AYX questions for Q4/Q1

My hypothesis was that Q4 2019 would be light compared to Q1 2020. This was based on the following assumption: lots of customer contracts were set to expire on 12/31/2019 and would not be renewed until 1/1/2020. This was called out by management on the Q3 2019 earnings call. Since it was explicitly called out, I was thinking that it could be a significant factor in leading to a normal beat in Q4 2019 and a nice bump to Q1 2020 revenue. Well, as we all saw last week, Q4 2020 was the biggest blowout quarter ever for AYX. Revenue was 19.4% above the high end guidance. Previously, typical beats were 5-8%. Q3 2019 was an outlier with a 13.6% beat. But a 19.4% beat??? What the heck happened? It’s time to reexamine the above hypothesis…

Did we actually see the contracts that were set to expire on 12/31/2019 actually get renewed in January or did customers renew early? I think it would be very useful to know the answer to this question, not for the long term but more for predicting what’s to come for Q1 2020. This has special interest to me because of the options trade that I made on Friday (bought AYX May $150 calls and sold AYX March $165 puts for a $4 credit). The Q1 2020 earnings results that are due out around May 1st will impact the profitability of my trade.

So below are my unanswered questions. I am going to try to get them answered. Maybe we can figure out some of this on our own. But for the things we cannot know, perhaps AYX Investor Relations can shed some light.

  1. So will we get a bump from contracts renewed after the new year?

  2. Or did some or many of the customers with contracts expiring on 12/31/2019 renew early (i.e. before the end of 2019)?

  3. Did AYX sales try to induce early renewal to get revenue into Q4? Were there incentives or promotions offered to these customers?

  4. I heard somewhere that AYX had a price increase. When was this price increase announced to customers? When did it take effect? Was there a possibility to renew early at the lower, older pricing? Did AYX try to use the price increase as a carrot to get sales into Q4?

  5. Any information on the above (1-4) would be helpful, and it would also be helpful if we can quantify the above.

So, we have a group of people here who may already have some answers and insight. In particular, does anyone know the details of the price increase? Which products of AYX’s products it pertained to and when it was enacted and whether it (the increase) could be avoided by entering into a contract in Q4 rather than in Q1?

After some discussion here, I plan to send a message to Investor Relations.

Chris

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2. Or did some or many of the customers with contracts expiring on 12/31/2019 renew early (i.e. before the end of 2019)?

This in turn raises two questions:

  1. This question seems to assume that contracts are on a calendar year basis. Is this actually the case? Or, if one signs a year contract on 22 April does it run through 21 April of the year following? Or, some other pattern like always starting on the 1st of a month?

  2. If one has an existing contract which ends 31 December and signs a new contract that begins 1 January of the following year and does the signing on 5 December, does the initial revenue from that contract get recognized in December when the signing occurred or in January when the contract started.

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Hi Chris

  1. From the CC, it appeared to me like the price increase was for Alteryx Server, and they said the increase was in Q1 (2020 I assume). From blog posts, it looks like it went from about $58k to $79k.

From my CC notes, I had:
7. Gap between revenue growth and billings growth expanded Q3 & Q4. Billings has noise, billing schedules different. Nothing interesting in Q4. But some large deals fall into January (Dec 31 expiry). Up-front amount tended to high-end of 35-40% range.

not a lot, but hope that helps

cheers
Greg

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Hi,

I think it has to be mentioned that the rent or cable contract-metaphor does not really compare to the way Alteryx recognizes revenue. Please remember that since Alteryx switched to ASC 606 they are recognizing 40% of the contract value upfront. The average contract length is two years. So while in the renting-metaphor it means making $1,000 per month for two years, in Alteryx’s case they take in $9,600 in the first month (40% of the contract value of $24,000) and then take in $626 every month for the remaining 23 months. That is a huge difference!!!

The problem in that picture is that quite obviously Alteryx is front-loading revenue through this revenue recognition method compared to ASC 605. Which in turn leads to the concern that this front-loading could lead to less revenue in the back-end. We have been “worrying” about that since the change to ASC 606; rightly so in my opinion.

Don’t get me wrong, this is not a criticism – I think recognizing more revenue up-front makes a lot of sense here from an accounting and business sense. But you have to be aware of the problem and not oversimplify things. Momentarily, that front-loading is not a problem apparently. Since the company is firing on all cylinders, raising prices without negative consequences and adding record numbers of new customers each quarter. Also, their high retention rate helps. But they are also not immune to revenue deceleration. It’s not the time to talk about that because everything is going really great and there is no sign of a slowdown. But just to keep in the back of your mind: If/when the company adds fewer customers and/or can’t upsell the way they used to, the revenue deceleration could be stronger and more abrupt than with other companies.

