Altair Engineering Inc. (NASDAQ:ALTR) Q1 2023 Earnings Call Transcript May 7, 2023

Operator: Good day, and welcome to Altair’s First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only-mode.. Please be advised that today’s conference is being recorded. It is now my pleasure to introduce SVP of Investor Relations, David Simon.

David Simon: Good afternoon. Welcome, and thank you for attending Altair’s earnings conference call for the first quarter of 2023 ended March 31, 2023. I’m Dave Simon, Altair’s SVP for Investor Relations. And with me on the call are Jim Scapa, Founder, Chairman and CEO; and Matt Brown, Chief Financial Officer. After market closed today, we issued a press release with details regarding our first quarter 2023 performance and guidance for the second quarter and full year 2023, which can be accessed in the Investor Relations section of our website at investor.altair.com. This call is being recorded, and a replay will be available on the IR section of our website following the conclusion of this call. During today’s call, we will make statements related to our business that may be considered forward-looking under federal securities laws.

These statements reflect our views only as of today and should not be considered representative of our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from our expectations. These risks are summarized in the press release that we issued earlier today. For a further discussion of the material risks and other important factors that could affect our actual results, please refer to those contained in our quarterly and annual reports filed with the SEC as well as other documents that we have filed or may file from time to time. During the course of today’s call, we will refer to certain non-GAAP financial measures.

A reconciliation of GAAP to non-GAAP measures is included in our press release. Finally, at times in our prepared comments or responses to your questions, we may offer metrics that are incremental to our usual presentation to provide greater insight into the dynamics of our business or our quarterly results. Please be advised that we may or may not continue to provide this additional detail in the future. With that, let me turn the call over to Jim for his prepared remarks. Jim?

Jim Scapa: Thank you, Dave, and welcome to everyone on the call. Altair had a very strong start to 2023 with software product revenue, total revenue and EBITDA above the high end of our guidance. Q1 exceeded our expectations and represents an all-time high for software product revenue and total revenue and continues our good momentum from 2022. Demand for our products is strong, and we’re seeing the investments we’ve made in product development and our approach to customer success paying off. Adjusted EBITDA for Q1 2023 was $43.1 million, well above our expectations. Software product revenue as a percentage of total revenue for the first quarter continued a strong positive trend at 90.1% compared to 88.2% in the first quarter of 2022 and 88.5% for the full year 2022.

Our recurring software license rate was 95% for the quarter as compared to 93% in the first quarter of 2022 and 92% for the full year 2022. Software product revenue in the first quarter grew by 10% year-over-year on a constant currency basis, led by strong renewals and expansion, especially in automotive and the aerospace verticals. We also continued to add several new and important logos in the first quarter, and the number of significant deals continues to grow as we focus on selling our broad solution set, especially our data analytics offerings into existing and new customers. We are experiencing a substantial increase in engagement from our traditional manufacturing customers to apply our data analytics portfolio and leverage AI to accelerate simulation using CAE and test data.

This is translating into meaningful new opportunities. Overall, we believe our strong first quarter performance positions the company well for the rest of 2023. The core of Altair success is the industry-leading breadth and depth of our technology. We work hard to deliver awesome capabilities and our HyperWorks 22.3 platform release exemplifies this commitment. HyperWorks 2022. 3 offers an enhanced ALTA-1 experience by providing users with flexible access to solutions, applications, data and compute power. Users can submit solver jobs covering structural, thermal, computational fluid dynamics and electromagnetics disciplines in Altera’s scalable elastic cloud infrastructure, making it easier for organizations to meet budgets and demand. The latest software updates enable product teams to collaborate on all aspects of electronic systems, printed circuit board, firmware and 5G connectivity development in a connected end-to-end environment.

HyperWorks 2022. 3 features tighter integration between Alterflux, Flux Motor, nanoFluidX, SimLab and material data center to help users streamline workflows and provide advanced modeling capabilities, electrical system design exploration and optimization and faster acoustic and thermal flow analysis. Debugging and post-production servicing updates are also available with Altair EE vision for electronic system design. Further improvements enable better modeling and analysis through low and no co design and engineering tools, reduced pre and post-processing lead times, improved surface modeling, integrated solver dashboard capabilities, expanded fluid topology optimization, coupling between AcuSolve and Nidham more. HyperWorks has been augmented with AI to enhance the modeling experience with automated part identification, characterization and grouping as well as geometry feature recognition and management for use in downstream processes and further end user recommendations.

