When the company reported earnings on 8-6-2020, the guidance was weak enough for us to drop it from the number three spot, to an unnumbered Spotlight.
But, we had a surprise update in the other direction in early October.
We wrote Alteryx Surprise: Growth Returns Quickly on October 6th, 2020.
We added AYX to Top Picks on 15-Jan-19 for $65.
As this writing it is trading at $118.16, up 82% in about two-years and up 18% for 2020 year-to-date.
We have spoken with the CFO one-on-one (again), and will share that transcription in the near future.
This entry date and price has been verified by the third-party audit firm Krost. Please feel free to visit their website.
In the long-term, we don’t see evidence of a material change to Alteryx’s business or thesis other than, yes, COVID-19 is bad, and yes, Alteryx’s software offering is not considered an absolute must have in times of a recession.
We maintain our bullish view with a simple proxy for success: The company must return to 30%+ revenue growth in 2021, or most likely, 2022 and it must see a stabilization in its dollar based net expansion rate.
As long as those two things happen, which we believe they will, we have a wonderful software company that is both growing and consistently profitable — and that is rare in this market.
* Revenue: $129.7 million versus analyst estimates of $113.5 million.
This was a beat
– The company ended the quarter with $449.5 million in annual recurring revenue (ARR), an increase of 38% year-over-year.
* Adj EPS: $0.39 versus analyst estimates of $0.12.
This was a beat
* Next Quarter Revenue Guidance: $148 million versus analyst estimates of $151 million.
This was a miss
– This represents a decrease of 7% to 4% year-over-year.
* Next Quarter Adj EPS Guidance: $0.29 versus analyst estimates of $0.39.
This was a miss due to COVID-19
* Full Year Revenue Guidance: $483 million an increase of 15% to 16% year-over-year.
The full year guide points to 15.5% revenue growth, which in fairness, during COVID-19 is excellent.
It also does match what the CFO said to us.
This is a great company with exceptional leadership and they have communicated their position.
I was one many that thought, while growth was obviously going to slow from 60%+, that it would not near single digits.
It is a stark reminder that COVID-19 isn’t just a health pandemic, it is an economic catastrophe.
No matter what happens to stocks in the next few weeks, what we are facing this Fall and Winter could be as unnatural as the pandemic itself, the legislative actions taken to combat it, the monetary policies to combat it, and the stock recoveries out of it.
This is going to get funky.
* GAAP gross profit for the third quarter of 2020 was $119.3 million, or a GAAP gross margin of 92%, compared to GAAP gross profit of $93.8 million, or a GAAP gross margin of 91%, in the third quarter of 2019.
We can recognize the fabulous job the company has done on the earnings side through all of this.
* Achieved a dollar-based net expansion rate (annual contract value based) of 124% for the third quarter of 2020.
This is still a remarkable number, but it’s slipping as we said it could in our Alteryx risk alert two weeks ago.
This chart also puts into plain view the start of what will be a bad year due to COVID-19.
That is to say, this number will get worse before it gets better, in our view.
* Ended the third quarter of 2020 with 6,955 customers, a 24% increase from the third quarter of 2019. Added 241 net new customers in the third quarter of 2020.
* Added net new customers in the third quarter of 2020.
The company exited the quarter with approximately $982.5 million in cash and equivalents.
But alas, a quarter is a quarter — up or down it matters little as long as the thesis holds.
We never said it would be easy.
We just said it would be worth it.
This thesis is holding and although it feels like that can’t be the case with a revenue guidance miss this bad, companies that can actually grow the top line in this era while maintaining margins are wunderkinds.
At CML Pro we are used to ROKU and PINS with massive revenue guidance pointing to over 40%.
But, not every company can pull that off and we simply must accept that things will slow down before the speed up.
Things will get worse before they get better.
But they will get better.
The COVID-19 economic disruption will end.
Just know it.
While this section is an overview, within about 25 sentences and a few images, you should understand the basis of the Alteryx story and the short-term impact from COVID-19.
Here we go.
We’ll start by noting that while the Q2 results were very strong, the company did observe an abrupt and significant change in customer buying behavior in March (last quarter) as many of its customers and prospects around the globe responded to shelter in place directive.
The current macroeconomic environment is clearly in a state of turmoil and it expects it will continue to negatively impact the business.
Now we have our first full quarter of results with the impact of COVID-19.
