Alteryx, Inc. (NYSE:AYX) Q3 2023 Earnings Call Transcript

Alteryx, Inc. (NYSE:AYX) Q3 2023 Earnings Call Transcript November 6, 2023

Alteryx, Inc. beats earnings expectations. Reported EPS is $-0.0007, expectations were $-0.06.

Operator: Greetings, and welcome to the Alteryx, Third Quarter 2023 Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ryan Goodman, Head of Investor Relations. Thank you, Ryan. You may begin.

Ryan Goodman: Thank you, operator. Good afternoon, and thank you for joining us today for Alteryx’s third quarter 2023 earnings conference call. I’m Ryan Goodman, Alteryx’s Head of Investor Relations. With me on the call today are Mark Anderson, Chief Executive Officer; and Kevin Rubin, Chief Financial Officer. Additionally, Paula Hansen, our President and Chief Revenue Officer; and Suresh Vittal, our Chief Product Officer, will be joining us for the question-and-answer session after prepared remarks. This afternoon, we issued a press release announcing our results for the third quarter ended September 30, 2023, as well as our shareholder letter with key metrics and commentary on the results. If you would like a copy of the release and shareholder letter, you can access both online at our Investor Relations website.

During this call, we will make forward-looking statements related to our business, including statements about our financial guidance for the fourth quarter and full year 2023. These statements are not guarantees of future performance. They are subject to a variety of risks and uncertainties, some of which are beyond our control. Our actual results could differ materially from expectations reflected in any forward-looking statement. For a discussion of additional forward-looking statements made during this call and the material risks and other important factors that could affect our actual results, please refer to our SEC filings available on the SEC’s website and our Investor Relations website, as well as the risks and other important factors discussed in today’s earnings release.

Additionally, non-GAAP financial measures will be discussed on today’s call. A reconciliation of these measures to their most directly comparable GAAP financial measures can be found in today’s earnings release and shareholder letter. With that, I’d like to turn the call over to our Chief Executive Officer, Mark Anderson.

Mark Anderson: Thank you, Ryan, and thank you all for joining us today. Q3 was a solid quarter for Alteryx across the board. Our product team made significant progress with our Generative AI infused offerings that we believe will bring high value to our customers. Our business execution improved from the prior quarter with key financial metrics above the high end of our guided ranges. Annualized recurring revenue or ARR, came in at $914 million, up 21% year-over-year. This includes a currency headwind of approximately $6 million due to rate changes since we established the outlook. Revenue came in at $232 million, up 8% year-over-year. And non-GAAP operating income of $36 million exceeded the high end of our guided range by $30 million, driven by both revenue upside and disciplined cost management.

These results reflect improved sales execution despite consistent demand trends relative to Q2. Our customers continue to demonstrate a deep growing commitment to the Alteryx platform. We believe the quest to digitize government entities and businesses around the world is intensifying, as we hear our customers look for ways to improve efficiencies and drive automation and analytics across their user communities. We also believe Alteryx is uniquely positioned as the data analytics orchestration layer of an increasingly fragmented data ecosystem. Customers are leveraging our solutions to automate analytic processes to do more with less and our easy to use solutions enabled us with improved governance and security features. These are substantial competitive moats that have enabled us to win for years.

Again, I am so proud of our R&D team as they work to incorporate Generative AI throughout our cloud connected platform, reinforcing this differentiated market position to customers and prospects alike. AiDIN, our brand of Generative AI and machine learning technologies is uniquely suited for this time and place. We recently announced several new AiDIN capabilities. More on that shortly. I’m also encouraged with the progress we’re making with our sales strategy. On our Q2 earnings call, we committed to improving our sales execution and enhancing the visibility of our business, particularly in the context of the tougher macro environment. We quickly adapted with some personnel and process changes to do just that. First, we made significant progress enhancing our pipeline management.

