Alteryx, Inc. (NYSE:AYX) The Raymond James 2022 Technology Investors Conference December 5, 2022 2:50 PM ET
Company Participants
Mark Anderson – CEO
Kevin Rubin – CFO
Conference Call Participants
Alex Sklar – Raymond James
Alex Sklar
All right. Good afternoon, everyone. My name is Alex Klar. I’m one of the Application Software Analyst here at Raymond James. Very pleased to have Alteryx here with us. Mark Anderson, Chief Executive Officer and Kevin Rubin, Chief Financial Officer. We’re going to be doing a fireside chat and will open up questions from the audience here about halfway through.
So just as a background, Mark, Alteryx has really evolved as a company since you joined a little over two years ago, broadened product portfolio, revamped go-to-market. So just as a kind of an inroad for the audience, can you give us a quick overview of the company and with that, the key value propositions for customers particularly in the current macro?
Mark Anderson
You bet. And thanks for the opportunity, Alex. We — two years ago, we were a company that was largely focused on selling to users. The analysts that sit outside of the CFO’s office for the Head of Supply Chain’s office. And the entire company was focused on delighting those users. We make great software.
But I think when I came on board, I really felt there was a strong need to build more around use cases and the value propositions that drive real value for the enterprise. And that requires — instead of a bottoms-up sales motion, it requires much more of a top-down one. So you’re articulating very defined returns on investment for use cases that typically are in the office of the CFO or any of the functional areas that need transformation.
And really what our software does. I think in this world where everyone is rushing to try to digitize and transform their business, automate their business. We’ve, over the last 25 years of being a business, we’ve made what I think is the hardest part of that journey possible, and that’s getting going. We allow users to take data from almost infinite sources and then cleanse, prep and blend that data so that it can be a pipeline to a data location like Snowflake or Databricks.
And if you want to check out how much our customers love us go visit our community site, they talk — there’s, Alex, for Alteryx, they talk about putting the Alteryx on the biceps and name their kids Alteryx. And our goal is to — today, we have roughly 400,000 members of that community. I want it to be 1 million one day and 40 million down the road because it will be really transformed output for those employees and it’s something very personal to the people themselves.
Question-and-Answer Session
Q – Alex Sklar
Got it. So some of the very topical investors right now, the overall demand environment the macro. Third quarter was a strong booking ARR was up, you had $1 million ARR, customers was up, your large ACV deal to-date. So how many you care is the overall demand environment that’s in point to?
Mark Anderson
Yeah. Well, firstly, I’m glad that we transformed from selling to analysts to selling our COO and CFO is really reminders of the treasury now and they are the ones that are really driving the prioritization of spend and clearly, spending is narrowing. So I’m glad we’re not in nice to have. Everything that we do, we do to help customers run a tighter ship, to really be able to predict inflation and the impact of the recession on their businesses by being able to use data from anywhere to make better data-driven decisions.
So I think what we’ve seen at worst has been an elongation of sales cycles often manifested in an extra step or two in the process. And we’ve been teaching our now largely transformed sales team, many of them come from $1 billion or greater companies, come with more than 15 years of experience.
So often, it’s not the first crisis that they’ve managed through. And we’re teaching them how to demonstrate that value upfront. And I think we’ll have to have, not a nice to have.
Alex Sklar
So you kind of hit on the kind of switch to selling towards to the CFO. I want to hit on the go-to-market. That’s been a big a big kind of revamp under your leadership and bringing in Paula on the go-to-market side. So seeing — we saw a kind of a really big increase in sales and marketing head count, not just kind of direct sales reps, but the entire organization. How do you feel about kind of the overall coverage and capacity of the go-to-market as you see it today? And then with that kind of overall productivity trends?
Mark Anderson
Yeah. Well, firstly, this will be my ninth quarter, I think, at the end of this quarter, and we’ve grown productivity every single quarter. So we really are enabling our people better and again hiring better people that have stage experiences that the next few legs of the journey, which I think is pretty important.
