Q1 2020 Earnings Call
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Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to stand back I think if they patients.
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Ladies and gentlemen, thank you for standing by and welcome to the Altair Engineering first quarter 2020 earnings Conference call.
All participants are not listen only mode. After the speaker presentation, there will be a question and answer session.
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I would now they can the conference just because today I would watch CFO. Please go ahead Sir.
[music] good morning, welcome and thank you for attending Altera earnings Conference call for the first quarter 20 Twond.
I wouldn't <unk>, Chief financial Officer ball too.
With me on the call these trends capital.
<unk> chairman and CEO.
After market close yesterday, we issued a press release with details regarding first quarter performance.
Updated guidance for 2020.
Can be accessed on the Investor Relations section on our website.
Investor Altair Dot com.
This call is being recorded at the 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 that maybe considered forward looking under federal Securities law.
These statements reflect our views only as of today and should not be considered representative of our views as of any subsequent day.
We disclaim any obligation to update any forward looking statements for outlook.
These statements are subject to a variety of risks and uncertainties it could cause actual results to differ materially or expectation.
These risks are summarized in the press release issued yesterday.
For further discussion of the material risks and other important factors that could affect 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 on may file from time to time.
During the course of today's call, we will refer to certain non-GAAP financial measure.
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 networks that are incremental to our usual presentation to provide greater insight into the dynamics of our business for affordably result.
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.
Well first address our response to the Cobot 19 crisis, what this means for Altair going forward.
And I will talk about her strong first quarter, followed by some highlights from new product releases and customer engagement.
I'm very proud of our global health care team and how they have come together to support our customers and each other during the pandemic.
It's truly an honor till the it's such a profoundly dedicated and hardworking organization.
Or productivity. During this time has been stellar as evidenced by continued great product releases and excellent wins with current and new customers.
Alters Archie infrastructure has proven remarkably robust as we shifted almost everyone to working from home.
Most importantly, our systems have performed well.
We are focused on keeping our customers working via solutions like hosted units and temporary licenses.
At the same time like everyone else our people have been facing the realities of stay at home orders home schooling their children concern over aging parents the effects of isolation worries about their own health in future.
Most internal meetings and calls up transition to video calls and this has proven to be very powerful to connect with each other visually.
Instead of complaints my conversations with Belterra plans are full of creative solutions to our customers.
These stories about life under quarantined.
Pictures of some amazing food creations.
We are global family and the last few weeks have made us even more keenly aware and appreciate the update us.
I was curious keys trends, our people and culture.
Breadth and depth of our technology in a recognized ability to deliver innovative products and excellent support.
Oh. Good 19 has demonstrated we are extremely capable of providing outstanding customer engagement remotely.
We are fortunate to have very broad and diverse industry base, but as the macro economy. It set with extreme reductions in consumer spending we believe some companies the consider new product development to be mission critical may be forced to reduce R&D spending.
This is likely to affect our ability to grow revenue in the near term.
Before talking about our new product releases, some impressive customer engagement and a recent acquisition that will summarize the first quarter financials.
We're pleased to report topline results for the high end of our guidance range. The total revenue of 131.5 million for the first quarter.
Driven by 5% year over year increase in software product Robin do despite a significant decline in revenue quarter over quarter in China.
On a constant currency basis software product revenue growth was 6% for the first quarter.
Adjusted EBITDA of 21.7 million was at the high end of our guidance range for the quarter.
Software related services for the quarter declined 29% versus Q1 of 29 team to 6.9 million, primarily driven by project deferrals.
Well in engineering services grew by about 15% to 13.9 million. That's a result of business will not until brought into 2020.
Altira remains focused on growing software product revenue continues to leverage services strategically to drive higher gross margin software product revenue growth.
And expand our relationship with key clients.
Software product revenue was 82% of total revenue for the first quarter compared to 81% in the prior year period.
Recurring software license rate was 93% for the first quarter 2020.
This is 92% for the same period and 29 chain.
Customer support training and marketing teams have moved very quickly tour remote working environment.
We saw 26% Johnson self paced online training between February and March.
Trade shows and technical expositions being canceled globally, we have been replacing them with webinars around focus topics.
Any of these are attracting hundreds of attendees and we believe the momentum toward virtual engagement will be a positive trend to emerge from the current situation.
We announced two major product releases in the past couple of weeks and we plan to announce the most significant uptake released two of our software in the history of Belterra or in the second quarter.
On April 16, we announced a major release of pent up to kill them or platform for user driven monitoring of real time data.
