Clarivate Analytics plc — Fiscal 2019 Form 10-K Summary
Business context and reporting period
Clarivate is a global information services and analytics company serving scientific research, life sciences and intellectual-property markets. Its two product groups are Science, including Web of Science and Life Sciences, and Intellectual Property, including Derwent, CompuMark and MarkMonitor.
The filing covers the fiscal year ended December 31, 2019, with comparative fiscal years 2018 and 2017. The company completed its merger with Churchill Capital Corp. in May 2019 and began trading on the NYSE under “CCC.” Results before the merger reflect the predecessor Clarivate business under reverse-recapitalization accounting.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue, net | $974.3 million | $968.5 million | 0.6% |
| Adjusted revenue | $974.8 million | $951.2 million | 2.5% |
| Subscription revenue | $805.5 million | $794.1 million | 1.4% |
| Transactional revenue | $169.3 million | $177.5 million | (4.7%) |
| Loss from operations | $(43.1) million | $(105.7) million | Improved |
| Net loss | $(211.0) million | $(242.2) million | 12.9% improvement |
| Basic and diluted loss per share | $(0.77) | $(1.11) | Improved |
| Adjusted EBITDA | $294.1 million | $272.9 million | 7.7% |
| Adjusted EBITDA margin | 30.2% | 28.7% | 150 bps improvement |
| Standalone Adjusted EBITDA | $336.1 million | $311.0 million | 8.1% |
| Operating cash flow | $117.6 million | $(26.1) million | Improved by $143.7 million |
| Free cash flow | $47.7 million | $(71.5) million | Improved by $119.3 million |
Subscription revenue represented 82.6% of total revenue, compared with 81.7% in 2018. Annual revenue renewal was 90.1%, down from 91.7%, while annualized contract value increased 3.5% to $793.7 million. Science revenue increased 3.7% to $547.5 million, while Intellectual Property revenue increased 0.9% to $427.2 million.
At December 31, 2019, cash and cash equivalents were approximately $76.1 million. Total debt outstanding was approximately $1.665 billion, consisting primarily of $900 million of term loans, $700 million of 4.50% secured notes due 2026 and $65 million drawn under the revolving facility. Net long-term debt on the balance sheet was $1.629 billion after issuance costs and current maturities. The company reported compliance with its debt covenants and stated that available cash, operating cash flow and revolver capacity were adequate for at least the next 12 months.
Material changes versus prior comparable period
- Underlying adjusted revenue increased 2.5%, but reported growth was limited by the 2018 divestiture of the IP Management product line and foreign-exchange effects.
- Adjusted subscription revenue increased 3.7%, or 4.3% at constant currency, driven by pricing, new business, acquisitions and product upgrades.
- Transactional revenue declined 4.7%, or 3.9% at constant currency, reflecting weaker patent-services demand and timing and product-mix effects.
- Cost of revenue declined 12.6%, primarily due to lower transition-services costs and the IPM divestiture. Transition, integration and related expenses declined 76.8% to $14.2 million.
- Interest expense increased 20.6% to $157.7 million, mainly from debt refinancing, debt extinguishment and write-offs of deferred financing costs.
- Cash generation improved substantially, reflecting higher deferred revenue, a lower operating loss and reduced transition costs. Capital expenditures increased to $69.8 million from $45.4 million.
- The company completed the acquisitions of SequenceBase and Darts-ip, and recorded $68.4 million of acquisition cash outflows. It also classified certain MarkMonitor brand-protection assets as held for sale.
Guidance, outlook, commentary, risks and unusual items
Management’s transformation strategy emphasizes focusing on two product groups, simplifying the organization, improving productivity, increasing automation and cloud usage, consolidating facilities, optimizing pricing, expanding cross-selling and growing in Asia Pacific and emerging markets. Management targeted further cost savings and margin improvement but did not provide a clear formal fiscal 2020 revenue or earnings guidance figure in the filing.
Unusual 2019 items included $46.2 million of transaction expenses, $15.7 million of restructuring costs, $18.4 million of impairment on MarkMonitor assets held for sale, $51.4 million of share-based compensation and a $39.4 million gain from a confidential legal settlement. The company also paid $200 million to terminate its tax receivable agreement, eliminating future payment obligations under that agreement.
Subsequent events materially changed the company’s capital structure and operating scope. The MarkMonitor brand-protection, antipiracy and antifraud business was sold on January 1, 2020 for $3.8 million. Decision Resources Group was acquired on February 28, 2020 for approximately $950 million, funded with cash, a $540.7 million equity offering and $360 million of incremental term loans. The company also repaid the $65 million revolver draw and reported substantial warrant exercises in early 2020.
Principal risks include substantial leverage and variable-rate debt, acquisition and integration risk, reliance on subscription renewals, intense competition and free information sources, cybersecurity and cloud-provider dependence, data privacy and regulatory compliance, foreign exchange, Brexit-related uncertainty, intellectual-property claims, litigation, impairment of goodwill and intangible assets, and the ability to realize projected cost savings. LIBOR phaseout and future benchmark-rate changes may affect borrowing costs.
Most important facts for investors to verify
- Reconcile GAAP results with Adjusted EBITDA, Standalone Adjusted EBITDA, adjusted revenue and free cash flow, including the significant exclusions and estimated cost-savings adjustments.
- Assess post-acquisition leverage and liquidity after the approximately $950 million DRG acquisition, $360 million incremental term loan and equity financing.
- Monitor renewal rates, ACV growth and the mix between recurring subscription revenue and declining transactional revenue.
- Evaluate whether planned restructuring, facility consolidation, automation and productivity initiatives produce sustainable cash-flow and margin benefits.
- Review the integration, goodwill and intangible-asset risks associated with DRG and prior acquisitions.
- Consider dilution from warrants, incentive awards and the 7 million merger shares expected to be issued by December 31, 2020.
- Verify the impact of the MarkMonitor divestiture and the company’s remaining exposure to regulatory, cybersecurity, privacy and third-party data-provider risks.