Alright. Good morning, everybody. Thank you for joining us on day three of our global financial services conference. Unfortunately, we're virtual again. Hopefully, next year, we will be able to do it.
Third time might be a charm in person. My name is Manav Patnaik. I'm Barclays' business and information services analyst, and I'm very pleased to have with us today Jerry Stead, who's the CEO, and Richard Hanks, who's the CFO of Clarivate Analytics. So thank you both for being here.
It's great to be with you, man. I'll thank you. Thank you.
Just for the audience, you know, I will be doing a fireside chat with, Jerry and Richard. If you have any questions, you should see a q and a box on your screen. Feel free to send them in through there. If I catch them, I'll bring it up. Otherwise, I'm I'm happy to follow-up with you after the chat.
So with that out of the way, Jerry, maybe just to start off with, you know, you just did a a share offering and just curious on what led to that ahead of potential deal closure, which is ProQuest. And maybe somewhat tied to it, just you also had a buyback program announced, so perhaps just some update there.
No. Actually, thanks for asking, Manav. It goes actually all the way back to a year ago in February when I had started negotiations with in February 2020, I'd started discussions with ProQuest. So keep that in mind for a minute. When we were in the process of acquiring what's now CPA, where if you remember, we closed in July of last year.
That then becomes into part of our organic growth in October one of this year. Sorry, the negotiations, let me be square, that I started was in February of twenty twenty one with ProQuest, Andy Schneider. We had reached agreement that in 2020, when I was negotiating to acquire CPA, which was a wonderful acquisition, one we're very pleased with, with both OnExperience, who's been a great investor. They were the original investor that had carved out Clarivate and started the carve out in 2016. We did a reverse merger with them in May of twenty nineteen, and that's when I talk took over.
I'll come back on that in a minute. So we had agreed with Leonard Green and also on experience that we would do our best before the one year lockup ended with Leonard Green, which is October 1, to do as much downside selling downside selling as we could have of unexperienced share. What happened then was we expected to do that last spring. That's when we were negotiating the the deal with with Andy for ProQuest. So that stopped us from managing through that period of time because, of course, that was inside knowledge.
What happened then was my commitment was to take them down from a little over 100,000,000 shares they had left down to under 60,000,000. So and agreed and had that also agreed with Leonard Green. So we did two things. We did the 10,000,000 share tack on, if you will, with the primary offering we did in June. And then with time running out, we did the 25,000,000 shares last week, which gets them down under 59,500,000.
And that's what created the the time issue. So going forward then, with me managing the any future secondaries, as we move forward, it will be a balanced one. We'll look at Leonard Green. We'll talk to both of them, who's been very cooperative, as has on expiring. And any decisions we make that'll be made with both of them will share it.
So critical. And I I inadvertently created the issue because we didn't expect that we'd do the ProQuest deal. As you remember, when we announced it, Manoff, pretty straightforward. They were planning to go public. I got wind of that and had the opportunity to get them in.
We had hoped to acquire them 2022. And so that's what put all of the stress on us, and we did that. So then I think having that all behind us, the other issue is we would love to have bought back those shares ourselves. As you know, we have a $250,000,000,000 share buyback Because of a situation that we will get corrected, have corrected going forward, that we're a Jersey based corporation, we were not allowed to do that share buyback, or that's the way we would have handled this. So that gets us current.
Going forward, I'll manage to the very best of my ability. I've done a lot of this over the years that it's at the right time, right place, right price.
Got it. So good to hear on the appetite for share buybacks there. Just on the ProQuest deal, I know anything with the FTC sensitive topics. So to the extent you can, I at the time of the acquisition, it didn't sound like there was a lot of overlap? So is there something to be worried about the second review, or is it just a change in administration?
No, it's a great question. I announced when we announced the deal, there was $3,500,000 actual overlap. That is the only overlap. I would say that we're with the second request, and it is the result of change of management. We're on point.
