Q4 2019 Earnings Call

[music].

Ladies and gentleman. Please standby your conference call will begin momentarily once again, ladies and gentlemen at least down the line.

[music].

Ladies and gentlemen, thank you for standing by to walk through the Altior Engineering Q4, 2019 earnings conference call. At this time all participants are in listen only mode. After the speakers presentation, there will be a question.

After session to ask the question during especially the press star one on your telephone if you require further assistance. Please press star one zero I would now like to do is recipes conference call. The Star Remora CFO you may begin.

Thank you good afternoon, welcome and thank you for attending Altera earnings conference call for the fourth quarter 2019.

I'm Howard more opt chief financial Officer of Altair, and with me on the College, Jim's Kappa, our founder Chairman and CEO.

After market close today, we issued a press release with details regarding our fourth quarter performance and guidance for 2020, which can be accessed on the Investor Relations section of our website at Investor Dot Altera Dot com.

This call is being recorded into replay will be available on our IR website. Following the conclusion of the call.

During today's call, we will make statements related to our business maybe 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 if any subsequent date.

We disclaim any obligation to update any forward looking statements for 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 today.

For 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 FCC as well as other documents that we have filed for 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 for 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.

Thank you Howard and welcome to everyone on the call.

During the fourth quarter, we made significant progress in key areas of our business, including our product offerings customer engagement and go to market activities.

Alters vision is to transform customer decision, making by applying simulation data analytics and optimization, all leveraging high performance computing.

We're excited to be at the center of the market converging around mathematics algorithms and programming automation for companies to gain insight and operate efficiently in a complicated and highly connected world.

First let me discuss our financials.

We're pleased to report stronger than expected total revenue of 123.9 million.

The fourth quarter, driven by an impressive 27% year over year increase in software product revenue.

On a constant currency basis, the software product revenue growth was 28% for the fourth quarter and 23% for the full year.

Altair continues to grow software billings and revenue.

Fast pace relative to the market.

Our recurring software license rate was 87% of product revenue for the year, 1% decline from the previous year, primarily driven by perpetual revenues in the data analytics business.

We expect the transition from perpetual to subscription for a data analytic software sales, which was substantial during 2019.

To continue during 2020.

Toward our overall target recurring software license revenue percentage of close to 90%.

Software related services for the year declined approximately 6% to 35 million.

Client engineering services grew around 2% to 49 million for the year.

Altera remains focused on growing software product revenue and continues to leverage services strategically to drive higher gross margins software product revenue growth.

And expand our relationships with key clients.

Overall services were relatively flat for the year, while software product revenue grew robustly.

Software product revenue grew to 82% of total revenue for the fourth quarter from 78% in the prior year period.

To 80% for the full year from 77% in 2018.

Total billings for the quarter, driven by software product momentum and adjusted for constant currency grew by 20% over the same period, a year ago and 20% for the full year.

Total revenue on a constant currency basis increased by 21% for the fourth quarter and 18% for the full year.

We're pleased that usage of our software portfolio grew by over 20% through 2019 compared to 2018.

We believe Altira continues to gain market share across a broad range of physics, including structures electromagnetics and computational fluid dynamics or cfd.

Our momentum in Cfd continues to be strong.

We saw wins across a number of applications, including household appliances batteries electric motors commercial pumps and gas turbine engines in the fourth quarter.

Acceptance of ultra fluid acts are you FX, our solution for external aerodynamics and automotive continues to grow substantially.

Several customers, including two major automotive companies in Asia are increasing their investments in GPU hardware to run you FX as confidence around this next gen solution matures.

The latest release of you FX includes an important new and more accurate wall model formulation, which expert users are very pleased with.

We are excited that the recently acquired Edem products for bulk material modeling enhance our position in the heavy machinery mining and processing markets and we believe the opportunities for growth are significant.

Especially when integrated in multi physics simulation solutions.

Electromagnetics continues to have strong momentum, especially our flux solutions for electric motor design and FICO for antenna design and wave propagation simulation.

In early January we acquired new facade, which brings leading technology and computational in high frequency electromagnetics to address a wide range of problems such as antenna design and placement radar Cross section analysis automotive vehicle to vehicle and Ada Es and infra red.

Thermal signatures.

We believe this transaction solidifies alters places a world leader in high frequency Electromagnetics, a critical technology to support advanced digital communications, including Fiveg for areas, such as Aiotv cellular networks mobile phones and connected devices.

Vtv radar and radio.

New facade is relevant in the aerospace Marine automotive defense Communications, consumer electronics energy and healthcare industry verticals.

Some solid usage grew dramatically and is beginning to drive meaningful revenue.

Usage of our simulation driven design portfolio under the inspire brand grew well over 50% through 2019.

Some solid integrated within inspire will release in early Q2.

This combination delivers powerful geometry manipulation capabilities to product designers.

We expect this will be very well received design oriented market and that this can be impactful in the SMB market.

Last month Nathan's The International Association for the engineering modeling and simulation community published an exciting benchmark study, noting that there is significant there is a significant trend toward designer oriented analysis tools.

They write quote.

We have started hearing a lot lot of noise about two new designer oriented analysis tools, some solid from L. tear and discovery line from answers and quote.

The study showed very favorable results for some solid.

Noting that quote the correlation is surprisingly good considering that the time consuming process of meshing has been removed.

The software was easy to use and all of the benchmarks evaluated here took a matter of minutes to set up and analyze and quote.

We have deep respect for the independents and technical integrity of the names organization and we'd like to thank them for their careful evaluation of some solid.

We're especially pleased this benchmark confirms publicly the game changing performance of some solid that many customers have discovered and often much more rigorous private benchmarks.

Our confidence in L. tours portfolio of products for data analytics continues to grow and our platform vision for a fully integrated cloud native open and big data ready solution for data preparation data science and visualization is coming together nicely.

We believe this will be important in enterprise level accounts look to managing Dormice datasets share data and work collaboratively across teams.

These organizations mature their data analytics capabilities, we anticipate the move toward leveraging large scale cloud HPC resources will happen at a fast pace.

In addition, our products address the need of expert data scientists as well as business analysts who some in the market have begun to call citizen data scientists.

We believe we have significantly expanded our total addressable market or Tam since we went public in late 2017 and that our data analytics technologies acquired from Datawatch alone expand the potential within our manufacturing customer base and increase our overall Tam.

In Chile.

Al tiers designer oriented simulation solutions, such as inspire and some solid expand our end user potential by adding designers and design engineers, including in small and midsize enterprises as we are able to bring fast accurate and intuitive simulation to the math.

Yes.

The many capabilities added to our solver portfolio.

Both organically.

Organically developed and via acquisition also grow our potential usage in many if not most accounts.

Altira continues to invest for growth with organic investments in sales marketing and technology.

We will actively investigate acquisition opportunities in engineering software and make prudent purchase decisions, considering technology price and addressable market.

We seek technology companies, which bring important new features and functionality to our product portfolios and expertise to our technical population.

There are also many interesting acquisition opportunities in the data analytics market and with our business model now deployed across our data analytics products. We believe we can quickly deliver acquired solutions and delight customers as we have done for years and the engineering simulation market.

Altira strong automotive market software product revenues continued to grow in 2019 at a more moderate pace of between five and 10%.

While aerospace Hi, Tech and electronics drove significantly higher growth rates.

We expect these trends to continue in 2020.

Specific to the automotive sector, we anticipate the overall sector slowdown is likely to persist in 2020, which will likely continue the trend to reduce services revenues.

Software revenues and automotive will continue to grow at a more modest rate at more modest rates than other verticals as we saw in 2019.

As discussed earlier, we are winning new automotive applications, especially in noise reduction.

Computational fluid dynamics and electronics significantly driven by the growth of electric vehicles.

While we remain optimistic about continued growth for our software across all market verticals and geographies.

We do see elevated risks in the economy related to some global market trends.

We are therefore more conservative on 2020 guidance.

The Corona virus situation has kept many workers home, especially in China for extended periods during the beginning of the year and cause some loss of business, including for Altair.

Our team members in China did not work in the office for four weeks.

Like everyone. We hope these global health challenges subside quickly and anticipate that business will generally recover to balance out 2020 performance.

While we do see 2020 as a more subdued macro growth environment. We are very positive about altira is product and sales delivery capabilities.

And confident in our prospects for long term organic and inorganic growth toward being one of the more significant software companies in the enterprise space from a revenue profitability and product impact point of view.

Now I will turn the call over to Howard to provide more details on our financial performance and our guidance for the first quarter and full year 2020 Howard.

Thanks, Jim as a reminder are reporting for 29 team and guidance for 2020 are under assay six IL six as part of the comparative numbers from 2018.

Our seasonal billings patterns, coupled with the treatment of revenue under NSC six centex results in the 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 in our press release.

In prior conference calls, we have noted that changes in certain currencies can have an impact on our revenue expenses and cash flows, especially when those changes occur over relatively shorter time periods are when currency changes are more pronounced overtime.

When we initiated guidance for 2019, we noted that currency shifts were expected to have an adverse impact of between seven and $10 million on revenue and between two and $3 million on adjusted EBITDA for 2019 compared to 2018.