In addition, we introduced physics AI, an all-new module, seamlessly integrated within our modeling environment to automatically train a neural net with previous simulations to quickly predict accurate results for a new CAD or a simulation model without running additional solver analysis. Last week, we announced the release of SimSolid Cloud, allowing users to access next-generation simulation technology through a web browser, anywhere, anytime. SimSolid Cloud eliminates geometry simplification and meshing, the two most time consuming and expertise intensive tasks in traditional finite an analysis, handles complex assemblies and delivers results with unprecedented ease and speed. SimSolid Cloud is available via Altair 1 Alters Cloud Innovation Gateway that offers collaborative access to simulation and data analytics technology, alongside scalable, high-performance computing and cloud resources.

We believe SimSolid Cloud has the potential to dramatically accelerate and simplify the daily work of structural analysis in all markets and that rapid adoption of this technology will become necessary for companies to maintain their competitive advantage in product development. We reached a positive milestone for Altair related to our acquisition of World programming in 2021 and the establishment of Altair SLC. On April 6, the U.S. Court of Appeals for the Federal Circuit affirmed the decision of the court for the Eastern District of Texas, which ruled in favor of Altair by dismissing the 2018 lawsuit initiated by the SaaS Institute against World programming for alleged copyright infringement of SaaS software. After more than 10 years of litigation across multiple international venues, it was ruled that the SaaS language is not proprietary and companies other than the SaaS Institute are free to provide compilers and development environments, supporting the SaaS language as is the case with other languages, including Python, C++, Fortran and others in the public domain.

Altair SLC demonstrates our dedication to open architecture technology, which we believe is the best way for people to harness innovation, improve products and get the most from their work. Now companies in any industry across the globe can embrace open source languages and technology while simultaneously leveraging the decades of investment they’ve put into the SaaS language. Momentum in our data analytics business continues to be positive as companies look to modernize their data analysis operations and standardized development primarily with Python, the most popular language Talton universities, the Altair RapidMiner offers a unique solution to support companies converting a percentage of existing SaaS language code to Python while leveraging Altair SLC for the rest.

We won a multiyear 7-figure software license for the Altair RapidMiner platform with a major computational hardware company for its users in IT, marketing, corporate affairs, data office engineering and e-commerce. We are currently engaged with many BFSI accounts on modernization projects where SLC accelerates and derisks their move to Python and the cloud. We also have new revenue coming in for Altair SLC from three financial sector companies in India and an insurance company in South America. The bank in APAC founded more than 100 years ago, have committed to Altair SLC and RapidMiner to help their corporate credit check activities. Our simulation business continues to grow with the convergence of data analytics and AI and CAD workflows. Every week, we hear more stories from our account teams about customers using AI combined with simulation to produce clear efficiency gains and product development.

The government research organization is using the Altair HyperWorks and rapid miner platforms to acquire real-world armored vehicle data, apply machine learning and develop predictive models. A passenger vehicle manufacturer is using Altair SimSolid and other Altair simulation tools, combined with data analytics, including Altair Panopticon for real-time data streaming to develop operational digital twins for electric vehicles. Another vehicle manufacturer is using Altari’s tools for machine learning to use historical simulation data for crash, NVH and durability. A global leader in power management is using Altair Compose, combined with data analytics to develop a digital test bench for electrical systems. The stories from the field continue to build and the convergence of simulation with AI is a reality for Altair’s customers.

Altair’s HPC Works platform for high-performance computing continues to be a strong growth area for Altair. One of the top five global fabless semiconductor companies committed to a 6-figure expansion representing a six x year-on-year increase. And in EMEA, a major materials company awarded Altair, a multiyear 7-figure deal for Altair’s Azure Virtual Appliance cloud solution, of which you will run a broad spectrum of Altair CAE software, along with third-party CAE offerings. A recently published case study demonstrates the positive social impact of high-performance computing. Argon National Laboratories with university and industry collaborators won the 2022 Gordon Bell special prize for high-performance computing-based COVID-19 research for its work using AI to track virus variants.

