Alteryx Inc

F:3AI

Earnings Call Transcript 2018-Q2

[Operator]

Greetings, and welcome to the Alteryx Second Quarter 2018 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host to Chris Lal, General Counsel. Thank you. Please begin.

[Chris Lal, General Counsel]

Thank you, Operator. Good afternoon and thank you for joining us today to review Alteryx’s second quarter 2018 financial results. With me on the call today are Dean Stoecker, Chairman and Chief Executive Officer; and Kevin Rubin, Chief Financial Officer.

After prepared remarks, we will open up the call to a question-and-answer session. During this call, we may make statements related to our business that are forward-looking statements under Federal Securities Laws. These statements are not guarantees of future performance but rather, are subject to a variety of risks and uncertainty.

Our actual results could differ materially from expectations reflected in any forward-looking statement. For a discussion of the material risks and other important factors that could affect our actual result, please refer to our SEC filings available on the SEC's EDGAR system and our 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 this conference call. Please refer to the tables in our earnings release and the Investor Relations portion of our website for a reconciliation of these measures to their most directly comparable GAAP financial measure.

With that, I’d like to turn the call over to our Chief Executive Officer, Dean Stoecker.

[Dean Stoecker, Chairman and CEO]

Thanks Chris, and welcome everyone to our Q2 2018 earnings call. I am pleased to share that we another outstanding quarter.

We grew total revenue by 54%, increased international revenue by 100% and we maintained our best-in-class net revenue retention rate of 131%. We also crossed an important milestone in the quarter achieving more than 200 million in annual recurring revenue.

We continue to benefit from market tailwinds as companies of all sizes in diverse industries and geographies increasingly seek to turn data into insights. And with the Alteryx platform, we are doing so with significant improvements and outcomes while experiencing tremendous productivity gains in the process.

These tailwinds are resulting in continued demand for our end-to-end analytics platform both from new customers and existing customers looking to expand their Alteryx footprint. We believe Alteryx can become synonymous with analytics by delivering high value data science and analytic outcomes for our customers across the globe each and every day.

We saw this in action at our Inspire conference in June, our annual user event which brings together and celebrates the Alteryx community. This year was the largest U.S. Inspire ever. We had over 3,000 participants. But more importantly, it provided for them to showcase 100s of innovative used cases presented by our customers. I had the opportunity to meet with dozens of customers and prospect during the conference. And our team altered everything, resonated well with them.

I heard stories of how Alteryx - Alteryx top and bottom line results improved operational efficiencies, elevated the skill sets of data workers, advanced career opportunities, and improved work-life balance.

We also had a record number of people attending training sessions, which in our view is a positive leading indicator of our ability to become a critical element of our customer's analytic infrastructure.

During the four-day conference we filled more than 3500 training seat, spanning 40 different training sessions. Another element of our strong customer focused culture is the Alteryx Community, at community.alteyrx.com.

It is becoming clear in data science and analytics that, power is not in what you know but in what you share. As we approach the third anniversary of the launch of Alteryx Community, we continue to see strong growth in consumption and collaboration as our customers come together to support each other, explore new use cases, submit ideas for our platform, and advance our analytic capabilities through learning and thought leadership.

This is all supported with strong community metrics, including a 136% year-over-year growth in unique visitors and 176% year-over-year increase in consumption of user based solutions posted to the Community.

In the few months since the launch of Alteryx Academy, our online learning environment within the Alteryx Community, customers have consumed over 140,000 interactive lessons and obtained 3200 product certifications. Participating users in Alteryx Academy are accelerating their analytic skills and improving their careers, and organizations are better able to identify skilled talent as they seek analysts with proven expertise.

Our vision is that Community becomes a key pillar of our strategic imperative to activate our ecosystem of partners, customers, systems, integrators, and analytic consulting firms, for building new connectors, tools, macros, apps, and even new companies on our platform.

During Q2 we had 267 customers and ended the quarter with 3940 total customers around the world, including nearly 500 of the Global 2000 companies. Some of the new customers added in Q2 include Dropbox, Herman Miller, Samsung Electronics, Tim Hortons, and Union Pacific.

In Q2 we had a record number of six figure deals, which more than doubled year-over-year. Our significant growth in larger transactions indicates to us that Alteryx is becoming much more strategic for our customers, as we continue to address broader analytic needs and enterprises, hoping to establish Alteryx as a data science and analytic platform of choice for digital transformation.

For example, MINDBODY, a leading technology platform for the fitness, wellness, and beauty services industry. Like many fast-growing organizations, sees the power in its data. They selected the Alteryx platform to streamline and automate data driven decisions across their enterprise.

With Alteryx, MINDBODY will enable data scientists and business analysts to access the right data assets faster than previously possible. Business analysts can finally move out of spreadsheets, and data scientists can spend more time on advanced analytics and less time getting the data ready for analysis.

MINDBODY envisions a self service analytics platform freeing up their data scientists from supporting ad hoc reporting to delivering insight, with one version of the truth, to help further the company's growth. By adopting the Alteryx platform, business users at MINDBODY will have access to the analytics they need while conserving valuable resources in the process.

And larger expands are also occurring, for example, Reed Business Information, RBI, a leading global provider of data and analytics services first embraced Alteryx as a platform in Q2 of last year.

The team found Alteryx Designer especially compelling as it does not require business analysts to code in order to have an immediate impact. With data assets coming from numerous external sources, information needs to be normalized and transformed before analysis can begin.