As the year has now concluded currencies did have a negative impact of $9.1 million on revenue and $1.9 million on adjusted EBITDA.

In addition, currencies had a negative effect of $7.8 million on billings.

Accordingly, we believe it is meaningful to measure aspects of our performance on a constant currency basis.

We exceeded our guidance for Q4 provided at the time, we released our Q3 results.

As mentioned at that time, given the feedback from our field organization, we felt it would be appropriate to take a more conservative view of our potential growth expectations for the fourth quarter.

Our fourth quarter results were driven by continuing solid demand for our software products.

Software product revenue reached $101.2 million, an increase of 27% from a year ago, while total revenue equaled $123.9 million representing growth of 20% from the fourth quarter of 2018, both exceeding guidance.

Even adjusting for the approximate $4 million of revenue that shifted to Q4 from Q3 due to 606 requirements mentioned last quarter software product revenue growth would have exceeded 21% in the quarter.

Software related services declined by 11% in Q4 compared to a year ago, primarily impacted by the headwinds in our automotive customer base.

Our strong 2019 results were primarily due to growth in demand for our software products software product revenue reached $366.7 million, an increase of 20% from a year ago, while total revenue equaled $458.9 million representing growth of six.

10% from 2018, both exceeding guidance provided last quarter.

Software related services declined by 6% for 2019 compared to a year ago, primarily impacted by the headwinds and our automotive customer base.

This decline is also aligned with our anticipation that consulting revenue will continue to be relatively flat going forward as our growth strategies are focused on higher margin software product revenue.

Adjusting for the adverse impact of currency fluctuations in Q4, 19 software product revenue grew by an impressive 28% and total revenue grew by 21% compared to Q4 18.

For the 12 month period on a constant currency basis software product revenue grew by 23% and total revenue growth grew by 18% compared to 2018.

As previously discussed acquisition accounting requirements mandated 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.

For 2019, we have included this as an adjustment for non-GAAP revenue and adjusted EBITDA, which we referred to as modified adjusted EBITDA for this specific purpose.

Going forward for comparative purposes. We will include this adjustment within the elements of how we present adjusted EBITDA.

We do not anticipate including acquisition accounting related adjustments for deferred revenues for the Polyone, Doug Dam and new from time to acquisitions as those adjustments would otherwise be insignificant and amount.

Including the impact of the deferred revenue adjustment for Datawatch, our constant currency non-GAAP software product revenue growth exceeded 30% this quarter and 26% for the year.

In the fourth quarter software product revenue increased to over 82% of total revenue up over 400 basis points from 78% last year without any adjustment for currency or acquisition related data points.

Continuing the important long term trend of increasing mix of software product revenue a key driver of expanding our operating margins in the future.

For the full year software product revenue represented 80% of our total revenue up from 77% for the prior year.

We expect this favorable trend to continue into Twentytwenty.

No debt for the year software product revenue as a percent of our software segment eclipse, 91% of segment revenue up over 200 basis points compared to 2018.

Our recurring software license rate that is the percentage of software revenue that as recurring continues to be strong and consistent with our past performance at over 87% a slight decline for the year.

During 2019, we were able to substantially increase the percentage of revenue to recurring revenue streams, we acquired from Datawatch. The slight reduction in our recurring software license rate for 2019 is solely due to the inclusion of the former Datawatch revenue streams into this metric.

Fourth quarter billings were $130.4 million, an increase of 17% from a year ago indicative of the strong growth in our software product business.

Currency shifts also impacted current pilling current period billings negatively by $3.1 million, none at constant currency basis billings increased by 20% for the quarter.

For the year billings were $475.9 million, an increase of over 18% from a year ago, driven by the strong growth in our software product business.

Currency shifts impacted 2019 billings negatively by $7.8 million.

On a constant currency basis billings increased by over 20% for the year.

We tend to view 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 piano results some of which are on a non-GAAP basis.

A reconciliation of GAAP to non-GAAP measures has been provided in the press release, we issued earlier today.

Gross margin in the fourth quarter was 70.2% essentially flat relative to Q4 18, primarily driven by increased hardware sales in Q4, 19 that contribute smaller gross margins and our revenue mix.

On a full year basis gross margin improved to 71.1% compared to prior year gross margin of 70.7% driven by the positive shift in revenue mix to greater software product revenues.

For the quarter non-GAAP operating expenses, which excludes stock based compensation amortization of intangibles and other operating income were $76.8 million.

Non-GAAP operating expenses have remained in a very tight range across our quarters. This year with a minor uptick in Q4 as is typically expected.

Coupled with incremental costs for Polyone dam activities.

Our modified adjusted EBITDA for the quarter equaled $15 million, an increase of 16% from last year driven substantially by the increase in software product revenue above our guidance range.

Our bottom line results were only slightly impacted by a $200000 negative impact from shifts in foreign currency during the quarter compared to last year.

In Q4, we did pick up some minor revenue and incurred expenses related to the acquisitions of Pallete log and dam in excess of revenues realized whoever the magnitude of these inclusions did not significantly impact our results either on the topline for Bottomline.

Modified adjusted EBITDA exceeded our guidance for the year at $48.5 million compared to adjusted EBITDA of $50.2 million a year ago reflective of continuing investments focused on long term growth opportunities along with the impact of the conversion of perpetual.

Revenue streams to recurring revenues beneficial for long term growth.

Turning to our balance sheet, we ended the fourth quarter with $223 million in cash and cash equivalents and $150 million in undrawn capacity on our us revolver.

Moving to our cash flows cash flow from operations in the fourth quarter with an inflow of $1.4 million compared to an outflow of $4.2 million for the fourth quarter of 2018.

We generated cash flow from operations for the year of $31.4 million compared to $36.2 million for 2018.

For the full year, our free cash flow equaled $21.7 million compared to $29.6 million for the prior year.

The decline in cash flow was primarily primarily related to the timing of funding certain us payrolls earlier in the year.

Before I run through guidance expectations for 2020, I would like to offer just a few words on our performance in 2019.

While challenging we have successfully integrated the Datawatch organization.

With great excitement about the team that technology and products and customer acceptance of our units licensing model.

Some solid continues to amaze the breakthrough capability of the technology can be seen in substantially increasing usage, especially after customers. Appreciate the unparalleled combination of model complexity speed and accuracy that can be realized applying this unique solver capability.

Acquisitions of Polyone dam, and new facade continue to expand our technology offerings.

Our outlook is based on entering twentytwenty position to deliver growth in revenue, particularly software product revenue, coupled with maintaining a disciplined approach to our operating costs.

As Jim mentioned, we are entering 2020 with a more conservative view for growth expectations.

As we have noted before we believe that our best measures of growth are based on longer term view, rather than extrapolating one quarter to another.

Of course, we're all paying close attention to the Corona virus situation. However, it is hard to quantify what affects the outbreak may have on our markets for customers.

We expect to continue to strategically invest in certain R&D and technical support areas and selectively expand our sales capacity.

At the same time, we intend to maintain appropriate controls of over other increases in spending with a continued focus on facilities technology travel and consulting.

For the Twentytwenty year as a whole we expect.

Software product revenue of between 395, and $399 million representing growth of 8% to 9% from 2019 software product revenue.

And growth of 5% to 6% over non-GAAP software product revenue.

Total revenue of between 491, and $495 million representing growth of 7% to 8% from 2019 total revenue and growth of 5% to 6% over non-GAAP total revenue from 2019.

Adjusted EBITDA of between 49, and $53 million, representing an increase of over 9% at the high end of the range from modified adjusted EBITDA from 2019.

Free cash flow of between 25 in $30 million.

As to Q1 Twentytwenty our expectations are.

Software product revenue to be between 105, and $107 million representing growth of 2% to 4% from 2019 software product revenue and basically flat over non-GAAP software product revenue from 2019.

Total revenue to be between 129, and $131 million representing growth of 1% to 2% from 2019 and basically flat over non-GAAP total revenue from 2019.

Adjusted EBITDA of between 20, and $22 million, representing a decrease of $4 million to $6 million compared to modified adjusted EBITDA from Q1 2019.

Further detailed guidance tables had been provided in the press release issued after close of market today.

Some comments as to our tax rate for 2020.

We incurred taxes and basically two components taxes based on our earnings across our global footprint and taxes tied to certain remittances from non us jurisdictions back to the us call tax with held at source.

Taxes with held it sorts would ordinarily be available to offset our us income taxes via foreign tax credits.

Due to our evaluation allowance position in the us for taxes, we're not able to reflect that potential offset of tax with held at source.

These taxes currently approximate $6 million annually and represent part of our cash tax obligations.

In addition to these taxes, which we expect to incur in Twentytwenty, regardless of our pre tax income.

The tax rate applied to our pretax income is expected to be about 30%.

We believe that the investments we have made and successes we have achieved so far provide a strong foundation to support long term growth and thereby expanding operating margins as we look forward.

With that operator can we now open the call to questions.

