Q3 2020 Altair Engineering Inc Earnings Call

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Ladies and gentlemen, please standby your conference call would begin momentarily once again, ladies and gentlemen, please stay on the line.

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Time, all participants are in a listen only mode. After the speakers presentation. There will be a question and answer session to ask a question during especially the press star one on your telephone if your required. He further assistance. Please first start from zero.

I like to do groceries conference call Mr. Howard more off you may begin.

[music] good morning, welcome and thank you for attending Altera earnings conference call for the third quarter of 2020.

Howard Mora, Chief Financial Officer of Alterra, and with me on the call is Jim Scalpel.

<unk> chairman and CEO.

After market close yesterday, we issued a press release with details regarding our third quarter performance and updated guidance for 2020.

Can be accessed on the Investor Relations section of our website at Investor Day, Altair Dot com.

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

During today's call, we will make statements related to our business that may be considered forward looking under federal Securities law.

These statements reflect our views only as of today.

It should not be considered representative of our views as of any subsequent date.

We disclaim any obligation to update any forward looking statements.

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 yesterday.

For a further discussion of the material risks and other important factors that could affect our actual results.

Please refer to those contained in our quarterly and annual reports filed with the FCC as well as other documents. 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 correct.

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.

By greater insight into the dynamics of our business or our quarterly results.

Please be advised that we may or may not continue to provide this additional detail in the future.

With that let me turn the call over to Jim for his prepared remarks, Jim.

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Thank you Howard and welcome to everyone on the call.

Ultra had an excellent third quarter, especially in context of the ongoing global health crisis, and economic uncertainty experience for much of the year.

Our focus on delivering technology and value remains strong.

So the loyalty and enthusiasm of our customers for our technology and simulation data analytics performance computing.

Today, I will discuss our recent acquisitions Uniboss Lexus and base.

What they mean for our technical and go to market vision.

I will talk about the recent launches of the Altair material data center, and L. parents firewall products and their relationship to each other and to the Bates acquisition.

Finally, I'll review, the global Health care technology, calling throws out virtually in September.

Other notable customer activities.

First allow me to summarize <unk> third quarter financial results.

We are pleased to report Q3 results with total revenue of 106.5 million.

Software product revenue for the quarter was 87.8 million.

Adjusted EBITDA was 8.2 million.

All were well above our guidance ranges.

For the first nine months of the year software product revenue grew to 278 million from 265.5 million in the prior year, an increase of 5%.

Total revenue equaled 336.5 million compared to 335 million small increase recognizing the continued softness in services.

Software product revenue was 82.5% of total revenue for the third quarter compared to 77.5 or so in the prior year period.

Our recurring software license revenue was 92% for the third quarter of 2020 versus 88% for the same period from 29 chains.

[noise] software renewals in the quarter continued to come in as expected several significant expansions occurring including some with customers expressing interest to transition from computing solutions to all chairs.

New customer activity remained relatively robust with our software sales pipeline, increasing lined with our expectations across all regions and key solution areas.

Of note, we saw strong sales momentum and the technology vertical in Q3 up 2020.

We believe high performance cloud computing is emerging as a critical element of digital transformation.

H.B.C. plays a significant role in all areas of computational science and data analytics.

<unk> leadership position across many verticals, including manufacturing Pharmaceuticals financial services and energy.

Afford us the opportunity to more deeply comprehend rapid changes occurring around many different industries and the unique imperatives driving each to change.

Health care is an established thought leader and innovator in HPC workload and work flow management technology.

We work closely with research teams in academia.

Burmans labs and commercial organizations doing important work in fields, such as weather electronics design artificial intelligence and life Sciences.

We were pleased to have recently announced two acquisitions in HPC.

Uniboss Andaluc sales.

Universe footprint in the market and unique technology enable altscher to grow in life Sciences and financial services and.

And it's experienced team further cements our leadership position in this fast moving field.

Health care will continue to invest in universal technology to support existing customers and specific market verticals, while integrating with altscher as HPC data analytic solutions consistent with our vision towards the convergence of these technologies.

Elecsys provides leading storage and input output for Io analysis solutions.

Their software is used for Io diagnostics optimization, and dependency detection and many enterprises with complex HPC environments.

Elecsys delivers per job storage agnostic filing network Io real time monitoring to identify latencies, and bottlenecks or faster job execution times and better resource utilization.

Health care plans to offer a lexus solutions to our existing customers and integrate elecsys technology to provide storage, where scheduling critical and growing requirements for modern workloads, including for big data analytics, AI and aid us.

In early October we announced the acquisition of M. base, leading international supplier material information systems with a focus on plastics.

One of the most important decisions and product development.

The selection of materials.

Health care has been investing significantly in the area of mature a model for several years as part of driving forward our vision of simulation driven design.

M. basins offering covers the complete lifecycle material data from testing and test evaluation computer aided engineering interfaces.

The acquisition of them is an important step to deliver a comprehensive material guidance and infrastructure to predict.