Bringing on a great leader like Paula Hansen, super important as well. She’s a very special leader. I got great experience managing thousands of people and billions of dollars. So she’s seen the movie a few times herself. But I think it can’t just be salespeople. It’s got to be the people that support those salespeople that make them more productive. So we’ve actually started to spend a lot more money on post sales.
So customer success organizations has more than quadrupled in the last two years. These are people that go in and help us stick the landing of an implementation so that the customer is up and running are getting to the breakthroughs that they’re paying for. And then that earns us permission to go in and ask for warrant. So you said your net retention rate was 121%, up 1%. But for our large customer cohort, it was up 1% to 129%. And so we can plan a pretty darn good fiscal year by leveraging these resources to drive that retention and expansions right.
Alex Sklar
Got it. Aside from the overall demand environment, profitability a much bigger focus now. Kevin, 2022 has kind of been — has been a big investment year. Given kind of the overall macro, how are you thinking about like the levers to drive margin expansion? And kind of help kind of think about the path to profitability back to profitability.
Kevin Rubin
Yeah. Thanks for the question. So I want to emphasize the point that Mark made. We made the intentional decision over ’21 and ’22 to really invest in the go-to-market and to a lesser degree, but also important is R&D to really put the infrastructure in place to be able to have an enterprise capable sales organization to have the capabilities from a customer success and a customer’s support perspective to really support these larger enterprises. And that investment was largely done towards ’21 and ’22.
We feel very comfortable with the infrastructure and the foundation that we’ve set for the business going forward. So as we think about ’23 and beyond, it is really how do we now get leverage and productivity out of these investments that we put in place?
When I think about levers of margin expansion, having the enterprise go to market that we have today is a pretty powerful lever as we think about what that’s able to capture going forward. It’s obviously less expensive to continue to serve your existing customers. And so we have a very good infrastructure around that to help drive leverage.
Partners are becoming more and more important to the model and partners are a great way to be able to continue to scale in a more efficient way. And then we have cloud, right? So as we think about — we’ve spent a lot of time innovating the platform. We launched the analytics, the Alteryx Analytics Cloud. And 2023 is really the opportunity for us to start to see some meaningful momentum from a cloud perspective. And so all three of those dynamics are all levers that we would expect to realize from a leverage perspective.
Alex Sklar
Got it. Definitely want to hit on the partners and cloud here in a minute. I did want to touch on just the overall — you kind of alluded to this, but the product portfolio has kind of really broadened versus even where you started the year. So can you just give us an update on where the platform stands today? And how you see the strategic positioning of the product in terms of like opening up a broader base of users?
Mark Anderson
Yeah. Well, we acquired a company called Trifacta, early part of this year, and that was really what we felt was by far the best and most available replatforming option. We — our product was primarily a Windows-based big client prior to this. And I tell having a cloud presence would reduce friction from the idea or from the journey from ideation to provisioning and using fingertips on keyboard.
So really important to have much lower friction on the beginning of the journey part for us. And that integration is going really well. We’re knitting together the Alteryx applications designer cloud. We’re in a customer right now. We — it will be fully productized and available on the Trifactor platform next quarter. Alteryx auto Insights, which was a result of another acquisition Hyper Anna that we acquired about year and half years ago.
That’s doing really well. That’s hitting the Trifacta platform. And then Alteryx auto machine learning, which allows Alteryx customers, designer customers to be able to have some preconditioned machine learning models so that they start to experience with machine learning themselves as general knowledge workers.
And so I think over time, you’ll see us add more and more capability organically but also inorganically onto that platform. We think there’s — nobody is really stepping up and building a proper platform in this as it’s a very fragmented vendor landscape. And we think who better than us to go build this platform because we made the hardest part of the journey easy with designer.
Alex Sklar
And I know it’s still early days. A lot of the products have only come on this year, but are you seeing that kind of multiproduct adoption like you would have expected today that’s been kind of even faster or curious on how that’s kind of —
Mark Anderson
Yeah. It’s early days. So the vast majority of our revenue comes from design and server, the two premise-based products. But as we start to get the capabilities of these cloud products to be high value, we’ll start to see a much greater uptake.