Ladies and gentlemen, if you have a question or comment at this time. Please press the star than the one key on your touched on telephone. If your question has been answered your single yourself from the Q. Please press the pound keep our first question comes from Rich Valera with Needham Company.

Thank you.

Just wanted to get a little more color on the auto weakness and what you think is driving that and from your perspective is it something you can address on the product to the sales side or is it purely macro and then you said you think thats going to persist through.

Through this year I mean, what's your sense of when that May be turns you know when do we maybe get back to some kind of normalized growth rate in oil I know, that's a tough one but bigger Alaska.

Okay. So.

Hi, rich.

Jim.

So yes, I mean, I think it's primarily macro and automotive is a somewhat cyclical businesses you know.

Typically this cycle down as a year to 18 months or low limits starts to rise back out.

For us, we're still growing and automotive I want to make that Paul.

Sure.

It's just not growing as fast as those.

The other other all.

Here verticals for also grew if you look or are growing 234 times faster depending on the vertical you talk about.

And so primarily macrilen in my estimation I know, maybe some others are saying get from but.

The reality is.

The reality.

It's not product, we're we're rock solid on product.

Fair enough.

You mentioned.

20% solver usage growth. Okay can I want first I was curious what time period was that for was that for Fourq you were for the whole year.

And then can you give us any clue on how that translates into revenue growth.

Yes so.

It's over 20% on its own.

2019 versus 2018 actually.

You know, there's there's a little bit of a lag I, we've talked about before usage climbs for us.

And then we tend to see revenue coming.

As a follow on to that and we are seeing that actually if you look I mean, our organic growth last year was over.

It was double digit basically was over 10% even into low teens.

And.

We're we're actually feeling very very positive about the momentum we have.

The products that we.

And frankly, the long term prospects auto yup.

Im just saying it as it is actually which is frankly speaking just.

The auto industry is so.

As in its in its lower moments here right now probably will be for all of this year.

We're still going to grow though we're still seeing gains as I think I said in my prepared remarks.

In CMT and electromagnetics.

The some solid stuff is taken off like like a shot in automotive on on the designer desktops for example, as well so.

You know there's been a lot of talk about legacy versus new.

The vast majority of simulation spend is still what people are referring to is legacy.

And.

That's all very very healthy still I mean, these companies see the replacement of test with simulation as the future and really cost saving for loan.

But but there is there was a reality about about these cycles.

Got it one more if I could on Datawatch.

Just wondering if you could quantify the headwind to revenue headwind you saw from the ratable transition in 19, and what you expect on the ratable transition this year, presumably less and then if you could just give us kind of the state of the Union for Datawatch, how you feel about that heading into this year and if you expect.

Growth from that business.

I can probably let Howard address the more specific question on on the impact we are going to see a little more this year, because we're we're continuing to try and move that needle.

And so good we're feeling very positive.

Products about marketing.

Sales.

Definitely had its rob spot through the year last year we.

Really made that that transformation now and we added a lot of sales.

Capacity on the data side, especially through the last quarter.

We come into this quarter with a very significant increasing capacity of course, a lot of those guys are still learning and ramping up.

And that will continue we're going to continue to higher this year actually are our overall sales capacity.

Last year grew almost 25%, but a lot of that came in on that in that last part of the year in the ramp up takes time.

But again, we're feeling very very positive about things.

So as to be.

Revenue headwinds due to the conversion from perpetual to recurring.

Yes high single digit million, so how about 7 million or so.

In terms of where we're entering 2020, having done more successful than we expected in terms of that conversion in the adoption of recurring revenue model rich.

Really not.

Yes.

We're not talking about we won't be talking about revenue headwinds any further in terms of that particular revenue stream.

Certainly still more work to do there, but it will not be anywhere near a significant.

Through 2020 as it wants to 29.

So I don't disagree my CFO, but but we move probably from under 60%.

Our rates or maybe 75, all night and our goal is to get closer to 90.

So we're probably halfway there so proportional impact no that's fair enough.

Okay, but it just put on some some.

Got it thanks for taking my question gentlemen.

Thank you.

Our next question comes from King, Ken Wong with Guggenheim.

Hi, great. Thanks for taking my question.

So as we look at the outperformance in Q4, which good good quarter on your guys. Just the happened then compare that to you know again softness in Q1.

Can you guys maybe talk about maybe some of those dynamics was there any pull forward and then as we think about Q1 typically like you said, it's you're you're kind of seasonally strongest quarter.

Yes, what gives you confidence that the rest of the year kind of picks up the slack and when thinking about your full year guide.

So we did not pull anything forward actually on them. So that that's not what we've done here.

Just just was a strong quarter for us we were pretty conservative going into into Q4 quite frankly and.

We're we're sort of learning a little bit and that'll be a public company in and we've decided to take a pretty conservative stance going forward.

Why is Q1.

Like most of that has to do with claiming.

Actually the pipeline through the years very very solid for us we're feeling good about about the pipeline.

And it it's mostly just the timing impact Q1 is not our biggest growth quarter by the way I'm not sure.

And then impression.

Typically Q4 is the biggest.

But year by year, it does sometimes changing and the timing of when we see deals coming in is a big part of.

Why we're seeing things this way.

Got it.

And then maybe a follow up.

You guys mentioned.

M&A being something that you guys are still going to be very focused on I guess in light of the macro I mean, how should we think about the willingness to continue to pursue M&A is that dial back and macro or you guys viewed as more opportunistic when when things get a little little shakier.

So I think you'll notice that most of the M&A, we're doing is tuck in some.

You know technology.

Acquisitions.

I do think that that.

A little bit of down market can create some opportunities and we're just constantly we have a very very good sense of the technologies that we're looking to add the features in the functions that were trying to bring into our technology.

And Thats how were out.

Our out operating I did talk about the data analytics piece, a little bit because.

You know frankly speaking, it's a very very large Tam when you look across in other many many features and functions, we really do a subset of those today with data preparation and prescriptive analytics and the.

Visualization stuff that we do specialty the livestream stock.

But there is there's opportunities to bring in some other functions and features as well on but most of it's for US is relatively small.

And I do think that a little bit of a down environment can create some opportunities. So we're still going to keep looking.

Probably a little go shading.

Got it and then maybe one last one just clarification. So you mentioned, obviously Q4 very conservative heading in and you guys are still kind of finding kind of finding how you guys are forecasting as a public company should we view.

I have a similar approach to how you guys modeled out fiscal 2000.

We certainly you know we're guiding initially on the basis.

We think is appropriate realistic considering where we are in the cycle in some of the unknown.

And such so I would say, yes, we're conservative.

In terms of our view of 2020.

It's a pretty there's a lot of uncertainties in our view.

Coming into this year on the macro side primarily.

Yeah.

Yes, so we.

We've tried to consider that as best we can.

Perfect I appreciate it guys I'll pass it to the next is an excellent.

Our next question comes from Jackson Adder with JP Morgan.

Thanks, Good evening guys, thanks segments questions.

First one is actually R&D expense side, sending Howard last quarter, you were kind of signaling 2020 year or looking ahead, there maybe some tightening tightening of expenses.

You mentioned it a little bit in your prepared remarks, but now that now that the fourth quarter and shaped up a little bit better than obviously, a lot better and maybe was expected.

How should we think about expense growth and when you talk about targeting sales hiring.

Targeted sales hiring I should say.

Where do you think you'll be targeting.

So were our perspective on managing expenses going into 2020 is is.

Still want to.

Being pretty tight and careful around.

Where we are expenditures going where growth would go or head count additions. We go as we've been very clear very specific targeted hiring in R&D and continuing to add quota carrying or sales capacity.

That continues and we we've identified some areas that we've spoken about.

Where we're going to continue to focus on being very.

Thoughtful and careful I'm, not suggesting we won't be spending a nickel more but.

We're going to be very.

Controlled in our view of expense.

Growth as we navigate through 2020, we think thats absolutely prudent.

Considering where we are in some of the uncertainties that we see out there.

We do think a lot of in our bigger investing is a little bit more behind us and as we continue to scale the business over the next couple of years.

There's there's a lot of opportunity to grow these margins along.

Okay.

Great and then a follow up.

On usage, so the 20% solver growth in usage year over year or greater than 20% Thats great how about.

The bread and butter, the modeling and visualization.

How is that usage year view.

So I don't usually break it out but it's.

I'm going to compete should I don't even know by shifted at this point.

But it's it's more moderate then then.

Than that it's.

It's still double digit actually I'm going to say barely double digit, but it's still very healthy.

So for us.

One of the big things side.

It is is that our modeling and visualization solution has had a pretty big breakthrough over the last.

Several years in the aerospace market.

We have displaced another vendor.

In the major play in in the major players across the world and.

They've been.

We've been basically training and moving on offer the other vendor onto our solution.

And that's that's really a big big deal in our world because once we on the desktop we have the opportunity.

To move into other things as well so most of that transition has.

Has occurred at Theres still probably another year or so of the transition, but those decisions were made a couple of years ago now.

And.

And that's primarily modeling visualizations, so that's continuing to move forward pretty nicely for us.

That's great. Thank you for the back into transparency, Nick It's wonderful. Thank you.

Yes.

