Good morning and welcome to the Clarivate Analytics Q4 2019 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to your host today, Mark Donohue, Vice President and Head of Investor Relations. Please go ahead.

Thank you, Keith and good morning everyone. Thank you for joining us for the Clarivate fourth quarter and full year 2019 earnings conference call. With me today are Jerre Stead, Executive Chairman and Chief Executive Officer; Richard Hanks, Chief Financial Officer; Mukhtar Ahmed, President of Science Group; and Jeff Roy, President of the IT Group. All 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 Analytics. 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 ending December 31, 2019. The release as well as an accompanying supplemental presentation is available on 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 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 could cause such 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 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. Reconciliations of these measures to GAAP measures are available in our earnings release and supplemental presentation on our website. Again after our prepared remarks, we will open the call up to your questions.And 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. 2019 was an extraordinary and highly productive year for Clarivate. I am so very, very proud of my Clarivate colleagues and the significant progress our team made on both strategic and financial initiatives. Their collective accomplishments were a leading contributor to driving our transformation and driving our growth last year and positioning us for continued success in 2020 and the years beyond. We were last officially with you at our Investor Day in November. And when I think of what we have gotten done in the multiple priorities we have managed since then, I am even more grateful for the talented and committed Clarivate team and we are just getting warmed up.We hit the ground running in 2020 with the acquisition of Decision Resources Group, which we will close within the next few days, more on this strategic acquisition in a minute. And as you know, we have just completed a very successful equity offering, our many thanks to all of you for your support. We are announcing very solid results for our fourth quarter and full year 2019, delivering growth on both a sequential and year-over-year basis. Richard will cover the financials in detail, but before I will highlight some of our major accomplishments.Now, let me provide an overview of our results. Adjusted revenue for the fourth quarter increased 4.2% on a constant currency basis. Adjusted EBITDA was up 11.6% and our adjusted EBITDA margin improved by 200 basis points to 33.2% compared to last year’s fourth quarter. Our growth was driven by pricing and new business across both our science and IP product groups. We also started to see the benefits of our operational cost efficiency initiatives.On a full year basis, 2019 was in…

Thank you, Jerre. Clarivate had a very solid fourth quarter, closing out our first year as a new publicly traded company on a high note. Reported revenues for the fourth quarter of 2019 increased by $10 million or 4% to $255 million compared to the prior year period. This represents growth of 4.2% on a constant currency basis. For the fourth quarter, 79% of our revenues were U.S. dollar denominated, and there was minimal impact from foreign exchange as compared to prior year. In November 2019, we announced the divestiture of several MarkMonitor assets and completed the divestiture on January 1 of this year. Excluding the divested products, revenues for the fourth quarter increased 4.9% on a reported basis and were up 5.1% at constant currency.Turning now to our revenue profile, firstly, when looking at revenue by geographies for the fourth quarter, we have a consistent balance across the regions, with 46% in the Americas; 31% in Europe, Middle East and Africa; and 23% in Asia-Pacific. Secondly, and moving on to revenue by type, adjusted subscription revenues increased by $11.8 million or 6% to $209.5 million for the fourth quarter. The increase in subscription revenues was driven in part by price increases as well as new business with the largest dollar increases in the quarter coming from the Web of Science, Life Sciences, CompuMark and Techstreet product lines. Subscription revenues accounted for 82% of total revenues in the quarter compared to 80% in the prior year period. Annual contract value, or ACV, of subscription-based contracts at the end of 2019 represented growth of 3.5% at constant currency compared to the same period last year. Excluding MarkMonitor brand protection, as I said divested with effect from January 1 of this year, the year-over-year growth in ACV on a pro forma basis…

Thank you, Richard. This concludes our prepared remarks. We are very well positioned for success and really excited about the opportunities ahead of us to continue to profitably grow our business. Please do join us for our 2020 Investor Day to be webcast on May 19 when we will be sharing a thorough review of Clarivate and our growth strategies. We are now ready to take your questions. As a reminder, please limit yourself to one question, then return to the queue. Operator, please?

Yes, thank you. [Operator Instructions] And the first question comes from Andrew Nicholas with William Blair.

Hi, thanks for taking my question. I wanted to walk through first, the changes to 2020 guidance. It looks to me like at the midpoint you added about $215 million or so to the top line guide, which if I am doing the math correctly, would imply 20%, 25% growth at DRG in 2020, if I annualize its revenue impact. So I guess my question is, first, can you confirm that DRG is the only change to your guidance in 2020? And then second, if that is the case, what gives you confidence in that level of growth acceleration this year? Thanks.

