Q3 2019 Earnings Call
Business wins.
I will discuss progress against our goals expand on our important acquisition in electronics simulation and verification as well as to the EDAM acquisition, we are announcing today.
First let me discuss our financials and revised guidance.
Altair continues to grow billings and revenue at a fast pace relative to the market.
Total billings, including services for the quarter, driven by software product momentum and adjusted for constant currency grew by 24% over the same period, a year ago and 22% to date.
Our recurring software license rate year to date remains high at 88%. Despite the Datawatch acquisition in December 2018.
Which had recurring revenues of less than 60%.
Since then we've shifted these data analytics deals to approximately 75% recurring in 2019 and approximately 86% when factoring in multi year subscription deals.
In addition, our Korea subsidiary also made a positive shift towards subscription from approximately 75% recurring.
Revenue last year to 85% year to date.
Total revenue on a constant currency basis increased by 17% for both the third quarter and year to date. Despite the fact that approximately $4 million could not be recognized under six so six in Q3.
Revenue was impacted by an 8% year over year decline in our software related services business as the automotive sector showed some signs of slowing and we continue to transition to more strategic services.
On a constant currency basis software product revenue growth was 23% for the third quarter and 21% year to date.
Software product revenue as a percent of total revenue year to date grew to 79% from 77% in 2018.
This continues a strong and important multiyear trend for our business and directly correlates to improving gross margins.
Through Q3, we have achieved our billing targets. However, we see two significant downward trends on revenue for Q4.
Which we under forecasted coming into 2019.
First while we are excited about transitioning customers to subscription faster than anticipated. It does have a short term impact on revenues.
Additionally, we are seeing more weakness in the automotive market, especially in Germany, and Japan than we anticipated.
These two items when combined with some smaller execution issues related to indirect sales and toggled have had an impact on our Q4 forecast and we decided to take a more conservative approach. Given this is our second downward revision in two quarters.
Even with the reductions for Q4, we project full year 2019, non-GAAP software product revenue growth of between 18% to 19% from 2018.
While we are disappointed with our outlook for Q4, we remain highly optimistic for 2020.
This optimism is based on strong momentum for some of our exciting new product introductions. The completion of two recent acquisitions, which broaden our product line and continued diversification of our customer base and finally the growth in maturity of our Salesforce based on the investments we made in 29.
Team.
Later in our prepared remarks, Howard will cover our revised guidance in more detail.
Now, let me turn to some of our new products that we believe position us well for 2020.
This year, we launched our newest version of Hyperworks, which represents our next generation integrated innovation platform to drive design with simulation concepts to detailed systems.
The vision for Hyperworks is that all of our applications are under one common user experience and leveraged domain knowledge and AI with advanced solutions for NVH crash Cfd manufacturing anymore.
The transition will be friction less for long term users, but exciting and very modern for new users.
We believe the new Hyperworks is a big deal in our market and initial feedback from our customers is extremely encouraging.
Data analytics is rapidly emerging as an exciting element of our customers portfolio of tools to design analyzed predict and optimize performance.
We are beginning to see traction for our units based subscription licensing model in our financial services and banking customers.
We recently saw the first large units based six figure deal targeting about 100 data prep and science users with a major bank in India.
We hold a number of Altira technology conferences each year.
And attracted about 10000 registrations globally in 2019, a new record.
This year numerous stories were presented about the application and machine learning and engineering.
At our October conference in Detroit six of the 41 customer papers presented included the application of data science.
Ford Motor Company pack the room with their presentation about using machine learning to make better stamping process decisions to improve manufacturing efficiency and increase part quality.
One of the world's largest will manufacturers share that their trials using machine learning could lead to scrap reduction in the range of 50%, which is amazing when you consider they produced 60 million wheels annually.
Some solid continues to be a breakout product for Altair.
We have seen a powerful surgeon customer interest and usage momentum with more than 8000 downloads and numerous companies telling us the product is game changing for its ease of use speed and accuracy.
This represents an unprecedented uptake of new technology in our space.
During our global HTC major automotive Oems presented their use of some solid standing room only crowds.
Based on the strong interest we continue to see we're planning to ramp up efforts around development marketing training of some solid.