We're always going to do whatever Federal Trade Commission asks. I'm very pleased with our progress. We're working through that. And as I said, when we announced the second request, we expect to close by year end and feel really good about the progress. I'm very thankful for our team and everything that they've done as I for the ProQuest team.
They've done a great job. We did do one thing that was important, Manav, because when we had announced the second request, we had expected to close mid July latest. And as we were all talking earlier, there's a the whole world is full of labor shortage, if you will, and lots of turnover, high demand. So we were able to work through, just did a great job with the ProQuest management. We provided $20,000,000 to lock up critical members of their organization through 2022, December '30 '1, '20 '20 '2.
Because we've got 3,000 people there that want to come join our 9,000 people. And once we get approval, we'll do that. And I just I feel really excited. The one upside benefit of taking longer is we continue to learn more and more about what we'll do together. So great question.
Thanks.
Got it. Richard, maybe just on the ProQuest deal itself, can you just remind us of kind of the guidance you had given on accretion and some of the numbers just around ProQuest, assuming they haven't changed?
Yeah. Sure. I mean, just
in terms of broad strokes, it's a $900,000,000 plus business, 30% margins. We committed to save $100,000,000 on a run rate basis over eighteen months. Given the timing that Jerry's just described, we are we will be working very hard to get the bulk of that executed within the first twelve months. In terms of accretion, we're looking at double digit accretion within in the within the first twelve months and then into the teens after eighteen months, which are the guardrails that we always have on on any material transaction.
Got it. And, Manif, if I could, I'd just add, just as a reminder to everybody, we were at the end of twenty nineteen, the first half year we were public. We were about an $800,000,000 business If if you take out what we sold, we'll exit 2022 as a $3,000,000,000 business. And I I make that comment, one, because I'm very proud of what we've accomplished. But I feel better today than any place else I've been before with the organization we've got in place.
Thanks.
Got it. And and and, Jerry, maybe just on ProQuest. I mean, it obviously adds a lot of scale to your academic and government vertical the way you've described it. But just talk about the merits of you talked a little bit about potential revenue synergies, but is it just scale? Like what are the revenue synergies there?
Well, two things. Great question. We never include revenue synergies in our valuation or in our adjusted EPS. So that's all upside for us as we go forward. I've well, in fact, you've been with me a long time, so you know how many acquisitions.
I've done two thirty over my career. This one is the best matchup side by side with the exception of 3,500,000 out of a 1,000,000,000 over of the 3,500,000.0 overlap side by side 1.2 very complementary. Some of the ProQuest software is as good as I've ever seen. It's in a market as we're shifting then off to the one Clarivate. Just a reminder, when I first got involved in May of twenty nineteen, we had seven businesses, seven CEOs.
We, by September of 'nineteen, we merged those into two groups, Science Group and IP Group, then made the acquisitions with DRG that complement the Science Group and the IP Group with CPA, all of which we're very pleased with. What this does then is we move to one Clarivate that we've announced. We'll go into 2022 in four major markets. The second largest market is academic and government. It's a $26,500,000,000 market.
By the way, we'll report on each of those markets so people can see how we're doing quarter by quarter. We'll be 1 point billion one point three billion five percent of that market. The upside is significant. There's many places where they have software sold 2,000. We have over 7,000 of the universities around the world, of which they've sold software and product into 2,000, great cross selling opportunity.
And we'll be bundling not just their products and ours, but also the life science products for the research universities. And we look forward to selling to a lot of the universities a CPA product for managing their assets, intellectual property patents. So that'll play out very well. Couldn't feel better. And what it does is a significant cost reduction in total for most of our customers as we go forward in that market.
So really excited about it. More to come. Just a quick reminder, on November 9, we'll do the Investor Day. We'll give guidance for 2022. I'm assuming that would not include ProQuest.
So you'll see exactly what we expect to do in 2022, get a good view of that. Then the day we close, we'll give guidance for the merged businesses so you'll know exactly what we're expecting. And that will and we'll talk in more detail at that time about the opportunities we've got with revenue synergies.
