Clarivate plc — Q2 2023 Form 10-Q Summary
Business context and reporting period
Clarivate provides information, analytics, professional services and workflow solutions serving academia and government, intellectual property, and life sciences and healthcare markets. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, compared with the corresponding 2022 periods. Dollar amounts are in millions unless otherwise stated.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $668.8 | $686.6 | $1,297.9 | $1,348.8 |
| Adjusted EBITDA | $284.9 | $274.4 | $537.6 | $536.7 |
| Adjusted EBITDA margin | 42.6% | 39.9% | 41.4% | 39.8% |
| Net income (loss) | $(123.1) | $62.4 | $(79.6) | $131.9 |
| Net income (loss) attributable to ordinary shareholders | $(141.7) | $43.7 | $(117.0) | $94.5 |
| Basic EPS | $(0.21) | $0.06 | $(0.17) | $0.14 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $389.9 | $164.6 |
| Free cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $273.0 | $75.5 |
Q2 revenue declined 2.6% year over year and declined 3.5% on a constant-currency basis. Six-month revenue declined 3.8%, or 3.3% on a constant-currency basis. Adjusted EBITDA increased despite lower revenue, with margin expansion driven primarily by lower cost of revenues and restructuring costs.
- Segment revenue: Q2 Academia & Government revenue increased 2.8% to $342.0; Intellectual Property declined 9.6% to $216.3; and Life Sciences & Healthcare declined 4.3% to $110.5. Six-month segment revenue changes were 1.9%, (11.5%), and (3.7%), respectively.
- Revenue mix: Subscription revenue was $406.0 in Q2 and $799.2 for six months. Subscription and re-occurring revenue represented 77.3% and 78.4% of revenue, respectively, in the two periods.
- Operating results: Q2 operating loss was $88.3 versus operating income of $86.2 in the prior-year quarter. The six-month operating loss was $33.7 versus income of $131.1. Results included $135.2 of goodwill and intangible-asset impairments in Q2 2023.
- Cash and debt: Cash and cash equivalents were $436.1 at June 30, 2023, versus $348.8 at December 31, 2022. Total debt outstanding was $4,920.8, including $2,347.4 of Term Loan Facility debt. The company prepaid $150.0 of term debt during the first six months.
- Liquidity: Reported liquidity was $1,177.3, consisting of cash and $741.2 of additional revolving-credit availability. The $750.0 revolving facility had no outstanding borrowings, although $8.8 of letters of credit used the facility.
- Leverage and covenants: The company reported a 4.1-to-1 consolidated coverage ratio and a 4.0-to-1 consolidated leverage ratio and stated that it was in compliance with its credit-facility covenants.
Material changes versus the prior comparable period
- Revenue weakness was concentrated in Intellectual Property and Life Sciences & Healthcare, especially patent-renewal, search and analytics, patent-filing, trademark, and real-world-data activity. Academia & Government grew organically, supported by pricing and net installations.
- Transactional and other revenue declined 9.6% in Q2 and 10.2% for the six months, while subscription revenue was broadly stable before the effects of divestitures and foreign exchange.
- Annualized Contract Value was $1,567.2 at June 30, down 3.6% year over year, primarily because of the MarkMonitor divestiture and foreign exchange; organic ACV growth was 2.8%, largely from price increases. The annual renewal rate improved to 91.9% from 91.3%.
- Operating cash flow increased $225.3 year over year for the six months, partly because the prior year included nonrecurring payments from restricted cash related to the CPA Global Equity Plan. Free cash flow increased $197.5.
- Interest expense increased 17.2% in Q2 and 20.4% for the six months because of higher floating interest rates, partly offset by debt prepayments and interest-rate swaps.
- Mark-to-market gains on financial instruments were materially lower than in 2022, reducing a significant source of prior-year earnings benefit.
Guidance, outlook, commentary and unusual items
The filing does not provide a clear numerical full-year revenue or earnings guidance range. Management stated that cash from operations, cash on hand and available revolver capacity are expected to be adequate for debt service, liquidity needs and necessary capital expenditures for at least the next 12 months.
- The company entered into an agreement to sell a small Intellectual Property product group for approximately $34 payable over ten years. Closing was expected in the fourth quarter of 2023. The assets were written down to $26.1, producing a $132.2 intangible-asset impairment and a $3.0 goodwill impairment.
- A $49.4 gain from settlement of a legal claim was recognized during the six months; the settlement was covered by insurance.
- Restructuring and lease-impairment charges were $12.2 in Q2 and $21.6 for the six months. Management estimated $10.0 of future costs for the ProQuest Acquisition Integration and Segment Optimization programs.
- The company transitioned LIBOR-based debt and swaps to Term SOFR during Q2 and entered into €100.0 of cross-currency swaps on July 12, 2023.
- Management identified an unremediated material weakness in controls over the preparation and review of financial-statement footnote disclosures. Disclosure controls were therefore considered ineffective as of June 30, 2023, although management concluded the financial statements were fairly stated in all material respects.
- Clarivate expected to file an amendment to its 2022 Form 10-K reflecting the material weakness and an adverse independent-auditor opinion on internal control effectiveness. The amendment was not expected to revise previously issued consolidated financial statements.
- Key risks include substantial indebtedness, floating-rate exposure, foreign exchange volatility, cybersecurity and data-protection risks, customer retention and product acceptance, competition, litigation, acquisitions and divestitures, and the potential effects of geopolitical and macroeconomic conditions.
Most important facts for investors to verify
- Whether the material weakness has been remediated and the status and content of the expected Form 10-K/A and adverse internal-control opinion.
- Progress and final economics of the planned Intellectual Property product-group divestiture, including the ten-year payment structure.
- Intellectual Property and Life Sciences & Healthcare revenue trends, patent-renewal volumes, transactional demand, and organic growth.
- Debt maturities, Term Loan Facility interest rates, hedge coverage, covenant headroom and the ability to reduce leverage while funding operations.
- Sustainability of cash conversion and free cash flow after considering working-capital seasonality, capital expenditures, preferred-share dividends and restructuring payments.
- The effect of the impairment, legal settlement, restructuring charges, foreign exchange movements and warrant remeasurement on reported versus adjusted performance.
- Potential exposure from securities litigation and other legal proceedings, for which the filing states that losses may be uncertain despite existing reserves and insurance coverage.