For example, just in the last quarter, we talked about 1 customer, a large U.S. airline that didn’t ELA with us last year. They doubled the number of users that they used in the ELA just one year later. And then they brought on two more cloud-based products to become a greater than $1 million ACV customer, all just in the span of a little over a year. And so we do see salespeople wanting to have more quivers in their arrow, and that’s certainly what these additional products represent. They solve — important to solve problems that will be — will be a future kind of cornerstone of our platform.
Kevin Rubin
And just maybe to extend on that, you may recall, earlier this year, we launched cloud ELA SKUs. And so the whole intention of the cloud SKUs is that they marry very nicely with be on-premise ELAs. So over time, they’re very plugged in play. So for customers that have elected the ELAs that are on-premise technology, we have a hearing, if you will, of a cloud ELA that they can just attach to. So the ability to cross-sell over time is only going to get stronger.
Alex Sklar
So I do want to ask about the ELA. So it’s been a new introduction. It’s only been a little over a year. So what have you talked about in terms of kind of penetration in your base that’s adopted one of those? What kind of utilization are you seeing from customers that are on the ELA versus maybe a more legacy contract? Kind of curious, — and then is that at all increasing your visibility in terms of kind of like the upsell potential?
Mark Anderson
It is for sure, Alex. Yeah, the ELAs we started in Q3 of 2021. And this airline customer that I mentioned was an early cohort of an ELA user. These are — it’s not rocket science, but we made these ELAs burstable.
So a lot of software companies will penalize you if you go over your user count. We think what we do is so important. We want to motivate customers to do more and go faster, so we give the ability in our ELAs to burst upwards of 50% more licenses. And customers have really taken that up. We said on the last earnings call that of the early cohorts of ELAs that we did, over 40% of them were already in their burst capacity.
So that’s a real tell. We look at the telemetry from all of our usage when they’re already in their first capacity in the first couple of quarters. It’s a really good tell a, that they’re going to renew and b, that they’re going to renew at the higher amount.
And I think that’s happening because of the sales and marketing investments we made, the majority of that investment went into these customer success or subject matter expert resources that help customers get up and running faster.
Alex Sklar
Got it. And so on that kind of — you kind of alluded to this already, 40% or inverse capacity. You have a bigger renewal quarter, I think, coming up in fourth quarter. You talked about 2023 as a big renewal year in general. Just given what the NRR is, what you’re seeing on the burst capacity, like how should we think about kind of the renewal opportunity for upsell broadly?
Kevin Rubin
I mean, generally speaking, we’ve been pretty open that the best opportunity for us upsell customers is in the year of renewal. And if you dig deeper, it’s in the quarter of renewal. So guidance for Q4 certainly suggests what our feelings were relative to the Q4 opportunity as we think forward into 2023. So first of all, we expect to have a significant — we expect to have a significantly larger renewal base available to us. We’re going to have a larger concentration of ELAs that hopefully have been well into their burst. So that provides a tremendous amount of visibility to us.
Not to mention, we’ve got a whole host of new products that we can actually offer these customers. So I think there’s a lot of good momentum going into ’23 as we think about what that will look like.
Alex Sklar
And as we do get through ’23, is that kind of — are we through most of kind of the — to kind of replacement to ELA structure? Is that kind of the last milestone to lap? Or there’ll still be more of that kind of longer tail in the years to come?
Kevin Rubin
Well, I think we’re in a cadence now where we have a larger concentration of one year cohorts, and those are going to come up every year. If we’re successful in being able to renew those each year at higher levels, you should see the renewal base continue to grow year after year. I think we’re well behind any of the prior behavior and discounting in particular that we talked about a couple of years ago. Customers are making decisions on duration based on their specific purpose. It’s not being motivated by higher discounts. And so it’s a very healthy renewal base that we continue to see.