Paula Hansen has driven more rigor and discipline into deal qualification, stage assessment and forecast management. With visibility improving, we are better able to optimize our go-to-market resources. Second, we improved our in-quarter linearity. The nature of our renewal cycle leads to a back-end weighted quarter, but we did much better capitalizing on opportunities to secure wins earlier in the quarter. And third, we incorporated these changes into our sales enablement capabilities. We are providing new training programs and tools to sales leaders throughout the organization, to help them better monitor opportunities and deliver coaching actions needed to drive success with their teams. We have more work ahead of us, but we are pleased to see an early impact from our efforts.

We saw our best pipe conversion in recent quarters, plus delivered meaningful improvement in sales and marketing efficiency. As discussed on last quarter’s call, we’re excited to welcome two new senior leaders to the sales organization, both reporting directly to Paula Hansen. First, our new SVP of sales for the Americans, Mark Dorsey, joins us from Oracle, where he served as SVP of Enterprise Cloud Sales, growing Oracle’s cloud business and transforming the sales team into a skilled cloud sales organization. Mark has held several leadership positions at Oracle, and most recently was the SVP of the retail vertical for North America. And second, our new SVP of Global Alliances and Channels, Scott Van Valkenburgh, brings over 25 years of partner leadership experience, working with global channel organizations.

Scott joins us from Genpact, where he ran their global channel and alliance business. Prior to which he held a high performing global alliance team at SAS Institute, where he managed over 1,400 partners. I’m excited to welcome both, Mark and Scott, to the mission and look forward to building on recent progress in our go-to-market strategy. On that note, we continue to see strong validation that our executive facing enterprise focused sales motion is working. Global 2000 penetration came in at 49%. That’s up three points from Q3 last year. Global 2000 net expansion rate held strong at 130% and remains well above our overall net expansion rate of 119%, and we continue to attract marquee additions to our growing partner ecosystem. We announced a great new partnership with SADA, a leading business and technology consultancy and Google Cloud’s top global partner.

Our ELA strategy has provided a streamlined land and expand motion that is resonating with larger organizations. ELA simplified pricing, bundle features, and often include a component of trial suits, what we refer to as burst licenses. This flexibility encourages exploration and removes the friction that software vendors often impose on customers. Of course, we support these projects with our customer success team and partners, which we believe accelerates upsell opportunities. We had a great Q3 win with a Fortune 500 biopharmaceutical company that demonstrates the value of the ELA. This customer adopted its first burstable ELA with Alteryx in 2022. Early users quickly generated significant cost savings by automating time-consuming tasks across finance and operations teams.

This resulted in a strategic push to broaden user engagement with the burst licenses. We saw a dramatic use case expansion. In Q3, 2023, the customer signed on for a new larger ELA with burst to drive momentum into next year, and we are selling more and more ELAs every quarter. In Q3, we more than doubled the number of ELAs sold versus the same quarter last year. NVIDIA, the leader in accelerated computing and AI, is leveraging Alteryx to automate tasks and orchestrate data within finance and beyond. One of the largest private companies in America signed on for a 1,000-seat ELA with 500 burst seats. This customer is establishing a flexible framework for increased engagement and automation across finance, tax, accounting, and HR, plus is exploring use cases in manufacturing and supply chain management.

Our Snowflake partnership and integration were key differentiators here. Avalara, a leading provider of tax-compliant automation software, meaningfully expanded within the ELA as they are finding incremental opportunities to save cost by automating more within finance. And a Fortune 500 global marketing and communications company adopted a new multi-year ELA as they expand their usage of Designer. After using Designer for years to enhance marketing analytic processes for their clients, the customer is now exploring opportunities to automate financial processes and unlock savings within their very own organization. We now have a foothold in nearly half of the Global 2000, many of which remain early in bringing scale and accessibility to their data stack.

With our top-down executive level engagement, we believe these companies are establishing Alteryx as a key pillar of their data analytics journey. Pacific Dental, a leading national dental and medical support organization is a great example of this. After beginning with a relatively small implementation of Alteryx Designer a few years ago, we established multiple workflows that generated significant time savings throughout the finance organization. With the ROI potential well-established and strong executive engagement and support, Pacific Dental expanded to a much more comprehensive, versatile ELA package this quarter as they look to empower new users and introduce Alteryx to adjacent teams. We’re also seeing traction with the technical executive leadership teams of our customers, Chief Information Officers, Chief Technology Officers, and Chief Data Analytics Officers.