But, if Alteryx is right, as the CEO so clearly stated, Alteryx will emerge from this pandemic stronger:
But it’s going to take time.
Alteryx sits squarely in the software as a service (SaaS) segment, which has been a great place to be.
At the end of this summary we point to an underappreciated sales ecosystem that has just begun.
The software has many functions, but primarily it acts as digital transformation (DX) software, which means it automates data tasks, and most importantly, it acts as a “drag and drop” or “code-less” machine learning and artificial intelligence (AI) platform.
The tasks the software executes make it very difficult to replace and we can see that in its dollar based net expansion rate (DBNER) of 128%.
The company is steadily becoming the fabric of enterprise digital transformation and analytics, and that makes it indispensable.
The thematic all starts with an explosion in the amount of data that is coming onto our world at a pace that is unprecedented.
Data comes from many places; we start with the Internet of Things (IoT) trend, where IoT refers to the number of pieces of hardware connected to the Internet and generating data:
A chunk of IoT comes from smart phones, PCs, tablets and routers. Here is the data creation from those ‘things’ from 2016 to 2022:
This fire hose of data has created, what we call, ‘data chaos,’ and that the rest of the world calls ‘dig data.’
With that chaos (big data) comes a need to analyze it and turn that analysis into concrete decision trees and prediction models formed on the back of machine learning, and in particular, deep learning which spans artificial intelligence.
The revenue from this data is a thematic too, and here are the forecasts:
Alteryx sees its total addressable market as $49 billion.
The hidden pot of gold that I have yet to see anyone discuss is Alteryx’s newly launched partner program ecosystem.
About 20% of its business has historically been driven by reseller partners.
But the company designed and implemented a strategic alliance program last fall (about 9-months from the earnings release).
A large part of that was bringing on Price Waterhouse Cooper (PwC) as a “global elite,” and that agreement was signed in the first couple of days of February.
If Alteryx is right (and it is usually right), this newly empowered ecosystem could be the burgeoning sales powerhouse that thrusts it forward yet faster, and it is less than a year old.
The company is “starting to see a lot of inbound activity, particularly around digital transformation” and it has openly stated that it is building a pipeline through this ecosystem.
Alteryx is a pick-axe to the machine learning and data chaos theme.
If you believe that the thematics discussed will continue and that the COVID-19 pandemic will end (at some point) then that’s it.
It may take two-years to reboot sales to the 40% growth level, but if you see that future, then the rest is just conversation.
What Alteryx Does
This section largely repeats our bullish thesis from the original dossier and can be skipped by readers deeply familiar with the company.
At its core, Alteryx is a data and machine learning automation software. As we will see below when we discuss the thematics, that all starts with an explosion in the amount of data that is coming onto our world at a pace that is unprecedented.
This fire hose of data has created, what we call, ‘data chaos.’
With that chaos comes a need to analyze it and turn that analysis into concrete decision trees and prediction models formed on the back of machine learning, and in particular, deep learning which spans artificial intelligence.
But there is a convergence emerging. With the explosion of computer scientists and data scientists comes, in our opinion, a reckoning.
Either firms want the coders to develop the models that will determine the success or failure of the company, or they want the mathematicians to do it, or they want the business leaders to do it.
Further, company’s want the business intelligence within their corporation to modify the models and learning in a way that uses industry specific expertise that developers may lack.
For the longest time this meant a choice. Either the business guys did the work, stick to Microsoft Excel and substantially inferior learning algorithms, or the computer scientists did the work, with substantially more complex learning models but substantially less business acumen.
The choice has long been a dent in the optimal version of this solution and that means businesses were leaving money on the table and potentially simply watching the entire company go bankrupt.
Now, Alteryx has the answer. While I could write it, let’s allow the CEO to put it into his own words:
Citizen data scientists are no longer simply creating dashboards and status reports, but are working on higher value outcomes. And data scientists are increasingly looking to automate and streamline data pipelining to enable them to spend more time on building, operationalizing and managing models.
Alteryx addresses both of these challenges by up-leveling skills for line of business analytics and automating data flows and streamlining model deployment and management for data scientists, all via a single unified platform experience.
This convergence has been accelerating with the emergence of Chief Data Officers and organizations focusing on digital transformation.
I know my dossiers read fairly often some sort of sentiment like “Wall Street doesn’t get it,” but I’m telling you, as a celebrated machine learning mathematiciantrained in my graduate work at Stanford University and a business driven CEO, this problem is enormous, and the proper solution is worth trillions of dollars worldwide when we sum the potentially better outcomes for all businesses of various types.