Machine learning played an important role in the research and the researchers analyzed 1.5 million complete high-quality SARS, COVID genome sequences, a process that would have previously been time and labor-intensive by individually examining every protein and mapping mutation. Instead, the team streamlined the process by developing the first genome scale language model, the computing hardware used in the project is equipped with workload orchestration by Altair PBS professional, and we are pleased to have played a part in this important life-saving work. In addition to our technology, Altair’s culture has kept us moving in the right direction. Throughout our history, we have always prioritized diversity as it is a foundational pillar of our culture and thereby our success.

We have also long supported STEM education. Combining these two values, we recently established the Altair only forward scholarship and Columbia University School of Engineering and Applied Science. It is designed to assist incoming first year students pursuing an undergraduate degree in engineering and applied science and who have demonstrated leadership in or support for the African-American and/or Latino community. Ideally, the scholarship will benefit first-generation college students and students who are socioeconomically disadvantaged. The scholarship will award 10 students pursuing a 4-year engineering or STEM-related undergraduate degree with $25,000 annually, which they will receive each year of their undergraduate studies until graduation.

Columbia Engineering will select and announce the first cohort of scholarship recipients in the fall of 2023. We continue to invest and partner with companies developing leading-edge technologies to remain on the forefront of innovation. Altair has a long history of creating and investing in HPC technologies. In the fourth quarter of 2022, we invested in Xscape Photonics, at Columbia University start-up, dramatically accelerating data transfer rates between various computing elements, leveraging photonic chips for ultra-high-bandwidth connections inside data centers and HPC. More recently, we invested in Riverland, a Cambridge University start-up, developing an operating system for Quantum Computers to support multiple hardware architectures for error-corrected Quantum Computing.

Riverland’s groundbreaking technology has the potential to accelerate the impact and scale of Quantum Computing. Collaborating with Xscape and Riverline allows Altair to stay ahead of the curve of transformative technologies to help our customers fast track their innovations. In conclusion, Q1 2023 was a strong quarter, and we are optimistic that the value we bring to our customers will continue to help us perform well against the backdrop of global uncertainty. We have been prudent in our hiring practices, and we are investing to develop our exceptional workforce We are experiencing a less competitive hiring environment this year versus the last couple of years, and our turnover rates have returned to our historically low pre-pandemic levels.

Our summer internship program, which focuses on top-tier educational institutions saw a 100% acceptance rate, which is well above normal. Now I will turn the call over to Matt to provide more details on our financial performance and our guidance for the second quarter and full year 2023. Matt?

Matt Brown: Thank you, Jim. Hello to everyone on the call, and thank you for joining us. The first quarter was a great start to 2023, coming right on the heels of a very strong fourth quarter to end last year, Q1 exceeded our expectations and represents an all-time high for software product revenue and total revenue. And we once again exceeded the high end of the range on software product revenue, total revenue and adjusted EBITDA. It’s encouraging to see the continued momentum in our software products where demand continues to be strong. As I dive into the details of our financial results, remember, some of our revenues and expenses are transacted in currencies other than the U.S. dollar. And therefore, our reported results may be significantly impacted by changes in foreign exchange rates.

To aid in a review of our results, throughout my remarks, I will make reference to growth rates in both reported and constant currency. Total billings for the quarter were $163.5 million, a year-over-year decrease of 4.6% in reported currency and 0.9% in constant currency. Remember that in Q1 last year, we highlighted our largest-ever data analytics and AI deal in the BSSI vertical, which was a 5-year 8-figure deal. So while we’re pleased with this year’s first quarter billings, the significant multiyear deal from a year ago is impacting the year-over-year billings growth rates. In Q1 2023, we saw strength in our renewals base, especially in the automotive and aerospace verticals, and I was pleased with our new customer growth, which increased compared to last year.

