CLARIVATE PLC
NYSE:CLVT
Earnings Call Analysis
Q4-2023 Analysis
CLARIVATE PLC
Clarivate's CEO has acknowledged 2023 as a pivotal year for the company, marking a period of substantial transformation aimed at creating a robust foundation for future expansion. Notably, the macroeconomic headwinds have had an impact, causing organic growth to trail initial expectations. Despite this, the groundwork laid out in 2023, particularly the alterations to the organizational structure and substantial investments in product innovation, signals a commitment to an upward trajectory into 2024 and 2025. As a result, the company's plans to stimulate mid-single-digit organic growth by 2026 remain intact, albeit delayed by one year due to the challenging macro environment and strategic adjustments, particularly in the Life Sciences & Healthcare segment.
Clarivate has transitioned from a functionally aligned operating model to a segment-focused framework, dividing into Academia & Government, Intellectual Property, and Life Sciences & Healthcare. This shift is designed to enhance customer intimacy and accelerate innovation. New seasoned leaders have been appointed to preside over each segment, suggesting that Clarivate is reinforcing its upper management with industry experts to foster accountability and operational efficiency.
Acknowledging past underinvestment in flagship products, Clarivate embarked on an aggressive capital investment increase of approximately $40 million or 20% year-on-year, aimed at reigniting product portfolios across all segments. Early signs suggest these investments are paying dividends, as exemplified by the renewed growth in the Web of Science platform and imminent new product launches, such as the revamped IP intelligence platform and strategy pivot in Life Sciences & Healthcare. For investors, the focus on product innovation is pivotal, as the success of these investments is seen as critical for sustaining future growth.
Despite the challenging environment, Clarivate reported organic subscription revenue growth of over 2% in 2023, achieving a record renewal rate of 92% and the highest free cash flow to date, totaling more than $500 million. The leverage ratio has been reduced to below 4x owing to aggressive debt repayment. Looking ahead, the company expects approximately $400 million in cash for deleveraging in 2024, maintaining a pragmatic approach to capital allocation.
Clarivate disclosed a modest revenue increase for Q4 2023 and projected a slight organic growth for 2024, focusing on key areas such as subscription file growth and cost management to maintain healthy margins. The full-year 2024 revenue is anticipated to hover around $2.62 billion, with adjusted EBITDA margins around 41.5% at the midpoint. Adjusted diluted EPS is expected to decrease slightly, and the anticipated free cash flow for the year is forecasted between $420 million and $500 million. The company intends to prioritize debt prepayment and is working towards a long-term net leverage target of about 3x.
The company's strategy includes shedding non-core, low-growth assets to refine its focus on innovative products. In the upcoming period, Clarivate plans significant product launches tailored towards high-growth areas. Within the Academia & Government sector, the aim is to attain mid-single-digit growth through the Web of Science platform by expanding functionality and content. The Life Sciences & Healthcare segment is gearing up to introduce a new pharma-grade real-world data product, aligning with specific therapeutic areas. Meanwhile, in the Intellectual Property arena, upcoming enhanced solutions for the Patent Intelligence subsegment are expected to generate substantial monthly active user growth. All these ventures are forecasted to progressively boost organic growth, with an overall target of reaching a 4% to 6% range by 2026.
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Hello, all, and welcome to Clarivate's Fourth Quarter and Full Year 2023 Earnings Call. My name is Lydia, and I will be your operator today. [Operator Instructions]
I'll now hand you over to Mark Donohue, Head of Investor Relations, to begin.
Thank you, Lydia. Good morning, everyone. Thank you for joining us for the Clarivate Fourth Quarter and Full Year 2023 Earnings Conference Call. As a reminder, this conference call is being recorded and webcast and is copyrighted property of Clarivate. Any rebroadcast of this information in whole or in part without prior consent of Clarivate is prohibited, and accompanying earnings call presentation is available in the Investor Relations section of the company's website, clarivate.com.
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. Clarivate believes non-GAAP results are useful in order to enhance an understanding of our ongoing operating performance, but they are 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.
With me today are Jonathan Gear, Chief Executive Officer; and Jonathan Collins, Chief Financial Officer. Both will be available to take your questions at the conclusion of the prepared remarks. After our prepared remarks, we'll open the call.
With that, it's a pleasure to turn the call over to Jonathan Gear.
Great. Thank you, Mark. Good morning, everyone, and thanks for joining us today. As I begin my second full financial year as CEO of Clarivate, I would like to provide an update on our turnaround journey, including the timing and actions required in the years ahead. 2023 was a critical year for Clarivate as we executed significant changes. These changes allowed us to set the foundation for future growth. I will cover some of these changes on the next slide. It also was a year where we were impacted by macro pressures that, to varying levels, impacted each of our segments and contributed to lower organic growth than originally expected. Nonetheless, these changes were required to set us up for the next phase of Clarivate where we innovate for growth.