Optimize product performance through simulation.

M. base Springs to Altair first grade plastics material data supplied directly by material producers deep knowledge and material database technology.

Plastics material data preparation from raw data.

Data consumable designers and engineers.

M. basis, you official software supplier to the computer aided material pre selection by uniform standards for campus.

World's most successful plastic material database adhering to rigorous international standards.

Health care will continue to invest in campus to ensure a consistent high quality material data for customers to drive accurate simulation results.

The integration of in basin to the altar ecosystem brings deep knowledge and experience are material database projects as well as the high quality data our customers require to improve the design of their products.

This has been a very busy period for new product launches.

Last week alter announced the launch of the Altair material data center.

Comprehensive material information management system, providing access to materials data from metals polymers, and composites, including data sheets raw data and solve a card's full trace ability back to the suppliers source.

Ensuring valid assumptions and consistency across teams.

It enables designers engineers and scientists to explore materials, including structural fatigue.

Louis thermal electromagnetic properties as well as.

Manufacturing process specific data.

Standalone application or through the interface of Altscher of simulation and optimization tools.

Customers can seamlessly access the Altair material data center as a SaaS solution hosted by Alterra.

Or privately to manage proprietary information within the solution.

It's intuitive web based user experience allows users to browse search view and compare material data.

Through its open a.

I don't care material data center can integrate with any desktop solver for it.

Non disruptive work well workflows.

Material inputs can be efficiently and easily generator for all major solvers, including L. terrorists.

Healthcare is established strong relationships with material manufacturers over many years and now with the acquisition of them base, we've expanded our presence in the plastics industry.

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This week, we announced the launch of Altira inspire mold revolutionary end to end solution for simulating injection molding from initial design through two material mapping reinforced engineering polymers and optimizing the structural and fatigue performance or complex parts.

Inspire mold brings alturas core philosophies.

Simulation, driven design and democratization of simulation to this 250 billion dollar manufacturing sector.

Or injection molded plastic components.

A critical role vast array of applications from toys, and consumer electronics to high performance load bearing components in sectors like aerospace and automotive sales.

Inspire mold offers engineers fast like highly capable tools, then optimize user experience and unrivaled solver performance from our brand new extremely fast three d. solver technology.

Conspire mold experimental approximations of traditional two and a half de solvers are eliminated.

Poured for advanced physics, empowers bands and office users with deeper insights and understanding.

Manufacturability of new components can now be evaluated at the outset of development process and the risk of defects such as working sink marks and short shops are mitigated before any costly investments are made in malls.

[noise] inspire mold.

Joins out here is industry, leading inspire manufacturing simulation portfolio.

Polluting casting forming extrusion polyurethane foam and additive manufacturing.

In October we help first all virtual global Altera Technology conference the GA to say.

We hosted attendees from 121 countries and more than 2500 companies in virtual sessions focused on the future of technology is driving decision making.

It wasn't invigorating three days of forward looking presentations on topics, including empathetic AI simulation driven design engineering education.

The G.H.T.C. followed a short form format this year.

Brought together thought leaders from academia industry and from within Altair speak about the future they envision for their area of expertise.

We also held panel discussions covering data driven enterprises, deploying digital twins and transforming knowledge to solutions.

I would like to thank all the presenters organizers and attendees who made it happen.

As we move move into a post Bogot world. We are appreciated so that many good things accelerated during the crisis, including our ability to broadly communicate and engage on a global basis.

Healthcare is truly impacting the world transforming decision, making across many market sectors.

Below are examples of our successes in Q3, which illustrate the value customers place in our solutions and the expertise we offer them.

The third quarter included six and seven figure expansion deals in the automotive and aerospace sectors against a very tough macro environment.

We believe this is a positive indicator related to the benefits customers are seeing from simulation driven design.

We also entered into an important new seven figure software deal.

Within North American automotive light truck company, specifically to support electric vehicle development.

This evening relationship takes advantage of Montreal through portfolio, multi disciplinary simulation tools and it.

Fluids everything from structural performance in computational fluid dynamics to communications controls and electronic systems development.

This electric vehicle development team is also using our inspired platform for conceptual design.

And leveraging the power accuracy and speed of some solid within that environment.

Our vision for multi physics simulation is exemplified by a large order in a pack to support electromagnetic product development.

Including aerodynamic thermal or dynamic pressure and high power and microwave antenna right you did.

Simulations will be done using parallel computing across more than 2000 cores by leveraging FICO state of the art scalability.

We had several other wins for FICO and our strong electromagnetics portfolio in the quarter across multiple industries and geographies.

Electronic systems design as an emerging growth area for Altair now, we have developed or acquired and integrated a complete portfolio of solutions in this arena.

We see this as a large addressable market opportunity, we're just beginning to expose as our field organization gains confidence in our very competitive products for customers in the space.

Initial meetings that result in surprise from customers, who are just beginning to appreciate the growth in power.

