Alteryx, Inc. (NYSE:AYX) Q2 2023 Earnings Call Transcript

Alteryx, Inc. (NYSE:AYX) Q2 2023 Earnings Call Transcript August 7, 2023

Alteryx, Inc. misses on earnings expectations. Reported EPS is $-0.0017 EPS, expectations were $0.66.

Operator: Greetings, and welcome to the Alteryx Second 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 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 second 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 second quarter ended June 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 third 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. 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. We delivered Q2 revenue of $188 million, up 4% year-over-year and non-GAAP operating loss of $30 million, both better than our guided range. However, annualized recurring revenue, or ARR came in at $890 million, up 22% year-over-year, below our guided range. While we exceeded our outlook on both revenue and non-GAAP operating loss, our Q2 financial results fell short of our expectations. We’ve taken swift action to identify areas for improvement as well as opportunities to enhance execution going forward, and I’ll discuss some of these initiatives underway shortly. But first, I’d like to start with what’s most important to our customers, which is our product innovation momentum, specifically generative AI and cloud connected experiences as well as other Q2 highlights.

First, aiming our broad set of generative AI technologies that we are infusing throughout our platform. We introduced new generative AI offerings that we believe will enable our customers to significantly accelerate and scale data analytics throughout their organization with proper governance and security. Second, cloud connected experiences with cloud execution for desktop, Designer users can now publish workflows to the cloud, bringing the ubiquity of the cloud to Alteryx workflows. Third, customer commitment remains high. We saw a robust customer retention and engagement metrics again in Q2 as customers continue to leverage our unique platform to scale analytic enablement across the employee base. Customers everywhere are using Alteryx to tighten their belts and to do more with less.

Fourth, we’re seeing positive international booking trends in both Europe and Asia, important pillars of our growing global business. And fifth, we continue to see strong success with large enterprise organizations. Our Global 2000 penetration came in at 48%, up two points year-over-year with a steady net expansion rate of 131%. We are at a pivotal moment in this market. Transformative technologies like generative AI create enormous opportunities. These technologies have the potential to change how companies operate how they analyze data and how they win. Alteryx is uniquely positioned as the data analytics orchestration layer at the heart of it all. This is how we’ve won for years, abstracting an increasingly complex data ecosystem with easy to learn, easy to use solutions, enabling our customers to scale data analytics across the enterprise.

With AiDIN, we believe we are well on our path to reinforcing this differentiated market position in the era of generative AI. Now, let’s take a moment to discuss the Q2 performance and what we need to do better. While we had incorporated a tougher macro into our Q2 guidance, we encountered a pronounced change in customer buying behavior in the last two weeks of the quarter. This was especially apparent with larger customer expansion projects outside of the normal renewal cycle. As a result, many large customer upsell opportunities to which we thought we had clear line of sight ultimately pushed out of the quarter or closed with a reduced size. We recognize that we need to improve our execution on deals like these, particularly in North America.

These are significant opportunities, and they require a higher level of engagement and diligence in the current macro backdrop. We’re implementing a significantly higher regimen of dual scrutiny and disciplined going forward, plus enhancing sales enablement, which should, in turn, improve our pipeline quality and conversion rates. We’re also focused on identifying higher probability win opportunities with a strategy more attuned to the current macro. This is absolutely key to driving improvements in our sales productivity. The business has grown substantially in the last couple of years. The market is moving quickly, and there will be learning’s along the way. I’ve led teams through several economic cycles at both the executive and board level.

I found the one consistency in times like this is that they create opportunities to adapt the business model and strengthen execution. With that in mind, we’ve identified several opportunities to improve operationally. First, we’ve made some key leadership changes within our sales organization. We have an exceptional team, and it’s important to make sure we continue to have proper stage experiences for each leg of the journey ahead. To that end, we are bringing in new sales leaders for North America sales as well as our partner and alliances team, both reporting to our President and CRO, Paula Hansen. These two new leaders will have the unique opportunity to rent together and be very aligned on process and productivity improvements to meet at this moment.

