Alteryx (AYX) Q4 2019 Earnings Results Review

Alteryx released earnings results for Q4 2019 on February 13, 2020. Overall, results were strong and exceeded expectations. The market responded favorably by driving the stock price up 9.5% the following day to an all-time high. Analysts were positive in their response with raised price targets. Projections for 2020 surpassed estimates, with ample room to outperform. Let’s do a deep-dive of the results.

Headline Financial Results (EPS is Non-GAAP)

• Q4 2019 Revenue was $156.5M vs. $130.6M expected, up 75.4% year/year. Beat of $25.9M or almost 20%. Note that original Q4 Revenue estimate issued in Q3 earnings called for 45.5% year/year growth, so the significant outperformance here is notable for investors.
• Q4 EPS was $0.64 vs. $0.29 expected, representing a beat of $0.35 (over 100%). Note that original Q4 EPS estimate issued in Q3 earnings was $0.28 at the midpoint, versus $0.33 expected. Again, major outperformance of original estimates.
• Q4 Non-GAAP gross margin was 93%, equal to 93% in the year ago period and up from 92% in the prior quarter. Gross margin above 90% is best in class for software companies.
• Q4 Non-GAAP operating margin was 33%, up from 30% in the year ago period and 21% in Q3.
• FY 2019 Revenue was $417.9M, vs. Q3 estimate of $390.5M, representing year/year growth of 65%. Note that original full year 2019 Revenue guidance published in Feb 2019 was $347.5M at the mid-point, which would have represented 37% growth. Actual 2019 Revenue revenue growth of 65% represents over-performance of almost 30%. This provides perspective for the 2020 Revenue guidance.
• FY 2019 EPS was $0.94, compared to $0.60 in 2018, representing a year/year increase of 57%.
• FY 2019 Non-GAAP gross margin was 92%, inline with 2018.
• FY 2019 Non-GAAP operating margin was 18%, versus 19% in 2018.
• Q1 2020 Revenue guidance of $105-$108M vs. consensus of $105.2M, representing year/year growth of 38-42%. Raise of $1.3M at the mid-point.
• Q1 2020 EPS guidance of $(0.11) to $(0.07) vs. consensus of $0.05. Reduction of $0.14 at mid-point.
• FY 2020 Revenue guidance of $555-$565M versus consensus of $521.3M, representing growth of 33-35% year/year. Raise of $38.7M at the mid-point.
• FY 2020 EPS guidance of $0.80 to $0.91 vs. consensus of $0.84. Raise of $0.01 at the mid-point.

Other Notes

• RPO (Remaining Performance Obligations) of $407M on Dec 31, 2019. This is up 82% from Dec 31, 2018, and 50% from the prior quarter. RPO represents future contracted revenue that has not been realized yet.
• Bookings growth was strong as well in Q4, adding approximately $290 million in total contract value, up 81% year/year. For 2019 overall, added $600M in TCV bookings, for growth of 70%.
• Ended Q4 2019 with 6,087 customers, representing a 30% increase from Q4 2018. Added 474 net new customers in Q4 2019, representing growth of 8.4% over Q3. New addition rate accelerated slightly.

• Customer base comprises 36% of the Global 2000. Added 36 new G2K customers in Q4. Highlighted Q4 customer additions included Caesars Entertainment, Canadian Pacific Railway, Emerson Electric, Halliburton, Komatsu and NASDAQ. Other significant customer transactions were Chevron, Federal National Mortgage Association, Fannie Mae, Salesforce, Splunk, Ulta Beauty and Xerox Corporation.
• Achieved a dollar-based net expansion rate (annual contract value based) of 130% for the fourth quarter of 2019. This compares to 132% in the year ago period, and 132% in the prior quarter.

• Acquired Feature Labs in October 2019 to augment Alteryx’s machine learning capabilities and establish an engineering hub in Boston.
• Drove strong international expansion. Q4 international revenue was $45.9M, up 84% year-over-year and representing about 29% of total. Approximately half of their Global 2000 customers are based outside the U.S.
• Alteryx also closed a record number of large deals. Contracts worth over $1M grew 150% year/year, while deals valued over $500k grew by 80%.
• Saw a small sequential increase in contract duration. For the full year 2019, average contract duration was 2.0 years.
• Introduced a third target customer persona of data engineers. This is in addition to their two main analytic personas, citizen data scientists (47M worldwide) and the trained data scientists with deep quantitative and coding expertise (2M worldwide). Data engineers usually perform data analysis and modeling as part of the IT organization, supporting data source requests from data scientists. The implication is that this represents another target customer segment for expansion.
• Highlighted new 5-year relationship with PwC, as a global elite partner. PwC will advise clients in establishing strategy around their data automation program, building solutions on the Alteryx platform. The goal is to accelerate digital transformation across the Global 2000.
• As of December 31^st, had cash, cash equivalents, short-term and long-term investments of $975 million.

Analyst Reactions

Analysts generally reacted positively to the results, with all raising price targets. A few analysts maintained neutral ratings, presumably due to valuation concerns. None of these analysts exhibited negative bias on the earnings call and they asked constructive questions.

The analyst from Needham issued a buy rating and $151 price target prior to earnings and then subsequently raised it to $167 after earnings. He provided the following commentary, which I think summarizes the overall sentiment following earnings.