Our next question comes from Brian Essex from Goldman Sachs.

Hi, Good afternoon. Thank you for taking my question I guess, maybe one easy one and 101.

You need for the easy one on the Datawatch I think you successfully integrated that business what are the next steps for that business and.

What's left on the integration side, whether its.

Highly log board discrete element method.

Business that you brought on.

That we might.

Be able to expect in both in terms of expenses and then scalability across your platform.

Mm, 100% sure I understood. Your question, we're right, where you mean, adding about datawatch in particular, because then yes.

Yes.

Yes, so that.

Just in general with the acquisition so Datawatch what's next.

Our all the changes Don is it now.

Point, where you're scaling sales reps across that business in that for the new acquisitions, what's left to go.

Okay, obviously, datawatch a whole different scale.

On every level for us so.

What we're doing as we're focused on product.

I talked a little bit about it in my prepared remarks, we are.

We are basically investing significantly in in this completely integrated platform.

Datawatch has a very very strong offering and pure data preparation under the monarch brand a very strong prescriptive analytics as a solution that basically lets you build models for machine learning.

Called knowledge studio and basically the best in the World I don't think many would argue for real time data streaming use by buying Blaine mainly used in one bank trading desks.

Bringing all that together most of those are our desktop solutions were bringing all that together in a purely cloud native solution.

They have already done some work on that before the acquisition was made but we've done some restructuring there we put a lot more resources on that.

And.

And frankly speaking we are.

We have a lot more experienced since then they do a developing these types of enterprise applications.

Where you really have to think about security in a lot of other elements. So.

That is really coming together in a nice way and we expect to to be able to support.

In a much more open way.

You know the world that world basically so on the product. So we're feeling great about where we're going with product.

We've had lots of discussions with customers and.

Makes a lot of sense you have a whole lot of people, who really want to continue to have a desktop solution, but you have a.

Whole class of large enterprise customers that are really looking for this cloud native.

Fully integrated solution.

So thats coming along well.

On the sales and technical support side, we've had to build out.

Operations around the world, we they had a lot of focus in the northeast Franklin and Canada.

And and also in London basically.

So we've we've put some effort into building that out.

And I'm talking about their traditional markets you know banking financial services. So we've built out and several other markets now.

And continuing to get that going and then of course, we're beginning to.

So.

Both to the engineering as well as to the.

[music].

Office finance in our existing.

Customer accounts with some cross selling and other.

So.

I think for Datawatch, where there's plenty of work to do it on means that imply there isn't but.

It's really really big opportunity of the Tam I hesitate to talk Tam I was looking at what one of the other players in this space talks about for Tam and I noticed that they talk about 48 billion plus another 24 billion.

I don't I don't think.

It's that big honestly for the the things that we specifically and that company by the way also plan.

But but it's very significant it is probably around the same sizes, the simulation and analytics market.

So it's a big opportunity.

The answer your EDAM, where are we with EDAM.

That kind of acquisition for the Eatem acquisition is is which happened what two months ago.

Is nearly integrated for us it's already.

Most of that integration is done that's that's like we do that with our eyes closed.

Because of you know because of the experience that we have as an organization to do that.

So that one's done poly is a little more complicated its they were based in Korea, and so we have a little bit more work to do different reasons than datawatch, but.

Great products, but but we have to.

We have a little bit more work to do to bring some people on in.

And in some other regions and to get that really gone.

But we're very optimistic about where that's going to go that's a big opportunity actually for us great technology.

Great Thats helpful scraped detail and maybe just quickly for Howard just to touch on the guidance.

I guess, if you look at the macro and obviously there are a lot of unknowns, but if we think about.

Kroner virus and how that might impact your business what are the and obviously you can't quantify it but but I am I guess looking more for.

What are the areas that you have your eyes open for where you might see it in their businesses that uptick in utilization at customers that might not be.

At their offices is it the pipeline as customers might throttle back on their budgets under the uncertainty are there how do how did you approach the full year guidance and what's what's kind of underlying assumptions.

So Brian we did not put a precise percent too I would say the corner virus question because there's just the obviously so many unknowns about.

About the environment there.

What we did as we as we were looking at our pipeline and trying to assess.

From a conservative perspective, what we.

Broadly thought the impact could be.

We took those considerations into effect, we have the benefit of of understanding what happened during the period, where we nobody was working in our China office, and so we've seen a little bit, but it but it's hard to extrapolate that to the rest of the world.

[music].

So we.

We tried to set forth a conservative perspective, and absolutely we like everybody else is watching literally day by day.

In terms events that are unfolding.

Yes.

Yes that we can do that if I could could answer that I mean, if your long term investor and I get that not everybody is heavier longer mr. Andrew.

In our company.

So to me.

It really shouldn't matter with what goes on for two or three or whatever quarters if.

The virus really has a big impact whatever I mean, the prospects for our business long term.

We are extremely extremely strong.

When you go out whatever five years from now on.

We're targeting to go over 1 billion revenues and just a really.

Significant company in the enterprise software space and there is nothing really between us and that.

Maybe there's a blip in here or there I can affect what you know.

At least buys.

But just in general we tried to be.

Service driven.

Thanks for this year.

Okay fair enough. Thank you very much.

Thank you.

Next question comes from Bob uncertainty with William Blair.

Hey, guys. This is Don Decker Encore wrapper on appreciate you taking your questions.

Two quick ones from US I guess, just real briefly I mean, we touched on electromagnetic CFPB.

Ultra fluid X a lot of these early stage.

Product in the portfolio.

Looking at 2020.

I mean are these are starting to see some meaningful impact I think you mentioned on solid.

Start to see that then contributing more to total revenues throughout the year on that as they look at kind of the opportunity in some of these other markets.

We continue to see that uptick having a larger impact or is that still.

On the on the horizon.

So that I always get asked that question as some solid contributing meaningfully.

To revenue and Thats why I think.

By the end of last year, we're starting to see but the answer is yes, and I think when you look at the rate of growth there right I hesitate to say with the rate of growth as it's that big.

When you look at the rate of growth. It is going to contribute meaningfully what is meaningfully mean I'm not going to site.

But it is it is starting to clearly contribute meaningfully to our business.

I think thats, just kind of continue to grow through this year and the next.

Several years probably.

[music].

Customers Love It I mean, it's.

It's that good.

And the other products I didn't pick up on which were like like Paul X. I don't think pollux will contribute meaningfully.

Yes, it will contribute.

Yeah.

And then not meaningful is but it will be less 1% probably in 2020.

At this point.

I don't know, which other ones you were talking about there.

They're all they're all different obviously.

No that's great and I appreciate the additional color and then I guess, just one last one too I know a lot of focus kind of this year was on.

The new sale, we talked on sales hiring, but additionally, some initiatives kind of building around processes for customer engagement kind of improving go to market things like that.

Can you kind of.

Dig a little deeper I guess on how this is kind of initially tracking what steps are you putting in place and how is it kind of trended versus your expectations. Thanks.

Yes, I mean, I think we've been doing a lot more trend that talked about before we've been doing a lot more training.

Across our sales organization.

We've invested a lot in inside sales and business development and continuing to do to do that we told you that we added like 25%.

Capacity in the last year, but we will not continue at that pace. This year, we don't think we need to it it will be substantially slowed down from that but over the long term I think we said over five years, when we IPO and we're going to shoot around 15% a year.

From a sales capacity point of view and.

Other things Richard just trying to get a lot more efficient about how we use all of our resources. So we are turning the guns. If you will on operating.

Issuances.

Both how we.

Support customers all those things.

Right and I think we have a lot of.

A lot of innovation.

We are pretty innovative company and so we try and be innovative and everything that we do.

Thats great. Thank you guys appreciate it.

Again, ladies and gentlemen, if you have a question or comment at this time. Please press the star than the one key on your touched on telephone.

Our next question comes from Andrew debt compared with Brian Bird.

Yes. Thanks for taking my question, maybe could you comment on your EBITDA margin for this year and how that relate to your target I guess, a three years out I mean, you still feel confident about that 20% number.

Yes, we do.

When you take a look at the investments that we've made the turning point that were at notwithstanding.

I would say a conservative view heading into 2020.

With our ability to support this business has a much larger business from our overall gionee perspective, and some of the other leverage points and Jim's comment about.

Focused on an operating efficiencies.

In other areas as well.

Coupled with the unmistakable fact that as software revenues grow it started off 6% close margin will continue to generate lift there.

We see a nice path towards our long term target over the three.

That's helpful and maybe just a point of clarification Howard in terms of the revenue guidance you gave out was that non non gap or gap.

I wasn't clear on that and those remarks.

So for 2020 there'll be no difference between GAAP or non-GAAP, because we will not have any acquisition accounting related deferred revenue.

Right, but if you could give out 8% to 9%.

Our I'm sorry.

Im sorry, you said, 8% to 9% was the number for that for next year for the Sharon.

In terms of revenue growth.

Yes.

Okay, great. Thanks.

And I'm not showing any further first of the somewhat from the call back over to management for closing remarks.

Okay. So thank you very much appreciate everybodys interest and Altair and.

Thank you very much.