Solution portfolio for electronics.

Sure HPC solutions had some excellent wins in the quarter.

One technology company into 2020 contract that is more than two times larger than their 2019 licensing.

This account is a great example of Altira starting out with a single small product use case and working with customers to show value build trust and develop the infrastructure for growth.

Silicon Valley Semiconductor company came on board as a brand new customer for license management tools.

Also in the Valley, we are pleased to be supporting hardware emulation workflow for one of the major players.

The third quarter included numerous data analytics wins in financial services manufacturing defense and public health.

Many of these wins and expansions were six figure deals.

In Q3, we released the beta version of knowledge works, our cloud native end to end platform for data analytics.

The altera sales and field organization is excited about the opportunities for this solution, especially as they are sensing appreciation from customers and analysts.

Our pipeline for data analytics continues to grow strongly towards 2021, all data products across all customers and verticals.

Healthcare remains focused on delivering great technology, and delighting customers, while we grow our scale as a software company and increase our gross margins and EBITDA margins.

Our balance sheet remains strong and we are confident in our prospects for sustainable long term growth.

In closing I want to express that we feel strongly positive about the current and future state of our company and products.

Now I will turn the call over to Howard to provide more details on our financial performance and our guidance for the fourth quarter and full year 20 Twond.

Howard.

Thanks, Jim.

As Jim mentioned, we delivered excellent third quarter results on the top and bottom lines well in excess of our expectations going into the quarter.

We exceeded our revenue guidance for Q3, driven by strong growth in software product revenue.

And also handily exceeded our adjusted EBITDA guidance driven by the combination of strong revenue performance.

With continued control over our operating expenses.

Before delving into further detail I would like to remind everyone that our seasonal billings patterns, coupled with the treatment of revenue under sea sick. So six.

Results in heightened seasonality in revenue and associated metrics, but higher software product revenue recorded in our first and fourth quarters of any given year we.

We expect this pattern to continue under present business conditions.

Our third quarter results were driven by healthy demand for our software products.

Software product revenue equaled $87.8 million compared to $77.8 million in the third quarter, a year ago growing by 13% year over year.

Total revenue equaled $106.5 million versus $100.4 million in Q3 of last year up 6%.

Total revenue continued to be impacted by the reduction in software related and client engineering services revenue due to the continuing impact from COVID-19 on the demand for these services.

Additionally, currency shifts accounted for $1.1 billion of positive impact on total revenue predominantly from software product revenue.

Acquisitions completed this year have not had a meaningful impact on revenue.

In line with our expectations and reflecting an uptick compared to Q2, our software related services revenue declined about 22% in the quarter relative to the prior year.

These results represent a slight improvement compared to Q2, which declined 31%.

Customers continue to adjust your external project spend in response to market conditions as a result of COVID-19.

Also as expected our client engineering services revenue declined by 15% in the quarter compared to the prior year due to reductions imposed by some of our CES customers, but also reflect a slight improvement compared to Q2, which declined 22%.

For the quarter, our revenue mix improved by 500 basis points software product revenue equaling, 82.5% of total revenue up from 77.5% from Q3 of the prior year.

The revenue mix shift in Q3, it's very consistent with our recent trends and demonstrates our continued progress towards increasing the mix of software product revenue.

A key driver of expanding our operating margins going forward.

Note that for the quarter software product revenue as a percentage of our software segment right.

Over 93% of segment revenue up about 270 basis points compared to the third quarter 2019.

Consistent with the shift we have seen this year.

Our recurring software license revenue.

It is the percentage of software revenue that is recurring continues to be strong at 92% and.

An increase of about four percentage points compared to 88% for the prior year period.

The key driver of this increases our continued emphasis on increasing recurring revenue licensing stream.

Third quarter billings were $107.7 million compared to $103.6 million in the year ago period.

Billings increased by $4 million driven by software momentum in the quarter.

We tend to view billings over longer time period due to the impact variations in timing of renewals expansions and new customer arrangements can have quarter to quarter.

For the year to date period feelings equaled $334.5 million compared to $345.6 million a year ago.

Foreign currency FX had a negligible impact on year to date fillings.

I would like to move to the balance of the piano results.

Gross margin in the third quarter was 72.7%, reflecting an increase of over 400 basis points from Q3 19.

This increase is mostly driven by the favorable revenue mix shift to software product revenue.

Gross profit in the quarter was adversely impacted compared to the prior year.

Approximately $1 billion directly attributable to the decline in software related and client engineering services performance.

For the quarter non-GAAP operating expenses, which excludes stock based compensation amortization of intangible assets and other operating income decreased to $73 million from $74.3 million in Q3 19.

The reduction in operating expenses were largely due to the proactive steps we enacted as part of our early response to COVID-19.

Well, we will have incremental costs from our recently announced acquisitions in.

To our non-GAAP operating expenses for the remainder of this year will be modest.

