Q1 2022 Altair Engineering Inc Earnings Call
Hello, Thank you for standing by and welcome to the Altair Engineering, Inc. First quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speaker presentation there'll be a question and answer session to ask a question. During the session you will need to press star one on your telephone please be advised.
Today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker today, David Simon Chief Administrative officer. Please go ahead.
Good afternoon, welcome and thank you for attending Alturas earnings conference call for the first quarter of 2022.
Ended March 31 2022.
I'm, David Simon Chief administrative officer of Altair, and with me on the call or Jim Scapa.
<unk> chairman and CEO .
Brown Chief Financial Officer.
After market close today.
A press release with details regarding our first quarter performance.
Guidance for the second quarter and full year 2022, which.
Which can be accessed on the Investor Relations section of our website at.
Investor Altair.
Tom.
This call is being recorded.
A replay will be available.
On the IR section of our web site following the conclusion of this call.
During today's call, we will make statements related to our business that may be considered forward looking under federal securities laws.
Statements reflect our views only as of today and should not be considered representative of.
Of our views as of any subsequent date.
We disclaim any obligation.
To update any forward looking statements or outlook.
These statements are subject to a variety of risks and uncertainties that could.
Actual results could differ materially from our expectations.
These risks are summarized in the press release that we issued earlier today.
For further discussion of the material risks and other important factors that could affect our actual results. Please refer to those contained in our quarterly and annual reports.
With the SEC.
Well as other documents we have filed.
Or may file from time to time.
During the course of today's call, we will refer to certain non-GAAP financial measures a reconciliation of GAAP to non-GAAP measures is included in our press release.
Finally at times in our prepared comments or responses to your questions. We may offer metrics that are incremental to our usual presentation to provide greater insight into the dynamics of our business or our quarterly results.
Please be advised that we may or may not continue to provide this additional detail in the future.
Let me turn the call over to Jim for his prepared remarks.
Jim.
Thank you, Dave and welcome to everyone on the call.
Today, I will discuss our results for the first quarter of 2022.
The recent acquisitions and integrations of towers and world programming.
The release of our stimulation 22 software suite.
Some customer stories and our outlook for the remainder of the year.
Algeria had a very strong first quarter 2022, with all of our key metrics coming in above guidance ranges.
We began this year focused on our mission to deliver high value products and expertise to help our customers increase the personal C and competitiveness by driving smarter decisions with computational science and artificial intelligence.
Despite macroeconomic challenges, including Lockdowns in China, the warm eastern Europe supply chain disruptions and inflation, our business momentum continues to be robust globally and across industry verticals.
Total billings for the first quarter 2022, or $171 3 million, an increase of 17, 5% compared to Q1 2021.
Given primarily by strong new and expansion software opportunities and high retention on our software renewal base we.
We saw growth in all three geographic regions, and particular strength on the technology and banking financial services and insurance verticals.
The growing success, we experienced with our data analytics products in the second half of 2021.
<unk> in the first quarter 2022, with notable wins in that space.
We are pleased to report Q1 results with total revenue of $159 8 million.
Software product revenue for the quarter was $140 9 million versus $129 5 million in Q1 of 2020, one reflecting year on year growth of eight 8% or 11, 5% in constant currency.
Adjusted EBITDA for Q1, 2022 was $46 6 million.
Compared to $37 million in Q1 of 2021, an increase of nearly 26% from the first quarter of 'twenty 'twenty. One software product revenue was 88, 2% of total revenue for the first quarter compared to 86, 3% in the prior year period.
Yes.
Our recurring software license rate remains high at 93% for the first quarter of 2022 as compared to 92% for the full year 2021.
While we saw strong software product revenue growth in the quarter and over 80% of this incremental revenue converted to incremental EBITDA. The balance of the business saw an overall aggregate revenue decline of approximately $1 7 million as compared to the prior year period.
In March Alger acquired tower sale.
Our market, leading provider of simulation and design tools for power electronics, including power supplies motor drives control systems and micro grids.
This acquisition expands Altos electronics system design technology, and so the domain power electronics.
Power some has a leading solution.
Proven to reduce development costs and time to market for thousands of customers around the globe, including major companies in the automotive aerospace consumer electronics and industrial applications sectors.