In native cloud offering, which we believe has brought value for business finance engineering in I O T applications.
And Optik on users can examine their time series data down to the millisecond or below.
As well as monitor any number of real time streaming feeds.
Mineable ways.
On series databases, and real time information or growing importance.
With an uptick on 2020, we're delivering a single pane of glass view into the complete application lifecycle and what we consider the most scalable cloud ready streaming analytics platform on the market.
On April 21, we released a new version of in spire.
Fully integrated generative design analysis, and manufacturing simulation solution that accelerates the creation optimization study of innovative structurally attrition parts and assemblies.
It is full of great new features including the complete integration of some solid so interactive modifications to geometry can be made on the fly in one integrated solution.
Significant share of our usage growth is being driven by many of our newest products and technologies, including some solid ultra Nanofluid, Alex you Dumb Pollux knowledge works and then spire.
It is exciting to see the investments we've made in people and technology is contributing to our success, both now and into the future.
Shared many stories of increasing use of some solid.
The highlights of the first quarter wasn't order for a major heavy equipment manufacturer specifically targeted some solid.
This customer insisted on some tough benchmarks.
And some solid came through with great speed and accuracy.
We believe this account has great opportunity for growth as the tool gets deployed broadly to their design engineers.
Healthcare continues to invest for growth with organic investments in sales marketing and technology.
And we continue to actively investigate acquisition opportunities and engineering data analytics and high performance computing.
Yesterday, we announced the acquisition of the wrap software business from Swedish company ramp International a date.
Wrap is a world leading software technology for spectrum management and radio network planning.
And covers a wide range of applications with a focus on controlling radio spectrum assets maximum utilization, including radio planning interference coverage calculations.
Wrap complements health care as existing FICO nuclear song and when prop software.
Wireless propagation modeling and network planning and we are excited to have the team and technology as part of Belterra.
They bring an impressive user community, including major defense organizations Telecom authorities broadcast operators and public safety organizations.
Welcome to our newest else Ariens.
Turning to our outlook.
Prior to cope with 19, we expected 2020 to reflect a more subdued macro growth environment.
Global crisis has clearly had a downward effect on the economic outlook for the remainder of the year and we have taken a conservative approach by revising our guidance accordingly.
We now expect software product revenue for 2020, it should be flat to slightly up.
Versus 2019.
And total revenues to be flat to down 4% versus 29 teen due to a decline in services and foreign exchange headwinds.
Despite the exceptionally challenging macro environment, we are all experiencing globally.
We continue to see a lot of momentum for our product offering.
On customers and users.
We added 20% more new customers in Q1 up 2020.
Added in Q1 up 29 team.
Our software renewals are coming in as expected. However, we are experiencing elongated sales cycles, and some weakness in new and expansion deals, especially in the automotive and aerospace markets, which comprise approximately 50% of our total revenue.
Nevertheless, we continue to see many new and expansion opportunities and growing interest from customers to transition from competing products towers as the economic benefits and solution breadth of our platform become more apparent.
Having been in business for over 35 years, Altira and our senior team have been through multiple downward economic cycles.
Our business as always performed well and tends to emerge with increased market strength.
Due to the value we bring to customers.
For example, since our way no nine our recurring revenue has grown considerably.
Our end market and customer exposure has become much more diversified.
During the same period, our revenue mix has shifted significantly to over 80% soft for 2019.
And we expect this trend to continue for several years.
Given our ability to work remotely and support our clients virtually.
We remain well positioned to successfully manage through the current environment.
Additionally, the business continues to generate ample free cash flow and our balance sheet remains strong.
We continue to be very positive, but alturas product and sales delivery capabilities and we are confident in our prospects for sustainable long term growth.
Now I will turn the call over to Howard to provide more details on our financial performance and our guidance for the second quarter and full year 2020 Howard.
Thanks, Jim.
First I would like to remind everyone that our seasonal billings patterns, coupled with the treatment of revenue under.
So six.
Results in the heightened seasonality in revenue and associated.
Higher software product revenue recorded on our first and fourth quarters, but any given year.
We expect this pattern to continue under present business conditions.
We exceeded our revenue guidance for Q1, driven by strong software product revenue growth and achieved adjusted EBITDA at the high end of our rent.
Our software related services revenue declines relative to the prior year said were below our expectation.
These services are more susceptible to reductions at some of our customer for customer external Pakistan.
Response to deteriorating market conditions as result of Cobot 19.
Our first quarter results were driven by continuing solid demand for our software products.
Software product revenue reached $108.4 million, an increase of 5%.