Some of the actions we undertook in late Q1 and throughout Q2 and Q3, we'll continue to mitigate increases in operating expenses as we look over the balance of the year, which we will speak about shortly.

Our adjusted EBITDA for the quarter exceeded the top of our guidance range at $8.2 million and reflects a $10.5 million increase from last years third quarter.

This increase is driven substantially by the positive shift in revenue mix, coupled with realizing reduced expenses in response to the COVID-19 environment.

Turning to our balance sheet.

Consistent with a typical seasonality in our billings and collections activity.

We ended the third quarter with $245 million in cash and cash equivalents and $120 million undrawn capacity on our us revolving.

We did drop $30 million on our revolver to fund the acquisition of units.

Our liquidity position remains strong and we feel well prepared to continue to invest in our business along with navigating the uncertainties in the current business environment associated with COVID-19.

Moving to our cash flows cash flow used in operations in the third quarter was an outflow of $6 million compared to an outflow of $1.9 million for the third quarter of 2019.

The decrease in cash flow was primarily primarily related to normal variations in working capital elements and timing.

Free cash flows for the nine months slightly improved to $23.4 million compared to $21.9 million for the same period last year.

Slightly lower cash flow from operations offset by lower Capex expenditures in the current year.

We are updating our guidance for 2020 to reflect our outperformance for Q3 and a more conservative outlook for Q4, given the uncertain impact secondary Lockdowns may have on our customers around the globe.

We believe the conservative perspective is appropriate, especially since our fourth quarter typically includes a larger portion of new and expansion revenue.

We expect to continue to see reductions can softer related services for the balance of this year, along with similar challenges for client engineering services.

We view Q4, and a cautious manner.

Especially if the impact of COVID-19 evolved into fall and winter period.

We believe operating with a cautious and conservative posture is most prudent.

Until we see tangible evidence that global economic conditions improve translating into sustainable growth and investment in R&D technology.

We previously implemented adjustments to certain expenses to reflect the current demand environment.

Going into Q4, we have reversed the prior adjustments to employee compensation level. It's.

As we believe it is important to compensate our workforce given their commitment to our company and our customers.

Adjustments to other expenses to correlate with business conditions billings and cash collections from customers such as reducing the use of outside contractors, along with consulting and professional fees remain in effect and continues to be fine tune as necessary.

As a result of travel restrictions substantially all of our sales professional services and other activities continues to be conducted remotely also contributing to cost savings.

Just know that with our broad global footprint, we adapt our policies to local or regional condition.

With our long term goals in mind, we will continue to strategically invest in certain R&D and technical support areas and selectively expand our sales capacity.

Our recently announced acquisitions are evidence of our commitment to continue to invest in people and technologies. We believe are important to support our growth objectives.

Importantly, we believe our performance in Q3, certainly highlights the value of our technology can people bring to our customers and provide solid motivation to continue to invest in our business.

Substantial level of uncertainty remains regarding the impact of coping talking to our customers and our business as we look to the balance of this year.

Significant geographic differences across the globe may impact when business conditions will normalize for our customers are most heavily affected by the economic and business conditions through which we must all conducts business.

Fortunately, we operate with a very diverse geographic and customer industry footprint.

Against this backdrop, we have updated our guidance for the year, which we believe reflects a prudent level of caution and conservatism necessary under todays uncertain and evolving circumstances.

Our recently announced acquisitions are not expected to have a significant impact on revenue for the fourth quarter, Although I will add modestly to our operating expenses, which is reflected in our guidance.

For the 2020 year, we presently expect.

Software product revenue between 373, and $377 million representing growth of 2% to 3% year over year.

Total revenue between 448 and $453 million, representing a decrease of 1% to 2% from 2019, driven primarily by a reduction in software related endpoint engineering services revenue.

Adjusted EBITDA between 40, and $42 million, representing an increase of 1% to 6% from 2019.

Free cash flow between five and $10 million.

As mentioned before our free cash flow expectations are sensitive to billing and collection patterns. Following the seasonality of our buildings.

Yes, the Q4 2020, our expectations are.

Software product revenue between 95, and $99 million, representing a decrease of 2% to 6% from the fourth quarter of 2019.

Total revenue between 112 and $117 million, representing a decrease between six and 10% from the same period last year.

Adjusted EBITDA between five and $7 million, representing a decrease of about $5.7 million to $7.7 million from 2019.

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 expectations for the balance of 2020 calls for a tax expense of between two and $3 million for the fourth quarter.

As a reminder, due to the valuation allowance position that we are primarily in the U.S.. We are not able to capture the value of foreign tax credits for operating losses for GAAP purposes in our financials.

As detailed in our prior filings we issued approximately 2.1 million options in gene at an average price of $39.48 per share. We expect to issue approximately 2 million additional options in December of this year, a strong incentive to our global senior teams to.

Can you to drive long term value.

Our updated guidance takes into account the expected increase in share based compensation expense on the relevant metrics from this issuance adoption.

