AYX: Accounting Change and Future Growth?

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Hi all,

I know this board has been very busy discussing NTNX horrible quarter, which was great, but I have the feeling that some other stories maybe didn’t get the attention they deserve. I’m talking about the accounting change of Alteryx.

Ethan wrote about it, got 31 recs, but no one replied:
https://discussion.fool.com/ayx-asc-606-and-q4-34146055.aspx?sor…

Darth brought up a good point about lumpiness of Alteryx’ revenues going forward due to the accounting change and it sparked a little discussion over at the NPI:
https://discussion.fool.com/ayx-asc-606-lookback-34150145.aspx?s…

I just want to summarize what I think are the most important points about the change in my opinion:

  1. This is just an accounting change and will not influence how the company structures their deals and does business. It also doesn’t change how much revenue the company will make in the long term, it just changes the way revenue is spread over the contract duration.
  2. The company will now account 35%-40% of the total contract value (TCV) at the contract signing. The rest of TCV will be accounted ratably over the duration of the contract. This means that revenue will be recognized much more up-front (i.e. today’s revenue goes up a lot but tomorrow there is not so much recurring revenue left to recognize; but then when the contract gets renewed revenue shoots up again), deferred revenue will be much lower, and calculated billings will not be a helpful metric to follow going forward.
  3. Because of the new revenue recognition method, revenue will be much lumpier and follow the seasonal patterns of billings. Billings have been very strong in Q4, followed by a big sequential drop in Q1. In Q2 and Q3 sequential growth picks up again.

As I said, long-term this doesn’t change anything, in my view, but I was contemplating a lot about the short-term impacts of this change. Are there any?

When an analyst asked in the call what would be the guidance in Q1 if they were reporting under ASC 605, this was the answer:
“Yes. Thanks, Michael. So, for the first question, I mean, it’s really hard to compare. Both the 605 and the 606 are just different mechanics. And we’re not guiding forward under 605. So, it would be hard for me to draw that correlation other than to say if you just look at our 606 guidance, that should reflect the strength that we’re seeing in the business.”

Not really helping alot… Over on NPI I argued that even though the new accounting standard changes the sequential patterns, it shouldn’t impact the yoy-growth rate really. I still believe that.

But here is what confuses me a bit:

Due to the change to ASC 606, 2018 revenue and GAAP EPS went up to $254 million (from $204 million; +20%) and $0.43 (from $-0.29; +167%). At the same time the shares went down from $79 to $67. That’s down 15%, back about where we where in mid January, even though the valuation on EV/S basis went down considerably. Even taking their low-ball 2019 guidance of $350 million they have a forward EV/S of around 12 now.

So if, as is my opinion, nothing really material changed due to the accounting changes, why was the market selling off shares even though their numbers have gotten so much better (yes, numbers went up artifically but still the valuation compressed quite a bit now)? Am I missing something? Is this simply the market being cautious and unsure? Is there more to it? Is this a buying opportunity?

Would love some input and opinions!

Best,
Niki

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So if, as is my opinion, nothing really material changed due to the accounting changes, why was the market selling off shares even though their numbers have gotten so much better (yes, numbers went up artifically but still the valuation compressed quite a bit now)? Am I missing something? Is this simply the market being cautious and unsure? Is there more to it? Is this a buying opportunity?

China trade FUD and other political FUD that always affects markets short term, sometimes just days. If you like AYX take the RedTag sale discount. I got some @ $65.00 yesterday.

Denny Schlesinger

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Don’t believe me? Read these headlines…

Stock futures edge lower as investors brush off China stimulus

Trump pushing for trade deal with China in hopes of boosting stock market ahead of 2020 bid

Stocks future subdued due to lack of fresh catalysts

Wall Street Futures Flat, Dollar Gains; China Nears 9-Month High on Stimulus Bet

The Dow Jones Industrial Average Is Still Waiting For a Trade Deal

Markets are complicated!

Denny Schlesinger

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It will make next years YoY growth rates look like they are slowing.

They had to change account standards due to the size of there company. The are no longer classified as “emerging”.

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“Don’t believe me? Read these headlines…”

When stocks were down Monday, I struggled looking for news. During the day, is there a site you recommend?

Thanks.

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My first post here, so hope I’m not breaking any rules. I have taken early retirement due to extreme burn out in the aged care industry in NZ and Saul and his team here have been the single biggest inspiration in a long time. Thank you so much.