Now, let me turn to two new additions to our product portfolio through two strategic acquisitions to bolster our position as the leading provider of solvers for high end simulation and optimization.
Last month, we moved to fill the gap in our electronics simulation portfolio with the acquisition of Polyone, Doug Hi Tech EDA software company based in Sol with best in class technology focused on the rapidly growing electronics industry.
Poly log expands altisource portfolio solutions for system level engineering and analysis of printed circuit boards.
This is a large addressable and rapidly growing market because pcbs are a key component of products across many industries from light bulbs to the most sophisticated in complex devices and systems such as automobiles.
Polyone brought some important customers, including electronics design groups at major consumer electronics companies, such as Samsung and LG electronics.
We expect to grow this business substantially as it expands our electronics portfolio, especially in the areas of power and signal integrity simulation complementing our advanced thermal circuit and electromagnetic solvers.
Poly log shares alters open architecture philosophy, and integrates easily into customer environments and work streams using any of the leading PCB design and Ecad tools.
Innovative and practical Pollack solutions give instant design feedback perfect fit for what we call simulation driven design.
Today, we are announcing the acquisition of E them, the world's leading discrete element method simulation software to broaden our footprint in large addressable markets such as mining energy heavy equipment and process manufacturing such as pharmaceuticals chemicals and.
Consumer packaged goods.
We believe that Altira is existing solutions for machinery and materials simulation will be enhanced by offering new tools that provide better integration for customers.
This systems level simulation capabilities will enable insights to the interaction between materials and their environments to visualize and optimize machinery design materials handling and manufacturing processes and a broad spectrum of industries.
Now I would like to provide some color on our key end markets.
Technology as a growing market for Altair and now represents our fastest growing vertical increasing over 30% year to date.
We continue to see strong demand for our innovative tools for managing workloads and workflows as well as our simulation software solutions.
In July Fujitsu was selected to take believe in building Australia's fastest supercomputer.
And Altira was identified as one of the key suppliers to the project for job scheduling with PBS works.
We are proud to be part of the team supporting the national computational infrastructure within the Australia and nationally University campus at Canberra to support more than 5000 researchers.
The project will help increase compute speeds by 10 times for users such as Geosciences, Australia, and the Bureau of Meteorology.
Today three of the four major cloud providers use alturas technologies for EPA simulation in the cloud and two of them use our tools for designing their own specialized chips in the cloud.
At another major technology company, we received a three X expansion for processor scheduling towards semiconductor chip development.
Further broadening our market leadership.
This is on top of a more than two X usage increase and another EDA player, which also led to a six figure expansion deal in the quarter.
The poly log acquisition is key for us to bring even more expertise and technology to the EDA market.
Aerospace continues to be a very important market, where altira is gaining share rapidly.
We have historically been strong with our optimization and impact solvers.
More recently, we have emerged as the leading aerospace modeling and visualization solution and see the opportunity to further grow our market share for solvers.
We recently signed strategic multi year and multimillion dollar commitments for the major aerospace manufacturer as well as one of the largest aircraft companies in the world.
And expect the use of solvers and other altair tools to grow substantially in these accounts.
Automotive is our largest Marge market segment, representing 35% of our software revenues and approximately 2300 customers or 20% of our global customer base.
We categorize all of these companies as automotive however, many have diversified their businesses during the last 10 years.
Unfortunately, this sector is slowing and year to date grew less than 2% before taking into account currency impacts.
We believe this is related to general market headwinds.
While the automotive market is increasingly challenged we also see many new opportunities for our solutions with companies investing in electrification autonomous data analytics and digital transformation.
We had many nice wins in the automotive sector in the quarter.
In China, we had several notable net new and expansion software sales, including three new automotive supplier customers using our software to design battery packs for electric vehicles.
As well as new business related to tires signal to noise ratio analysis antenna placement and transmission design.
Altair has invested significantly in our sales organization and capacity this year.
Despite significant attrition of data analytic sales executives in the middle part of the year. Thus far we've added over 20% net new quota carrying account managers and inside salespeople globally for both the data analytics and the engineering markets.
We also increased our engagement with resellers, especially in the U.S.