Prior to Alteryx, the company was dependent on the technology team to address these needs, resulting in elongated turnaround times. Alteryx removes this dependency and allows Reed Business Information to deepen its insight, while at state of accelerating its pace of business.

Alteryx is now the major driver of the sales profits at RBI, and plays a critical role in sales enablement by automating more than 85% of the work associated with manual data transformation, and allowing analysts to spend time feeding insights to the various teams. RBI has experienced considerable growth in the business.

We also saw strength internationally in Q2, as our international business doubled year-over-year, and we did business in 70 countries. A few notable deals included Umniah Mobile in Jordan; Unilever, Chile; Globosat Programadora and CBRE in Brazil; Al-Futtaim and Al Khaleej Sugar in the U.A.E.; GS Engineering and construction along with GDS Consulting in South Korea; and OTP bank in Romania.

Due to this growth, we continue to build out our international teams and the infrastructure to support them. Over the past year we've increased our international headcount by 97% and now have 136 Alteryx associates outside of the U.S.

Our increased market awareness is also helping us to build a broad and robust partner ecosystem. Alteryx is benefiting from strong levels of engagement at many systems integrators, analytic consulting practices, and global audit and advisory firms. Not only are they some of the largest customers we have but they engage with the clients in a wide variety of use cases, industries, and geographies, often leveraging Alteryx in those engagements.

This not only expands our global reach but also helps position Alteryx as a strategic part of their analytic framework. The subject matter expertise of these firms is helping to expand the use cases for the Alteryx platform.

For example, in Q2, we saw a significant uptick in the use of Alteryx in corporate finance schemes covering a wide variety of use cases in tax, audit, Sox compliance, treasury, foreign currency risk, transfer pricing, valuation modeling and more.

At Inspire, a customer told me that both Alteryx represents the first modernization of tax technologies since spreadsheet was invented 30 years ago. Both land and expand in these new found use cases were strong in Q2, including deals with Amgen, Coach, Garman, Houlihan Loki, Royal Caribbean Cruises, and Walgreen.

As we continue to evolve with new use cases like those in tax and audit, we also continue to innovate on the platform, giving us multiple vectors to continue driving our growth. We are focused on furthering both sophistication and ease-of-use of our platform, addressing more complex use cases particularly around data science.

Last quarter we launched Promote, our advance analytics model management product for deploying, managing, and monitoring statistical, predictive, and machine learning models.

While still early, we are pleased with the adoption trends so far. We are in the early days of enterprises leveraging data science and analytics and we believe we are well-positioned to take a leading role in the growth of data science platforms.

For example, a large North American insurance company expanded with Alteryx in the second quarter by adding Promote to help scale their data science initiatives. This organization was using a homegrown predictive API for real-time model scoring, but faced challenges with scalability.

The maintenance of the custom API became a burden as more users began leveraging the models. The team knew this homegrown solution wasn't a long-term one. They selected Promote as a unified way to deploy and manage predictive models, resulting in streamlined operations and reduced costs.

Promote has allowed the team to more strategically allocate resources, engineers can now focus on model management, freeing up the data scientists to spend more time developing new models and drive improved business performance.

By eliminating implementation complexity, more models will be put into production which this customer believes will significantly increase their efficiency and capacity of their data science organization.

To quote their head of analytics "We are using Promote to refine the model deployment process as it provides a structured testing environment that we simply didn't have before. By adopting Promote, it will allow us to increase the quality of what we produce and generate a positive revenue impact for the business."

By discovering new use cases and extending our platforms capabilities, we believe we can not only land more new customers but we can extend expansion rates for our existing customer cohorts, maintain strong net revenue retention rate, and increase customer lifetime value.

As evidence of this, we initiated our land and expand model in Q1 of 2014. $1 of land revenue acquired in the first cohort year expanded to a $1.70 of revenue in the second year, $2.70 in the third year to just under $4 in the fourth year.

The subsequent cohorts of 2015 and 2016 have performed at similar levels. These trends coupled with the momentum we're seeing in the market gives us confidence to accelerate some of our hiring who can best capitalize on the massive opportunity in front of us.

Kevin will provide more details on our outlook shortly. Before I close, I want to take a moment to address some recent organizational changes. Ned Harding, one of our cofounders has decided to step down from his role as CTO.

I'd like to take a moment to acknowledge Ned's tremendous contributions to Alteryx, and on behalf of the entire Alteryx community, I want to thank him for everything he has done over the past two decades. Ned will continue to serve us in a technical advisory capacity. This transition gives us the opportunity to re-imagine the CTO position for a rapidly growing organization that is scaling around the globe.

To that end I'm also excited to announce that Derek Knudsen will be joining Alteryx as our new CTO, spearheading software engineering, engineering operations, and IT. His knowledge and expertise will allow us to continue to innovate on our platform while we grow the Company.

Additionally, to further support our growth strategy we are expanding our Chief Revenue Officer, Scott Jones's responsibilities by consolidating all of our go-to-market functions including marketing, under his leadership. As a result, Scott has been appointed President and Chief Revenue Officer.

We believe having all of our go-to-market activities tightly aligned under Scott's leadership will further improve sales efficiency and effectiveness, and best position Alteryx to deliver sustained growth for many years to come.

In closing, we had a great quarter. I'm extremely proud of what the Alteryx team delivered in Q2, and I want to personally thank all of the Alteryx customers, partners, and associates, for everything they do each and every day to make Alteryx a world-class organization.