Ladies and gentlemen. This concludes todays presentation you may now disconnect and have a wonderful day.

[music].

[music].

[music].

Ladies and gentlemen, thank you were standing by to walk through the Altira Engineering Q4, 2019 earnings conference call. At this time all participants are in listen only mode. After the speakers presentation there'll be a question answer session to ask the question during especially the press star one on your telephone if you require further assistance. Please press star one zero.

I would now like to do Cirrhosis conference call. The Starwood moral CFO you may begin.

Thank you good afternoon, welcome and thank you for attending Altera earnings Conference call for the fourth quarter 29 team.

How would more actually financial officer of Altair and with me on the Collins jokes cap on our founder Chairman and CEO.

After market close today, we issued a press release with details regarding our fourth quarter performance and guidance for 2020, which can be accessed on the Investor Relations section of our website at Investor Dot Altera Dot com.

This call is being recorded and a replay will be available on our IR website. Following the conclusion of the call.

During today's call will make statements related to our business maybe 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 if 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 today.

For 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 FCC 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 for 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.

Thank you Howard and welcome to everyone on the call.

During the fourth quarter, we made significant progress in key areas of our business, including our product offerings customer engagement and go to market activities.

Altos vision is to transform customer decision, making by applying simulation data analytics and optimization, all leveraging high performance computing.

We're excited to be at the center urban market converging around mathematics algorithms and programming automation for companies to gain insight and operate efficiently and a complicated and highly connected world.

First let me discuss our financials.

We're pleased to report stronger than expected total revenue of 123.9 million.

The fourth quarter, driven by an impressive 27% year over year increase in software product revenue.

On a constant currency basis, the software product revenue growth was 28% for the fourth quarter and 23% for the full year.

Healthcare continues to grow software billings and revenue at a fast pace relative to the market.

Our recurring software license rate was 87% of product revenue for the year, 1% decline from the previous year, primarily driven by perpetual revenues in the data analytics business.

We expect the transition from perpetual to subscription for our data analytic software sales, which was substantial during 2019.

To continue during 2020.

Toward our overall target recurring software license revenue percentage of close to 90%.

Software related services for the year declined approximately 6% to 35 million.

Client engineering services grew around 2% to 49 million for the year.

Altera remains focused on growing software product revenue and continues to leverage services strategically to drive higher gross margin software product revenue growth.

And expand our relationships with key clients.

Overall services were relatively flat for the year, while software product revenue grew robustly.

Software product revenue grew to 82% of total revenue for the fourth quarter from 78% in the prior year period.

To 80% for the full year from 77% in 2018.

Total billings for the quarter, driven by software product momentum and adjusted for constant currency grew by 20% over the same period, a year ago and 20% for the full year.

Total revenue on a constant currency basis increased by 21% for the fourth quarter and 18% for the full year.

We're pleased that usage of our solver portfolio grew by over 20% through 2019 compared to 2018.

We believe Altira continues to gain market share across a broad range of physics, including structures electromagnetics and computational fluid dynamics or CF day.

Our momentum and Cfd continues to be strong.

We saw wins across a number of applications, including household appliances batteries electric motors commercial pumps and gas turbine engines are the fourth quarter.

Acceptance of ultra fluid acts are you FX, our solution for external aerodynamics and automotive continues to grow substantially.

Several customers, including two major automotive companies in Asia are increasing their investments in GPU hardware to run you FX has confidence around this next gen solution matures.

The latest release of you FX includes an important new and more accurate wall model formulation, which expert users are very pleased with.

We are excited that the recently acquired Edem products for bulk material modeling enhance our position in the heavy machinery mining and processing markets. We believe the opportunities for growth are significant.

Especially when integrated and multi physics simulation solutions.

Electromagnetics continues to have strong momentum, especially our flux solutions for electric motor design and FICO for antenna design and wave propagation simulation.

In early January we acquired new facade, which brings leading technology and computational in high frequency electromagnetics to address a wide range of problems such as antenna design and placement radar Cross section analysis automotive vehicle to vehicle and a Dallas and infra red.

Thermal signatures.

We believe this transaction solidifies alturas place as a world leader in high frequency Electromagnetics, a critical technology to support advanced digital communications, including Fiveg for areas, such as Aiotv cellular networks mobile phones and connected devices.

Viavi radar and radio.

New facade is relevant in the aerospace Marine automotive defense Communications, consumer electronics energy and healthcare industry verticals.

Some solid usage grew dramatically and is beginning to drive meaningful revenue.

Average of our simulation driven design portfolio under the inspire brand grew well over 50% through 2019.

Some solid integrated within inspire will release in early Q2.

This combination delivers powerful geometry manipulation capabilities to product designers.

We expect this will be very well received design oriented market and that this can be impactful in the SMB market.

Last month nave.

The International Association for the engineering modeling and simulation community published an exciting benchmark study, noting that there is significant there is a significant trend toward designer oriented analysis tools.

They write quote.

We have started hearing a lot lot of noise about two new designer oriented analysis tools, some solid from Altair and discovery life from adds us and quote.

The study showed very favorable results for some solid.

Loading that quote the correlation is surprisingly good considering that the time consuming process of meshing.

Has been removed.

The software was easy to use and all of the benchmarks evaluated here took a matter of minutes to set up and analyze and quote.

We have deep respect for the independents and technical integrity of the names organization and we'd like to thank them for their careful evaluation of some solid.

We're especially pleased this benchmark confirms publicly the game changing performance of some solid that many customers have discovered and often much more rigorous private benchmarks.

Our confidence in L. theres portfolio of products for data analytics continues to grow and our platform vision for a fully integrated cloud native open and big data ready solution for data preparation data science and visualization this coming together nicely.

We believe this will be important enterprise level accounts, who look to managing normal datasets share data and work collaboratively across teams.

These organizations mature their data analytics capabilities, we anticipate the move toward leveraging large scale cloud HPC resources will happen at a fast pace.

In addition, our products address the need of expert data scientists as well as business analysts who sell in the market have begun to call citizen data scientists.

We believe we have significantly expanded our total addressable market or Tam since we went public in late 2017 and that our data analytics technology has acquired from Datawatch alone expand the potential within our manufacturing customer base and increase our overall Tam.

In Chile.

Our peers designer oriented simulation solutions, such as inspire and some solid expand our end user potential by adding designers and design engineers, including in small and midsize enterprises as we're able to bring fast accurate and intuitive simulation to the math.

Yes.

The many capabilities added to our solver portfolio.

Both organically.

Organically developed and via acquisition also grow our potential usage in many if not most accounts.

Healthcare continues to invest for growth with organic investments in sales marketing and technology.

We will actively investigate acquisition opportunities in the engineering software and make prudent purchase decisions considering technology price and addressable market.

We seek technology companies, which bring important new features and functionality to our product portfolios and expertise to our technical population.

There are also many interesting acquisition opportunities in the data analytics market.

With our business model now deployed across our data analytics products. We believe we can quickly deliver acquired solutions and delight customers as we have done three years and the engineering simulation market.

Altira strong automotive market software product revenues continued to grow in 2019 at a more moderate pace of between five and 10%.

While aerospace Hi, Tech and electronics drove significantly higher growth rates.

We expect these trends to continue in 2020.

Specific to the automotive sector, we anticipate the overall sector slowdown is likely to persist in 2012 today, which will likely continue the trend to reduce services revenues.

Software revenues and automotive will continue to grow at a more modest rate at more modest rates than other verticals as we saw in 2019.

As discussed earlier, we are winning new automotive applications, especially in noise reduction.

Computational fluid dynamics and electronics significantly driven by the growth of electric vehicles.

While we remain optimistic about continued growth for our software across all market verticals and geographies.

We do see elevated risks on the economy related to some global market trends.

We are therefore more conservative on 2020 guidance.

The Corona virus situation has kept many workers home, especially in China for extended periods during the beginning of the year and cause some loss of business, including for Altair.

Our team members in China did not work in the office for four weeks like everyone. We hope these global health challenges subside quickly and anticipate that business will generally recover to balance out 2020 performance.

While we do see 2020 as a more subdued macro growth environment. We are very positive about alturas product and sales delivery capabilities and confident in our prospects for long term organic and inorganic growth toward being one of the more significant software companies in the entered.

Price space from a revenue profitability and product impact point of view.

Now I will turn the call over to Howard to provide more details on our financial performance and our guidance for the first quarter and full year 2020 Howard.

Thanks, Jim as a reminder are reporting for 2019 and guidance for 2020 are under assay six IL six as part of the comparative numbers from 2018.

Our seasonal billings patterns, coupled with the treatment of revenue under assay six context results in the 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 six six basis in our press release.

In prior conference calls, we have noted that changes in certain currencies can have an impact on our revenue expenses and cash flows, especially when those changes occur over relatively shorter time periods are when currency changes are more pronounced overtime.

When we initiated guidance for 2019, we noted that currency shifts were expected to have an adverse impact of between seven and $10 million on revenue and between two and $3 million on adjusted EBITDA for 2019 compared to 2018.

As the year has now concluded currencies did have a negative impact of $9.1 million on revenue and $1.9 million on adjusted EBITDA.