We believe stronger recurring revenues momentum and excitement for new products, including some solid and pollux increased sales capacity and strong marketing campaign initiatives position us well for 2020.
Now I will turn the call over to Howard for details on our financial performance and our guidance for the fourth quarter and the rest of the year.
Howard.
Thanks, Jim.
As a reminder are reporting in guidance for 2019 is under assay six so six as are the comparative numbers from 2018.
As previously noted our seasonal billings patterns, coupled with the treatment of revenue under assay six so six result in heightened seasonality in revenue with higher revenue recorded in our first and fourth quarters of any given year.
For ease of reference we have included a table, reflecting summarized results for all four quarters of 2018 on an assay 606 basis and our most recent 10-K and in our press release.
In prior conference calls, we have noted that changes in certain currencies can have an impact on both our revenue and expenses, especially when those changes occur over relatively shorter time periods or when currency changes are more pronounced overtime.
When this occurs as it has for Q3 19 compared to Q3 18 is meaningful to measure aspects of our performance on a constant currency basis.
Certainly the current macro environment, coupled with our global presence may increase the adverse impact currency exchange rates may have on our business for the balance of this year and our updated guidance reflects in part our current assessment of those impacts.
Our third quarter results were driven by continuing solid demand for our software products I.
I would first like to note Q3 results reflect the negative impact of approximately $4 million of revenue that was not recognizable within the quarter due to the fact that under six so six with license commencement date in very early October revenue from these arrangements was not recognizable in.
Q3.
But for this item, we would have met our guidance expectations for revenue and modified adjusted EBITDA.
Even taking into account the negative impact on timing for the quarter software product revenue reached $77.8 million, an increase of 21% from a year ago, while total revenue equaled $100.4 million representing growth of 16% from the third quarter of 2018.
Adjusting for the adverse impact of currency fluctuations in Q3, 19 software product revenue grew by an impressive 23% and total revenue grew by 17% compared to Q3 18.
For the nine month period software product grew by 21% compared to a year ago on a constant currency basis.
Software related services declined by 8% for Q3 compared to a year ago, primarily impacted by the headwinds Jim mentioned in our automotive customer base.
This decline is also aligned with our anticipation that consulting revenue for the year, we'll continue to be slightly down as we focus our growth strategies at higher margin software revenue.
As previously discussed acquisition accounting requirements mandate and adjustment to historical Datawatch deferred revenue as of the date of acquisition.
Upon acquisition, we adjusted deferred revenue down by $9 million, which would have been recognized during the 2019 year.
Our guidance for 2019 included this acquisition adjustment for non-GAAP revenue and adjusted EBITDA, which we referred to as modified adjusted EBITDA for this specific purpose.
Including the impact of the acquisition adjustment our constant currency non-GAAP software product revenue growth equaled 26% in this quarter.
In the current quarter software product revenue increased to 78% of total revenue up almost 400 basis points from 74% last year without any adjustment for currency or acquisition related data points, continuing the important long term trend of increasing mix of soft.
Core product revenue as a key driver of expanding our operating margins overtime.
For the year to date period software product revenue represented 79% of our total revenue up from 77% for the prior year.
Our recurring software license rate that is the percentage of software revenue that is recurring continues to be strong and consistent with our path performance at 88% for the first nine months of the year positively impacted by the accelerated conversion to recurring revenue mentioned by Jim earlier.
Our bottom line results were impacted by the timing of revenue recognition noted previously as well as a $200000 negative impact from shifts in foreign currency, resulting in modified adjusted EBIT that below our guidance range at a loss of $100000.
Third quarter calculated billings were $103.6 million, an increase of 22% from a year ago indicative of this strong growth in our software product business.
Currency shifts also impacted current period billings negatively by $1.8 million, none at constant currency basis would have increased by 24% for the quarter.
We tend to view calculated billings over longer time periods due to the impact variations and timing of renewals expansions and new customer arrangements can have quarter to quarter.
I would like to turn to the balance of the PNM results some of which are on a non-GAAP basis.
A reconciliation of GAAP to non-GAAP measures has been provided in the earnings release, we issued earlier today.
Gross margin in the third quarter was 68.4% essentially flat relative to Q3 18 and was negatively impacted in the quarter, primarily as result of the timing of revenue recognition in the quarter.
