of Biopharma, Medtech, and Clinical Research Organizations, with new features such as conversational AI with referenced answers and multilingual capabilities. It allows users to search and interact in preferred languages. We are also embedding additional AI agents across key existing life sciences offerings as well as launching new AI-native products. We expect this offering to help us expand ACV going forward. On the next slide, I'm pleased with the significant progress we have made by executing our value creation plan across all three segments. We introduce AI-powered solutions including Web of Science, Research Intelligence, AI Agent, Trademark Opposition Assistant, Riskmark, and Search and Regulatory functionality within Cortellis. We have also driven internal cost efficiency, scaled our customer success teams, and improved sales execution. These actions have optimized our business model and accelerated innovation across our portfolio.

As we look ahead to 2026, our focus remains on executing our robust value creation plan while driving innovation and operational excellence across Clarivate. We will continue the rapid deployment of agentic AI, embedding it across customer workflows and segments. Building on our momentum, we will release new AI native solutions and extend AI powered capabilities across our flagship portfolio. Accelerating AI innovation at scale is a top priority as we're driving organic ACV and recurring revenue growth through focused sales execution. We will aim to continue to boost sales productivity by focusing on our people, processes, and tools, leveraging AI insights, engaging customers to support ongoing account growth, and improving commercial execution. We believe operational efficiency and margin expansion will be achieved by utilizing agentic AI and embedding organization-wide AI adoption for cost efficiencies.

Finally, we are streamlining our business model and market focus by completing our exit from A&G, Transactional Books, Sales, and the Life Sciences Real World Data Resell Market. Regarding Strategic Alternatives, earlier this year, we have highlighted that we are actively progressing through a comprehensive review and assessment of strategic alternatives. As we communicated to you in July, we are making good progress and expect to share more details with you when we report our fourth quarter results in February 2026. In closing, our performance this year is starting to demonstrate clear and positive momentum across our core financial metrics. We remain on track to deliver our 2025 financial guidance. We have achieved sequential and year-over-year improvement in organic ACV to 1.6% and renewal rate to 93%.

Recurring organic revenue growth has improved to 0.6% for the first nine months of 2025 compared to 0.1% last year, and organic revenue mix has risen to 88%, up from 80% in 2024. These results reflect our commitment to driving sustainable growth and operational excellence. As we look forward, we are confident that our strong foundation and ongoing momentum position us well to create shareholder value. Thank you for your continued support and interest in Clarivate. We look forward to updating you on our progress in the quarters to come. I'd like to now turn the call over to Jonathan for a review of our financial results. Thank you.

Thank you, Mark, and good morning, everyone. Slide 16 is an overview of our third quarter and year-to-date financial results. Compared with the same periods from the prior year, Q3 revenue was $623 million, essentially flat over the same period in the prior year, bringing the year-to-date to $1.84 billion. The third quarter net loss was $28 million. The improvement over Q3 of the prior year is driven by higher foreign exchange gains and the non-cash impairment charge recorded last year that did not recur this year. Adjusted diluted EPS, which excludes items like the impairment, was flat sequentially at $0.18. The change over last year is entirely attributed to the divestiture of ScholarOne. Operating cash flow was $181 million in the quarter. The change compared to last year is driven by adjusted EBITDA and working capital.

Please turn with me now to page 17 for a closer look at the drivers of the third quarter top and bottom line changes from the prior year. The top line was essentially flat in the third quarter, yet margins were lower as expected as we continue to invest for future growth and remain on track to deliver our full year guidance. The changes were driven by four primary factors. First, while organic subscription revenues continued to grow at more than 1% following the continued acceleration in our ACV, total organic revenue is essentially flat as the subs growth was offset by modest recurring and transactional declines. Operating expenses were higher in the third quarter as we continue to invest to drive growth and incurred higher incentive compensation expense as we remain on track to deliver our full year guidance.

Second, during Q3, the businesses we are disposing actually increased slightly over the prior year due to multiple large one-time yet low margin ebook sales, which more than offset continued declines in the other products. This is a meaningful contributor to the raising of our full year guidance range on revenue, which I'll come to in just a few moments. Third, as we've seen in the last couple of quarters, we continue to experience the inorganic impact of the ScholarOne divestiture. Fourth, the U.S. Dollar remained relatively weaker against the basket of foreign currencies, which caused a foreign exchange tailwind on the top and bottom lines. Please turn with me now to page 18 to review how these same drivers impacted the top and bottom line changes on a year-to-date basis compared to the same period in the prior year.

Year-to-date revenues have declined by more than $50 million. However, margins are within 30 bps of the same period in the prior year. Let's step through the major drivers of this change. As Moty noted in his remarks, year to date organic growth has improved by 160 basis points over where we ended last year. This modest top line growth over last year is offset by higher operating costs as we continue to invest to grow the business while offsetting some of the cost inflation with efficiencies. The combined impact of the disposals and divestitures lowered revenue by nearly $70 million and adjusted EBITDA by just over $30 million compared to the same period last year. Both the top and bottom lines benefited from foreign exchange translations so far this year as the U.S.