Total revenue equaled $131.5 million representing growth of 3% from last year.
Exceeding our guidance.
We're able to achieve growth in total revenue. Despite a decline of 29% software related services from last year, and a 1.6 million dollar negative currency impact in the quarter.
The decline in soccer related services was larger than we anticipated and reflects continued headwinds in our automotive customer base.
Notably our current engineering services reflected growth of 15% compared the prior year.
However, due to reductions imposed by some of those yes customers. After Q1 due to cope with 19 do not expect that level of growth in the near term as we will detail in guidance shortly.
Adjusting for the adverse impact of currency fluctuations in Q1 warranty.
Core product revenue grew by 6% in total revenue grew by 4% compared to Q1 90.
In the first quarter software product revenue increased to over 82% of total revenue.
Over 100 basis points from just under 81% last year without any adjustment for currency related data point.
Continuing the important long term trend of increasing mix that software product revenue.
A key driver of expanding our operating margins as we look forward.
No step for the quarter software product revenue as a percentage of our software segment it 94% of segment revenue.
Over 250 basis points compared to first quarter 2019, due to the combination of growth in software product revenue in decline in software related services revenue.
Our recurring software license written that is the percentage of software revenue that is recurring continues to be strong and consistent with a path performance at about 93%.
Likely better than the prior year.
The key driver during this quarter that we were able to increase the percentage of revenue to recurring revenue streams compared to the revenue profile for data analytics business.
Q1 29 team.
First quarter billings were $127.9 million, a decrease of 4% from a year ago.
Billings were negatively impacted by the decline in software related services as well as sponsorship, which impacted current period fillings negatively by $2.9 billion.
I would like to turn to the balance of the P.N.L. results.
Gross margin in the first quarter was 74%.
Actually flat relative to Q1 19.
It's not for the decline and software related service revenue that I mentioned earlier gross margin would have increased year over year.
Gross margin in the quarter was you personally impacted compared to the prior year by approximately $1.8 million directly attributable to decline to the decline in software related services rapidly.
For the quarter, Noncat operating expenses, which exclude stock based compensation amortization of intangibles and other operating income where $79.1 million.
Noncat operating expenses remained in a tight range across our quarters last year within Upticking queue for 19 is expected.
With incremental costs related to the acquisitions of probably log and down.
We have taken a number of action to reduce or operating expenses to more closely aligned with our reduced outlook, which we will speak about shortly while continuing to invest in those activities. We believe are beneficial to realizing long term grow.
Oh, we're adjusted even tougher the corner was near the top proper guidance range at $21.7 million.
<unk> decrease a 10% from last year is first quarter driven substantially by the decrease from gross margins from software related services.
Or just to be a bit I was also affected by 300000 dollar negative impact from shifts and foreign currency during the quarter.
Long with an additional expense due to the adoption of the new C., so credit loss requirements approximating $200000.
Turning to our balance sheet.
Consistent with the seasonality in our feelings and collection activities. We ended the first quarter with $247 million in cash in cash equivalent.
And $150 million and Undrawn capacity Hunter U.S. revolver.
Or liquidity position remains quite strong and we feel well prepared to navigate the uncertainties in the current business environment associated with poke at 19.
Moving to our cash flows careful from operations in the first quarter within inflow of $28 million compared to an inflow of $25.3 million in the first quarter of 2019.
The increase in cash flow was parameter primarily related to normal variations in working capital elements.
Free cash flows improved from $20.7 million last year to $26.4 million this year.
It's improvement was based on improved cash flow from operations, along with a lower level up capital expenditures. This year in the first quarter compared to the same period last year.
Are updated guidance expectations for 2020, I rooted in our belief that we will continue to see reductions in softer related services for the balance of this year.
With similar challenges for Klein Engineering services.
Although we do expect that both will start to see improvements as we approach you for of this year.
Well, we expect stable software product revenues, we appeared back expectations of growth for this year based on the uncertain economic conditions that we are presently same.
We believe that operating with a cautious in conservative posture is most prudent.
Until we see tangible evidence that global economic conditions begin to improve translating into broken investments and earn D. technology.
Our priority at the health and safety at our employees and customers. We've adopted several measures in response to the Pope It 19 outbreak in hearing to local and regional restriction, including instructing employees to work from home shifting certain of our customer events to on line only webcam and restricting nine credit.
Oh business travel by our employees.
And we have adjusted are expensive to reflect the current demand environment by reducing certain employees compensation levels or similar adjustments is permitted.
