Good morning, and welcome to the Clarivate U. ProQuest Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.
I would now like to turn the conference over to Mark Donahue, Head of Investor Relations. Please go ahead.
Thank you, Andrew, and good morning, everyone. Thank you for joining us for the proposed acquisition of ProQuest. With me today from Clarivate are Jerry Stead, Executive Chairman and Chief Executive Officer Richard Hanks, Chief Financial Officer Muqtaar Ahmed, President, Science Group and Clifford Smith, Head of Corporate Development. Also joining us is Andy Snyder, Chairman of ProQuest and CEO of Cambridge Information Group, the parent owner of ProQuest. 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. 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 the proposed acquisition. 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 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 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, adjusted EBITDA, adjusted free cash flow and others. Clariant believes non GAAP results are useful in order to enhance an understanding of our ongoing operating performance, but they
are supplemented 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 supplemental presentation and within this morning's press release. After our prepared remarks, we'll open the call up to your questions. With that, it's a pleasure to turn the call over to Jerry.
Thank you, Mark, and thank you, everyone, for joining us on short notice for the call today. I want to welcome all of our investors and Clarivate colleagues from around the world on the call or webcast. I'd also like to extend a special welcome to our soon to be new colleagues at ProQuest. This is a historic day for both organizations as this proposed acquisition will create a global leader in academic, government and research content with enhanced software and analytics capability. With our highly complementary products, we will be in an even better position to serve the evolving needs of researchers, learners and innovators in academia, governments, corporations, schools and libraries around the world.
The combination will enrich our value chain across the research lifecycle with products that largely serve different needs. It will enhance our capabilities to offer customers a unique value proposition across content, analytics and workflow solutions. By combining with PearlQuest, our academic and government business will generate more than $1,300,000,000 in annual revenues, while providing customers with the world's largest collection of curated content and data from ideation to outcomes. The global academic and research library market for analytics, enterprise software and content aggregation is more than CHF 33,000,000,000 in line with spend. Enterprise software is the fastest growing library market segment and has high customer retention due to workflows integrated in core library systems.
With our combined strengths, we will provide users with leading technologies that enhance content, discovery, sharing and management. Importantly, it will also deepen our client relationships across our global user base, which will provide significant opportunities to further increase our high retention rates, improve our customer like scores and present significant cross selling opportunities. This proposed acquisition will strengthen Clarivate's revenue and EBITDA growth. And we anticipate that it will further enhance our subscription and unit recurring revenue base to more than 83%. We expect this transaction to result in double digit accretion to Clarivate's earnings in 2022 and mid teens accretion in 2023.
In a few moments, Andy will provide a high level overview of ProQuest, which will give you a good idea of why we're so very excited to add their products, services and colleagues to the Clarabate family. Since going public in May of twenty nineteen, almost two years ago to the day, we've transformed Clarabate. We ended 2019 with $975,000,000 in adjusted revenue, dollars $294,000,000 in adjusted EBITDA and 30% adjusted EBITDA margins. Through a series of acquisitions, including DRG and CPA and many, many operational improvements and now the proposed acquisition of ProQuest, our combined revenues will have almost tripled compared to year end 2019. Combined adjusted EBITDA will have quadrupled and our combined EBITDA margin will expand into will have expanded approximately 45%.
And yet we're nowhere close to where I believe we can ultimately be. This past November, at our Annual Investor Day, I provided my personal goals for where I thought Clarabase could go as we exit 2023. This proposed acquisition puts us well ahead of schedule to achieve my personal targets. Those personal targets were revenues of 2,800,000,000.0 to $3,000,000,000 adjusted EBITDA to $1,300,000,000 to $1,400,000,000 and adjusted free cash flow of $1,100,000,000 to $1,200,000,000 exiting 2023. Once we complete this proposed acquisition on a combined 2020 basis, our revenue would have exceeded more than $2,600,000,000 adjusted EBITDA would have been $1,200,000,000 including cost synergies and we would have had $1,000,000,000 of adjusted free cash flow.
When combining Clarivate's current standalone 2021 outlook and ProQuest expected standalone performance for 2021, our combined results for 2021 will move us very close to my personal goals. This is a cash and stock transaction valued at $5,300,000,000 including the refinancing of $1,000,000,000 of ProQuest net debt. ProQuest share owners will receive $3,000,000,000 in cash and $1,300,000,000 of Clarivate shares, representing 7% pro form ownership of the combined company or approximately 47,000,000 shares issued to ProQuest shareholders, including the annual tax benefits of $65,000,000 resulting from the deal structure, which we currently expect to enjoy over the next fifteen years. This transaction implies an adjusted EBITDA margin of 14 times, inclusive of more than $100,000,000 of run rate savings, which we expect to achieve within fifteen to eighteen months of closing. This is a very attractive valuation considering the many, many strategic and financial benefits we will enjoy from this proposed acquisition.
