Clarivate plc — Form 10-Q Summary
Business context and reporting period
Clarivate provides information, analytics, software and workflow solutions through Academia and Government (A&G), Life Sciences and Healthcare (LS&H), and Intellectual Property (IP). This unaudited Form 10-Q covers the three and nine months ended September 30, 2022. The company realigned its reportable segments during the third quarter and recast prior-period segment information.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Revenue | $635.7 million | $442.1 million | $1,984.5 million | $1,316.2 million |
| Revenue growth | 43.8% | — | 50.8% | — |
| Adjusted EBITDA | $271.6 million | $190.0 million | $808.3 million | $543.8 million |
| Adjusted EBITDA margin | 42.7% | 43.0% | 40.7% | 41.2% |
| Net income (loss) | $(4,415.5) million | $28.4 million | $(4,283.6) million | $(159.1) million |
| Net loss attributable to ordinary shareholders | $(4,434.4) million | $6.0 million | $(4,339.9) million | $(181.5) million |
| Diluted EPS | $(6.64) | $(0.12) | $(6.66) | $(0.47) |
Revenue growth was primarily acquisition-driven following the December 2021 ProQuest acquisition. On a constant-currency basis, revenue increased 50.9% in the quarter and 56.1% year to date; organic growth was 1.2% and 3.4%, respectively. Subscription revenue increased 65.6% in Q3 and 67.5% year to date, while re-occurring revenue declined 7.0% in Q3 and 1.3% year to date.
Q3 segment revenue was $307.1 million for A&G, $103.6 million for LS&H and $225.0 million for IP. Nine-month segment revenue was $951.6 million, $327.7 million and $705.2 million, respectively. Nine-month segment Adjusted EBITDA was $351.5 million, $125.4 million and $331.4 million, respectively.
GAAP results were materially affected by a $4,448.6 million goodwill impairment charge, including $1,745.8 million related to the ProQuest reporting unit and $2,662.1 million related to IP reporting units. Operating loss was $(4,375.2) million in Q3 and $(4,244.1) million for the nine months. Restructuring and impairment expense was $26.0 million in Q3 and $56.9 million year to date. Depreciation and amortization was $169.7 million in Q3 and $521.7 million year to date.
Net cash provided by operating activities was $372.4 million for the nine months, compared with $305.5 million in the prior-year period. Capital expenditures were $156.5 million, producing reported free cash flow of $215.9 million versus $219.3 million. Adjusted free cash flow was $414.7 million versus $315.6 million, after adjustments including $150.7 million of CPA Global equity-plan payments.
At September 30, 2022, cash and cash equivalents were $446.0 million, restricted cash was $8.6 million and total debt outstanding was $5,544.3 million, including $2,797.4 million under the term loan and $175.0 million under the revolving facility. Reported long-term debt, net of current maturities and issuance costs, was $5,417.1 million. Total liquidity was $1,011.8 million, comprising cash and $565.8 million of additional revolving-credit availability.
Material changes versus the prior comparable period
- ProQuest contributed substantial acquisitive revenue growth, particularly to A&G and subscription revenue.
- Organic growth remained modest relative to reported growth and was affected by foreign exchange and the cessation of commercial operations in Russia.
- Adjusted EBITDA increased, but the margin declined to 42.7% in Q3 and 40.7% year to date from 43.0% and 41.2%, respectively.
- GAAP profitability deteriorated sharply because of the goodwill impairment and continued amortization, restructuring and interest costs.
- Foreign currency translation losses reduced other comprehensive income by $1,396.4 million for the nine months.
- The company repurchased and retired 10.7 million ordinary shares for $175.0 million during the nine months; approximately $825.0 million remained available under the repurchase authorization.
- The revolving credit commitment was increased by $400.0 million to $750.0 million and extended to 2027, subject to a springing maturity provision.
Guidance, outlook, risks and unusual items
The filing does not provide a clear formal revenue or earnings guidance range. Management stated that operating cash flow, available cash and revolving-credit capacity are expected to be adequate for debt service, liquidity needs and necessary capital expenditures for at least the next 12 months.
On October 31, 2022, Clarivate completed the sale of the MarkMonitor domain-management business for approximately $302.5 million of net cash proceeds and prepaid $300.0 million of term-loan debt. The filing states that a pre-tax gain is expected; the amount was not provided.
Key risks include substantial indebtedness and floating-rate exposure, foreign-currency volatility, macroeconomic conditions, inflation and rising interest rates, cybersecurity and data-privacy risks, customer retention and renewal rates, competition, dependence on third-party data, acquisition integration, and the continuing effects of COVID-19 and the Russia-Ukraine conflict. The company had $2,972.4 million of floating-rate debt, with $1,225.4 million hedged through interest-rate swaps.
Management reported a material weakness in internal control over financial reporting related to the precision of controls reviewing tax balances in acquired entities' opening balance sheets. A previously reported weakness concerning communication of modified pre-existing compensation agreements was deemed remediated, but the tax-related weakness had not yet been remediated as of September 30, 2022. Disclosure controls and procedures were therefore ineffective at period end.
The company is involved in securities-related class actions and other litigation. Management estimated potential liability for larger legal claims at approximately $55 million, while stating that losses related to the securities actions could not yet be reasonably estimated because the matters were at an early stage.
Important facts for investors to verify
- Whether the $4.45 billion goodwill impairment signals lower long-term growth, margins or valuation assumptions for ProQuest and IP reporting units.
- The sustainability of organic revenue growth, subscription pricing, annual revenue renewal rates and the 3.9% organic ACV growth cited by management.
- Leverage, interest-rate exposure, covenant compliance and the effect of the $300.0 million term-loan prepayment.
- Actual proceeds and gain recognized from the MarkMonitor sale, and the post-sale effect on revenue and EBITDA.
- Progress and testing results for remediation of the material weakness in tax-related acquisition controls.
- Potential exposure from the securities litigation and other legal proceedings.
- The extent to which adjusted EBITDA and adjusted free cash flow depend on add-backs, restructuring costs, equity-plan payments and other non-recurring adjustments.