Clarivate plc — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2023. Clarivate provides information, analytics, professional services, and workflow solutions through Academia & Government, Intellectual Property, and Life Sciences & Healthcare segments. Amounts are in millions unless otherwise stated.
Financial Performance and Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Revenue | $647.2 | $635.7 | $1,945.1 | $1,984.5 |
| Income (loss) from operations | $87.2 | $(4,375.2) | $53.5 | $(4,244.1) |
| Net income (loss) | $12.3 | $(4,415.5) | $(67.3) | $(4,283.6) |
| Net loss attributable to ordinary shares | $(6.6) | $(4,434.4) | $(123.6) | $(4,339.9) |
| Basic EPS | $(0.01) | $(6.58) | $(0.18) | $(6.41) |
| Adjusted EBITDA | $281.4 | $271.6 | $819.0 | $808.3 |
| Adjusted EBITDA margin | 43.5% | 42.7% | 42.1% | 40.7% |
Q3 revenue increased 1.8% reported but declined 1.3% on a constant-currency basis. Nine-month revenue declined 2.0% reported and 2.6% on a constant-currency basis. Q3 revenue growth reflected increases in Academia & Government and Life Sciences & Healthcare, partly offset by Intellectual Property. Nine-month revenue declines were concentrated in Intellectual Property and Life Sciences & Healthcare.
- Q3 segment revenue: Academia & Government $327.2, Intellectual Property $211.7, and Life Sciences & Healthcare $108.3.
- 9M segment revenue: Academia & Government $983.9, Intellectual Property $637.1, and Life Sciences & Healthcare $324.1.
- Q3 Adjusted EBITDA: Academia & Government $144.0, Intellectual Property $98.5, and Life Sciences & Healthcare $38.9.
- 9M Adjusted EBITDA: Academia & Government $416.2, Intellectual Property $293.2, and Life Sciences & Healthcare $109.6.
- Subscription and re-occurring revenue represented 79.6% of Q3 revenue and 78.8% of nine-month revenue. Annual renewal rates were 92% for both comparable nine-month periods.
- Annualized Contract Value was $1,579.2 at September 30, down 4.1% year over year; management cited the MarkMonitor divestiture and foreign exchange, partly offset by 2.6% organic ACV growth.
Cash Flow, Liquidity, Debt, and Balance Sheet
- Net cash provided by operating activities was $553.3 for the nine months, compared with $372.4 in the prior-year period.
- Capital expenditures were $178.6, producing free cash flow of $374.7 versus $215.9 in the prior-year period.
- Investing cash outflow was $170.4, including $178.6 of capital expenditures. Financing cash outflow was $322.2, including $150.0 of term-loan prepayments, $100.0 of share repurchases, and $56.7 of preferred-share dividends.
- Cash and cash equivalents were $398.9 at September 30, 2023; total cash and restricted cash was $407.2.
- Reported liquidity was $1,139.9, consisting of cash and $741.0 of availability under the revolving credit facility, net of letters of credit.
- Total debt outstanding was $4,920.5, with carrying-value long-term debt of $4,866.4. The company had no revolver borrowings and $2,347.4 of term-loan debt outstanding.
- During the nine months, the company prepaid $150.0 of its term loan. Interest expense increased to $218.5 from $193.3, primarily because of higher floating interest rates, partly offset by hedging and debt prepayments.
- As of September 30, the company reported a consolidated coverage ratio of 4.1 to 1.00 and a consolidated leverage ratio of 4.0 to 1.00 and stated that it was in compliance with its debt covenants.
Material Changes and Unusual Items
- Q3 2022 included a $4,448.6 goodwill impairment charge; no comparable Q3 2023 charge was recorded. This explains much of the year-over-year improvement in operating income and net loss.
- During the nine months of 2023, Clarivate recorded $132.2 of intangible-asset impairment and $3.0 of goodwill impairment related to a small Intellectual Property product group held for sale.
- The company recorded a $49.4 gain on settlement of a legal claim during the nine months, covered by insurance.
- Restructuring and lease-impairment costs declined to $25.3 for the nine months from $56.9 in the prior-year period. The company expects approximately $6.0 of additional costs under its Segment Optimization program and no significant further costs under former programs.
- Private-placement warrant liabilities declined to $6.6 from $21.0 at December 31, 2022. Mark-to-market gains were $12.6 in Q3 and $14.4 for the nine months, compared with $53.3 and $202.7, respectively, in the prior-year periods.
- Clarivate repurchased and retired $100.0 of ordinary shares during Q3 at an average price of $7.22 per share. As of September 30, $400.0 remained available under the $500.0 authorization.
- The company entered into a commercial agreement to sell the held-for-sale product group for approximately $34 payable over ten years; closing was expected in Q4 2023. The filing states that the transaction was not expected to materially affect operations or results.
Outlook, Risks, and Contingencies
Management stated that operating cash flow, cash on hand, and available revolver capacity should be adequate to service debt, meet liquidity needs, and fund necessary capital expenditures for at least the next 12 months. The filing does not provide a clear quantitative revenue or earnings guidance range.
- Key risks include substantial indebtedness, higher floating interest rates, foreign-exchange volatility, cybersecurity incidents, data-protection compliance, dependence on third-party data and services, competition, customer renewals, changing technology and regulation, macroeconomic conditions, and execution of acquisitions or divestitures.
- The company is subject to OECD Pillar Two global minimum-tax rules. United Kingdom legislation becomes effective January 1, 2024; the company has not yet estimated the quantitative impact and states that future tax provisions could be materially affected.
- Clarivate faces securities class-action litigation alleging weaknesses in internal controls and alleged misstatements concerning product quality, organic revenue growth, and business-model changes. Motions to dismiss were pending, and the company could not estimate any reasonably possible loss.
- Management identified an unremediated material weakness in controls over the preparation and review of financial-statement footnote disclosures, including completeness and accuracy of source information. The weakness resulted in immaterial disclosure misstatements in prior periods and could result in material misstatements if not remediated.
- The company identified new control activities during Q3 2023 but stated that remediation remains in progress. Management nevertheless concluded that the financial statements were fairly stated in all material respects.
Facts Investors Should Verify
- Whether Intellectual Property revenue and renewal-related activity stabilize following the reported declines in patent renewals, trademarks, search, analytics, and patent filing activity.
- Whether the 43.5% Q3 and 42.1% nine-month Adjusted EBITDA margins are sustainable after excluding restructuring, impairment, legal-settlement, warrant, and other adjustments.
- Term-loan refinancing or repayment capacity before the 2026 maturity, given $2,347.4 of floating-rate term debt and total debt of $4,920.5.
- Progress and effectiveness of remediation of the material weakness over financial-statement footnote controls.
- The final terms, timing, and cash economics of the held-for-sale product-group divestiture.
- The effect of Pillar Two tax rules, cumulative mandatory convertible preferred dividends, pending litigation, and continued share repurchases on future cash availability.