Making adjustments to our other expenses to correlate with potential declines in billings and cash collection of some customers such as reducing the use of outside contractors, along with consulting and professional fees.
Historically, a portion of field sales professional services and other activities were conducted in person.
As a result of travel restrictions substantially all of our sales professional services and other activities are being conducted remotely also contributing to cost reductions.
We had personally adjusted cost of revenue to mitigate loss of software related services robbing primarily through the reduction in use of outside contractors.
We will continue to strategically invest in certain earned the and technical support areas and selectively expand our sales capacity.
Or experience in history, having navigate it too many challenging business cycles for for more than 30 years.
Taught us that it is important kind of long term basis to retain much of the deeply technical and specialized engineering resources typically engaged which has allowed us to continually develop and support abroad array of technologies and service our customers.
Against us uncertain economic backdrop, we believe our long term target of achieving 20% plus adjusted EBITDA, maybe impacted in a manner that it's presently difficult to quit.
Well, we firmly expect that we can achieve this in an even greater level of profitability. We do think it is prudent to revisit our timeline for achieving this target.
Has the events related to cope with 19 evolve over the balance of this year.
Look forward to providing an update regarding the timeline expectations for achieving our long term target and beyond.
For the 2020 year, we presently expect.
Software product for Avenue between 365 and $380 million.
Setting essentially flat growth, a 4% year over year.
Total revenue of between 440 and $460 million.
Presenting a decrease 4% so flat from 2019, driven primarily by a reduction in services rather than.
Adjusted EBITDA between 30, and $35 million, representing it decreased tough $5 million to $10 million from 2019.
Free cash flow between five and $15 million.
As mentioned before or free cash flow expectations are sensitive to billington collection patterns following the seasonality of our billing.
Two Q2 Twentytwenty our expectations are.
Software product revenue to be between 76 and $80 million.
Presenting a decrease of 5% to 10% from the second quarter of 2019.
Total revenue to be between 91 in $96 million.
Sending a decrease of 10% to 15% and the same period last year impacted by the reduction in software related services inclined engineering service revenue apart from software product rather than.
Adjusted EBITDA between one and $4 million, representing a decrease from $5 million into 220 19.
Further detailed guidance tables have been provided in the press release issued after close of market yesterday.
Please note that these expectations assume stable foreign exchange rate.
Our tax rate expectations for 2020 remain unchanged. We continued to expect that our tax rate applied to our pretax income will be about 30% this year.
We believe that adopting a very cautious from conservative you. It's the most appropriate perspective at this juncture.
Covert 19, driven events are evolving at a rapid pace and in an unpredictable manner.
Decades of experience navigating through several theory challenging business cycles emanating from different factors. There are few key points to emphasize about our business.
Our engineering technologies are critical to the R. and D. and product design activities of our customers regardless of industry.
Data analytics products respond to the important need to perform deep analysis and streams of information so that our customers can make better decisions much more quickly which is so important in today's environment.
For licensing model is incredibly well suited to continue to support our customers and allows us to leverage the key benefits, we provide for the present and future needs of our customers.
Are strong balance sheet gives us the flexibility to continue pursuing selected on many activities and we will continue to do so opportunistically.
Most importantly, we have a highly experienced global team dedicated to continuing to support our customers regardless of the business environment.
With that operator can we now open the call to questions.
Thing yeah.
<unk> to ask a question you will need to Palestine, one on your turn to Retry. Your question press the pound key please stand by probably compared to turn their their.
I first question comes from <unk>, you know and developing.
Thank you can morning.
Jim I was hoping you could talk about you know some of your history here with these types of downturns. Obviously you you referenced I think that you you were involved in the the Oh wait <unk> downturn and you just wondering how you're thinking about this when maybe relative to that one as it relates to the ability of your auto customers to to not only survive, but should have come out.
The other side.
It may be bounce back to where they were just any any perspective on how you're thinking about that'd be great.
Oh, sure, but things fridge.
First of all I'm in California by the way I don't remember, where you are but it but it's pretty early.
I think this time entering into all this the auto companies were quite a bit stronger than they were.
Prior in the L. eight or nine instance.
And a little bit of the doubles by D.C., one C.D.S. Christmas. So we are projecting that should be down.
Actually what we've seen is is very little reduction, there's really only on one of the larger automotive companies has a very significant number of their people for love them for a temporary period, we don't know how long, but they for load a quite a few.
And so most of the others a cup you know older engineering, that's even their contractors are are working from home right now which is not unusual. So I think they've you know they're quite a bit stronger first of all I think they also.