This dynamic is most prominent with our larger customers, and we believe is validation of the governance and enterprise readiness of the Alteryx platform. Additionally, CIO endorsement is often an important milestone on the path to broader cloud adoption. On that note, our platform-focused strategy of creating cloud-connected data analytics experience is resonating. We provide customers with the ability to design analytic workflows anywhere and then implement and automate workflows in the Alteryx Analytics Cloud Platform. Some users will create workflows in Designer on a desktop. Some will leverage our analytics cloud offering for model creation, and some will tap into adjacent offerings with machine learning, auto insights, and location intelligence.

This multifaceted democratization of data analytics, all built on a single, unified platform, is what we mean when we say cloud is an ‘And,’ not an ‘Or.’ We’re seeing many of our early Alteryx Analytics Cloud Platform adopters also expanding their flagship designer implementations in parallel. WestRock Company, a Fortune 500 packaging solutions company, is a great example of this. In collaboration with our customer success team and a partner, WestRock identified opportunities to create value through automation across a broad range of use cases. We found we were able to best meet the needs of new users by meaningfully expanding the designer implementation with a new Designer and server ELA bundle. Plus, add a new cloud ELA to enable use cases across Designer Cloud, machine learning, and auto insights.

Cloud is also opening up access to new customer opportunities. For example, KeyBanc National Association, one of the nation’s largest bank-based financial services companies, selected Designer Cloud as a foundational component to accelerate their analytics program. Designer Cloud’s ease of use, scalability and native integration with Google Cloud Platform were key differentiating factors in KeyBanc’s decision to expand with Alteryx. Advancing the cloud-connected analytics experience is certainly an important R&D priority for Alteryx. Another top innovation focus is Generative AI. We envision a world where generative AI influences all aspects of software and see opportunities to incorporate AI throughout our entire platform and breadth of offerings.

Earlier this year, we introduced AiDIN, and we’re already seeing great traction with aided features by existing Auto Insights customers. Over the last three months, more than half of active Auto Insights accounts have leveraged magic documents. That’s strong engagement for a solution we introduced less than six months ago. At our Inspire Conference in Europe, we had several exciting AI announcements. First, AI Studio, previously codenamed AI Workbench, is designed to enable Alteryx platform users to securely manage, tune, and consume customized large language models based on their proprietary data. A seamless integration with Alteryx Designer will enable customers to use those LLMs in existing designer workflows and construct applications with a conversational interface.

Second, Playbooks is a new AI feature planned for Auto Insights that automatically recommends high-value use cases tailored to a customer’s industry vertical, job function, or company. This will enable users to quickly generate synthetic data sets and build proof-of-concept deliverables. And third, AI-powered brushing is a new Designer Cloud feature that is designed to provide predictive transformation suggestions for workflows as users explore workflow results real time. This allows users to automate the creation of data pipelines and get from data to insights faster. One more platform launch I want to highlight is the Alteryx Marketplace. Launched in early October, the Alteryx Marketplace has already gained significant traction with over 2,000 add-on downloads and a rapidly expanding collection of verified, expert-built, and supported add-ons, including connectors and macros.

The Alteryx Marketplace is designed to provide our users with a platform for extending their analytic capabilities with confidence. Again, it’s about helping our users increase efficiency with their analytics and get to insights faster. In conclusion, we’re encouraged with the Q3 operational performance and results relative to our expectations entering the quarter. Our differentiated, easy-to-use platform enables our customers to rapidly scale a data-driven culture throughout their organizations. And with new cloud-connected experiences and our generative AI AiDIN innovations, we’re finding ways to further enhance and accelerate the analytic journey. We certainly faced some challenges in Q2, and I am so proud of how quickly the team adapted and improved execution this quarter.

And we did it while maintaining our focus, vision, and disciplined cost management. I believe the business and this team is on a strong foundation, and we are hard at work to carry forward the momentum as we close out the year. With that, I’ll turn the call over to Kevin.