Software product revenue in Q1 2023 was $149.6 million, a year-over-year increase of 6.2% in reported currency and 10.0% in constant currency compared to Q1 2022. Software product revenue growth was led by strong renewal and expansion in simulation. As Jim mentioned a few moments ago, we continue to hear customer success stories regarding continued convergence of data analytics and AI and simulation processes, and this is showing up in our financial results. Total revenue in Q1 2023, which includes services and other revenue was $166.0 million, a year-over-year increase of 3.9% in reported currency and 7.5% in constant currency compared to Q1 2022. Our recurring software license rate, which is the percentage of software product billings that are recurring, continues to be strong at approximately 95% for the quarter.

Non-GAAP gross margin, which excludes stock-based compensation, was 81.9% in the first quarter compared to 81.4% in the prior year, an increase of 50 basis points. Software product mix drove this increase as our software revenue, which carries higher gross margins increased as a percentage of total revenue. Software revenue was 90.1% of total revenue in Q1 2023 compared to 88.2% in the prior year. Over the long term, we continue to expect a general mix shift towards software product revenue as growth there will outpace services and other revenue. And as a result, we expect our non-GAAP gross margin to continue to increase modestly in the near term. Non-GAAP operating expenses, which excludes stock-based compensation and amortization of intangible assets were $93.9 million compared to $84.9 million in the year ago period.

Beginning in Q1 2023, we began to allocate certain indirect expenses such as facilities and IT-related expenses across our operating expenses to improve comparability with our peers presentation. These costs were previously captured primarily in general and administrative costs, but are now allocated across research and development, sales and marketing and general and administrative costs based on global headcount. We’ve made this change prospectively as well as to all prior comparable periods, which we’ve included in a supplemental table in our earnings release. Adjusted EBITDA in Q1 2023 was $43.1 million or 25.9% of total revenue compared to $46.6 million or 29.2% in Q1 2022. This decrease compared to the prior year quarter was driven by an increase in year-over-year expenses, but is actually above our expectations heading into the quarter.

We had anticipated the increase in expenses year-over-year due primarily to acquisitions we made throughout 2022, and actual expenses for the quarter landed in line with our expectations. The overperformance in adjusted EBITDA relative to our expectations was driven by the increase in software revenue in the quarter, most of which dropped down to the bottom line. Turning to our balance sheet. We ended the quarter with $378.4 million in cash and cash equivalents, an increase of approximately $62.2 million from year-end. We’re extremely pleased with our ability to generate free cash flow, and we’re able to generate $57.5 million of free cash flow in the quarter. The turmoil in the banking sector in March served as another reminder of the importance of a strong balance sheet.

We feel very comfortable with our significant cash balance, relatively low levels of debt and access to an additional $200 million line of credit and that we’re well positioned to withstand various types of market uncertainty. Let’s turn to guidance for Q2 and full year 2023. We’ve provided detailed guidance tables in our earnings press release, including reconciliation to comparable GAAP amounts. We are continuing to see an FX impact relative to 2022 as foreign exchange rates change throughout last year. To provide more clarity on the FX impact to our expectations, we’ve provided growth rates in both reported currency and constant currency in our guidance tables. For Q2, we expect software product revenue in the range of $123 million to $125 million, a year-over-year increase of 5.2% to 6.9% in reported currency and 6.7% to 8.4% in constant currency.

For full year 2023, we are maintaining our previous outlook for software product revenue in constant currency and slightly increasing our outlook in reported currency to a range of $551 million to $561 million, a year-over-year increase of 8.8% to 10.8% in reported currency and 9.1% to 11.0% in constant currency. As expected, services and other revenue has begun to stabilize in 2023 compared to the sharp declines we saw in 2022. While services and other revenue was down slightly year-over-year in Q1, we expect it to be flat year-over-year in Q2 and for the rest of the year. As a result, we expect total revenue for Q2 2023 in the range of $138 million to $140 million, a year-over-year increase of 4.0% to 5.5% in reported currency and 5.4% to 6.9% in constant currency.

