Alteryx Inc (AYX) 2018 Q2 法說會逐字稿

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, Chris Lal, General Counsel. Thank you. Please begin.

Thank you, operator. Good afternoon, and thank you for joining us today to review Alteryx' 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 uncertainties. 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 results, 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 in 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.

Thanks, Chris, and welcome everyone to our Q2 2018 earnings call. I'm pleased to share that we had 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 continued to benefit from market tailwinds as companies of all sizes in diverse industries and geographies, increasingly seek to turn data into insight. And with the Alteryx platform, they are doing so with significant improvements in 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 a forum to showcase hundreds of innovative use cases presented by our customers. I had the opportunity to meet with dozens of customers and prospects during the conference and our theme, Alter Everything, resonated well with them. I heard stories of how Alteryx altered 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 customers' analytic infrastructure. During the 4-day conference, we filled more than 3,500 training seats, spanning 40 different training sessions.

Another element of our strong customer focus culture is the Alteryx Community at community.alteryx.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 their analytic capabilities through learning and thought leadership. This is all supported with strong community metrics, including 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 3,200 product certifications. Participating users in Alteryx Academy are accelerating their analytics 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 who are building new connectors, tools, macros, apps and even new companies on our platform.

During Q2, we added 267 customers and ended the quarter with 3,940 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 6-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 to our customers as we continue to address broader analytic needs in enterprises, helping to establish Alteryx as the data science and analytics 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 1 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 time. Alteryx removed this dependency and allows Reed Business Information to deepen its insights while accelerating its pace of business.

Alteryx is now the major driver of the sales process 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 UAE; DS 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 teams 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 technology since the spreadsheet was invented 30 years ago. Both lands and expands in these newfound use cases where strong in Q2, including deals with Amgen, Coach, Garmin, Houlihan Lokey, Royal Caribbean Cruises and Walgreens. 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 the sophistication and ease-of-use of our platform, addressing more complex use cases, particularly around data science. Last quarter, we launched Promote, our advanced 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're in the early days of enterprise -- that enterprise is 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 model. The team knew this homegrown solution wasn't a long-term one. They selected Promote as a unified way to deploy and manage predictive model, 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 platform's capabilities, we believe we cannot only land more new customers, but we can extend expansion rates for our existing customer cohorts, maintain strong net revenue retention rates 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 $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 level. These trends, coupled with the momentum we're seeing in the market, gives us confidence to accelerate some of our hiring so we 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 co-founders, 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 2 decades. Ned will continue to serve us in a technical advisory capacity. This transition gives us the opportunity to reimagine 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' 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 on 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?

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 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 market reflects the investments we have made and continue to make to grow our business globally. In the quarter, we added 267 net new customers compared to 258 net new customers in the same period last year, and we ended the quarter with 300 -- 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 results. 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 in our customer support and professional services organizations 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 in local markets as well as supporting our new products, 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 sales people 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 GAAP balance sheet. As of June 30, we had cash, 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 6 months of 2018, we reported positive cash flow from operating activities of $6.4 million. Cash used in operating activities for Q2 2018 includes cost associated with our U.S. Inspire Conference.

Finally, we ended the quarter with 674 employees, up from 629 at the end of the first quarter of 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 a final determination. We plan to communicate additional information with the 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-GAAP 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 Instructions) Our first question comes from the line of Brent Bracelin with KeyBanc Capital Markets.

Dean, I'll start with you. If you look at the strength in the quarter, driving this acceleration in revenue and billings growth, it looks like large deals were 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?

I think there is a couple of dimensions here. As you know, we have 2 primary sales motions, a bottoms-up sales motion with selling to the analysts in a relatively small $10,000 land over a 45-day sales cycle. Those customers -- that 6-digit numbers that we suggested in the earnings script are both across new business and existing business, those that are expanding their footprint. So the new business customers keep coming back time and time again, buying [3 to 4] 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 a bottoms-up and a top-down motion. And I think it's also important to note that, it's in part because we're really the only general-purpose data science and analytics platform 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 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 but existing customers.

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

Brent, so as I said in the prepared remarks, I mean we are continuing to invest specifically in customer support, and in our professional services organizations internationally and putting those resources closer to our customers in local markets. 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 2 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.

Our next question comes from the line of Jesse Hulsing with 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 accelerating along with that. I guess if you outline where you've been investing, what have been the top priorities? And how have newer reps been ramping versus your expectations?

Well, we had 97% growth in our international personnel over the last year, primarily a result of being 100% growth year-over-year in the international business. So we're in this $30 billion TAM, and so we recognize a land grab happening internationally. We're seeing trial downloads occur pretty much everywhere, so we're establishing headcount in faraway places. I think, we've illustrated the 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, continued to build out our team in France and in Germany. We just established a presence in Dubai to cover off in the Middle East, where we have quite a few customers already under our umbrella. So I don't think it's a super concentrated effort, it's rather a global effort, and we're going where the opportunities exist.

