Clarivate plc — Form 10-Q Summary
Business context and reporting period
Clarivate provides content, analytics, professional services and workflow solutions through its Science and Intellectual Property product groups. The unaudited report covers the three and six months ended June 30, 2020, with comparisons to the same periods in 2019. Amounts are in thousands of U.S. dollars unless otherwise stated.
The company acquired Decision Resources Group (DRG) on February 28, 2020, divested certain MarkMonitor assets in January 2020, and remained exposed to COVID-19-related economic uncertainty. Clarivate reported 387.3 million ordinary shares outstanding at June 30, 2020.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue, net | $273.5 million | $242.3 million | $514.1 million | $476.3 million |
| Revenue growth | 12.9% | — | 7.9% | — |
| Net loss | $(1.5) million | $(77.8) million | $(75.5) million | $(137.0) million |
| Operating income (loss) | $14.2 million | $(36.6) million | $(14.1) million | $(62.5) million |
| Interest expense, net | $21.1 million | $37.5 million | $52.1 million | $70.6 million |
| Operating margin | 5.2% | (15.1%) | (2.7%) | (13.1%) |
| Net margin | (0.5%) | (32.1%) | (14.7%) | (28.8%) |
| Adjusted EBITDA | $100.1 million | $73.2 million | $178.3 million | $132.4 million |
| Adjusted EBITDA margin | 36.2% | 30.2% | 34.3% | 27.8% |
Subscription revenue was $216.6 million in the quarter and $409.8 million year to date; transactional revenue was $60.4 million and $109.6 million, respectively. Annualized contract value was $852.8 million at June 30, 2020, up 9.0% from the prior year, and the six-month annual revenue renewal rate was 92.6% versus 91.8% in 2019.
Cash flow, liquidity and debt
- Operating cash flow was $107.6 million for the first six months, compared with $42.9 million in 2019.
- Capital expenditures were $52.7 million, producing reported free cash flow of $54.9 million versus $18.0 million in the prior-year period.
- Investing cash outflow was $940.2 million, primarily reflecting $885.3 million paid for DRG and $52.7 million of capital expenditures.
- Financing cash inflow was $1.376 billion, including $843.8 million from share issuances, $360.0 million of incremental term loans and $277.5 million from warrant exercises.
- Cash and cash equivalents were $608.5 million at June 30, 2020; cash plus restricted cash was $610.5 million.
- Total debt outstanding was $1.954 billion, consisting primarily of $1.254 billion under the term loan facility and $700.0 million of senior secured notes due 2026. The revolving facility was undrawn after a $65.0 million paydown.
- Management stated that operating cash flow, cash on hand and available revolving capacity should satisfy operating, debt-service and capital-expenditure needs for at least 12 months. The company reported compliance with its debt covenants; consolidated coverage and leverage ratios were 5.11x and 3.07x, respectively.
Material changes versus the prior comparable period
- Q2 revenue increased 12.9%, while constant-currency revenue increased 14.2%. Six-month constant-currency revenue increased 8.9%.
- Science revenue increased 34.9% in Q2, primarily due to DRG, pricing and new subscription business. IP revenue declined 12.3%, reflecting the MarkMonitor divestiture and weaker transactional demand.
- Organic transactional revenue declined as COVID-19-related economic conditions reduced demand, although acquisitions more than offset that decline in reported revenue.
- Q2 operating income improved to $14.2 million from a $36.6 million loss. Lower share-based compensation, selling and administrative costs, transaction costs, transition costs and interest expense were key contributors, partly offset by higher amortization and restructuring charges.
- Net loss narrowed substantially, but the company remained loss-making for the six-month period.
- DRG contributed $46.7 million of Q2 revenue and $63.7 million of six-month revenue, including purchase-accounting deferred-revenue adjustments, and contributed net losses of $8.9 million and $9.5 million, respectively.
Guidance, outlook, commentary and unusual items
- No formal full-year revenue or earnings guidance is presented in the filing. Management emphasized uncertainty from COVID-19 and stated that the ultimate impact on results, financial condition and cash flows could be adverse if the pandemic persists.
- Clarivate expects approximately $48.0 million of total pre-tax charges under its operating simplification and optimization program, with approximately $23.0 million remaining at June 30, 2020.
- The DRG integration program is expected to generate approximately $14.8 million of total pre-tax restructuring charges, with approximately $5.3 million remaining and substantial completion expected in 2020.
- Q2 included $15.8 million of restructuring and impairment charges, including a $4.8 million non-cash lease impairment. Six-month restructuring and impairment charges were $23.6 million.
- Subsequent to quarter-end, Clarivate announced an agreement to acquire CPA Global. The proposed transaction would involve issuing up to 218.3 million shares, using approximately $400.0 million of cash and $1.5 billion of new debt to refinance CPA Global debt, and is subject to customary and regulatory approvals.
- Key risks include substantial indebtedness, acquisition execution and integration, achievement of expected synergies, renewal rates, cybersecurity, intellectual-property claims, regulatory and tax matters, foreign operations, impairment risk and the continuing effects of COVID-19.
- Management concluded that disclosure controls and procedures were effective at a reasonable assurance level, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile reported revenue growth and adjusted EBITDA growth to organic performance, particularly given the substantial contribution from DRG and Darts-ip and the MarkMonitor divestiture.
- Assess the sustainability of the 92.6% renewal rate, $852.8 million ACV and the reported decline in organic transactional demand.
- Review cash conversion, the $54.9 million free cash flow figure, working-capital seasonality and the significant $940.2 million investing outflow.
- Evaluate leverage, floating-rate exposure, debt covenants and the potential financing and dilution effects of the CPA Global transaction.
- Track remaining restructuring and DRG integration charges, contingent DRG stock consideration of $64.7 million, and potential acquisition-related costs.
- Consider that adjusted EBITDA and free cash flow are non-GAAP measures and exclude or adjust for significant recurring or unusual costs.
- Monitor COVID-19 effects on transactional demand, customer collections, renewal rates and impairment testing.