Description

Clarivate was originally written up by Jumbos02 in 2021. I encourage readers to first read that idea and the messages as they include important discussion of the business and the key debates/concerns since then.

Introduction

Investors love the playbook of information services companies: mission-critical products with limited competition, pricing power and high single-digit organic growth, high and improving margins, healthy leverage, and capital return. To these investors, Clarivate is the runt of the litter. The company has low single-digit organic growth, faces concerns around its capital structure, and pays no common dividend. As a result, the stock has been sold off, the valuation has plummeted, and the price is not right.

Business Overview

Clarivate is a global information services company that curates and provides mission-critical enriched data, analytics/insights, workflow software, and expert services to organizations. The company serves the Academia & Government (“A&G”), Intellectual Property (“IP”), and Life Sciences and Healthcare (“LS&H”) markets, Clarivate’s three revenue segments. The company makes subscription revenues from annual contracts. They also make re-occurring revenues from the IP maintenance subsegment (patent and trademark renewals). Transactional revenues are derived from content sales, consulting engagements, and other services. In 2023, subscription, re-occurring, and transactional revenues made up 61.6%, 16.9%, and 21.5% of revenue. 53% of revenue came from the Americas, 27% from EMEA, and 20% from APAC. As of 1Q24, annual renewal rates were 93%, up from 91% in 2022 and 2021.

Clarivate was originally the Intellectual Property & Science business of Thomson Reuters, an information services company. In 2016, Thomson Reuters sold this business to the Onex Corporation and Baring Private Equity Asia for $3.55B in cash. In 2019, Clarivate went public by merging with Churchill Capital, a special purpose acquisition company. The merger implied an enterprise value of $4.2B, 14.3x 2019 adjusted EBITDA. Currently, Clarivate has a market cap of $3.79B and net debt of $4.26B for enterprise value of $8.05B, 7.4x 2025 EBITDA.

Academia & Government (50.3% of 2023 Revenue)

The company offers research and analytics, content aggregation, and workflow software to academic and governmental institutions. Clarivate’s curated information set has 7B+ digital pages, 2.4B+ bibliographic records, 2B+ citations, 245M+ journal articles, 5M+ dissertations, and 1.8M+ E-books. The company has also been integrating AI and large language models to streamline customer research and ensure standards in their products. The collection and curation of essential data and research is a time-intensive and costly process for any single institution to do. Clarivate solves this problem through the following products.

Research and Analytics: Web of Science

Eugene Garfield, known as one of the founders of bibliometrics and scientometrics, advanced the indexing and distribution of scientific and scholarly research with his Institute of Scientific Information (“ISI”). The Thomson Corporation acquired ISI in 1992 and launched the Web of Science, incorporating ISI’s solutions, in 1997. Customers can analyze and manage research through Web of Science. The product allows users to locate the most important research on given subjects. The Web of Science faces some competition from Scopus; however, the Web of Science is superior in the amount of information as well as its date range. Thomson and Reuters merged to form Thomson Reuters in 2008. In 2009, Thomson Reuters launched InCites, an analytical tool to evaluate the performance and impact of research, within the Web of Science. In 2016, Thomson Reuters sold the former ISI within the sale of their Intellectual Property & Science business to Onex and Baring Private Equity Asia. Clarivate has 930+ curation and editorial staff who review research for quality and standardize research for ease of searchability. Universities, libraries, research institutions, governments, etc, recurringly subscribe to the Web of Science to explore, analyze, and evaluate curated research. According to the National Center for Science and Engineering Statistics, global R&D expenditures grew from $726B in 2000 to $2.4T in 2019, a 6.5% CAGR, with the majority of growth coming the US and China.

Content Aggregation: ProQuest

In 2021, Clarivate acquired ProQuest One for $5.3B ($4B in cash and $1.3B in equity; includes pay down of ProQuest debt), 15.1x pro-forma EBITDA ($250M 2020 EBITDA, $100M run-rate cost synergies). The transaction also targeted $65M in annual cash tax savings. Upon acquisition, the former chairman of ProQuest, Andrew Snyder, became the vice chairman of Clarivate and then Chairman in 2022 when former CEO and chairman Jerre Stead retired. ProQuest is a data, analytics, and software provider to academic, corporate, and research institutions. ProQuest provides curated journals, E-books, primary sources, dissertations, news, and media, as well as workflow solutions. The majority of revenues come from the higher education industry, including all the top 50 universities in the world. Upon acquisition, ProQuest had a 100% retention rate with its top 2.5k recurring customers, 25k+ total customers, and recurring revenue making up 92% of revenue. The acquisition resulted in Clarivate having the world’s largest curated collection of research. It also expanded Clarivate’s reach into higher education and library markets and strengthened the company’s ability to cross-sell. Just like the Web of Science, academic, research, and government institutions recurringly subscribe to ProQuest’s solutions.