The addition of power some technologies and experienced technical team with deep domain knowledge and power electronics rounds out Algiers offerings for electric motor design and many other applications.
We are rapidly integrating power systems software and to Altair is electronics system design suite for motor and controller designs device system and circuit level simulations.
Bedded co generation.
And combined cooling and thermal analysis.
Consistent with the tremendous value, we offer customers under Altair, you and us.
Our Simmons available under unit based licensing subscriptions at no incremental cost.
Last December Alger acquired World programming, a UK based technology company founded 20 years ago specializing in data analytics software.
World programming <unk> flagship product allows programmers to develop and execute software solutions and multi language coding environments, including Python or SQL and most notably the SaaS language.
Their technology and products are being integrated into Alterra is data science solutions.
<unk> made available under Altair units.
The SaaS coding language was developed and implemented in the early 19 seventies.
Over the last 40 years, many large enterprises have used SaaS language to develop data processing statistical analysis and data analysis programs, which run critical back office functions often on mainframe computers.
Many organizations and individual programmers have been using it for decades and are comfortable and extremely proficient in AR.
While compilers and interpreters for most languages are widely available on many platforms SaaS language compile and interpret was only available for many years from the SaaS Institute.
Today, we believe world programming SaaS language compiler technology is extremely competitive.
Our performance and completeness perspective, as over 500 customers, including many large scale global enterprises employ it and push its development.
We see the acquisition of World program.
Bringing a substantial opportunity for Altair.
However, the acquisition came with a significant challenge and injunction existed again selling world programming products in the United States, the largest market for data analytics globally.
In addition, many multinational customers expect to implement enterprise applications globally, including the United States.
Which means selecting world programming solutions a challenge.
On March 3rd 2022, a federal judge in North Carolina rule to lift the injunction and close the case against World program Man.
Alterra is now free to sell world programming products everywhere, including the United States.
World programming technology exemplifies our dedication to an open architecture philosophy.
Is the best way for people to harness innovation improved products and get the most from their work.
Awesome as well as circuit board and electronic design capabilities.
This latest release also includes a myriad of updates to <unk> traditional solutions with many new features and capabilities that broaden and strengthen.
And further Specialise altruist comprehensive simulation tool kit.
Simulation of 2022.
Includes a host of updates that bolster altair system modeling finding element analysis and manufacturing solutions <unk>.
Including an exciting new solver for binder jet centering simulation for additive manufacturing.
Simulation 20 twenty-two also includes connectivity uptake features that help users simulate antennas with exceptional accuracy.
Get resolved and salt bigger problems faster and broaden users tool set for the eight S applications.
This release also includes many updates for architectural engineering, including support for several new international construction standards.
We've added more capabilities for circuit board in electronic design and enhance users abilities to design and implement smart components.
Products and systems, including expanded features for design verification signal integrity and printed circuit board modeling functionalities.
In our simulation 2020 release alter introduced the design explorer module to.
To provide users with seamless easy to use design, Ivy Asian and exploration tools.
Integrated into our find it all that modeling environment.
Design explore workflows deliver interactive insights with multi run simulation setup X.
Execution design of experiments optimization and interpretation.
It also leverages artificial intelligence as exploration generated data is trained using advanced machine learning techniques, providing AI predictive capabilities with near real time performance.
With the release of Altair simulation 2022.
Design explorer workflow is available and inspire.
Allowing design engineers to parameterized geometry.
And leverage the extreme performance and efficiency of some solid.
In summary, Altair simulation 20, twenty-two represents an outstanding new level of functionality and performance to help our customers leverage the power of computational science and artificial intelligence.
The significant increase in capabilities does directly related to several great first quarter wins for a simulation technologies.
And the mayor we had two aerospace winds, representing 60% revenue increases through multidisciplinary tools, including some solid three D printing electronic systems design and topology optimization.
A major APAC automotive manufacturer committed to an expansion related to a multidisciplinary optimization and computational fluid dynamics.
In a building equipment supplier and he may selected altair to be its solution across many disciplines, including electric motor development and structures.
The convergence of simulation and AI continues to flourish.
We recently published a case study from B M. W. Describing how it is emulating engineering expertise for automotive crash worthiness optimization.
AI enhanced surrogate modeling.
