AYX thoughts

Saul asked: And what do you guys think about what happened when ASC 606 hit Alteryx … and revenue jumped some huge amount overnight, and earnings went from negative to substantially positive. Is that likely to happen with some of the rest of our SaaS companies?
https://discussion.fool.com/and-what-do-you-guys-think-about-wha…

My first thought would be that no, this is not likely. I believe most of the other companies are already on AS 606. I know Okta is, and Nutanix is, and I’m pretty sure Zscaler is.

But I’ve actually been trying to figure out why ASC 606 affected Alteryx more than other companies. My best guess so far is that it has to do with the timing of their billings. Maybe they get paid for a 3-year contract all upfront, where other companies get paid a year at a time? I’m not sure, but this is the only thing I can come up with. Does anyone know?

One last thought: Guidance for the March quarter is $72m, which they said is up 43%, implying that March 2018 revenue would have been just over $50m. But they reported $43m last year, and the change in deferred revenue was actually negative for the quarter, so I’m not sure how they would have had $50m under ASC 606. I’m sure I’m missing something obvious.

I lied, one more thought. Unless my math is wrong, Dec 2017 calculated billings were about 70m. They reported 116m in the Dec 2018 quarter, so that’s up 66%. It’s possible they’re growing even faster than we realized.

Bear

22 Likes

Bear,

their contract duration varies between 1 and 3 years with an average contract duration of 2 years. They bill one year in advance as most SaaS companies.

Niki

5 Likes

Bear,

their contract duration varies between 1 and 3 years with an average contract duration of 2 years. They bill one year in advance as most SaaS companies.

Niki

Thanks Niki. Then why do you think their Dec Q revenue was only ~60m under 605 and ~90m under 606? That’s a lot bigger jump than any of our other companies have had when they converted to 606, right?

Thanks,
Bear

Bear,

Maybe Revenue was so lumpy on high side because they had huge billings this quarter.

Q4 revenue grew 57% year-over-year to $60.5 million. Q4 billings were up 65% year-over-year to $116 million.

I think they said Q4 & Q1 were seasonally high for billings due to customer renewals.

As you can see billings were almost double ASC 605 revenue. Since 606 forces them to recognize a larger percentage of that upfront you can see how that could account for a large uptick in ASC comparable revenue. I’m guessing that Q2 and 3 would have a smaller disparity between 605 and 606 due to the lower number of renewals(and lower billings-revenue).

Darth

5 Likes

Then why do you think their Dec Q revenue was only ~60m under 605 and ~90m under 606? That’s a lot bigger jump than any of our other companies have had when they converted to 606, right?

Most of the difference is due to revenue recognition rules. Under 606, more revenue is recognized upfront. You can see the difference if you look at the balance sheet under 605 and 606.

Chris

1 Like

I am far from an expert but I work in finance and my company went through this transition last year as well. Overall the NRS changes attempt to make revenue recognition outcomes more common sense and align to deal economics. Overall there is earlier (up-front) revenue recognition (primarily software licenses) and less revenue recognized ratably over time- this is because NRS relies on more estimation processes and eliminates punitive software industry rules which delayed revenue recognition in the past(e.g. VSOE). Previously, revenue recognition for an arrangement with software term licenses, non-critical upgrades and support services is ratably recognized over the term. Under the new revenue standard, licenses will be recognized upfront for right to use (assuming software has significant standalone functionality) but support services will be recognized as performance obligations are satisfied (ratably over the term). Here is a simple table showing what is changing and what is staying the same:

Perpetual SW Licenses - Upfront > Upfront
Term SW licenses* - Ratable > Upfront ; *Security offers with critical future updates remain ratable
SW Support Services - Ratable > Ratable
SaaS - Ratable > Ratable

The reason there will be different impacts based on SaaS company are b/c:

Security offers with critical future software updates maintain subscription treatment

Pure SaaS subscriptions maintain subscription treatment

AYX has indicated on several occasions that they are cloud agnostic and still do a large portion of their business on-prem and through term licenses and not SaaS. They also would not have the critical security updates that would likely be present for OKTA/ZS. This means they have the largest % of business in this “Term SW Licenses” bucket vs our other companies.

I also think because of their relatively short average term length they would have less impact of “lost” deferred revenue. When a company moves to 606 they get to begin transacting new business under 606 rules (for AYX this includes significantly more upfront) but also have to adjust their deferred revenue accordingly (anything that was deferred in the past under 605 that would not be deferred under 606 goes to retained earnings and will not be recognized by the company). Because AYX is growing so fast their new bookings / business being recognized upfront is much larger than the deferred revenue waterfall they have now “lost” from business they closed 1/2 years ago.

Hope that helps! It would be good to know if any other companies followed here are still 605 so please chime in if you know of any.

Last thing to note is 606 also included significant changes to how sales through distributors / partners are recognized as revenue but that is more pertinent to HW companies and while meaningful would have a smaller impact on the numbers.

Erik

23 Likes

Just to give a theoretical example:

Let’s say Alteryx closes a 3-year contract for $300 at the beginning of the year.

Under ASC 605 they would recognize $25 in the first quarter ($300 divided by 36 months times 3 months for the first quarter) and $25 in the following 11 quarters.

Under ASC 606 they now recognize approx. 35% of the total contract value of $300 upfront = $105; plus 3 months worth of revenue from the remaining 65% of TCV $300 = $16.25 (65% of $300 = $195 divided by 36 months times 3 months), for a total of $121.25 in the first quarter and $16.25 in the following 11 quarters.

Now, in this example this would mean they actually recognize almost 5 times more revenue in Q1 of the contract under ASC 606. So the question actually should be why do revenues only go up 50% from 60m to 90m in the Dec Q? I have two explanations:

  1. The company closes deals that are between 1 and 3 years, with an average duration of 2 years. So the 3-year contract example is the most extreme in terms of revenue recognition difference, since ASC 606 recognizes revenue upfront as a percentage of TCV and the longer the contract duration, the higher the TCV; ie the higher the revenue upfront under ASC 606.
    If we take the example above and assume a contract duration of 2 years the revenue recognition difference in Q1 shrinks to $129.4 (ASC 606) vs $37.5 (ASC 605) = only 3.45 times more;
    If we assume a 1-year duration the difference shrinks to $153.75 (ASC 606) vs $75 (ASC 605) = only 2 times more.

  2. If you increase the revenue recognition upfront, you decrease the revenue recognition in the remaining quarters. So while they get a revenue bump from new contract deals in 2018 and 2019 they also recognize less revenue from the contracts in place that were closed in 2017, 2016 and 2015.

In my view there is no way of disecting exactly how these factors influence the revenue. There are just too many variables; basically thousands of contracts for 4,000 customers with different contract durations and TCV’s. All we know is that this is the end result:


	Q1	Q2	Q3	Q4	Sum	
2017	28,5	30,3	34,2	38,6	131,6	ASC 605
2018	50,3	51,5	62,6	89,2	253,6	ASC 606
Growth	76%	70%	83%	131%	93%	

But now I have to stop… I already digged too deep into this subject. We just have to trust that the accountants did their job correctly.

Hope I didn’t confuse anyone. I think the key takeaway here is that this is merely an accounting change, we have to use ASC 606 numbers for 2018 and then we will have a nice apple to apple comparison in 2019. Let’s just wait for Q1 2019 results. :slight_smile:

Niki

26 Likes