Got it. All right. That's super helpful. Jerry, one of the questions, you pointed out that pre COVID, you were 800,000,000. And now today, despite all the, you know, craziness in the world, you're at 3,000,000,000 almost as you may close the ProQuest deal.
You know, you're you're moving at warp speed, basically. Like, do you have the capacity in the organization to handle all this so fast and and and quite frankly, so a lot of big acquisitions here?
Great question. We've we've rebuilt the entire company and been blessed man off, to get the kind of talent. If you remember, I always look for how do I get a team in place that can double and triple the business. Now in this case, in three years, we'll have almost quadrupled the business, and then we'll look to the future. We've been blessed to put together the best integration team I've ever been part of.
Some of the folks that were at IHS that now have worked are working for us with a law along with a great group of people that some in CPA, some in DRG, and some in the mother ship, if you will, Clarivate. So yes, I just a couple of comments, sir. We increased at the end of Q2 from $75,000,000 to $100,000,000 of cost takeout that we're getting out of CPA. We over recovered what we said we'd do with DRG. And as Richard said, we committed to 100,000,000 out of ProQuest.
And I we're on track, in fact, ahead of track in all the businesses. When we exit 2022, we'll have taken three over 300,000,000 of actual cost out. We're much more efficient today, and we'll operate in a much better way. Two other quick comments on that. We've done a lot of change internally.
If you remember way back when, when we first started talking, we said 60% of our research and development people were contractors. And we said we're going to move that down to 10%. That's done. An amazing shift, as I expected and Richard did. We're saving we're about 30% more efficient in time than we were before of new products.
That's why the new products keep flowing, and we'll do a really good job of explaining those at Investor Day. And we're also much more efficient, which is amazing if you think about doing all of this during COVID. Many of our people have never met each other, but we're we've created great teams. So I feel really good about that. I I commented yesterday.
It's hard for me to believe, but three of our team that are on the leadership team, the top 13 that I support, none of my the rest of my team except me has ever met, which is kinda hard to believe. And we actually have one, Gordon, who's an incredible leader, great executive of out of CPA, just an outstanding executive now running IP, I've never met personally. And it's kinda hard to believe that we're accomplishing all that. So I feel great about it. We track it.
In fact, yesterday, we had our biweekly update on on integration, and it's bang, bang, bang, bang, bang. Just couldn't be happier. Great team. Feel really good about that. We haven't talked much about it, but that includes the five smaller tuck in acquisitions, and we've wrapped those all up too.
Thanks. Got
it. Richard, I was hoping you could just help us. You've talked about before you had seven silos. You brought it to two product groups. But I was hoping the I think you described four or five different verticals that go after this hundred billion TAM.
So I was just hoping you could just help remind the audience what those five verticals are and, you know, what mix perhaps they are of Clarivate.
So absolutely. So the One Clarivate structure is is the customer led design that Jerry and Steen Thompson, who's our new chief revenue officer, essentially introduced and led at IHS Markit. We will have four customer segments initially, academic and government, life so academic and government, life sciences and health care, professional services, and then the fourth is a combination of manufacturing, consumer products, and tech. And when we get scale in that fourth leg, through organic growth and also M and A, we'll strip that out into into twos. That goes from four to five.
In terms of scale, as Jerry referenced earlier, the TAM is enormous, hundred billion dollars plus. Pro form a for ProQuest will be, you know, around $3,000,000,000 exiting next year. Academic and government will be our largest segment. It will be a circa 1,300,000,000 segment, including ProQuest. Very good growth trajectory.
To your earlier remark about growth in academic and government and the synergies with ProQuest, Personally speaking, I am really excited about the software part of the business. They sell currently to 2,000 institutions. We sell the software tools, we sell for six to seven thousand, our our suite of offerings around web around web of science, so there's a significant runway for growth there, number one. Then number two, I think, geographically, as a vector for growth, we have a we have real scale in Asia Pacific, and ProQuest have less presence than we do. We've got some terrific customer relationships in the big markets, China, Japan, South Korea, Australia.
