Clarivate PLC

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 3/5

Clarivate is a global provider of proprietary content, information, analytics, professional services, and workflow solutions that enable their clients to make decisions and conduct research.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Clarivate’s business model is to collect and then deliver information and analytics. It’s a data business. Therefore, let’s explore its moat through the 4 pillars as described in “The Little Book That Builds Wealth”.

Moat Analysis

  • Intangible Assets:
    • While Clarivate boasts a vast trove of proprietary data and analytics, this is not fully unique. Other companies and competitors can also acquire similar data by doing similar work, although Clarivate is the leader in this field. Therefore, we assign only a small moat for intangible assets.
    • The brand is not what customers value most. It’s primarily the data and analytics insights and reports.
    • They have a lot of patents in the life sciences segment but this is also not so big of a moat since they only apply for a small section of the business.
  • Switching Costs:
    • Clarivate’s products are embedded in workflows. This can be tough to change as customers need to retrain staff if they use another service.
    • For many businesses, Clarivate’s tools are their primary go-to tools. However, it is also easier to use cheaper tools for analysis in the same industry. Therefore we assign a moderate switching cost moat.
  • Network Effects:
    • While Clarivate’s data, specifically in the academic and government domain, grows as more researchers rely on it, this network effect isn’t very strong. For example, it will not increase the utility of a legal document analysis service used by lawyers if more researchers use a similar product. Many of its products do not have network effect.
  • Cost Advantages:
    • Scale can give a cost advantage as the company needs to create their datasets and then sell it to many customers. However, the company will always need to continually make such data and it can be replicated by competitors, Therefore, I assign a small moat based on cost advantages.

Based on the criteria above we will give it a rating of 2 / 5 on the moat scale.

The “moat” of Clarivate is not something that protects it strongly from competition and it is easy for other companies to build the same product. Moreover, their intangible assets which form the bulk of the business are also not unique.

Business Risks and Resilience

  • Technological Disruption:
  • A primary risk lies in the rapid pace of technological change. New, more efficient tools or AI-driven analysis could disrupt Clarivate’s market position. This risk is very large for them.
  • AI could make the job of researchers and their reports much more obsolete.
  • Competition:
  • The information and analytics industry is becoming more and more competitive, making it essential for the company to have its processes working in optimum efficiency. * The company also has many competitors on a global scale making it more tough to generate profits and value.
  • Economic Cycles:
    • Although companies always need the data and solutions provided by Clarivate, but in recession, new investments in analytics can see a massive downturn which could negatively affect CLVT.
  • Acquisition Integration:
    • They are aggressively growing using acquisition which can lead to management issues if not done properly. Therefore, they should be managed and taken in very carefully.
  • Business Resilience:
    • Clarivate has a global presence and a diverse customer base which increases its resilience to regional problems.
    • The core business is deeply entrenched in the system, and a lot of users rely on it for their research, thus this is an asset.

Business Overview

Clarivate operates in the information and analytics industry, offering data, software, and solutions that enable customers to discover new insights, manage risks, and accelerate decision-making, particularly in scientific research and intellectual property.

  • Revenue Distribution:

    • Subscription-based Revenue: The majority of their revenue is derived from subscription-based access to their proprietary databases, analytics platforms, and research tools. This provides a reliable stream of recurring revenue.
    • Professional Services Revenue: This segment includes consulting, project management, custom data analysis, and other services, which are generally linked to the clients they are serving, creating a strong relationship between them and their business.

  • Industry Trends:

    • Increasing demand for actionable information: Companies are increasingly using analytics to make strategic choices.
    • Proliferation of Data: Volume and complexity of data are increasing, raising the demand for solutions that can make sense of that information.
    • Focus on specialized knowledge As more and more people specialize in one field or sector, the need for deep analysis of niche fields is increasing.
    • Technological advancements: AI tools are being increasingly used for analysis and can lead to disruption.

  • Competitive Landscape:

    • The industry is becoming more fragmented with a growing number of players offering similar services.
    • Competition in their respective fields are quite intense and the pricing may not always be in their hands.
  • Unique aspects:
    • They have proprietary data that they have been collecting for years.
    • They have the capability to provide insights from that data that few other firms can compete with.
  • Recent issues
    • In recent earnings calls and reports, the company was showing concerns about the churn rate of their customers. Specifically, they are having trouble retaining small and medium size customers, who are looking for more budget friendly and flexible alternatives.

Financials

  • Revenues: The revenue growth has been low, about 3.9% YoY in 2022, with a similar projection for 2023.
    • Revenues for 2021 was $1872.1 million, 2022 was $1,945.2 million and in 2023 is projected to reach over $2000 million.
    • This low growth is indicative that the business might have a less solid moat than thought.
  • Margins: Their EBITDA margins are about 45%, which is relatively good, but it also points to a business that can be replicated by other players.

  • Profitability: The company is profitable but the growth in profits is also minimal which is similar to the case with revenue.

  • Balance Sheet Health: They have a large amount of intangible assets and goodwill in their balance sheet, which may reflect the premium they have been paying for acquisition.
    • They also have more long term debts than assets making it a risky prospect.
    • Their cash on hand is comparatively very low.

Given the parameters above we assign a rating of 3/5 for balance sheet health. The debt is high and they have low cash reserve.

Understandability

The company’s main offering, and way they generate revenues is very easy to understand. They collect and analyze data and sell it to their customers. Therefore, we assign an understandability rating of 4 / 5.

Clarivate has a decent business in a growing industry, but it faces challenges in maintaining a moat. Their earnings and profit are also not growing rapidly. The financials of the company are a bit strained due to large amount of debt.