Second, we are driving improved sales linearity within the quarter and are also incorporating additional deal scrutiny into the sales process, given our increasing enterprise traction and expanding average new booking deal size, these efforts are key and should meaningfully improve our visibility and results. Third, we are redoubling our focus on sales enablement to accelerate the path to higher productivity. This includes additional coaching and training on how to navigate deals in the current economic environment. And finally, we are implementing additional cost-saving initiatives across the business with an agile business model in which we can quickly adapt spending, and we are committed to upholding profitability, as we work to improve our sales execution.

It has never been more important to have a customer-centric mindset. Our customers depend on the Alteryx Analytics platform to better understand their data and to drive more informed mission-critical business decisions. Our telemetry data shows robust engagement for activated users across the Alteryx analytics platform. Designer workflows are trending towards increased complexity and automation with approximately 65% of workflow runs now automated. We believe this indicates a higher level of repeatable value add and stronger customer retention. Our customer and partner community enthusiasm was palpable at our recent Inspire user conferences. Over 4,000 attendees joined us at our US Inspire Conference in May and our international tour is well underway across Sydney, Tokyo and London.

This elevated level of engagement with our customers gives me confidence that the recent up-sell moderation is cyclical and not structural and that Alteryx remains well positioned for durable, profitable long-term growth. I am a steadfast believer that discipline and focus on strategic initiatives are key to delivering long-term success. While we are focused on improving our sales execution, we are also committed to delivering an unrelenting pace of platform innovation and driving ahead with our go-to-market strategy. I’m incredibly proud of the initiatives we announced in Q2. First, AiDIN, our brand of generative AI and machine learning technologies. This includes new transformative offerings tracking for early availability later this year as well as several offerings in customers’ hands today.

The first is AI Workbench, which is designed to leverage our data analytics expertise to help our customers responsibly introduce generative AI in large language model into their enterprise. AI Workbench is designed to effectively train these models with their customer data and proper governance and security. Next is Multimodal. This solution facilitates collaboration between multiple personas by different interfaces, including designer, coding or simplified white board. We see this as a meaningful accelerator for our customers in validated democratization journey as it removes barriers between stakeholders and nurtures an unprecedented collaboration experience. We’re developing these offerings with input from several Global 2,000 companies and invisible AI Workbench and Multimodal to be monetizable, complementary elements within the platform.

Three aiding capabilities are already incorporated into our platform, including Magic Documents, Workflow Summary for Alteryx Designer, and an OpenAI Connector. These are all examples of how we are incorporating generative AI to accelerate the path from data analytics to insights for our customers. We’re already seeing signs of interest and early engagement across all three tools. Another key area of innovation focus is cloud, where we had several exciting announcements in Q2. First, Cloud Execution for Desktop, a major step forward in integrating our on-premise and cloud platform environments with which customers can create Workflows in the Desktop Designer and then save, share, and execute those workflows in the cloud. And second, Location Intelligence which introduces visualization and analysis of geospatial data to identify patterns and trends that cannot typically be found within spreadsheets.

Cloud is resonating with our current customers with approximately two-thirds of our Q2 cloud wins coming as upsells to existing customers. McLaren Racing, for example, has leveraged Designer across a breadth of use cases ranging from production workflow optimization to social media monitoring to real-time racing analytics. In Q2, McLaren signed on for both Auto Insights and Machine Learning as they look to further abstract analytics for new personas and explore new operational use cases. We’re also seeing positive early trends for our cloud ELA with new customers. We signed a cloud ELA with a multibillion-dollar oil and gas customer as they look to automate and optimize their Office of the CFO with a modern cloud-based platform, plus establishing analytical framework for new strategic initiatives.

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We had a cloud-driven win with a leading provider of online real estate marketplaces, Information and Analytics. This customer will leverage Alteryx to automate and optimize key data intake processes for real estate industry benchmarking services. The cloud momentum is encouraging and we are excited to soon roll out regional support to handle international data residency requirements for the Alteryx Analytics Cloud platform later in Q3. Cloud has become an important underlying pillar of our go-to-market strategy. This has complemented our strategic initiatives around enterprise, partners, and customer success. Our ability to continue to expand within the Global 2000 and with many of our existing large enterprise customers is key to our long-term growth trajectory.

