Software companies have been sending mixed messages. The old “macroeconomic headwinds” are creating turmoil around growth numbers, yet the promise of “generative AI” means things have never looked better. The reality is that companies everywhere started looking for ways to run leaner when the bear market started in late 2021. Cost cutting exercises can manifest themselves over years, especially for software providers who offer access through multi-year contracts. Consequently, key metrics for investors to watch include net retention rate and the foundation of all software-as-a-service businesses – annualized recurring revenues (ARR). Today, we want to check in with a company we’re holding called Alteryx (AYX), but first, let’s address the elephant in the room.
The Acquisition Rumors
“According to people familiar with the matter,” Alteryx “has been working with an investment bank to explore a potential sale after attracting takeover interest.” So sayeth Reuters, which means we have nothing more than a he-said-she-said rumor. But this one seems to have some credibility based on the rich details provided such as the following statement:
Insight Partners, an early investor in Alteryx which has retained a 1.5% stake in the company and representation on its board of directors, has recused itself from the sale deliberations because of its interest as a potential acquirer.
Credit: Reuters
Both Alteryx and Insight Partners declined to comment, and that’s standard practice for any firm responding to rumors. The Reuters piece goes on to say that “expressions of interest that Alteryx has received thus far have not met its valuation expectations.” That brings up a point that any investor sitting below their cost basis will be pondering. With Alteryx stock price dropping 43% over the past year (compared to an NYSE increase of +8%), it’s entirely possible an acquisition could take place at a price that locks in losses for existing investors.
This is a common problem tech investors face when the valuations of companies they hold fall alongside a volatile share price. Private equity sharks love to see this blood in the water because they’re then able to acquire good assets at a discount. Purchasing Alteryx means they can acquire over 8,000 customers – 48% of the Global 2,000 – who they can peddle adjacent product offerings to.
It’s entirely possible Alteryx could get acquired, but those rumors and $5 might get you a Whopper sans cheese. The big swinging king who gets to decide if an acquisition happens is Alteryx co-founder and Executive Chairman Dean Stoecker, who “owns 11.5% of the company, but controls it through dual-class shares that give him 51% of all outstanding shares’ voting power.” Enough gossip, let’s get down to brass tacks.
Checking Alteryx’s Health
Consistent net recurring revenues (NRR) that exceed 100% show that existing customers are spending more on a product as they continue using it. That only happens when the product is useful, because when bear markets happen, companies look to trim costs. That often takes the form of vendor consolidation, where mediocre niche platforms are displaced by industrial strength solutions with more breadth and scale. For Alteryx, NRR has been consistently good thus far. If they brought on no new customers from this day forward, they’d be increasing run rate by 20% each year.
That doesn’t mean revenues will increase 20% a year because there’s a disconnect between contracted usage and when money owed hits Alteryx’s books. In looking at ARR, we see annual growth of 22% year-over year with consistent quarterly growth.
The Alteryx quarterly investor deck looks about how you’d expect for a company with too many chiefs in the kitchen. (Anyone know what a Chief Advocacy Officer does?) Everyone’s “contributions” culminate in a deck that’s best started 28 pages in where we’re told the company won’t see nearly as much growth this year for revenues and – most importantly – ARR is only expected to see 9-10% growth this year.
The revised guidance seen above caused Alteryx shares to tumble.
Value or Value Trap?
Premium subscribers have noticed Alteryx’s simple valuation ratio of three vs our catalog average of six. The recent earnings call saw shares dip 20% as Alteryx lowered their growth guidance for this year while citing “a pronounced change in customer buying behavior in the last two weeks of the quarter.” More specifically, the company cited “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.” That sort of language is troubling because it implies this is a nice-to-have platform as opposed to a critically important business driver.
We’ve already maxed out our position size and notified annual subscribers that we’d wait “until we see if this is an indicator of more damage to come.” We don’t just move slowly because we’re slow people, we do so because the dip oftentimes keeps on dipping. While the rumors of a potential acquisition (if true) show there’s value to be had here, being able to view three key metrics every quarter – ARR, NRR, and # of customers with ARR of $250,000 or greater – means we’ll quickly be able to spot more weakness. We’d prefer to wait for last quarter guidance which provides a good indication of how bad/good this year will be. That “sudden change in customer buying behavior” needs to be observed for a bit longer.
That brings us to a question raised by paying subscribers whose intelligence is only surpassed by their good looks.
Growing Debt
It’s understandable why private equity firms might be viewing this top-heavy depressed asset as an easy turnaround story. Moving existing clients to the cloud creates an opportunity for additional ARR uplift with little work required. Just flatten the organizational structure a bit and start taking advantage of those 90% gross margins which should help in managing all that debt on the books.
Alteryx has $692 million in cash and short-term investments which is offset by $1.2 billion in debt. Seems like a big number for a $2.4 billion company. With interest taken into account, here’s what their debt obligations look like.
The $445 million coming due next year can be paid with cash on hand which buys them a few more years before the next chunk comes due. Indeed, that may be why they raised $400 million this year for, “general corporate purposes, including potential repurchases or repayments of its outstanding convertible notes.” The remaining $900 million in notes could be handled a lot easier if they resume positive operating cash flow and start enjoying some of those 90% gross margins.
Conclusion
Disruptive tech stocks can see valuations change quite quickly because lots of their value lies in forecasts for things that haven’t happened yet. When stocks fall out of favor, intrinsic value starts to approach market value and private equity firms see bargains to be had. When companies aren’t being operated as efficiently as possible, there’s an opportunity to take them private and start cutting costs. Alteryx may show strong metrics for this quarter, but the dimming forecast they’ve given implies trouble is on the horizon. Whether or not an acquisition actually happens, investors should continue to closely monitor NRR and ARR metrics for any signs of trouble.