We have built a powerful and sustainable business model that will enable us to capitalize in the massive market opportunity in front of us.

With that, let me turn the call over to Kevin to discuss our Q2 financials and our outlook for Q3 of this year. Kevin?

[Kevin Rubin, Chief Financial Officer]

Thanks Dean.

As Dean highlighted at the beginning of the call, we had a strong Q2. Revenue was $46.8 million, an increase of 54% year-over-year. International revenue increased a 100% year-over-year to $13.3 million and represented 28% of our Q2 revenue.

The strong growth across both our U.S. and international markets reflects the investments we have made and continue to make to grow our business globally.

In the quarter we had a 267 net new customers compared to 258 net new customers in the same period last year, and we ended the quarter with 3,940 total customers up 40% year-over-year. Our dollar-based net revenue retention rate of 131% exceeded 130% for the seventh consecutive quarter.

Before moving on, I would like to remind everyone that unless otherwise stated I will be discussing non-GAAP. Please refer to our press release for a full reconciliation of GAAP to non-GAAP results.

Our gross margin was 90% in the second quarter, an improvement of 600 basis points from the second quarter of 2017 and in line with the first quarter of 2018. As we discussed with you last quarter, our gross margin has benefited from operational improvements and our customers support and professional services organization and lower royalties from third-party syndicated data.

In the near to midterm, we expect increased investments in our support and professional services organizations as we expand globally and align these organizations closer to our customers and local markets, as well as supporting our new products to Connect and Promote.

Total operating expenses were $46.5 million compared to $30.8 million in Q2 2017. We continue to invest in programs to drive awareness and adoption of our platform and expand our teams globally. This includes go-to-market investments in additional quota carrying salespeople, as well as marketing and other supporting personnel to accelerate our global expansion.

Sequentially operating expenses increased 17% resulting from higher headcount and costs associated with our U.S. Inspire conference that took place in June.

Operating loss was $4.3 million which equates to an operating margin of negative 9%. This represents a significant improvement compared to an operating loss of $5.5 million or negative 18% in the second quarter of 2017.

Net loss was $5.6 million and net loss per share was $0.09. This is based on $60.7 million weighted average shares outstanding basic and diluted.

Turning now to our balance sheet as of June 30 we had cash and cash equivalents, short-term and long-term investments of $405.2 million compared to $194.1 million as of December 31, 2017. Our cash balance reflects the proceeds of our $230 million convertible senior notes offering which we completed in the quarter.

Cash used in operating activities was $5.7 million for the quarter. For the first six months of 2018, we reported positive cash flow from operating activities of $6.4 million. Cash used in operating activities for Q2 2018 include costs associated with our U.S. Inspire conference.

Finally we ended the quarter with 674 employees out from 629 at the end of the first quarter 2018 and 491 employees at the end of the second quarter of 2017.

Before we turn to our Q3 and full year guidance, I’d like to update you on our adoption of ASC 606. We believe that we will no longer qualify as an emerging growth company after December 31, 2018. If we no longer qualify as an EGC after December 31, 2018, we will be required to adopt ASC 606 and reflect the impact of adoption in our annual report on Form 10-K in early 2019.

We continue to evaluate the potential impact of ASC 606 on our financial statements and have not yet reached the final determination. We plan to communicate additional information with the current third quarter earnings release. The guidance we are providing you today is under ASC 605.

Turning to guidance as Dean noted, we continue to see strength across our business. We are raising our revenue guidance for the full year 2018. We are also accelerating investments to support continued growth as we build a company for long-term growth and scale.

For the third quarter of 2018, we expect GAAP revenue in the range of $49 million to $50 million representing year-over-year growth of approximately 43% to 46%. We expect our non-GAAP operating loss to be in the range of $2.5 million to $3.5 million and non-GAAP net loss per share basic and diluted of $0.04 to $0.06.

This assumes 61.5 million non-GAAP weighted average shares outstanding basic and diluted. For the full year 2018, we now expect GAAP revenue in the range of $191 million to $193 million representing year-over-year growth of approximately 45% to 47%. We now expect our non-operating loss to be in the range of $13 million to $15 million and a non-GAAP net loss per share basic and diluted of $0.24 to $0.27. This assumes 61 million non-GAAP weighted average shares outstanding basic and diluted.

To close, we delivered another strong quarter in Q2, we continue to build the foundation for many years of durable growth as we make Alteryx synonymous with analytics across the enterprise.

And with that, we’ll open the call to questions. Operator?

[Operator]

[Operator Instructions] Our first question comes from the line of Brent Bracelin with KeyBanc Capital Markets. Please proceed.

[Brent Bracelin, KeyBanc Capital Markets]

Dean I’ll start with you if you look at the strength in the quarter driving this acceleration and revenue and billings growth. It looks like large deals or an outsized factor there more than doubling. I guess my question is, are those large deals tied mostly just to larger seat expansions or are you starting to see the benefit of Connect and Promote bundles that are driving just deal sizes higher?

[Dean Stoecker, Chairman and CEO]

I think there's a couple of dimensions here. As you know we have two primary sales motions, a bottom up sales motion with selling to the analyst and in a relatively small $10,000 land over a 45 day sales cycle.

Those customers - that six digit numbers that we suggested in our earnings script apart both across new business and existing business those are for expanding their footprint. So the new business customers keep coming back time and time again buying three or four seats ultimately getting to a server.