Beginning on prior investments and changes, we expect to see continued progress in Academia & Government and new success in our focus areas in Intellectual Property and Life Sciences & Healthcare. This will accelerate in 2024 into 2025. We expect new product introduction to lead to increased renewal rates, new sales, better ability to capture pricing and drive revenue growth. I now fully expect us to exit 2025 positioned to drive value as we couple mid-single-digit organic growth with our scaled business model, to accelerate our ability to be a cash generation machine for investors.
I should acknowledge that this revised outlook is a year longer than the plan we set forth at Investor Day last year. The macro environment hampered us in 2023, and we pivoted our strategy in Life Sciences & Healthcare under a new leader. Nonetheless, with 1 year under my belt and the changes complete, I am more confident than ever in the potential for Clarivate's success and growth. 2023 was a foundational year for Clarivate. It was a year where we drove significant changes in 3 areas to position us for growth. Prior to 2023, our operating model was primarily aligned by function, and this allowed us to rapidly realize cost synergies from the 3 large acquisitions completed over the prior few years. However, there were trade-offs, namely less accountability and a fragmented key account management strategy. I recognize that we needed to drive more accountability and build a more effective way of operating closer to our customers.
From this view, we created our segment operating model to tighten our customer focus, accelerate decision-making and bring innovations to market faster. The result was an organizational alignment into 3 segments: Academia & Government, Intellectual Property and Life Sciences & Healthcare. In May 2023, I appointed presidents to lead each segment. I hired 2 external industry leaders, Bar Veinstein, to run Academia & Government and Henry Levy to run Life Sciences & Healthcare. I reassigned Gordon Samson from his role as Chief Product Officer to run the IP segment, an industry in which he's had nearly a decade of experience. With new experienced leadership in place that has full accountability for their respective segment P&Ls, including sales, go-to-market, product leadership, technology and operations we are in a better position to drive improved performance across the organization.
At our Investor Day, we highlighted the lack of investment in flagship products and innovation over several years, which we needed to reverse. We commenced a significant level of investment and executed against a roadmap to reinvigorate our portfolio. This includes creating new products, enhancing existing solutions and accelerating the use of artificial intelligence to move faster, be more agile and bring solutions to market more quickly.
Starting in 2023, we increased our annual capital investment by around $40 million, an increase of around 20% to propel product innovation across all segments. We are seeing early evidence that these investments are paying off.
The reinvigoration of Web of Science, where we made the earliest investments, is our first example as that platform has returned to growth with further growth acceleration expected. Patent Intelligence Services and IP is our second example. We hired a new product team in late 2022. They engaged deeply with our customers in the first half of 2023 and began executing against a roadmap to; reinvigorate this platform. We plan to take it to market in the first half of 2024 and look forward to sharing KPIs with you in future calls.
In Life Sciences & Healthcare, we made a major pivot on our real-world data platform after the arrival of Henry Levy. We invested in a new focused strategy in the second half of 2023 and expect to share initial customer wins later in the year. Finally, and related to our new org structure, we renewed a focus on aligning with our customers and supporting their success.
On myself, hosted nearly 100 customer meetings in 2023 and learned what we're doing well and what we can do better. As a result, we realigned our customer-facing teams, including sales, marketing, customer care with the product teams, ensuring our differentiated industry expertise is front and center in every customer interaction.
With the foundation now built, over the next 2 years we will focus on specific organizational and segment priorities to improve organic growth to a low single-digit range. First, with our organizational wide priorities, with our segment model now in place for a year, we are better equipped to drive excellence across Clarivate to build a winning culture, focused on innovation, customer centricity and accountability.
We will continue to pursue operational efficiencies, including utilizing AI and its many benefits to further enhance productivity. This will help us maintain and improve our operating margins while still investing in innovation. It will also help us generate even stronger cash flow to reduce our leverage to the low 3x range.
Finally, we are actively evaluating opportunities to prune the portfolio of smaller dilutive products. This will sharpen our focus on core growth markets and generate cash to reinvest in our business and reduce our debt.
Moving on to our segment priorities. Our prior year investments in the Web of Science have delivered improved usage and renewal rates. With additional product innovation, we are targeting enhanced performance across content aggregation within the A&G segment. In addition, we continue to pursue advancements in AI as well as in business development opportunities such as acquisitions -- sorry, our acquisition of Alethea, an AI student engagement solution.
In 2023, our IP segment experienced some of the most challenging economic and budget pressures in years. This has now stabilized and we expect improvements in the second half of 2024 as we lap the prior year comps. Last year, we launched 2 new AI-powered workflow solutions, the Brand Landscape Analyzer and an IP forecast tool. We look forward to launching our new IP intelligence platform this year and extend our current IP management system win rates through service integration with AI-enabled workflows.
