August 2018

Alteryx

 

Investment Thesis

 

Alteryx, provider of data analytics software, is one of my favorite companies because of its huge market, incredible customer satisfaction and first-class financial picture.

 

Huge Market

 

The company offers a full product suite to allow data citizens, people without data science or coding experience, to make sense of the overflow of data these days. The way the world is going, the amount of data will double every two years. This means that in the next two years, the same amount of data will be created as in the history of the world. It’s clear; Big Data is here to stay.

 

Rather than pay hundreds of thousands of dollars to pay the salary of a data scientist, what if you had a platform that enabled Shawn from marketing to make comparable insights from the vast sea of customer data? Alteryx seems to be doing just that.

 

It’s software is practically an all-in-one data analytics tool, giving you everything from accessing and cleaning data to blending it to running analysis and predictive models. The company notes that the market for Business Intelligence tools is around $19 billion. On top of this, an extra $10 billion could be added to the market as there are still 20 million spreadsheets users.

Source: Investor Presentation

One of the company’s goals is to displace all spreadsheets. I’d say that is rather ambitious, considering how entrenched Excel is. But Alteryx’s platform is essentially Excel on steroids. Rather than import data on clunky spreadsheets, what if there was a way to create workflows with a drag and drop interface? It sounds too good to be true and customers say the same.

Source: Investor Presentation

 

Incredible Customer Satisfaction

 

If you take the time to read through Alteryx’s case studies, you begin to think, are all case studies this glowing? I always try to take case studies provided by the actual company with a grain of salt, but time and time again, people gush over how much time Alteryx saves them.

 

For instance, here is a quote from a user,

 

“The workflow may appear to be rather straightforward and innocent-looking, but the amount of time that it saved us is unfathomable.”

 

Another user claimed that what used to take her 5 months, now can be updated in 5 minutes. I can’t quite comprehend that, but it is clear that customers are happy.

 

There is one project on Alteryx’s community site that includes the case studies where an employee in the public sector showed a map of his Alteryx workflow. It was pretty mind-boggling how many data sources it involved, yet here was the testimony saying that Alteryx was indeed a life-saver, well, at least a time-saver. And the financials sure are evidence of this customer satisfaction.

 

First-Class Financial Picture

Revenue in the latest quarter grew 50% to almost $43 million. Gross margins ticked up to an astounding 90%. The reason this number is so high is twofold. First, the software is mostly self-serve, meaning you can easily buy it online as a customer. Rather than engaging a high-paid enterprise sales force to wine and dine IT execs, a simple buy-now is all the company needs. 95% of sales are from subscriptions. Secondly, this software doesn’t come cheap. Trailing twelve months sales were about $146 million. In total, the company has about 3,700 customers. This means that the average yearly price for an Alteryx package is almost $39,500. It is crazy to think that organizations will gladly spend this amount of money in a low-touch manner. But that is not the whole story.

 

This strategy works because Alteryx lands and then expands. In the last 13 quarters, the revenue expansion rate has been over 120% and most recently investors have been spoiled by rates above 130%. Since the software is bought on a per-seat basis, companies realize its power and then buy it more employees as well as buy other products like Promote or Connect for deeper analytics.

Source: Investor Presentation

 

So the initial self-serve amount that Alteryx charges is not indicative of its average yearly selling price. Customers likely don’t spend almost $40,000 over the internet. But this is why Alteryx has such high gross margins.

 

This has allowed the company to show serious improvement in operating leverage as well. In the past three years, on a non-GAAP basis, net losses went from -25% of sales to -5% and in the most recent year, -1%. Most of this can be attributed to the decrease in sales and marketing as a percentage of revenue, which decreased from 80% to 51% last year. At the same time free cash flow margins went from negative to 25% of sales in the latest quarter.

 

All in all, the financial picture of Alteryx is a thing of beauty; great revenue growth and everything else trending in the right direction for profitability.

 

Valuation and Risks

 

TTM sales are $146 million and management forecasts 40% revenue growth for the next year. This ends up to be about $204 million in forward sales. Enterprise value is about $2.3 billion, meaning 11x forward sales. Of course, not cheap, but not ridiculous either for this quality of a company. Especially if free cash flow stays high, the market will likely continue to assign a premium valuation.

 

Just like any other company, this one is not without risks. There have been some volatility when other companies in the general space announced new products. For instance, Tableau (DATA) announced a data prep product a couple months back and Alteryx’s stock languished for a few weeks. Tableau and other data visualization companies do not quite provide the full suite of capabilities that Alteryx does. However, these companies are larger and have sufficient resources to try to squash Alteryx. If money was all it took, the bigger companies would win every time though. And we know that’s just not how the cookie always crumbles.

 

 

To End

 

Alteryx is a full-service data analytics software provider that has been executing superbly since its IPO just over a year ago. At a market cap of sub-$2.5 billion, it’s not too late to jump on this train. Compared to its market potential, this name has a long way to run.