I’m not sure what to do about Alteryx. I just know the market has got it all wrong.
I had it all wrong too. I thought (based on comments they made in the Q1 call) that they had more recurring revenue than they actually did. I messed up! I was interpreting the comments wrong, probably hearing what I wanted to hear.
They said they had reached 400m in ARR (annual recurring revenue) in Q1, so I figured there was no way Q2 revenue would be less than 100m (400 divided by 4) and probably would be a good deal more, maybe 110 or 115 million. After all, they had 109m revenue in Q1. Most SaaS companies have more each quarter.
But AYX is not a SaaS company. Because of that, ASC 606 requires them to recognize 35-40% of revenue in the quarter not in which it’s not delivered, but in which it’s generated. I didn’t realize how much impact that has. On 400m of ARR, only between 240 and 260 million is left to recognize ratably (evenly across all quarters). So they weren’t “guaranteed” 100m in Q2, but just over 60m! Big difference!
So for new contracts, and also for renewals, 35-40% of those hit revenue in the quarter when they happen. And not just 35-40% of the ARR, but the TCV (total contract value). Woah! These can be 3 year or 5 year contracts! That hugely affects recognized revenue each quarter, and even more so when comparing quarters YoY – it almost doesn’t make sense to do so at all with AYX!
But wait a minute, they said ARR at the end of Q2 was 430m. So where’s all the benefit from this 30m new in Q2 (plus however much in renewals, which we don’t know)? Well, two answers:
- We don’t know how much ARR rose in Q2 2019, but we can guess it was actually more than 30m. (I’ll give some guess numbers later.)
- Since we don’t know how many renewals there were this Q2, and in Q2 2019, the difference could greatly skew the comparison! Maybe Q2 2019 was a big renewal quarter, but they were 3 and 5 year deals, so they didn’t come back up this year (and won’t for a couple more years).
Alteryx has said they hit 200m of ARR in Q2 2018. If I fill in some guess numbers, we can see the real progress of the business using ARR, which (for AYX) makes a lot more sense than comparing quarterly revenue YoY!
Bear’s ARR guestimates
Q1 Q2 Q3 Q4 2018 ? **200** 220 250 2019 270 307 340 385 2020 **400 430** *460* __*500*__ Or by percentages... Q1 Q2 Q3 Q4 2019 53% 55% 54% 2020 48% **40%** _35% **30%**_
They said ARR grew about 40% in Q2 and that they’ve guided for 500m by Q4 and said that’s 30% YoY growth, so I just filled in the rest of the numbers. Remember, they’ll be hoping to beat in Q3 and Q4.
It’s pretty clear: AYX was never really a company growing at 60% or 75%. Those jumps in comparable recognized revenue were simply due to accounting! AYX was growing in the 50% - 55% range, and now they’re growing in the low 40% range during the pandemic. They may slow into the high 30’s. But the 17% they turned in in Q2 and potentially lower numbers in Q3 and Q4 are due to accounting.
As I said at the top, I’m still not sure what to do with AYX. They’ve clearly seen headwinds and slowed down. I don’t think they’ll ever be a 60% or 70% grower, truly. But it also seems clear they are totally misunderstood. That doesn’t mean they’ll suddenly be rightly understood next week or next quarter.
So what to do? The short term is harder to gauge with AYX than with SaaS companies. If a SaaS company has weird and wacky revenue numbers, there’s something wrong. This is different. So do we hold AYX with long term intentions only, ignoring the short term? That’s kind of unlike us. But the alternative is to put it in the “too difficult” basket, as I’m now doing with LVGO/TDOC. Obviously we don’t have that level of complexity and confusion with AYX; frankly it just seems like pandemic headwinds we’ve seen with other companies. Even DDOG hasn’t been immune to those. AYX has slowed from 50% to 40%, though. Not 80% to 70%. That makes a big difference. Hard to know where it settles in 2021 or 2022. Maybe it’s reasonable to think it could grow like OKTA, which is seen as more than doubly as dominant as AYX based on PS ratio. I think that’s selling AYX’s dominance a little short. But perhaps the product just isn’t as “must-have” as we thought, at least in the short term.
I added about 15% to my mid-sized AYX position Friday, which didn’t even raise it back up to its pre-earnings level of 8% of my portfolio. It’s sitting at about 6.5% right now. Man, that drop! But I am keeping it. I just don’t know if I’m adding. Maybe some LEAPs (OT options reference so don’t respond here; look it up on Google if you want to know about LEAPs).
Would love to hear others’ thoughts. Perhaps Hastan and Fish (Ryan Reeves) and others might understand all this even better than what I’ve laid out here.