We intend to refinance ProQuest one billion dollars of net debt and finance the purchase price for this acquisition through a combination of cash on hand, 2,000,000,000 of new debt facilities and proceeds from a primary equity offering, all prior to closing the transaction. We're targeting pro form a net leverage of about 4.5 times at closing. With the strong cash flow we're currently generating, plus the great addition of ProQuest, we're in very good position to quickly reduce our debt, targeting leverage in the mid three times level by the end of twenty twenty two. We expect to close the transaction during the third quarter of twenty twenty one, subject to customary closing conditions and regulatory approvals. Upon closing, Opress will appoint two directors to the Clairvay Board, including Andrew Snyder, who will serve as Vice Chairman of the Clarivate Board.
And with the addition of the two new directors, our Board size will increase from 13 to 15 members. There is a lockup period for selling Clarivate shares of one to two years for certain ProQuest shareholders, including majority on Cambridge Information Groups and Ateris. It's now a great pleasure to turn the call over to Andy for a brief overview of ProQuest. Andy?
Thank you, Jerry, and good morning, everyone. I'm Andy Snyder. I'm the Chairman of ProQuest. On behalf of all of my colleagues at ProQuest who have been instrumental in building our company into a leading global software and data analytics provider, I'm very excited to be here to announce this important milestone for our business. I want to provide you with a brief introduction to ProQuest and an overview of what we do.
Some quick background. I've been in this business for a long time. My family's roots with ProQuest go back fifty years to 1971 when my father acquired Cambridge Scientific Abstracts, a small business with a close group of employees serving academic institutions. Over the past twenty years, we've built that original business from under 200 employees to the 2,700 plus that comprise ProQuest today. We like to describe ProQuest as Bloomberg for academia.
We provide a vast amount of research information needs on college campuses and across research institutions and all of the software to manage, access and discover that information. Importantly, we are unique in our market in providing both solutions at the scale that we do. Our content business, which makes up 62% of revenue, is a leading content aggregator and provider of unique collections of research material across all formats: journals, e books, newspapers, dissertations, video and beyond. And our Software Solutions business, which is 34% of revenue, is one of the leading SaaS cloud based multi tenant platform in the industry, led by our Alma platform with additional products like Rialto and Sploro and others that are delivering innovative workflow solutions for professionals on campuses and across research institutions. The majority of our revenue comes from the higher education industry, where we have all 50 of universities in the world and an expansive global footprint.
We also serve a broad and diverse customer base that includes research institutions, public libraries, government agencies and corporates. As I mentioned, ProQuest is a global business with over 2,700 people worldwide, including approximately four forty sales and marketing reps serving our global customer base in over 150 countries. We're headquartered in Ann Arbor, Michigan and have major centers in The U. K. And Israel.
Forty Percent of our revenue comes from outside North America. Importantly, we are well positioned for global growth as we act globally and think locally with platform support and content capabilities in local languages. LoQuest is fortunate to serve over 25,000 customers, including all the leading universities around the world. 81% of our customers are from higher ed market with the remainder from corporate, public, K-twelve and government. We have a marquee list of customers across each of those segments, many of which have been with us for decades.
We've had a 100% customer retention rate among our top 2,500 recurring revenue customers, and we don't have a single customer who represents more than 1% of our total revenue. This results in a great business with a terrific financial profile. Quick summary of the business on a pre synergies basis includes: we delivered $876,000,000 of revenue in 2020, which represented 4% organic growth, excluding a very small print book segment. Importantly, we enjoy a very high level of recurring or reoccurring revenue at 92%. Our 2020 adjusted EBITDA was $253,000,000 representing 30% margin and 11% growth.
With a free cash flow conversion rate at 80% last year, we produced $2.00 $2,000,000 of EBITDA less CapEx. With that, I'll turn it back to Jerry, but I just close by saying I'm really looking forward to what our two businesses can achieve together. Thank you.
Thank you. You, Andy, and all of your teammates at It's a great pleasure. As you can see, ProQuest is an ideal partner for us. In addition to their breadth and depth of products and services, their culture and values are very similar to ours. We have a long, proud heritage, a customer first focus and a commitment to excellence and innovation.