In addition, currencies had a negative effect of $7.8 million on billings.

Accordingly, we believe it is meaningful to measure aspects of our performance on a constant currency basis.

We exceeded our guidance for Q4 provided that the time, we released our Q3 results.

As mentioned at that time, given the feedback from our field organization, we felt that would be appropriate to take a more conservative view of our potential growth expectations for the fourth quarter.

Our fourth quarter results were driven by continuing solid demand for our software products.

For product revenue reached $101.2 million, an increase of 27% from a year ago, while total revenue equaled $123.9 million representing growth of 20% from the fourth quarter of 2018, both exceeding guidance.

Even adjusting for the approximate $4 million of revenue that shifted to Q4 from Q3 due to six six requirements mentioned last quarter software product revenue growth would have exceeded 21% in the quarter.

Software related services declined by 11% in Q4 compared to a year ago, primarily impacted by the headwinds in our automotive customer base.

Our strong 2019 results were primarily due to growth in demand for our software products software product revenue reached $366.7 million, an increase of 20% from a year ago, while total revenue equaled $458.9 million representing growth of 16.

Percent from 2018, both exceeding guidance provided last quarter.

Software related services declined by 6% for 2019 compared to a year ago, primarily impacted by the headwinds and our automotive customer base.

This decline is also aligned with our anticipation that consulting revenue will continue to be relatively flat going forward as our growth strategies are focused on higher margin software product revenue.

Adjusting for the adverse impact of currency fluctuations in Q4, 19 software product revenue grew by an impressive 28% and total revenue grew by 21% compared to Q4 18.

For the 12 month period on a constant currency basis software product revenue grew by 23% and total revenue grew by 18% compared to 2018.

As previously discussed acquisition accounting requirements mandated an 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.

For 29 team. We have included this as an adjustment for non-GAAP revenue and adjusted EBITDA, which we referred to as modified adjusted EBITDA for this specific purpose.

Going forward for comparative purposes. We will include this adjustment within the elements of how we present adjusted EBITDA.

We do not anticipate including acquisition accounting related adjustments for deferred revenues for the poly log.

And new France on to acquisitions as those adjustments would otherwise be insignificant and amount.

Including the impact of the deferred revenue adjustment for Datawatch, our constant currency non-GAAP software product revenue growth exceeded 30% this quarter and 26% for the year.

In the fourth quarter software product revenue increased to over 82% of total revenue up over 400 basis points from 78% last year without any adjustment for currency or acquisition related data points, continuing the important long term trend of increasing mix of software product revenue.

A key driver of expanding our operating margins in the future.

For the full year software product revenue represented 80% of our total revenue up from 77% for the prior year.

We expect this favorable trend to continue into Twentytwenty.

Note that for the year software product revenue as a percent of our software segment eclipse, 91% of segment revenue up over 200 basis points compared to 2018.

Our recurring software license rate that is the percentage of software revenue that as recurring continues to be strong and consistent with our past performance at over 87% a slight decline for the year.

During 2019, we were able to substantially increase the percentage of revenue to recurring revenue streams, we acquired from Datawatch. The slight reduction in our recurring software license rate for 2019 is solely due to the inclusion of the former Datawatch revenue streams into this metric.

Fourth quarter billings were $130.4 million, an increase of 17% from a year ago indicative of the strong growth in our software product business.

Currency shifts also impacted current pellet current period billings negatively by $3.1 million, none at constant currency basis billings increased by 20% for the quarter.

For the year billings were $475.9 million, an increase of over 18% from a year ago, driven by the strong growth in our software product business.

Currency shifts impacted 2019 billings negatively by $7.8 million.

On a constant currency basis billings increased by over 20% for the year.

We tend to view 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 PML results some of which are on a non-GAAP basis.

A reconciliation of GAAP to non-GAAP measures has been provided in the press release, we issued earlier today.

Gross margin in the fourth quarter was 70.2% essentially flat relative to Q4 18, primarily driven by increased hardware sales in Q4 19 that contribute smaller gross margins in our revenue mix.

On a full year basis gross margin improved to 71.1% compared to prior year gross margin of 70.7% driven by the positive shift in revenue mix to greater software product revenues.

For the quarter non-GAAP operating expenses, which excludes stock based compensation amortization of intangibles and other operating income or $76.8 million.

Non-GAAP operating expenses have remained in a very tight range across our quarters. This year with a minor uptick in Q4 as is typically expected.

Coupled with incremental costs for Polyone down activities.

Our modified adjusted EBITDA for the quarter equaled $15 million, an increase of 16% from last year driven substantially by the increase in software product revenue above our guidance range.

Our bottom line results were only slightly impacted by a 200000 dollar negative impact from shifts in foreign currency during the quarter compared to last year.

In Q4, we did pick up some minor revenue and incurred expenses related to the acquisitions of Polyone and dam in excess of revenues realized.

However, the magnitude of these inclusions did not significantly impact our results either on the topline for Bottomline.

Modified adjusted EBITDA exceeded our guidance for the year at $48.5 million compared to adjusted EBITDA of $50.2 million a year ago reflective of continuing investments focused on long term growth opportunities along with the impact of the conversion of perpetual.

Revenue streams to recurring revenues beneficial for long term growth.

Turning to our balance sheet, we ended the fourth quarter with $223 million in cash and cash equivalents and $115 million in undrawn capacity on our us revolver.

Moving to our cash flows cash flow from operations in the fourth quarter with an inflow of $1.4 million.

Compared to an outflow of $4.2 million for the fourth quarter of 2018.

We generated cash flow from operations for the year of $31.4 million.

Compared to $36.2 million for 2018.

For the full year, our free cash flow equaled $21.7 million compared to $29.6 million for the prior year.

The decline in cash flow was primarily primarily related to the timing of funding certain us payrolls earlier in the year.

Before I went through guidance expectations for 2020, how we'd like to offer just a few words on our performance in 2019.

While challenging we have successfully integrated that Datawatch organization with great excitement about the team the technology and products and customer acceptance of our units licensing model.

Some solid continues to amaze the breakthrough capability of the technology can be seen in substantial increasing usage, especially after customers. Appreciate the unparalleled combination of model complexity speed and accuracy that can be realized applying this unique solver capability.

Positions of Polyone dam, and new facade continue to expand our technology offerings.

Our outlook is based on entering twentytwenty position to deliver growth in revenue, particularly software product revenue, coupled with maintaining a disciplined approach to our operating costs.

As Jim mentioned, we are entering 2020 with a more conservative view for growth expectations.

As we have noted before we believe that our best measures of growth are based on longer term view, rather than extrapolating one quarter to another.

Of course, we're all paying close attention to the Corona virus situation. However, it is hard to quantify what affects the outbreak may have on our markets for customers.

We expect to continue to strategically invest in certain R&D and technical support areas and selectively expand our sales capacity.

At the same time, we intend to maintain appropriate controls of over other increases in spending with a continued focus on facilities technology travel and consulting.

For the Twentytwenty year as a whole we expect.

Software product revenue of between 395, and $399 million representing growth of 8% to 9% from 2019 software product revenue and growth of 5% to 6% over non-GAAP software product revenue.

Total revenue of between 491, and $495 million representing growth of 7% to 8% from 2019 total revenue and growth of 5% to 6% over non-GAAP total revenue from 2019.

Adjusted EBITDA of between 49, and $53 million, representing an increase of over 9% at the high end of the range from modified adjusted EBITDA from 2019.

Free cash flow of between 25 in $30 million.

As to Q1 Twentytwenty our expectations are.

Software product revenue to be between 105, and $107 million representing growth of 2% to 4% from 2019 software product revenue and basically flat over non-GAAP software product revenue from 2019.

Total revenue to be between 129, and $131 million representing growth of 1% to 2% from 2019 and basically flat over non-GAAP total revenue from 2019.

Adjusted EBITDA of between 20, and $22 million, representing a decrease of $4 million to $6 million compared to modified adjusted EBITDA from Q1 2019.

Further detailed guidance tables had been provided in the press release issued after close of market today.

Some comments as to our tax rate for 2020.

We incurred taxes and basically two components taxes based on our earnings across our global footprint and taxes tied to a certain remittances from non us jurisdictions back to the us call tax with held at source.

Taxes withheld it sorts would ordinarily be available to offset our us income taxes via foreign tax credits.

Due to our evaluation allowance position in the us for taxes, we're not able to reflect the potential offset of tax with held at source.

These taxes currently approximate $6 million annually and represent part of our cash tax obligations.

In addition to these taxes, which we expect to incur in Twentytwenty, regardless of our pre tax income.

The tax rate applied to our pre tax income is expected to be about 30%.

We believe that the investments we have made and the successes we have achieved so far provide a strong foundations as important long term growth and thereby expanding operating margins as we look forward.

With that operator can we now open the call to questions.

Ladies and gentlemen, if you have a question or comment at this time. Please press the star than the one key on your touched on telephone. If your question has been answered your some of your so from the Q. Please press the pound.

Our first question comes from Rich Valera with Needham Company.

Thank you.