So they kind of grow slowly over time but what we’re seeing in the top down sales motion is that as chief data officers come into the picture earlier often with IT lockstep with them, we’re starting to see new lands occur in larger sizes as well. And so I think there's not really one dimension to it it’s both the bottoms up and the tops down motion.

And I think it's also important to note that it’s in part because we we’re really the only general-purpose data science networks platforms on the market today. I think between that and just pure go-to-market execution along with continued benefits from the tailwinds of the IPO, a lot more awareness about who Alteryx is and where we fit in the enterprise software and the understanding of analytics importance to the C-Suite. We’re seeing these larger deals happen both on new business, as well as new business to existing customers.

[Brent Bracelin, KeyBanc Capital Markets]

And then one for Kevin here the gross margin came in obviously 90% for the first time but pretty impressive there, I guess my question for you is that running a little hot. Can you maintain that - you had planned it to make additional investments, walk us through how we should think about kind the gross margin level here now ticking to 90% and whether that's sustainable or not?

[Kevin Rubin, Chief Financial Officer]

As I said in the prepared remarks we are continuing to invest specifically in customer support and our professional services organization internationally and putting those resources closer to our customers in local market. And so that will have some drag on margins going forward.

That being said, I think we’re very excited with and pleased with the leverage that we've seen in gross margin over the last several quarters. And so you know the balance of those two will have some incremental drag on margins but I think in the long-term they’re going to be sustainable at a very high rate.

[Operator]

Our next question comes from Jesse Hulsing with Goldman Sachs. Please proceed.

[Jesse Hulsing, Goldman Sachs]

Dean you really accelerated sales and marketing investments over the last couple of quarters which is good to see because growth is also a color along with that. I guess if you outline where you've been investing, what have been the top priorities and how are new reps been ramping versus your expectations?

[Dean Stoecker, Chairman and CEO]

Well we had 97% growth in our international personnel over the last year primarily a result a 100% growth year-over-year in the international business. So we’re in this $30 billion TAM and so we recognize the land grant happening internationally. We’re seeing trial downloads occur pretty much everywhere so we’re establishing headcount in faraway places.

I think we've illustrated last couple of quarters that we opened up our Singapore office we continue to invest in sales and marketing in Singapore. In the last quarter, we opened up Tokyo there's a number of heads either have already started or that will be planned for the Japanese market continue to build out our team in France and in Germany.

We just established presence in Dubai to cover off the Middle East where we have quite a few customers already under our umbrella. So I don’t think it's a super concentrated efforts its rather a global effort and we’re going where the opportunity exists.

[Jesse Hulsing, Goldman Sachs]

And then Kevin on 606 comment any idea yet if you'll be able to maintain ratable treatment?

[Kevin Rubin, Chief Financial Officer]

The challenge we have is the Alteryx platform and the breath of offerings are incredibly sophisticated and we have elements that are on-prem and elements that our cloud-based. And so we are working through the process in the literature and as we have more information we will certainly share.

[Operator]

Our next question comes from the line of Derrick Wood with Cowen and Company.

[Derrick Wood, Cowen and Company]

We heard a lot of interest in the new visualitics product I was hoping to get some – you could share some feedback what the feedback was from the announcement. Specifically how do you think it will drive new business or engagement out of the installed base and what is the rollout of the timeframe look like?

[Dean Stoecker, Chairman and CEO]

This whole notion around visualitics actually started about a year ago at last year's inspire conference. We have a fundamental different in how visualization should be embraced in enterprise software like ourselves. We think that you should be able to see your data at every moment through your analytic pipelining process.

And so rather than waiting the end to create charts in a dashboard or putting your data into Excel and running chart there. We believe that putting the visual insight at the beginning in the middle and at the end of your analytic processes are critically important.

So that by the time you discover the truth you can actually start deploying the truth and we’re starting to see that more and more with people building machine learning algorithms going into parts of the platform like promote.

So we have team dedicated to visualitics we rolled out a bunch of it at this year’s an Aspire things around data profiling so they instantly see what's happening in your data before you start to do processes on your data. We have interactive charting and dashboarding in the works. Our goal is to support all the consumption layers whether it's our BI clicker tableau but lot of our customers are telling us that they would like to see interactive visual elsewhere throughout their analytic pipelining process.

So we’re responding to what customers are asking for an it's an ongoing effort as our platform is very horizontal and almost every single vertical and pretty much every functional area use cases never seem to diminish though we’ll continue to prosecute our visualitics strategy for quite some time.

[Derrick Wood, Cowen and Company]

And Dean at the Analyst Day and the customer panel some customers were talking about replacing legacy ETL or legacy BI with you guys. We've also heard more customers looking at getting data out of SAP system. So just curious are these dynamics really taking hold and are they something that can drive bigger deal sizes?

[Dean Stoecker, Chairman and CEO]

I think it’s true that they will drive bigger deal sizes over time. We’re typically net new when we landed in the new customer our customers often ask what they can replace. We tell them we don't know but they'll figure it out because usually people have a plethora of software tools at their disposal some of them are last generation visualization tools. Some of them are last generation PI reporting tool many of them are point solutions.

We were starting to see last generation ETL tools get replaced. We’re seeing people wean themselves of even dashboarding tools because they want to see and interact with their data in the middle or beginning of their analytic journey.