For full year 2023, we are maintaining our previous outlook for total revenue in constant currency and slightly increasing our outlook in reported currency to a range of $614 million to $624 million, a year-over-year increase of 7.3% to 9.0% in reported currency and 7.5% to 9.3% in constant currency. From a cost perspective, we’re on track with our spending goals for 2023, continuing to invest in areas for growth, for example, in additional sales capacity while cutting back on administrative costs and overhead. For Q2 2023, we expect adjusted EBITDA in the range of $15 million to $17 million or 10.9% to 12.1% of total revenue compared to $16.4 million or 12.4% of total revenue in Q2 2022. For the full year 2023, we are maintaining our outlook from last quarter for adjusted EBITDA, which we expect to be in the range of $120 million to $130 million or 19.5% to 20.8% of total revenue compared to $108.6 million or 19.6% of total revenue in 2022.

And finally, for the full year 2023, we are maintaining our outlook from last quarter for free cash flow, which we expect to be in the range of $108 million to $116 million, which represents a substantial increase year-over-year. As a reminder, our cash flow expectations are sensitive to billings and collection patterns which fluctuate seasonally. In particular, our historical pattern has shown a larger free cash inflow in the first half of the year, primarily from collections of billings from Q4 and Q1 and a smaller free cash inflow in the second half of the year. We’re expecting that pattern to continue this year We’re excited to be starting the year with an all-time high in quarterly revenue, which we feel gives us momentum and helps to achieve our financial goals for the year.

With that, we’d be happy to take your questions. Operator?

Q&A Session

Operator: Thank you. And our first question comes from the line of Blair Abernethy with Rosenblatt Securities.

Blair Abernethy: Thanks. Nice quarter, guys.

Jim Scapa: Thank you, Blair.

Blair Abernethy: Matt, just one for you, if you could. Could you just walk us through a little bit of your thinking on the Q2 guide, and it’s sort of down sequentially a fair bit. Is this partially the outperformance in Q1, just sort of your thinking of how you got there for Q2? And also just in terms of the linearity you saw in deals in Q1, that would be helpful.

Matt Brown: Sure. Yes. Thanks for the question, Blair. So what we ended up seeing the dynamic that we’re seeing from Q1 into Q2, it’s actually just very similar to our historical pattern. So as you know, we typically have our quarters seasonally, Q1 and Q4 are our highest quarters, whereas we end up having Q2 and Q3 being somewhat lower. And so what you’re seeing here in 2023 and what’s embedded in the guide is that same pattern continuing for 2023. And then so when we sort of look broadly over the full year, which is really how we’re looking at things, we end up seeing growth in Q1 in software product revenue in constant currency was about 10%. And then if you sort of look at the midpoint of the guide and what that implies for full year growth, is very consistent with what we’re expecting for full year.

So nothing to point out in particular for Q2. It’s sort of similar to some of the remarks we made a quarter ago, we really are looking at things 1 year at a time and not focusing on the ins and outs of one particular quarter.

Blair Abernethy: Okay. Great. Thanks to clarify. And just one for you, Jim, if I might. Just RapidMiner, deal closed in September, mid-September. How is that performing for you now? How are those components of the AI analytics business coming together now that you’ve had them for another quarter?

Jim Scapa: We feel really, really great about that acquisition, to be honest with you, Blair. It’s – we’ve been bringing these pieces together and the rapid minor piece, the sort of the final and necessary element to bring it all together. And as we go out to customers, it’s just extremely well received now. And beyond that, the sales force is just super confident these days, and that’s across the entire sales force selling into our traditional manufacturing customers. There’s a noticeable uptick in the number of discovery calls we’re having and the level of interest and our credibility is just really soared in that space.

Blair Abernethy: Great. Thanks very much. Nice job, guys.

Jim Scapa: Sure. Thank you.

Operator: Thank you. One, moment please. And our next question comes from the line of Ahmad Khalil with Oppenheimer.

Ahmad Khalil: Hey. Thanks for taking my question, guys. A nice quarter. First question for Jim. Really, really impressive commentary coming out of the manufacturing side in terms of demand for analytics. I guess, are you noticing any changes in dynamics outside of manufacturing? I know you had a peer report and it seems like they’re seeing the opposite?

Jim Scapa: So you mean like in the banking and financial services sector, for example.