They have a sense of of the importance of continuing to do a lot of engineering.
So you know <unk> sort of overlaid with a little bit of a downturn overall and automotive that had been speaking about.
But I am large I think you know obviously this this is a very very tough you know sort of localized.
But I think they're going to come out of it just fine and get back to business. Some of the smaller you know start ups those kind of guys. Maybe some of those are going to shake out of this.
But in general so.
So these companies are going to come back and can certainly be engineering sightings.
<unk>.
That answer the question.
Yeah, and just to follow up on that Jim you reference that any coming out of the last downturn the o. eight or nine one that you actually saw some quite strong growth.
[noise] ears can can you just comment on that and if you think there might be sort of an analogous set up this time.
Okay, so being.
Conscious of not predict the future Yeah. We came up really strong you know a couple years. The followed were really strong years for us.
Feeling the same kind of energy and momentum quite frankly.
We're we're seeing or usage climbing actually we're seeing a lot of interest in our.
But.
You know I can't.
Predict with certainty, but but you're sitting on our software even during this is actually a pretty solid.
Oh, you look at our Q1 and.
You know is down.
Substantially you know I'll say as much as 25% in sin Q1.
And you see the services that that we took we so beat all the numbers that we put up.
You know, we're we're expecting that software is is going to be flat this year to to up a little bit and that's what we're saying them and we think we're going to live is pretty strong.
[noise] great appreciate the colored gym in glad to hear your your safe out there in California. Thanks.
<unk>. Thank you.
Yeah.
I'm next question <unk> airliner kind of open.
Hey, Jess glad you're all unsafe in while echo that thanks to take my question I. Appreciate it I guess, Jim I wanted to double click it drove down a little bitch on the usage in the current environment, So renewals company as expected.
So a newer but also slower expansion sales. That's when you think about usage or utilization optimization around be hyperworks units model.
You sort of seen companies, especially in Tibet that automotive aerospace space.
Tried optimize around but hyperworks units usage, meaning you know maybe I had you know x. number units for X. number of people and now I can spread them across more of those people have you seen that happen at all or you sort of seen those trends play out what was that something that that that actually is not happening.
I haven't really.
Explicitly seeing the no quite frankly, you know, we're we're pretty generous during these periods with our customers, we recognize that they're having a tough time and.
You know we have this concept of posted hyperworks units by the way, which yeah, we invented about eight or nine years ago and customers had not really had a lot of take up of that we we.
Very robust system that we use for education, we use it internally and.
For some percentage of our customers, but it's the perfect mechanism going up you know for this situation because it it doesn't affect your VPLS.
A lot of these customers, we're not geared up to to have that kind of activity on alert depend servers. So.
That's that's been really helpful. We've given you know a number of free.
You know licenses as well to get circle customers, you know up and running gallery.
So we're pretty friendly we we give a little better terms to to someone else drummers.
We're pretty friendly Oh with our customers when we continue to support them I'm not really seeing the up there you know stretching their their their licenses, maybe a bit and I'm not aware of it but but in general no I think there's a lot of interest in leveraging our tools for some competitive tool.
Quite frankly during this period.
And that's what gives me some hope for when we come out.
Yeah, no. It's great. It's a terrible and then I want to touch a little bit on the free transition to cloud based software automation enough chunk about sort of custom attraction here and then maybe for Howard as if you're seeing tracking expect you to track cannot see coming out of this people are going to do more cloud one of the longterm implications the models.
Out of that to love to understand sort of what you're seeing that club transition, especially given it's free and then if people do start moving sort of more work goes there what is what is the impact of model. Thank you.
So we do think those things are gonna move you know more and more to cloud and we're doing a lot of things in that direction obviously.
We'll have some other you know things we're announcing over the course of the next month or so even in this direction nothing to do with covert 19, just continuing on pace with with what we work on.
For the most part you know the way we're we're restructured right now the hosted unison I'm talking about is really just the licensing and an L.A.S. us their licenses is just from l. own servers actually as opposed to servers on their networks and that's how they avoid the beep yeah.
You know game there.
I think that you're going to start to see you know the growth of of the use of a cloud.
Loud offerings Panno is now native clown offering we're moving the knowledge works a platform.
Later on a cloud offering we are working on other applications as you might imagine and many of our applications can run you know from the cloud using some technology. So we've developed over the years.
I don't think it's gonna dramatically alter I love as question per per hour. So I can let him answer part of it but I don't think it's going to dramatically alter.
Answers.
I'm sorry.
I said I'll take both your answer and Howard dancer, both answers.
