Clarivate plc: Q3 2021 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 intellectual-property customers. Reportable segments are Science and Intellectual Property (IP). This unaudited filing covers the three and nine months ended September 30, 2021, with prior-period amounts presented as restated where applicable.
Financial performance and key metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Revenue, net | $442.1 million | $284.4 million | $1.316 billion | $798.5 million |
| Revenue growth | 55.5% | — | 64.8% | — |
| Operating income (loss) | $9.1 million | $(12.7) million | $(36.9) million | $(26.7) million |
| Net income (loss) | $23.3 million | $(182.0) million | $(82.9) million | $(336.9) million |
| Net income (loss) attributable to ordinary shares | $0.9 million | $(182.0) million | $(105.3) million | $(336.9) million |
| Adjusted EBITDA | $190.0 million | $108.2 million | $543.8 million | $286.5 million |
| Adjusted EBITDA margin | 43.0% | 37.8% | 41.2% | 35.6% |
| Operating cash flow | Not separately provided | Not separately provided | $305.5 million | $128.0 million |
| Free cash flow | Not separately provided | Not separately provided | $219.3 million | $49.4 million |
Q3 revenue included $246.5 million of subscription revenue, $110.4 million of re-occurring revenue and $85.4 million of transactional revenue. Subscription and re-occurring revenue represented 80.7% of total revenue, compared with 77.5% in the prior-year quarter. Annualized Contract Value increased 8.8% to $936.7 million, while the nine-month annual revenue renewal rate was 90.6%, compared with 91.0% in 2020.
As of September 30, 2021, cash and cash equivalents were $2.480 billion and restricted cash was $1.854 billion. Total debt outstanding was $5.369 billion, consisting primarily of $2.826 billion of term loans, $921.4 million of senior notes due 2029, $921.2 million of senior secured notes due 2028 and $700.0 million of senior secured notes due 2026. The revolving credit facility was undrawn. Management stated that operating cash flow, cash and available revolver capacity should 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 driven primarily by the October 2020 CPA Global acquisition, the February 2020 DRG acquisition and other acquisitions. IP revenue increased 152.1% in Q3 and 155.5% for the nine-month period; Science revenue increased 5.3% and 14.0%, respectively.
- Cost of revenues as a percentage of revenue improved to 31.9% in Q3 from 32.9% and to 31.6% for nine months from 33.6%. Adjusted EBITDA margin improved to 43.0% in Q3 from 37.8% and to 41.2% for nine months from 35.6%.
- GAAP profitability benefited from an $83.0 million Q3 and $113.2 million nine-month gain from mark-to-market changes in warrant liabilities, compared with losses of $144.8 million and $224.2 million in the corresponding 2020 periods.
- Interest expense increased to $65.2 million in Q3 and $141.2 million for nine months, reflecting additional acquisition-related borrowings and the 2021 notes issuance.
- Restructuring and impairment charges increased to $15.6 million in Q3 and $122.0 million for nine months, including significant non-cash lease impairments and costs associated with the CPA Global integration and One Clarivate program.
- Operating cash flow increased $177.5 million year over year, and free cash flow increased $169.9 million. Investing cash usage declined because the prior-year period included substantially larger acquisition spending.
- In June 2021, Clarivate raised $728.1 million from a primary ordinary-share offering and $1.393 billion from 5.25% mandatory convertible preferred shares. It also issued notes that had $1.843 billion of aggregate principal outstanding at September 30, 2021, with proceeds held in escrow for the planned ProQuest acquisition.
Guidance, outlook, commentary and risks
The filing does not provide explicit quarterly or full-year revenue or earnings guidance. Management expects cost savings from the CPA Global integration and One Clarivate restructuring programs, with approximately $2.9 million of CPA Global program costs and $5.8 million of One Clarivate costs expected in future periods based on the estimates disclosed.
The ProQuest acquisition remained a significant financing and execution item. Clarivate expected to fund part of the purchase price with ordinary shares, preferred-share proceeds and debt proceeds. If specified escrow conditions are not satisfied by April 29, 2022, the new notes may be subject to special mandatory redemption at par plus accrued interest.
- Principal risks include substantial indebtedness, integration and realization of acquisition synergies, cybersecurity and business continuity, data-protection compliance, customer retention and renewal rates, competition, technological change, key-personnel retention, international and tax exposures, foreign-exchange volatility and warrant-liability valuation changes.
- COVID-19 remained an uncertainty, although management stated that pandemic-related credit-loss risk was not material through September 30, 2021.
- Legal claims are ongoing. The company accrued an estimated probable liability of $69.0 million for larger legal claims, partly offset by a $2.3 million insurance recovery asset. Actual outcomes could differ materially from estimates.
- Prior-period financial statements were restated for warrant-accounting errors, increasing the reported 2020 net loss by $144.8 million for Q3 and $224.2 million for the nine-month period.
- The previously reported material weakness related to warrant classification was remediated as of September 30, 2021; management concluded disclosure controls were effective.
Most important facts for investors to verify
- Completion status, final consideration, funding and integration progress for the ProQuest acquisition.
- Whether escrowed debt proceeds are released or the 2028 and 2029 notes are mandatorily redeemed.
- Debt covenant compliance, leverage, interest burden and the availability of unrestricted cash after excluding $1.854 billion of restricted cash.
- Sustainability of the 43.0% adjusted EBITDA margin and the extent to which results depend on acquisition contributions and non-GAAP adjustments.
- Progress and cash costs of the CPA Global and One Clarivate restructuring programs.
- Renewal rates, organic growth and the effect of any foreign-currency movements on reported revenue.
- Final outcomes and insurance coverage for the accrued legal claims, as well as any additional litigation or contingency exposure.
- Potential dilution from the mandatory convertible preferred shares, outstanding private-placement warrants and equity consideration related to ProQuest.