IT budget cutting.....

Occasionally I’ll read something about where in an overall enterprise budget there may or may not be cuts depending on circumstances. After reading the following from a recently former CTO about this subject and how it pertains to AYX, I have to ask if anyone here is privy to the vagaries of such things?

Specifically, can I assume that security is a cost with decreasing ROI when exposure is decreased along with the sales activity of the enterprise? I wonder is CRWD more fungible than AYX? Before I read the following I would have said “No”.

Peter Offringa-
On the Q4 and Q1 earnings calls, several sell-side analysts asked about the pricing of Alteryx products and the recent 35% increase in server costs. They seemed concerned about the list price of Alteryx products and whether that would impact sales going forward. I suppose it could on the surface, but product list price usually doesn’t coming into play in IT budgeting, at least in my experience. As a CTO and VP Engineering at several past organizations, I would generally review the IT budget with the CFO as a roll-up by line item on a quarterly or annual basis. Each software service, whether pure SaaS or per user license, would just be listed as a line in a spreadsheet with a total cost for that time period. We would then go through each line item and decide if the total cost was worth the value to the organization. In Alteryx’s case, a medium deployment of 20 Designer licenses and a Server license might cost $200k a year. If that was the primary tool used by the analytics team every day, the total cost might be just fine. Broadly deployed SaaS applications can quickly rack up costs as well for an organization with thousands of users. Okta, Office 365 or even Datadog could generate annual costs in excess of Alteryx for a large installation. Those might be justifiable as well. It is all evaluated through the lens of value created for the business.
On the earnings call, the Alteryx leadership team mentioned closing a 7-figure deal with a European financial company in March. In this case, I imagine the global CIO or CDO simply looked at the total cost of the Alteryx solution in the context of the value it provided for the organization. That person probably wasn’t concerned what each license cost. Granted every organization will be managing costs in this COVID-19 impacted environment, but I don’t think the licensing model is the issue. Cost reductions are generally applied across the board, like to cut an organization’s IT budget by 20%. In that case, the result might be to give up or not renew a couple of Designer licenses, but I would apply the same approach to any other SaaS tool licensed on a per user per month basis.
Also, the perceived flexibility of SaaS or subscriptions billing on a monthly basis versus annual license fees isn’t a benefit in reality. Most SaaS vendors will offer a discount for multi-year deals or minimum annual spend commitments, so enterprises get locked into a longer contract regardless.
With all that said, subsequent comments at the Piper Sandler and J.P. Morgan analyst conferences lead me to believe that Alteryx is pursuing an expansion of their product portfolio and possibly different pricing models. The CEO teased a major platform release in June, an upcoming intelligent suite and a browser-based version of Designer. These could bring alternate pricing options for Server and Designer “light” that align with conventional SaaS models.

The fact that product mix and contract duration in Q1 remained constant with prior periods indicates that the 35% price increase for Server introduced on February 1st hasn’t generated pushback from customers or impeded new sales at this point. We will need to monitor this going forward, but speaks to the value of this product.

Me here: thanks in advance for your consideration.

Jason

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We are reviewing our numbers as a leadership team and the ones that we as a group did not question was Crowdstrike. I sold out of AYX because we have a small license base of a few users but after a demo and hearing the list price did not even consider bringing it up to expand usage. I think their pricing is a barrier to extension in these uncertain times. I think companies will try to maintain their existing AYX footprint but may not increase that substantially. I may be completely wrong but in my opinion in these uncertain times security and ability to get to customers quickly will be areas where spend will be maintained but other tools especially in the data analytics space will take a back seat till such time as things recover. I moved the cash from AYX to FSLY and CRWD and now am equally invested in LVGO,FSLY,DDOG,CRWD,VERX with a smaller position in TTD. VERX IPO’d this week and while it does not meet the criteria from this board feel that it has a very established client base and should be able to grow their market cap over time to be a multiple of where they are today.

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I am planning to hold my AYX position through earnings, but will consider selling if the revenue growth story has not recovered.

There are some SaaS services where the business would cease to function if they were cut off such as FSLY, OKTA, DDOG, and CRWD. I believe data analytics has a harder sell to management on the value, and could be one of the of the first software services to be cut off if a company was forced to choose.

The biggest wildcard for the company is why the earnings call was so pessimistic last time. It was at the height of the pandemic, and was easily the most negative of all the earnings calls I listened to last quarter. The company has a history of underestimating earnings, but this one was almost bizarrely pessimistic. Would be shocked if they don’t beat the predicted numbers by a decent amount.