Alex Sklar
Got it. So shifting gears for a second. Use of cash, and you’ve got a good deal of cash in the balance sheet. You’ve been acquisitive historically, but you’ve got some converts coming due, certainly not unique in software with the converts — with having issued converts over the past several years. But how should we think about kind of free cash flow generation, use of cash and the opportunity to address those converts?
Kevin Rubin
Yeah. So we have $85 million coming due in 2023 from the initial converts we did. We have $400 million coming due in ’24 and then another tranche in ’26. We obviously have more than enough cash to address the ’23s without any issue.
We have a number of attractive options that we are evaluating as it relates to the ’24 notes and evaluating which of those options is best for us and shareholders. So more to come on that.
In terms of use of cash, we still have ample of cash to be able to run this business highly effectively as well as entertain other inorganic activities of some size and scale. And so a top priority for us is getting the leverage in the business that we talked about as we think about going forward, which free cash flow will then follow that component and then taking any pressure off the capital structure.
Alex Sklar
Got it. So I kind of want to go back to something we were talking about earlier, but the launch of kind of the browser-based offering broadly — more broadly next year. How do you think — how should investors think about that from an addressable market perspective? So not everyone is obviously, although most probably could junk on the Global 2000, but not everyone is a Windows company. So is that a real TAM expander from you as — is that the right way to think about it?
Mark Anderson
Yeah. I really think it is, Alex. I think — the objective for us, it’s a different product than designer desktop. Designer Desktop has been the product of 25 years of continued innovation. We’ve been at Designer Cloud for about a year. And still learning a lot from our customer deployments that are there now. But think of it as a subset of the connectors, so a subset of the data sources and a subset of the analytical tools that you can apply to the data. And we think it opens up new personas that we can sell to.
Alex Sklar
I’m going to open it up to the audience. If there’s any questions.
Unidentified Analyst
Understand the elasticity of pricing on the longer term basis. Obviously, it’s a premium product, but do you feel give the ability to kind of where pricing and overtime how do we think about that in terms of a quick number?
Alex Sklar
Just real quick. The question was around price elasticity and longer-term potential is pricing for — as a growth as a growth driver?
Mark Anderson
Yeah. I think if we think our future state long-term, there’s going to be dozens and then ultimately, hundreds of apps that will be made available on our cloud-based platform. And there’ll probably be hundreds of use cases that we’ll be able to monetize independently for someone that just wants to buy a use case, maybe not necessarily a net of Alteryx.
So I think long term, the revenue growth is going to come from different form factors of revenue than just license revenue and then also different personas to whom we can sell.
Alex Sklar
So one of the things we talked about earlier when the go-to-market was creating — you’ve created a lot of templates and the idea of use case selling. And I’m curious, as we think about kind of enablement broadly, what’s kind of been the results of that kind of more use case selling? I’m just curious how that’s driven kind of results so far?
Mark Anderson
Yeah. Well, I’m not sure about your CFOs, but I know my CFO here, he doesn’t think about buying licenses or products. He thinks about getting something in return for the capital or operating expense we spend. And it’s usually tied to a business outcome.
And so use cases are really just templated business outcomes. And I think they dovetail very nicely with a kind of a large top-down enterprise selling type approach. I think — to me, I think being able to prove it out with the value engineering resources that we have and with the ability to help them quickly get to the realization of the application or the use case.
If you go to our website today, there’s hundreds of different use cases that we’ve chronicled in a use case Navigator, really just showing the possibilities that it really helps setting up an appointment and saying, “Hey, you’re not saying I’d like to sell you some Alteryx licenses. You’re saying, I read from your annual report that you’re having issues, making sure that people that are now living in different states are paying the right taxes and we’re withholding the right revenue taxes.
Well, we’ve got an application for that and we can help you and we can sell that. And then once we deliver that, we can validate the innovation was consumed and they got the return. And that earns us permission to go sell more.
Alex Sklar
So the other thing on the enablement side, also kind of go-to-market related, but the partner network. And you’ve seen ramping kind of contribution from the partners already, PwC global kind of expansion, KPMG I think you partner sourced ACVs up pretty meaningfully. So can you just talk about what you did to the partner program over the past kind of couple of years? And how you expect those benefits to play out?