Kevin Rubin: Thank you, Mark. We are pleased with the improved execution in the quarter, which enabled us to deliver key Q3 financial metrics above our prior outlook ranges. ARR came in at $914 million, up 21% year-over-year, and $9 million above the high end of our guided range. While we don’t provide constant currency, I would note that currency rate changes since we established our guidance in early August resulted in a headwind of approximately $6 million. Removing the impact of this currency headwind, our Q3 ARR outperformed the high end of our guided range by $15 million. Better-than-expected conversion rates on expansion opportunities plus durable, robust gross retention contributed to our total Q3 bookings, tracking above our assumptions for the quarter.

Revenue came in at $232 million, or $20 million above the high end of our guided range. This reflects the bookings upside and slightly higher contract duration. Finally, our non-GAAP operating income was $36 million, $30 million above the high end of our guided range. We have been closely managing incremental spend and optimizing internal processes, which enabled the revenue upside to fall through to the bottom line. In recent years, we decided to up-level our go-to-market strategy to target the largest organizations in the world. In doing this, we hired experienced enterprise sales reps and leaders, enhanced our partner programs, and built out an enterprise-quality customer success team. Over the past year, we’ve seen progress on this strategy in our financial results, and that continued in Q3.

We’re winning with larger organizations, as evidenced by our growing Global 2000 penetration, now at 49%. That’s an increase of 10 points from two years ago. We’re winning larger deals. Our average deal size for Q3 expansion wins increased meaningfully year-over-year. And we’re seeing our average customer size expand, as customers are increasing designer and server implementation, as well as exploring new use cases with our cloud-connected offerings. We grew our 250,000 plus ARR customers by 20% year-over-year to 706, and our 1 million plus ARR customer count increased over 30% year-over-year. We are constantly working to optimize and refine our go-to-market strategy. And now, as we are moving beyond the heavier investment phase from earlier last year, we are starting to see improved leverage and profitability in the model.

Sales rep productivity, as defined by new bookings per rep, improved year-over-year, a function of both performance management and go-to-market enhancing efforts. Both GAAP and non-GAAP sales and marketing expense came down as a percentage of revenue by over five points versus Q3 of last year. And we’ve effectively decreased GAAP and non-GAAP general and administrative spend, while increasing ARR by more than 20% year-over-year. This underlying financial leverage is enabling us to improve profitability, while still investing in a healthy level of research and development to fuel product innovation around Generative AI, Cloud Connected Offerings, and Alteryx Platform Integrations with Adjacent Enterprise Systems. As we think longer term, many of the profit drivers for this business are still ahead of us.

First, while landing large enterprise new logos is costly, expanding with an existing enterprise customer can carry a much lower go-to-market cost. Second, our recent cost optimization initiatives have resulted in an organizational structure that we believe is more aligned with the current macro environment. This means we expect to enter 2024 with a leaner cost structure than we’ve had for several quarters. Third, we’ve established a strong partner ecosystem. And now under the leadership of Scott Van Valkenburgh, we look to expand our partner source contributions to drive additional scale and efficiency. Fourth, our portfolio of cloud connected offerings creates new opportunities to cross sell and engage with new types of users. And finally, as we’ve demonstrated throughout 2023, we are approaching our cost structure with greater discipline and expect to unlock additional efficiencies with scale going forward.

Now, before I turn to the outlook, I’d like to share how we are thinking about the near term opportunity and our guidance philosophy. We have a lot to be excited about in Q4. We have significant upsell opportunities given our large renewal base. We’re lapping Q4, 2022 ELAs, which creates opportunities for additional expansion as burst licenses expire. And of course, we have our ramping portfolio of cloud connected solutions that are increasingly gaining customer interest. And while our Q3 performance demonstrated solid progress in improving our execution, we’re still cognizant of the macro dynamics that we encountered in Q2, as well as the time required to continue improving sales execution. As such, we’re largely maintaining the prudent assumptions we incorporated in our prior guidance as it relates to customer buying behavior, conversion rates and renewal rates.