That's that's fine so I don't know, what's going to dramatically all through the the way that.
Our model really works I I think you may see.
Some or take up a shorter term you know, we'll we'll we'll offer some shorter term licenses that are more expensive. So a customer who wants to do something for a month or for three months I'd be able to do that but in general but.
Going to be that great of of our again I think unless that really is they're they're need.
And and so you'll see that you'll see a we have some patterns.
Macleod with with our units model for how you can use you know the units for for hardware for example, and we're going to we're going to start.
Experimenting with all that were pretty Experimentalist company when it comes to models as you see and.
Huh.
That's been pretty effective for us I don't know how would you want to.
Address that how the cloud effects are accounting.
Yeah sure well you know from from from.
From a basic perspective, no is Jim indicated we don't really expected significant shift.
But frankly, it's you know they the evolution of the model was really geared to allow those who want to do more simulation to continue to be able to do it in a manner that continues to leverage that technology till we don't really see it.
If you will a negative in any particular way, but more of a continued growth in positive.
More and more need to use and simulation clearly yeah. You know we provide three months scenario versus our typical annual recurring and and if it's more in a traditional I would say task way.
We're we're back to revenue that looks like a monthly revenue stream rather than under six or six a little bit more of an up front, but on the margin you know, maybe there's a little bit of a a ship, but by and large we don't pay per shift here in model one in economics performance.
Just to add thank God I don't have the shift you know just to add to that I don't go to shift is going to be <unk>, it's not going to be like a stop function, where everybody was to that I'd like it's going to be.
Much more slow pace to be perfectly honest Oh, that's just the nature of our market L.A.
I think it's going to move there, but it's going to take a lot longer than people may mix, but.
Thank you very much.
Thank you.
Think yeah.
And next question comes from that had back with I.B.C. capital markets. Yeah mine is open.
Oh, Hey, great. Thanks, guys for taking my questions I'm glad to hear you guys are all doing well.
Jim 20% growth a new customers was was impressive I I'm curious if you can talk about sort of what drove that was that pre Colgate and I guess I'm wondering you know how how new business trends continued thus far or through April now.
Yeah.
You know, we're we're bearing down right. So we added a lot of sales guys. We've added a lot capacity into the into the organization and you know, we're we're doing things a little more I cannot.
Then we were you know in the past we've been talking about that over the last year and and so I think that's driving alone a new customer activity for us.
You have to realize though that that new customer activity.
You know.
It it it's it's a little longer.
<unk> Avenue customers the relative revenue.
In that initial deal is not as large as you know some of our bigger stuff, but it it speaks to the future as as I think you'll understand and so we're we're a lot more focused on that and we used to be we we were much more focused on the on and you know exclusively the markup.
We remain focus there, but but we are pushing pushing down market, where we simply have not you know really even tried to compete in the past and so that's that's why we're home that impact.
That's great and then maybe Howard when we think of your 2020 guidance. Thanks for all the colored it's helpful. When we think about modeling just maybe digging into it a little bit more I think you said that you expect to recovery queue for does this assumed that also that the the worst headwinds or <unk>.
Exceeding two two and then you sort of slowly getting better through Acuform sort of curious you know if you think about it like you are a v. shaped type recovery I know, there's lots of acronyms out there, but just sort of a little bit more than that I'm sort of the expectations of of where to to sits in terms of the the expected headlines.
Well well well certainly obviously, we were taken you know a cautious view for sure, especially where we're adding two two and.
And we were customer bases in in all the things that everybody has certainly witnessing firsthand now you know we do expect to see some gradual improvements we get through the year as we approach you know queue for you know don't don't read into that you know overly optimistic.
You know or anything along those lines I think we've guided you know conservatively and frankly appropriately with a level of uncertainties and not now and.
We certainly do expect more you know activity to pick up as as we get into that time period. Yeah. Obviously, if we see differences you know coming between now and then we'll certainly be speaking to those differences whether positive or negative for that.
It just to chime in on the.
And I think Howard said, it very well, we've we've been really conservative.
You know about what what we see for the rest of the year.
There's not a lot of wishful.
Stuff in in the way, we're operating here acute to circle only we we think of skill it's going to be the toughest, but we've also seen you know what's happened in in China, and Korea, which which time you know came in the early part of the way, but if you will and you know how they've been getting back to work and and they're getting back to work but.
You know full you know fully back right. It's you know it's total back relatively slowly.
So we we factored that in into the way, we're thinking about things.
That's great context, thanks, thanks smoking.