Our Life Sciences & Healthcare segment, which has the greatest upside potential, has been our most volatile business over the last 2 years. While this segment also experienced macro headwinds last year, we believe the growth potential far exceeds our other 2 segments. With a change in leadership and the change in our go-to-market strategy it has brought, we are now better positioned to optimize the long-term success of the analytics platform. In addition, on prior earnings calls, we discussed the investments we're making to drive innovation across our Real-World Data platform, supported by generative AI functionality. The increase in capital spending in 2024 is primarily targeted to accelerate innovation within this very important high-growth segment. Each of our presidents looks forward to sharing more details on these growth strategies over a series of upcoming investor webinars. We will be sharing more details on the timing of these events soon.
As we exit this year, we will be well on our way in our transformational journey. Under our updated outlook, we believe we can achieve our mid-single-digit organic growth target in 2026. This is approximately 1 year longer compared to the target we provided last March. We, of course, will continue to look at every opportunity to accelerate this timeline. I'm confident that we have the people, customer relationships, products and solutions to succeed. By achieving a mid-single-digit growth rate, we will be well positioned to deliver margin accretion, stronger cash flows, capital allocation optionality and deliver significant value for our shareholders.
I now want to briefly discuss our 2023 financial results. Even in a challenging growth year, we improved on our underlying financial position. Organic subscription revenue grew more than 2% in 2023, and we achieved record renewal rates of 92%. We generated our highest free cash flow ever at more than $500 million of which $300 million was allocated towards accelerated debt repayment, dropping our leverage ratios below 4x. We also repurchased $100 million of our ordinary shares.
With an improving balance sheet and strong cash generation, we continue to invest in CapEx spending to drive additional product innovation. We will continue to be disciplined in capital allocation and currently expect to use approximately $400 million, primarily for deleveraging in 2024.
I want to thank all of my colleagues for their ongoing dedication and helping Clarivate achieve its full potential. I'm confident that the significant structural and operational changes we made last year have created the path to accelerate and sustain organic revenue growth. I look forward to updating you on the progress in the quarters ahead.
With that, let me now turn the call over to Jonathan Collins, to walk you through our financials.
Thank you, Jonathan. Good morning, everyone. Slide 12 is an overview of last year's fourth quarter and full year financial results compared with the same periods from the prior year. Q4 revenue was $684 million, an increase of $9 million versus 2022, bringing the full year to $2.629 billion, a decrease of $31 million compared to the prior year. The decline was entirely due to the MarkMonitor divestiture and was partially offset by favorable foreign exchange.
The fourth quarter net loss was $863 million due to the noncash goodwill impairment charge related to the legacy businesses in the IP and LS&H segments. This was also the primary driver of the full year net loss of $987 million, which was an improvement of $3 billion over 2022 as this year's noncash goodwill impairment charge was lower than the one recorded in the prior year.
Adjusted diluted EPS, which excludes the impact of onetime items like the impairment, was $0.23 in Q4, a $0.01 improvement over the same period last year. The full year result was $0.82, $0.03 lower than 2022, stemming from the MarkMonitor divestiture.
Operating cash flow was $191 million in the quarter, an increase of $54 million over the prior year's fourth quarter as the working capital timing issue from the third quarter unwound. Full year operating cash flow improved $235 million or 46% over 2022 to nearly $0.75 billion on lower onetime costs and working capital requirements.
Please turn with me now to Page 13 for a closer look at the drivers of the full year top and bottom line changes from the prior year. On our Q3 earnings call, we indicated Q4 organic growth was expected to approach 1%. However, it came in slightly below those expectations, closer to flat. Q4 has historically been the largest transactional sales quarter of the year for our A&G segment and the outcome for this area was modestly lower than not only our expectations, but also the prior year's results. Adjusted EBITDA was right in line with our expectations despite the modestly lower revenue. The full year changes to the top and bottom line were driven by the 4 key factors highlighted on this chart. First, revenue was up $7 million on organic growth of 0.3%. Despite the softer year-end transactional sales, A&G accelerated growth on the back of the Research & Analytics subsegment as we reap the benefits of the investments in the Web of Science product.
Our LS&H segment declined, led by a double-digit drop in transactional revenues due to the challenges with our legacy strategy of selling our real-world data that we discussed in prior calls and is in the process of being addressed.
Finally, our IP business was down slightly in our Patent Intelligence solutions, which is also being reinvigorated in 2024 as well as previously discussed macro-related softness in our patent renewals and trademark services offerings. The adjusted EBITDA impact was negligible as we were able to achieve efficiencies that offset most cost inflation.
