Alteryx: Buy While It’s On The Operating Table (NYSE:AYX)

Investment Thesis

While not technically a SaaS (Software-as-a-Service) cloud company, Alteryx (AYX) is a high growth analytics software company with a land-and-expand adoption model.

After its Q2 earnings, which showed a significant revenue growth slowdown due to the COVID-19 recession (as the company had guided to, by the way), Alteryx sold off by as much as 40%.

Overall, though, management still seems bullish about the long-term business potential. Alteryx has also shifted to reporting annualized recurring revenue (NYSE:ARR). This metric shows a much healthier picture of the company, and hence may suggest that Alteryx’s issues might be mostly near term.

Since Alteryx’s status among investors as a high growth company is in jeopardy after its most recent earnings, now may be an excellent time to start a position in the name. Especially, since value in the broader SaaS sector is currently quite hard to find elsewhere.

As a Warren Buffett (BRK.A)(BRK.B) quote goes:

The best thing that happens to us is when a great company gets into temporary trouble. … We want to buy them when they’re on the operating table.

Alteryx: The Platform and Products

Alteryx is a data science/business intelligence and analytics software company.

Alteryx provides an end-to-end platform for data analysts. As such, it is digital transformation tool that should improve their productivity. Alteryx will often use the term citizen data scientist for its target users. This means they can have any background, but still use data. This is achieved through low code/code-friendly or code-free tools. In general, such a workflow consists of collecting data from various sources, such as Excel or Snowflake (SNOW), building a predictive model, and thirdly, applying it, which could mean for instance visualizing the data, which could involve third-party software such as Excel or Tableau. For businesses, use cases are often around generating ROI by using data to optimize solutions, thereby saving money. It can also be used for automating data tasks.

Alteryx often uses the term Analytic Process Automation (NASDAQ:APA) as the category that the above description entails. Its key pillars are democratizing data analytics (“citizen data scientist”), automating processes, and upskilling people.

Alteryx is not necessarily a (pure) SaaS company, but foremost a software company, and charges annually per seat and per server. This has been a point of debate among investors, for example, some arguing that lacking a cloud solution is a disadvantage in the current age. However, Alteryx argues that (1) it actually has had a cloud solution for a long time already, and (2) that its product should be used where the data is, and that remains mostly on-premise. Nevertheless, Alteryx says it is monitoring this space and customer feedback, so additional progress on the cloud side might come at some point.

Its products have a hefty price, but Alteryx deems these justified given the value and ROI they provide. For example, Designer costs $5,195 per year per seat, Server costs $78,975. Various other products and suites also have their own additional costs.

AlteryxAlteryx

Despite some of the macro issues further discussed below, Alteryx has a healthy innovation pipeline.

For example, in Q2, Alteryx launched Intelligence Suite, Analytics Hub, and AMP engine.

Intelligence Suite consists of additional code-free modelling tools. Analytics Hub is positioned as an alternative to Server. The AMP engine is not a specific product, but an engine for higher performance.

Alteryx is proud and humble to have been named a customer’s Choice Recipient in the Gardner Peer Insights for Data Science and Machine Learning Platforms for the third consecutive year.

Competition

Alteryx is not the only player in this space, as for example, IBM (IBM) and the big cloud providers also have solutions in this space.

Alteryx was first named a leader in the Gartner 2018 Magic Quadrant for Data Science and Machine Learning Platforms. This is the 2020 quadrant, showing Alteryx as a leader and, while lacking in vision compared to several other leaders, it makes up firmly in execution.

Gartner MQ for DSML

According to Gartner, leaders “demonstrate strength in depth and breadth across the full data exploration, model development and operationalization process”.

The explanation for Google (GOOG), Amazon (AMZN), and Microsoft’s (MSFT) place in the quadrant, as visionaries is their lack of on-premises platform. The Forbes article indicated the AWS’s SageMaker offerings were announced after the cut-off date; otherwise, it might be placed similar to the other two cloud giants.

Gartner has put AWS in the honorable mentions along with SAP, Oracle, and Teradata. Startups like Cloudera, FICO and Iquazio found a place in the honorable mentions.

Alteryx views itself as an end-to-end data platform, which gives it an edge over its competitors:

Alteryx

Simply put, then, Alteryx presents investors with an opportunity to invest in a leading, pure-play data science company.

Evaluation

Lacking personal experience with the tool, to check the narrative presented so far of Alteryx as a leading data analytics company, I looked through evaluations of the software.