Yes, that makes sense. And then, Kevin, on your 606 comment, any idea yet if you'll be able to maintain ratable treatment?

Yes. I mean the challenge we have is the Alteryx platform and the breadth of offerings are incredibly sophisticated. And we have elements that are on-prem and elements that are cloud-based and so we are working through the process and the literature and as we have more information, we'll certainly share.

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

We've 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 does the rollout of the time frame look like?

Well, this whole notion around visualitics actually started about a year ago at last year's Inspire Conference. We have a fundamental difference in how visualization should be embraced in enterprise software like ours. We think that you should be able to see your data at every moment through your analytics pipelining process. And so rather than waiting to the end to create charts in a dashboard or putting your data into Excel and running charts there, we believe that putting the visual insights at the beginning, in the middle and at the end of your analytic processes are critically important, so that by the time you've discovered 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 a team dedicated to visualitics. We rolled out a bunch of it at this year's Inspire, things around data profiling so that you can 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 Power BI, Qlik or Tableau, but a lot of our customers are telling us that they would like to see interactive visuals elsewhere throughout their analytic pipelining process. So we're responding to what customers are asking for, and it's an ongoing effort. As you know, our platform is very horizontal, in almost every single vertical and pretty much every functional area, use cases never seem to diminish. So we'll continue to prosecute our visualitics strategy for quite some time.

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 systems. So just curious, are these dynamics really taking hold, and are they something that can drive bigger deal sizes?

Yes. I think it's true that they will drive bigger deal sizes over time. We're typically net new when we land in a 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 BI reporting tools, many of them are point solutions. We were starting to see last-generation ETL pools 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 will tell. We've always said that the $30 billion TAM is broken up into 2 distinct audiences, the $10 billion TAM that'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 contention has long been that the winner of that space, and we intend it to be us, will be the natural beneficiary of the share shift of the $20 billion that's sitting in IT of all those last-generation capabilities. So my suspicion is, over time, we'll continue to see larger deal sizes as -- particularly as enterprises start to embrace the idea that having a Chief Data Officer to get to success and digital transformation will happen sooner.

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

I guess, I just wanted to touch a little bit on some of the products, but not sort of the very newest ones, but really Connect and Promote. Industry conversations certainly suggest interest there, strong interest. I guess, just an update on the traction you're seeing with the products, probably maybe a little more for Connect and early on Promote, but just love to understand some traction there. Maybe an update on the pipeline for Connect. How do you expect that to impact '18? I know it's early but certainly what we're hearing in the field seems to feel like that, that might actually be incremental to '18. So just love to get your sense of what you're seeing obviously which is much closer or deeper than what we see?

Yes, 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 rate, although we are getting good traction with current customers who have loaded up a bunch of users of Alteryx and are now training -- trying to harness that curated knowledge that those users have in harvesting the XML workloads 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 off on that gnawing issue of metadata management and 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 haven't 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, that we're probably going to have to have more support around these things, if not a self-service tool that you sell to the line of business analysts, 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's, 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 Salesforce and Tableau and Qlik, Snowflake and even our own XML documents. So we're covering off on all the 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 curated. 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.

And I'll just follow up, my second question's kind of in that space. It was about the partners. Do you think about sort of enterprises and dealing with sort of data curation, data governance, metadata management, there's a whole host of stuff being done by Accenture, Deloitte, KPMG. You obviously have some partnerships. Love to understand 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?

Good question. Our channel program is actually very, very influential in the business. About 20% of the revenue is coming from resellers. But more importantly is 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 -- you don't hear very often, but firms like LEK out of Chicago or XP out of Sydney, Australia. These are great organizations. They help us develop or help identify unique use cases. They're the perfect organizations 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 to end process so that we can get the help we need without heavy-ing up on too many services of our own because this is the beautiful match between a company that doesn't have many service dollars [at the time] and companies who make their living on service dollars.

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

Just following on your earlier comments being around seeing some traction within finance, some of those use cases. Are there any others you'd call out, where you're noticing a trend, perhaps supply chain or another area -- an operational area?

Actually, you hit on it. Supply chain is coming up more and more. There's so much data complexity in supply chain. I've just spent the last few days listening to presentations that were given by customers at Inspire, and I heard a number of them talk about supply chain influences that Alteryx has on improving operational efficiencies. Everything from reducing cost of inbound 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 more 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 use cases to bear. So I think it's important for all of you and investors to go to community.alteryx.com. We have well north of 160 different use cases, many of them have been posted in the last 6 months. Things that I think would surprise you.

And along those lines, with those use cases, are your -- you're 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?