Mark Anderson
Yeah, I’ve spent a career working with partners as a sales leader, and you’ve got to really invest. And to be frank, two years ago, we didn’t really have much of a partner organization. So number one, you have to have an organization that’s designed to work with partners to help make them productive, teach them provide programs that motivate them and curate the relationship with them so that they feel cared for and loved and ultimately rewarded with leads and margin.
The other thing you have to do is you have to have the kind of people in the field that are motivated to work with partners, right? We have really made a wholesale transformation in the quality of the people that we have. And they’re people, not too dissimilar to me that come with an average of 15 years or more of experience. They’ve worked for $1 billion-plus companies like VMware or Palo Alto Networks. They’ve seen that long-term result on a very, very long TAM — long-tail TAM. And they’re used to working with partners and getting leverage on our partners. And so I think we did both. We transformed the team who are comfortable sitting in the office of the CFO with a partner from PwC.
The other thing that we did is we really started to get much better at being a proper technology integrator with technology partners, partners like Snowflake, Databricks, Google BigQuery, AWS. These are becoming important influence partners for us. And so whenever these two products are being used by a customer, the integration work that we’ve both done together, technical integration work that we’ve done together makes the use of Alteryx and Google BigQuery, much more seamless, much easier. Same thing with Snowflake. We’ve built really strong field integrations with most of these companies as well so that salespeople can sit down at a Starbucks on a Monday, compare their territories, build campaigns together to go try to sell more of each.
And then if you just look at LinkedIn, almost on any given week, we’re doing a tiding a webinar with one partner or another. And at the end of the day, I think of all of this is we’re trying to drive relevance up in the community, right? We’re trying to be very easy to use and deploy, very successful and a high correlation to value when you do deploy us. And we’re trying to be more relevant to the community, to partners as well as to customers
Alex Sklar
Got it. So maybe just kind of as a wrap up question here. What do you think are maybe one or two kind of underappreciated aspects of the Alteryx story today that investors are going to have a greater appreciation for 12 months from now?
Mark Anderson
I think it’s — we can only control the things that we can control. We can’t control the demand environment, I would say, more and more customers are using us to do more with less and that can be interpreted in a number of different ways, all of which I think are meaningful during times where spending gets narrowed.
They need to run tighter ships. They need to see around corners and they need to make better data-driven decisions. And that’s why people do business with us.
The other thing, I think, is by using Alteryx, you’re building workflows that are basically automating previously onerous and manual processes and you’re putting them into something called a workflow that gets embedded into business process. And some of our biggest customers have thousands and thousands of workflows.
If spending gets really tight and they want to stop spending, you can’t replace those workflows with Google or a brother you can’t just do cut and paste from the logic that’s been put into those workflows and use them with anybody else. It’s a very, very sticky product, which is why our expansion rate has been so, I think, world class.
So I think we’re looking to build on all of that, build this proper platform that, of course, has to be in the cloud. And we think there’s permission for an independent company like us to go, hoover up 10%, 20%. And that’s 10 to 20x from where we are now. And the decisions we’re making are really long term in the manifestation. We think of this as very much a long game from my own experience, growing companies from $100 million to billions of dollars.
You do all the right things at the different stages. You hire great people, you orchestrate their output. And the shareholder values will in the long run come. And I hope for those of you that are shareholders, we’re not happy with a $40-something stock price. But those of you that are prospective shareholders, we’re all working really hard to leverage this incredible innovation.
Kevin Rubin
I would just add to all of what Mark says. I think the last piece is the actual earning power of this business, right? We have an incredibly sticky product. We have demonstrated historically the ability to drive significant profitability. We’ve made some very intentional investments in the last couple of years to put us in a very enviable position today as we go forward. And this business has the capacity and the ability to be a highly profitable business.
Alex Sklar
That’s great. Well, Mark, Kevin, thank you for the time today. Thanks, everyone.
Mark Anderson
Thank you all. Have a great day.
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