AYX - Alteryx Faces Challenging 2023 Market Environment

2023-03-30 15:04:38 ET

Summary

• Alteryx, Inc. reported its Q4 and full year 2022 financial results on February 9, 2023.
• The firm provides data automation software to organizations worldwide.
• Alteryx management is forecasting slower revenue growth rate in 2023 as it focuses on profitability.
• I'm on Hold for Alteryx, Inc. in the near term.

A Quick Take On Alteryx

Alteryx, Inc. ( AYX ) reported its Q4 2022 financial results on February 9, 2023, beating revenue and EPS consensus estimates.

The firm has developed software to enable enterprise users to more easily and effectively analyze data.

Given management’s outlook on a slowing revenue growth trajectory, its continued investment in and increase in its sales resources, and macroeconomic risks, my outlook on Alteryx, Inc. stock in the near term is a Hold.

Alteryx Overview

Alteryx, Inc. has created software that enables data analysts to obtain, manipulate, analyze and export data to improve their business operations.

The software doesn’t require any knowledge of programming, so it effectively allows enterprises to push data analysis further out to various departments where it can more quickly impact decision-making.

The company is led by Chief Executive Officer Mark Anderson, who previously was president of security company Palo Alto Networks.

Alteryx’ offerings include:

• Designer

• Intelligence Suite

• Machine Learning

• Auto Insights

• Connect

• Server

• Metrics Score.

The firm obtains new customers through a variety of means, including inbound response, direct sales and marketing, business development efforts and partner referrals.

Market and Competition

In a 2022 research report by Allied Market Research, the global market for data visualization tools (as a proxy for data automation tools) was an estimated $7.4 billion in 2021 and is forecast to reach $19.5 billion by 2031.

This growth would represent a CAGR of 10.2% from 2022 to 2031, if achieved.

The market received a strong boost during the COVID-19 pandemic, due to increased dependence on digital devices by consumers worldwide amid a growing online presence.

Also, a rise in the work-from-home movement, which has now morphed into a more ‘hybrid’ environment, added the need for more and better solutions for businesses seeking to cope with rapid changes in their markets and operations.

Participants in the market include:

• IBM

• Microsoft

• Oracle

• Domo

• SAP

• SAS Institute

• Tableau (Salesforce)

• MicroStrategy

• TIBCO

• Qlik

• GoodData

• ObviouslyAI

• Others.

In addition, there are numerous data analytics software companies that provide either adjacent potential threats or partial competition.

AYX’s Recent Financial Results

• Total revenue by quarter has grown sharply in recent quarters:

• Selling, G&A expenses as a percentage of total revenue by quarter have fallen more recently:

• Operating income by quarter has rebounded to breakeven in Q4 2022:

• Earnings per share (Diluted) have remained substantially negative:

(All data in the above charts is GAAP.)

In the past 12 months, AYX’s stock price has fallen 20.6% vs. that of Domo’s drop of 74%, as the chart indicates below:

As to its Q4 2022 financial results, total revenue rose 73.2% year-over-year and gross profit margin fell 1.1 percentage points.

SG&A expenses as a percentage of total revenue have been trending lower and operating losses have been essentially eliminated in the most recent reporting period.

However, earnings per share remain heavily negative.

Management did not disclose any company or customer retention rate metrics, a notable omission.

For the balance sheet , the firm ended the quarter with $341.8 million in cash, equivalents and short-term investments and $877.5 million in total debt.

Over the trailing twelve months, free cash used was a hefty $128.4 million, of which capital expenditures accounted for $23.6 million. The company paid a whopping $226.5 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For Alteryx

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha.)

As a reference, a relevant partial public comparable would be Domo (DOMO, Inc.); shown below is a comparison of their primary valuation metrics:

(Source - Seeking Alpha.)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

AYX’s most recent GAAP Rule of 40 calculation was 35.2% as of Q4 2022’s results, so the firm has performed reasonably well in this regard, per the table below:

(Source - Seeking Alpha.)

Future Prospects For Alteryx

In its last earnings call ( Source - Seeking Alpha ), covering Q4 and full year 2022’s results, management highlighted its "strong growth momentum and an increasing focus on profitability" during 2022.

However, the firm is seeing similar slowdowns in customer decision-making "in the form of elevated deal scrutiny and elongation of sales cycles."

Should this continue through 2023, it will negatively impact the company's growth trajectory and focus on profitability.

While the firm is increasing its focus on enterprise clients, they usually require a longer sales cycle even as the firm goes to market with a now-standard "land and expand" approach.

Looking ahead, for 2023 management expects revenue to be $200 million at the midpoint of the range, representing growth of around 26.5%.

Non-GAAP net loss should be ($0.27) at the midpoint. Note that historically Alteryx has paid a very large amount of compensation in the form of stock, which if continued, as I presume it will be, will produce higher GAAP losses in 2023.

Regarding valuation, the market is valuing AYX at an EV/Sales multiple of around 5.3x.

The Meritech Capital Index of publicly held SaaS software companies showed an average forward EV/Revenue multiple of around 6.2x on February 23, 2023, as the chart shows here:

So, by comparison, AYX is currently valued by the market at a discount to the broader Meritech Capital SaaS Index, at least as of February 23, 2023.

The primary risk to the company’s outlook is an increasingly likely macroeconomic slowdown, which will accelerate new customer discounting, produce slower sales cycles and reduce its revenue growth trajectory.

Given management’s outlook on a slowing revenue growth trajectory, its continued investment in and even ramp-up of its sales resources, and macroeconomic risks, my outlook on Alteryx, Inc. in the near term is a Hold.

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