So that will be a a significant focus for us as we integrate ProQuest and really drive growth and exceed the exceed our objectives. So that's academic academic and government, very nice underlying trajectory. The products in that segment have the highest renewal rates. Number two is life sciences and health care. It is fair to say that in terms of the end market growth, this would be our probably our fastest growing potential.
The overall life sciences market for data and analytics is growing 12 to 14%. And anchored in that execution is, of course, the DRG business that we acquired in February, which is growing very nicely in 2021. So in terms of drivers of growth, nice organic growth opportunities there for us. And I think that in terms of M and A, that would be an important area of focus for us as we think about capital allocation. Got it.
Number three is professional services, great growth trajectory there, and then and then, of course, manufacturing and consumer products. So that's the that's the overall design.
Understood. And and, Jerry, just to follow-up there, I mean, clearly, life sciences is a fast growing market, so it sounds like there's a lot more M and A coming there. But, you know, when you think about professional and the other, I guess, other category, you know, it sounds a little bit like, you know, what you did at IHS. You have these different verticals you entered into and built up. So, you know, every deal you've done has been bigger than the past one.
And so just help us understand, like, you know, what do we expect going forward? Like, are there a lot more big, big deals to be done?
It's a great question. And again, once we get the approval, if you will, with ProQuest, we'll lay that out in pretty good detail for sure, Manav. And think about the priorities of life science and for sure. And yes, there are. When we talk about professional services, there, that market is that includes all the law offices and all the other professional service companies in the world.
So that one has, I would say, more tuck in capability with us, including geographically, for sure. And I feel really good about where we'll be on the academic and government, which by the way is growing at 7% globally worldwide. And we'll report those each quarter too. So we'll see how this all plays out. But we're always thinking through how to make sure that we increase what our customers expect us to do.
And that life science, as Richard said, would be a high priority of professional services as we've defined it. I would see us filling in a very strong plate of opportunities there. And then as he said, the last the fourth one. Actually, we do more than most people know there. We'll lay that out.
But with CPA, for example, we manage patents for Apple. We manage all the patents for Microsoft, etcetera. So that's one that, again, we'll tuck in as we move forward. It's a great question. I feel really good about where we're at now to be at 3,000,000,000 actually two years ahead of what I said we would be.
That feels great, and we'll make sure that all works. And our job is to make sure that a huge part of the scale is because of the beauty of the business. We'll be delivering over $1,000,000,000 of free cash flow. And we'll use that very efficiently to reduce the number of outstanding shares and also reduce the debt to equity debt ratio, if you will, and make sure that we balance that, Manav, for our shareowners and our customers with new products going forward.
Got it. I just wanted to touch on some of the organic growth and specifically, your exit rate that you've talked about for 6% to eight percent exiting the fourth quarter of this year. Can you just help us walk through your confidence behind And you know, clearly, the comps were easier. So, you know, is that six to eight sustainable?
Great question. Let's work backwards. Yes. The six to eight is sustainable and will be for years to come. High degree of confidence of exiting as we said we would, six to 8%.
You know, we actually did 6% organic in the first half. It was an interesting first half because we had the COVID effect in second quarter of twenty twenty, where that normally would have been in first quarter. So that's why we said, please look at us in total. And in fairness too, it was 4% annual subscription base. And so you'll see that growing as we exit 2021 into 2022 into a higher number.
Price realization will end about just over 3% for 2021. We build in over 4%, and we'll get that because we now have, for the first time, where we can show the value to our customers, We know by product, by customer, the usage on an hourly basis. Huge shift there. Feel very good. We've got all of it was it's been interesting to me.
We announced what we're gonna do with inside sales. That's all in place. I think some people think it may be quicker than you're able to do. We did it pretty quick. But we'll now have 23% of our revenue as we go into 2022 on inside sales.
That'll significantly increase price realization. Equally, if not more important, is the retention rates will go up. And our target is to exit 2023 at ninety five percent. And just a reminder on that, which is we measure it, as you know, Manav, no price increases included. And if I did a deal with you last year at $100 and we started $99 in 2022, that's a mess.