Some points that were mentioned included: time saving, easy of use, product support, scalability, features. Disadvantages included cost, reporting, and sharing data and integration with other tools. As one example, this quite recent Seeking Alpha comment:

But the product is soooooo good. It is the only tool I know that allows the creation of low code, hyper complex data models to run on desktops with an absurdly high performance. In companies entire devisions torture themself with endless Excel files that Alteryx can run in no time. If more companies understood its potential this would not be discretionary spending.

In general, user product reviews seemed in line with the capabilities that Alteryx management talks about and likely warrant its elevated pricing.

Preliminary Conclusions

Alteryx provides a data analytics platform and is considered a leader in this space. While there are quite some competitors, Alteryx’s capabilities are among the most powerful, and Alteryx also says that it is still ‘competing’ quite a lot with spreadsheets.

It actually seems to compare quite similarly to my investment thesis for another company I have covered regularly: Intel (INTC). The Intel thesis is based on the ever-exploding demand for compute in what is called the data economy (“data is the new oil”). In particular, while data generation keeps surging, the analysis of data to gain insights is still trailing behind.

From that view, the APA category that Alteryx has defined is still quite emerging and it can be readily expected that demand for data analytics tools will keep increasing. For example, Alteryx still serves only a bit over a third of the Global 2000.

On a slight tangent, coincidentally, Intel is also currently on the operating table, so to speak.

The Business

Most investors will be primarily interested in is the pace of adoption and perhaps the size the company could become in later stages.

For some quick facts: IPO in 2017, 1,500 employees, $418M revenue in 2019, 6,700 customers, 37% of the Global 2000.

Alteryx’s goal is to consolidate the analytic process on its tools. Alteryx claims that its “transformative platform” benefits from network effects. I have not found further explanation of these effects but assume this may be because broad adoption creates a knowledgeable community that is convinced of the tool’s benefits and therefore, perhaps likely to recommend the software to peers. Alteryx claims this results in a winner-takes-most opportunity. Given the quite large competition as discussed previously, this may be somewhat exaggerated, but at the same time that comparison also showed that Alteryx indeed has one of the leadership data platforms.

A previous company I covered that benefited from network effects was Slack (WORK): Network Effect Will Propel Slack Adoption, Outperforming Stock Performance To Follow. In Slack’s case, this effect is more obviously seen, but market share gains are, of course, also possible simply by having a best-of-breed product.

As growth can, indeed, also benefit from having a large market opportunity. It is likely the world is nowhere near ‘peak data’ yet, as COVID-19 has also shown. To that end, Alteryx claims it plays in a $50B market, which means it has about 1% share of this opportunity.

The way Alteryx goes about converting this opportunity is via the tried and tested land-and-expand model. This is how Alteryx sees a typical customer journey towards ‘standardizing’ on the Alteryx Platform:

Alteryx

Further growth comes from international expansion, channel/partner ecosystem, community expansion and new products.

Earnings

Alteryx’s earnings at a glance:

Alteryx

After a strong Q4, revenue growth in 2020 so far hasn’t delivered at quite the same pace as its historic trend: revenue has more than quadrupled from 2016 to 2019. Nevertheless, gross margins remain best-in-class at 91%, ARR stood at 40% growth, and the net expansion rate also remains strong, although trending downward for quite some time now. Net expansion for the G2K was above corporate average at 137%.

Alteryx

Revenue vs. ARR

The key point behind the investment thesis in Alteryx is its large market opportunity in data analytics as a leader and pure-play in this space. However, revenue growth has been trending downward in the past year, which requires some analysis and evaluation.

As mentioned in the preliminary conclusions section, I deem the opportunity has not subsided. COVID-19, however, has introduced various effects which affect its financials.

Most notably, the main point that this affects is around revenue recognition, and this is the strongest argument that arguably even despite the weak headline growth numbers, the fundamental business actually remains solid.

In Alteryx current revenue recognition scheme, most revenue is recognized upfront, which indeed is different from most SaaS companies. This creates quite some lumpiness (which may further translate into ‘lumpiness’ in the stock market). It seems this can exaggerate growth during a quarter with many design wins, but the opposite can also happen, where the underlying business can be growing faster than revenue growth indicates.

To that end, Alteryx has decided to start reporting ARR. The comparison is quite stark. Alteryx is currently guiding to 11% YoY revenue growth in 2020. On the other hand, ARR guidance calls for exiting 2020 with $500 million, which would be an increase of 30% YoY.

As further discussed below, I would suggest investors evaluate the company based on ARR, especially given COVID-19 macro trends.

