Altair Engineering Inc. (NASDAQ:ALTR) Q3 2023 Earnings Call Transcript

Altair Engineering Inc. (NASDAQ:ALTR) Q3 2023 Earnings Call Transcript November 4, 2023

Operator: Good day, ladies and gentlemen. Thank you for standing by. Welcome to Altair’s Third Quarter 2023 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please note that today’s conference will be recorded. I will now hand the conference over to your speaker host for today, Dave Simon, Senior Vice President of Investor Relations. Please go ahead.

Dave Simon: Good afternoon. Welcome, and thank you for attending Altair’s earnings conference call for the third quarter 2023, ended September 30, 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 close today, we issued a press release with details regarding our third quarter 2023 performance and guidance for the fourth quarter and full year 2023, which can be accessed on 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. The third quarter of 2023 was excellent for Altair with software product revenue, total revenue, and adjusted EBITDA all above the high end of our guidance. Our Q3 performance demonstrates the power and veracity of our vision for the convergence of computational science and AI across industries and verticals, including engineering, scientific discovery, and business. Adjusted EBITDA for Q3 2023 more than doubled year-over-year to $15.5 million. Software product revenue as a percentage of total revenue for the third quarter grew to 88.9% compared to 86.9% in the third quarter of 2022. Software product revenue as a percentage of total revenue for the first nine months of 2023 increased to 89.3% as compared to 87.8% in the first nine months of 2022.

The recurring software license rate for the first nine months of 2023 was 94%, an increase from 93% through the same period in 2022. Software product revenue on a constant currency basis grew by 14.5% in the third quarter compared to the third quarter of 2022, and 11.1% for the first nine months of 2023 compared to the same period in 2022. Altair’s growth continues to be broad-based across many geographies, technologies, and verticals. We are releasing a landmark set of product solutions across our entire portfolio, representing some of the most important and powerful software updates we have delivered in many years. Included with these releases are next-generation user experiences, modern APIs, tightened integrations between products, seamless access to high-performance computing, and increased computation speeds.

Over the past year, our employees from all parts of the organization have embraced a shift to focusing on verticals, as well as cross-pollinating our data science expertise with our traditional simulation and design go-to-market teams. This convergence has created new growth opportunities with our customers by helping them apply digital twin technologies to improve their products, scale compute power faster, and use data analytics and artificial intelligence to accelerate their digital transformation efforts. As part of this effort, we are pushing the boundaries of what we know is possible by integrating our products in truly transformative ways across all three of our major software platforms. Altair HyperWorks, our design and simulation platform, Altair RapidMiner, our data analytics and AI platform, and Altair HPCworks, our high-performance computing and cloud platform, as well as Altair One, our cloud innovation gateway.

Altair HyperWorks 2023 empowers engineers with a comprehensive suite of design and simulation solutions that harness the power of computational science, HPC, and AI, its new, modern user experience and python APIs throughout the platform empower developers and users to create unified best-in-class solutions, leveraging technology from the entire Altair HyperWorks portfolio. HyperMesh was upgraded with a user-centric design providing unmatched pre- and post-processing capabilities through AI power tools and next-gen design and optimization workflows. HyperMesh CFD complements these capabilities by streamlining CFD workflows within a unified environment. SimLab has expanded capabilities as an integrated multiphysic solution for electronic design automation, enhancing user-friendliness while advancing electronic and EDA product development.

Our new product introduction of simulation data management is an exciting and timely solution for customers looking to leverage AI-driven simulation, where historical simulation runs become key sources of valuable data. We see significant momentum among all customers to implement digital twins for both design and in-service applications. Twin Activate, the foundation of Altair’s digital twin solution, continues to evolve as a differentiated solution, especially with our strong ROM AI capabilities. In addition, the integration of OmniV, recently acquired for requirements management, gives our platform a strong and complete digital twin offering for customers. SimSolid continues to gain market share in all our established and many new accounts as the technology rapidly matures and adds new functionality.