We believe continuing with a very cautious and conservative view is the most appropriate perspective.

Opened 19 developments are evolving at a rapid pace and in an unpredictable manner.

Our engineering technologies are central to the R&D and product design activities of our customers across many industries.

Our data analytics products respond to the important need for deep analysis and streams of information so that our customers can rapidly make better decisions, which can be critically important in today's environment.

Our licensing model is remarkably well suited to support our customers and allows us to leverage the key benefits, we provide to meet the expanding needs of our present and future customers.

Our strong balance sheet gives us the flexibility to continue to pursue targeted M&A activities. We expect to continue to do so opportunistically.

We are quite pleased at how resilient our business is driven.

Driven by the combination of our licensing model technology investments customer centric focus and our employees around the globe.

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

Ladies and gentlemen, if you have a question or a comment at this time. Please press Star then the one key on your Touchtone telephone. If your question has been answered you were seeing with yourself from the queue. Please press the pound key.

Our first question comes from Rich Valera with Needham.

Thank you good morning, gentlemen.

Question on.

Your Fourq you your implied fourq guidance and the Threeq I mean.

I understand you're taking a conservative stance there in the fourth quarter trying to understand if that's more conservative than you were taking previously and if there was any kind of pull forward or earlier than expected renewal in threeq, you, which kind of optically is the way it might look that maybe you've got some business in Threeq you that you expected in Fourq, you and kind of left the year Relet.

Typically unchanged just trying to understand those two dynamics sort of maybe early.

Recognition as Fourq revenue, we're just taking a more conservative stance on the Fourq, you and how that plays out the guidance.

Howard you want to take that sure absolutely rich no there was no.

Meaningful shift among a Q4 to Q3, so no revenue pull forward if you will.

You know, we're just we pay close attention to.

The events that are occurring as we see them on cold here and with you know.

Lockdowns that are reaffirming that we've all heard about.

Yes, the trends that we're seeing we just think it's really important to be very cautious and conservative.

As we're heading into fall winter.

And just to follow up on that so have you actually seen any.

Changes in purchasing behavior or.

Finishing up your funnel or this is just kind of an abundance of caution here given given the macro events out there.

Yes, it's mostly just caution in your to be honest with you rich.

We there's just so much uncertainty, we we've kind of learned that we're better to be very cautious though.

The future.

Theres nothing nothing.

No.

On toward.

In our in our numbers really.

Fair Fair enough and then.

Jim last quarter, you said you were.

Some optimism that maybe you're.

The services side of the house would actually shows some improvement in the back half than you actually did see that it quarter over quarter.

Both to your software and client engineering services actually improved.

Yes, just wanted to get your sense of how that part of the businesses and have you seen any changes. There is any reason to think that that might not continue to improve or are you kind of taking a cautious stance there as well.

I'm in services did improve but but in general we are still placing the services are going to remain.

Somewhat you know certainly for the rest of the year.

Got it.

And then just on the on the product side, Jim It sounds like you were.

Getting some good traction with your electromagnetics portfolio can you give any more color on that I mean, how how significant of a business is that is that something that can be a needle mover and maybe take it up a level to just the solve a portfolio in general, which I know has been an area of focus.

It may be higher than the overall portfolio growth for you.

So first of all electromagnetics has done pretty strong part of our business for the last few years and made the acquisition.

So in 2014, and then Weve continued to invest pretty significantly both organically.

And also through M&A activity.

Yes.

That is already a pretty significant piece of business.

What's different as we've been investing in additional tools and technologies.

And finally, you know.

These things are sort of coming together and so if I look more broadly at a lift from that tronox.

Or what were calling electronic system design and even the manufacturing side.

We're now just beginning to get some recognition from customers and actually recognition internally from our sales force that we actually have this really powerful portfolio tools.

You know in many cases the customers are surprised my own surprised I think when they're seeing the reaction of some customers and so.

Just sort of coming together, so weve electromagnetics has been strong I think the broader electronics. When you think about the terminal all the things that we can now do on the PCB World.

And you.

You know going on from there so.

I think there is a really big opportunity for us.

Thank you. Our next question comes from trucks and happy with that.

Great. Good morning, guys. Thanks for taking my questions.

Just a.

A quick follow up I guess on on the software license piece, it's nice to see that recurring part ticked up in the quarter and it's trending in the right direction, but.

How should we be thinking about perpetual licenses here in the fourth quarter, we saw.

Your your typical seasonal jump in perpetual licenses in the fourth quarter of 2019.

But just curious what's kind of baked into your thoughts as we head into this one.

Julien so that Howard Yep Yep so.

So Jackson.

We.

We've continued to emphasize shifting as much as we can obviously into recurring world.

And we've been quite successful in doing so both in terms of product line and geography, they'll continue to be a little bit of perpetual.

That occur some of that is driven a little bit more on HPC universe.

But the reality is we will continue to see.

No incremental.

Incremental improvements you know inching the.