So time we’ll tell we've always said that the $30 billion TAM is broken up into two distinct audiences. The $10 billion TAM, it's in the line of business that really is the citizen data scientists who just want to love their job and some discovers of marginal profitability for the enterprise. And our intention has long been that the winner of that space and we intended to be us will be the natural beneficiary of the shares shift of the $20 million that's sitting in IT all the last generation capabilities.

So my suspicion is overtime we'll continue to see larger deal sizes, particularly as enterprises start to embrace the idea that having a chief data officer to get to success in digital transformation will happen sooner.

[Operator]

Our next question comes from the line of Bhavan Suri with William Blair. Please proceed.

[Bhavan Suri, William Blair]

I just want to touch a little bit on some of the products, but not sort of the very newest ones but really, Connect and Promote, industry conversation certainly suggests interest there, strong interest, I guess if you can update on the traction you're seeing at the products probably maybe a little more for Connect and early on Promote. But you talked in a sense some traction there maybe not there in the pipeline for Connect, how do you expect that impact to '18? I know it's early but concerning what we're hearing in the field seems to feel like that that might actually be incremental to '18. So just want to get your sense of what you're seeing obviously, which is much closer deeper than what we see.

[Dean Stoecker, Chairman and CEO]

It's pretty interesting Bhavan, I think we rolled out Connect Q3 of last year, Promote at the end of Q1 this year. Both of them are still pretty early. We don't - we're not going to illustrate any attachment rates although we are getting good traction with current customers who have loaded up a bunch of users of Alteryx's and now are planning to harness that curated knowledge that those users have in harvesting the XML workflows from Alteryx in Connect.

There's lots of interest from new customers who have decided not to go down the route of self-service until they cover up on that nine issue of metadata management curated catalog.

So we're still really early on. Obviously we wouldn't be able to report on churn rates for quite some time since we have even been at this for a year. We're encouraged by what's going on, we're putting additional resources around it.

I think as Kevin mentioned in the last conversation around margins - we're probably going to have to have more support around these things, it's not a self service tool to sell to the line of business analyst, they install it, learn it over a ham sandwich and get busy.

It's a more complex installation process, there's -- we're finding out that there is across large organizations thousands of different databases and data assets that need to be curated. So, it's going to take a long time to build all of the loaders for that metadata. We're comfortable with a lot of the common loaders that have been built, so we're covering off today on SQL, and Oracle, and Redshift, and in Salesforce, and Tableau, and Qlik, Snowflake and even our own XML document.

So, we're covering off on all things we think are important but what we're hearing from enterprises is that there's an endless set of data that need to be curates. So, this problem has been going on for a long, long time in enterprises. And over the next few years we intend to bring chaos to order.

[Bhavan Suri, William Blair]

My second question is kind of in that phase, it was about the partners. Do you think about enterprises and dealing, what sort of data curation, data, data governance, metadata management, there's a whole host of stuff being done by Accenture, Deloitte, P&G, you obviously have some partnership, not just that sort of the influence partners are having how that's grown and sort of how you perceive that growing over the next let's say 24 months?

[Dean Stoecker, Chairman and CEO]

Our channel program is actually very, very influential in the business. About 20% of the revenue is coming from resellers. But more importantly the influence coming from the analytic consulting firms, the tax and audit advisory practices, the systems integrators that you mentioned, and a bunch of other ones that are, don't hear very often, but firms like L.E.K. out of Chicago, or XP out of Sydney Australia, these are great organizations, they help us develop or help identify unique use cases.

They are the perfect organization that can do some of the heavy lifting around standing up, promote, building algorithms, getting people started, creating loaders for Connect. And so they're very helpful, we're in right now some program to make sure that we're teaching and training those folks on the end process so that we can get the help we need without having up on to many services of our own because this is the beautiful match between a company that doesn't have many service dollar sign and companies who make their living on service dollars.

[Operator]

Our next question comes from the line of Brad Sills with Bank of America Merrill Lynch. Please proceed.

[Brad Sills, Bank of America Merrill Lynch]

Just following on your earlier comment being around seeing some traction within finance some of those used cases, are there any others you'd call out where you're noticing a trend perhaps at supply chain or another area, operational area?

[Dean Stoecker, Chairman and CEO]

Actually you hit on it. Supply chain is coming up more and more. There's so much of data complexity in supply chains, I've just spent the last few days listening to two presentations that were given by customers that inspire and I heard a number of them talk about supply chain influences that Alteryx has on improving operational efficiencies, everything from reducing costs of them down shipping from supply-chain to making sure that suppliers are meeting their obligations for putting merchandise on shelves, all the way through just the analytic pipelining of knowing what's in a warehouse. It's becoming more and more important, although I think it's still second fiddle to all the activity around, everything in finance.

We're hearing a lot about tax and fraud where people are beginning to talk about robotic process automation, all the things that you would expect Alteryx to be involved in. And it took our partners to bring many of these used cases there.

I think it's important for all of you and investors to go to community.alteryx.com. We have well north of a 160 different use cases, many of them have been posted in the last six months, things that I think would surprise you.

[Brad Sills, Bank of America Merrill Lynch]

And along those lines, with those used cases, are you taking your direct sales force or even your partner channel, are they going to market with more of a vertical use case or vertical approach versus the horizontal?

[Dean Stoecker, Chairman and CEO]

Well, I think most of our partners do have that vertical subject matter expertise in there, in some cases altering the user interface of Alteryx by implementing new macros or apps. We've we rolled out the Python SDK, so it makes it pretty easy for partners to build new tools that sit on the canvas, in the pellet on Alteryx.