With this in mind, let’s turn to the Q4, 2023 outlook. We expect ARR to be in the range of $942 million to $948 million, representing year-over-year growth of 13% to 14%. This is based on current FX rates and incorporates the incremental $6 million currency headwind relative to the guidance we issued in August 2023. We expect GAAP revenue to be in the range of $334 million to $340 million, representing year-over-year growth of 11% to 13%. We expect our non-GAAP operating income to be in the range of $112 million to $118 million. We expect non-GAAP net income per share to be in the range of $1.10 to $1.17 per share. This assumes $77.2 million weighted average shares outstanding and an effective tax rate of 20%. For the full year 2023, we are increasing our GAAP revenue range to $953 million to $959 million, representing year-over-year growth of 11% to 12%.

This is up from the prior growth range of 9% to 10%. We expect non-GAAP operating profit to be $100 million to $106 million and improvement from our prior outlook for $70 million to $80 million. We believe we are executing well on recent cost optimization initiatives and are seeing savings earlier than originally planned. Finally, we expect non-GAAP net income per share to be in the range of $0.94 to $1.01 [ph], an improvement from our prior outlook for $0.62 to $0.72. This assumes a 76.5 million weighted average shares outstanding and an effective tax rate of 20%. In closing, improved execution despite consistent macro conditions enabled us to outperform our assumptions entering Q3. We converted on expansion opportunities at a higher than expected level, plus we’re capturing cost savings faster than anticipated.

While we are pleased with the results in the context of the challenging first half of the year, we are mindful that we continue to face challenging macroeconomic circumstances and there is more work to be done. The team is focused on building on recent improvements and closing the year with strength, which we believe will put us in a position for a productive and profitable 2024. With that, thank you all for joining us today and I’ll turn the call back to the operator.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Koji Ikeda with Bank of America. Please proceed with your question.

Koji Ikeda : Yeah, hi. So, I wanted to ask a couple of questions here, with the first one on the new SVP of Sales for Americas and then the SVP of Global Alliance and Channels. Just really thinking about any near-term or long-term changes to the overall growth strategy with them joining the team.

Paula Hansen : Hi, Koji. It’s Paula. I’ll take that question. We’re very excited about both Mark and Scott joining us and in both cases, it’s really about building on the progress that we’ve had in this business over the last couple of years. In the Americas, Mark will be helping us to continue our focus on operational discipline and rigor, while obviously helping us with cloud becoming an increasing percentage of the business and the conversations that we’ll be having with customers around that. And then with Scott in the Alliance and Channels business, it’s building on the foundation that we have there. As we’ve talked about, more than 50% of our new ACV each quarter comes from partners and we look to continue to build on that, accelerate that, and help us continue to drive efficiency and scale. So I couldn’t be more pleased with them joining Altrix.

Koji Ikeda : Thanks, Paula. And just one follow-up here for Mark, Paula or Kevin. It’s going to be somewhat of a tough question, but I have to ask, and it’s around your framework for creating shareholder value. Clearly the third quarter results here are better than last quarter and the stock reflects that being up after hours. But in the back of our minds, we keep thinking about the rumors of takeover interest, and you know the question here is, I really realize you can’t probably comment on that directly, but any sort of commentary on your framework for driving shareholder value would be really helpful. Thank you.

A – Mark Anderson: Yeah, thanks for the question, Koji. You know listen, we think this business is a really important business for a very long time. And given the distributed kind of nature of the competitors in this space, we think there’s going to be a couple of independent companies that over in the mid and long-term that will build a platform that will take sizable share. And we’re running this business because we think it’s going to be Altrix and so obviously can’t comment on any rumors, but we feel really good about the improvements that we’ve made to execution and the focus that we’ve applied to bringing profitability and free cash flow to the business.

Koji Ikeda : Thanks Mark. I appreciate it. Thank you so much.

Operator: Thank you. Our next question is from Sanjit Singh with Morgan Stanley. Please proceed with your question.