Second, inorganic impacts, namely the divestiture of the MarkMonitor business in 2022, lowered revenue $63 million and profit $32 million last year. Third, cost synergies from the ProQuest acquisition contributed $40 million of incremental profit. And not only buoyed profit margins, but we're completely responsible for the expansion over the prior year.
And finally, the foreign exchange translation impact of non-U.S. dollar-denominated subsidiaries increased revenue by $25 million compared to 2022. The profit increase was negligible as transaction gains were lower than the prior year.
Please turn with me now to Page 14 to step through the conversion from adjusted EBITDA to free cash flow at the highest rate we've seen since the IPO in 2019. Free cash flow was $127 million in the fourth quarter, an increase of $36 million over the same period the prior year, bringing the full year amount to more than $0.5 billion, growth of nearly $200 million over 2022, which represented an 18 percentage point improvement in the conversion on adjusted EBITDA. The majority of the improvement, $155 million, was caused by lower onetime costs as we completed the integration of the acquisitions.
Interest payments were up $22 million over the prior year as the impact of base rate increases was partially offset by the lower debt quantum due to the deleveraging in Q4 of 2022 and H1 of 2023. Cash taxes were $21 million lower than the prior year as we recognize the benefit of planning initiatives, jurisdictional mix and the timing of payments.
Working capital was a $5 million source of cash compared to a $73 million the prior year. The timing of payments within our patent renewal business in our IP segment was a meaningful contributor to the year-over-year improvement. Capital expenditures rose $40 million to nearly $0.25 billion or 9% of revenue as we ramped up our investment in product innovation. We used our free cash flow to service our preferred stock with a dividend, prepaid $300 million of term debt and repurchased 14 million shares of our common stock. This balanced capital allocation brought our net leverage ratio to our year-end target of less than 4 turns.
Please move with me now to Slide 15 as we turn the page on 2023 and provide our guidance for 2024. Beginning at the top of the page, we expect organic growth to improve over last year to about 1% at the midpoint of our range. From a segment perspective, we anticipate A&G's growth will continue to improve modestly, LS&H to improve to about flat, and IP to return to low growth. In terms of revenue types, we expect the subscription file will grow between 2% and 3%, in line with last year, reoccurring to grow about 1% and transactional to decline about 2%. It's worth noting that we expect to be off to a slower start in Q1 with a decline of more than 2%.
While we anticipate the subscription file will continue to grow, we're likely to see high single-digit declines in both the reoccurring and transactional order types, driven by tougher comps in our IP segment, namely patent renewal and trademark servicing volumes. We expect organic growth to be modestly positive, excluding these product areas, and our full year guidance predicts positive organic growth for each of the remaining quarters of this year. 1% organic growth for the full year would yield a revenue of about $2.62 billion at the midpoint of the range. Moving down the page, we expect adjusted EBITDA in the range of $1.55 billion to $1.115 billion, resulting in a profit margin of about 41.5% at the midpoint of the range. We anticipate diluted adjusted EPS between $0.70 and $0.80, down $0.07 from last year at the midpoint. The adjusted EBITDA decline, which I'll detail on the next page, will account for about $0.04 and higher D&A from increased capital spending to drive growth will cause $0.03. And finally, at the bottom of the page, we anticipate free cash flow between $420 million and $0.5 billion.
Please turn with me now to Page 16 for a closer look at the full year top and bottom line changes we're expecting compared to last year. Since the benefit of the cost synergies from the ProQuest acquisition are completely embedded in last year's results, the full year change to revenue and adjusted EBITDA this year is driven by 3 key factors. First, organic growth at the midpoint of our guidance range will add about $30 million to the top line but will have no impact on the bottom line, leading to a modestly lower profit margin as we remain committed to investing in product innovation that we believe will accelerate organic growth in coming years. Second, the inorganic impact from selling a small business line in the IP segment will remove some revenue this year compared to last year. We expect the transaction will close this quarter, and we'll deduct about $30 million of revenue and about $15 million of profit this year. As Jonathan highlighted earlier, pruning the portfolio of small growth dilutive products to improve execution is a priority to accelerating our organic growth, and this is another step in this direction.
And finally, we anticipate a $10 million foreign exchange translation headwind on the top line and a slightly higher headwind of $15 million on the bottom line as last year's transaction gains are not expected to recur this year. These changes to adjusted EBITDA account for 3/4 of the change in free cash flow compared to last year, but let's turn to Page 17 to step through some of the other items. Onetime costs are expected to continue to decline this year to $40 million, an improvement of $20 million over last year as the ProQuest integration is completely behind us. We do expect cash interest to decrease by about $15 million, caused in part by the debt we prepaid in Q4, the rate benefit from refinancing our Term Loan B earlier this month and the expectation that base rates will fall later this year. Taxes will increase by approximately $15 million due to timing of payments and jurisdictional mix.
