I think AYX had a great quarter. For me the most important stat is the 65% revenue growth, which is their second quarter of significant revenue growth acceleration. In Q1 they had 51% growth and in Q2 they had 59% growth so to see 65% growth this quarter is impressive. I don’t see how they can keep accelerating like this and think they probably hit a plateau. Looking at Q4 guidance, it looks like this acceleration will stop. They guided revenue to be “in the range of $128 million to $131 million, representing year-over-year growth of approximately 44% to 47%”. This would be a meaningful slow down from 65% growth.
But now let’s consider their Q2 and Q3 guidance just to understand the level of sandbagging. In the Q1 release, they guided Q2 revenue to be “in the range of $74.0 million to $77.0 million, an increase of 44% to 50% year-over-year” but the actual Q2 revenue came in at $82.0 million, an increase of 59%. In the Q2 release they guided revenue to be “in the range of $88.0 million to $91.0 million, an increase of 41% to 45% year-over-year” but came in at $103.4M, an increase of 65%.
Let’s look a little closer as guidance for Q4 and the full year:
For Q4 2019, we expect GAAP revenue in the range of $128 million to $131 million, representing year-over-year growth of approximately 44% to 47%.
For the full year 2019, we are raising our outlook and now expect GAAP revenue in the range of $389 million to $392 million, representing year-over-year growth of 53% to 55%. We expect our non-GAAP operating income to be in the range of $50 million to $53 million, and non-GAAP net income per diluted share of $0.57 to $0.60.
Considering they beat the high end of their Q2 revenue guidance by $5.0M or 6.5% and beat their Q3 revenue guidance by $12.4M or 13.6%, we could extrapolate the average 10% beat percentage to get a more realistic revenue estimate of $144.1 for Q4. That would be 61.5% growth from $89.2 million last year. That would also put total 2019 revenue at $405.1M. I might be too optimistic here, but management is obviously sandbagging so we need to adjust our expectations.
Let’s look into the figures in more detail. By region, US revenue came in at $74.7M up 73%. Slightly disappointing, international revenue was $28.7 million, up 48% year-over-year. This compares to 58% growth in Q2. When asked if there was anything causing this slower growth compared to the faster US growth, management said:
No, I actually think that it’s just the maturity and when we entered these markets, more than anything else. So we don’t go into much detail other than international in general. But all the markets did well. Again, the customer focused on automation, convergence, community, aren’t really any different around the world. The teams are newer in some of the markets and that might have an impact on things. But also to say that we actually did quite well in North America.
By revenue type, subscription based licenses was $54.3M up 88.5%, while support and services was $49.1M up 45%.
Dollar-Based Net Expansion Rate was 132%, down slightly from 133% in Q2.
Another area of potential concern was slowing customer growth. Although adding 335 new customers is a slow down compared to last year when they added 375, they have grown total customers by 30% over the last year. Sequentially they are starting to add more customers as they only added 277 customers on Q1 and 305 customers in Q2, so they are heading back in the right direction with 335 adds in Q3. They also went from 656 global 2000 customers in Q2 to 683 in Q3 and now have 34% share. Importantly, they are focusing on adding higher quality customers that will have more seat expansion in the future. Again from the call:
Notable customers that transacted with Alteryx during the third quarter include Amazon UK Services, Canada Post, Commonwealth Bank of Australia, Ingram Micro, Microsoft, Rakuten Marketing, Workday and Uber Technologies.
For Q3, non-GAAP operating margins were 21% and they generated positive cash flow from operations of $7 million. This is where AYX shines compared to other software companies. I love their long-term FCF target of 30-35% of revenue.
Given the growth, they are continuing to spend:
Finally, we ended the quarter with 1,176 associates, up from 1,076 associates at the end of Q2 2019 and 756 associates at the end of Q3 2018. Our increase in headcount is reflective of the pace of investments we are making and we expect to continue to make to capture the meaningful opportunity we see globally.
