AYX Shareholder Meeting Review

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.

Fool on!
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.

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Great work and thanks for sharing!

On #1 is/was “IT team” meant to include Developers?

Due to my work, i think of IT as more the infrastructure guys vs software developers.

For example, at a large enterprise account i worked with, they got a new dir of IT who came over internally from the “developer side of the house” and that person made a point to say they were “new to IT”.

The reason i ask was my main AYX question is whether they have plans to drive more interest and initial “Lands” via developers in a way more commonly seen with MDB or AYX.

Thanks again!
Dreamer

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Thanks for attending and for sharing! Great work on the write up, I’m impressed you could write the review with such detail!

The only part I’m still confused and slightly concerned about is the convertible debt. 1000$/ 22.2 is only $45 a share. Wouldn’t those have automatically activated when we passed $45 a while ago, meaning the dilution already occurred?
I apologize if my understanding of converts or debt is inaccurate

Dreamer you said “more commonly seen with MDB or AYX”, but you must have meant to type another company since we are discussing AYX?

Dreamer you said “more commonly seen with MDB or AYX”, but you must have meant to type another company since we are discussing AYX?


Thanks…mdb or estc…that is what i meant.

Dreamer

Hi Dreamer and Inphanint. Thanks for responding to my post. And thank you too to everyone who recommended it. What an overwhelming response! I’m humbled.

Dreamer,

First of all, I got into the IT field early enough that developers were IT too, and I’ve always looked at it that way. I know the pace of change in that industry all too intimately. I retired early this decade, so much may have changed. I hope I didn’t botch the question up too badly, in your eyes.

I think that I may have gotten to the crux of it when I talked about identifying use-cases. CEO Stoecker periodically gives us a hint of where potential use-cases might be found (although sometimes transcribers – automated or not – don’t know what he’s saying). If you see Excel users working with complex VLOOKUP functions, you’ve probably found a use-case prone to Alteryx conversion. In my career in IT (which ranged from business-side stuff like data modeling, through database coding (network as well as relational) plus database design and performance tuning, all the way through a brief stint as an AIX system administrator), I never had to use VLOOKUP in Excel. That doesn’t mean the use-cases aren’t there in the broader IT world. I just never touched them. That could be because I was always very close to the data and had native means for accessing it. If you use complex Excel VLOOKUP or know people who do (who fit within a broad definition of IT), those are use-cases that maybe Alteryx should hear about. I don’t mean to imply that all that Alteryx does is replace VLOOKUP. All I’m saying is that when you see a complex VLOOKUP function, you’ve probably stumbled upon a use-case suitable for Alteryx. I hope that helps.

Inphanint,

I don’t want to talk too much about the convertible debt without studying the Indenture document, which I haven’t. The initial conversion is closer to $43 when you calculate using all the significant digits, but, no, conversion is not automatic when the dollar threshold is crossed. In the 10-K, Alteryx describes a formula that triggers when the debt first becomes convertible. That has occurred, so debtholders CAN convert, but when they choose to do so is usually at their discretion. On Alteryx’s balance sheet, these convertible notes have shifted from long-term liabilities into the short-term category because their status has changed to actually being convertible. Maybe that’s more accounting than anyone cares about… Convertible debt typically pays interest, and the debtholder will lose the stream of interest payments if they convert to shares, especially since AYX pays no dividend. People buying convertible debt probably have a different risk profile than most of this board’s participants.

I also want to identify one potential problem associated with convertible debt. This issue is mentioned in the Risk Factors section of the 10-K. I know that this can and does occur – at least sometimes – because I’ve seen it firsthand with another holding of mine. Once the debt becomes convertible, anyone interested in converting would rather see a lower AYX share price than a higher one. Why? They get more shares. Bad actors who own the convertible debt and want shares could sow temporary fear, uncertainty, and doubt (FUD) to get more shares. I don’t want to say that WILL happen here, but it COULD. We, as investors, need to be on the lookout for FUD attacks. That is always true, but especially so when convertible debt is outstanding. If the bad news being spread is really based on fact and it changes our investment thesis, we should consider selling. Most FUD attacks sound convincing but are largely based on innuendo. We need to steel ourselves and not be shaken out of our holdings because someone is spreading FUD to try and get a few more shares out of a debt conversion. I know that many of this board’s participants have seen FUD attacks before, are well aware of what they look like, and will post their own warnings here when they see it. But perhaps some were unaware of the potential connection with convertible debt. I hope this too helps.

Fool on!
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.

32 Likes

BOB…AWED AT HOW SKILLFULLY YOU PREPARED FOR THE AYX MEETING AND THE QUESTIONS YOU ASKED.

Also fascinated as I skimmed your Family’s portfolios. ULTA in all! I found that Company, decades ago…went to see a store, Lynchlike…bought shares at $17…but sold before $200. Mistake…a very successful Company…combining beauty shops with STUFF for customers to buy!

Thanks, Bob, for the great post.

Your mentioned that convertible bond holders want the stock price to be lower seems not right. My understanding is that the higher the stock price, the better. Because they will convert at a set price no matter what the stock price is. So if the stock price is above the set price, they will want to convert.

Here is some information I found.

https://www.thebalance.com/what-are-convertible-bonds-416834…

Example of How a Convertible Bond Works

Let’s say Acme Company issues a 5-year convertible bond with a $1,000 par value and a coupon of 5%. The “conversion ratio”—or the number of shares that the investor receives if he or she exercises the conversion – option is 25. The effective conversion price is, therefore, $40 per share, or $1000 divided by 25. The investor holds on to the convertible bond for three years and receives $50 in income each year. At that point, the stock has risen well above the conversion price and is trading at $60.