We expect the change in working capital this year will be negligible, just as it was last year. And we remain committed to investing in product innovation and plan to raise capital spending by about $20 million, taking it to about 10% of revenue. The net impact of these changes is free cash flow of $460 million at the midpoint of the range.
From a capital allocation perspective, the free cash flow reduction of $40 million will be largely offset by lower dividend payments on our preferred stock. We have 2 more coupon payments to make before they convert to common shares in the second quarter, freeing up an additional $35 million of cash in the second half of the year. As a result, we expect to have $400 million available to prepay debt or repurchase shares just as we did last year. We intend to use most of this to prepay debt and close in, in our long-term net leverage target of about 3 turns.
Please turn with me now to Page 18 for a look at how last year's results and this year's guidance affect the trajectory of our organic growth acceleration in the form of our revised long-term targets. As Jonathan acknowledged at the onset of the call, it's going to take us longer to reach our mid-single-digit organic growth target with a lower starting point than originally anticipated. When we outlined our recovery path at the Investor Day last March, we expected to reach about 6% in 2025, and we now believe it will take us another year to touch this level of growth. We now anticipate making steady progress towards the range of 4% to 6% in 2026.
A key driver of this progression includes modestly pruning small, lower-growth assets that are distracting our team's focus on core product innovation. As a reminder, to reach our market potential in each segment, we must modernize platforms and enhance our solutions in 1 key subsegment in each.
First, we expect to build on last year's momentum in Research & Analytics within A&G, lifting growth to mid-single digits in this category through expanding platform capabilities and breadth of content.
Second, within LS&H, we plan to launch our new pharma-grade real-world data product in H1 and 2 specific therapy area aligned products in H2. Combined with AI-enhanced capabilities in our commercialization products, these investments will drive the growth acceleration in the highest potential business in our portfolio.
And third, we're targeting to deliver 4 enhanced solutions this year in our Patent Intelligence subsegment within IP, built on our unparalleled data that we expect will lead to double-digit monthly active usage growth by the end of this year, setting us up for a meaningful improvement in organic growth in this subsegment next year.
As our organic growth accelerates, we expect profit margins will return to last year's levels over the next few years and will compound to accrete $0.15 of EPS from this year's expectation, lifting free cash flow conversion to 50% over the same time horizon.
Please move with me now to Page 19 to put these long-term targets in the context of the financial objectives that we outlined last year. Our primary aim is to accelerate our organic growth, lifting us from last year's level of essentially flat to mid-single-digit growth in a few years. Our second goal is to maintain durable profit margins as we make the investment to achieve the primary goal. We are committed to providing the resources to drive product innovation in all our businesses and are finding operating efficiencies to fund some of these but are also willing to modestly lower our profit margins in the near term to benefit the long-term health of the enterprise. The third objective we outlined was to significantly improve our free cash flow, which we've done by reaching $0.5 billion last year, but we see room to continue to expand our cash flow conversion to 50% as we improve our top line growth. And finally, we remain committed to allocate our capital in a disciplined manner. We've demonstrated balance in this area by using about 3/4 of last year's available free cash flow to prepay debt, bringing our net leverage below 4 turns and also used about 1/4 of it to repurchase stock. We see a clear path to bringing leverage below 3 turns in the next few years, maintaining a similar balance.
I'd like to use this opportunity to thank my more than 12,000 teammates here at Clarivate for your tireless work to get us to this point and your commitment to executing our plan to help us achieve these objectives. I want to thank all of you for listening in this morning. I'm now going to turn the call back over to Lydia to take your questions. [Operator Instructions] Lydia, please go ahead.
[Operator Instructions] Our first question today comes from Owen Lau of Oppenheimer.
So both, Jonathan, you talked about some of the investments for future growth in 2025 and 2026. Could you please add more color on kind of like which -- what kind of product do you expect to invest into, when do we expect to launch this new product and the return on these investments.