Ahmad Khalil: Yes…

Jim Scapa: Yes, yes. To be honest, we’re feeling relatively positive really in all those accounts. I was just on a call with one of the major banks. And I think there’s a lot of opportunity for us. Our business model is a really unique model, and we’re into all these accounts. We’ve been converting most of them to our units model. And with the RapidMiner element, I think we’re extremely well positioned as a sort of differentiated platform. We’ve got like all the right answers to all the questions that they’re asking. And I think they’re even surprised, and we were just at the Gartner conference a month or so ago, and we got a very, very strong reception. So yes, the financial sector, obviously having some challenges. But for us, it’s actually – the team that we have focused on BFSI is very energized and I think actually doing pretty well.

Ahmad Khalil: That’s great to hear. And thanks for elaborating. And then secondly, also a question for Jim, for you, Jim. Since Solid Cloud you had some pretty, I guess, prosthetic comments there. What makes you so confident in the technology?

Jim Scapa: Because it sounds like a lot of marketing ball, but SimSolid is just so powerful. I mean you’re importing a complete CAD model. There’s no modeling and meshing necessary. You push a button and very, very quickly, you’re getting very accurate results, including on very complex assemblies with thousands of parts. And it’s only getting faster and we’re adding more and more capabilities to it. We’ve added thermal. We’ve added a lot of nonlinear. We’re looking at other physics as well. And so I think especially in the mid-market and the lower end of the market where, frankly speaking, Altair not historically played big, but others have. I think those customers, which will say are less – even less sophisticated, a tool like this that can give them such a fast turnaround is really – it’s magical actually, I think.

It’s a matter of getting the opportunity to get into these accounts, getting the – the eyeballs, the awareness of it, that is the biggest challenge, and we’re working hard on that. And the competition is trying to make similar claims. But frankly speaking, when you dig in, it’s just not true. What we’re doing is really quite special.

Ahmad Khalil: Thank you. And congrats again.

Jim Scapa: Thank you.

Operator: Thank you. Our next question comes from the line of Andrew Degasperi with Berenberg.

Andrew Degasperi: Thanks for taking my question. Maybe the first one, Jim, on the topic of AI. You mentioned how you added those capabilities to a HyperWorks. I was just wondering, is potentially adding that to SimSolid as well, something in the cards that you’re thinking longer term?

Jim Scapa: Yes, there’s no reason that the same fundamental technology that we’re using. This is something we’ve been working on a long time, by the way. And we’re feeling very excited about the quality of the results that we’re getting. We’ve completely integrated it in HyperMesh actually. So that is – there are a lot of start-ups in the space and all that, but it’s quite important that it’s easy to use, if you will, and sort of integrate it in the users’ workflows, and we’ve done that. There’s absolutely no reason you can’t use this with some solid as well.

Andrew Degasperi: That’s helpful. And then maybe on the 7-figure RapidMiner deal, the SLC wins that you’ve had this quarter. I was just wondering, in terms of how accretive these are relative to your broader simulation portfolio? I mean, would you say these tend to fall on the higher end in terms of deal size?

Jim Scapa: I’m going let Matt answer that question.

Matt Brown: Thanks, Jim. Yes, I mean, so clearly, there are large opportunities, and particularly when we’re looking at our data analytics suite in the larger BFSI space. It’s where we see some of the larger deals. But that’s one of the things that makes us exciting about integrating this technology, not just stand-alone and data analytics, but also within our simulation customers. So yes, I think there’s opportunity. Our deal size is increasing. That’s something that we’re happy about. And I think that, that continues to present opportunities as we continue to integrate and push forward in the space.

Andrew Degasperi: Thanks, Matt. And Jim, appreciate it.

Operator: Thank you. One moment for our next question. And our next question comes from the line of Dylan Becker with William Blair.

Unidentified Analyst: Hi, guys. It’s Phaze on for Dylan. You touched on this with a previous question, but can you just provide some color on how this SimSolid plays into the longer-term strategy of targeting those less technical users and just driving incremental usage of the platform through democratization of simulation in those lower end market audiences.?