Just wanted to get a little more color on the auto weakness and what you think is driving that in from your perspective is it something you can address on the product where the sales side or is it purely macro and then you said you think thats going to persist through.

Through this year I mean, what's your sense of when that May be turns you know when do we maybe get back to some kind of normalized growth rate in auto I know thats, a tough one but figure I'll ask.

Okay. So.

Hi, rich.

Hi, Jim.

So yes, I mean, I think it's primarily macro and automotive is a somewhat cyclical businesses you know.

On typically this cycle down as a year to 18 months or low limits starts to rise back up.

For us we're still growing in automotive I want to make that Paul.

Sure.

It's just not growing as fast as those.

The other other all.

Here verticals for all screw if you look or are growing 234 times faster depending on the vertical you talk about.

And so primarily macro and my estimation I know, maybe some others are solid gift from but.

Although the reality is.

The reality.

It's not product, we're we're rock solid on product.

Fair enough.

You mentioned, 20% solver usage growth that's taken I want first I was curious what time period was that for was that for Fourq you are for the whole year.

And then can you give us any clue on how that translates into revenue growth.

Yes so.

It's over 20% on its own.

2019 versus 2018 actually.

There is theres, a little bit of a lag I, we've talked about before usage climbs for us.

And then we tend to see revenue coming.

As a follow on to that and we are seeing that actually if you look I mean, our organic growth last year was over.

It was double digit basically was over.

10% even into low teens.

And.

We're we're actually feeling very very positive about the momentum we have.

The products that we.

And frankly, the long term prospects auto yup.

Im just saying it as it is actually which is frankly speaking just that the auto industry is.

As in its in its lower moments here right now probably will be for all of this year.

We're still going to grow though we're still seeing gains as I think I said in my prepared remarks.

And CMT and electromagnetics.

Some solid stuff is taken off like like a shot in automotive on on the designer desktops for example, as well so.

There's been a lot of talk about legacy versus who.

The vast majority of simulation spend is still what people are referring to as legacy.

And.

That's all very very healthy still I mean, these companies see the replacement of test with simulation as of the future and really cost saving for loan.

But but there is there was a reality about about these cycles.

Got it one more if I could on Datawatch.

Just wondering if you could quantify the headwind to revenue headwind you saw from the ratable transition in 19, and what you expect on the ratable transition this year, presumably less and then if you could just give us kind of the state of the Union for Datawatch, how you feel about that heading into this year and if you expect.

Growth from that business.

I can probably let Howard address the more specific question on on the impact we are going to see a little more this year, because we're we're continuing to try and.

Needle.

And well good we're feeling very positive about products about marketing.

Sales.

Definitely not it's Rob spot through the year last year we.

Really made that that transformation now and we added a lot of sales.

Past city on the data side, especially through the last quarter.

Coming to this quarter with a very significant increase in capacity of course, a lot of those guys are still learning ramping up.

And that will continue we're going to continue to higher this year actually are our overall sales capacity.

Last year grew almost 25%, but a lot of that came in on that in that last part of the year in the ramp up takes time.

But again, we're feeling very very positive about things.

So as to be.

Revenue headwinds due to the conversion from perpetual to recurring.

As high single digit million, so how about 7 million or so.

In terms of where we're entering 2020, having been more successful than we expected in terms of the conversion of the adoption of recurring revenue model rich, we really not.

Yes.

We're not talking about we won't be talking about revenue headwinds any further in terms of that particular revenue stream.

Certainly still more work to do there, but it will not be anywhere near a significant through 2020 isn't washed in 2019.

So I don't disagree in my CFO, but but we move probably from under 60%.

Alright, so maybe 75 alike.

Our goal is to get closer to 90.

So we're probably halfway there so proportional impact.

That's fair enough Yep.

Okay.

Just putting some some.

Got it thanks for taking my question gentlemen.

Thank you.

Our next question comes from King, Ken Wong with Guggenheim.

Hi, great. Thanks for taking my question.

So as we look at the outperformance in the Q4, which good good quarter on your guys as behalf and then compare that to again softness in Q1.

Can you guys maybe talk about maybe some of those dynamics was there any pull forward and then as we think about Q1 typically like you said, it's you're you're kind of seasonally strongest quarter.

Yes, what gives you confidence that the rest of the year kind of picks up the slack.

And when thinking about your full year guide.

So we did not pull anything forward actually on that so that that's not what we've done here.

I just was a strong quarter for us we were pretty conservative going into into Q4 quite frankly.

You know, we're we're sort of learning a little bit and that'll be a public company in and we've decided to take a pretty conservative stance going forward.

Why is Q1.

Like most of that has to do with timing.

Actually the pipeline through the years very very solid for us we're feeling good about about the pipeline.

And it fits mostly just the timing impact Q1 is not our biggest growth quarter by the way Im not sure.

You had that impression.

Typically Q4 is since the biggest.

But year by year, it does sometimes change in and the timing of when we see deals coming in is a big part of.

Why we're seeing things this way.

Got it.

And then maybe a follow up.

You guys mentioned.

Yes, M&A being something that you guys are still going to be very focused on I guess in light of the macro I mean, how should we think about the willingness to continue to pursue M&A is that dial back and macro or you guys do it as more opportunistic when when things get a little little Shakier.

So I think you'll notice that most of the M&A, we're doing as tuck in some.

On technology.

Positions.

I do think that.

A little bit of a down market can create some opportunities and we're just constantly we have a very very good sense of the technologies that were there were looking to add the features and functions that were trying to bring into our technology.

And Thats how were out.

Our out operating I did talk about the data analytics piece, a little bit because.

Frankly speaking that's a very very large Tam when you look across in other many many features and functions, we really do a subset of those today with data preparation and prescriptive analytics and the.

Visualization stuff that we do especially the livestream stock.

There is there's opportunities to bring in some other functions and features as well.

But most of its.

For us is relatively small.

And I do think that a little bit of down environment can create some opportunities. So we're still going to keep looking.

Probably not going on in negotiating.

Got it and then maybe one last one just clarification. So you mentioned, obviously Q4 very conservative heading in and you guys are still kind of finding.

Finding how you guys are forecasting other public companies should we view.

Kind of a similar approach to how you guys modeled out fiscal 2000.

We certainly.

We're guiding initially on the basis of what we think is appropriate realistic considering where we are on the cycle on some of the unknown.

And such so I would say yes.

Conservative.

In terms of our view of 2020.

That's a pretty well over a lot of uncertainties in our view.

On.

Coming into this year on the macro side primarily.

And.

Yes, so we.

We've tried to consider that as best we can.

Perfect I appreciate it guys I'll pass it over the next is an excellent.

Our next question comes from Jackson Adder with JP Morgan.

Thanks, Good evening guys, thanks segments questions.

First one is actually R&D expense side. So I mean, Howard last quarter, you were kind of signaling 2020 are looking ahead, there maybe some tightening tightening of expenses.

And you mentioned it a little bit in your prepared remarks, but now that now that the fourth quarter and shaped up a little bit better than obviously, a lot better than maybe was expected.

How should we think about expense growth and when you talk about targeting sales hiring.

Targeted sales hiring I should say.

Where do you think you'll be targeting.

So were our perspective on managing expenses going into 2020 is is.

I still want to being pretty tight and careful around where we are expenditures going where growth would go our head count additions would go as we've been very clear very specific targeted hiring in R&D and continuing to add point to carrying or sales capacity.

That continues and we we've identified some areas that we've spoken about.

Where we're going to continue to focus on being very.

Thoughtful and careful I'm, not suggesting we won't be spending a nickel more but.

We're going to be very.

Controlled and our view of expense.

Growth as we navigate through 2020, we think thats absolutely prudent.

Considering where we are in some of the uncertainties that we see out there.

We do think a lot of in our bigger investing is a little bit more behind us and as we continue to scale the business over the next couple of years.

There's there's a lot of opportunities to grow these margins along.

Okay.

Great and then a follow up.

On usage, so the 20% sahlberg growth in usage year over year or greater than 20% Thats great how about.

The bread and butter, the modeling and visualization.

How is that usage.

So I don't usually break it out but it's.

I'm going to be sure I don't even know by ship it at this point.

But it's it's more moderate and then.

Than that it's.

It's still double digit actually I'm going to say barely double digit, but it's still very healthy.

So for us.

One of the big things.

Is that our modeling and visualization solution has had a pretty big breakthrough over the last.

Several years in the aerospace market.

Displaced another vendor.

In the major play in in the major players across the world and.

They've been.

We've been basically training and moving on offer the other vendor onto our solution.

And that's that's really a big big deal in our world because once we on the desktop we have the opportunity.

To move into other things as well so most of that transition has.

It has occurred at Theres still probably another year or so of the transition, but those decisions were made a couple of years ago now.

Yeah.

And Thats, primarily modeling visualizations, so that's continuing to move forward pretty nicely for us.

That's great. Thank you for the come to try and financing it so wonderful. Thank you.

Yes.

Our next question comes from Brian Essex with Goldman Sachs.

Hi, Good afternoon. Thank you can take on the question I guess, maybe one easy one and one heartland.