Workflow Software: Alma and Polaris

The ProQuest acquisition also gave Clarivate Alma and Polaris. These two products allow A&G institutions to manage content with workflow software. They are an end-to-end library software system. Alma faces little competition as similar platforms have an insignificant number of installations compared to Alma.

Intellectual Property (32.8% of 2023 Revenue)

Clarivate helps organizations establish, protect, and manage critical IP assets through data, software, and expertise. The company provides IP Maintenance, IP Intelligence, and IP Management. Clarivate’s curated information set includes 150M+ patent documents, 26k unique classifications of structured patent insights, 140M+ trademark records, and 9M+ IP law cases. The company has also incorporated generative AI to automate brainstorming and analysis of new brand names based on customer criteria. The only identifiable competitor is Questel which has an insignificant amount of information compared to Clarivate.

IP Maintenance: Patent and Trademark Renewals

Clarivate helps customers safeguard IP rights, analyze their portfolios, and streamline the renewal process. In 2020, Clarivate acquired CPA Global, an IP solutions provider, for $6.8B, ~26x EBITDA ($262M 2019 EBITDA). Upon acquisition, CPA Global had 97% customer retention, ~12k total customers, and recurring revenue making up 90%+ of revenue. The acquisition gave Clarivate products for automated IP procession, renewals, filing, and prosecution, as well as workflow software and IP analytics. IP maintenance involves filings and fees for trademark and patent renewals that take time and can be costly. Clarivate’s solution takes care of this for organizations, so they focus their time and efforts elsewhere. As a result, customers recurring subscribe to Clarivate’s Patent and Trademark Renewals service.

IP Intelligence: CompuMark and Derwent

Clarivate helps organizations make decisions about IP protection, risk, and creation. The company provides a Trademark Searching tool for customers to screen new patents on. These customers will also use CompuMark which provides them with a curated “Full Search” report to evaluate the availability of the proposed trademark. CompuMark also has a Trademark Watching service that continuously monitors if trademarks are being infringed upon. Derwent provides customers with a database of patents. Customers can explore the database and, for example, evaluate the novelty of a newly proposed patent. As customers increasingly develop IP and pursue new trademarks and patents, they will use Clarivate’s IP intelligence solutions.

IP Management: IPFolio and Foundation IP

Clarivate provides customers with a structured environment for protection and management of IP assets. IPFolio is an end-to-end IP lifecycle management cloud-based solution that allows customers to manage their IP assets in a centralized environment. It helps with mitigating manual tasks with automation, analytical insights for better IP decisions, and collaboration with all parties such as inventors, legal counsel, and other stakeholders. The acquisition of CPA Global also gave Clarivate Foundation IP, an IP lifecycle management cloud-based solution for law firms. It helps law firms automate manual tasks, provide insights for better client work, and manage client IP portfolios in one place. Customers working with IP portfolios will recurringly subscribe to Clarivate’s IP management solutions.

Life Sciences & Healthcare (16.8% of 2023 Revenue)

The company provides intelligence solutions, data, and technology for life sciences and healthcare customers. Specifically, their solutions are tailored towards R&D, regulatory and safety, and commercialization solutions. Clarivate’s LS&H curated information set includes 48B+ patient claims & HER records as well as proprietary disease insights covering 200+ diseases and biomarkers across 45+ countries and 3.5k+ patient segments. The company has also integrated AI and machine learning to better predict clinical trial performance, regulatory approvals, and valuations on M&A.

R&D: Cortellis Competitive Intelligence and Cortellis Drug Discovery Intelligence

Clarivate’s R&D solutions helps customers with the development of new drugs and medical devices throughout the development lifecycle. Cortellis Competitive Intelligence helps customers monitor competition with a broad and deep set of drug pipeline data, allowing customers to maximize returns on investment. Cortellis Drug Discovery Intelligence provides multi-source biological, chemical, and pharmacological indexed data to help customers avoid unnecessary costs, develop hypotheses for new drugs, and predict success. All the top 30 pharmaceutical companies and hundreds of research organizations use Cortellis. Drug and medical devices developers will recurringly use Clarivate’s R&D solutions.