Yes, good question. Just as Richard will pick up in just a second, but remember we’ve only got 10 months build into the guidance for DRG. As I said, we expect to close in the next few days. We have assumed 10 months. But Richard just pick up the rest because it’s a good analysis.

Exactly right. So we have got 10 months of DRG included in 2020, and we also have a full year of contribution from the Darts-ip transaction that we completed at the end of November 2019. So those are the primary drivers of the year-on-year growth – or the year-on-year change in consensus – year-on-year change in guidance given in – on November 12 last year.

No, go ahead because you’re going to ask part B, right?

Well, yes, I know that we’re limited to one here. I’m just trying to understand what – how you get to that – such a strong growth rate. Obviously, I think you had said that DRG was growing upper single digits to 9% in ‘19, and I don’t think Darts-ip is a particularly large contributor. So I am just interested in what makes you so confident in that stronger growth or what are the underlying drivers at DRG that gives you that confidence?

And then – and if you go back and look at what we gave you guidance, earlier for our base business at Clarivate, that’s strong growth too. What I thought you are going to say, so I’ll make it up for you, is question B is, is really strong growth in adjusted EBITDA? It’s about 38% year-over-year, and that’s three things. One, our commitment that we told you we would deliver as we have gone through all the cost reductions in 2019 and through 2020, as Richard talked about, where we’ll exit 2020 with $75 million in total on that. It includes a small part. I think we publicly announced it would be $10 million with DRG for the first year and a balance of $20 million or more, $30 million in 2021. So it’s got a lot of growth. And if we can figure out a way to do that every year, we would, but let’s do it for 2020. Thank you. Next question.

And that comes from Shlomo Rosenbaum with Stifel.

Hi thank you very much for taking my questions. Hey, Richard. The guidance is really strong, particularly on the EBITDA side as well. But in the fourth quarter, I would say the EBITDA just seemed kind of lighter than expected. You guys came out for the full year towards the lower end of the adjusted EBITDA guidance expectation as – that you guys provided. Could you just walk through like what were some of the puts and takes? What were some of the things that happened with divestitures and how did that kind of track through the year and then since the third quarter?

No, good to hear you, Shlomo, actually, it was a very strong fourth quarter in EBITDA, the highest EBITDA margin quarter that this company has ever had. And even stronger, with an EBITDA margin, if you exclude the pieces of MarkMonitor that we sold. So sorry, if you felt that was light, but it was not. It was right on the button we expected, and sets us up well as we move into 2020. Richard?

No. I think that’s right. I mean Q4 was essentially $85 million of adjusted EBITDA that was up nearly 12% year-on-year. We had – we kept costs essentially flat year-over-year for the quarter. We had great momentum on top line, particularly in subscription revenues, which were up 6%. So all in all, we – our view is we closed out the year strongly. And the – we are starting – we are seeing the benefits of the cost optimization program coming through. And I would add that the governance we have around cost management is very high. And so we are excited about 2020 and continuing to drive margins upwards.

I’m just comparing to $294 million versus the $290 million to $310 million, that’s what I’m comparing over there.

Understood.

And let me just add to that, Shlomo, because it’s a fair question for sure. That guidance was given on January 14, 2019, and we put that together about 6 hours before we announced the deal. And so I am very proud of what we actually delivered inside the range in both cases. So understand your question and – but that’s exactly what happened. And as I said, if you look back and you will see that it was our best quarter in history, but more exciting is what you said the – about 2020. It’s a strong guidance, and we look forward to delivering against that. Thanks Shlomo and next question.

Yes, thank you. And that comes from George Tong with Goldman Sachs.

Hi, thanks. Good morning. Your 2020 EBITDA margin and guidance does imply material margin expansion from 2019 levels of 30%. You had cited pricing increases, improved retention rates and cost efficiencies as drivers of the margin expansion. Can you just elaborate on these factors? Where you expect to see the most contribution to margin improvement? And what going forward might cause the rate of margin expansion to potentially moderate from what you expect to see this year?

Two quick comments. I said that our goals when we exit 2021, was 38% to 40%, so don’t expect us to moderate at this point because that’s our goal, George. But great question. Richard, pick up the pieces, please.