As I mentioned earlier, in Q2, we increased our Global 2000 penetration to 48%, up from 46% last year with our strongest ARR growth coming from our largest customers. Our Global 2000 net expansion rate was solid at 131%, with our overall net expansion rate coming in at 120%. We had an inspiring $1 million-plus ARR win with a large non-profit health organization, expanding with Designer and adopting Auto Insights and Machine Learning. This customer’s nursing team has created Workflows to track and forecast cold, flu, and COVID trends across its network of hospitals plus optimized PPE inventory and distribution. It’s humbling to see Alteryx empowering these frontline workers to actually save lives with their own data. ELAs continue to gain traction with solid year-over-year growth in numbers of POA sold.

The [indiscernible] is an excellent example of this, as they signed on for their initial EUA in Q2 of 2022. They since implemented a broad range of use cases driving tangible ROI across multiple lines of business, finance, procurement, IT, digital marketing and more in just one case, a single Alteryx workflow unlocked over $2 million of identifiable value. As they lap the one-year mark in Q2 of this year, they signed on for an expansion to their ELA, more than doubling the size of the original implementation. Partners continue to be a core pillar of our go-to-market strategy, unlocking access to decision-makers and IT and reducing friction in the sales motion. Partners played a role in over 3/4 of our top 20 new logo and expansion deals with key contributions from Presidio, Slalom and EY, among others.

With our new leadership, we look forward to working even closer with our partners to build tighter and more consistent engagement programs. We had a great partner supported win with a global property and casualty insurance company. The partner provided training to bring on new personas and hosted working sessions to explore new use cases and opportunities to drive value. This customer ultimately expanded its Alteryx implementation by approximately 7x, with a new ELA as they look to further optimize processes throughout the financial organization and enhance overall corporate governance. In closing, we have an incredible opportunity ahead of this company. Our market position as an analytics orchestrator across an increasingly fragmented data ecosystem is highly differentiated.

And the need for data analytics at scale with governance and security is rising. We’re delivering on our innovation road map and enhancing our value proposition with new cloud connected experiences and generative AI. We’re taking quick and decisive steps to improve certain pockets of our sales execution and diligently calibrating spending to maintain our improving profitability momentum. Most importantly, our customers are demonstrating a strong commitment to Alteryx, near-term environment, notwithstanding [indiscernible] set on the significant addressable market opportunity, and we are positioning this company for long-term durable and profitable growth. With that, I’ll turn the call over to Kevin. Kev?

Kevin Rubin: Thanks, Mark. I’ll begin today with a closer look at some of the key Q2 financial metrics, and then we’ll discuss our philosophy around growth and profitability for the remainder of 2023. First, revenue came in at $188 million, above our guided range. We saw contract duration increase sequentially to approximately 1.5 years, another important indicator of our customers’ long-term commitment to Alteryx. The revenue upside, along with strong spending discipline drove non-GAAP operating loss of $30 million, $18 million better than the high end of our guided range. ARR came in at $890 million, up 22% year-over-year, but was below our guided range. While we had incorporated a weaker macro environment in our prior financial outlook, we did not anticipate the significant change in customer buying behavior that we experienced at the end of Q2.

And as roughly two-thirds of the business historically lands in month three, with many deals closing in the final weeks of the quarter, the shifting market dynamics were not apparent until very late in June. Our existing customer base provides three key underlying drivers that are each important to sustaining our growth momentum. Customer renewals, expansion upsells at the time of renewal and independent expansions outside of the renewal cycle. We saw healthy trends in both renewals and corresponding upsells. But it was the third element, expansion deals independent of a renewal event where we encountered challenges. In the last two weeks of the quarter, we saw a significant divergence from historical conversion rates in which customers opted to delay or meaningfully reduce new initiatives until the time of renewal.