Yes, sure thank you. It’s a great question. If you remember we’ve spoken for quite some time. Our revenue mechanics and ARR are disconnected. Revenue is driven by bookings which is TCV and an upfront portion based on product mix. And ARR is really just the accumulation of ACV overtime. So the two are very disconnected in that regard.

COVID-19

As it has done to many other businesses, COVID-19 has also impacted Alteryx. Several effects can be noted, with some likely playing a role in near-term revenue growth:

We observed notable changes such as higher levels of scrutiny on spending across all sectors resulting in longer sales cycles, smaller deal sizes and less favorable linearity in the quarter.

The overall thesis, though, is that the business is likely to re-accelerate as the macro environment improves. While I noted that Alteryx adoption is spurred for a large part due to the ROI it generates (from its models, automation capabilities, etc.), it is obviously not a critical part of a business. And due to charging per seat, downsizing can be a means for businesses to directly save costs in turbulent times.

One of the main ways the COVID-19 impact was seen, and how Alteryx reacted, was in the surge of its ‘adoption licenses‘: 60% YoY and 100% QoQ. These are lower cost, and they also have shorter contract duration. However, adoption licenses, Alteryx claims, are a tried and proven method of converting to full licenses (land-and-expand) since they allow companies to prove to themselves the value it generates before committing long term.

So, while this will directly affect revenue (lower cost, shorter contract duration), it serves as a way to keep engaged with customers during COVID-19 and could indicate a reacceleration is possible once customers expand their investment in Alteryx as visibility improves.

And indeed, Alteryx noted that its community remains healthy. Touching on those network effects, land-and-expand and COVID-19, a relevant quote from the earnings call:

We’ve been investing in our community for the last five years and we have a very, very active community. Again we’ve had a 68% improvement in the monthly active users on community and we know the impact that community has on our customers. They tell us. We help them get up to speed in the data science world. We help them socialize it to their co-workers. It leads to more expansion and when we come out of COVID. We’ll see that expansion I suspect. But we also have done a lot of around new programs in community that would take the place of onsite working days, where we go onsite and workshops with customers. So everything from our discovery program we have lots and lots of people in our Discovery programs, our virtual solution center has done over extraordinarily well more than 1,000 customers spend considerable time with our teams on line. So I think we made the pivot to the virtual world quite well.

So, to that end, management expects that COVID-19 may provide a boost towards the adoption of the APA category in the longer term. While initial lands may be smaller (adoption licenses), at least the land activity remains strong, which is arguably more important than revenue during this time.

Based on what we see today, we do not anticipate a material improvement in business conditions during 2020. At the same time, we believe that COVID is creating a longer-term tailwind for our business. Companies that lacked analytic rigor or those with data c

The growth of these licenses to me indicates that the business continues growing quite firmly; it’s just in a way that results in the associated revenue being delayed.

Management Discussion

The earnings call provided investors with some additional information that may interest some investors.

Alteryx on SaaS and Cloud Adoption

Expanding on the cloud discussion:

Sure, thank you for the question. So everyone knows we actually have quite a few customers who are in the cloud. We have our server deployments for automation and the analyst processing up in AWS and Azure for as little as $9 an hour that you can execute with just a few keystrokes. We actually have that up there for three or four years with almost no activity and that’s not suggest that cloud isn’t important. But we’re hybrid. We understand that we want to be close to where the data lives and in large organizations especially in the Global 2000 most of their data hasn’t moved.

In fact earlier this week, I was on the phone with a Chief Data Officer of a Fortune 50, insurance company on the East Coast and he indicated that they’ve been dabbling with the cloud for quite some time. But not a single bit of customer data was currently in the cloud. And so I think that we’ve been focused on cloud for a very long time. We are in the process of a cloud-based designer mostly to ease the burden of deployment of large implementations in organizations around the world.

If you attended our APA event, you would have heard that PWC indicated they have 55,000 users of Alteryx. Now if they hassle to deploy quarterly releases of an image for those users for having a browser-based delivery would be better. The customers are not pushing us for a multi-tenant SaaS service at least not today. The data is living everywhere. It’s going to be hybrid forever.

We’ll live where the customer tells us to live and we’ll be prepared when the customer says that the data gravity has shifted. It just has not shifted and I don’t think it’s going to shift for quite some time.

While the hybrid approach is indeed one that is often heard, for investors looking for a company with a more cloud-focused approach, the Snowflake IPO may catch their attention. The difference between these companies is that Snowflake is more about the storing of data, while Alteryx is used for the analytic process of using such data; Snowflake to that end can be one source of data.

