Clarivate plc — Form 10-Q Summary
Business context and reporting period
Clarivate provides content, analytics, professional services and workflow solutions to academic, government, life sciences, research and development, and intellectual-property customers. Reportable segments are Science and Intellectual Property (IP). This report covers the three months ended March 31, 2021, with March 31, 2020 comparative figures presented as restated.
The results include the acquisitions of Decision Resources Group (DRG), CPA Global, Beijing IncoPat and Hanlim IPS. CPA Global was acquired on October 1, 2020 and substantially changed the scale and mix of the IP segment.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue, net | $428.4 million | $240.6 million | Up 78.1% |
| Adjusted revenue | $431.5 million | $242.5 million | Up 77.9% |
| Loss from operations | $34.2 million | $28.3 million | Loss increased 20.8% |
| Net loss | $24.0 million | $129.6 million | Loss decreased 81.5% |
| Basic and diluted loss per share | $0.04 | $0.38 | Improved |
| Adjusted EBITDA | $164.8 million | $78.2 million | Up 110.7% |
| Adjusted EBITDA margin | 38.2% | 32.2% | Up 6.0 percentage points |
| Net cash from operating activities | $174.0 million | $46.1 million | Up $127.9 million |
| Free cash flow | $141.1 million | $26.7 million | Up $114.4 million |
GAAP operating margin was approximately negative 8.0% in Q1 2021 versus negative 11.8% in Q1 2020. Net margin was approximately negative 5.6% versus negative 53.9%, respectively. Adjusted metrics exclude significant items and are not substitutes for GAAP results.
- Subscription revenue was $235.1 million, up 21.7%; transactional revenue was $84.2 million, up 71.0%; and re-occurring revenue was $112.2 million, primarily reflecting CPA Global.
- Science revenue was approximately $191.3 million, up 29.9%. IP revenue was approximately $240.2 million, up 152.2%, driven mainly by CPA Global, IncoPat and Hanlim.
- Annualized Contract Value was $909.4 million at March 31, 2021, up 10.9% from $820.3 million. Annual revenue renewal rates were 92.5%, compared with 93.0% in the prior-year quarter.
- Cash and cash equivalents were $399.0 million, with restricted cash of $13.5 million, at March 31, 2021. Total cash and restricted cash increased to $412.5 million from $269.0 million at December 31, 2020.
- Total debt outstanding was $3.540 billion, consisting primarily of $2.840 billion under the term loan facility and $700.0 million of 2026 senior secured notes. The revolving credit facility had no borrowings.
- Total assets were $15.114 billion and shareholders’ equity was $9.397 billion at March 31, 2021.
Material changes versus the prior comparable period
- Revenue growth was largely acquisition-driven, particularly from CPA Global and DRG, with additional contributions from IncoPat and Hanlim. Organic revenue also increased, including improved subscription and transactional activity.
- Cost of revenues increased 67.8% with the larger acquired operations. Amortization increased to $128.3 million from $49.1 million because of acquired intangible assets.
- Selling, general and administrative expense decreased 16.3%, primarily because Q1 2020 included higher DRG acquisition and offering-related costs, while Q1 2021 benefited from changes in contingent and phantom share valuations and lower employee, consulting and marketing costs.
- Restructuring and impairment charges increased to $64.7 million from $7.8 million. Q1 2021 included $40.984 million of non-cash lease right-of-use asset impairment and $3.104 million of lease termination fees.
- Other operating expense was $16.2 million versus other operating income of $6.0 million, primarily due to foreign-exchange remeasurement.
- A $51.2 million gain from mark-to-market changes in financial instruments, principally private placement warrants, contrasted with a $55.6 million loss in Q1 2020. This significantly affected the year-over-year net loss comparison.
- Operating cash flow benefited from higher revenue, acquired businesses and working-capital movements. Capital expenditures increased to $33.0 million from $19.4 million.
Guidance, outlook, commentary, risks and unusual items
Management stated that cash from operations, cash on hand and available revolving-credit capacity are expected to 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 specific full-year revenue or earnings guidance.
- The CPA Global integration and optimization program is expected to incur approximately $42.8 million of additional expense after March 31, 2021 and is expected to conclude in 2022. Total program costs were estimated at approximately $121.0 million.
- Subsequent to March 31, 2021, additional leased-site exits resulted in $21.7 million of impairment charges.
- Management expects no material additional expenses after March 31, 2021 for the legacy Operation Simplification and Optimization and DRG integration programs.
- COVID-19 remains a risk to demand, counterparties, operations, financial condition and cash flows, although pandemic-related credit risk was not considered material as of the filing.
- Other principal risks include cybersecurity and data privacy, technology and market acceptance, personnel retention, competition, renewal rates, international tax and foreign-exchange exposure, acquisition integration, substantial indebtedness and warrant-related earnings volatility.
- The company disclosed a material weakness in internal control over financial reporting relating to the evaluation of warrant settlement features and classification. Disclosure controls and procedures were therefore not effective as of March 31, 2021. Management has initiated remediation but had not determined that the weakness was remediated.
- The filing restated Q1 2020 financial statements because of errors in warrant accounting. The restatement increased Q1 2020 net loss by $55.6 million, from $74.0 million as originally reported to $129.6 million as restated; cash flows were unchanged.
- Interest-rate exposure remains significant: $2.840 billion of floating-rate debt was outstanding, $450.0 million was hedged, and the filing states that a 100-basis-point rate change would have an annual cash-interest impact of approximately $337 thousand for the quarter.
Facts investors should verify
- Reconcile reported revenue growth with the contribution, retention and integration performance of CPA Global and DRG, and distinguish acquisition growth from organic growth.
- Assess the sustainability of the 38.2% Adjusted EBITDA margin and the extent to which it depends on exclusions for amortization, restructuring, acquisition costs, warrant valuation changes and other unusual items.
- Review debt covenants, refinancing requirements, floating-rate exposure and available revolving-credit capacity relative to $3.540 billion of debt.
- Track the material weakness remediation and any future warrant-accounting restatements or control deficiencies.
- Evaluate remaining CPA Global integration costs, lease exits and the $21.7 million subsequent impairment charge.
- Confirm renewal rates, ACV growth, organic revenue trends and the effect of foreign-exchange movements.
- Review acquisition purchase-price allocations, goodwill of $6.246 billion and intangible assets of $7.266 billion for impairment sensitivity.