This release enhances SimSolid’s ability to automatically set parameters, leveraging machine learning, which is key for the design community. Inspire’s release beautifully integrates implicit modeling for optimizing lightweight lattice structures, building on technology from our 2022 acquisition of Gen3D. This software is further enriched by a new cutting-edge visualization and rendering graphics engine, which will also be released in future versions of HyperMesh and SimLab. Altair RapidMiner 2023 now delivers generative AI capabilities for domain experts and data scientists and deeper support for coding data scientists. The platform also continues to integrate advanced automated functionality, including decision trees, auto-clustering, auto-machine learning, auto-feature engineering, and auto-forecasting.

Customers can build and use rich real-time dashboards more intuitively than ever with a new streamlined user interface, and those with intellectual property in the SAS language will be able to write, test, and run SAS code directly from their Python development environment. Furthermore, Alta RapidMiner with generative AI enables non-programmers to create large-language models and refine models for new or proprietary use cases, all without needing to write code. Users can access all 300,000-plus hugging-face models with one click and fine-tune models with billions of parameters, competing with some of the biggest models on the market. Generative AI in Altair RapidMiner also simplifies and accelerates workflow design. Users simply state the desired data transformations, and the platform will suggest and configure the appropriate workflow.

Altair HPC Works 2023 has undergone one of the biggest technology changes in decades. Through the adoption of web-scale distributed technologies, we give HPC centers around the world the scale and adaptability demanded by modern distributed workflows. Furthermore, we are improving our dynamic cloud scalability based on real-time demand by implementing a unified interface for monitoring cloud-deployed nodes. This ensures efficient cloud spending by enabling global cost controls and providing enhanced visibility from your preferred Altair workload manager. By targeting specific workloads with cloud resources, we ensure expenditure matches business needs. Altair One 2023 lets customers easily configure, build, and deconstruct their HPC infrastructure on demand with any of the popular cloud providers, avoiding vendor lock-in and uncontrolled cost.

Altair Material Data Center and our simulation data management are built on the Altair One platform for consistency, traceability, and collaborative decision-making across the enterprise. On Altair One, users can interact with Altair support, access our new enhanced AI-powered and manage their software licenses and users. In addition to these exciting product releases, we have added additional technology to our structural optimization portfolio with the acquisition of OmniQuest. The Company was founded by the late Professor Gary Vanderplaats, a giant in the field of structural optimization. Its advanced structural analysis and optimization software is used by many customers in the automotive sector to develop lightweight, efficient designs.

We believe this acquisition further enhances Altair’s optimization market leadership. The aerospace vertical was particularly strong for us in the third quarter. Notably, Altair extended its long-time collaboration with Airbus with a recently signed new multi-year agreement. This agreement allows Airbus to access the complete Altair portfolio, including our simulation, HPC, data analytics, and AI software solutions. Additionally, it will accelerate Airbus’s deployment of Altair SimSolid, our game-changing meshless simulation technology. In addition, an aircraft engine manufacturer signed a six-figure license agreement focused on data analytics and machine learning to detect anomalies related to electromagnetic interference. An aerospace system supplier committed to using Altair RapidMiner to drive its data-driven digital transformation for engineering, manufacturing, and aftermarket services.

A major aerospace company renewed with a double-digit increase on its annual seven-figure spend with Altair simulation tools regarded as a core technology for its product development and verification processes. Finally, an aerospace supplier sourced a six-figure deal specific to Altair Monitor, a real time software licensing, monitoring and management system. The automotive vertical, driven by several innovative applications, contributed to our third-quarter software sales growth. A European automaker worked with us to use AI for improved NVH performance. An APAC automaker used RapidMiner to improve its supply chain efficiency, and a Formula 1 team expanded its six-figure annual spend without tear by over 30%, with applications mainly focused around structural optimization.

Finally, we had a six-figure expansion with an EV manufacturer, including work targeted at vehicle dynamics. In the heavy equipment vertical, we want a multi-year seven-figure commitment representing double-digit year-on-year expansion compared to 2022 and also going forward. This relationship is a great example of a global company leveraging a large portion of Altair’s portfolio to address longer-term goals for electrification, digital twin, and overall data-driven enterprise strategies. We are excited about its products and look forward to playing a continued role in helping this company succeed. In the technology vertical, we won two new semiconductor customers in Europe and a seven-figure expansion with a major U.S. technology supplier for applications related to high-performance computing.