These principles align closely with our vision, mission and values. This morning, we reaffirmed Clarivate's twenty twenty one standalone guidance, which excludes this acquisition. Our standalone outlook is adjusted revenues in the range of $790,000,000 to $1,840,000,000 adjusted EBITDA of $790,000,000 to $825,000,000 adjusted diluted EPS of $0.74 to $0.79 and adjusted free cash flow of $450,000,000 to $500,000,000 Once we close the acquisition in this year's third quarter, we will provide you our updated 2021 outlook, including the great addition of ProQuest. Before we open up to questions, I want to express my deep, deep gratitude to my colleagues at Clarabate and our soon to be colleagues at ProQuest for all the great work that went into putting this transaction together. And to both companies' colleagues around the world who continue to deliver outstanding performances, especially over this past year in these very unusual times.
I thank you all for your time today. We're now ready to take questions. Operator, let's open the line for questions.
Thank you. We will now begin the question and answer session.
Session.
The first question comes from Manav Patnaik with Barclays. Please go ahead.
Thank you. Good morning, guys. I was just hoping you could just help us appreciate the complementary nature of your product offerings and whether that how that creates the revenue synergies that you alluded to in the presentation. I get the cost synergies and the deal rush now, but just trying to understand what the product synergies look like.
Yes. Great question, Manav. I'm going have Mukhtar fix that up, and then we'll go from there. But great question.
Great. Thank you, Gerry. Yes, the way to look at this is with a combined portfolio, what we're able to do is really serve the entire research value chain. So the entire continuum from early stage research that can typically occur in an undergraduate or high school setting all the way through to research that's conducted in a postgraduate setting and all the way through to corporate. And what this brings is a wonderful platform for the distribution of information, highly enriching set of content that ultimately we can take to just different personas and users that are involved in research.
Not just the end researchers, but those that sponsor research, the practitioners of research and really those that are vested in the outcomes associated with research. So this combined portfolio brings enhanced software, it brings additional content and data assets And it really, really enhances that experience for our customer communities.
And Andy, just to pick up a bit from your view. Just quick background. Andy and I met once in person, actually in my dining room here in Scottsdale for six hours. When we left, we knew the opportunity was bigger than perhaps the best I've ever seen. And one of the reasons is that Andy and his team, led by great people, were on in the pursuit of significant year over year organic increase with all they've done.
So Andy, just share your views of how this plays.
Yes. Thanks, Gerry. Look, I think it's a great combination on the product side as we think about just a really complementary fit against the particularly on the content side, putting the ProQuest content collection alongside the Web of Science franchise is a very complementary fit. And obviously, the software business that we have, which is driving meaningful growth for us, is a place where we would look to leverage down the road and particularly some of the things we're doing that we're both doing on a complementary basis around research management is going to be an area of opportunity down the road.
Thanks, Andy. Just for quick color, Uttar, just to add some of the pleasant surprises like the life science piece of ProQuest too.
Yes, yes, absolutely. I mean, naturally, the natural observation is that this provides a lot of strength in academia. But I think what we've also, I guess, found out during our discussions is some of the content and there are some specific tools in the ProQuest portfolio that make that really are additive to our life sciences portfolio, and particularly in corporate research in the area of pharmacovigilance and some other areas of search around drug discovery that we think will be really, really interesting for us moving forward.
And I'd just add, Manav, great question. ProQuest is off to an outstanding start as will we in the first quarter. They grew at 7.7% organic constant currency growth, excluding that small print business. So it's a great start and we look forward to accomplishing everything we said we were going to do and this just enhances it a lot. Thanks.
Next question please.
The next question comes from Hamzah Mazari with Jefferies. Please go ahead.
Hi, this is Mario Cortellacci filling in for Hamzah. I was just hoping you can give us a sense for what the organic growth rate for ProQuest and what that looked like, especially, I guess, prior downturns. Gerry, you just mentioned that they got off to a great start, I guess, 7.7% in the first quarter. But what does that look like historically? And maybe you can give us an outlook for what that organic growth looks like ex revenue synergies.
Is it should we expect that high single digit growth rate even as we lap 2020 with potentially some headwinds? Just any color around what we should expect from this business, again, ex revenue synergies and with the revenue synergies kind of being additive to that longer term?
Yes. No, great question. Andy, just give a quick background of how well you performed during the downturns, and then I'll pick up the rest of the question. Just as a reminder, the Classic Clarivate business also always performed well during downturns as did DRG and CPA. But Andy, please.
Yes. So thanks for the question. At ProQuest, during the last cycle, we had our downtime, and this was before we owned the software business, which is a higher growth and stickier profile probably. In 2010 was our down year following the financial crisis, and the business was down 1% at that time, and that was really because we had bought something that was declining. So it held up very well through the financial cycle.