Well, I think most of our partners do have that vertical subject matter expertise. And they're, in some cases, altering the user interface of Alteryx by implementing new macros or apps. We've rolled out the pipeline SDKs so it makes it pretty easy for partners to build new tools that sit on the canvas, in the palette on Alteryx. And so we're beginning to hear more and more people, not just with Designer, but even with Connect roll out vertical solutions. And again, this is where -- we tried 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, via 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 businesses on the platform.

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

I was wondering if you could give us an update on the competitive environment. As you get into larger deals and some of the broader use cases, if the competitive environment has changed significantly over the last year. And then if you could kind of compare and contrast that competitive environment in kind of the core data prep space versus the more broader analytics platform if you're going up a vendor -- against a vendor like SAS?

Sure. So I would start by saying that there's almost no competition in the data prep world given the longevity we've had in, one, defining the space and building the end to end capabilities of data prep. If the question was specific to Tableau Prep, we don't see them in the market at all yet, I would have expected that we would have already, if it had -- it's announced for, what, 90 days and 2.5 years of development. The reality is we're hearing more of Tableau reps coming to us looking for additional assistance to perhaps unblock some of their larger deals that they're trying to get to. The thing that we see happening more and more is a direct competition with SAS. We have win reports on every deal that's brought in whether it's new or -- a customer or new business to existing customer and the vast majority of the competes are directly up against SAS, and we tend to win. And then I think it's important to recognize that the reason you would find it in SAS as a compete is that we're the only ones who are really addressing the end-to-end capabilities that both a scientist would need and a Citizen Data Scientist. And as a result, we just don't see many people other than SAS.

Yes, and I guess, related to that, if I think about the plans you've communicated about increasing hiring and obviously, the sales and marketing growth accelerated versus last year in the quarter. Where exactly are you putting those additional resources? Is it more on the advanced analytics 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?

Well, I don't think our sales hiring model has changed much. Obviously, we're hiring more sales people in more theaters. I think that as we've become more data science-y over the last 3 or 4 years since the implementation of our -- embracing the -- R tools, and certainly, now with Python and our work around Jupyter Notebook, we're actually changing a little bit of the profile around our solution engineers, recognizing that we have to have more quant expertise to help these people understand algorithmic building processes. But the seller's -- the model is pretty much the same. Obviously, we like people who have both land and expand experience, but have enterprise-class selling skills to address both that bottoms-up selling motion, selling to the analysts and that top-down motion engaging with the C-Suite.

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

Dean, I think as a follow-on to some of your previous comments about SAS. One of the observations at the customer panel we had was that there was less focus by those customers in discussing what they were doing on prep and more around using you as an analyst platform for building models and applications. So if I started to move into the land as well as into expand, are you getting new customers, is that what you're referring to when you're talking about competing with SAS or is that just for the existing customers only?

It's actually both. I think that we, for a long time when we first built the predictive capabilities into Alteryx, we tried to stay away from the quants initially until we figured out whether or not the Citizen Data Scientists would embrace predictive capabilities. And I think in those situations where there's a Chief Data Officer or a proxy for one, they're actually surrounding their digital transformation teams with quants. And the quants are beginning to recognize that they want to be more productive too, and the best way to do that is to help -- 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 Scientist. So we are seeing more predictive use cases on lands and we're certainly are seeing a lot were skating towards predictive on the expands. I think I indicated at Inspire in 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 as a combination of spatial analytics as well as predictive analytics. 45% of those customers were engaged in advanced. This year, that same cohort is now 57% engaged in advanced analytics. So some of that is the quants starting earlier with us and some of it is our ability with the platform to advance the skills of the citizens who are now beginning to move well beyond descriptive analytics and further up the analytic continuum to spatial analytics and predictive analytics.

Very helpful, Dean. And Kevin, fairly quickly, I know you don't -- you obviously don't guide to cash flow but the cash flow was a little bit light of certainly our model and despite strong billings and EBIT line. We did notice some items around deferred taxes and the [higher] GAAP tax line also. So was a one-timer there, or is anything else going on with the cash flow?

Yes, I mean I think cash flow has really 2 big drivers: one, as we've mentioned, Inspire -- the U.S. Inspire Conference is a seasonally higher both expense and cash item for us. So we have the element of that. Some of that bleeds into Q3, and then it was really just timing of working capital changes to be true. The deferred tax stuff, that 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 that affected the rate.

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

One for Dean and one for Kevin. First, Dean, just with 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 him to focus on with his increased responsibility, and likewise with Derek now as CTO, does he have different marching orders than Ned had or just how you're thinking about sort of the motion of the new responsibilities? Then 1 quick follow-up.