Regarding workplace culture, Alter added to our growing list of 2023 awards by again being named one of Newsweek magazine’s Most Loved Workplaces in the U.S. and in the U.K. This year, we were also named one of Fortune Magazine’s 40 best workplaces in technology. We appreciate the recognition from these highly respected award programs. We look forward to closing out a solid 2023 despite a relatively challenging macro environment. Now I will turn the call over to Matt to provide more details on our financial performance and our guidance for the fourth quarter and full year 2023. Matt?

Matt Brown: Thank you, Jim. Hello to everyone on the call and thank you for joining us. Q3 was an impressive quarter for Altair with our financial results exceeding the high end of the range for every metric we guided to for the quarter, once again fueled by strength in software revenue across a number of verticals. Fiscal 2023 continues to progress in a positive way, and we are well positioned to achieve our financial goals for the year. 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 the review of our results, throughout my remarks, I will make reference to growth rates in both reported and constant currency.

Total bills for the quarter were $124.4 million, a year-over-year increase of 1.2% in reported currency and $0.1 million in constant currency. Software product revenue in Q3 2023 was $119.1 million, a year-over-year increase of 14.8% in reported currency and 14.5% in constant currency compared to Q3 2022. In Q3, we saw particular strength in expansions within our renewal base, including the cross sell of our data analytics and AI solution into traditional engineering customers, as Jim mentioned a few minutes ago. These wins are encouraging and support our view that customers are expanding the use of applications across our product portfolio to drive better designs and decision-making. From a vertical perspective, we continue to see meaningful growth in automotive, aerospace, and technology where demand for our products is strong.

Total revenue in Q3 2023, which includes services and other revenue, was $134.0 million, a year-over-year increase of 12.3% in reported currency, and 11.9% in constant currency compared to Q3 2022. Our recurring software license rate, which is the percentage of software product billings that are recurring, continues to be strong at approximately 94% through the first three quarters of 2023. Non-GAAP gross margin, which excludes stock-based compensation, was 80.1% in the third quarter, compared to 78.6% in the prior year, an increase of 150 basis points. Software product mix and an increase in our software product gross margin drove this increase. Our software product revenue, which carries higher gross margins, was 88.9% of total revenue in Q3 2023, compared to 86.9% in the prior year.

Over the long term, we continue to expect a general makeshift towards software product revenue, as growth there will continue to 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 exclude stock-based compensation and amortization of intangible assets, were $93.9 million compared to $91.7 million in the year-ago period, an increase of just 2.4%. This year-over-year change was driven by increases in research and development and sales capacity, partially offset by decreases in general and administrative costs, and represents the smallest year-over-year quarterly percentage increase in operating expenses since the COVID pandemic impact in 2020.

Adjusted EBITDA in Q3 2023 was $15.5 million or 11.5% of total revenue compared to $6.8 million or 5.7% in Q3 2022. The year-over-year increase was driven by the increase in revenue while maintaining a disciplined approach to costs. In September, we celebrated the one-year anniversary of our acquisition of RapidMiner. In addition to the exciting new product capabilities that Jim spoke about in our Altair RapidMiner 2023 release, we’ve also realized cost synergies ahead of expectations. Turning to our balance sheet. We ended the quarter with $431.2 million in cash and cash equivalents, an increase of approximately $12.9 million from the prior quarter. This increase was driven primarily by cash from operating activities, and we continue to be pleased with our cash flow generation.

Free cash flow through the first three quarters of 2023 was $97.8 million. Looking ahead to guidance for Q4 and full year 2023, we’ve provided detailed guidance tables in our earnings press release, including reconciliations to comparable GAAP amounts. We are continuing to see an FX impact relative to 2022, as foreign exchange rates changed 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 Q4, we expect software product revenue in the range of $153 million to $159 million, a year-over-year increase of 5.6% to 9.7% in reported currency and 5.1% to 9.3% in constant currency. For full year 2023, we are maintaining our previous outlook for software product revenue in constant currency at the midpoint and slightly decreasing our outlook in reported currency due to changes in foreign exchange rate to a range of $547 million to $553 million, a year-over-year increase of 8.0% to 9.2% in reported currency and 9.4% to 10.6% in constant currency.