Dollar remains weaker than a basket of foreign currencies, and the profit conversion on the change is high as a result of transactional gains. Please turn with me now to page 19 for a look at how the Q3 and year to date adjusted EBITDA converted to free cash flow and how we allocated the capital. Free cash flow was $115 million in the third quarter, bringing the year to date to $276 million. The change so far this year over the prior year is driven entirely by the adjusted EBITDA impact outlined on the last two pages as higher one time costs are offset by lower capital spending. We incurred $13 million of one time cost in Q3 and $55 million so far this year, largely driven by restructuring related outflows associated with the implementation of the value creation plan.

Capital spending was $11 million lower than last year in Q3 as we begin to recognize the savings associated with the disposals. We used a combination of free cash flow we generated in the third quarter and cash on hand to repurchase another 11.7 million shares, bringing the year-to-date buybacks to $150 million, and we called $100 million of the bonds that are due next year. The balanced capital deployment this year has allowed us to maintain net leverage of about four turns while retiring nearly 35 million or about 5% of our outstanding shares. We also took the opportunity during the third quarter to extend our interest rate protection on our floating rate debt by four years by entering into $500 million of interest rate swaps through 2030.

Please turn with me now to page 20 for a look at our full year financial guidance ranges for this year beginning at the top of the page. Based on the continued acceleration of our organic annual contract value in the third quarter, we are raising the indication from the midpoint towards the higher end of our range as we expect continued acceleration in the fourth quarter. We continue to anticipate recurring organic growth in the upper half of our range as a result of the better than planned organic performance combined with a weaker U.S. dollar and slower than anticipated attrition in the business disposals. We are raising our revenue guidance by $50 million from our last indication near the upper end of the previous range to $2.44 billion at the midpoint of our new range.

Due to the slower than expected decline in our revenue of the businesses we're disposing, we now anticipate recurring revenue mix will likely be towards the low end of the range. It's worth reiterating what Matti indicated earlier. Our organic recurring revenue mix, which excludes the disposals, is already at 88% year-to-date and we expect will remain at this level through the end of the year. Moving down the page, we now expect adjusted EBITDA at the high end of the range and our profit margin at approximately 41% due to higher revenues from the disposals and FX which have lower profit conversions. We continue to anticipate diluted adjusted EPS and free cash flow near the midpoint of the ranges. Please turn with me now to page 21 for more details on the full year top and bottom line changes we're expecting compared to last year.

The full year guidance for the top and bottom lines is based on our expectation that Q4 revenue and adjusted EBITDA will be about $600 million and approach $250 million respectively. The anticipated changes in revenue and to a large extent adjusted EBITDA for the full year compared to last year are largely driven by the disposals targeted at optimizing our business model and the divestiture of non core products and services. We continue to expect organic growth will be essentially flat as the growth in recurring revenues will offset the originally anticipated decline in our remaining transactional business. This represents about a $10 million improvement over our initial indication at the midpoint of the original revenue guidance range. We continue to expect a profit headwind in this area of about $20 million as cost efficiencies will not fully offset inflation and higher incentive compensation expense.

The strategic disposals are now expected to lower revenue this year by approximately $90 million, and we are reducing operating expenses by $60 million, which yields a profit impact of about $30 million. We expect most of the remaining more than $100 million revenue reduction will take place next year. The divestitures of both Valleypat and ScholarOne last year will lower revenue by about $40 million and profit by about $20 million. We continue to anticipate a modest foreign exchange translation benefit to the top and bottom lines of $10 million and $5 million, respectively, as the U.S. dollar has remained slightly weaker against other foreign currencies compared to the prior year. Please turn with me now to page 22 to step through the components that will lead to more than a third of the adjusted EBITDA converting to free cash flow.

As I mentioned, we continue to expect free cash flow near the midpoint of our range. One-time costs are expected to be elevated over last year as we invest to execute the value creation plan. We expect cash interest to improve by about $10 million over the prior year as a result of the debt we prepaid last year. Cash taxes are expected to be in line with 2024. We anticipate the change in working capital this year will be negligible, which will represent an improvement over last year of about $25 million. While we remain committed to investing in product innovation, the strategic disposals and cost efficiencies will improve capital spending by about $30 million.

The net impact of these changes is free cash flow of $340 million at the midpoint of the range and will result in the same conversion on adjusted EBITDA of last year at about 34%. From a capital allocation perspective, we continue to have the flexibility between share repurchases and deleveraging as we move into the fourth quarter. In closing on page 23, I'd like to draw your attention to the consistent free cash flow we've generated over the past four years. Delivering free cash flow at the midpoint of this year's guidance range will result in a four-year cumulative average growth rate of 4% during the same period. Our free cash flow conversion on adjusted EBITDA will be about 35%. At the end of Q3, our stock was yielding a double-digit free cash flow return of 13% by the end of the year.