And so we're beginning to hear more and more people not just with Designer but even with Connect rollout vertical solutions. And again, this is where we try to stay away from that because of the heavy lifting on hiring subject matter expertise. But our partners are game changers in this arena.

So we're working with many of them to figure out the right go-to-market motions, whether we decide at some point in time to be a marketplace we could sell their new capabilities or not.

Some of those things are still in the ideation phase but we're starting to see a lot of organizations do way more than just their own analytic pipeline, they're building tools, macros, apps, exposing APIs, even building new business on the platform.

[Operator]

Our next question comes from the line of Tyler Radke with Citi. Please proceed.

[Tyler Radke, Citi]

I was wondering if you could give us an update on the competitive environment. You get into larger deals and some of the broader use case is that the competitive environment has changed significantly over the last year and then you can kind compare and contrast the competitive environment and kind of the core data prep space versus the more broader analytics platform that you're throwing up the vendor, against a vendor like SaaS.

[Dean Stoecker, Chairman and CEO]

I would start it by saying that there's almost no competition in the data prep world given the longevity we've had in one defining the space in building up the end-to-end capabilities of data prep.

If the question was specific to tableau perhaps we don't see them in the market at all yet. I would expected we would have already if it’s announced for 90 days and two and a half years of development. The realities we’re hearing more of tableau reps coming to us looking for additional assistant that perhaps then blocks some of their larger deal that they're trying to get to.

The thing that we see happening more and more is a direct competition with SaaS we have win reports on every deal that's brought in whether its new customer or new business to an existing customer. And the vast majority of the compete are directly up against SaaS that we tend to win.

I think it’s important to recognize that the reason you would find it in SaaS as a compete is that we’re the only ones who are really addressing the end-to-end capabilities that both our scientist would need and a citizen data scientists. And as a result, we just don't see many people other than SaaS.

[Tyler Radke, Citi]

Yes, I guess related to that if I think about the plans you communicated about increasing hiring and obviously the sales and market growth accelerated versus last year in the quarter. Where exactly are you putting those additional resources is it more on advanced analytic side, is it I assume it's more on the enterprise side but if you could just kind of drill down on exactly where you’re adding capacity?

[Dean Stoecker, Chairman and CEO]

Well I don’t think our sales hiring model has changed much, obviously we’re hiring more salespeople in more theaters. I think that as we become more data science over the last three or four years since the implementation of our embracing – our tools. And certainly now with Python and our work around Jupiter notebooks we’re actually changing a little bit of the profile around our solutions engineers recognizing that we have to have more quant expertise to help these people understand algorithmic building processes.

But the sellers the model is pretty much the same obviously we like people who have above land and expand experience, but have enterprise class selling skills to address both that bottoms up selling motion, selling to the analyst and that top-down motion engaging with the C-Suite.

[Operator]

Our next question comes from the line of Michael Turits with Raymond James. Please proceed.

[Michael Turits, Raymond James]

Dean, I think there is follow on to some of your previous comments about SaaS and what are they observation that the customer can’t only we had was that it was less focused on as customers were discussing what they were doing prep and more around using you as an analyst platform for building models and application. So is that starting to move into the land as well as in to expanding getting new customers and is that what you referring to when you talk about continuing with SaaS or is that just with existing customers on there?

[Dean Stoecker, Chairman and CEO]

It’s actually both, I think that we for a long time will first there will be pretty good capabilities we try to say away from the quant initially until we figure out whether or not the citizen data scientist would embrace predictive capabilities. And I think in those situation where there is a chief data officer or a proxy full one, they are actually surrounding their digital transformation teams with quant’s and the quant’s are beginning to recognize that they want to be more productive to and the best way to do that is have them help the citizen data scientists we’re bridging the gap between the capabilities of the quant and the abilities of the citizen data scientists.

So we are seeing more predictive use cases on LANs and we certainly are seeing a lot more skating towards predictive on the expand. I think I indicated and Inspire the keynote that a year ago the cohort that we represented at Inspire indicated that 45% of our customers engaged in advanced analytic functions in Alteryx and we classify that the combination of spatial analytics as well as predictive analytics 45% of the specimens were engaging in advance this year that same cohort is now 57% engaged in advanced analytics.

So some of that is the quant starting earlier with us and some of it is our ability with the platform to advance the skills of the citizens we’re now beginning to move will be on a descriptive analytics and further up the analytics continuing to spatial analytics and predicative analytics.

[Michael Turits, Raymond James]

And Kevin fairly quickly I know you don’t give out some guide to cash flow, but cash flow was a little bit late just the arm model and despite strong billings and EBIT line. You did notice some items around for taxes and higher cap tax line also. So was the one-timer there was anything also pointing to cash flow?

[Kevin Rubin, Chief Financial Officer]

Yeah I mean I think cash flow was really too big drivers one as we mentioned Inspire U.S. Inspire conference is a seasonally higher both expensing cash item for us. So we have the element of that some of that leads into Q3. And then it was really just timing of working capital changes to be true. The deferred tax stuff they had more to do with just the accounting around the convertible there was a deferred tax liability that gets set up as part of the convert. And so you had the release of some valuation allowance of effect of the rate.

[Operator]

Our next question comes from the line of Greg McDowell with JMP Securities. Please proceed.

