The building where the Alteryx Annual Shareholders’ meeting was held was a modern, if nondescript, office building. I don’t believe that Alteryx is the building’s sole tenant, but their logo was just below the roofline, easily visible from the main road. I very much appreciated that, since I wasn’t sure how easy the building would be to find. Once inside, I found my way to the second floor and a kind employee let me in with his card key. I signed in with the receptionist, showing my brokerage statement and ID. If you ever get to attend a shareholder meeting, you should definitely have those things with you. Not every company requires it, but why risk being turned away after traveling there? There was no food or beverage on offer (except I accepted a bottled water). There were no kiosks to show off the company’s products. I wasn’t necessarily expecting those things, but some companies make them available. I got the impression that they realized that they needed to be prepared just in case shareholders arrived, but that they weren’t necessarily expecting any.
The meeting itself was held in a sparse, but high-tech, conference room large enough to hold many dozens of people, if necessary. It wasn’t necessary. At the front of the room was a dais with four people: Chief Executive Officer (CEO), Chairman of the Board of Directors and co-founder Dean Stoecker was left-most, from the audience’s perspective. The other three were members of the Board of Directors. I know that there were at least two more Directors who were telephoned into the meeting, but they were largely silent. It is possible that all eight directors were either present or called in, but I’m only certain about six. Facing the dais were four rows of tables with seats. The first row was filled with almost all of Alteryx’s C-suite employees. I took a seat in the second row, as did the only other shareholder present. There were a couple of people in the last row who seemed to be supporting the meeting, but it wasn’t clear to me what their role was.
The first part of the meeting is a scripted affair that works its way through the meeting’s official agenda, including ending the official part of the meeting with adjournment. All annual shareholder meetings feature this official part, and it always seems to be highly-scripted, although some executive teams try to inject more humor than others. Alteryx’s management played it straight. All the nominated directors were approved and all the proposals were voted in line with the company’s recommended vote. That isn’t terribly surprising at most companies. It is even less surprising since, at Alteryx, management and the Board of Directors wield more than half of the voting power. Alteryx has two classes of common stock. I believe that Class A and B shares have equal rights as far as the corporation’s economic benefits are concerned, but Class B shares have ten times the voting rights of Class A shares, and Class B shares are not publicly-traded.
After the meeting was officially adjourned, CEO Stoecker opened the meeting up to shareholder questions. In many meetings I’ve attended, the CEO will offer to give an investor presentation that often lasts about 15-20 minutes. This is typically a shortened version of the kind of presentation given at conferences held by investment banks. I think it is a nice feature, especially if I am less familiar with the company. But that wasn’t offered. Of the two shareholders, I raised my hand first and was acknowledged.
“Hello, and thanks for taking my questions. My name is Bob. In addition to being a shareholder, I am a freelance financial writer. Most of my work supports subscribers to various Motley Fool newsletters. Some of my questions are my own, and some come from subscribers. They’re probably shareholders too, but they’ve certainly expressed an interest in learning more about your company as an investment. I intend to write about my experience here today. Here are my questions. Please forgive my “reading” them, rather than just “asking”. Also please forgive that I tend to ask questions in flurries.
1. Alteryx’s target customers seem to be business analysts first, trained statisticians second, and IT professionals third. Maybe CDOs first or second. I get the relative ranking of the first two, given the roughly 20:1 ratio you’ve described in the past. I wonder where Alteryx stands in terms of sales directly into IT departments, compared to the opportunity you see there? How do you see that opportunity changing over time? Are there impediments making it difficult to sell to IT versus business analysts?”
Management’s answer here hewed fairly closely to the script that is often used in response to analyst questions on an earnings conference call. I think this is typical of managements in general, and not a trait peculiar to Alteryx. I suspect that executives work with the company’s general counsel to set boundaries on what can and shouldn’t be revealed. Management generally stays close to the script. CEO Stoecker indicated that the typical initial sales call occurs after the Designer software has been downloaded for a trial period. It is rare that this first download is initiated by someone in the IT department. This initial contact is what Alteryx calls “land” in their “land and expand” approach to increasing sales. It usually results in two or three seats being sold. When they “expand”, they certainly work with the IT department because those people want to be sure that the business analysts are happy, although they’re also concerned with things like data security. The IT department is more likely to ask for licenses for the Server product than for the Designer.