Back on topic - re AYX, Change to reporting standards. There was an EXCELLENT article on the Seeking Alpha site by Niki Schranz explaining it in detail and its relationship to SaaS companies in general. Here is the link(If this link was on their paid sub site I wouldn’t be free to post it so I’m hoping this is Okay): https://seekingalpha.com/article/4246224-alteryx-little-saas…

Re the query for News updates. I too frantically search for news when a stock or stocks take a hit, starting right here with Saul & Co. After that it’s off to Seeking Alpha then Market Watch. Hope that helps the query in the post above.

I had 17% in AYX and lost it in a dip, having set what I thought was a safe Stop Loss limit. Stupid. Have been buying back in on dips. Very high conviction, esp after the likes of the article in the link I’ve given here.

Please remove this post if it breaches any rules as I wish to comply.

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Hi Thomasgss:

Great to have a new poster on the boards. I look forward to your contributions to the learning here and other places around the Fool.

You wrote: There was an EXCELLENT article on the Seeking Alpha site by Niki Schranz explaining it in detail and its relationship to SaaS companies in general.. Diablito, the person who started this thread, is Niki Schranz! :slight_smile: I am sure he won’t mind the compliment.

Re: Stop Loss…When you play with fire, you’re bound to get burned…

No rules breached whatsoever, as far as I can tell!

Best, Swift…

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If you are looking at a good entry point to add to your allocation like I just did, Ayx has been hovering around it’s 50 day MA (62.57). I used this dip to bring Ayx up to a 10% holding in my portfolio from a 5%. Like most of you I have high confidence in this company and I think they are going to continue to grow like crazy over the next year or so.

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Thank you Swift, Niki et al!!! :slight_smile:

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Not really helping alot… Over on NPI I argued that even though the new accounting standard changes the sequential patterns, it shouldn’t impact the yoy-growth rate really. I still believe that.

If a larger (smaller) amount of revenues gets booked up front (during the contract term), quarterly YOY growth will be impacted for for at least four quarters. If they had three years subscriptions under 605 and didn’t convert them when they went to 606, the amount of time could be a bit longer. Nevertheless, at the rate they are growing, it shouldn’t matter so much.

So if, as is my opinion, nothing really material changed due to the accounting changes, why was the market selling off shares even though their numbers have gotten so much better (yes, numbers went up artifically but still the valuation compressed quite a bit now)? Am I missing something? Is this simply the market being cautious and unsure? Is there more to it? Is this a buying opportunity?

There are probably no material changes to the business, unless the accounting change causes unintended changes in behavior of the sales team (or perhaps some other unintended consequences). When companies make a booking change, be it as a result of a change in regulation or a shift from perpetual to subscription or some other reason, compensation plans can be gamed by the sales teams. It takes really smart and strong management to minimize such effects.

I’ve seen deals get pulled forward and also delayed as a result of changing recognition policies without a corresponding modification in compensation. I’ve also seen sales give away valuable long-term conditions just to satisfy a stupid accounting rule. This happens all the time. This is why I love the SaaS subscription model as opposed to the perpetual model. It greatly reduces the likelihood of gaming the system.

Also, Alteryx most likely doesn’t have such issues as they get a lot of follow-on sales directly from customers.

However, if 606 requires more revenue to be recognized up front, I see this as a negative, all else equal, because the value of the product is probably spread evenly during the contract while the recognition is front-loaded. This creates an incentive for companies to optimize on the number and not on the value.

It could be that the market expected higher revenues last quarter under 606 or that some of the speculators have been selling due to the uncertainty the changes bring. There doesn’t seem to be a problem with the business.

DJ

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When stocks were down Monday, I struggled looking for news. During the day, is there a site you recommend?

I keep several portfolios on Yahoo (no buy and sell data) and Yahoo provides these headlines. You can also set up a portfolio a SA but then you get more junk mail – still, it’s a source.

Denny Schlesinger

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I had 17% in AYX and lost it in a dip, having set what I thought was a safe Stop Loss limit. Stupid. Have been buying back in on dips. Very high conviction, esp after the likes of the article in the link I’ve given here.

Stop loss orders are for traders, not for investors. Keep your stop loss orders, “mental.”

Denny Schlesinger

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Great advice Denny…on both counts. Thank you

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Hi Niki,

It just seems that AYX is seeing its usual volatility… i cant find anything else to read into post earnings sell-off as there was not a specific driver to pre-earning run up.
Price today (6th of March) is same ($67.60) as it was on 6th of Feb.
Most of SAAS stocks have come down over last few days, not sure if there is any specific driver than usual volatility.

BTW - I enjoy your articles a lot on SA. Keep it going.

Nilvest