For example, we had over 10 large opportunities, which included both six and seven figure deals outside of the renewal cycle that delayed or closed at less than 50% of our expectation. This dynamic was particularly pronounced in the US region and resulted in a significant year-over-year decline in US bookings. While we attribute the change in part to macro pressures, as Mark described, we are taking measures to quickly adapt and improve our sales execution. In terms of the financial model, we have two clear initiatives for the second half of 2023. First, we’re calibrating the business model to preserve our improving profitability momentum which assumes this phase of moderated growth persists through the remainder of the year. And second, we’re ensuring key investment areas are well funded to drive the long-term success of the business, including generative AI and cloud.

Let’s begin with our strategy for balancing growth and profitability over the coming quarters. With the softer macro backdrop persisting into the second half, we are adapting our spending plans to continue on the path to higher profitability. We’ve highlighted several cost savings initiatives in recent quarters, such as real estate rationalization and optimization of head count in both sales and marketing and G&A. Looking ahead, we will continue to focus cost-saving efforts in these areas. When we decided to meaningfully expand our go-to-market motion in early 2022, we anticipated a very different macro environment. We’ve since tapered that back as the growth environment has waned. And given what we saw late in Q2, we are initiating additional cost savings initiatives in the second half of the year.

This includes elimination of most open positions, scaling back spending, areas of reorganization, additional performance management and headcount reductions. We expect these cost-saving efforts to generate an annualized cost savings of over $30 million. As we closely scrutinize our spending, we’ve also identified key investment areas that we are committed to. These are areas that present significant opportunities for Alteryx to both differentiate and drive long-term durable growth. The first is generative AI and machine learning. As Mark mentioned, we recently introduced AiDIN, our brand of generative AI and machine learning technologies. We’ve recently announced several enhancements to the platform that are seeing early user engagement and interest, and we see AiDIN as an opportunity for additional revenue streams in the years ahead.

The second is cloud. Our cloud portfolio has now been generally available since February 2023, and we’re encouraged with the early traction. We’re delivering an incredible pace of innovation here with new offerings like location intelligence as well as incremental cloud-connected capabilities that move to converge our portfolio of offerings. At our Investor Day in May, I presented our long-term model for 25% to 30% non-GAAP operating margins by FY 2028. Our framework to achieving this model is through 3 to 4 points of margin expansion per year, and this assumes we maintain 20% plus of ARR growth per year. We continue to believe this model is an appropriate long-term balance sheet growth and profitability. In the intermediate term, we are committed to delivering improved profitability in an accelerated rate.

In a sense, this is an extension of the actions taken in late 2022 and early 2023, and is incorporated in our plan to improve non-GAAP operating margins by over 6 points in 2023. Looking ahead to 2024 as we capture the full annualized benefits of recent cost-saving initiatives, we expect to drive 5 points plus of margin expansion, which is faster than the long-term framework would suggest. As for growth in the remainder of 2023, we’re assuming no improvement in customer buying behavior from what we saw in the last two weeks of Q2. The growth drivers we previously discussed are still in place. We have a record level of Q4 renewal opportunities that provide tangible selling events. We continue to demonstrate strong ELA momentum and have significant upsell opportunities in Q4.

We believe our comprehensive portfolio of cloud offering is gaining traction, and we have a ramping sales force supported with an expanded partner ecosystem of the customer success team. And while we continue to see robust customer retention trends, we are taking a much more conservative posture on the pacing and magnitude of upsell and expansion projects not attached to a specific renewal event this year. We believe the business is positioned to deliver progress towards Rule of 40 next year, defined as a combination of ARR growth and non-GAAP operating margin. With this in mind, let’s turn to the Q3 2023 outlook. We expect ARR to be in the range of $901 million to $905 million, representing year-over-year growth of 19%. We expect GAAP revenue to be in the range of $208 million to $212 million, representing a year-over-year decline of 4% to 2%.

