Alteryx Stock is Dropping, But No Need to Worry
Even seasoned investors confuse stock price movements with the quality of the underlying business. We may say to avoid a stock because we don’t believe the business model is economically viable. When the stock doubles the next day because some chump on Reddit decided to manipulate it, people are quick to say “see, you were wrong.” If you’re a long-term investor, knowing if you’re right or wrong doesn’t happen for many, many years.
Conversely, when you’re long a stock and the thing drops faster than an anchor, it’s tempting to feel you made a mistake. In the words of Marsellus Wallace, that’s pride effing with you. That’s why when we see our Alteryx (AYX) position is down -34%, we want to make sure our original thesis hasn’t changed for this big data/robotic process automation/artificial intelligence stock.
Why Alteryx is Dropping
Part of our job is to research what investors are looking for and give it to them. Do that enough times, competently, and eventually, you’ll get them to open their wallets. A whole bunch of people have asked why Alteryx stock is dropping, not just now, but every time the share price is falling. Today, we want to talk about the drop of -16% or so that coincided with their Q2-2021 earnings announcement. Turns out the earnings call had some pretty enlightening information once you get past the corporate platitudes like “reimagining the go-to-market development journey.”
Let’s talk about yesterday’s drop first. For whatever reason, stocks that reach a certain size then have analysts assigned to them who try and predict various financial metrics. When companies don’t meet the expectations that these analysts
pull out of their asses use their expertise to produce, the stock price falls. When a company provides guidance – forward-looking estimates of earnings or revenues – and then revises said guidance downwards, people get pissed and sell shares. And that’s exactly what happened yesterday.
For the full year, the company sees revenue in a range of $520 million to $530 million, and net loss of 12 cents to 26 cents. That compares to consensus of $571 million and a one-cent loss per share.Credit: ZDNet
Simply put, revenues for 2021 are going to be less than what everyone was expecting – 5% to 7% year-on-year growth instead of 15% growth. So, we listened to every word of their conference call to figure out why that is.
Too Many Chiefs?
A cursory look at the Alteryx leadership page shows quite a few chiefs – twelve of them to be exact. (What a fun org chart that must be to navigate.) One of these chiefs is a fresh new face – Paula Hansen – who joined the firm this past May as Chief Revenue Officer. Yep, we thought that was just another name for a Chief Financial Officer, but it’s not.
CFOs handle the full array of financial aspects for the business keeping the idea of revenue in mind as an end goal. However, CROs drive revenue as their only objective through sales, marketing, and partnership management.Credit: Resultist Consulting
The above excerpt was taken from an article titled Resolving CFO and CRO Conflicts which implies that having too many chiefs that don’t work well together can be problematic. In the Alteryx earnings call, the CEO makes it a point to reassure everyone that Paula is playing together really well with all the other chiefs. She also might be one of the reasons why the revenue estimates dropped, but not in a bad way.
Why Revenues Dropped
Alteryx’s revenue forecasts dropped for two reasons:
- The average duration of sales contracts decreased
- A bunch of salespeople left the firm
In regards to the second bullet point above, this represents “near-term lower sales capacity” which resulted from salespeople leaving the company, a large percentage of whom “did not have the experience selling to senior executives, along with global systems integrators.” That’s a temporary problem, and it actually sounds like a good thing.
In regards to the first bullet point, it sounds complicated, but it’s quite simple. The average length of contracts that Alteryx signed with their customers decreased from 2 years to 1.5 years. Apparently, there’s an appetite now for enterprise software sales contracts to be one year in duration. This goes against another strategy which is to try and lock in your customer in multi-year contracts using discounts. Since Alteryz recognizes 40% of any contract immediately upon signing, lower duration contracts result in less revenue. (A movement of one-tenth of contract duration has about a $10 million effect on revenue.)
What BSD salespeople often do is push for a longer contract using large discounts to sweeten the deal. Alteryx recognizes revenues as follows: 40% when the deal is signed and 60% over the life of the deal. If a salesperson is compensated when revenue gets recognized, they’ll clearly be pushing for longer deals. Those incentives have changed, and one-year contracts are now becoming the norm. Not only are customers asking for this, but Alteryx can also gain from not having to give discounts. If a 3-year contract provided a 30% discount, then come renewal time, that customer will move to a one-year contract and effectively pay 30% more.
Having a revised revenue forecast shortly after the arrival of a new CRO shouldn’t come as a surprise. One might theorize that Ms. Hansen was the impetus for the move to shorten contract length, along with moving the company’s focus towards large enterprise customers.
Focusing on ARR
We’ve talked before about the importance of annual recurring revenues (ARR). It’s a number that shows what the company is bringing in at a single point in time based on all contracts currently signed. Alteryx ended Q2 with $548 million in ARR, representing year-over-year growth of 27%. They expect to exit 2021 with approximately $635 million of ARR, or approximately 29% year-over-year growth. The number of total customers becomes less important as the company focuses on larger enterprises which are spending more over time. Net retention for large enterprises is 129% vs. the 120% average. It’s important to note the difference between net retention and gross retention:
Gross Revenue Retention only considers the starting revenue minus any revenue lost through downsell or churn. Net Revenue Retention considers the offsetting revenue from expansion (upsell and/or cross-sell).Credit: ClientSuccess
One thing we are concerned about is how moving from longer contracts to shorter contracts affects gross retention. In their latest 10-Q, Alteryx reports gross retention “in the 90s” which means we’re going to assume 91%, which is about average. Optimally, they would state this number explicitly so we wouldn’t have to guess. It’s a key metric which assures us that a shorter contract duration isn’t hurting retention.
To Buy or Not to Buy
One thing we completely overlooked when analyzing this business the first time around was that they’re not actually a proper software-as-a–service (SaaS) business because they’re almost entirely deployed on-premise (their offering does not live in the cloud, which makes things a whole lot more difficult to maintain). This is why their financials have that funky breakdown seen below.
We’re reassured by the business that all the revenues you see above are actually subscription revenues, but they do mention not being cloud-based as a risk. The 10-Q mentions an instance where you can actually access their tool through an Internet browser (rolls eyes) which implies that at some point, they may move their solution into the cloud, which will take loads of resources and just provide another excuse for revenue growth to slow while they “undertake the next step in their digital transformation journey.”
In May 2021, we announced an Early Access Program for Designer Cloud, which offers early access to Alteryx Designer through an Internet browser. This offering and our continued steps toward incorporating a SaaS business model into our operations has required and will continue to require us to make additional investments to our infrastructure.Credit: Alteryx
Putting that aside for now, the reason for Alteryx revising their revenue forecasts makes perfect sense. It’s the prudent thing to do and the effects seem quite temporary. If they manage to increase ARR by 29% from 2020 to 2021 as they say they will, then we’re happy campers.
Given the company’s decision to focus mainly on ARR, and the short-term reasons for their revised revenue guidance, we see this as a temporary setback and believe it’s an opportunity to pick up discounted shares. Use dollar-cost-averaging because we’re by no means calling a bottom. Tech shares are volatile, and you better get used to being unable to buy at the absolute lowest point. Just remember what else Marsellus Wallace said. Pride only hurts, it never helps.
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