Unfortunately, this occurred to me after the meeting. Alteryx seems to have a very good handle on how their product is being used. In their marketing materials, they explain use-cases that their tools can solve. Alteryx also uses its software internally to ensure that its own decision-making is based upon the best available data. What they probably need to do is identify use-cases within their own IT department and start to promote those use-cases to the customer IT departments that they encounter. This may already be happening. I can’t imagine that I’m the first person to think of this. But the “Solutions” tab on their website doesn’t have a section that would speak to either IT developers or IT administrators. At least it doesn’t today…
“2. In your Form 10-K, I see that the initial conversion rate for your convertible debt is 22.5572 shares per $1000 of debt, but there could be adjustments. Can you tell me what the worst-case conversion ratio is, from the perspective of a Class A common shareholder, and does the capped call cover the worst case? I ask because in the Risks section, you talk about reducing the dilution effects rather than fully offsetting them. I was also curious… Are conversions occurring? I would guess that the interest payments are a mild deterrent to early conversion.”
Kevin Rubin, the Chief Financial Officer (CFO) took the lead in answering this one. He focused on the conversion ratio and I don’t believe he addressed the question of whether conversion had occurred. The answers here were not exactly what I would have hoped. First, the capped call is not designed to entirely offset dilution, just a good portion of it. Second, he explained that the worst-case conversion ratio cannot be identified at this time because the future stock price is unknown. I’ve seen some convertible notes where there’s a bracket around the conversion ratio, but the CFO didn’t indicate that such restrictions exist. If I have some time, I might poke through Alteryx’s 8-K filings to see if I can find the Indenture document. But I’m not sure what I dread more: trying to find the Indenture document, or finding it and trying to decipher it! I’m pretty sure it’s the latter, but neither is fun. Regarding whether conversions have occurred, I don’t think there have been any through March 31, 2019. When Alteryx files Forms 10-K and 10-Q, there is a “Statement of Stockholders’ Equity” that reconciles changes in the share count. Neither the 2018 10-K nor the 1Q19 10-Q have line items related to the convertible senior notes. Had conversions occurred in April or May, I don’t think the CFO would have been allowed to say so. Therefore, I suspect that his lack of an answer was his erring on the side of caution about what he can and can’t say in such a setting. Actually, the Equity statement names are different in the 10-K and 10-Q, but that’s where the information would show up if notes had been converted.
”3. The rate of growth for customer count seems to be slowing, although a mid-30s rate makes other CEOs jealous, I’m sure. When you were asked about this during the first quarter earnings conference call, your answer centered around a focus on Global 2000 companies. Do the deals in larger organizations take longer to close than the 45 days you’ve talked about in the past? Do you anticipate a reacceleration once the Global 2000 is better penetrated? You must, since you recently talked about 16,000 customers in 2021. There is such a gap between your revenues and your addressable market that a slowdown seems counterintuitive. You have indicated that a large portion of your addressable market is in the Global 2000. How will you triple your customers in under three years?”
There were two points that CEO Stoecker wanted to emphasize in his answer. First, the 16,000 customers number was mostly meant to illustrate that Alteryx could get to $1 billion in revenue with far fewer customers than the vendor against which the comparison was being made. He says that is because Alteryx’s products offer more value and can support a higher selling price. Second, he wanted to be sure that I understood that he was certain that the focus on Global 2000 companies was appropriate at this point in Alteryx’s growth, and that he has data to back that claim. He also wanted to point me toward tracking revenue growth and Dollar-based Net Expansion Rate, rather than customer count. Which brings me to my final question…
”4. Please forgive this one because it probably sounds like a kindergartener questioning the statistics professor about his statistical methodology. When calculating Dollar-based Net Expansion Rate, you talk about identifying a “cohort of customers”. My understanding of “cohort” in this context is that it means “a subset of customers with a common defining characteristic”. In some of your earnings conference calls, it sounded as if you were using the term “cohort” the way I might use “vintage” when talking about wine. That is, that the defining common characteristic might be the year when the customer first generated sales. For the purposes of calculating Dollar-based NER, I fully understand exclusion of revenue based on professional services. Further, the exclusion of customers with no contract at the end of the period makes sense to me. Let me call customers that weren’t excluded by that criterion “active customers”. What is unclear to me from your explanation is whether that is the ONLY criterion for removing customers from the Customer Base to create a comparison. Three questions, then, although perhaps there will be just one answer: Are there any other criteria you are using to select the cohort? How might the set of Base Customers in the cohort – based on your definition – vary from period-to-period? Why would I, as an investor, gain better understanding from your “cohort” method versus just calculations against the entire “active” customer base, if, indeed, the cohort is a subset of active customers? In answering, please remember what I said about kindergartener. Thank you.”