On a year to date basis gross margin improved to 71.5% compared to prior year gross margin of 70.8%.
For the quarter non-GAAP operating expenses, which excludes stock based compensation amortization of intangible assets and other operating income were $73.9 million compared to $60.2 million a year ago.
I would note that our non-GAAP operating expenses have remained in a very tight range across our quarters. This year as we balance investments in our business against expectations for revenue growth opportunities, both short term and long term, including acquisitions that are long term focused.
And the desire to deliver increased operating margins to our stakeholders.
Modified adjusted EBITDA for the quarter was negative $100000 compared to positive $2.4 million a year ago.
Turning to our balance sheet, we ended the third quarter with $247 million in cash and cash equivalents and $150 million, an undrawn capacity under us line of credit.
Moving to our cash flows cash flow from operations in the third quarter was an outflow of $1.9 million compared to an inflow of $3.1 million for the third quarter of 2018.
Free cash flow in Q3, 19 was an outflow of $3.3 million and consistent with our business cycle.
For the nine month period, our free cash flow equaled $21.9 million compared to $35.1 million for the prior year.
Our earlier guidance for 2019 was impacted by fluctuations in currencies, such as the euro and pound.
It is possible that continued shift in foreign exchange rates for the balance of the year could increase the impact on our operations.
For the nine month period, the impact of currency fluctuations resulted in a reduction of $8.3 million per revenue.
And $1.7 million for adjusted EBITDA.
As Jim mentioned, we're reducing our guidance for the year to take into account three primary factors.
First it has been a more rapid unexpected shift from perpetual to subscription in both the data analytics business and from our Korean subsidiary.
The data analytics business derived from the acquisition of Datawatch has shifted from less than 60% annual recurring revenue in 2018 to around 75% and 2019 recurring revenue so far this year.
Our Korean operation has surpassed our goals by shifting from about 75% recurring revenue in 2018% to 85% recurring in 2019 today.
The totally anticipated impact on revenue of this transition in 2019 is approximately $9 million of which about $4 million is attributable to the fourth quarter.
While this transition has a negative impact on revenue in the near term this accelerated conversion carries longer term benefits to topline growth.
Second weakness in the automotive sector is resulting in an approximate $11 million pipeline reduction about $3 million of which is attributable to software related services.
The countries most affected by this are the us, Germany, France and Japan.
Third although we are pleased with the continued buildout of our go to market strategies for indirect business. The pace of the Buildout has been slower than anticipated, resulting in $2 million less from this channel than previously expected.
Given the margins on software product revenue, the noted reductions and topline impacts our bottom line virtually dollar for dollar.
Q4 is historically Altair is most substantial quarter for new business and as we rolled up our updated pipeline, we found more weakness than we anticipated.
Accordingly, we believe it is prudent to take a more conservative view of the growth potential within our pipeline as we guide for the balance of this year.
As we begin to look forward to 2020 for which we will be providing specific guidance. Early next year, we're focused on tighter control over increases to our headcount numbers, we expect targeted hiring for R&D and technical support coupled with continued growth in our quota carrying sales force.
We will also be looking deeper at reducing non employee related expenses, such as four facilities technology travel and consulting.
Turning to guidance given that timeline of the poly log and E. Damn acquisitions, we do not expect them to have a meaningful impact on our revenue or modified adjusted EBITDA for Q4 or for 2019.
As to Q4 2019, our expectations are.
Software product revenue to be between 83, and $87 million representing growth of 5% to 9% from 2018.
non-GAAP software product revenue of between 86, and $90 million representing growth of 7% to 12% from 2018.
Total revenue to be between 105, and $109 million representing growth of 2% to 6% from 2018.
non-GAAP total revenue of between 107 and $111 million representing growth of 4% to 8% from 2018.
Modified adjusted EBITDA of between nine and $11 million, a reduction of 12% to 27% from 2018.
For the 2019 year as a whole we expect software product revenue of between 349 and $353 million.
Representing growth of 15% to 16% from 2018.
non-GAAP software product revenue of between 358, and $362 million representing growth of 18% to 19% from 2018.