Regulatory and Safety: Cortellis Regulatory Intelligence and OFF-X

Clarivate provides solutions that help customers monitor drug safety and adhere to the latest regulations. Cortellis Regulatory Intelligence is a comprehensive database that covers all regulatory functions across the drug and medical device development lifecycle. It allows customers to monitor regulator changes, maintain compliance, navigate regional differences, and make new submissions more efficient. OFF-X is a translational safety intelligence portal that helps customers monitor and anticipate safety issues. Safety problems can disrupt R&D and create costly failures. OFF-X makes sure developers are always on top of potential disruptions with preclinical toxicity and clinical adverse event intelligence. Drug and medical devices developers will recurringly use Clarivate’s regulatory and safety solutions.

Commercialization: Real World Data and Optimize

Clarivate provides solutions that inform customers’ commercial launch strategies. In 2020, Clarivate acquired Decision Resources Group (“DRG”), a provider of data and analytics to the healthcare industry, for $950M (financed with debt and equity). DRG focused on commercialization solutions such as market evaluation, brand tracking, pricing, and marketing. The acquisition allowed for synergies and cross-selling with Clarivate’s existing LS&H products, such as Cortellis which were more focused on pre-clinical and clinical stages of the development process, for an end-to-end solution. Real-World Data includes patient population and addressable market data, drug adoption data, etc, which allows developers to forecast and validate their investments. Optimize helps customers analyze markets and strategically target payers, providers, and patients. Customers consistently commercializing new drugs and medical devices will recurringly use Clarivate’s commercialization solutions.

Competition

There is no single competitor that offers the breadth and depth of Clarivate’s portfolio of solutions. Clarivate’s moat is a result of the curated nature of its data. The company has >950 scientists with advanced degrees that focus on content curation and editing to provide customers with easily searchable and comprehensible data and analytics. This process is very time-consuming and expensive for any single entity to execute and creates a barrier to entry for competitors.

Financials

In 2023, Clarivate had revenue of $2.63B and adjusted EBITDA of $1.12B for a margin of 42.5%. The company total debt of $4.64B and cash of $381M for net debt of $4.26B. Clarivate had $1.39B in 5.25% series A mandatory convertible preferred shares (14.4M shares). On June 3, 2024, all the shares were converted into common stock (3.8462 common shares per preferred share) and the preferred holders received a final cash dividend of $1.3125 per share. Any share price calculations in this report include dilution from the converted shares and stock-based compensation.

Returns on Capital

From 2019-2023, returns on invested capital ranged from 4-9%. The company has a book value of equity of $5.89B and total debt of $4.64B for total capital of $10.53B. This represents a debt/capital of 44.1%. Considering future debt paydowns, I see returns on invested capital increasing to >11%. This does not consider any future dividends or share repurchases which could increase returns on capital.

Employees

Clarivate has >12k employees in 42 countries. 36% work in the IP segment, 28% in A&G, 18% in LS&H, and 18% in corporate. 49% are in APAC, 27% in EMEA, and 24% in the Americas.

Management

As of July 2022, Clarivate’s CEO is Jonathan Gear. He was formally the CFO of IHS Markit, an information services company, and oversaw the sale to S&P Global which formed one of the largest information services companies. He has >20 years of leadership experience in information services through his experience at IHS Markit (formerly IHS pre-merger with Markit). Gear has a target compensation mix of 58% in performance stock units (PSUs), 19% in restricted stock units (RSUs), 14% in an annual incentive plan (AIP; cash incentive), and 9% in base salary. In 2023, Gear’s base salary was $900k with no y/y growth. His AIP includes a target cash incentive at 150% of base salary. 90% of the incentive is tied to pre-bonus adjusted EBITDA performance and the other 10% is tied to voice of customer results. 75% of Gear’s long-term incentives are PSUs and 25% are RSUs. RSUs vest ratably over 3 years. PSUs are tied to adjusted EBITDA margin and adjusted diluted EPS ranges as well as a 3-year TSR modifier relative to the S&P 500. Currently, Gear has grant value in RSUs of $1.87M and in PSUs of $8.70M.