Thanks, Andy. And I just pick up on it and because this is what's so exciting for us. We expect to deliver, as I said, as we exit 2021 to be at the upper end of the 68% that we said we thought we would in the business prior to the acquisition and closure of ProQuest. We'll give you full guidance the day we can announce the closure the agreement with ProQuest and what we've laid out. And I have great confidence in Andy and his team and Uttar and our team and the ability to carry forward all in, certainly the kind of numbers that we've talked about consistently inside of Clarivate for years to come.
A lot more to come on that in 2021 when we close the deal. Thanks very much. Next question?
The next question comes from Andrew Nicholas with William Blair. Please go ahead.
Hi, good morning. Thank you. I was hoping you could spend a bit more time talking about the software solutions. I know you've mentioned a couple of different times that it's faster growing. If there's any growth rate that you could put on that, that would be helpful.
And maybe some use cases for Alma and Rialto and Vega, some of the bigger products. What does that look like within these academic institutions? And yes, just to help us get a sense for exactly what it is that these products do. Thank you.
That's a great question. That's what makes this so exciting. I'll have Lutzar start with the view that we looked at and then Andy pick up with a couple of examples because the day Andy and I spent by the way, it was the only time any of us were together physically during this whole deal. And I'm just proud of everybody. But when he left that day, and I called Mukhtar and Richard, and I said, Alma is a winner at Grand Slam home run.
Mukhtar?
Sure. Probably the way to look at the ProQuest portfolio and the software products is probably three categorizations of what I call kind of use cases or end user experiences. If you look at Alma, that represents what is essentially information management and workflow. And really think of that as really being kind of the distribution infrastructure for getting the right information and content to the right user. That's probably the best way you're looking at that.
And so that's one. Then the second way of looking at the portfolio of ProQuest products, I'm sure Andy will add to this is think of it in the context of search, research and discovery. And that's where Exploro, Pivot and other products fall into that category. And so that's really about the search experience. It's about identifying the right information and finding the means to get to that information.
And then the third area is really around engagement and particularly student engagement, which we think is extremely powerful here. So actually engaging with the end users, actually being part of the end user experience, particularly students that start that journey of learning in the K-twelve setting, carry that through into colleges, carry that through universities, and ultimately into their professional lives. So that journey of learning, of knowledge acquisition is such a strong area for ProQuest. And going back to what I said earlier is once you bring in our Clarivate offerings and we look at how to automate that innovation cycle, really empowering researchers with best in class analytics and data and really driving that research, the outcomes proposition. That union of software data and expertise, remember, we know what we're also bringing is advisory and consulting expertise to the table.
We think that union will really help us go deeper into our core markets.
Thanks, Mukher. Andy, a couple of examples because it's a great question.
Sure. I think at a high level, the way to think about the software business is we're making these institutions, particularly college campuses and how they manage and discover all of their research material, we're trying to make them more efficient and the lives of the professionals easier. And so Alma is really the cornerstone of that. It's essentially the ERP system of the library. And on top of that, we've built a lot of workflow solutions that really help simplify the process and the workflow of the professionals on campus.
So Rialto is a good example. It's really an innovation in how book purchasing and material purchasing is being done on campuses. It's built into the Alma platform, and we expect that to be an exciting product for a while. You mentioned Vega. Vega is basically a similar ERP system now driven at the public library market on the back of an acquisition we did just last year of innovative.
And we'll continue to roll out innovative and disruptive workflow solutions, things like Leganto, which is a teaching and learning application that goes into the classroom and Exploro, which makes research management simpler. And all of those are things that have touch points with Clarivate as well.
Thanks, Andy, and great question. It's one of the exciting things, very exciting about this. Some of you may know over the years as a public CEO, I've led 100% software businesses like Legion. This is an incredible addition to what we've laid out to do. So very excited.
Thank you. Next question.
The next question comes from Toni Kaplan with Morgan Stanley. Please go ahead.
Thank you. Just a couple of housekeeping questions. Just wanted to understand how you're thinking about the debt to equity split. Was that in order to achieve the 4.5 times leverage at close? And also, you share what the breakup fee is?
Thank you.
There is no breakup fee. That's not something I've ever done, Tony, and we don't need one like that because that's a great question. Thanks. But most important, we said publicly for a long time that the two bookends of any large acquisition, one, we would not exceed the 4.5x trailing debt ratio. This puts us at that on closing.