Wall Street has neither mathematicians nor CEOs as analysts — they are usually MBAs – a degree which I also carry. As an MBA, I would simply not understand the impact of this problem / solution for enterprises.
As a CEO, I too would not fully grasp the imposition of this divergence.
It has taken my odd path in life to fully appreciate this problem and how impactful the solution will be.
The problem solver must be the person with the best information and the problem solver code must be done by the person with the best computing information.
These are rarely the same person. Alteryx has solved it, and that’s why it will beat all of Wall Street’s estimates.
The estimates themselves are made by good meaning but not fully capable analysts.
So How Do We Get There With Alteryx?
The chaos must be organized, without losing the value of that chaos itself. This is loosely called ‘data transformation’ or ‘DX.’
Worldwide spending on the technologies and services that enable the digital transformation (DX) of business practices, products, and organizations is forecast to reach $1.97 trillion in 2022, according to a new update to the International Data Corporation (IDC).
An IDC analyst Craig Simpson said it quite well (our emphasis added):
The full solution to the convergent analyst must incorporate the realities of automation.
This cannot be a team of business analysts working in Excel. Nor can this be a team of developers working in Python.
It must be both super powered by automated convergence.
Here is Alteryx’s CEO:
And, while one-off examples are hardly data validation, these examples shared by the CEO are an example of the power that is not only needed, but will be expected of companies.
This used to be a matter of operational efficiency, it will soon be a matter of survival for a company.
They will either evolve in the DX, or they will go away entirely.
Their market will not shrink, they will go bankrupt.
Here are the examples from the CEO (our emphasis added):
He said with Alteryx, we have revolutionized the way we connect, work and drive true insights with data. His organization has productionized nearly 200 daily workloads and 10s of analytical applications, democratizing data and embracing the mindset of true self-service analytics.
Thematics – More – Both Low and High Hanging Fruit
Some of this may feel like a repeat — that’s good. repetitio est mater studiorum (repetition is the mother of studies).
It’s in these moments that we repeat the thesis that we become experts — and with that, we become unshakable when good or bad news flows in, because we know exactly which news is truly enterprise changing, and which is not.
Data will come from many places and in many forms. The two most obvious drivers are data from mobile devices and connected devices.
Then that data has to be turned into information. It’s the conversion of data into information where Alteryx stands uniquely positioned to simply an ever more complex landscape.
Or, as we like to say, it’s the answer to the data chaos.
First, the number of devices that will be in consumer and business hands will grow to 30 billion in less than two-years, and 75 billion in less than six-years:
In about five-years there will be on average 10 connected devices per person on this planet. Just hold on to that thought and breathe it in before you keep reading.
It’s unfathomable and yet we can so easily read the sentence and move on to the next.
Most of those connected devices must run on a wireless world, and that world is going to be shaken up so enormously that I’m not sure anyone, even scientists and analysts, really understand what is just around the corner. Of course, we’re talking about 5G — the next generation of mobile network.
In our seminal dossier Surprise: The 5G Revolution is Coming Faster Than Expected we discuss the revolution that will turn the world upside down.
Mollenkopf went on to note that “you will see [5G] in real devices, on the shelf, in 2019,” and further, “and if I were to answer that same question a year ago, I would have said 2020.”
But before then, On July 4th, 2017, we wrote Breaking Technology Update: The Massive 5G Opportunity, which surrounded the earth shaking news from China that it was expected to see total investments on 5G mobile networks reach 2.8 trillion yuan (US$411 billion) in the period from 2020 to 2030, which could mark the country’s most expensive build-out of telecommunications infrastructure.
We also note that while the broader market will vacillate, and we may see a sell-off, or even a panic, nothing is stopping this technological shift.
This is happening — and it has nothing to do with the stock market’s ups and downs, or quarter by quarter company earnings — this is seeing the future, and while the specific companies we note may or may not be successful, this trend is coming.
5G is expected to support 1 million connected devices per square kilometer and deliver up to 20 gigabits per second of peak data download rate for each cell site (20 gigabits are 20,000 megabits).
So, in English, we could download a full-blown high definition movie in about 3 seconds on our cell phones. A single music file could be downloaded in under one second — in fact, 500 songs would take one second. That’s not Wi-Fi, that is standard mobile network speed.