Alteryx also discussed use cases

I will say that as we’ve gone more from in the last 12 months maybe even 18 months. More and more from a small land to the top down selling motion with larger lands and large expand. One of the things that we’ve also done even in the last 90 days is, leverage our value engineering team for more of the strategic discussions that we’re having with the C suite. So we put together a value engineering team about a year and half, two years ago.

We’ve perfected the playbook for value engineering in a few of the verticals. We’ve begun socializing that effort with a broader part of our go-to-market team. So we do drive value. I think you see that in every customer you talk to, to see that in all the used cases, that you find on 260 used cases that you find on community. And so the key is actually driving more of it so that sellers have that value proposition at the moment of inflection for customers to buy.

Alteryx on APM engine

No the AMP engine is an in-memory engine. It is far more scalable we’re seeing. Extraordinary throughputs on processing for large databases particularly when there is complex analytics process is being run. But again it is an engine that for processing in memory. And frankly, we don’t care where the processing does occur. Someone wants to push business logic from the Alteryx UI back into redshift or Teradata or Snowflake or SQL server. We’ll allow you to do that. But it provides the horsepower that analysts need.

Now that we’ve liberated data across their enterprise, they don’t always have to go with the server. Although, I will say that the purpose of rolling out the analytics hub was intended to get people to adopt server earlier. And of course the AMP engine is shipping with server, hub and designer.

Valuation

The stock has fallen back to a value first seen in mid-2019. Alteryx is currently valued at about 17x forward P/S. For a company supposed to grow at 30% levels or higher, this seems quite a reasonable valuation. If revenue growth can rebound, as this thesis calls for, the sell-off has provided the stock with an opportunity for multiple expansion.

The 30% growth mentioned seems justified based on ARR, as discussed.

Risks

The main risk is likely that Alteryx may be unable to return to 30% or higher revenue growth in the near term, given the COVID-19-driven slowdown in 2020. On the plus side, though, the slowdown seems entirely driven by these macro issues.

COVID-19 has clearly provided enterprises with some reluctance to invest in non-critical tools, which Alteryx might perhaps be considered. While Alteryx has responded, for example, by providing adoption licenses, it is unknown how long this current business environment will persist and affect Alteryx operating capabilities.

Nevertheless, while revenue growth has slowed down, the ARR metric at >30% shows quite a different picture of a(n underlying) business still growing at quite a pace. If anything, it seems to me that revenue growth may rebound with a vengeance when all is said and done.

Takeaway

Alteryx had been on my radar for a while, but like many cloud/SaaS or related growth companies, valuation held me back from rushing to initiate a position.

But after Q2 earnings, other investors were rushing en masse to the exit doors, and hence Alteryx suddenly found itself in a position where it got on the operating table. So, when this happened, Alteryx caught my attention and I initiated a position.

Alteryx touches on a key computing theme: data analytics, or using compute to gain useful information from data. While this initially seemed to many investors as beneficiary to the COVID-19 trends, it did turn out that businesses tended to downscale as the realities the pandemic set in.

Nevertheless, as a leader in this growing category, I expect Alteryx will go back to its previous highs and continue to make new highs thereafter, based on a re-acceleration of the business. Alteryx’s dollar retention, customer growth and ARR (and even adoption licenses growth) metrics support this, to a greater extent than its revenue metric. As the CEO said at some point during the Q2 Q&A:

Well I think it’s important Derrick to remember that we guided to 30% growth on ARR to the end of the year. So healthy strong growing business in a very large space for data science and analytics and today we’re the only publicly traded companies that focuses in on this space with a code-free, code-friendly platform to help people see success in digital transformation.

Given an over 30-40% drop in stock value, Alteryx is currently one of the few growth stocks with also a reasonable valuation, and as such may likely be considered one the less risky growth investments currently. This is a similar investment thesis to Pinterest (PINS), which I recommended while it was below $25, far from its all time highs.

Overall, Alteryx’s CEO remains bullish on the long-term and leading its product category, which seems reasonable given this dawning age of AI.

You’ve heard me say on many quarters. In good times people need data science and analytics. In bad times they need them more and it’s a matter of time and yes, I’m pretty confident that in the end. We’re going to win the APA category and we’ll be the leader in the data science and analytics space. And we just may have to wait, a smidge longer.

Summing up, others are concerned about short-term revenue growth. Nevertheless, ARR growth is firmly above revenue growth, with the surge in adoption licenses being another proof point of the current macro realities.

Disclosure: I am/we are long AYX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Be the first to comment

Leave a Reply

Your email address will not be published.


*