Total revenue of between 440, and $444 million representing growth of 11% to 12% from 2018.
non-GAAP total revenue of between 449 and $453 million representing growth of 13% to 14% from 2018.
Modified adjusted EBITDA of between 43, and $45 million, a reduction of 10% to 14% from 2018.
Free cash flow of between 12 and $14 million.
As we reflect on our performance in 2019, some element of the Datawatch acquisition were more challenging than expected and market performance has not met our expectations as we have gotten deeper into the year impacting on our ability to deliver on our commitment to drive improvements in our operating performance.
As you can tell from Jim's comments, we are optimistic that the changes we have made and that successes. We have achieved in 2019 provide a strong foundation to support superior long term growth and thereby expand operating margins as we look forward to 2020 and beyond.
With that operator can we now open the call to questions.
As a reminder to ask a question you will need to press star one on your telephone.
To withdraw your question press the pound.
Please standby, while we've compiled acuity roster.
Our first question comes with a lot of Jackson Adder of JP Morgan Your line is open.
Great Hey, guys. Thanks for taking my question.
Let's just start on the automated sector, we can.
Is it any of the difficulty that you're seeing competitive in nature or is it simply your customers coming up to their annual renewal of Hyperworks units and.
Either not taking as many as they were near prior or not.
Taking additional units like maybe you had Bob.
We are looking hi, Jackson.
Thanks. Thanks for the question. So we we don't I've been actually digging through my whole organization to try and understand if we think there's.
Competitive thing here and.
Very very clearly coming back, but thats not the case.
We're not reducing we're not seeing any reduction in.
The unit counts renewal, we're still growing by the way.
From what we're forecasting.
Going forward into Q4 for example is we're not growing as fast.
And I think that if you think about the competitors in general.
We tend to play more in the historical markets that are the mechanical engineering side and a lot of the.
Vestments, removing two electronics and a couple of other areas, where we actually have a lot of really new products exciting stuff coming on and we're starting to see wins, but it's a little bit newer for us and so I think were.
We're catching up getting our salesforce used to selling into those new teams and in some of that actually.
Okay.
That's helpful. Just said than a quick follow up on data analytics and Datawatch. So.
I just need help really understanding.
The move to the subscription transition how it how it kind of.
Not snuck up on us but.
You know whether.
I guess why why Didnt, we Steve Thats being this size of the headwind three months ago.
What has changed since the last time, you kind of took a look at the pipeline there.
So we were beginning to see the transition to so subscription, especially on the data analytics side, we really did not see it as much on for example, the Korea move.
It's a little that accelerated from what we saw before and I have to be really honest with you. We came to the end of Q3, and we frankly, we knew that we had that our billing numbers, we were feeling pretty good about things and you know the anecdotal.
Information, we were getting from the field dissolve pretty positive, but as we rolled up the pipelines.
And really took a look at what's happening we we frankly saw a different picture so.
Yes, I mean, we were.
We were really quite surprised.
Yes.
All right.
Thanks for taking my questions guys.
Thank you.
Thank you next question comes from Andrew Degasperi Baron Baird. Your line is open.
Thanks for taking my question I guess first under 4 million that should have been in Q3 did that get pushed into Q4 or is it potentially moving.
Further out and then.
Secondly, maybe can you.
Can you maybe discuss.
The confidence you have for 2020 and given the pipeline that you have today exactly what kind of visibility do you have where.
If you think this is a transitory issue in Q4.
This is Howard Thank you I'll take that the.
Technical question Rich and address the business. The the 4 million was in fact build in Q3.
Well what forced the revenue recognition out of Q3 literally lower license commencement dates on those transactions of basically October 1st October 2nd So.
The billings were there and but for a date on a document.
And would have been recognized in Q3.
It really would not have been an issue for us if we were really under our.
Old scheme of 605 by but Thats what success its compelled to do.
Okay and then on so.
Why are we confidently about going into 2020 was that will not really essentially the question there.
Well like considering Q4 in the pipeline that now that's better.
So I'm going to be very honest, we're feeling good going into 2020.
For four or five key reasons want one is.
The product momentum that we have we have I talked a bit about the products that are coming onstream theres, others as well in the computational fluid dynamics space as well and we think a lot of these products are going to start to hit.
