What happened
Clarivate (CLVT 3.00%) investors lost ground to the market on Tuesday as shares fell 12% by 11:15 a.m. EDT, compared to a 0.4% drop in the S&P 500. That decline put the analytics company near its lows for the year, down over 45% since early January. It was powered by news of slowing sales growth amid declining profitability.
So what
Clarivate said in an early-morning press release that sales rose a healthy 60% in the Q2 period, after accounting for currency exchange rate shifts. Organic revenue rose 4.8%, or just slightly faster than the previous quarter's 4.4% rate.
Yet there were some signs of increasing stress on the analytics business. Adjusted profit margin fell by 2.4 percentage points to 39.9% of sales. Organic subscription revenue rose just 3.8% too, and that growth came mostly from higher prices.
Management highlighted encouraging demand trends, including rising contract values and solid engagement by existing customers. "We delivered a good quarter," CEO Jerre Stead said in a press release, "as our...strategy is building traction across our global customer base.
Now what
Investors chose to focus instead on Clarivate's weakening short-term growth picture. Sales will land between $2.7 billion and $2.76 billion this year, executives said, compared to the prior forecast range of $2.8 billion to $2.88 billion. Management also slightly reduced their adjusted earnings and free cash flow forecasts for the year.
These declines are coming mainly from the strengthening U.S. dollar. That type of weakness is temporary and shouldn't worry investors. Still, there are some warning signs about potentially weakening demand.
To judge whether that demand slump is coming, watch Clarivate's customer base, which ideally will continue growing quickly in concert with rising contract values. That growth picture is being clouded by currency exchange rate shifts today, so it makes sense that investors would feel a bit more cautious about the tech stock right now.