Jim Scapa: Sure. Thanks for the question. So I mean we’re mostly focused. We’ve talked a lot about simulation-driven design, so we’ve been very focused through our Inspire platform on sort of the design and engineer community, particularly in sort of the more sophisticated large enterprise customers. But there’s really also a very – and that’s a large opportunity. You could argue it’s 5 or 10x bigger than just the analyst community within those companies. But there’s also a very, very large opportunity at the mids and small market customers. But again, we have not historically been as large into. We are definitely focused there more and more and so for them, you have less sophisticated users often it’s the same guy who is designing whatever they’re working on and doing simulation. And for those guys, I think the technology really makes a great tool for them…

Unidentified Analyst: Awesome. Thank you.

Jim Scapa: Thank you.

Operator: Thank you. One moment for your next question. Our next question comes from the line of Charles Shi with Needham & Company.

Charles Shi: Hi, Jim, Matt, thank you for letting me ask a question or two. I want to ask you about what your view on your automotive end market. I know it’s probably a declining revenue contributor to our overall business, but still it was about roughly 30% of your business as of fiscal 2022. Jim, I think are you being very vocal when you see some early warning signs in the past, right? You did give the analyst community a very early warning when you are seeing something was not turning in the right direction roughly, I think in three ago. But how do you feel about the automotive end market going into the end of the year and going into next year, especially now we kind of continue to feel a little bit nervous about the macro environment with the recent added uncertainties related to the banking crisis. So I want to get your thoughts on what you see here from automotive customers? Thank you.

Jim Scapa: Okay. No, Charles. Thank you for the question. It’s interesting because I live in the Bay Area now. And all around me, all the tech companies are laying people off, they’ve over hired their businesses are very significantly affected. But I was just back in Detroit. We did – I spent a week there and it’s very, very clear that in the sort of main street world of manufacturing, it’s sort of business as usual. They’re doing some trimming of their own in certain areas. There are always – these companies know how to manage costs because they’ve been doing it so long. They don’t go out and over hire. But the demand is still really high for new cars. And so right now, that whole market, I think, is still very solid. And for us, you’re right, it’s declining as a percentage of the total for us every year but it’s still growing.

Now if you look at the startup EV community, I think that community of company is feeling probably more strain as the more traditional players are really starting to come in and Tesla is cutting prices and so on. But right now, I think the demand is still very, very high for their products, and I don’t see it as really a problem for us. Thank you.

Charles Shi: Thanks. So maybe a follow-up. Maybe this is for Matt. You basically reiterated your 2023 guidance maybe taking it up a little bit on a U.S. dollar basis. But given the seasonality pattern, we’re seeing that Q2 seems to be a little bit – it’s relative to at least my expectation, it’s a little bit more seasonal than I thought, which would have been a little bit more, I mean, steady than what you guided for, which kind of implies Q3 maybe follow the same seasonality pattern kind of suggests we’re going to need a very strong double-digit sequential growth into the year-end to really meet the full year target. I know Jim just provided some commentary around automotive. But how do you think about that trajectory? Is that what gives you the confidence that the same pattern will repeat going into the year and a double-digit sequential growth into Q4? Thank you.

Matt Brown: Yes. Thanks, Charles. Yes, it’s actually interesting, if you just look back at 2022 and look to see what happened in 2022, Q1 to Q2, software product revenue in particular was down fairly consistently with where we’re projecting our guidance to be sequentially this year. So it’s actually fairly in line with historical. But just kind of stepping back, if we look at first half, second half dynamic, which I think is sort of useful here, we feel pretty good about how the first half is balancing in the second half. We’re not expecting to have to go out and get a big number in the second half, for example, in order to make our guidance. I mentioned a moment ago that in Q1, we got to 10% software product revenue growth in the first quarter in constant currency, and that for full year, at the midpoint, we’re at 10.1%.

So that’s certainly consistent. But even when you look at just first half versus second half, what’s implied at the midpoint of the guide, it’s roughly 9% in first half, which, of course, includes that Q2 guide and a little over 11% in the second half. So we’re not – we’re really not talking about a big ramp in second half. It’s something that we feel is manageable and we’ve got eyes on and feel is attainable. So yes, not expecting a significant ramp in the second half from our perspective.