[Greg McDowell, JMP Securities]

One for Dean, and one for Kevin. First Dean just put some of the management updates I was just hoping if you can talk a little bit about any expected changes I guess especially with Scott Jones taking on increased responsibility or is there anything in specific or any specific initiatives you expect them to focus on with his increased responsibility and likewise with Derek now a CTO. Does he have different marching orders than then Ned had or just how you're thinking about throughout the motions of the new responsibilities. And one quick follow up?

[Dean Stoecker, Chairman and CEO]

I spend a lot of my time thinking about how we’re going to scale the organization to $1 billion. And a lot of that has to do with improving alignment across functional areas that need to have tight alignment. So I wouldn’t read too much into it other than Scott has done an amazing job clearly a world-class sales leader. We've done a great job this year in marketing you seen a continued decline in our customer acquisition costs. And it's important for us as we scale globally to make sure that we have tight alignment between the sales and marketing, go to market motion.

And so, it was important for me to give Scott that capability and that ownership he is going to do really well at it. In the case of development obviously Ned has done an amazing job for us for the last couple of decades that we could not have done to this point without his turner level coding capabilities from way back when and over the last few years we've been building up the development team. Many years ago had one development team we now have lots of development teams focused on very specific attributes of the platform.

And it was clear to us that we needed tighter alignment between product management, development and development operations for engineering operations. And so I think in the release you see that IT and business systems along with engineering will go to Derek. With a chance for us to just reimagine what the CTO role would look like at a much larger organization around the world. So again I wouldn't read too much into it other than I would expect us to have even better alignment in both of those areas then we have today.

[Greg McDowell, JMP Securities]

That’s really helpful and Kevin one follow-up for you I mean with issuing the convert you have a fortress balance sheet with over 400 million in cash and investments. And I think it begs the question of your capital allocation strategy and I can't help but sort of ponder that the M&A environment and the fact that it looks like the two acquisitions that resulted in promoting Connect are well behind you. So maybe just a reminder and maybe this is for you too Dean. But sort of - M&A strategy what adjacencies might look attractive to you just given all the cash you have? Thanks.

[Dean Stoecker, Chairman and CEO]

Well, we did the convert to make sure that we had some dry powder in the event that the macro conditions change and all of these companies who have interest IP become available, which is certainly a possibility. We have an M&A playbook and we've reiterated it now three times. Once with [Samantha], second time with [indiscernible] and the third time with buying our distributor in ANZ.

We look at a lot of things, I don't think we've decided exactly what we need. The market is very, very fluid. There's thousands of individual players all which have interesting IP, none of it which is going to be standalone.

So there's all kinds of interesting things happening in the space, everything from advancing war machine learning capabilities to smarter technologies for data preparation, auto modeling, all kinds of things that could be part of the platform in the future. We just want to be prepared when that opportunity rises.

[Operator]

[Operator Instructions] Our next question comes from the line of Mark Murphy with JPMorgan. Please proceed.

[Mark Murphy, JPMorgan]

Dean, how confident are you in the emergence of citizen data scientist as a category? And relating to that, I'm curious if you look at the typical company and their employee base, what percentage of their employees do you think would become citizen data scientists over time?

[Dean Stoecker, Chairman and CEO]

Well Mark, when we did the IPO in order to validate the TAM, we hired IDC to broaden and find out how many people were living in complex dealer cost. So that was kind of the baseline understanding of who was munching data to get to some analytic outcome.

We found 30 million of them worldwide, I think they impacted the 8% of all workers are data workers. So, I've got to believe that that's kind of the minimum. I think that we're finding in our user community that there's a lot of data workers who don't have an analyst title. And I think we're surprising ourselves every day where new people come to the front in legal organizations for example, so whether they're using Alteryx to do text analytics and they don't have analyst titles.

And so the number could be much bigger. I think we're satisfied with low single-digit penetration rate in the 30 million size TAM around the world. But what we do know for certain is that there aren't enough PHPs to solve any enterprises challenges. And you've heard that probably at our Investor Event that Inspire were one of the largest automotive manufacturers in the world, said that it took them 40 years to get 400 users of SaaS, it took them 30 months to get 3000 users of Alteryx, and they'll double again next year.

And that's telling us that perhaps the TAM is too small. We're perfectly happy with where we set because - in any of our even largest penetrated customers we're still in the low single-digit rate in terms of penetration.

[Mark Murphy, JPMorgan]

And then as a follow-up, if you had to pick a timeframe, when do you think the center of gravity would start to tip over where your customers datasets would move into the public cloud on such that you would want to offer I guess as you say it, such that they would want you to offer a fully cognitive version of Alteryx including all of the Designer functionality?

[Dean Stoecker, Chairman and CEO]

Well, if you read the appointment that would have happened years ago, it still hasn't happened. Most of our customers as Kevin had mentioned, we have a very sophisticated platform. Most of our customers have most of their data still on-premise.

Most of them have experimented or trying to experiment with things in the cloud, which is why we have to be hybrid, we have to have on-prem product, we provide a key where you can take your servers to cloud, created on AWS or Azure, a couple of clicks today and run it by the hour. Pretty slow traction on that actually, and that tells us that the data gravity hasn't moved.

Having said that though, we know that over the next decade there's going to be a point in time where we do have to be more cloudy, we understand that. We've done all kinds of work around - thoughts around a cloud-based Designer, whether it has to be fully featured or not, it is not a huge request from customers, to be honest with you.