When there is that much data created, there is in fact data chaos. Companies know they should do something with this data, but how and what is not that easy.
This is where Alteryx comes in.
When we look at the IoT device count we know that each device will be a content and bandwidth vacuum, stressing our wireless networks to the maximum. While smartphones will make up less than 25% of the total of IoT, those devices will be the major requesters of data and mobile smartphone subscription growth projections are totally absurd.
Projections call for nearly 75% growth in mobile subscriptions within six-years leading to virtually everyone on planet Earth.
Here is a visual that walks us down the path of that seemingly ludicrous forecast:
But that alone isn’t the driver — which is to say, it’s not a linear increase in data, it is exponential. Check out this next chart for data usage per smartphone:
It’s this last chart, in conjunction with the growing number of users, that lifts this network change to truly revolutionary. Here’s that same information in a single chart — note the dark orange area is data from smartphones:
And here’s the scary part — 5G will still be in its early stages in 2022 — we won’t see the real impact for another five-years after that.
All of this data drives trends and companies we have on Top Picks, but the problem Alteryx solves is rather direct: “What do we do with all of this data once we have it?”
* Hidden data references the fact that 37% of analyst time is spent searching for data.
6 billion hours per year are spent on working in spreadsheets, which translates into 26 hours per week are wasted and 8 of those hours are from needlessly repetitive tasks.
* Modeling inefficiencies references the fact that there is $60 billion a year spent on repetitive manual spreadsheet work.
* Wasted efforts references the fact that 87% of data science models are only partially deployed.
(The source for this data is IDC: The State of Self-Service Data preparation and Analysis Using Spreadsheets.)
We refer to all of these people as lower hanging fruit, because they know they need help.
And with all of that, here comes Alteryx.
The modern, end-to-end Alteryx analytics platform enables analysts and data scientists alike to discover, share and prep data, perform analysis – statistical, predictive, prescriptive and spatial – and deploy and manage analytic models. Hundreds of thousands of people in enterprises all over the world rely on Alteryx daily to deliver game-changing results.
Alteryx already has the trust of some of the largest and most influential companies in the world:
Audi, Experian, Ford, McDonald’s, Unilever, Vodafone, Johnson & Johnson, Dell, Hyatt, Kroger, Walgreens, The Home Depot, Yum Brands, Proctor and Gamble, Coca-Cola, Verizon, BP, Royal Dutch Shell, Anthem, Humana, General Electric, Toyota, Wells Fargo Charles Schwab, Marketo, Dropbox, EMC and so many more.
A look at Alteryx products shows that they span:
“ADVANCED ANALYTICS, BI + VISUALIZATION, DATA DISCOVERY + MANAGEMENT, LOCATION INTELLIGENCE, DATA PREPARATION, TECHNOLOGY INTEGRATIONS.”
This is the software kit made for everyone, from data scientists to decision makers that are the end consumers of the data. The company sells its products as a subscription, and business is booming.
Alteryx products are available on every major cloud platform including Amazon, Microsoft, Oracle, Google, Cloudera, and so many more it’s just to the point where “if you were wondering,” the answer is probably “yes.”
The workbench already has more than 250 tools with a wide range pf pre-configured statistical and predictive models tied to the “visualytics” that are necessary to communicate the results.
The total addressable market (TAM) AYX claims is $49 billion from the worldwide big data and analytics software market. $19 billion comes from the BI and analytics tools, analytic data integration, and spatial information analysis markets.
We see it a little differently. As we have discussed, the DX revolution is measured in trillions. Given the expansion capability for this company, as we discuss below, the TAM is well in the hundreds of billions:
In 2018, big data and business analytics was expected to generate $166 billion worldwide.
And as we discussed with 5G, that chart is going to grow — and it may not be linear.
We see many risks for Alteryx.
* Gross margins are so high that competition is likely coming and already exists.
* The company will not realize the $553 million in sales for 2020 that was originally expected, nor the $500 million that was then revised down, and with a current valuation of over $10 billion — now that is a lofty valuation.
* Revenue growth has been guided to slow down dramatically starting with this year, 2020, and that was before COVID-19.
* COVID-19: In truth, none of us know how bad this could be. That’s just a matter of fact.
We wrote this exact phrase in the earnings recap in the prior quarter:
We just have to accept that stocks go up and down, and it will be scary when the ‘down’ part comes.
Alteryx remains a Spotlight Top Pick.