Thank you.
As a reminder to ask a question you will need to Palestine, one on your telephone.
The next question comes from Jackson, <unk> with T.P. My N.L.N.F.L. Okay.
Great. Thanks for taking my questions. This morning, guys. The first one Jim could be just spend a little bit of time on the data analytics side of things.
A lot of changes in 2000, a 19 expect gaining a little bit of a bounce back here in 2020 so.
I'm just curious how deal momentum has fared in that business, maybe relative to simulation during all this disruption.
Sure. Yeah, I think things are are pretty settled down in a team and you know people are have been ramping up and know what they're doing a little bit understand the altar, you know way of doing things.
Color wrapping their heads around the units model are much more than before.
And they're very active so you know I think it's it's been.
I think it's been very solid you know really consistent with with the rest of the business actually.
Of course, you know, it's not what we hope none of it as what we perfectly hoped insurance or Oh, but everything's actually you know pretty solid for us.
You know I've I've been listening to some of the other calls from from you know other players in the market and.
I think.
Probably my sense I you know is is that we're.
We're probably want calmer than than maybe others are at this point and part of that I think it's just we we operate.
Very conservative way all the way through Ray where it gives such my recurring revenue is Oh, so that's coming in for US. We're we're not trying to play any games any financial gains we're not doing multi year deals typically we converted most of the data multi or deals to subscriptions and we've content.
Knew that pretty aggressively and Q1, and we'll come into Q2 as well.
So.
You know data data and gentle specifically is is pretty solid for us.
The only very optimistic about the future they're actually.
That's great. Okay. Thank you just a quick follow up on on C.E.S.
And these the type of assignment that our <unk>.
But first and come back or [noise] excuse me or are these the type of assignments that a first cut and maybe last to come back.
So.
<unk> [laughter] I would say that you know there first concept.
And last back but.
I'm seeing is that and I've been I've had some very senior level conversations with some executives at some of them the customers.
And they're actually afraid of losing people.
You know, there's there's sort of this <unk> you know high caliber engineering, you know people and and.
It really worried about losing their people, it's a competitive world out there and so I think this is why all of whom except for one and I honestly think that that particular client.
That's probably made some stops.
Because we've placed some of those those people that they are low.
Some other.
Customers already.
I I just think that so that was on this stuff. So in general normally I would say, it's it's first out last.
But in this case it it seems like you know they they just don't want I'll be lose so you know a quality quality people.
Okay. Thanks score thanks for that color.
Yep.
Think yeah I'm next question comes from Brian Essex Goldman Sachs, Yeah, and that's how often.
Hi, Good morning, and thank you for taking the question and glad to hear everyone as well as well just a quick question for you on the simulation side you know maybe could you talk a little bit more about the conversations that you're having with your customers. I know you mentioned you know for a lows in in temp.
Reductions in the long dated sales cycles, but you know are are you also having more creative conversations with those customers in terms of there's recognizing that we're all kind of we've all kind of shifted to work from home environment, and R. and D., that's probably not the status quo for them and and in order for.
An r. and d. to kind of <unk>.
Continue you know from work from home environment.
Is there an opportunity considering that there are no longer you know there is no longer the ability to be physically probably didn't do physical testing is that kinda materializing in in the conversations at all.
Oh.
Yeah, I mean, <unk>, it's the new normal right.
Sitting in my home office and.
And you're probably all doing the same and all of our customers are doing the same than when I talked to an executive.
From a customer.
Making love those calls.
You know there there are the same rate.
And in general.
It's been surprising for me actually our productivity level.
May actually be higher.
And I don't know others had been talking about that much and I don't know it back in persists because you know there's other challenges for people you know working from home with you know kids and.
Whatever and and all that but but people have been extremely engaged and I've seen the same from the customers as well so I think.
They're going to try and get back and and labs can't work and and as much as we like simulation.
They you know nor do their work they have to have to make parts and then you know the labs are necessary to to their work.
So I think people are going to figure out how to get you know.
Back little by Little here, and then go but I, certainly think there'll be more working from home in the future and and certainly for us.
Tonight, and and and I don't think it's a bad thing if you have to be flexible.
Or on your People's personal lives as well, though.
Don't know if money manager <unk>, sorry, I didn't think so I guess I'm, just I'm trying to get a get a handle on it if that is an opportunity where you know your customers are trying to rename product productive without access to physical facilities, how near term versus long term of an opportunity might that'd be for you and the simulation side.
<unk>.
You know I try not to to be as wishful thinking recess British too.
