Alteryx (NYSE:AYX), a software vendor best known for its data integration tools that help business users pull together various streams of data into a single platform for seamless analysis, has long been one of the fastest-growing companies in the software sector. And besides being prized for its growth, Alteryx exhibits one of the highest gross margins in the software sector as well as rich free cash flows - which, prior to the spread of the coronavirus, made Alteryx one of Wall Street's darlings in the sector.
The upheaval caused by the coronavirus, however, has altered the company's growth trajectory. Alteryx is famous for being an expensive IT solution, and also one that many customers purchase on an upfront (and not recurring) basis. This has proven to be a major headwind as the lockdowns continued and businesses pulled back on non-essential IT spend. Post-Q1, we can now see the impacts of the coronavirus on Alteryx's business, and shares have lost nearly 10% as a result:
Data by YCharts
I was a longtime Alteryx bull. Though I typically shy away from software stocks with high valuations, Alteryx provided the rare combination of companies that could grow rapidly while expanding profit margins and cash flows at the same time, while also being a category leader in a critical and nascent area of infrastructure software that was seeing secular tailwinds from the growing trend toward "data-driven decision making." After seeing Alteryx's latest results - and particularly, its dour outlook for Q2 - I now think the stock is fairly priced.
We note that while Alteryx is still down roughly 30% from highs notched in February, the stock has turned positive for the year, even after its post-Q1 fall. At current post-earnings share prices of ~$114, Alteryx trades at a market cap of $7.47 billion. Netting out the $991.9 million of cash and $706.1 million of convertible debt on Alteryx's balance sheet yields us an enterprise value of $7.18 billion.
Prior to Alteryx yanking its guidance forecast alongside its Q1 earnings release, the company had guided to $555-$565 million in revenue for FY20, representing 33-35% y/y growth. Now, however, Alteryx has re-written its growth trajectory to fall to just 10-15% y/y growth by next quarter, as shown below:
Figure 1. Alteryx Q2 guidance update
Source: Alteryx Q1 earnings release
This makes it more likely that Alteryx will land closer to ~20% y/y growth for the full year. Nevertheless, even if we take the $560 million midpoint of Alteryx's original revenue range, we still arrive at a heady valuation multiple of 12.8x EV/FY20 revenue. Given that growth could fall substantially to the mid-teens, and the fact that other ~20% growth peers tend to trade at high single-digit multiples, I find it unlikely that Alteryx can meaningfully expand its valuation multiples and rally from here.
Alteryx's lowered performance has turned the stock into a "wait and see" situation. Keep monitoring price movements here (if Alteryx falls to a ~9x forward revenue multiple, or an $82 price target, it becomes far more interesting) but don't be tempted to buy the dip just yet.
Q1 download
Let's now review Alteryx's first-quarter results in greater detail. The earnings summary is shown below:
Figure 2. Alteryx Q1 results
Source: Alteryx Q1 earnings release
Revenues grew 43% y/y to $108.8 million, beating Wall Street's expectations of $105.6 million, or +38% y/y. While Alteryx did deliver a comfortable beat to consensus expectations, revenue did decelerate sharply from Q4's 75% y/y growth rate. And if we take Alteryx's Q2 guidance at face value, it implies that this high-flying business that was once nearly doubling its revenues will now only see growth rates in the mid-teens.
Part of the culprit is Alteryx's slowdown in net retention rates. Though Alteryx has long been a proponent of the "land and expand" business model and continues to deliver solid upsell results, Alteryx's dollar-based net retention rate fell to 128% this quarter as customers continue to delay their IT investments.
Figure 3. Alteryx retention trends
Source: Alteryx Q1 earnings release
Here's how CFO Kevin Rubin characterized the weakness of the demand environment surrounding the coronavirus on the Q1 earnings call:
In March, we saw activity levels slow considerably. This was particularly evident with opportunities with new customers and expansion opportunities that were not attached to a renewal.
Although, as Dean mentioned, we did close a number of transactions with companies in highly impacted verticals such as travel and hospitality, manufacturing and retail, we did experience lower expansion rates from these verticals as these companies focused on difficult decisions to realign their operations in response to COVID-19 and the macroeconomic slowdown. Finally, we experienced a moderate increase in our churn rate most notably in Europe.
To give you more color on our business, approximately one-third of our ARR is from our Global 2000 customers. About 25% of our ARR today is from customers who are in the most impacted verticals."
Alteryx's exposure to the virus is more pronounced than most other SaaS companies for two primary reasons: first, its heavy 25% exposure to industries that are directly impacted by the coronavirus, and the fact that its revenue base comes primarily from license sales that depend on customers to renew and upsize their buys. When pricing for Alteryx licenses can start as high as $5,200, cash-strapped businesses are going to rethink making those costly investments during uncertain times.
One uplifting note, however, was Alteryx noted that early data from April suggests new business activity is picking back up again at levels seen in April 2019 - though it's still in the early innings to tell if this strength can be sustained. Secular tailwinds for collecting data and making it readily available for executives to see will still benefit Alteryx in the long run, but at the moment, IT investments are oriented around immediate priorities like enabling remote work.
On the profitability front, Alteryx didn't deliver any overwhelmingly positive results. On the bright side, Alteryx's pro forma gross margins, already among the highest in the software sector, inched up one point to a sky-high 91%. Pro forma operating margins, however, fell back five points to -3% - though the majority of this decline was due to $6 million of non-recurring expenses tied to the rescheduling of Alteryx's user conferences. Outside of this expense, pro forma operating margins would have been flat at +2%.
Figure 4. Alteryx margin trends
Source: Alteryx Q1 earnings release
Alteryx also delivered $15.0 million of free cash flow this quarter at a 14% FCF margin, though that's flat to 1Q19's FCF of $14.5 million at a 19.1% margin. With nearly $1 billion in cash on the books and positive free cash flow, we're not worried about Alteryx's ability to navigate through the current pandemic even if sales remain depressed for multiple quarters.
Key takeaways
Alteryx's mid-teens revenue valuation multiple was always based on its astronomical growth rates, often nearly doubling year-over-year and on an organic basis, without material contribution from acquisitions. But now that the company is expecting growth rates to fall to the low teens, we question whether Alteryx's current ~14x forward revenue multiple can still hold. It will likely take several quarters for Alteryx to fully digest the impact of the coronavirus and for the company to chart a course back onto meaningful sales growth - and until that happens, Alteryx's stock is likely to flounder. Keep a close eye on price movements here, but don't immediately catch the dip.