Some analysts kept drilling in on the slower than expected billings as a potential sign of slowing growth in the future. Management did state that the 65% revenue growth was helped by product mix and contract duration, but these had only a minor impact on the revenue growth and that it was mainly driven by execution/true growth. They highlighted revenue guidance as the best indication of future growth vs using billings. See more from the call here:
If you think about the product mix, we’ve talked to a reasonable range of 35% to 40%. So as you move across that range, I mean, you can kind of figure out that there’s some contribution to product mix and its certainly favorable, but it’s not enough in terms of order of magnitude to drive a significant uplift, but it does have an impact.
And then, duration as I’ve mentioned, there was a modest increase sequentially, but we’re still averaging about two years. Both of those two factors certainly contributed to the strong revenue performance. But having said that, it was actually execution that really drove the lion share of the revenue that we put up this quarter.
And then:
So billings are, I mean, essentially an invoicing activity. At the end of the day, they’re subject to the timing and the amount they could build in the contract. So to your point, there is seasonality, there is timing. And that can fluctuate quarter-to-quarter. As I mentioned to Tyler’s question, we do think that revenue is the most appropriate indicator of the strength and momentum in the business. Billings can move up and down based on contractual arrangement.
Also related to future growth, management thinks there is still a lot of room to grow. See below quotes from the call:
Remember, in terms of designer seats, we’re still in the 1% penetration rate of even the G2K seats that exist out there. So I think there’s a long time before you will see any degradation in seat activity that would support our net expansion numbers…
…We’ve long said that the audience for self service data science and analytics was going to be won by us in the line of business it’s a $15 billion space. The winner of that space will be the natural beneficiary of the $28 billion share shift of all that technology that has historically sat in IT. We are beginning to see that shift.
It’s important though that we’re focused on the G2K and having CDOs or proxies for CDOs in the mix, because they are the ones who are going to drive that shift from systems of record deep in IT to systems of engagement out in the line of business. But we are beginning to see the early stages of that.
One of the areas that is driving the significant revenue growth is the 92% growth in the number of expands greater than $250,000. Note that this is up significantly from 50% growth in Q2. Management talked about that here:
Well, let me just comment that we did have 92% growth in those large expands or 250. We don’t talk about their contribution to overall revenue, but we call this out for a reason. The large organizations that we’re dealing with, particularly but not exclusively in the G2K are recognizing that we have become an enterprise standard in their enterprises. And many of these customers are going from tens of seats to thousands of seats in their build out of our platform.
Management also talked about how the big accounting firms and consultants are driving business:
The area where there is the most influence, it tends to be the global analyst consultant and the big six accounting firms. They’re actually helping carry a lot of the messaging to the C-suite, both CDOs, CFOs, CEOs, who are acutely aware of the necessity to have a digital transformation effort. And so their global expanse has been very helpful in helping us land many of the G2Ks. So we’re going to continue to leverage these strong partnerships, where there is no margin shift, going forward.
I actually just had lunch on Friday with 3 PwC consultants, so I asked about their use of AYX. As you may recall, AYX had to stop using PwC as their external auditor because PwC was becoming such a big customer. They told me that all PwC staff now have AYX licenses and are encouraged to use AYX in their work. I forgot to ask if this was US employees (about 75,000) or worldwide (about 250,000). They told me that PwC sees that the world is moving towards data analytics/big data and they wanted to be at the forefront. They also told me that in their meetings with various companies, the current environment is very focused on cost cutting through automation and efficiency. I think this plays into AYX’s favor. Separately, my company has EY as our external auditor and the manager on our account is rotating out to go into their data analytics group. I asked if this meant using AYX and he said that it did. This new group would work with EY audit teams to use analytics to make their audits more efficient. I am sure KPMG, Deloitte and the big consulting firms (McKinsey, Accenture, etc) are also ramping their AYX use to improve their data analytics.
Separately, I attend quarterly roundtables of internal audit groups and each quarter data analytics and AYX comes up more frequently. There are a couple of people that love AYX and talk about how helpful it really is. I may have to look into getting a license for myself at some point.
Turning lastly to valuation, as of Friday AYX has a market cap of about $6.4B with net cash of about $300M, so they have an EV of $6.1B. With 2019 revenue of $400M, they have an EV/sales of 15.3 times. With revenue growing above 60% and with long-term FCF margins of 30-35% of revenue, AYX seems like the best bet of the growth stocks in our universe. I am happy to have bought more on Friday and plan to be a long-term holder and potentially a user in the future.