For Q4, we expect total revenue, which includes services and other revenue, to be in the range of $169 million to $175 million, a year-over-year increase of 5.3% to 9.1% in reported currency and 4.9% to 8.6% in constant currency. For the full year 2023, we are maintaining our previous outlook for total revenue in constant currency at the midpoint and slightly decreasing our outlook in reported currency due to changes in foreign exchange rates to a range of $610 million to $616 million, a year-over-year increase of 6.6% to 7.7% in reported currency and 7.9% to 9.0% in constant currency. Moving to adjusted EBITDA. For Q4 2023, we expect adjusted EBITDA in the range of $44 million to $50 million or 26.0% to 28.6% of total revenue, compared to $38.7 million, or 24.1% of total revenue in Q4 2022.

For full year 2023, we are maintaining our previous outlook for adjusted EBITDA and constant currency at the midpoint and slightly decreasing our outlook in reported currency due to changes in foreign currency exchange rates to a range of $120 million to $126 million or 19.7% to 20.5% of total revenue compared to $108.6 million or 19.0% 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, and represents a substantial increase year-over-year. As a reminder, our cash flow expectations are sensitive to billings and collections 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 on 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. I’m very proud of the steady execution our team has made so far this year in so many areas across the Company. Our performance through the first three quarters gives us confidence we’re on track to meet our financial goals for the year. With that, we’d be happy to take your questions. Operator?

See also 20 Biggest Infrastructure Companies in the US and 15 Largest Auto Insurance Companies In The US.

Q&A Session

Operator: [Operator Instructions] And our first question coming from the line of Charles Shi with Needham & Company.

Charles Shi: So maybe I want to start with your Q3 result and the Q4 guidance, which kind of relative to what you guided a quarter ago, there was a good amount of upside to Q3, but there seems to be a little bit downside to Q4, but on balance, it looks like at least on constant currency basis, you didn’t really change your outlook. So I really just wonder, this put and take across those two quarters, are those just a timing issue of the revenue, or you are seeing something else? That’s my first question.

Matt Brown: Yes, thank you for the question. I can take that. So one of the things that we’ve just been very proud of this year is just the steady execution against what we viewed as our outlook and software product revenue at the midpoint showing growth of 10%. So we had that outlook to start the year, and we’ve been able to just sort of reaffirm that each quarter as we go. Last quarter, as you probably recall, we really tried to emphasize the fact that we’re looking at the second half really as a second half as a whole. And so when you look and see how we performed, that view is still intact. And we feel like the really good news is we got some benefit in Q3 above what we were expecting, and that helps de-risk Q4. And in total, our second half view remains consistent in constant currency. So it’s something that we’re pretty happy about.

Charles Shi: So maybe our next question, maybe for Jim. Jim, I think there has been quite a good amount of not so positive headlines related to the automotive industry, I mean, regarding maybe some of the demand softening, maybe more on the EV side, but also that the strikes, UAW strikes, I mean, it looks like it can put some cost pressure on automakers. I think the question is, do you see some of the macro affecting vertical in automotive? Or do you see some of the strikes probably going to cause some issues with your customers in terms of when they plan for the next year’s budget for the areas that’s relevant for Altair’s business?

Jim Scapa: Sure, Charles. Thank you. In general, I just don’t see the work that we do is really being affected much by any of that, quite frankly. I think these companies are continuing to need to innovate. They are continuing to embrace simulation and data science more and more, frankly, because they recognize that this is the path to actually doing things for less cost and faster. And so we’re just not affected in the way that you might anticipate. And I think that, frankly speaking, I think that the auto companies have managed their finances quite a bit better than they used to in the past. And so I just don’t see that kind of strain affecting us at all. Thank you.

Operator: And our next question coming from the line of Dylan Becker with William Blair.

Jim Scapa: Am I missing the question? Maybe we should go to the next question.

Operator: Our next question coming from the line of Blair Abernethy from Rosenblatt Securities.

Blair Abernethy: Great quarter. I guess a couple of things I wanted to drill in on, Jim. Can you just give us a little more color on this cross-selling that you were able to pull off on the data science in the manufacturing, and just kind of a little more color on how you did that, how big is that opportunity now that you’ve really had RapidMiner for a year? Just want to get a sense of how accretive that can be to you.