Business Context and Reporting Period
Clarivate plc, a Jersey-based provider of content, analytics, professional services and workflow solutions, reported unaudited results for the three and six months ended June 30, 2022. The company operates through Science and Intellectual Property segments. Results include the December 1, 2021 acquisition of ProQuest, which materially affects year-over-year comparability.
Key Financial Metrics
| Metric | Q2 2022 | Q2 2021 | Six Months 2022 | Six Months 2021 |
|---|---|---|---|---|
| Revenue | $686.6 million | $445.7 million | $1,348.8 million | $874.1 million |
| Revenue growth | 54.0% | — | 54.3% | — |
| Operating income (loss) | $86.2 million | $(63.8) million | $131.1 million | $(133.3) million |
| Net income (loss) | $62.4 million | $(131.5) million | $131.9 million | $(187.5) million |
| Net income (loss) attributable to ordinary shareholders | $43.7 million | $(131.5) million | $94.5 million | $(187.5) million |
| Adjusted EBITDA | $274.4 million | $189.0 million | $536.7 million | $353.8 million |
| Adjusted EBITDA margin | 39.9% | 42.3% | 39.8% | 40.3% |
| Net cash provided by operating activities | — | — | $164.6 million | $261.7 million |
| Free cash flow | — | — | $75.5 million | $199.7 million |
Subscription revenue was $407.4 million in the second quarter and $811.2 million year to date. Subscription and re-occurring revenue represented 75.6% of total revenue in the quarter and 76.9% year to date. Annualized Contract Value was $1,625.9 million at June 30, 2022, up 75.9% year over year, primarily due to ProQuest and 3.8% organic growth. The annual revenue renewal rate was 91.3%, compared with 90.8% in the prior-year period.
Science revenue increased 121.6% in the quarter and 120.7% year to date, primarily from ProQuest and organic growth. IP revenue decreased 2.3% in the quarter and 0.8% year to date on a reported basis, although constant-currency organic revenue increased 4.2% in both periods.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $359.7 million at June 30, 2022, down from $430.9 million at December 31, 2021. Including restricted cash, total cash was $372.9 million.
- Total debt outstanding was $5,551.9 million, including $2,804.5 million under the term loan, $175.0 million under the revolving facility, $921.4 million of 2029 senior notes, $921.2 million of 2028 senior secured notes, $700.0 million of 2026 senior secured notes and a $29.8 million finance lease.
- Additional revolving-credit availability was $568.7 million, producing reported total liquidity of $928.4 million.
- The revolving facility was increased to $750.0 million and extended to March 31, 2027, subject to a springing maturity provision. Management stated that the company was in compliance with its debt covenants.
- Net cash used in financing activities was $239.4 million, primarily reflecting $175.0 million of share repurchases and $37.7 million of preferred-share dividend payments.
Material Changes Versus the Prior Comparable Period
- Revenue growth was heavily acquisition-driven: ProQuest contributed substantially to Science revenue and subscription and transactional revenue growth.
- Operating results improved from a prior-year loss to operating income, supported by higher revenue, cost-saving programs and lower restructuring charges.
- Adjusted EBITDA increased, but margin declined to 39.9% from 42.3% in the quarter and to 39.8% from 40.3% year to date.
- Operating cash flow declined by $97.1 million year to date, mainly because of payments related to the CPA Global Equity Plan and higher working-capital requirements.
- Restructuring and impairment charges declined to $19.2 million from $50.7 million in the quarter and to $30.9 million from $118.6 million year to date. Management indicated that several prior programs were substantially complete, while future costs of approximately $35.0 million remained for the One Clarivate and ProQuest integration programs.
- Interest expense increased 61.8% in the quarter and 60.5% year to date, primarily because of debt issued in connection with financing the ProQuest acquisition.
- Foreign-currency translation produced an after-tax comprehensive loss of $622.7 million in the quarter and $845.9 million year to date. Goodwill declined by $371.2 million from year-end, primarily due to foreign-currency fluctuations.
- The company repurchased and retired 10.7 million ordinary shares for $175.0 million during the first six months, with approximately $825.0 million remaining under the authorized program.
Outlook, Commentary, Risks and Unusual Items
Management stated that cash from operations, cash on hand and available revolving capacity should be sufficient to service debt, fund operations and necessary capital expenditures for at least the next 12 months. No specific revenue or earnings guidance is provided in the filing text.
- Management expects future performance to remain exposed to foreign-exchange movements, inflation, interest rates, macroeconomic conditions and customer spending priorities.
- The company ceased commercial operations in Russia in March 2022, which slightly affected organic revenue growth. It reported no expected material direct impact from the Russia-Ukraine conflict but could not predict indirect effects.
- COVID-19-related uncertainty, cybersecurity incidents, data privacy compliance, dependence on third-party data, competition, customer renewal rates, acquisitions and substantial indebtedness remain key risks.
- Mark-to-market gains on financial instruments were $49.0 million in the quarter and $149.4 million year to date, materially benefiting reported earnings but creating period-to-period volatility.
- Clarivate disclosed material weaknesses in internal control over financial reporting relating to acquisition-related compensation-agreement communication and review of tax balances in acquired entities. Management stated that enhanced controls were designed and implemented during the first quarter, but disclosure controls remained ineffective as of June 30, 2022.
- The company is defending consolidated securities class actions alleging weaknesses in internal controls and financial reporting, as well as a related Pennsylvania Securities Act action. Due to the early stage, no reasonably possible loss range was estimated. The company had accrued $60.4 million for larger legal claims overall.
- Jonathan Gear became CEO-elect on July 11, 2022 and was scheduled to become CEO on September 1, 2022, succeeding Jerre Stead, who would remain non-executive chair.
- In August 2022, the company entered into interest-rate swaps covering $780.0 million of term-loan arrangements, maturing in October 2026.
Facts Investors Should Verify
- Separate organic, acquisition and foreign-currency revenue growth, particularly the sustainability of organic growth after the ProQuest comparison becomes fully annualized.
- Whether Adjusted EBITDA margins stabilize or continue to decline as integration, restructuring and ProQuest-related costs continue.
- Operating cash flow conversion and the effect of working capital, capital expenditures and remaining restructuring payments on free cash flow.
- Debt maturities, floating-rate exposure, covenant headroom and the effect of rising interest rates on interest expense.
- Progress in remediating the disclosed material weaknesses and the impact of the securities litigation.
- The effect of foreign-currency movements on revenue, goodwill, intangible assets and accumulated other comprehensive income.
- The economics and timing of the share-repurchase program relative to leverage, liquidity and preferred-share dividend obligations.