We expect non-GAAP operating profit to be in the range of $2 million to $6 million. We expect non-GAAP net loss per share to be in the range of $0.08 to $0.04. This assumes $71.4 million weighted average shares outstanding and an effective tax rate of 20%. For the full year 2023, we expect ARR to be in the range of $930 million to $940 million, representing growth of 12% to 13%. We expect GAAP revenue to be in the range of $930 million to $940 million, representing a year-over-year growth of 9% to 10%. We expect non-GAAP operating profit to be in the range million of $70 million to $80 million, reflecting additional cost saving initiatives and spending discipline. We expect non-GAAP net profit per share to be in the range of $0.62 to $0.72, which assumes 76.7 million weighted average shares outstanding and an effective tax rate of 20%.

In closing, while Q2 did not pan out as we would have expected, we are quickly adapting to the current macro environment. We are executing on multiple strategic initiatives to drive improved sales productivity, enhance our pipeline visibility and position the company for long-term durable, profitable growth. Our robust growth retention and renewal rates demonstrates the value we drive with our customers and their commitments to Alteryx platform. We are supporting our profitability framework with more disciplined cost management, and we expect to deliver an incredible level of platform innovation with a particular focus on generative AI and cloud conversion. We are confident in our ability to capitalize on this significant addressable market opportunity and our ability to achieve our long-term financial model.

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 comes from Tyler Radke with Citi. Please proceed with your question.

Tyler Radke: Yes, good afternoon. Thanks for taking the question. I just wanted to start off on the guidance reductions. So if you look at the inside net new ARR reduction, I think you’re taking it down by at least $50 million for the second half, which is pretty substantial. It seems like you didn’t see any big changes in renewal rates. I was just hoping if you could unpack that a little bit better. I mean, are you just kind of throwing out the worst-case scenario? Obviously, this was one of the first quarters you actually missed the ARR guide and change in guidance philosophy. Or if you could just help us understand like what’s embedded in the guidance because honestly, it seems to be even worse than kind of the dynamics that you saw here in the quarter. Thank you.

Mark Anderson: Yes. Hey, Tyler, it’s Mark here. Thanks for the question. I get where you’re coming from. I think from our perspective, Q2, as we discussed in the prepared comments, we were surprised at the change in behavior, especially in the last couple of weeks. And so – and we missed ARR, this is the first time I’ve missed the ARR in 10 quarters, I think maybe a long time. And we don’t want to miss. We want to build the business in the second half that is resourced properly for the times that we’re in, and assuming the customer buying behavior persists. Some of these execution changes are going to take some time. And I wanted to be like conservative on a standalone basis to be able to say, we’re going to make our Q3 numbers based on our confidence in the deals and the way that we constructed the final number.

Tyler Radke: Great. Thanks for that, Mark, a follow-up just in terms of the reorg that you announced, it seemed like there was a couple pieces to it, one was the cost reductions. I guess. Obviously, you did a reduction for us last quarter. So just talk about kind of roles were eliminated and then secondarily, it sounds like there’s more further refinement of the go-to-market under Paula. Just talk about maybe some of the pain points that you discovered over the last couple of quarters and specifically what these new leadership roles are going to replace and kind of the problems you’re looking to solve? Thank you.

Mark Anderson: Yes. Tyler, another good question. Listen, I don’t think we’re alone as an enterprise that’s looking in the mirror, and saying, what do we need to look like a year from now when technologies that are going to have an impact on how we run our business like generative AI are going to be in full swing. And so are we doing the things today that we need to do to be able to get to that future state. I think a lot of the headcount expense reduction is going to be in go-to-market. It’s in frankly, low-performing territories or organizations that just sort of get consolidated. And there’s an organizational impact to a consolidation of people to make sure that we’ve got proper span and control and whatnot. So I think we’re focused on the right things. Paula can drill down if you need any more details.

Paula Hansen : Yes. Hi, Tyler. I think Mark hit on it. We’re looking to simplify the organization in some places, make sure that we’re doing the right things to continue to drive the transformation and the execution of the strategy efficiently and preparing for the next leg of the journey, which we certainly are interested in preparing for here in the second half and as we go into 2024.

Q – Tyler Radke: Thank you.

Operator: Thank you. Our next question is from Koji Ikeda with Bank of America. Please proceed with your question.