Needham raises their AYX tgt to $167 from $151. Analyst Jack Andrews added, “AYX reported a blowout 4Q19, handily exceeding consensus estimates across all metrics. The highlight in the quarter was continued strong sales momentum, exemplified by large deal strength (>150% increase in deals over $1 million and > 80% increase in deals over $500,000). Our key takeaway moving forward is that AYX appears to be broadening its addressable market opportunity by leveraging new relationships (PwC), addressing a new user base (data engineers), with new use cases (automation and potential consolidation of the analytics stack). Furthermore, given a new disclosure regarding contract duration (2.0 years in 2019), the anniversarying of an RPO metric, and a forthcoming financial analyst day, we expect the “accounting noise” around AYX to subside. We are raising both our estimates and our price target to $167; reiterate BUY.”

Briefing.com, Feb 14, 2020

Additionally, on Feb 19th, Citi analyst Tyler Radke put out a street high target of $202 with a Buy rating, noting re-acceleration in billings and better than expected guidance.

My Take-aways

• Revenue growth in 2019 was phenomenal. While Q4 is seasonally strong, revenue was 51% greater than Q3 (versus a 41% sequential increase in 2018).
• While driving strong revenue growth, AYX is maintaining profitability. Non-GAAP income from operations increased 53% year/year and EPS increased 57%. Operating margin remained at 18% year/year. I think this is a strong indicator that Alteryx can grow its top-line aggressively, while maintaining positive operating margins. This high revenue growth with above average profitability and 90+% gross margin puts AYX at the top of comparable software companies.
• Bookings growth of 81% and RPO growth of 82% were both above revenue growth of 75%. This is important, as it indicates a healthy backlog of future revenue. Concerns around bookings growth had been raised by analysts in 2019. These seem to be largely addressed.
• Q1 2020 EPS guidance was below consensus by $0.14, but Q4 2019 EPS beat was $0.35, so it’s hard to worry too much about this. Overall 2020 EPS guidance was inline and allows room to outperform.
• 2020 Revenue guidance would imply significant deceleration on the surface (34% year/year increase), but again, investors should consider this to be conservative. Looking at actuals for Q4 and FY 2019, we saw up to 30% over-performance on year/year comparisons.
• Free cash flow increased from $19.3M in 2018 to $22.7M in 2019, with FCF margins dropping slightly to 5%. On a Rule of 40 basis for FY 2019, then, Alteryx would garner a high score of 70.
• Of customer highlights, Salesforce and Splunk were interesting. With concerns about competitive offerings encroaching on Alteryx’s core market, it is encouraging to see adjacent product providers using Alteryx internally. Also, from the highlighted G2k logo list, we see Amazon, Microsoft and IBM, all of whom we might expect to be using an internal solution for data analytics.
• When asked about competitive environment, Dean reiterated the same stance that SAS is the only company they see head-to-head. He also predicted further consolidation in the space. With $975M of cash available, we might see additional acquisitions in 2020.
• Engagement with the global SI’s is particularly promising, as they are clearly building practices around Alteryx. PwC is the most prominent example, but on the call, Brent Bracelin from Piper Sandler mentioned checks showing “healthy engagement at Accenture, IBM and Deloitte.” These large consulting firms get tapped by Global 2000 companies to address broader strategic initiatives, like digital transformation and modern data analytics. To have the consulting firm incentivized to bring in Alteryx as part of the solution will be a powerful driver of additional revenue going forward.
• Adding to this, Dean mentioned some target booking metrics associated with the different levels of their partner program. “And this last fall we put together a team that created a more programmatic approach for alliances. We’ve got a global elite program and it’s anticipated to generate $1 billion in bookings to us over a five-year period, an elite alliance program that is expected to deliver $300 million in bookings to us over three-year period and a principal program that’s expected to deliver $100 million to us over a three-year program.” That equates to about $333M a year in new bookings over the next 3 years. This provides a significant tailwind to incremental bookings activity.
• The fact that Alteryx is raising prices of their products (specifically Server in Q1) is a positive indicator. If competition were a factor in deals, I would assume they would do the opposite. When asked about this on the call, management responded simply that Server delivers a lot of value for customers.

Items to Watch

• Traction with new products, like Connect and Promote. These round out the “platform” offering and need to demonstrate penetration. Dean acknowledged on the call that the majority of incremental spend is being driven by Designer licenses. As companies accumulate many Designer licenses and focus more on automation, Server licenses get purchased. At the end of the expansion are Connect and Promote, which become relevant when the growing data organization evolves to start sharing models and then deploying them. If the full data analytics organizational lifecycle isn’t realized, this will limit Alteryx’s expansion growth.
• There is anecdotal feedback that the Alteryx product suite is expensive and a call-out of the same in Gartner’s recent Magic Quadrant. This is a fair reaction, particularly given that alternate open source solutions are free or much cheaper. Investors will want to watch for future impact to revenue from this. Right now, it seems that customers realize sufficient ROI to justify the cost. We should watch DBNER for impact.

Investment Plan

Alteryx’s Q4 results were a blow-out and 2020 guidance provides ample room for upside. As part of their Q4 2019 Investor Presentation, management reviewed their long-term profitability targets.

Alteryx is well on their way towards hitting these long-term targets. Given Alteryx’s large addressable market, strong sales expansion in the global 2000 and new partnerships with SI’s, I would expect high revenue growth to continue over the next few years (at least 40% annual growth on average). Combine this with maintained discipline around profitability and target operating margin of 35-40%, we should see compounding of market cap for the foreseeable future, resulting in significant share appreciation for investors.

Given these results, I am maintaining my purchase recommendation of AYX for long-term investment. My original 5 year price target of $325 by 2024 or sooner looks achievable with good confidence.