And again, I think we're understanding from our customers implementations that they're not going to be cloud-based for a long time and even when they are, it's going to be hybrid cloud. No one is going to put all their data into one location.

But we are prepared for this, we talked about all the time and - I mean that's a great question, we just don't think it's going to be any time soon.

[Operator]

Our next question comes from the line of Rishi Jaluria with D.A. Davidson. Please proceed.

[Rishi Jaluria, D.A. Davidson]

One for Dean, and then I have a quick on Kevin. Dean, as we look at the ramp-up in international headcount, can you give us a sense for where you might be on the international hiring plan in terms of the near term, is there still a lot more ramping up to go or mostly kind of on topic and can go to a normal sort of hiring cadence internationally and has your focus been more on the service and support side or on field sales reps?

[Dean Stoecker, Chairman and CEO]

It's mostly in direct sellers and channel reps. Our motion typically in a new market we land with channel partners, we see what kind of success the partners are having, how much they emulate or don't emulate our land and expand model. We put in the direct people to support them, then we follow up with - as these pretty quickly thereafter.

So it's a little bit different depending on what theatre we're in and what market in which theatre we’re in, how many customers we have already established either directly or through our channel partners.

We're doing a lot of 2019 and 2020 planning now and I can't tell you and probably wouldn't tell you exactly where those people will go, but what I do know is that doing business in 70 countries this past quarter poses both opportunities and challenges for us. So, we will be spreading the investments around to make sure that we are clearly the global winner when it comes to a general purpose data science and analytic platform.

[Rishi Jaluria, D.A. Davidson]

And Kevin just wanted to circle back to your commentary around gross margins. You have mentioned that the emerging price Connect and Promote are expected to be headwinds to gross margin dilution near-term. Can you remind us, is this primarily because of how higher services attach rates or are there other factors? And what is the path look like to maybe ramp the incremental gross margin on those products, what does the ramp look like? Thanks.

[Kevin Rubin, Chief Financial Officer]

So I think Dean mentioned actually earlier in this discussion. With respect to Connect, I mean, it is a deeper engagement with the customer to work through and identify the various different data assets that they want to be able to implement and access. So, I think with respect to Connect it's probably more on the services and the implementation side.

When you think about Promote, that is a more critical nature application that does require a bit more support, it does require us to be able to respond to customer's needs in a much faster pace given just the strategic and critical nature of product.

So, both of those are just a little bit different than the Designer and Server pieces of the platform, and will require a bit more handholding with customers.

Look, I think as we go forward and continue to expand globally, you're going to see margins slightly impacted by all of those dimensions, right. I mean, going into a new country and building up a support organization and resources to be able do that, it does take time and dollars. So, we'll see that kind of play out here going forward.

[Operator]

Our next question comes from the line of Jack Andrews with Needham. Please proceed.

[Jack Andrews, Needham]

Wanted to see if we could drill down little bit more on the land and expand motion. I mean you should think about the success you're having on the calls the bottoms up side of things as you could see they capture more overall seats and organizations are spending more dollars with Alteryx.

Are you finding there's a certain crossover point I guess where you need to think about engaging with somebody higher up in the organization and what was originally a bottoms up motion becomes all of a sudden a top-down motion. And if so what would that crossover point look like?

[Dean Stoecker, Chairman and CEO]

Yes, that’s actually a great point and I think that as we've iterated our playbook Bill’s playbooks over the last three years, our teams are trained if you start that top-down selling motion as we’re closing the bottoms up first deal. I think before we had been waiting too long to start the top-down motion. But because analytics are at the forefront of every C level executives even if there's not a CDO in the mix, we begin those conversations right away and I think that is making us a huge difference.

And we train our people and it’s really are to selling we train our people to make sure that you start regardless of whether your top-down you better start the bottom-up, if your bottom up you got to start the top down early because the cross section of that two happens pretty quickly with organizations that want to ramp their way to digital transformation.

[Jack Andrews, Needham]

And there is an follow-up, you mentioned the 57% of your customers are engaging in this advanced analytic outcomes using your platform. Is there a number that you can share in terms of what percentage of your customers you think are taking advantage of the full capabilities of Alteryx at this point?

[Dean Stoecker, Chairman and CEO]

Well that's - I’ll say somewhat loaded question because Alteryx has 250 distinct tools and SDK where you can add an infinite number of new tools. And this is why our community is so impactful to the outcomes of our customers.

And it’s a long tail, we know what tools are most useful to our customers but across the entire telemetry of data that we see almost everything tool get access by somebody in some different combinations that is the impact, the power of the platform.

And I think that we've been asked know how much are we advancing the citizen data scientists and I think we raise order to these other basic metrics to illustrate that our customers are getting smarter with this platform. But there's so much capability in it I'm not sure anyone has mastered every single tool.

[Operator]

We have reached the end of our Q&A session. Allow me to hand the floor back over Dean Stoecker for closing remarks.

[Dean Stoecker, Chairman and CEO]

Great, thank you, Operator. As you seen here we’ve made significant progress on our key 2018 strategic imperatives and continuation of our journey to make Alteryx synonymous with analytics across the enterprise. We believe we’re building a business with continued strong revenue growth and long-term sustainable profitability. And I want to thank you for taking the time with us today, we looking forward to speaking with you again very soon. Bye-bye.

[Operator]

Thank you. This concludes today’s conference. You may disconnect your lines at this time and thank you for your participation.