If you will the revenues side actually generating.
Billings and revenue much more next year than what we saw in this year, we were more optimistic about some of that.
For Q4 this year, but.
We think it's going to hit more.
And next year, the second to be honest as the acquisition integration of data launch.
There was a lot of work to do there we were still feeling really great about that acquisition by the way.
But there was certainly a good deal to work to do.
We had.
We did a lot of work around synergies and we we also lost a number of people in the Salesforce.
Especially through the middle part of the year as some of the Rs use came on.
And we worked really hard to.
To structure that and to bring new people on in fact, we brought so many new people.
Just on the data analytics side of the capacity, we think is enough for growing I'm, not making any any guidances here, but the capacity is there for about.
Well more than 30% growth on the data analytics side next year.
The other thing for US is spent a lot more diversification in our business.
We have historically been.
In a much more automotive if you go back a few years were probably 45%.
Right now are about 35% in its continuing to decline and we're into a lot of other new markets energy and sporting goods, all the golf club makers whenever.
And then and then just finally to be honest we have been.
Working hard on the sales organization, not just adding a lot of capacity through the year, especially during the second half.
As a lot of focus on strategic accounts.
Reducing the number of accounts per account manager and shifting some of the smaller accounts to the indirect.
Partners that we now.
On the other than we've done as we've we've been building inside sales teams through this year.
And they are in every region in every country in that.
Makes a really big big impact for us. So it's that combination of things, yes light and they had for Q4 I think I think it just takes time to to get that all up up and going sales guys for us historically take about one year.
So fully ramp up.
Right now shows your answer.
That helps that's helpful. Thank you.
Thank you. My next question comes from Rich Valera of Needham and company. Your question. Please.
Thank you.
Just wanted to follow up on your statement that you.
Sort of said Youre over index to some of the traditional product areas at least from a sales perspective, but I think you expressed some optimism that you sort of have products on some of the new areas, where the automotive manufacturers are focusing but maybe you're not up to speed selling them. So could you just give.
Down into that and explain what you were thinking there do you feel like you have the product portfolio do you need more work on the product portfolio on some of these newer areas or is it more matter of sales training and getting folks to sort of sale to different groups in side. Some of these these auto players.
Right. So I think its combinations will be honest.
Historically, we really don't play that much on the Cfd sign for example.
And we have both a general purpose Cfd code chronicled accu Saul.
And then we also have this external aerodynamics solver.
Both those products are really coming up to speed to be really interesting competitive.
Both in sort of different ways, one handles the internal flows and won the external flows.
And we have historically not pushed products into those those accounts those segments in other different departments in these and these companies.
So we're beginning to do more of that and we're thinking we're going to start seeing more traction around that.
Similarly, we didnt have product for some of the PCB.
Type applications and with the politics product, we're feeling pretty excited.
That we bring something new there, but again, we have to we have to learn how to sell into these departments.
Effectively.
So.
We've had really strong electromagnetic solutions and we frankly have a lot of successful electromagnetics.
Over the last over the last couple of years, both for the low end the high frequency stop both for motor design Electric motor design on.
And.
Antenna design.
But.
We're we're still we're still learning on a bit and we're still filling out the portfolio in some of these areas.
Got it.
I was going to finished by just saying we're feeling like like these last couple of pieces that we brought by the way the DM product, although not that relevant and automotive is another if you will niche area of CFTC of these very interesting that you have different types of solvers for different.
Scenarios so.
The DM solver, among all CFT is probably 5% to 7% of that market, which is a very very large market.
Got it so that obviously you feel strengthens your your cfd portfolio.
And then as Howard just wanted to make sure I understood. What you said on the the reduction the 20 million reduction I think you called out $11 million.
Kind of related to auto and was that 3 million on the services side and 8 million on the software side is that how that broke down.
Yeah.
On an overall basis, it's a little more on the software than on the services for Q4.
Yes, if you'd have a.
3 million is more on an annual number on the services side.
As 11 million.
Is really that the total.
Pipeline kind of reduction for Q4.
Probably pack about 10 software anyone and services for the quarter.
Thanks again for US Q4, as our large is our largest quarter for new and expansion.
So the.