Charles Shi: Got it. Thank you, Jim and Matt.

Operator: Thank you. One moment for our next question. Our next question comes from the line of Mark Schappel with Loop Capital Markets.

Mark Schappel: Hi. Good afternoon. Thank you for taking my question. Jim, I just want to build off one of the earlier questions on SimSolid cloud. I was wondering if you could just give us some additional details into the go-to-market model or strategy for the product? And how you plan to kind of take that solution down to smaller and mid-market customers?

Jim Scapa: Well, there’s a lot of discussion to be honest with you, internally around how we do that. A lot of it really comes down to more marketing. I think we really have to promote it in a fairly substantial way. And that’s what we’re planning to do. So it’s – there’s no brilliance here, but we really have to promote it somewhat aggressively, I think, so that it gets the visibility of that mid-market. We’re also obviously pushing very, very hard through our indirect channels, which are getting more robust year-by-year. And those relationships are getting much, much better for us. So that’s how we do it.

Mark Schappel: Okay. Great. Thank you. And then second question, one of your sales strategies has been to push or sell your data analytics products into the engineering simulation customer base. Just wondering if you could just give us a little bit of an update on those efforts. I know it’s relatively early days.

Jim Scapa: Well, actually, it’s sort of turning a corner, I would say. And there’s a couple of reasons why we made the decision to bring the data analytics products into a suite at sort of our upper-end suite of simulation products. So it’s not across everything, but it’s into the upper level suite where you got electromagnetics and things like that. And so now those products are available to use in that customer base that’s already paying sort of a premium for their solution. Now they get access to this. And there’s a lot of interest much, much more than I think we were perceiving before. But I think what’s most important is that our technical teams have been training across all the different products, Panopticon, RapidMiner Monarch.

And they are finding use cases. I just saw one that was super interesting where we’re looking at wells, for example, and able to plot the results beautifully in panel across the whole model in 3D. And there’s just so many applications that we’re starting to come up on and the customers are really very hungry for how they can apply this kind of technology as well. So the sales force, the technical engagement force all kind of coming up to speed. They’re learning it. And I think the customers are very, very interested in an environment where everybody is watching cost, whatever, I think our offering makes it easy for them to slide into using some of these tools and technologies. So I think we are turning a corner now.

Mark Schappel: Thank you.

Jim Scapa: Sure.

Operator: Thank you . One moment for our next question, please. Our next question comes from the line of Arsene Metalolwhic with Wolfe Research.

Unidentified Analyst: Hi. This is Arsene on for Josh. Just one for Matt briefly. Just to confirm, constant currency software revenue and total revenue has been maintained, right? Because I’m looking at previous guidance, and I think it suggests a 40 basis point decrease on software revenue in on a constant currency basis. So I just wanted to make sure I had the message?

Matt Brown: Yes, that’s right. Arsene. So when we roll up our guidance in constant currency is consistent for the year, quarter-over-quarter. We include this table in the back of our earnings release that sort of has this walk from midpoint of guidance in February to midpoint of guidance in May, and then you can see the fluctuation there due to currency. So yes, you’ve got the message correct, constant currency, no change in full year guidance, but on a reported currency basis, it’s up just slightly.

Unidentified Analyst: Okay. And then just on indirect channel sales, I think it’s down sequentially as a portion of revenue. Is this driven maybe by strength in large customers and renewals? And maybe what’s the outlook on renewals down market? And has this changed maybe versus initial expectations given the backdrop?

Matt Brown: Yes. Was it – did you say indirect?

Unidentified Analyst: Yes.

Matt Brown: Yes, yes. So indirect is performing well. As you know, it’s been a focus of ours to continue to grow that. It’s relatively actually consistent year-on-year with what we saw in terms of percentage of indirect, but we expect to continue to expand there and to focus of ours to eventually grow that up more in the 20% range. Of course, that’s a multiyear project we’re on. But yes, overall indirect channel is performing well as is our direct channel.

Unidentified Analyst: Got it. Thank you.

Operator: Thank you. Ladies and gentlemen, this concludes today’s conference call. Thank you for participating, and you may now disconnect.