Sure, Owen, will do. This is Jonathan Gear. I'll go ahead and go first. And maybe I'll walk around just through each of the segments to give a complete picture. So as I mentioned in my remarks, Owen, in A&G, that's the segment where we made the earliest innovation investments around Web of Science, and that's where we see the initial returns from that. As we discussed in Q1 of last year, we saw the uptake of renewal rates, and that really was on the back of a complete refresh of that platform. Now that is -- was the beginning of that journey. We continue to invest in Web of Science primarily by creating additional analytic tools to drive value and increase in the workflow of our researchers there. That will drive usage, allow us to capture price and that was priced differentially. We're also seeking ways to expand our pricing model to move into different segments of the market that we typically haven't been able to address with our existing pricing model. All that is to say within A&G, I think the path is the most advanced of the 3 segments in terms of the innovation and the results we're seeing from that. In IT, the biggest area of focus is around our Patent Intelligence and Search Analytics platforms. And that is the group that includes Derwent, Innography, IncoPat and related services around patent search. This is an area, Owen, I think as you know, that we've been underperforming in the past. We've -- the team has done a phenomenal job of getting close to the customers, having customer user groups drive this innovation, and we expect to launch the first 2 of a series of additional new modules in this area in the first half of this year. So we expect that to launch. And then as you know, that -- given our revenue model, these would be subscription products. If we launch it then sales happening more in the second half of the year, the revenue will appear more next year. But we feel very good about the path there. Then in Life Science & Healthcare, I would call out 2 areas. One is the Real-World Data analytics platform. And this is the area which, as you know, we've pivoted substantially middle of last year, where we pulled back on the previous strategy of selling our data to competitors. As I've shared ad nauseam in the past, it was a flawed strategy and we continued to accelerate, exited that as a channel. And at the same time, with Henry's arrival and his industry experience, we've really refocused the investments on that product to create pharma-ready data, which we have largely achieved at this point. So that's largely done. And then we're going to be rolling out some therapeutic areas in the first half of this year. So that's one big area. And then we also -- the other areas about R&D, which is kind of the second element or the second portion of our Life Sciences & Healthcare offerings. And there, we've had incredible content but very, very dated platforms. And we've been investing and refreshing those platforms and adding more analytics to really unlock the value of our underlying data. So all of those are -- again, Web of Science, I would say, is we kind of launched the first phase of it and we continue to improve against it. That will be ongoing improvement. The other 2 areas in both IP and Life Sciences & Healthcare expect some major product launches this year.
Our next question comes from Manav Patnaik of Barclays.
My question is the pruning of the portfolio that you talked about. Can you just help us size how much of the portfolio is up for pruning? And also, just what is the Board's version to doing something bigger? It sounds like you have 3 disconnected segments, Life Sciences is smaller and the most volatile. So why not do something bigger?
Yes. Thanks for the question, Manav. This is Jonathan Collins. I'll touch on the portfolio pruning and let Jonathan take the second part. So the small business that we are exiting in the IP segment that I mentioned in the prepared remarks that we will likely close on in Q1, and then will affect Qs 2 through 4, that's about the size that we're looking at. So the focus here is identifying areas that are growth dilutive and distractive to the teams, to help improve the probability of success in execution and product innovation by focusing the team. So that is about the size. It could be slightly larger, slightly smaller, but there are opportunities in all 3 of our segments to winnow down the areas that we are really focusing on and investing in to drive the organic growth acceleration.
Great. And I'll just -- Manav, this is Jonathan Gear. I'll touch on your second question on kind of a larger move. I mean certainly, the Board and myself are completely aligned that we are here to drive value for shareholders. As I've described in the past with you and others, we certainly see value of these segments being together and the value is being driven by shared content, shared technologies, in particular, around IP and Life Sciences & Healthcare, some shared customers and certainly on the significant cost synergies, we have been able to drive over the last few years, as we brought these 4 large platforms together. That being said, we will always optimize what's in the best situation for our shareholders and for our customers. And to do that right now with the Board has me focused and what I have the team focused is on operating and improving every single segment as we've described.
Our next question comes from Heather Balsky of Bank of America.
This is Heather Balsky. I was hoping you could talk a little bit more about the increase in CapEx spend and the investment spend you're doing? And just help us understand how much of it is Gen AI initiative, how much of it is other investments in the business? And how -- you talked about investing to drive growth, just how we should think about spend over the next few years and how you're thinking about if there's incremental opportunities to invest, just balancing that with the margin growth and cash flow growth?
Yes. Thank you for the question, Heather. So with respect to our CapEx increase, most of that is adding development capacity, which we capitalized at a relatively high rate when we're enhancing and improving products. So maybe I'll just touch on a couple of the areas that Jonathan mentioned a bit ago in the A&G segment. We continue to ramp up the investment in the Web of Science to stay ahead of adding features to the platform and ingesting new mediums of content to make it a great experience. And there certainly is an AI overlay there. All of our businesses are starting to move towards conversational discovery, which is an example of embedding AI in the products. And it certainly comes with a developed effort in all of those areas, Web of Science certainly doing that as well. As we move into Life Sciences, it's a combination of development capacity and some content or data for the real-world data offering. As Jonathan highlighted, we spent a lot of effort in the past couple of quarters building out pharma-grade data and the technology investment there. And then the next step for us is start to build these therapy area platforms or offerings that will take meaningful development efforts. So that's really how we're spending within the Life Sciences segment. And then on the IP side, the 4 new platforms or modules that will be put on top of the Derwent data set for search, for watch, for strategy and for R&D, those applications have pretty meaningful technology developments that will happen over the course of this year and into next year. Just in terms of the time horizon, we indicated last year and the cash flow guidance that we highlighted today, getting to that greater than or about 50% conversion in a couple of years, does contemplate CapEx being at a reasonably steady dollar level over the next few years. As revenue grows, that margin on CapEx should drop a bit, but we do expect that we'll need to continue to make that investment over the next few years.
