Bert’s take on Alteryx’s last earning report.
This was written in February about December quarter earnings and is thus more than a month old and fair game. I have shortened it and paraphrased it throughout (as the below is from my own notes) so any errors will be mine. Boldings are mine. I felt his comments about Bookings, RPO, Backlog, Competition, Data Science and Machine Learning, Cash Flow, and Alteryx’s forecasts were all very interesting, and were things I hadn’t taken into consideration as much as I should.
Saul
"The quarter was really one for the record books with revenue growth accelerating noticeably to 75% and bookings growth reaching 81%. It is rare to see this kind of growth for a company whose revenue run rate has reached greater than $600 million, with 33% adj op margins. The guidance is no more than a polite fiction whose purpose is only to restrain models that would otherwise take off from this quarters plateau.
The EV/S valuation metric is now about average for the extraordinary growth rate, that I have forecasted to average 48% over the next three years. The results of the past several quarters, while no doubt outliers, have been caused by strong secular trends that are unlikely to abate in the near future. My confidence in AYX achieving 48% CAGR over the next 3 years is pretty strong at this point, and it seems reasonable to expect free cash flow margins to rise steeply as well. I don’t imagine that the shares can keep rising at the rate they have been, but for longer-term holders, Alteryx will deliver returns for years to come. I expect to continue to hold the position going forward, and while I hate to recommend shares that have spiked as this one has, anyone trying to put together a long-term growth portfolio in the IT space is going to have to include Alteryx sooner or later.
Alteryx’s results certainly reflect a story of long term success. There are bound to be some chapters that are not totally happy, but when those clouds might roll in is not visible to me at this point.
It it is rare to see this kind of revenue growth reacceleration and it has gone on unabated the last 3 quarters, but it’s equally of note that they have been able to achieve outstanding unit economics even with reaccelerating growth. The growth story has many elements. The growth in new customers remains strong. They grew by 474 last quarter, up from growth of 381 new customers a year ago. The company’s penetration of the global 2000 increased from 534 to 720 over the course of the year.
Of all of the numbers that were presented in terms of revenue, the most salient, at least from my perspective, was bookings. Bookings grew by 81% and were $290 million compared to revenue of $156 million. Of all of the reasons to suggest that growth next year will continue near or above 50%, that bookings number has to be considered. Most of the bookings growth winds up in RPO (Remaining Performance Obligation), as there is no cash that has to be exchanged when signing multi-year Alteryx agreements [so it goes into RPO instead of deferred revenue]. For the full year, bookings growth was 70%. This quarter’s growth was the highest of the year.
The bookings number has nothing to do with the change from ASC 605 to 606. It is a simple calculation of the value of contracts signed in Q4 2019 compared to Q4 2018. The difference between bookings and revenue is backlog that will be recognized in future periods. In last year’s Q4, backlog grew by $56 million; in this quarter backlog rose $134 million. So the addition to backlog more than doubled with much of it sitting in the increase in RPO.
Adj op margins came to 33%, up from 31% a year ago. For the full year, they were 18% down slightly from 20% the prior year.
The free cash flow margin was only a bit greater than 10% last quarter. To a certain extent, this constrained free cash flow margin was a function of the company generating a huge level of RPO increase, while the increase in deferred (prepaid) revenues declined. At the end of the day, bookings, and the concomitant growth in RPO are of more importance to its business health than any other metric, and it has no need to cause its customers to choose to prepay bookings.
One reason to expect that Alteryx has a long growth runway ahead is that its competition is simply not effective at this point. Much of the time, when people think of Alteryx, they consider its use as a data preparation tool. Basically, while it is used by many of its customers as a data preparation tool, that’s not particularly where its focus is. Most buyers think more of Alteryx as a Data Science/Machine Learning platform. And in that space, Alteryx is #1 in terms of ability to execute with a rapid improvement in its positioning.
What makes Alteryx unique, is that while it can do data prep well… it can do data science better than anyone! and it can do so on a single unified platform. It presents enterprises with an end-to-end data solution and that is apparently what many users are after. And it is a no-code solution so it can be used by a wide range of individuals from citizen data scientists, to highly skilled data professionals. Alteryx is expensive for some users on a per seat basis, but it is this combination of functionality that makes the solution worth the money and has built a substantial competitive moat.
The second major factor in accelerating its growth rate is user emphasis on getting value for data. Many users have decided to make data analysis even more of a priority than it has been and are creating categories of employees that can effectively use the Alteryx set of solutions. The number of these data engineers has been growing substantially and this is one factor in the Alteryx DB-retention number and a factor in the company securing larger deals overall.
Finally, I think that the Alteryx strategy with major partners, now including PwC, Accenture, IBM and Deloitte, is bearing fruit at a level that had been unanticipated. The SI’s have seen a business opportunity of some magnitude to help their clients actually start to develop actionable insights from data analytics which is the gold standard of using this technology.
With the advent of ASC 606, Alteryx reports a significant amount of current period revenue from a booking, even though the actual contract it signs is typically of 1-3 years of duration.
Alteryx initially forecast that its revenues would be $254 million for 2019. That number wound up to be $418 million. The beats got larger as the year progressed. It is now forecasting full year revenues of $560 million, an increase of 34%. Even though some of the overall beat last year was a function of increased duration which may not happen this year, the basic issue is going to be sales productivity. The company’s salesforce hiring spigot is turned on. Overall, headcount for Alteryx rose 58% last year. Even in Q4, typically a slow quarter for hiring, headcount rose 10% sequentially. I see very little in the numbers and the commentary presented, that would lead me to believe that growth in 2020 will be below 50%. And at 50% growth, Alteryx shares don’t look nearly as expensive as they might seem. I feel well justified in suggesting that subscribers keep sizeable positions in this name."
This is my contribution to my recent request (see above)
Saul