CLARIVATE PLC quarterly report, Q1 FY2023

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Clarivate plc — Form 10-Q Summary

Business context and reporting period

Clarivate provides information, analytics, professional services and workflow solutions serving academia and government, intellectual property, and life sciences and healthcare customers. This unaudited Form 10-Q covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022. All dollar amounts are in millions unless otherwise stated.

Financial performance and liquidity

  • Revenue: $629.1, down 5.0% from $662.2. On a constant-currency basis, revenue declined 3.1%.
  • Revenue mix: Subscription revenue was $393.2, re-occurring revenue was $107.7, and transactional and other revenue was $128.2. Subscription and re-occurring revenue represented 79.6% of total revenue.
  • Segment revenue: Academia & Government revenue increased 0.9% to $314.7; Intellectual Property declined 13.5% to $209.1; and Life Sciences & Healthcare declined 3.0% to $105.3.
  • Operating income: $54.6 versus $44.9, producing an operating margin of approximately 8.7% versus 6.8%.
  • Net income: $43.5 versus $69.5. Net income attributable to ordinary shareholders was $24.7 versus $50.8. Basic and diluted EPS were $0.04, compared with basic EPS of $0.07 and diluted EPS of $(0.06) in the prior year.
  • Adjusted EBITDA: $252.7 versus $262.3; the Adjusted EBITDA margin increased to 40.2% from 39.6%.
  • Cash flow: Operating cash flow was $227.5 versus $67.4. Capital expenditures were $59.3 versus $41.4, resulting in free cash flow of $168.2 versus $26.0.
  • Cash and liquidity: Cash and cash equivalents were $364.2 at March 31, 2023. Total liquidity, including $740.5 of availability under the revolving credit facility, was $1,104.7. The company expects available cash, operating cash flow and borrowing capacity to fund operations and obligations for at least the next 12 months.
  • Debt: Total debt outstanding was $4,946.1, with carrying value of long-term debt of $4,884.8 after discounts and issuance costs. The company prepaid $125.0 of its Term Loan Facility during the quarter. There were no revolving-credit borrowings outstanding.
  • Leverage and covenants: The reported consolidated coverage ratio was 4.2 to 1.00 and consolidated leverage ratio was 4.1 to 1.00. Management stated that the company was in compliance with its credit-facility covenants.
  • Operating indicators: Annualized Contract Value was $1,555.2, down 3.2% year over year, while organic ACV growth was 3.3%. Annual renewal rates improved to 93.5% from 92.5%.

Material changes versus the prior comparable period

  • Revenue declined primarily because of lower patent-renewal volumes, lower transactional trademark and patent-filing revenue, lower life-sciences real-world-data sales, the MarkMonitor divestiture, and foreign-exchange effects.
  • Academia & Government grew organically, supported by subscription price increases and net installations. Intellectual Property was the largest source of revenue deterioration.
  • Cost of revenues decreased 7.8%, while selling, general and administrative expense increased 0.6%, including higher share-based compensation and travel and meeting costs.
  • Interest expense increased 23.7% to $73.6 because of higher rates on floating-rate borrowings.
  • The prior-year period included a $100.4 mark-to-market gain on financial instruments; the current period included a $1.1 loss. The change primarily reflects valuation changes in private-placement warrants.
  • The company recorded a $49.4 gain on a legal settlement and a $70.4 tax benefit related to settlement of an open Israeli tax dispute. These items materially benefited reported net income and cash flow.
  • Restructuring and impairment expense decreased to $9.4 from $11.7. The company reported approximately $20.0 of future expected costs for the ProQuest Acquisition Integration Program and no significant further costs expected under the One Clarivate Program.
  • Share-based compensation expense increased to $41.2 from $26.6.
  • The company made no ordinary-share repurchases under its public repurchase program during the quarter; approximately $825.0 remained available under the authorization.

Outlook, risks, contingencies and unusual items

The filing does not provide a specific quarterly or full-year revenue, EBITDA or cash-flow guidance target. Management expects liquidity to be adequate for at least the next 12 months, but notes that future capital needs depend on acquisitions, product development and other operating requirements.

  • Key risks include substantial indebtedness, higher floating interest rates, foreign-currency volatility, cybersecurity incidents, data-protection compliance, technology and regulatory changes, customer retention, competition, dependence on third parties, macroeconomic conditions and the ability to realize benefits from acquisitions and restructuring.
  • The company continues to monitor potential indirect effects of the Russia-Ukraine conflict and stated that it ceased commercial operations in Russia in March 2022.
  • Interest-rate swaps hedged approximately $1,219.1 of floating-rate principal; approximately $1,153.3 of outstanding borrowings effectively remained floating-rate.
  • The company is involved in securities and other litigation. It estimated potential liability for larger legal claims at approximately $32, while the ultimate loss from certain securities actions could not be estimated. The company stated that insurance is expected to cover some liabilities.
  • Mandatory convertible preferred-share dividends are cumulative at an annual rate of 5.25% of the $100 liquidation preference. The company accrued $6.4 during the quarter; dividends remain payable when and if declared by the board and continue to accumulate if not declared.
  • Disclosure controls and procedures were deemed effective as of March 31, 2023, with no material changes in internal control over financial reporting.

Important facts for investors to verify

  • Whether the decline in Intellectual Property revenue and transactional revenue is temporary or reflects sustained volume and demand pressure.
  • The sustainability of the 93.5% renewal rate, 3.3% organic ACV growth and 40.2% Adjusted EBITDA margin, particularly after excluding unusual items.
  • The effect of higher interest rates on debt service, cash flow and covenant headroom.
  • The timing and amount of the approximately $20.0 of remaining ProQuest integration costs and any additional restructuring charges.
  • The collectability and accounting treatment of the approximately $29.0 insurance recovery asset related to the legal settlement.
  • The potential impact of pending securities litigation and other legal claims, for which the filing does not provide a reasonably estimable loss range.
  • The impact of the MarkMonitor divestiture, foreign exchange and patent-renewal volumes on future revenue and ACV comparisons.