Alteryx Carnage - q2 2020 Analysis

The top line numbers are obviously bad, and I can’t seem to find much good in the underlying transcript of the earnings call.

In case people haven’t seen them yet, and for completeness sake, I will post highlights here:

Rev grew 17% yoy, much slower than last quarter’s 43% percent growth, and way slower than the quarter before that (60ish percent)
Margins are still incredible, at 91%.
Net expansion was 126%
Annual Recurring Rev (ARR) up 40% yoy
Non gaap net income was $1.7mm or $.02/share
$974mm in cash on balance sheet
Guidance: 7%-11% rev growth. Non gaap net income to be $8mm - $12mm or $.09-$.14/share. 30% yoy growth in ARR

The good: Maybe these adoption licenses will result in big conversions at some point in the future. Also, margins remain the highest of any company we follow, net expansion is very good, ARR is good, the company is profitable and has a strong balance sheet.
The bad: Lengthening sales cycles, smaller deals, customers have tighter budgets (scrutinizing every spend), more top down selling, higher churn rates
The ugly: Reliance on “adoption licenses”. Guidance is incredibly low again, and, as of yesterday, we have even more evidence that AYX does not always crush their guidance.

My understanding from the earnings transcript is that Alteryx is now becoming somewhat reliant on “adoption licenses”. Quoting from the transcript: “To address this new normal of buying behavior, we increased our use of adoption licenses.
An adoption license is a short-term contract generally six months that allows the customers to effectively take Alteryx for an extended test ride to prove value, engage demand before they make a longer-term commitment.”

My understanding here is that these “test rides” are not free, but they are perhaps much cheaper than a normal contract. The earnings transcript is not super clear on that regard.

If they can convert a lot of these adoption licenses, then perhaps there will be a big turn around in their business. I’m guessing here, but if they only started heavily doing those adoption licenses in, let’s say April, and they are six months long, then I would imagine they don’t convert to a normal contract until October at best. So this won’t show up heavily in the numbers for Q3, but it may have a positive impact on guidance for Q4. If that’s what happens and we see good, growing guidance for Q4 2020, expect me to take a small exploratory position after Q3 numbers come out.

Conflicting opinions: The voice of David Gardner tells us to hold through these kinds of down turns and stay invested for the long haul in the best companies. No doubt AYX fits into this narrative, and if this is the type of investor you are, you’re probably gonna buy more ayx today at its new, lower price. However, my interpretation of this board’s mentality, being “ruthless allocators of capital”, tells me to sell AYX and buy better businesses with both short and long term tail winds until the business fundamentals of AYX revert.

There are companies on this board that are great during non – covid times, and also great during covid times. I’m specifically talking about Zoom, Shopify, Cloudflare, Livongo, DataDog, and CrowdStrike. Shark Tank Voice: For this reason, I’m selling out of AYX completely. I had already pared down my AYX holding before earnings to a rather small 4.5%, so it isn’t a huge sell for me anyway.

A part of me feels dumb for not selling it out entirely before earnings. However, before this latest earnings report, we thought that maybe the narrative had changed with AYX. Now, we KNOW the narrative changed. So I don’t feel so bad for my prior investing decisions. The only remaining question is, is this just a short term change in the narrative, and if so how short term will these changes be? No one knows or can know the answer to either question.

Side note: motley fool post preview does not work for me as it should. Pasting in from MS Word causes weird formatting issues. For this post, I tried writing in sublime text (instead of MS Word) - let’s see how it goes.


The voice of David Gardner tells us to hold through these kinds of down turns and stay invested for the long haul in the best companies

Well a commonly-held view pre-earnings was that AYX may indeed suffer a slow down from the current macro economic conditions, but that the stock is worth holding for the expected macro recovery. I subscribed to that thinking and did not trim more than half, largely because I didn’t want to generate a hefty tax liability. Naturally, I wish I sold all my holding in the $170s in hindsight, however the thesis is not broken here. AYX is not mission critical at this stage of the Covid-induced macro cycle, but its products deliver high ROI for demand & growth to return in more normal times. The fact that there is very little competition (For the time being at least) helps me to worry less about AYX than the prospect of tech competition catching up with DDOG and CRWD.

Long: LVGO, AYX, DDOG, CRWD, ZM, FSLY, NET (This feels painful but nothing new)