Our next question comes from Toni Kaplan of Morgan Stanley.
This is Greg Parrish on for Toni. I just wanted to dig into the change since Investor Day in March, I mean, what really drove the difference in the turnaround trajectory that you were targeting? You're ramping up investment here. So is more investment required than you thought back then? Or they're really just macro? Or is the end market more challenged maybe than you thought? If you can kind of help bridge the gap there.
Sure, Greg. And the way I think about it, and I'm curious that you think about, is really 2 different things. First is macro certainly impacted us far more than we were anticipating in 2023, primarily in IP, and we talked about that in our Q2 call. Also in Life Sciences & Healthcare with commercial markets there. Those are the most impacted. And to a lesser degree, with some -- on the margin within A&G with some discretionary transactional items. But primarily, again, in Life Sciences & Healthcare and IP. So macro is part of it. So it ended up impacting kind of our starting point, if you will, on the 3-year plan. And the other element of it really was around as we brought in more -- brought back in more industry expertise back into the business, as we reestablished some of the teams that we've had before, we began to slightly modify and change some of our go-to-market product strategies, particularly around Life Sciences & Healthcare. And with Henry coming on board middle of last year, spending time with him, again, we really made a decision to change our Life Sciences & Healthcare, RWD platform strategy absolutely the right thing to do and it makes me even more confident in the future. But that did pull us back a year in terms of the timing around that platform. So those are really the 2 kind of key areas I would call out.
Next question is from George Tong of Goldman Sachs.
It looked like in your guide, you're expecting improved organic growth this year in subscription and reoccurring. It's really the transactional piece that's going to be the offset. So can you talk a little bit more about how much of the transactional revenue headwinds are cyclical versus structural and steps that you're taking internally to drive improved performance here?
Sure, George. Yes, just to reiterate what this year's guidance range contemplates on organic growth. So we do believe that the subscription business will be relatively consistent with last year. We grew about 2.5% last year. I think we'll be in that 2% to 3% range. As Jonathan highlighted, those investments that we are making this year in Life Sciences and in Patent Intelligence within IP should start to improve usage in the second half of this year and help to lift subscription growth next year, and we should continue to see some traction in A&G as the Web of Science product continues to improve. Most of the impact in reoccurring, which we think will grow modestly this year, is going to come from a modest improvement in the second half of the year on volumes within that market. We'll have tough comps early in the year, which is why I indicated growth will be lower, particularly in Q1. But to your point on transactional, we continue to expect and are conservative around commercialization budgets in 2024. We do think there is some opportunity in the second half for things to improve modestly, but we've been pretty conservative on the rate of improvement in that market. On the IP side, from a transactional search and watch, we've been relatively consistent there. It's been lower than in the past couple of years. And then on the A&G side, which is the only place that we were a bit softer in the fourth quarter, we've been a bit conservative about the expectation there. So that's what's leading to the anticipation that transaction will be down a couple of percent. In terms of what we are doing about it and the things that we can control, the primary area to focus on is within Life Sciences. So the investment that we are making in these therapy area focused offerings for our real-world evidence and the pharma-grade data will lead to opportunities to sell this in a subscription model. So that's a place where the headwinds we've seen in transaction over the last couple of years, we expect to see come back to us in the form of subscription growth. So that's a little bit more color on how we're seeing 2024's growth expectations by order time.
The next question comes from Seth Weber of Wells Fargo.
I was wondering if you could just touch on the pricing environment, where it sits today and kind of what you're contemplating for pricing as you ramp into 2026, like how much better do you think -- or how much of a bigger contributor do you think pricing will be as you get further down the road with more products and better -- more cross-selling, things like that? If you could just sort of talk through where pricing is today and how you see that trending over the next couple of years.
Sure, Seth. Yes, I'm going to go ahead and comment on that and see if JC has any additions. I mean, in general, pricing has been a net contributor for us across all 3 product lines with our subscription products. Now certainly, if you unpack that and look at specific products, where we have innovated in the past, where we are creating new updates to the products, that's where we're able to capture more price. In the areas where we've done less so, and I would call out Derwent, for example, not able to capture price. There's a direct correlation between our ability to innovate, drive that innovation to impact customer workflows and our ability to capture price. When I look forward to the plan this year, we've been fairly modest in terms of assuming any improvement on price capture for our plans for 2024. That being said, we are amping up our rate of innovation. Henry Levy has announced that he's going to be -- every product is going to have an update this year in terms of this portfolio, and that will be able to capture price. But I think we're going to take a wait and see in terms of when we actually see that coming through. JC, anything you want to add to that?