The reduction doesn't mean, we're not still growing but but Q4 as a big growth growth month for all growth quarter for us normally.
Got it and just one one more on on kind of that general topic. Just can you characterize what types of companies are where you are you seeing the hesitation at as did it at the OEM level that kind of tier one supplier at a level below that any.
Any consistency there was that just sort of general.
In general hesitation across a variety of different kind of tiers in the space.
I think I mentioned that somewhere in my prepared remarks for us automotive is like 2300 customer.
Yes about 11000 customers on nowadays and 2300, our automotive.
It's across most of the industry I mean.
If you're if you're in that world, which we are because were in Detroit.
No that theres been a lot of staff cuts.
Theres a lot of.
Very much in general feeling of keeping an eye on on expenses and different things. So it's.
It's something we certainly saying.
Understood. Thanks for taking my questions.
Thank you. Our next question comes from Ken Wong.
Of Guggenheim Securities. Your line is open.
Great. Thanks, Thanks for taking my question guys.
So we don't when I look at your non-GAAP software revenue guide for Q4 at the midpoint 87, eight if were to back out of 4 million that should have hit Q3, I guess I get a growth rate of roughly 5% Im just wondering like is that the right way to think.
About.
The software business going forward under these current conditions or is there something that I might be missing in that particular number that suggests that the growth rate is more robust in future quarters.
No.
And that it's a pretty fair.
Perspective on.
Keep in mind with what we've seen in terms of the very recent movement in the pipeline, we've we've taken a little bit more than than typical conservative approach here.
Based on what we've seen here over the last little bit so.
We're trying to be very thoughtful is as we're reacting in responding to two whats emerged here.
This is the second quarter that we're guiding downward or we're not happy about it but but we think we need to be.
Conservative.
Yeah.
Got it right, but and then.
Well I just want to make is that.
Our businesses we is.
I don't know, if I want to say lumpy, but but under six so six.
Different from under six so five.
Things.
I don't think you can make make estimates based on a one quarter one way or another now we've said Jim's right. We've said you its little hard to extrapolate one quarter to any other given quarter and when you look at what we're projecting.
And guiding to on a non-GAAP basis, you're talking 18% to 19% up from 2018 for for the full year. So.
Phil.
Fairly healthy growth rate number.
I'll I'll mention is we're not guiding today.
So I'm not going to put numbers out but.
We've been.
As you might imagine, we're we're asking similar questions right and so we've gone out to the two our sales organization and without.
As as my Chief revenue Officer says without putting any pressure on anyone yet.
We're getting pretty robust.
Growth numbers for next year out on them so.
People are very very optimistic about things coming into the into 2020, Despite what we're seeing in Q4.
Got it thanks for the color Jim and then maybe another question as I think about earlier Howard you mentioned that Opex has stayed very stable looks like it's growing kind of.
Low twentys year to date any sense for.
And how you guys might might might pace the growth of Opex given given the current climate.
So when you look at our Opex literally from Q1 to Q2, Q3, and non-GAAP Opex number youre going to see that it's going to literally pivot within about 1% of of 70 $374 million quarter to quarter to quarter.
The reason why there's an uptick relative to the prior year is obviously prior year did not include.
The cost that we picked up when we acquired.
Acquired Datawatch sell from the point that we Baselined in Q1, we've been really essentially flat in the variation quarter to quarter is negligible.
So we're going to continue that focused on targeted headcount increases in and enhanced focused on controlling certain non employee expenses as as we've mentioned.
Beyond those at obviously, we've listed as well.
Got it so I guess when I guess again in that.
Right now its grind you kind of kept at around 74 range, but earlier you did mention tighter control of head count reducing non employee related expenses. So should we think of that.
That number coming down by at least going forward I know you give you've given us Fourq you guide, but is that something that.
As you consider the weaknesses in the business right now that.
You would you would manage manage the.
Spend to a level that well below that 74 level.
Okay can I don't want to specifically guide obviously to expenditure levels going forward, but you know.
We're not suggesting that we're going to be having significant headcount reductions we've indicated targeted increases in R&D in tech support areas and in particular will continue to hire and quota carrying account executives just as we have this year.
I think what we're trying to be pretty clear about is.