So that's important to know, and that's a critical part. And now the bundled products that we'll be able to offer, just the examples we gave you in academic and government, are really exciting because this is the first year in the history of these businesses that we've had commissions in place for cross selling. Now as we move to the new one Clarivate that we laid out September 2019, we'll see that increase year after year. So it's very sustainable. Last piece, I'm very proud of what's been done in our professional service business, which is to take and complement our target is for every dollar of revenue we get out of professional services, we'll get $20 of pull through for our annual subscription base within two years.
I'm very proud. That business is growing rapidly. Two point five years ago, it didn't exist. So that's the other piece that we'll see picking up. For your question, how sustainable is the six to 8%?
Very sustainable.
Got it. Richard, we'll wait for Investor Day for the actual guidance. But just looking at the different pieces of your business, I mean, the reoccurring piece, the patent piece, I mean, that's pretty steady, I think, the five to 7% range. But can you just help maybe understand subscription, is that accelerating? And then also on the transaction side, like how much of a catch up or recovery or rebound is there to be had?
As you said, reoccurring, which is our patent patent annuities business, very steady price yield and volume, 5% to 7% is a good number. In terms of subscription growth, absolutely. I mean, this is a very, very high priority for us. As Jerry mentioned earlier, we have a high degree of conviction of realizing 4% on a run rate basis plus in 2022. We need to deliver that.
And as a reminder, 50% of the book renews in q one and twenty % of the book renews in q two. So we'll have the the majority of that behind us in the first half of next year. Number two is driving installations between now and the end of this year. So we've got a good anchor in our entry rate going to 2022. That's a very high priority.
So we're monitoring our datasets currently as we close out 2021 and drive the ACV book of business position into 2022. And then new new new installations and new products. We've got a significant we've done a lot on new product development in the last two years. You know, our our our product road map four years ago was very, very light as we took carved the business out from TR. It's just night and day in terms of what we want to bring to market now, the degree of interoperability we have across the portfolio.
It's it's really impressive. And investors will see that on November, which is our product strategy and product demo day. And then, obviously, we have the presentations, on the ninth. So and then I think finally, Jerry touched on this retention rates. Subscription retention rates currently 91%.
We consider best in class 95%. We need to see that that upward trajectory during 2022 and going to 2023 as we hone in on that 95% objective, which is very, very important. On transactional, professional services, custom datasets, and other other principal drivers there. So, professional service, we have real scale in life sciences professional services as we do in IP professional services where we're doing freedom to operate searches and trademark searches for our clients. It's a nice business, but I am particularly attracted, as I said earlier, to that life sciences space where we sell to the top 50 life sciences organizations globally, repeat purchases.
That's exactly where we wanna be, and that's growing very nicely.
Got it. In the in the last few minutes you have left, Jerry, maybe, you know, you know, the the strategy, the the process you're walking through is very similar to what you did at IHS. You know, the the different verticals, they obviously were a little bit more, I would say, different. And the the question is more science and IT together, these four or five verticals that you talked about. You know, how do they interconnect with each other?
Or maybe put another way, could do they have to be together?
No. It's a great question. I'll just check a couple of examples. Again, as I said earlier, Manav, we've never rewarded people at all for cross selling. So this is the first year, and I'll just use a real life example, a university.
I'm supporting the team that sells the sales team and service team that sells into the 20 largest research universities in The US. We never sold life science products in there. We never sold IP products in there. And we didn't and CPA never sold management of patents in there. So as an example only, good university.
Last year, we did $554,000 We have literally today out quotes for $3,600,000 What's more exciting about that is the savings that will come to the university. In this case, they've been managing their four colleges have been managing their patents. We'll do that with, obviously, CPA's incredibly great products, and reduce their costs by 3 out of $4 That's an example. I could go through each place, but that's what's exciting of where we're going.
Got it. All right, Jerry. I think we'll end it there. And Richard as well, thank you so much for both being here.
Thank you, Manav. We very much appreciate you.
All right. Thank you, everybody, for joining.
Thank you.