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I’m not sure I buy the ‘companies would cease to function’ argument for either OKTA or CRWD or any other security company. Enterprises have been rolling the dice on this since the internet was created.

What has changed is maybe there is now a lightweight agent, it’s updated in the cloud, and there’s a low upfront cost and superior product. But when a CFO is looking at ROI, I understand there is only cost and no benefit ever for security. There is only, perhaps, the absence of a bigger cost if hacked.

Now, when choosing between the income multiplier of say AYX and the cost of some aspect of insurance, what is a struggling enterprise going to cut?

Thanks again for your consideration,

Jason

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I’m not sure I buy the ‘companies would cease to function’ argument for either OKTA or CRWD or any other security company.

With OKTA, if all the employees and customers are logging in OKTA’s single sign on and authentication there’s simply no way to disable this without re-architecting the system. Not to mention other add-ons the company may have. The cost to switch to create their own authentication system would be so expensive and timely that they cannot switch.

There’s a very strong vendor lock-in with a solution like OKTA. CRWD’s solutions might be easier to disable on demand though.

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" rolling the dice on this " seems very risky today since we have ever more attempts to penetrate security, more private hackers temporarily unemployed with time on their hands ,and at least two nations using resources of the state. We hear about ransom demands from public entities, I wonder how many companies were caught too but kept it secret. Thus I think with Covid the odds of a serious hack have temporarily increased. Companies most impacted by Covid really have no way to bring on more income so they will have to cut costs and Alteryx is expensive.
Of course at some level they can be over protected
I own AYX , but the benefits from using Alteryx probably take time to show up, and importantly the data is still there it can be stored relatively cheaply.

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The company has a history of underestimating earnings, but this one was almost bizarrely pessimistic. Would be shocked if they don’t beat the predicted numbers by a decent amount.

It’s the goal of every single company out there to beat their own estimates they provide. At the same time, I’ve learned not to argue with management or think their business is stronger than they’re letting on. So it would not surprise me in the slightest if they beat their guidance only by the usual, historic amount. We have to remember these earnings forecasts are 1/3 of the way into the next quarter.

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Thanks Mauser for your thoughtful reply.

Has the culture within the enterprise changed meaningfully toward valuing security?

I see the quarterly numbers CRWD is pulling in and read the improvements over their competition and I’m in up to 14% of my portfolio. And I’m nervous that what I may be missing is what’s going on between the CFO and the CTO. Are they willing to give up a slice of the insurance pie that CRWD provides now if they can get the $3 of revenue for every $1 it would cost to use AYX? (which is a ROI that has been thrown around a bit when talking about how beneficial Alteryx can be).

I see the margins Alteryx is getting and understand the need within an enterprise for what is offered by Alteryx and I’m in up to 8.5% of my portfolio. And I’m nervous that the CFO and CTO are saying what 12x just wrote in his last post, ‘Data isn’t going anywhere’ (always love to hear 12x). Is it better to shore up the WFH security now and wait to attempt to get that potential ROI offered by Alteryx later?

Does anyone know how I can become a bug on the wall in these deliberations between the CTO and CFO, if what Peter a Offringa is saying is happening elsewhere?

the benefits from using Alteryx probably take time to show up, and importantly the data is still there it can be stored relatively cheaply.

Which might apply to a new customer, but not to an existing customer who depends on those analytics to run current business and who has learned the value of those analytics for new problems. Moreover, for the new customer, the choice is to not analyze, which may be non-competitive, or to hire expensive analyst types. My customers historically who made use of the analytics that I could build came to depend on them more for running the business than any report or inquiry in the product.

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Yes I think many companies have no choice but to slow spending for projects that have a delayed and unknown payoff. Alteryx is a new spend or increasing spend for many companies but something like CrowdStrike may just be replacing an older inferior product, something they are already paying for. New projects may be harder to get approved. Then there is the fact that Alteryx is pretty expensive.
But this likely varies a lot between different companies and I have no special insight. Just guessing. After earnings come out we will have some factual evidence.

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tamhas, I doubt if present Alteryx customers will stop using it, they may just not buy more seats and new customers may be harder to find. We will know more soon.

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Moreover, for the new customer, the choice is to not analyze, which may be non-competitive, or to hire expensive analyst types. My customers historically who made use of the analytics that I could build came to depend on them more for running the business than any report or inquiry in the product.

Alteryx makes harvesting your existing data from many sources easier to do. If they must cut costs, they can make one of the “exempt” (non-hourly engineers) employees write some programs (Perl or Python scripts, or some data-base extension to Excel) to harvest the data in their “spare” time. That would be a smarter choice than dropping your CRWD subscription.

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