Around these things that this new normal is going I mean, it's almost simulation or no or you know him anything else I mean, the trend some more and more you know algorithmic work is there's a there's a trend that's going to continue.
They're going to accelerate because of this.
Maybe but I I'd, certainly in and build that into a four [laughter].
Right.
Yeah, So sorry, I don't buy into those kind of things.
Okay, and and maybe real quick for for Howard If if we look at your full your guidance I I totally get the conservatism and understand on the services side, you know the the direction and the drivers for the guidance. There. If we were to look at the software product revenue guidance and that the bottom end up.
Guide what did what kind of assumptions have you made to drive.
You know revenue towards the bottom of that range, what has to happen in order for that kind of scenario to play out.
Well is is is you know you know our recurring software license radio or this is you know 90% or so we pivot around that hmm. So most of our software is on any of you know recurring basis and such so they're still you know.
Signage, which you know approximately 10% on a.
You know you know perpetual type basis. So you know, we're we're again, making assumptions around yea that we've seen renewals continued to be you know coming in as we would expect and that they're on the lower end of the spectrum. You know, there's there's continued to be significant challenges out there from an operation.
Active is because we've talked about so essentially flat keep in mind also that you know relative to when we die did our initial guidance compared to where we are basically today no. Foreign exchange has also moved that we're you know a third U.S., a third hey packing a third.
So outback itself took about 6 million out of software product revenue just between check you know changes in currency races, as well. So we have another point and a half to maybe two points of of ground you know, but if we had a tax rates that existed earlier this year.
So we take that into into the numbers as well I I have no magic Crystal ball relative to F.X. rated in terms of what they will be and what will happen later in the year. That's what that's also contributing factor.
Guys. That's very helpful. Thank you.
Yeah.
The last question would be fun <unk> <unk> <unk>.
A good morning, I just wanted to quickly ask in terms of the renewal that you've seen so far in Q1 have you seen any incremental penetration of your to set within that cool word of customers.
So have we seen any incremental penetration.
Within the customers were there recurring revenue Oh, I'm, sorry, I didn't follow the question.
No more like have your customers added more <unk> are using more tools are more products from my parents Oh, the ones that have renewed yeah.
About it.
Yeah, I mean, we're we're.
<unk> business as usual right. So we're we're trying to drive usage or or introducing you know the new products that are there Oh, we've got some you know some very very interesting.
A new technologies politics is starting to get a lot of interest. We we you know just went out with with some marketing around it.
This huge list of companies that are interested in exploring.
Only eat them. So we we found a lot of a lot of interest there.
And.
Yeah, and there's a lot of interest in in some solid you know just that continues to really go we just had a weapon or.
With whirlpool presenting international and some solid only have over a thousand people.
Participate and we have another one another costs from I think might have been Renault.
And that was over a thousand people as well those are just too small webinars.
You know I mean, the the attendance you know.
<unk> an interest in all these these new applications is really really significant.
That's pretty impressive I, just wonder that quickly maybe switch to Howard in terms of the aerospace and defense exposure you have would you say excuse more on the due to defend side and could you maybe give us some some idea of how that got customer base is doing at this time.
Oh, Okay Aerospace Frost is is a little less and maybe 10%.
I found the software side and and as you know those those.
Development projects have very long time horizon.
At the same time, obviously, there are under yeah, <unk> immense pressure as you might suspect right now for for obvious reasons.
So you know we've again in a a pretty conservative view on that but we don't expect.
You know to see significant shifts.
In their business you know based upon where we are right now.
And and just let him actually I'm sorry go ahead.
I was just going to add I mean, we had a lot of momentum arrow coming into this year.
I mean, obviously everything is is you know adjust accordingly, but you know we're still feeling very very good about that space and and and defense in General I. I think is is just a little finals, while I see.
Great and mostly in terms of that large versus small medium business customers. They you serve have you seen any significant change in twos, one or the other I I'm assuming that the small medium size is probably going to be more pressured.
Yeah, but that's exactly right. So when we think about.
You know the.
But to change to the you know to the business cycles or slow down and opportunities you know for expansion whatever it's it's much much more impact to the small and medium customers for sure.
Great great. Thank you.
Thank you.
I'm not showing any further questions at this time and and I like to tend to call back over to Jim Scarpa, That's the closing remarks.
Yeah.
Thank you I I, just want to express appreciation to everyone for their support.
In the interest in L. terror, and a wish everyone just to say so thank you very much.
Ladies and gentlemen was concrete today's conference call. Thank you for participating you may not disconnect.
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