Sanjit Singh: Thank you for taking the questions, and really encouraging trends on the Salesforce productivity. To that end, as we go into Q4, which is obviously a big renewal quarter, is there any sort of, whether it’s macro or any other sort of KPIs that suggest that Q3 wouldn’t play out in Q4? I’m just trying to get a sense, Kevin, in terms of when you look at the Q4 guidance, what assumptions you have sort of embedded in, and it is sort of a continuation of the assumptions that we enter this quarter. And if the sort of productivity trends play out, we’re in for a similar quarter in Q4 as we did in this good quarter in Q3. I just want to get some context around how you constructed the Q4 guidance. I appreciate it.

A – Mark Anderson: Yeah, great question, Sanjit. It’s Mark here. Thanks for that. Listen, I think we’re happy with what we did in Q3. We feel it’s prudent and responsible to be conservative, if you will, around Q4 guidance, but we also know that Q4 is by far for us the biggest cohort of renewals in the fiscal year. And we’ve had the full year – sales teams around the world have had the full year to build campaigns, to build expansion on top of those renewals. And so with that said, I think we took – got taken out to the woodshed in Q2 for resetting Q3 and Q4, and we want to make sure that we can predict our top line, so that we can measure how much we’re going to spend on the bottom line and do that responsibly for all shareholders, but also for our customers and our people.

Sanjit Singh: Makes tons of sense, Mark. I guess my follow-up question is just sort of on the burstable ELAs. We’ve had that sort of contract vehicle out for a while now. And just in terms of what you guys are seeing in terms of yield, you mentioned a couple of customers expanding quite nicely, leveraging the trial users and the burstable ELA features of the contract. In terms of going to Q4 or just more broadly, what type of yield are you seeing in converting trial users into paid users with the burstable ELAs?

Paula Hansen: I’ll take that one, Sanjit. Thanks for the question. So in Q3 we saw continued interest from our customers in our ELA bundles. In fact, we more than doubled the number of ELAs in Q3 versus Q3 of 2022. And we also saw a number of customers that did uplift and expand with us as an outcome of their utilization of the burst from 2022. So we continue to be encouraged by the trends that we’re seeing there. And Q4 is going to be an even bigger opportunity for us as it relates to ELA upsells, because we’ll be lapping our biggest quarter of ELAs historically in Q4 of last year.

Sanjit Singh: I appreciate the color, Paula. Thank you.

Operator: Thank you. Our next question is from Derrick Wood with TD Cowen. Please proceed with your question.

Derrick Wood: Great. Thanks. First one for Mark. Nice to see the execution against targets. And you mentioned better linearity and the strongest pipeline conversion in several quarters. I guess just, what were you able to solve for to improve these motions? And I know last quarter, one of the main challenges was to sell outside of a renewal event. Did you see improvement in selling that way or did you drive earlier renewals? Just trying to understand how some of the sales engagements changed in a quarter.

Mark Anderson: Yeah. Hey Derek, thanks for the comment and question. I think for Q3 and for sure for Q4, what we wanted to get back to was what we’ve been doing for 11 of the past 12 quarters, that’s meeting our commitments or beating our commitments that we make to the street and that we make internally. So I think it was a bit of getting back to basics on the operating framework side of things. Paula really built a lot more rigor and discipline into the forecasting process, where in the stage is the opportunity and pretty heavily discounting deals that weren’t attached to renewals, because we did see in Q2, Kevin mentioned that there was greater than 10 deals that weren’t attached to a renewal that didn’t happen in Q3 – excuse me, in Q2.

So it was really sort of getting back to those basics and that really went up and down the organization. So the weekly forecast calls really drilled into how people were doing for the week, for the month and for the quarter, and I think this really worked across the board. The other thing I’d say is, we really took a number of different looks with the finance team under Kevin’s leadership on getting back to making sure that we can hit our pipeline metrics and hit our pipeline conversion metrics, and I think we did a nice job there as well.

Paula Hansen: I’ll just add that we’ve also put an increased focus on our enablement across the organization and leveraging of tools to help managers with coaching and to provide clear visibility up and down the organization to what’s happening with the pipeline and where opportunities exist. So I think that that gives me confidence that this is something we’ll carry forward in our execution in Q4 and beyond.