The fun part of CEO Stoecker’s answer is that he took a jab at CFO Rubin. It appeared to be good-natured, and I was actually pleased because I’m not sure he would have joked if he felt I was a hostile questioner. He basically said, “The Dollar-based NER calculation doesn’t require any kind of advanced degree, so I’m going to let Kevin explain it.” ZING!
But the best part of the answer is that I am certain that there is no customer cherry-picking going on. There is virtually no exclusion of customers other than those with no active contract. The term “cohort” in the 10-K is there because an annual $-based NER is the average of quarterly $-based NERs. The Customer Base used might be slightly different each quarter because the set of customers with an active contract at quarter-end might be different. That is exactly the answer that I wanted to hear, and I told them so.
And thank you for coming to beautiful Colorado. I hope my questions don’t dissuade you from returning!
CEO Stoecker noted that he was born and raised in Colorado. I knew from his biography in the proxy statement that his undergraduate degree was from the University of Colorado at Boulder. I also offered a shout-out to one of the Directors who had called in. According to his biography, he and I attended the same undergraduate college (and, based on his age, probably at the same time). We also both got our M.B.A.s from the same institution, although I won’t venture a guess regarding whether there was overlap in our study years. He acknowledged the coincidence in humble fashion.
I think this next section may make Ethan happy. I mentioned that another shareholder was present. It turns out that he is a former Alteryx employee. He asked about how the integration of ClearStory was going in light of the departure of a couple of high-level Alteryx executives. One of the departures was their former Chief Strategy Officer, Ms. Langley Eide. Her employment ended in January 2019, as described in the proxy statement. The other executive he mentioned was not a name I recognized. CEO Stoecker clearly wanted to decouple the acquisition and the departed employees. He touched on many of the same talking points raised when the acquisition was described during the first quarter earnings conference call, and noted that the departures were completely independent of the acquisition. The questioner seemed to want to press the point that perhaps the acquisition process was proceeding less smoothly due to the departures. CEO Stoecker noted that this is Alteryx’s fourth acquisition and they’ve worked to develop an acquisition playbook, refining it further with each acquisition. He felt as if this one was proceeding on track. Perhaps of interest to Ethan, CEO Stoecker did reiterate the point about perhaps being able to recruit additional talent in Silicon Valley. What he seemed to emphasize most was the Intellectual Property that Alteryx was purchasing, the quality of the talent they were bringing on board via the purchase, and the “smart tools” they were buying. I thought it interesting that he distinguished that Alteryx intended to “leverage” those “smart tools” rather than “integrate” them into their products. I guess we’ll learn more about what that means as time progresses and we see features added to Alteryx’s products.
Seeing no more questions, CEO Stoecker ended the meeting and the shareholders left.
Overall, I came away with a favorable impression of both CEO Stoecker and CFO Rubin. The studying I’ve done of the company over the past week or so has made me even more comfortable that Alteryx has found a great niche to exploit and is executing very well. If they hold next year’s annual shareholder meeting in Colorado, I’ll probably attend again. But I expect I would bring fewer, easier questions.
Thanks, and best wishes,
TMFDatabaseBob (long: AYX)
See my holdings here: http://my.fool.com/profile/TMFDatabasebob/info.aspx
Peace on Earth
Please note: I am not a member of any newsletter team. My opinions are my own and do not necessarily reflect those of the TMF advisers. I want to share my research with you since we’re all part of the larger TMF Community.