I think that’s basically been the worry here that also has spooked the market at times if I remember correctly. For example, when they switched to ASC 606, which was right around the change of the FY, Alteryx shares were extremely cheap because the market didn’t know how this revenue recognition will play out. As to Gauchochris’ questions, they are great questions but I think it is very hard to answer them with the facts available to us in a way to really predict future quarters (except question 4 which has been answered already).

Best
Niki

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I just wanted to add my voice to Diablito as I see the post above his got a lot of recs even though Diablito’s post is the correct one. Subscription revenue is treated differently under ASC 606 so it absolutely does matter if a contract is renewed early. Atlassian (TEAM) does price increases about once a year and addresses exactly what GauchoChris is talking about in their shareholder letter,
"In September, we announced price changes on specific products, driving stronger than anticipated Q2 revenue growth. Higher demand was driven by both early renewals and new sales. Our channel partners in particular drove this strength. Sales were pulled forward from both the second half of fiscal 2020, as well as fiscal 2021. "
Or in plain english, customers renewed contracts early to lock in at a cheaper rate.

For more on ASC 605 vs 606 and how it relates to SaaS companies and specifically AYX see my post here.
https://discussion.fool.com/ayx-asc-606-and-q4-34146055.aspx

best,
Ethan

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I seem to recall though that these price increases have been happening over the last few years. So customers would have been incentivized to lock contracts in early for at least the last 3 years including 2018 which had been adjusted to ASC606.

If you base your decisions on continued increases in growth rates each quarter I suppose this could be alarming.

But then again there had to be some of the ane mindset last year this time which showed up in the numbers.

I posted this in a different thread. More relevant here and reposting with changes.

"While this was an amazing Q couple of things to keep in mind:

  1. They had a price increase on Server in Q4 - see Dean’s answer to the last analyst Q. Earlier on responding to Tyler he said “this Q1” but his answer to the last analyst was clear. They did not clarify how much lift they got from the price increase. Price increases are great but they are somewhat less sustainable than organic growth imo.
  2. Under ASC 606 their rev recognition can vary between 35 to 40% in the Q a contract is signed or renewed. Last 2 Qs they have said they have been at the higher end of that range because of their product mix, say they were at 40%. If in Q4 2018 they were at 35% then it would have had a big impact on this Q growth.

AYX is my biggest position and I don’t plan to sell. But it would be interesting to see how the above 2 issues play out in 2020. My guess is that in Q3 and Q4 when compares get more challenging it will get tougher for them to post big beats…

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Hey Diablito and ethan1234, I totally blew it with my response to GauchoChris on this thread. It was an ASC605 answer that is no longer valid.

Thanks for your informative posts and corrections. I didn’t realize that Alteryx had a detailed presentation on how the ASC605/606 transition would change their practices. I wish I would have found that yesterday! It is a significant change and your posts have helped me more thoroughly understand that.

I apologize to everyone for the misinformation.

Brian
Fool One Guide and Fool.com contract writer
You can see my holdings here: https://discussion.fool.com/profile/TMFBwithbike/info.aspx

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1. So will we get a bump from contracts renewed after the new year?

2. Or did some or many of the customers with contracts expiring on 12/31/2019 renew early (i.e. before the end of 2019)?

3. Did AYX sales try to induce early renewal to get revenue into Q4? Were there incentives or promotions offered to these customers?

The difference between Billings ($290 million up 81%) & Revenues ($156.5 million up 75%) is their deferred revenue and may help explain some of the pull-forward concerns. I’d be concerned if we get a significantly lower relative growth rate in Billings as this would mean that more of the sales goes directly to the income statement as sales instead of the balance sheet as deferred revenues, indicating pull-forward activity.

Generally, ASC 605 is probably a lot better way to determine the reality of revenues for SaaS companies, because it enabled reporting to be done by evenly spreading the revenues out over the term of the contract (which is how a subscription works), instead of front loading by a percentage.

I think FASB or the accounting rules makers had worked on 606 for so many years prior to implementation that they didn’t fully consider SaaS businesses. The rules did provide a consistent and logical way to compare and analyze subscription business to perpetual business as so many companies relied on their VSOE (vendor specific objective evidence - or how they’ve always done it) for booking and recognizing revenue. VSOE was a requirement, regardless of whether or not it made sense.

The negative reasons I can see for Alteryx to do pull-forwards is if they are trying to cook the books or pay their sales people more money at fiscal year end. Another reason is accommodating customers who want to deplete their yearly budgets.

In my experience, once a company starts massaging revenues for any reason, it’s bad for the business and culture in the long run, because it leads to focusing on the wrong things and unintended consequence.

Alteryx certainly doesn’t need to do this.

It would be interesting to see there answers.

DJ

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