The investor converts the bond and receives 25 shares of stock at $60 per share, a total value of $1,500. In this way, the convertible bond offered both income and a chance to participate in the upside of the underlying stock.?

Keep in mind, most convertible bonds are callable—meaning that the issuer can call the bonds away and thereby cap the investors’ gain. As a result, convertibles don’t have the same unlimited upside potential as common stock.

On the other hand, let’s say that Acme’s stock weakens during the life of the security—rather than rising to $60, it falls to $25. In this case, the investor wouldn’t convert – since the stock price is less than the conversion price—and would hold on to the security until maturity as though it were a corporate bond. In this example, the investor receives $250 in income over the five-year period, and then receives his or her $1000 back upon the bond’s maturity.

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Hi Kevin2017.

Thanks for your kind words.

In the past, if I recall correctly, Saul has called bonds “certificates of confiscation”. Therefore, I’m pretty sure that an in-depth discussion of convertible bonds is “off topic” here. But I will reply quickly.

The example you offer seems to have a fixed conversion rate. In that case, yes, the bondholder looking to convert would want a higher share price. I still haven’t read Alteryx’s Indenture document (and still would prefer not to), but the 10-K clearly indicates that Alteryx’s convertible debt does not have a fixed conversion rate. When CFO Rubin answered my question about the the worst-case conversion rate, he indicated that the future AYX share price was a factor in determining the conversion rate. He didn’t indicate whether a higher or lower share price would drive higher dilution.

I could not find the Risk Factor that I remembered reading. My best guess is that I was reading the Risk Factors associated with the convertible debt and that’s when I remembered what had happened a few years ago with a FUD attack on one of my holdings to drive the share price down. There was speculation at the time that the attack occurred in order to gain leverage in a convertible debt situation. In that case, I had read the Indenture document (perhaps the root of my aversion) and it made sense to me that a lower share price – a temporarily lower share price, as I indicated before – would be beneficial to a debtholder looking to convert; they would get more shares. I will leave it at that because I haven’t read Alteryx’s Indenture document and the conversion terms could be – and probably are – very different than the ones in the document I did read. Regardless of conversion terms, FUD attacks have become part of today’s investment landscape and companies with high-flying share prices are especially prone. All I’m saying is that we should be on the lookout and that the convertible debt might increase the likelihood of a FUD attack. I hope that helps and hasn’t taken us too far into the weeds.

Thanks for your kind words too, 2100STJ. Please remember, though, that the ideas behind all but one of the questions were generated by board participants here, not by me. And, yes, my ULTA experience has been, shall we say, beautiful.

I should add that attending an annual shareholder meeting is a good way to get a better feel for the management team running the company of which you are a part owner. I recommend attending them if it is at all feasible. They are often early enough in the morning that it might not make you late for work, depending on your situation. Since we all benefit when we share information, I encourage anyone with an inclination to try to attend one and write it up for this board. Yes, I spent a lot of time preparing. That’s how I roll. I feel as if the more prepared I am, the deeper the insights I’ll gather. But there’s no requirement that you mimic my preparation before attending one of these meetings. Go as you are, observe what you observe, and share with the community.

Fool on!
Thanks, and best wishes,
TMFDatabaseBob (long: AYX, ULTA)
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.

12 Likes

I agree with Kevin.
Here is more info, taken from the press release:

The notes have an initial conversion rate of 22.5572 shares of Alteryx Class A common stock per $1,000 principal amount of notes…

The notes are senior, unsecured obligations of Alteryx, and interest of 0.50% per year is payable semi-annually in arrears. The notes will mature on June 1, 2023, unless repurchased or converted in accordance with their terms prior to such date. Prior to March 1, 2023, the notes are convertible at the option of holders only upon satisfaction of certain conditions and during certain periods, and thereafter, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. Upon conversion, the notes may be settled in shares of Alteryx Class A common stock, cash or a combination of cash and shares of Alteryx Class A common stock, at the election of Alteryx.

Alteryx may not redeem the notes prior to maturity. Holders of the notes have the right to require Alteryx to repurchase for cash all or a portion of their notes at 100% of their principal amount, plus any accrued and unpaid interest, upon the occurrence of a fundamental change (as defined in the indenture relating to the notes). Alteryx is also required to increase the conversion rate for holders who convert their notes in connection with certain corporate events occurring prior to the maturity date.

Bob - Great writeup and thanks so much. Just chiming in on the convertible note issues for a second…

I can only say a few words and will keep it short. It isn’t terribly OT only because there were a spate of these convertible note agreements with capped calls done early last year (or thereabouts) on several growth companies in the tech sector.

In these cases, the holders of the notes would want the stock price to be as high as possible, as one poster showed in the example earlier. The capped call transaction mitigates some of the potential dilution as it increases the conversion price. In this case, that conversion price is around $66.22 which was 100% above the stock price at the time the convertible offering was announced. I don’t know if this is the actual price the capped calls were written at.

So, the capped call would in essence be issuing about 15 shares per $1,000 to the note holder.
However, I don’t know what percentage of the notes are capped.

In regard to note holders converting, I would be speculating too much on the mechanics. After some point, I believe they have the right to convert. But I believe the company can choose to issue shares or pay them or a combination of the two. I do believe holders can likely convert now, but there may be many reasons why some would choose to do so now while others may wait. And then there are tax consequences that I have no idea about. The last paragraph here was speculation as I mentioned so take it with a grain of salt.

A.J.

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