AYX - Alteryx: Credit Risk Now Takes Precedence Over Business Execution

2023-04-24 02:48:18 ET

Summary

• Alteryx is showing signs of business stabilization, with steady quarterly ARR growth and dollar-based net expansion rates.
• The key risk facing investors now is credit. With limited free cash flow generation, Alteryx is at risk of not meeting debt repayment obligations.
• For the short term, the company is capitalized, but it faces major credit events in the next 2 years. We reiterate our neutral rating.

Investment thesis

Alteryx's (AYX) FY12/2022 results highlighted the business was beginning to show signs of stabilization. However, this was achieved via cash burn and highlighted a high credit risk profile, following the recent USD450 million debt raise which we believe is to refinance convertible bonds in FY12/2024. With limited free cash flow generation and net debt to equity at above 300%, we believe there is no reason to buy. We reiterate our neutral rating.

Quick primer

Alteryx is a provider of data preparation software called Designer, sold as packaged software on desktop PCs for individual licenses and servers for multi-users, and a cloud version released in 2022. The product is targeted primarily at 'citizen' data scientists, as opposed to highly skilled analytics experts. Current CEO Mark Anderson was appointed in October 2020, replacing co-founder Dean Stoecker who was made chairman. Peers include Power BI from Microsoft ( MSFT ), Tableau ( CRM ), and Domo ( DOMO ).

Key financials with consensus forecasts

Our objectives

Cohesion seems to be the key theme in FY12/2022 results. Key performance indicators such as annual recurring revenue ((ARR)) growth and dollar-based net expansion rate have stabilized, with the company demonstrating a rebound in non-GAAP operating margins.

This stability has come at a price, with the company burning USD 140 million and highlighting Alteryx's leveraged balance sheet with a net debt to equity at 309%. The debt structure has come under the spotlight with the company raising a cool USD 450 million in March 2023 at 8.75% - the annual interest payment is equal to the consensus forecast for FY12/2023 operating profit.

In this piece, we revisit our neutral rating from September 2022 and assess whether the company has turned a corner.

Stability at a price

The good news is that Alteryx is showing signs of business stabilization. As previously mentioned, quarterly ARR growth has stabilized at 31% YoY in Q4 FY12/2022.

Dollar-based net expansion rate has also stabilized, where we can infer that the level of customer success has found a balance. This metric compares sales growth YoY from the same cohort of customers, thereby only showing the upgrade/downgrade behavior of existing customers.

What remains problematic and contributed to the cash-burn profile for FY12/2022 is sales and marketing spending which remains at historically elevated levels, and nowhere near the long-term target of 29% (of non-GAAP sales).

The company is guiding positive non-GAAP operating profit for the first time in four years, coming from increasing scale with spending from larger enterprise customers. There appear to be no major objectives with regard to cost efficiencies, although management stated that they will have a 'nimble' approach in the current economic environment. With consensus forecasting 15% sales growth YoY for FY12/2023, we believe the company has a decent chance of at least breaking even, and not exactly a major positive surprise.

What appears to be more relevant to investors is Alteryx's recent debt raise and its implications.

A race to meet the current debt structure

The company has the following debt schedule for its convertible bonds.

In FY12/2023, USD82.7 million is due for conversion to equity, with a conversion price at USD44.33 per share (so currently in the money - the bonds can convert to equity) with a pending dilution of around 3%.

In FY12/2024, USD400 million of convertible bonds will be redeemed at par, as they are currently out of the money with a conversion price of USD 189.36 per share.

FY12/2026 will be a repeat of FY12/2024 with USD400 million of convertible bonds redeeming at par, as they are also out of the money with a conversion price of USD189.36 per share.

The recent USD450 million debt raise appears to refinance the FY12/2024 due convertible bond that will need to be redeemed. It is both a large sum of debt as well as an expensive one at an 8.75% coupon. This tells us that the bondholders appear happier to receive cash than to renegotiate for more lucrative terms. Secondly, Alteryx can only borrow at high levels of interest, as its level of credit is perceived to be low and effectively high risk (S&P has a B- rating).

As things currently stand, the company will have to raise further debt of USD400 million in two years' time in order to redeem the second tranche of convertible bonds outstanding. But with limited free cash flow generation, the balance sheet will remain highly indebted (we estimate net debt to equity remaining above 300% in FY3/2025), placing pressure on valuations to be discounted and limiting upside.

Valuation

The shares are trading on PER 72.7x two years out in FY12/2024. Free cash flow yield remains unattractive at 1.2%, and investors need to take into account the negative credit profile of the company which would place a discount on valuations.

Risks

Upside risk comes from Alteryx becoming an acquisition target, but now with higher credit risk, we believe this outcome is looking far less likely.

A major upturn in ARR growth from new customers as well as upselling to significantly large enterprises with potential for big tickets.

Downside risk comes from continued cash burn in the short to medium term, as spending on sales and marketing remains a key priority to maintain a growth profile.

Difficulties in obtaining affordable financing for the second tranche of the convertible bonds due in FY12/2025 could trigger a negative credit event.

Conclusion

Whilst it is reasonable to assume that under new management, the company needed to invest in its business to pivot and head towards a new earnings trajectory. Unfortunately, this investment has come at a cost, and the timing was ill-informed considering the refinancing requirements of the convertible bonds. We see no fundamental attractions to buy the shares, but in the short term, the company remains capitalized to fend off any credit events. Credit risk now takes precedence over business execution - we reiterate our neutral rating.

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