Yes. I mean the key for 2020 is continuing to deliver improved top line performance, and that’s really going to be driven by the strong momentum that we see coming to 2020 from the subscription book of business. The expectation and plans that we have around improving renewal rates, given the product improvements that we have made over the last 18 months and complementing that with additional prices increases, again, associated with improving renewal rates. So the objective is to continue to drive the Clarivate core business revenues upwards in the way that we demonstrated sequentially during 2019. Ally to that is keeping, as I referenced earlier, a very tight grip on expenses. So as we know – as you know, we have very strong protocols around weekly headcount approvals. Headcounts and headcount-related costs represent two-thirds of our expense base. We have a very formal PMO in place that is focused on the cost optimization programs that we have across the business. Technology, content facilities, we’re continuing to execute well against that program. And that program will wrap up pretty much at the end of this year other than in the technology space where, during the first quarter of 2021, we will be rounding out the in-sourcing of application development activity. As you know, only 50% of application development work is done by third parties who are expensive, and so we want to bring that work in-house. And so we will close out the execution of the cost optimization program for Clarivate core Q1, early Q2 2021. And then as Jerre referenced earlier, we’ll be completing the DRG transaction in the next few days. And we have an integration team lined up that will be focused on cross-selling to continue to drive top line growth. We are tremendously excited about the assets which DRG brings to our Life Sciences business. And in addition, we have identified, through our rigorous due diligence process, some interesting and attractive expense synergies that we’ll be executing during the next 12, 18 months so combination of top line growth and very strong professional management – financial management of the business.

Thanks, Richard. Thanks George. Next question please.

And that comes from Seth Weber with RBC Capital Markets.

Hey guys. Good morning.

Good morning. How are you?

Doing well. Thanks. How about yourself?

Always good.

Hey, why don’t you go back on the pricing commentary a little bit? It sounded like in the prepared remarks it’s stronger on the science business versus the IP. I just wanted to kind of flush out if that’s the right message that you’re trying to give. And I think, previously, you had talked about pricing for 2020 being up in the kind of like low 3%-ish range. Is that still the right way to think about it?

Good, no Seth. Let me just pick up, and then I’ll have Richard take the rest of the piece. But we – as we’ve said consistently, almost no price increase in 2018 to 2.1% in 2019, plan 3.1% to 3.2% in 2020. So you’re right. We also said in our remarks that we expect that in the years ahead to see 4% to 5% pricing power as we sell value in the future. But Richard, just pick up on the split question that Seth has.

Yes. I think in terms of yield, what we see is the price increases we are able to enjoy are slightly higher in the Web of Science portfolio because that is the suite of products that has the highest retention rate, and there’s a correlation between our ability to get price yield and retention rates. So as the retention rates on our other – across the rest of the portfolio improve due to the significant application development work we’ve done very focused on client experience UI/UX, we will expect to see yields – price yields from the other products also start to pick up. And that’s the principal driver across the improvement in price yields we have planned for in 2020. As Jerre referenced, average price yield is 2.1% in 2019, looking to add at least 100 basis points to that in 2020.

[Operator Instructions] And our next question comes from Zach Cummins with B. Riley FBR.

Yes, hi good morning. I just had a question around your organic business. I mean just given some of the concerns that you laid out here in the first half of the year, what’s your confidence in really reaching that 4% to 6% organic growth target for this year?

Well, we build it into the blend and I don’t miss blend. So our confidence level is very high, Zach. What we were saying, just to be – I am sorry, Zach – what we were saying, just to be clear is with the uncertainty going on, particularly in China right now, that we may see a shift of some of the renewals into second half of this year from the first half. What’s really important though is amazing. We’ve had our entire China team. And remember, we don’t sell product of hardware, etcetera. We’ve had our entire team working out of their homes, and it’s remarkable – without forecasting Q1, we’ve done a remarkable job at this point of the renewals taking place, new sales, etcetera. So, I feel really good. Our only caution was it’s a bit of an unknown. What we emphasize, though, was that the second half we expect to pick all of that up plus, but your question is a great one. And our confidence level of delivering – and you are right, we said way back when – in January of last year, Richard and I said, we do 4% to 6% exiting 2020, and we said we do 33% to...

No, 35% to 38%.

35% to 38%, thank you of EBITDA. And I would tell you, our confidence level on both of those is very, very high. And that’s why we gave you our not guidance, but our goals of the 6% to 8% exiting 2020 on revenue growth.

2021.

2021, thank you and our 38% to 40% exiting 2021 on EBITDA. And we told you, and we’ve said this consistently, this becomes a mid-40s business with time. So our target clearly is to try to exit 2021 with the 4% in front of it. Thank you. Good question.

Next please.

Yes thank you. And we have a follow-up from Shlomo Rosenbaum with Stifel.

Let me back in I just – I want to just ask you a little bit about some of the new product development that you are doing. This is clearly a shift from the historical trajectory of the business, and there is a lot more focus on it. Can you just talk about what’s gaining the most traction right now? What do you see kind of gaining more traction through the year? And then just as an aside, Richard, maybe you can just tell us how much revenue actually comes from China so people can just kind of put a box around that in their mind?