Good question, Greg. Thanks for asking. 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've seen a continued decline in our customer acquisition cost. 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 motions. And so it was important for me to give Scott that capability and that ownership, he's 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. We could not have gotten to this point without his kernel-level of coding capabilities from way back when and, over the last few years, we've been building out the development team. We many years ago, had 1 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 a tighter alignment between product management, development and developing -- development operations or engineering operations. And so I think in the release, you'll see that IT and business systems, along with engineering will go to Derek. It was a chance for us to just reimagine what the CTO role would look like at a much larger organization around the world. So I don't -- 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 than we have today.

That's really helpful. And Kevin, 1 follow-up for you. I mean with issuing the convert, I mean 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 the M&A environment and the fact that it feels like that 2 acquisitions that resulted in Promote and Connect are well, well behind you. So maybe just a reminder, 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?

Well, we did the convert to make sure that we had some dry powder in the event that macro conditions change and all of these companies who have interesting IP become available, which is certainly a possibility. We have an M&A playbook. We've iterated it now 3 times, once with Semanta, second time with Yhat, 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 of 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 more 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 arises.

(Operator Instructions) Our next question comes from the line of Mark Murphy with JPMorgan.

Dean, how confident are you of the emergence of Citizen Data Scientists 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?

Well, Mark, when we did the IPO in order to validate the TAM, we hired IDC to go out and find out how many people were living [in the complex of] VLookup. 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 -- in fact, it said 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 and, in legal organizations, for example, where they're using Alteryx to do text analytics, and they don't have analyst titles. And so the number could be much, much bigger. I think we're satisfied with low single-digit penetration rates in a 30 million-sized TAM around the world. But what we do know for certain is that there aren't enough PhDs to solve any enterprise's challenges. And you heard that probably at our investor event at Inspire, where one of the largest automotive manufacturers in the world said that it took them 40 years to get 400 users of SAS, it took them 30 months to get 3,000 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 sit because we're -- in any of our even largest penetrated customers, we're still in the low single-digit rates in terms of penetration.

Okay. 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' data sets would move into the public cloud, such that you would want to offer -- I guess, I should say, such that they would want you to offer a fully cloud native version of Alteryx including all of the designer functionality?

Well, if you read the pundits, that would've 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 are trained to experiment with things in the cloud, which is why we have to be hybrid. We have to have an on-prem product and we provide a key where you can take your server to the cloud, you can [advance] it 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 cloud=y. We understand that. We've done all kinds of work around -- thoughts around a cloud-based design or whether it'd have 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 pure cloud-based for a long time, and even when they are, it's going to be hybrid cloud, that no one's going to put all their data into one location. But we are prepared for this. We talk about it all the time and it's a great question. We just don't think it's going to be anytime soon.

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

One for Dean and then I have a quick one for 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 top that you can go to a normal sort of hiring cadence internationally? And has the focus been more on the service and support side, or on field sales reps?

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 direct people to support them, and then we follow up with [SEs] pretty quickly thereafter. So it's a little bit different depending on what theater we're in or what market in which tether we're in. How many customers we have already established either directly or through channel partners. We're doing a lot of 2019 and '20 planning now, and I can't tell you and probably wouldn't tell you exactly where those people are going to 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 analytics platform.

Got it, that's helpful. And Kevin, just wanted to circle back to your commentary around gross margins. You have mentioned that the emerging products Connect and Promoter are expected to be headwinds to gross margins at least in the near term. Can you remind us, is this primarily because those have higher services attach rates? Or are there other factors? And what does the path look like to maybe ramp the incremental gross margin on those products? What does that ramp look like?

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 customers' needs in a much faster pace, given just the strategic and critical nature of the 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 to do that. It does take time and dollars. So we'll see that kind of play out here going forward.

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

I wanted to see if you could drill down a little bit more on your land and expand motion. I mean as you think about the success you're having on the, call it, the bottoms-up side of things, as you continue to 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?

That's actually a great point. And I think that as we've iterated our playbook -- sales playbooks over the last 3 years, our teams are trained to start that top-down selling motion as they'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 executive, even if there's not a CDO in the mix, we begin those conversations right away. And I think that is making a huge difference and we train our people -- it's really the art of selling. We train our people to make sure that you start, regardless of whether you're top-down, you got to start the bottom-up, if you're bottom-up, you got to start the top-down early because the cross section of the 2 happens pretty quickly with organizations that want to ramp their way to digital transformation.

Great. And as a follow-up, you mentioned the 57% of your customers are engaging in this advanced analytic outcome using your platform. Could you -- 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?

Well, that's -- I'll say that's somewhat of a loaded question because Alteryx has 250 distinct tools, an 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 every tool gets accessed by somebody in some different combination. That is in fact the power of the platform and I think that we've been asked, how much are we advancing the Citizen Data Scientists? And I think we've resorted to these other basic metric 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. We all set?

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

Great, thank you, operator. As you've seen here, we've made significant progress on our key 2018 strategic imperatives and the 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 look forward to speaking with you again very soon. Bye-bye.

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