In a recent piece on hyperautomation, we talked about a success story where a professional services firm saved half a billion dollars by adopting robotic process automation (RPA). Thats the sort of exponential value thats an easy sell at the C-level. Companies that can manage to implement RPA successfully are now reaping big rewards.

Then, you have predictive analytics. The basic use case for any client is to take all the data theyre doing nothing with and then analyze it using machine learning algorithms. The resulting insights help guide an organization to make better decisions.

Today, were going to talk about a company thats melding RPA with predictive analytics, wrapping the whole thing up in a blanket of buzzwords, and selling it to more than 6,400 companies.

Gartners Magic Quadrants are helpful for identifying which companies are in the lead for any enterprise software niche. The 2020 Gartner Magic Quadrant for Data Science and Machine Learning Platforms lists out some familiar names.

No surprise to see IBM creeping across the challenger quadrant slowly in an attempt to enter the leaders quadrant and become relevant again. Already in the leaders quadrant is the company with the highest ability to execute, Alteryx (AYX).

Founded in 2011, Los Angeles based Alteryx took in $163 million in funding before having their initial public offering in March 2017. The IPO priced at $14 and today sits at $121.38 per share for a gain of +683% versus a Nasdaq return of +90% over the same time frame. Alteryx may be coming across peoples radars today because shares are down -28% in todays trading. Since past results are no indication of future performance, maybe todays dip represents an opportunity to add to or open a new position. First, lets look at what this $8 billion market cap company does.

The Alteryx marketing collateral is rife with so many buzzwords its difficult to see a clear picture of their value proposition. The document describing their core product drones on about the strategic imperative of digital transformation, before quoting a Gartner presentation titled Worlds Collide as Augmented Analytics Draws Analytics, BI and Data Science Together, which offers up the following pearls of wisdom:

The proliferation of augmented capabilities within analytics, business intelligence, and data science and machine learning products is making once distinct markets collide. The collision facilitates stronger, more complete and more effective links between data and analytic investments, practices, processes and key business outcomes.

Its difficult to see how anyone could keep a straight face while saying something like this to a room full of technically competent people. However, in a boardroom full of executives, just start talking about worlds colliding and youll see heads start to nod thoughtfully.

The end result of all these collisions of worlds is something Gartner refers to as augmented analytics. Its also what Alteryx calls analytics process automation (APA), and their target market is the 54 million disgruntled analysts who hate their jobs who want to be upskilled to be citizen data scientists.

We recently wrote about how robotic process automation (RPA) is now being upstaged by hyperautomation which involves lots of natural language processing so that we can talk to our digital robot co-workers. Then theres analytic process automation (APA), something that Alteryx assures us is unlike RPA because it contains three critical key pillars of digital transformation which are listed in the below diagram:

Using data to produce insights and automating processes to make things more efficient are pretty standard value propositions, but whats this about upskilling? It sounds a whole lot like training an entire organization on how to use an app, and then announcing to the Board that youre now ready to double down on your efforts because you invested in your citizens. In the meantime, half the people who attended the training have already forgotten about the tool, and a bunch of unused licenses sit around gathering dust. Thats why its important to monitor usage, and an increase in client spending can act as a proxy for increased usage. Its just one of many SaaS metrics Alteryx uses to monitor the health of their business.

Ark Invest recently published a paper on Software-as-aService (SaaS) which postulates that this decade may be the Golden Age for SaaS business models which constituted 25% of all enterprise software sales in 2019. For retail investors, a SaaS model provides easy-to-understand metrics for how a software business is growing.

Annualized run rate (ARR) is the amount of money that would be received in one year if nothing changes no new clients, prices stay the same, no up-sells, and no cancellations. At the end of Q2 2020, Alteryx had 6,714 customers representing annual recurring revenues of $430 million. This translates into an average $65,000 yearly spend on tools which are being sold using a land and expand business model (what others might know as the freemium model).

Once a new client is acquired, Alteryx can create some initial wins that will reverberate throughout the clients organization so that other departments adopt the product. When an existing client spends more money, this is measured by Alteryx in a metric called dollar-based net expansion rate. For example, the average client spent 26% more with Alteryx in 2019 compared to the year prior:

Above we can see strong annual revenue growth over the past four years, but that appears to be stalling based on the most recent quarterly results. Yesterdays revised guidance puts revenues for 2020 at $460-465 million which is being seen as a key reason for todays plummeting stock price. Heres the full guidance given for 2020:

Revenue is expected to be in the range of $460.0million to $465.0 million, an increase of 10% to 11% year-over-year. Annual recurring revenue is expected to be approximately $500.0 million as of December 31, 2020, an increase of over 30% year-over-year.

Seems unfair to complain about double-digit growth expectations given whats been happening in 2020, but apparently some analysts had much higher expectations for the company.

Even with revenue growth slowing, Alteryx offers a form of stability due to a yearly subscription model that will likely be renewed, provided the tool continues to generate value. Its one reason why SaaS companies are given a higher valuation by investors. ARK Invest lists several benefits of a SaaS business model as follows:

Once Alteryx has a client in their CRM system thats paying them money, it costs very little to cross-sell them more features and functionality based on their patterns of usage. With a nearly $1 billion war chest, Alteryx can also look to grow through acquisition. The recent dip represents a temporary growth setback. Says ARK Invest today:

In our view, during the pandemic customers prioritized customer-facing hardware and software solutions relative to business process automation, the latter of which will have to catch up over time.

Seems a bit counterintuitive as one would expect the demand for RPA solutions to accelerate in times of crisis as companies look to cut costs to increase earnings when revenues fall.

From an investors perspective, theres everything to like about the 90% gross margin, strong revenue growth, and breadth of customer base. We all know the market is behaving extremely unpredictably, and that revenue growth will be affected across the board for nearly all industries. The slowdown in growth for Alteryx seems to be expected and temporary.

Focusing on how many new customers you bring on each quarter is great for sales quotas but does little to describe customer retention or how youre able to up-sell existing clients. Paying attention to the dollar-based net expansion metric will make sure that theyre able to continue extracting net new revenues from their client base which translates into increased usage which helps further validate the value proposition for potential clients.

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An Analytics, Data Science, and Process Automation Stock - Nanalyze