I’ll help you with that. We don’t, Shlomo. Well, we don’t disclose the revenue by country. But I’m happy to have Jeff start and Mukhtar pick up on your question because it’s a great question. We’ve got more new product being delivered – having been delivered in 2020 than this company has had in probably, I don’t know, 10, 12 years, so Jeff, you start, you’ve got a lot to say, and then Mukhtar, you pick it up, please.

Yes, sure. Thanks, Jerre. I mean, I guess, what I would start with is saying that there is three real themes here. One, continuing the theme that Richard talked about regarding the customer experience. So we’re continuing to invest in the Derwent Innovation interface. We expect that to drive growth and retention. We have a release earlier this year around the analysis tools in the CompuMark business, which solves a lot of customer experience problems that were historically associated with the CompuMark business. We are working very, very hard around integration activities, particularly around the CompuMark and Derwent business with the Darts-ip content. That was a phenomenal acquisition of content that we think is going to help us expand revenue into both the trademark and patent space. And then lastly, I would say there’s a fair amount of effort that we’re focused on around analytics, and what I would call, the IP cloud. I think that our products, as Jerre has mentioned in the past, are based on a phenomenal set of really difficult to replicate data assets. And our intent is to decouple those data assets from the legacy products in such a way that it allows our customers to have more flexibility in terms of how they solve business problems with the data. So as we integrate our content, streamline our applications to solve more customer use cases and then obviously focus on completing the integration promises we made with the Darts-ip acquisition, we expect that to start to accelerate growth in the IP space.

Thanks, Jeff. Mukhtar?

Yes, just to pick up on this, there is really sort of two themes here, new products and then investment in some of our core products, which have real recognition as premier products within the markets that we serve. And just if we look at 2019, particularly Q3, Q4, we released a series of new products and enhancements for Cortellis, Cortellis Digital Health. We launched the new version of our integrity preclinical product under Cortellis. We also launched Content-as-a-Service offering, which is essentially a data-as-a-service offering for the marketplace. On our Web of Science platform, we released a number of our key offerings, Publisher Analytics, particularly for the publishing market through our ScholarOne product and so forth. And all of those releases, we expect traction and further adoption of those during the course of 2020. And in addition to that, we do have planned a series of new products that we’ll announce during the course of 2020 that really focus on going deeper with our existing customers and actually also perhaps being attractive to some adjacent markets that are extremely relevant to us.

Thanks, Mukhtar. Great. Thanks both of you guys. Next question please.

Yes, there is another follow-up from Seth Weber from RBC Capital Markets.

Hi, thanks for taking the follow-up. Just on the back of that question, I just wanted to kind of maybe, Jerre, get your sense for where you think you are in the kind of the sales force restructuring? Do you feel like you’re most of the way through, the guys have – the team has good footing, good traction at this point or do you think that, that kind of – which inning are we in, in the sort of the sales force restructuring and going to – having the team being fully loaded going to market?

No, great question, Seth. That’s – two steps to this question. We go into 2020 with a great sales force set up. We have been in all three of the regional sales kickoffs. Energy level is great. We’ve got great – we delivered commission plans and quota plans on January 15, this year. Everybody at every meeting had them. So we feel really good about that. And we’ve come a long, long way. Flip side is, as you know, we are setting up 3 global centers of inside sales. And that is in process, and we will close out as we go into 2021. That will be the next huge step because it will take about 80% of our customers, a little less than 20% of our revenue and bring that into inside sales. Once we do that, we will see retention rates increase in that long, long tail significantly. And most importantly, our existing field sales team will be able to focus as we start to put in global account teams based on industrial markets that we sell into. So that biggest impact will hit in 2021. So think about it as a two-piecer. Feel really good about where we are kicking off the year. I know Jeff, Mukhtar, Richard and I, all feel great about that. And then as the year transitions, we will move more and more to where we give the load, if you will, of the smaller customer to inside sales. And we will see a positive impact in 2021 because of that, which is part of the reason we said the 6% to 8% organic growth in – at the end of 2021. Great question. Thank you.

Thank you, guys. Next question.

Actually – and that concludes our question-and-answer session. I would like to turn the conference over.

Okay. So I’ll just close with saying thank you all very, very much. When we said we’re excited, we are. The progress is so fun to see. We’re eager to close RBC. RBC, I forgot to tell you that, Jeff. You weren’t even aware of that, were you Mukhtar? So we will close the acquisition in the next couple of days. But I’m very eager to see you all on May 19. It will be a great day. And what we will do is say, here is what we said on November 12 and here’s where we are, and here’s where we’re going to go. Thanks, everybody, very much.

Thank you. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.