Yes. I think the indication we would expect 2024 to be pretty consistent, as Jonathan highlighted. In 2025 and 2026, as we launch these new offerings, we certainly think that this will be an area that will help contribute towards the growth acceleration as we move up a bit in those key product areas that we haven't been able to price meaningfully in the last few years.
The next question comes from Ashish Sabadra of RBC Capital Markets.
Maybe just following up on an earlier question around the revenue growth trajectory in 2024. The visibility historically has been pretty low. So I was just wondering what gives the confidence in that back half acceleration in second half '24? And in order -- like what could drive upside or downside risk there? Is it mostly macro? Or are there certain client wins which are ramping up that can provide further confidence on that growth improvement?
Thanks for the question, Ashish. This is Jonathan. On the expectations and the cadence for this year, it's mostly driven by the comps from the prior year. So we have not built in, to your point, because of visibility challenges the last couple of years, a meaningful improvement in the markets in the second half of the year. But you'll recall, for example, in our patent renewal business, we started to see the softening in the second quarter, late in the second quarter. So we have tougher comps in the first part of the year. That's also true with the trademark business within IP. So that's the reason we expect that growth will be slightly negative in the first quarter, we'll return to growth in the second quarter and have better growth in the second half of the year. It's less to do with the run rate improving and more about the comps. And we have expected the transactional business to decline by a couple of percent as I indicated. So we think we've been a bit more conservative with our outlook on those sales that have been a bit more challenging to predict over the last couple of years.
[Operator Instructions] Our next question comes from Shlomo Rosenbaum of Stifel.
Some of the players in life sciences like IQVIA and Veeva are talking about improved optimism amongst the client base and they're thinking that we should see a second half improvement. Is that square with what you guys are expecting in your numbers? Are you not seeing that? Are you not expecting that? And then just, Jonathan, I want to touch on one thing that at the Analyst Day, the 2025 target was 6% growth, and you're now pointing to '26 at 4% to 6%. Can you just address is that lowering the growth expectation even in the next year?
Sure, Shlomo. This is Jonathan Gear. I'll go and address the first question and have JC address the second. So on Life Sciences, I think what -- as others are seeing, we are seeing renewed optimism within our within our life science customers. The commercialization budgets appear to be higher. There's -- and we're seeing kind of across the board, both on large pharma, large biotech and even small biotech. So there is renewed optimism coming back into it. That being said, we're going to want to wait and see in terms of how quickly that converts into really increased demand for our products and services and consulting. So we've -- while we are seeing that certainly in the macro environment, we've been cautious about putting that optimism into our guidance in the second half. JC, do you want to address some of the other questions?
Yes. And that conservatism around the macro, Shlomo, is the other factor that's really driving the change in the last year of the guide we gave. So to your point, we had previously indicated in the 5.5% to 6.5% range or 6% at the midpoint. We're now in the 4% to 6% range. So we'd have to get to the higher end of that to touch the prior midpoint. That is primarily due to our conservatism around the rate of improvement in the end markets. What could cause us to be to the higher end is faster acceleration, for example, in the commercialization market that Jonathan just highlight, a better outlook on the patent renewal front would be another example. So that is the primary difference in the change between the 2 outlooks.
Next question comes from Andrew Nicholas of William Blair.
I just had a small question on A&G. Jonathan Collins, I think you mentioned it's the largest transactional quarter. I think that's mostly backfile sales within Web of Science. But just if you could confirm that's where the weakness was. And then just any color on the drivers of that. Is that also budget-related cyclical pressures? Or is there -- is it just a timing issue and you'd expect some of that to come back next year?
Yes. Thank you for the question, Andrew. So as a reminder, we have multiple types of transactional sales within the A&G segment. You've touched on one of them where we're selling the backfile of Web of Science, which makes the analytics of the platform much more valuable to the users. Other examples are digital collections, historical collections that we've digitized and preserved and also our books business. So it's a combination of those.
Q4 usually is the largest quarter for us. What we saw a bit later in the quarter is our customers in that space pausing a bit. What we heard from them is that they want to wait and see on some other spending factors. Most of our customer base is in North America within that part of the business, and their budget years run similar to the school year. So their budget year will end in the second quarter. So we'll see how that plays out in the coming quarters. But that's most of the feedback that we heard from that market, and those were the sales that were effective.
Great. I think that was our last question. Just as I wrap, I just want to thank everyone for joining our call today and listening with our remarks, engaging with us. As we look forward to this year, again, as we said in the call, 2023 was a foundational year for us as we made the changes that we needed to make to really propel Clarivate. And I look forward to sharing with you over the ensuing quarters coming up, the results of the investments we're making, innovation as we drive this company to grow. Thank you very much, everyone. Goodbye.
This concludes today's call. Thank you for joining. You may now disconnect your line.