Information Services Peer Group

The playbook for an information services company is offer mission critical products with limited competition, achieve high single-digit (“HSD”) organic revenue growth with price increases and cross-selling, maintain and improve high EBITDA margins, maintain a healthy capital structure, and return capital to shareholders. As a result, many companies in the group are regarded as high-quality compounders. Clarivate is an outcast. The company has suffered from low single-digit (“LSD”) organic growth, has had a poor balance sheet from financing acquisitions with debt and preferred stock, currently pays no common dividends, and has not meaningfully bought back stock. Although, Clarivate has impressive margins. I model FY-2025 EBITDA margins at 40.8% while the median of the peer group is 27.1%. While Clarivate trades at 7.4x 2025 EBITDA, the median of the peer group is almost double at 15.0x.

Investment Thesis

LSD organic growth with no meaningful volume growth will provide significant upside

Clarivate’s valuation has taken a large hit as the company’s organic growth pales in comparison to the information services peer group. As discussed in the business overview. Clarivate’s portfolio of A&G, IP, and LS&H solutions are mission-critical with high barriers to entry – their products are not going away and there is no evidence to suggest that their subscription products should experience volume decline. The company may not have the same cross-selling ability and new growth areas as other information services companies. But, you do not need to believe that or management’s long-term guidance of 4-6% organic growth to get upside. I model 3% organic growth for subscription revenues going forward which will mostly come from annual price increases. I model transactional revenues declining at -1% organically and re-occurring revenues growing at 1% organically. In total, I see organic revenue growth of ~2%. As transactional revenues slowly decline and subscription grows as a % of revenue, I model a return to 41% EBITDA margins by 2026 and no further margin expansion. For perspective, EBITDA margins ranged from 41.8%-42.6% from 2021-2023. Management’s guidance is ~41.5% for 2024 and 2025 and >42% for 2026 and after.

Balance sheet issues have been addressed and are behind them

Clarivate’s debt and preferred stock has been a concern for the company’s common shareholders and is another reason for the valuation divergence. As of year-end 2023, Clarivate had a term loan facility maturing in 2026 with an effective interest rate of 8.470% and carrying value of $2.20B. The company refinanced and extended the maturity to 2031. The term loan facility now has an effective interest rate of 8.077% and carrying value of $2.15B. Clarivate currently has total debt of $4.64B with a weighted average interest rate of ~6.2%. Considering conservative earnings projections, the company can safely cover interest payments and pay down its debt. The company had $1.39B in 5.25% mandatory convertible preferred shares (14.4M shares) which discomforted investors because of the dividend and impending dilution. On June 3, 2024, all the shares converted into common stock (3.8462 common shares per preferred share, ~55.4 shares) and the preferred holders received their final quarterly cash dividend of $1.3125 per share ($18.90M). Dilution is behind the company, and I calculate implied share prices using the new diluted share count. Investors could also significantly appreciate a commencement of a common dividend or meaningful share repurchases. The company currently has $400M available in the share repurchase program which is valid through December 31, 2024.

Valuation

In my base case DCF valuation, I see upside of ~70% ($9.65 per share) using an 8% WACC and 0% terminal growth rate which implies a 2034 exit EV/EBITDA of 9x. Even assuming a terminal growth rate of -2%, there is still an upside of 43.6%. From a multiples standpoint, a 70% upside would imply 11x 2025 EBITDA and ~14x 2025 unlevered FCF. As mentioned above, the median of the information services peer group is 15.0x 2025 EBITDA and 25.5x 2025 FCF.

Risks

I believe an investment in CLVT is de-risked as the valuation has significantly diverged because of poor organic growth compared to peers and balance sheet issues. To get downside, the company’s subscription solutions would need to experience real volume declines which is unreasonable given the mission-critical nature of its offerings and limited competition. Management is focused on paying down debt and preferred stock concerns are behind them. Even if the stock does not experience a re-rating, there is still the 10% unlevered FCF yield based on 2025 numbers.

Summary

Clarivate has been mischaracterized as a low organic growth, bad balance sheet information service company. When you separate the company from the information service sphere and look at the asset itself, its free cash flows offer significant upside. LSD organic growth mostly coming from price increases and margin maintenance itself will produce upside. The company has refinanced its debt, is focused on debt paydown, and preferred stock has already converted. Clarivate offers a rare risk/reward of little downside and potential for 70% appreciation.

Catalyst

LSD subscription organic growth

Share repurchases

Potential common dividend