The percentage to recurring a little bit higher and that should I would I would think culture in Q4 as well.

Okay makes sense and how about.

We talked a lot I think on last quarter call about suites, and the new Alterra units model kind of maybe switching it to that so the the company gets to participate in some of the growth in usage rights or just any update Jim that you have on those two fronts.

Im sorry could you repeat the first part of your question I I didn't I cut off I'm really sorry, no no problem.

The suites, so focusing on specific users in the units model and then also kind.

Kind of that the Relaunching of the revamping of the Altair units model that you spoke about last quarter.

Yes, sorry.

So, yes, I mean, I think that that's starting to really come together.

We've we've reorganized the resellers for example, so that they are tiered.

Able to sell certain suites and others.

Well, that's actually come altogether, a very nice way and we are beginning to show customers to the new units model.

I think beginning this quarter.

It's the only way that they can they.

They can go and yes, it's having good traction level customers are are positive about it I understand that.

And sales organization is very very positive about it.

Okay, Great I answer your question.

Yes, yes.

Okay. Good.

Our next question comes from Robert Barry with William Blair.

Hey, guys. Thanks for taking my question and congratulations.

Really good quarter there I.

I wanted to touch really quickly.

Yes.

Our exposure to automotive and aerospace are you.

Starting to teach those I know your question about Q4.

I'll be speaking you post April are you starting to see stability and you start to see some of these guys start to invest more obviously the light truck went around innovation seems to suggest that you're watching pockets open up but love to get you know Jim from you were just a picture of sort of what you're seeing in the manufacturing. So given that there is big exposure, there and have been sort of improvement even in sentiment or from someone suppliers for.

Factories will be or how should we think about those markets.

So I mean for us.

That's been a fairly stable part of the business I mean, we have very very high recurring revenues on in those accounts and those have been.

Been pretty stable there has been more softness and in terms of growth in those accounts for sure this year.

I am seeing improved sentiment.

In in the automotive and aerospace markets that are there is no doubt about especially in supply business.

Yeah, I mean, I think there's going to be I think it's going to get better as time goes on again, we're super cautious for Q4 always you know.

The largest number of new cases of coal.

Yesterday I am you know.

Resurgence. So we're we're more thinking about the macro when we're thinking about being cautious for guidance through Theres nothing.

In our pipeline for example, that's really you know.

Uh huh.

Next question there.

Yes, it was more in the broader stuff.

Near term so much in the case of concern.

Concern for everybody.

It took a little bit on the pricing, while introducing summer so to make it easier for landing with the less technical design Engineering base can you talk about uptake there.

Slightly north, but much Robert should overall basically talking to people how customers use that and sort of how you view that not today again.

Next two to three years for up sell once you sort of got into these other areas. How do you think about sort of that potentially driving a layer of revenue that maybe you hadn't seen until you change your pricing on summer so little bit of the uptake and then and then how do you see going forward. Thank you.

Right. So the the the lower priced suites, all you're able to access a smaller subset of.

Occasions, and so that really helps us to penetrate into some of these.

Small medium types of accounts or even within a larger accounts into a department, we might not have gotten into before.

Then as the account as interested in using additional products until all within that suite.

Can either upgrade some of their units at additional units or upgrade all of their units to the higher level suite and have access to all those products. So we think.

It's actually going to help us to get the right value out of out of certain customers that maybe we're getting too much value in upcoming high enough price.

Products that they were they were getting from us.

The same time, giving more value to the customers the telephony.

Higher set of products. So we think it broadens the you know the addressable market for us both down and up.

And.

It gives us the opportunity to protect.

Central to get the right value from every customer.

Gotcha Gotcha helpful. Thanks, guys I appreciate it thanks for taking my questions.

Thank you.

Our next question comes from Ken Wong with Guggenheim Securities.

Great. Thanks for taking my question.

I wanted to maybe just touch on customer expansion kind of new customer activity I.

I know, it's always tricky to kind of gauge kind of those those trends relative to pretty cold, but any color you can give us in terms of how those have rebounded in a in threeq you [noise].

Yeah actually the number of new customers in Q3.

Was it was very similar to the prior year.

And.

Year to date, you know things have.

Were soft.

Q2 in general.

In general things were pretty.

The normal in Q3 for the most part.

Got it.

And then what about I guess willingness for customers to potentially kind of.

Broaden the existing renewables is that is that something that you're getting getting as much push back as you were on earlier people.

People more receptive now that things have been I guess macros, either they've gotten used to it or things have gotten a little better any color there.

I think things have gone.

A little better and again I'm not sure how you know how people are going to react.

The increase in coal revenue or.

It's sort of a wait and see for me, but until now everything else has gone.

Yeah.

Yeah, I mean in general we're feeling.

You know cautiously optimistic about the future and.

So in general.

Just feeling feeling very very solid.

Got it got it and then and then how one for you you mentioned that Q1 Q4, typically does see kind of in an up tick in terms of that that six so six tailwind.