Thoughtful and diligent around overall costs and not really a significantly different profile going forward than how we're running the business literally today.
Okay perfect. Thanks, a lot Howard.
Thank you. Our next question comes from Matt Hedberg of RBC capital markets. Your line is open.
Thanks, Yeah. This is actually not swanson on for Matt. We've spent a lot of time, obviously talked came out the automotive vertical I was just wondering from more general standpoint is the macro weakness very specific there I mean, some of the indicators should we look at like PM I might suggest that there might be some more general.
General headwinds.
You're seeing anything else many other spaces.
It's probably a little bit more general not just automotive, but it's more pronounced automotive for US again remember were 35% automotive.
So we certainly see that.
Particularly.
Important for us.
But it is a little more general I wouldn't disagree with that.
Thanks, and then one thing that we've traditionally talked about as one of the strength of your of your model vibrant works units since the ability for customers to try additional products.
Is this something you think can help you in automotive vertical when you're trying to explain expand from the mechanical side into some of the other areas that you discussed.
Well, we had our first politics.
I was just selling selling my chief operating officer, we at our first Pollux Webinars. This morning with customers and I was asking the guys had a goal and they said it really weren't great very first question.
People were asking is available under under our units. So yes, I do think it's going to make an impact.
The other place that it makes an impact is just the fact that the product is extremely open so that irrespective, which you can still use and you're able to use the solution something that we really like about other than it has really really nicely integrated simulation.
Multi disciplinary types of simulation, all all built and very fast very very accurate.
But yes the units I think is going to play.
Thank you. Our next question comes from bonds of William Blair. Your line is open.
Thanks, guys. Thanks, taking my question I apologize.
I guess I wanted to touch on some solid really quickly.
I'd love to understand.
I see that product start to accelerate our place in the legacy products.
About investing there, let's give some color on the investments we make Johnson solid let's go to market or product. Thanks, I got one follow up.
Okay, well, you really speaking quickly there, but I think I got it.
I think you've got I think you got it.
Yes, I did so some solid is is definitely accelerating.
I mean.
The product is truly amazing and I tried to give a little sensor that in my prepared remarks.
We do these webinars and we have over at the housing people coming.
We're going to do a lot more of that every customer is.
Excited about it.
We're integrating it that technology into some of our other.
Solutions like inspire and.
Some lam.
And.
I mean, I think that product is.
It's going to be everywhere.
And.
Not justice solution that can work for for the designers if you will become the.
The fact that it can work with really complex.
Designs.
Very very complex assemblies, and you get solutions so rapidly.
I know I've said, it over and over but it's a really game changing product and I think if you start talking to some customers you're going to get the same response.
Yes, we did have the user conference I guess I will touch on Datawatch.
I know that we've been thats death, little bit, but but really I, one such positive customer adoption, there and the pipeline have you seen that expands the manufacturing base.
More on the Panopticon an angle outside.
Manufacturers houses begin to get value out of the streaming and the machine learning IP fair or is that still pretty early as you think about sort of getting that in the hands of your actual coexisting basis. Thank you.
Sure. Thank you so the knowledge studio product definitely.
Actually almost every customer is interested in using the technology.
And there's just a huge amount of interest and being able to to apply machine learning algorithms. We are starting to see interest in the data prep as well.
To be really honest with you I have not seen as much on the panopticon and I think.
Some of that is because we're we're still trying to understand.
Where are the use cases, so that we can bring.
We can bring solutions to customers that make sense.
But on the other side of that we're starting to have wins I I'd just rather when this morning.
And you know at another another bank.
That we have and we're we're seeing the opportunity to to bring all the different products into the banks, whereas before they might use just monarch or just knowledge duty or just panopticon.
We think the units model is going to really start to have an impact coming into the next year and the sales team is finally embracing it.
Theres, just a lot of energy and excitement now that we we finally got all the integration behind us and we've grown the team they have been excited to see the that we're investing.
In the sales organization them and marketing and other things.
For the products that they basically love so.
Feeling really good about that.
Great Thats helpful color. Thank you guys. Thanks, taking my questions.
Yes.
Ladies and gentlemen, this concludes todays conference.
Walter Thank you for participating.
You may now disconnect.
Yes.