Clarivate plc — Form 10-Q Summary
Business context and reporting period
Clarivate provides subscription and transactional content, analytics, professional services, and workflow solutions through its Science and Intellectual Property product groups. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2020, with comparisons to the corresponding 2019 periods. Results are presented in U.S. dollars under U.S. GAAP.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Revenue | $284.4 million | $243.0 million | $798.5 million | $719.3 million |
| Operating income (loss) | $(12.7) million | $35.8 million | $(26.7) million | $(26.7) million |
| Net income (loss) | $(37.2) million | $10.8 million | $(112.7) million | $(126.2) million |
| Diluted EPS | $(0.10) | $0.03 | $(0.31) | $(0.48) |
| Net cash from operations | Not separately presented for the quarter | $128.0 million | $112.5 million | |
| Free cash flow | Not separately presented for the quarter | $49.4 million | $68.8 million |
- Q3 revenue increased 17.0%; constant-currency growth was 15.2%. Nine-month revenue increased 11.0% on a reported basis and 11.1% in constant currency.
- Subscription revenue was $222.1 million in Q3 and $631.9 million for the nine months. Transactional revenue was $64.4 million in Q3 and $174.0 million for the nine months.
- Q3 operating margin was approximately negative 4.5%, compared with 14.8% in Q3 2019. Nine-month operating margin was approximately negative 3.3% in both periods. Q3 net margin was approximately negative 13.1%, compared with 4.5% in Q3 2019.
- Adjusted EBITDA was $108.2 million in Q3 and $286.5 million for the nine months; adjusted EBITDA margins were 37.8% and 35.6%, respectively, compared with 31.7% and 29.1% in the prior-year periods. These are non-GAAP measures.
- Cash and cash equivalents were $601.1 million at September 30, 2020, versus $76.1 million at December 31, 2019. Total cash and restricted cash was $601.6 million.
- Debt outstanding was $1.951 billion at September 30, 2020, consisting primarily of $1.251 billion under the term loan facility and $700.0 million of senior secured notes. The revolving facility was undrawn at quarter-end.
- Management stated that operating cash flow, cash on hand, and available revolving capacity were expected to meet operating, debt-service, and capital-expenditure needs for at least the next 12 months.
Material changes versus the prior comparable period
- Revenue growth was primarily acquisition-driven, particularly from Decision Resources Group, acquired in February 2020, and Darts-ip. Organic subscription revenue increased, while organic transactional revenue declined because of weaker demand associated with COVID-19-related economic conditions.
- Science Group revenue increased 40.2% in Q3 and 30.0% for the nine months, aided by DRG. IP Group revenue declined 10.5% in Q3 and 10.7% for the nine months, reflecting the MarkMonitor divestiture and lower transactional demand.
- Profitability was pressured by higher amortization, transaction expenses, and restructuring charges. Q3 transaction expenses were $34.9 million versus $8.6 million; nine-month transaction expenses were $70.2 million versus $42.1 million. Restructuring and impairment charges were $3.2 million in Q3 and $26.8 million for the nine months, compared with none in 2019.
- The prior-year Q3 and nine-month results included a $39.4 million legal-settlement gain, which did not recur in 2020.
- Interest expense declined 13.4% in Q3 and 23.0% for the nine months, primarily because of lower borrowing rates following the 2019 refinancing, partly offset by incremental DRG debt.
- Operating cash flow increased to $128.0 million from $112.5 million, but free cash flow declined because capital expenditures rose to $78.6 million from $43.7 million.
- The company raised equity through February and June offerings and received warrant-exercise proceeds. Shares outstanding increased to 389.2 million at September 30, 2020 from 306.9 million at December 31, 2019.
Guidance, outlook, risks, contingencies, and unusual items
- The filing does not provide clear formal revenue or earnings guidance. Management expects restructuring charges of approximately $49 million for the Operation Simplification and Optimization Program, with approximately $16 million remaining at September 30, 2020, and approximately $4 million of additional DRG integration costs.
- On October 1, 2020, after quarter-end, Clarivate completed the CPA Global acquisition for aggregate consideration of $8.723 billion net of cash acquired. Consideration included approximately $6.762 billion of shares and approximately $2.053 billion of cash-funded debt repayment. Clarivate issued approximately 216.7 million shares and incurred an additional $1.6 billion of term debt, plus $60 million drawn on the revolving facility.
- On October 26, 2020, the company acquired control of IncoPat in China for cash on hand; its results were expected to be consolidated beginning in Q4 2020.
- COVID-19 created uncertainty, reduced demand for certain transactional offerings, and could adversely affect revenue, collections, operations, cash flow, and financial condition. The allowance for doubtful accounts reflected additional pandemic-related risk, though management considered that risk immaterial as of quarter-end.
- Other principal risks include substantial indebtedness, acquisition integration, competition, renewal rates, cybersecurity, data and technology dependencies, intellectual-property claims, international and regulatory exposure, tax matters, Brexit, and potential impairment of goodwill and intangible assets.
- The company was in compliance with its debt covenants as of the filing date. Its consolidated coverage ratio was 4.91 to 1.00 and consolidated leverage ratio was 2.94 to 1.00. The springing leverage covenant was not required to be tested at September 30 because the applicable revolving-credit utilization threshold was not met.
- Contingent liabilities included $3.7 million related to Publons and $89.7 million of contingent stock consideration related to DRG. Management did not expect ordinary-course legal proceedings to have a material adverse effect.
- Disclosure controls and procedures were assessed as effective at a reasonable assurance level, with no material changes to internal control over financial reporting.
Important facts for investors to verify
- Reconcile post-quarter-end CPA Global financing, share issuance, purchase accounting, integration costs, and resulting leverage.
- Assess whether subscription growth and the 91.0% nine-month annual revenue renewal rate can offset continued weakness in transactional demand.
- Evaluate the sustainability of reported adjusted EBITDA and the extent to which it excludes recurring acquisition, restructuring, stock-based compensation, and other costs.
- Monitor free cash flow conversion, capital expenditures, working-capital seasonality, and cash needs following the CPA Global acquisition.
- Review debt covenants, floating-rate exposure, interest-rate hedges, and available revolving capacity after the October 2020 borrowings.
- Assess acquisition integration, goodwill and intangible-asset impairment risk, COVID-19 effects, and the company’s remaining restructuring obligations.