I guess, how should we be thinking about deal duration deal sizes.

Has that started to tick back up is that something that we could potentially be surprised by in war and any any thoughts there.

Well as far as deal.

Sure as far as deal duration.

Now we're an annual recurring model. We also we have then since essentially the beginning of time. So deal duration is you're not going to see anything significant because we are what we are which is recurring model as far as average.

No transaction size or what have you I wouldn't necessarily look for anything significantly different yen.

In Q4, this year versus last year.

<unk>.

Great. Thanks, a lot guys.

[music].

Our next question comes from Matt Hedberg with RBC capital markets.

Oh, Hey, guys great. Thanks for taking my question.

I think Jim you mentioned, maybe it was you Howard, but I wanted to ask about your comment it sounded like you were suggesting that your data analytics pipeline is improving.

Just sort of wondering if you could unpack that comment a little bit more.

What's what's sort of behind that and what sort of.

The durability might we see in that trend, obviously cobot uncertainty aside.

Well you know the the.

The integration of the data analytics team took us a while to get calling we dropped some people know about some new people onto the team.

And I think that's all be gone to jail.

And sort of the go to market strategies come together confidence around the products and trust and all in the organization and so I just think now.

Now the things are operating in a very positive way.

In our machine if you will.

We're beginning to see the pipeline growing and.

The rest of the organization are beginning to understand how to speak about data analytics as well and.

And so it's it's just beginning to be a healthy part of the business, where we see the.

The pipeline really really coming together.

That's nothing more exciting than that sorry [laughter].

Yes.

Thank you. Our next question comes from Brian Essex with Goldman Sachs.

Hi, good morning, and thank you for taking the question Jim.

Jim just had a question for you, particularly based on you know some of the acquisitions that you've done like party log in Asia. What do you think from a macro perspective is it really it sounds like things are relatively stable in spite of some of the kind of industry volatility that we see seen part.

Particularly in aerospace and auto, but but from a macro perspective any insight you can offer.

By by Geo, and where you might be seeing pockets of perhaps better strength or I know pilot you acquired access to some pretty large customers on that side is that getting better traction maybe offsetting some of the macro that'd be really helpful to understand.

I mean in general I think China was was really down in Q1, and so it was Korea.

Come back very very strongly and that's critically important for Q Q4, China is always important than Q4 and it. It's also that was previous question well.

Oil perpetual we do have a little higher perpetual in China.

So Asia Pacific in General I think is unwell, India obviously.

Suffered allow confident.

They've they've.

Hung in there pretty well.

With that as well so in general I mean, I think things are operating reasonably well across most of the world for us and across all the different verticals and across the different solutions.

Sales coming.

Coming in pretty normally a little bit muted, obviously, we would love to see a lot more growth.

But it's an unusual time.

But but in general.

That's fairly fairly stable across the world.

Got it that's that's good to hear and then maybe want to touch quickly on the HPC services.

It sounds like your mate, making kind of incremental investment in that segment and I thought that you know your model of being able to utilize.

You know are enabling customers to utilize a PC compute power.

Across your platform as was pretty interesting.

How is that progressing is it meaningful contributor to the platform and how do your customers think about that versus maybe you know other either dedicated hosted HPC solutions they have access to.

So HPC is.

He is very very healthy actually part of the business for us and growing.

Probably ahead of us.

The other parts of the business in many ways.

For us it just makes sense to continue to invest there because.

All of the things that our customers do really leverage PC and.

And as HPC moves from on Prem to the cloud, we're pouring investment into that as HPC is moving from just simulation to a lot of data science.

This is why you see in storage where scheduling.

That's a big focus for us.

So.

I mean that it is because it's certainly a meaningful part of our business and growing and we continue to see it is important.

Understand not just the applications, but also in other.

The way. These things are are running well frankly, it's just a really really critical part of the business.

I'm not sure I answered your question, but I've tried to give you a little.

Hi, Joe.

So that.

That's really helpful. I guess I was trying to get to like how much easier is it for your customers to consume HPC across your platform as opposed to other resources. They may have access to the New York you have pricing power because you can consolidate the usage and make it more efficient to kind of port.

What models over onto the platform.

On the health care platform as opposed to using another service.

Yes.

So I mean, what we what we're really doing is we have a lot of technology that lets you move the workloads wherever you want to move on so you are not confined to azure already told us or even on Prem.

You can you know very efficiently understand.

Cost some efficiencies.

Response times, and all that to very efficiently schedule, where you're going to run on jobs.

We you know.

The level of technology that we have is really pretty sophisticated at this point.

And.

You know this idea of just running in the cloud for example.

Sort of back to the future timeshare if you go back 30 years ago.

Time sharing just letting your engineers throw jobs into the cloud.

Run up bills really fast so you know needing technology that helps as a manager licenses, which are very expensive your software licenses and technology that helps you to manage the cost side.

The performance side is going to be really critical so for us we see that hasn't really key element.