As I said, we'll be below 3.5% as we exit 2022 at or below that. That puts us on a really exciting basis for all of us. It will be $1,000,000,000 plus free cash flow year after year, giving us the opportunity to reduce debt, make acquisitions and eventually, if it makes sense, from a shareholder return to buy back shares. So really critical. The other end of the book end is that we won't do an acquisition that two things.
I think you all know and you should know, we don't do anything that is out for bid. And in this case, it was an exclusive agreement with ProQuest and Clarivate as our others have been. And part of that was we must have a double digit adjusted EPS accretion within the first year. As I said this morning, that will be a fact at the end of twenty twenty two. And at the end of twenty twenty three, we'll be well north of 15% adjusted my personal estimate, adjusted accretion and EPS.
So those are the two book ins. And more to comment the details of the exact timing and the balance that we plan with the new equity offering. Thanks, Tony. Great question. Next question, please.
The next question comes from Zach Cummins with B. Riley Securities. Please go ahead.
Yes, good morning. Thanks for taking my questions. Jerry, can
you give us a little
more of a sense of the customer overlap? I know it materially expands the kind of available customer opportunity. So just trying to get a sense of the current overlap across both of the businesses and how this plays into the cross selling opportunity?
Yes, I'll start a great question. I'll have Mukher pick up on it. The thing that strikes me is so exciting, Andy talked about it, Mukhtar has, we now are the first company in history that can touch and help every student and every from K through doctor's degrees and in every country around the world and help them be better at what they do. So the overlap is incredibly good. What's more important to me is the overlap is there is no product overlap.
It's 100% complementary, just so exciting to see that. But Muttar picked up because it's a great question.
Yes, absolutely. I mean, mean, as Jerry says, there's certainly customer logo overlap, but there's a lot of white space into those accounts where we can most certainly upsell and certainly cross sell the offerings, Not just things like Web of Science, but there's a real opportunity here for us to also take our IP portfolio, to take our life sciences and research portfolio under the Research Cloud into some of the accounts and markets that ProQuest operate in and vice versa. Also in terms of some of the segments and if we look at some of the verticals that we operate in Clarivate we're pretty deep in the government sector. We also have a strong foothold in the corporate sectors. We have strength in certain geographical sectors that we think we can certainly leverage here to certainly grow the ProQuest offerings.
And vice versa, there's an opportunity, as I said earlier, to take some of the Clarivate offerings into education and early stage research. And we think that's a huge opportunity here through that student engagement and really being part of that student journey from a very early stage.
It's a great question. Just want to add a couple of things to that. As you know, with the one Clarivate effort we have underway to have all of our after we get the inside sales all done, which we will do once we close with ProQuest too, where we've got 80 plus percent of the customers being handled every day at three global business centers around the world, we'll then be very focused on five global vertical markets. One, which happens to be, as Andy talked about, and Luc Tar did, it's a $33,000,000,000 market, growing at about 7%, which is academic and government. We'll be $1,300,000,000 and by far the leader there.
So that's a huge opportunity for us. Much of what we will bring together to customers, they've never had the ability to see and receive before. And what I always think through is how do we help our customers help their customers. That software that Andy and Mukhtar talked about, complemented by the amazing amount of information we'll provide, allows them to do things they've never done before. The other thing I'd say on this because it's so important, I've done acquisitions, I think two twenty, Cliff and I've done 75, 80 together.
There's none that's ever been more complementary. And if you just step back, on May 1439, we went public. We laid out two big steps. One was to move into two groups, which we did and just done a wonderful job by all of our team, one was science and one was IP. We've laid out an effort to become a world leader in life science and took a huge step forward with acquiring DRG.
We laid out to be the leader in intellectual property, and we're so pleased last year to be able to acquire CPA. So we're now $1,000,000,000 business that helps our customers in ways nobody's ever thought about with intellectual property. And now with this amazing addition of ProQuest, we're a $1,300,000,000 business in the government and academic area. So think about us focused with great customer solutions in those five global markets with an opportunity to grow better than anything I've ever been part of. That's what's exciting.
So today, as we move forward, I just couldn't be prouder of what's been accomplished. I'm so thankful for the entire team at ProQuest and delighted with the amazing effort that Clarivate members have added day after day after day. So it's a great situation for us. We'll give amazing returns to our shareowners. I believe, operator, there are no other questions.
If you could confirm that.
I confirm that. So I'd like to turn the call back over to you for any closing remarks.
Thanks. My closing remarks is great job by everybody. Couldn't be more excited. Lots more to come. Very, very thankful to add world class colleagues from around the world.
Think of us as a global solution company to five amazingly exciting vertical markets around the world with the world's best set of colleagues. Thanks, everybody. Bye bye.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.