Yes, maybe for the easy one on the Datawatch I think you successfully integrated that business.

What are the next steps for that business and.

What's left on the integration side, whether it's partly log bar discrete element method.

Business that you brought on.

That we might.

Be able to expect in both in terms of expenses and then scalability across your platform.

Mm, 100% sure I understood. Your question, we're right, where you are having about datawatch in particular, because then yes.

Yes.

Yes, so it just in general with the acquisition so Datawatch what's next.

Our all the changes done is it now.

The point, where you're scaling sales reps across that business in that for the new acquisitions, what's left to go.

Okay, obviously, datawatch a whole different scale.

On every level for us so.

What we're doing as we're focused on product.

Talked a little bit about it in my prepared remarks, we are.

We are basically investing significantly in in this completely integrated platform.

Datawatch has a very very strong offering and pure data preparation under the monarch brand a very strong prescriptive analytics as a solution that basically lets you build models for machine learning.

Called knowledge studio and basically the best in the World I don't think many would argue for real time data streaming use by employing mine, mainly used and bank trading desks.

During all that together most of those are our desktop solutions were bringing all that together in a purely cloud native solution.

They had already done some work on that before the acquisition is made but we've done some restructuring there we put a lot more resources on that.

And.

And frankly speaking we are.

We have a lot more experienced since then they do a developing these types of enterprise applications.

Where you really have to think about security and a lot of other elements. So.

That is really coming together in a nice way and.

We expect to to be able to support.

In a much more open away.

The world that world basically so on the product. So we're feeling great about where we're going to product.

We've had lots of discussions with customers and.

It makes a lot of sense you have a whole lot of people, who really want to continue to have a desktop solution, but you have.

Whole class of large enterprise customers that are really looking for this cloud native.

Fully integrated solution.

So thats come along well.

On the sales and technical support side, we've had to build out.

Operations around the world, we they had a lot of focus in the northeast frankly in Canada.

And and also in London basically.

So we we put some effort into building that out.

And I'm talking about their traditional markets channel banking financial services. So we've built out in several other markets now.

And continuing to get that going and then of course, we're beginning to.

So.

Both to the engineering as well as to the.

Office finance in our existing.

Customer accounts with some cross selling and other.

So.

I think for Datawatch, where there's plenty of work to do I don't mean to imply there isn't but.

It's all right really really big opportunity of the Tam I hesitate to talk Tam I was looking at what one of the other players in this space talks about for Tam and I noticed that they talk about 48 billion plus another 24 billion.

I don't I don't think.

It's that big honestly for the the things that we specifically and that company by the way also plan.

But but it's very significant it is probably around the same sizes, the simulation and analytics market.

So it's a big opportunity.

Answer your either where we with the them.

That kind of acquisition for the Eatem acquisition is which happens what two months ago.

Is nearly integrated for us it's already well.

Most of that integration has done that that's that's like we do that with our eyes closed.

Because of.

Because of the experience that we have as an organization to do that.

So that one's done poly is a little more complicated its they were based in Korea, and so we have a little bit more work to do different reasons than datawatch, but.

Great products, but but we have to.

We have a little bit more work to do to bring some people on in.

And some other regions and to get that really gone.

But we're very optimistic about where that's going to go thats, a big opportunity actually for us great technology.

Great Thats helpful scraped detail and maybe just quickly for Howard just to touch on the guidance.

I guess, if you look at the macro and obviously there are a lot of unknowns, but if we think about.

Cronto virus and how that might impact your business what are the and obviously you can't quantify it but but I am I guess looking more for.

What are the areas that you have your eyes open for where you might see it in your business is that upticking utilization at customers that might not be.

At their offices is that the pipeline as customers might throttle back on their budgets under the uncertainty are there how do how did you approach the full year guidance and what's what's kind of underlying assumptions.

So Brian we did not put a precise percent too I would say the corner virus question.

Right Theres, just obviously, so many unknowns about.

About the environment there.

What we did as we as we were looking at our pipeline and trying to assess how from a conservative perspective, what we.

Broadly thought the impact could be.

Took those considerations into effect, we have the benefit of of understanding what happened during the period, where we nobody was working in our China office, and so we've seen a little bit, but but it's hard to extrapolate that the rest of the world.

[music].

So we.

We've tried to set forth a conservative perspective, and absolutely we like everybody else is watching literally day by day.

In terms events that are unfolding.

Yes, that's that's passed that we can do that if I could could add to that I mean, if your long term investor and I get that not everybody is one of your longer term.

Andrew.

In our company.

So to me.

It really shouldn't matter with what goes on for two or three or whatever quarters if.

The virus really has a big impact whatever I mean, the prospects for our business long term or are extremely extremely strong.

When you go out whatever five years from now.

We're targeting to over 1 billion revenues and just a really.

Significant company in the enterprise software space and there is nothing really between us and that.

Maybe there's a blip in here or there I can affect what you know.

Hi, guys.

But just in general we tried to be.

Service revenue.

Thanks for this year.

Okay fair enough. Thank you very much.

Thank you.

Next question comes from Robin sorry, with William Blair.

Hey, guys. This is Don Decker Encore wrapper on appreciate you taking your questions.

Two quick ones from US I guess, just real briefly I mean, we touched on electromagnetic Cfd PCB.

Kind of ultra slim. Thanks, a lot of these early stage.

Products in the portfolio.

If you're looking at 2020.

I mean are these are starting to see some meaningful impact I think you mentioned on solid.

Start to see that then contributing more to total revenues throughout the year on that as they look at kind of the opportunity and some of these are markets.

We continue to see that uptick having a larger impact or is that still.

On the on the horizon.

So that I always get asked that question as some solid contributing meaningfully.

To revenue and Thats why I think.

By the end of last year, we're starting to see but the answer is yes, and I think when you look at the rate of growth there right I hesitate to say, what they're ready to growth as it's that big.

When you look at the rate of growth. It is going to contribute meaningfully what is meaningfully mean I'm not going to say.

But it is it is starting to clearly contribute meaningfully to our business.

I think thats, just kind of continue to grow through this year and the next.

Several years probably.

[music].

Customers love It Im units.

No.

That good.

And the other products I didnt pick up on which wed like like Pollack side, I don't think pollux will contribute that meaningfully.

Yes, it will contribute.

Yes.

And then not meaningful is but it will be less than 1% probably in 2020.

At this point.

I don't know, which are the ones you were talking about there.

They are all they're all different obviously it.

No that's great and I appreciate the additional color and then I guess just not one last one too I know a lot of the focus kind of this year was on.

The new sale, we talked on sales hiring, but additionally, some initiatives kind of building around processes for customer engagement kind of improving go to market things like that.

Can you kind of.

Dig a little deeper I guess on how this is kind of initially tracking what steps are you putting in place.

How is this kind of trended versus your expectations. Thanks.

Okay.

Yes, I mean, I think we've been doing a lot more training talked about before we've been doing a lot more training.

Across our sales organization.

We've invested a lot in inside sales and business development and continuing to do to do that weve.

Told you that we added like 25%.

On capacity in the last year, but we will not continue at that pace. This year, we don't think we need to.

It will be substantially slowed down from that but over the long term I think we said over five years, when we IPO and we're going to shoot around 15% a year.

From a sales capacity point of view.

Other things, which are just trying to get a lot more efficient about how we use all of our resources. So we are turning the guns. If you will on operating.

Issuances.

Both how we.

Support customers all those things.

And I think we have a lot of.

A lot of innovation.

We are pretty innovative company and so we try and be innovative and everything that we do.

Thats great. Thank you guys appreciate it.

Again, ladies and gentlemen, if you have a question or comment at this time. Please press the star than the one key on your touched on telephones.

Our next question comes from Andrew that compared with Brian Bird.

Yes. Thanks for taking my question, maybe could you comment on your EBITDA margins for this year and how that relate to your target I guess, a three years out I mean do you still feel confident about that 20% number.

Yes, we do.

When you take a look at the investments that we've made the turning point that were at notwithstanding.

I would say a conservative view heading into 2020.

With our ability to support this business has a much larger business from an overall gionee perspective, and some of the other leverage points and Jim's comment about.

Focus on an operating efficiencies.

In other areas as well.

Coupled with the unmistakable fact that as software revenues grow.

6% close margin will continue to generate lift there.

We see a nice path towards our long term target over the three.

That's helpful. And then maybe just a point of clarification Howard in terms of the revenue guidance you gave out was that non non-GAAP gap.

I wasn't clear on that and those marks.

So for 2020 there'll be no difference between GAAP or non-GAAP, because we will not have any acquisition accounting related deferred revenue enhancement.

Right, but if you could give out 8% to 9%.

Our I'm sorry.

Im sorry, you said, 8% to 9% was the number for that for next year British Chairman.

In terms of revenue growth.

Yes.

Okay, great. Thanks.

And I'm not showing any further first of the somewhat from the call back over to management for closing remarks.

Okay. So thank you very much appreciate everybodys interest and Altair and.

Thank you very much.

Ladies and gentlemen. This concludes todays presentation you may now disconnect and have a wonderful day.