I want to do a huge amount of analytics parametric studies running optimizations running data science applications.

Really need to use a huge amount of computing.

You just have to manage manage that and very very efficient way.

Thank you. Your next question comes from government <unk> Berber.

[music].

Hi, Good morning, Thanks for taking my question just a quick Q1.

Just one maybe Tim for you you guys of being kind of thinking about the go to market for the last couple of years. It looks like on this morning, and I couldn't be like you said, you've kind of reached a record low bid pricing model and we'll still because the market is true.

The channel.

Give us a little update on that and then on the high end of the market well.

What I'm what I'm hearing is you mentioned a lot of six and seven digit deals.

It kind of sounds more like what you guys have been trying to achieve for last few years in order to increase the adoption of the broader Blue Bank platform.

Can you give us a little bit of an update if that kind of.

Result.

On the platform coming together and that you know that you high and everything you've done around that or is it just more focused go to market, which cannot be reallocated. Some of the resources to kind of key account management. Thank you.

So on the high end I think we are focusing on on you know key accounts for sure and we're very focused on selling the entire portfolio as opposed to sort of tools or are single point solutions and we do have without question the broadest portfolio of technology.

In the market.

So I think that's what's happening there.

We're also beginning to as I said earlier really appreciate the power that we have on the electronics side I think it's a new area for us we're a mechanical company.

History, but we've poured investment over the last 10 years into the electronics.

Thats really coming together.

And so you know that is.

Just really really key for us on the small and medium side, we have a lot of investment into our indirect business. We're certifying resellers, we've been very official no.

Working with the right resellers dropping some resellers that really doesn't contribute.

Organizing them in ways.

Let me make the most sense, if you will in terms of which products they take to market a training.

Training investing together with them co selling with them doing.

Doing doing marketing together with them and.

We are seeing a move our goal is to grow the percentage of revenue that's coming from indirect.

Salt substantially actually over the last three years and we are seeing that beginning to take hold.

That's really helpful. And then just as a follow up on.

Gross margins continue to expand significantly as your software portfolio kind of central revenue grows based on that portfolio adoption, which is great to see.

How much of that margin.

Think about it we'd be moving to kind of next years I'm just directionally in terms of the margin considering the fact that.

Matt centric continues to grow faster than Dan.

Services aren't and potentially some of that travel comes back. So maybe you know on the Opex you do have a little bit more investment.

Do you think that that margin expansion continues to be sustainable as we move into the next few years say after the close it.

Our intention is for it to be sustainable.

On the on the travel expenses we.

Honestly don't expect that to get back to where it was before.

Honestly were.

Pretty focus we were focused coming into the year on reducing on them.

To some extent coated accelerates the hat.

Yes.

Our guidance came out the customers are more comfortable.

Working with us more remote Liam and we're more comfortable doing the same thing. So we're just trying to be more efficient in terms of how we support customers.

So we think we can.

We can do things in a more centralized manner.

I'll, let howard contribute to that.

As for as well logs.

Sure just very briefly the Yale certain.

Certainly you know there is potential for incremental improvement in gross and gross margins.

As Jim said.

Yes, yes.

As you look over the course of time with software growing obviously software product growing.

Obviously at a rate faster than related services.

And as we look forward you know part of the understanding here.

Are we likely to travel more at some point in the future than we did this year the answer is probably yes.

But that's certainly we've proven.

As many others have that you don't need to.

To travel quite as much as as we had been doing before to support the objectives of our business. So.

A little early to really call that right balance there, but certainly big opportunities there is no doubt.

Thank you. Our next question comes from Marshall troubled benchmark.

Hi, Good morning, and thank you for taking my question Jim.

Just one question with respect to your core engineering simulation product portfolio, where are you seeing pockets of strength is it in the inspire and some solid solution areas would be hyper mesh.

Your solvers.

Jim where you're going to take that one or do you want to be.

We may have lost.

Yes.

So mark Thanks for the question is is some of that in the prepared remarks reflected obviously a lot of strength on the electronics and electromagnetic side for sure.

From from our software portfolio and any absolutely.

Continued.

Yeah, great uptake and expansion driven by some solid and broadly within the inspired portfolio. So.

Yes, those those are two areas and in as well.

The key point here is selling the entire breadth of the portfolio, which includes beyond just like travel electronics or electromagnetics, including Cfds and such so.

No.

That's really what's been driving a lot of the success here in Q3.

Great. Thank you. Thank you you're welcome sorry, I got dropped off the call so apologize for that.

And I'm not showing any further questions at this time, let's turn the call back over to John.

Okay.

Again, sorry for dropping off the call there I'm not sure what I Miss.

Only only comment I would like to make is just I've never felt more excited about the products that we have many opportunities we have in the market right now.

I just want to thank all of you for your interest in health care and and.

Thanks to my team and also to our customers for their support so thank you very much higher grade.

Ladies and gentlemen. This concludes today's presentation you may now disconnect and have a wonderful day.

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