CLARIVATE PLC quarterly report, Q1 FY2022

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Clarivate plc — Form 10-Q Summary

Business context and reporting period

Clarivate provides content, analytics, professional services and workflow solutions to academic and government institutions, life sciences companies, and research-intensive corporations. Its reportable segments are Science and Intellectual Property (IP). This unaudited Form 10-Q covers the three months ended March 31, 2022, with comparison to the three months ended March 31, 2021. Results include the ProQuest acquisition, completed December 1, 2021.

Financial performance and position

  • Revenue: $662.2 million, up 54.6% from $428.4 million; constant-currency growth was 57.6%. Science revenue increased 119.8% to $420.4 million, while IP revenue increased 0.6% to approximately $241.6 million.
  • Revenue mix: Subscription revenue was $403.8 million, re-occurring revenue was $114.5 million, and transactional and other revenue was $143.7 million. Subscription and re-occurring revenues represented 78.3% of total revenue.
  • Profitability: Income from operations was $44.9 million versus a $69.5 million operating loss in the prior-year quarter. Net income was $69.5 million versus a $56.0 million net loss. Net income attributable to ordinary shareholders was $50.8 million, or $0.07 basic EPS.
  • Adjusted EBITDA: $262.3 million versus $164.8 million; adjusted EBITDA margin was 39.6% versus 38.2%. Adjusted EBITDA is a non-GAAP measure and excludes, among other items, depreciation and amortization, share-based compensation, restructuring, transaction costs and warrant mark-to-market gains or losses.
  • Unusual earnings items: A $100.4 million mark-to-market gain on financial instruments, primarily related to private placement warrants, materially benefited pre-tax income. The warrant liability declined to $127.4 million from $227.8 million at December 31, 2021.
  • Cash flow: Operating cash flow was $67.4 million versus $174.0 million. Capital expenditures were $41.4 million, producing free cash flow of $26.0 million versus $141.0 million. Management reported adjusted free cash flow of $191.3 million versus $163.2 million after adding back specified items, including $149.8 million of CPA Global equity-plan payments funded through restricted cash.
  • Liquidity: Cash and cash equivalents were $500.2 million, and additional revolving-credit availability was $569.7 million, for reported total liquidity of $1.07 billion. Restricted cash declined to $15.5 million from $156.7 million.
  • Debt: Total debt outstanding was $5.56 billion, including $2.81 billion under the term loan, $1.75 billion under the revolving facility, $921.4 million of 2029 senior notes, $921.2 million of 2028 senior secured notes, and $700.0 million of 2026 senior secured notes. The revolving facility was increased to $750 million and extended to March 2027, subject to a springing maturity provision.
  • Operating indicators: Annualized Contract Value was $1.61 billion, up 76.7% year over year, and the annual revenue renewal rate was 92.5%, unchanged from the prior-year quarter.

Material changes versus the prior comparable period

  • The ProQuest acquisition drove most of the increase in Science revenue and added significant amortization, operating costs and interest expense. The acquisition had aggregate consideration of $5.05 billion, or $4.99 billion net of cash acquired.
  • Operating expenses increased, including cost of revenues of $249.2 million versus $147.9 million and depreciation and amortization of $176.4 million versus $131.6 million. Cost of revenues increased as a percentage of revenue, while selling, general and administrative expense declined as a percentage of revenue.
  • Restructuring and impairment charges decreased to $11.7 million from $67.9 million, primarily because earlier integration and cost programs were substantially complete.
  • Interest expense increased to $59.5 million from $37.4 million, primarily reflecting debt raised or refinanced in 2021 to fund the ProQuest acquisition.
  • The Company repurchased 4.1 million ordinary shares for $66.4 million during the quarter and had approximately $933.6 million remaining under its repurchase authorization at March 31, 2022. Through April 29, 2022, it repurchased and retired an additional 6.6 million and 3.3 million shares, respectively.
  • Other comprehensive loss was $223.2 million, principally from foreign-currency translation, resulting in comprehensive loss of $153.7 million.

Guidance, outlook, risks and contingencies

  • Outlook: The filing does not provide a clear quantified financial guidance range. Management stated that operating cash flow, 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.
  • Integration and execution: ProQuest integration remains a significant factor, with $42.9 million of future costs expected under the ProQuest acquisition integration program. The preliminary purchase-price allocation remains subject to measurement-period adjustments.
  • Leverage and interest rates: The Company has substantial indebtedness and $2.99 billion of floating-rate debt, partially offset by interest-rate swaps covering $449.0 million of principal. Credit facilities contain restrictive covenants and a springing leverage covenant.
  • Internal controls: Management concluded that disclosure controls and procedures were not effective as of March 31, 2022 because of material weaknesses related to acquisition-related compensation agreement communication and review of tax balances in acquired entities. Remediation controls were implemented and operated during the quarter.
  • Legal matters: The Company estimated potential liability for larger legal claims at $60.4 million, including legal costs and accrued interest. Three putative securities class-action complaints filed in early 2022 allege weaknesses in internal controls and financial reporting; the Company cannot estimate a reasonably possible loss or range of loss.
  • Macro and operating risks: Management cited COVID-19 effects, the Russia-Ukraine conflict, foreign-exchange volatility, cybersecurity, data privacy, dependence on third parties, competition, customer renewals, acquisition execution and retention of key personnel.

Important facts for investors to verify

  • Separate the recurring operating performance from the $100.4 million warrant-related mark-to-market gain and other non-GAAP adjustments.
  • Assess ProQuest’s organic contribution, integration costs, amortization burden and impact on future margins and cash flow.
  • Reconcile the sharp decline in reported operating cash flow and free cash flow with management’s adjusted free cash flow measure and the CPA Global equity-plan payments.
  • Review debt maturities, floating-rate exposure, covenant compliance and the springing maturity terms of the expanded revolving facility.
  • Monitor remediation of the material weaknesses and developments in the securities class-action litigation.
  • Evaluate the sustainability of the 92.5% renewal rate, 76.7% ACV growth and the Company’s share-repurchase activity relative to leverage and liquidity.