The company is using Altair is machine learning solutions to help target specific crash kinematics during structural optimization.
This new M. L powered workflow augment and extends bmw's existing engineering expertise allow.
Allowing it to more efficiently allocated computing and human resources to high value simulation analysis and validation efforts.
Finally, our momentum and the banking and financial services sector continues.
We closed a significant data analytics deal to bring on one of the 10 largest banks in the U S as in Altair units customer.
And look forward to helping them fully leverage the power of data throughout their organization.
And we close to five year eight figure licensing deal, our largest data analytics and a ideal ever with a global financial services company for.
For applications across our product portfolio, including technology from our recent world programming acquisition.
The opportunities in front of us are exciting and we have many reasons to be optimistic midst worldwide geopolitical and economic concerns.
We're confident in our ability to do well despite the headwinds of economic uncertainty, especially given the exceptional value and combined strength of our culture technology offerings and business model.
We take deliberately Ah responsibilities as good global citizens Ah recently updated sustainability report includes discussion of our efforts around inclusion community involvement and academic programs, which empowers students to become the forward thinkers on innovators.
Who will help build a more sustainable world.
Now I will turn the call over to Matt provide more details on our financial performance and our guidance for the second quarter and full year 2022 map.
Thank you Jane and Hello to everyone on the call. Thank you for joining us.
In our first quarter of 2022, we achieved another exciting milestone by recording the highest revenue and adjusted EBITDA and al cares history.
The power of our software to enable better decision, making is resonating with our customers and translating to growth in both our top line and profit once again generating results above the high end of the range on every metric we guided to for the quarter.
Total billings for the quarter were $171.3 million, an increase of 17.5% compared to Q1 2021.
This is driven by strong software billings in the quarter supported by growth across all geography.
Our strengths and <unk> was partially offset by a decrease in services and other buildings, which were down in the first quarter compared to prior year, primarily as a result of declines in our CES business.
In total the strength in billings resulted in software product and total revenue exceeding our expectations for the first quarter of 2022.
Software product revenue was $140.9 million or an increase of 8.8% compared to Q1 2021.
Total revenue, which includes services and other revenue was $159.8 million or an increase of 6.4% compared to Q1 2021.
A recurring software license Rey, which is the percentage of software product billions that a recurring continues to be strong at approximately 93% for the quarter.
As a reminder, a significant portion of our revenues are building currencies other than the U S dollar.
And are therefore impacted by changes in F X rays.
Relative to Q1 2021 <unk>.
Our software product revenues and total revenues were unfavourably impacted by changes in F X rays of approximately $3.5 million and $4.0 million respectively.
Therefore on a constant currency basis in the first quarter 2022, we saw a year over year software product revenue growth in total revenue growth of approximately 11.5% and 9.0% respectively.
non-GAAP gross margin, which excludes stock based compensation and restructuring expense with 81.4% in the first quarter <unk>.
Compared to 79.0% in the prior year.
An increase of 240 basis points.
As our software revenue mix, which carries higher gross margins <unk>.
Increased as a percentage of total revenue.
In addition are non-GAAP margins specific to software product revenue continued to improve.
And our support costs as a percentage of revenue trended down.
Software revenue was 88.2% of total revenue in Q1 2022.
Compared to 86.3% in the prior year.
Over the longterm, we continue to expect a general mix shift towards software product revenue as.
As growth there will continue to outpace services and other revenue.
non-GAAP operating expenses, which exclude stock based compensation.
<unk> nation of intangible assets and restructuring charges.
$84.9 million compared to $82.6 million in the year ago period.
Adjusted EBITDA in Q1, 2022 was $46.6 million or 29.2% of total revenue.
Compared to $37.0 million or.
Or 24.6% in the prior year quarter.
An increase of 26.1%.
This increase compared to prior year quarter, as well as relative to our expectations.
Was driven by the increase in revenue in the quarter combined with her discipline spending.
We continued to drive higher adjusted EBITDA as we see a greater percentage of our incremental revenue growth dropping to the bottom line.
Turning to our balance sheet, we ended the first quarter with $405.6 million in cash and cash equivalents.
Decreases approximately $8.2 million from your end.
The quarter over quarter decrease is primarily due to our payment of the litigation judgment against W. P. L of.
Of $65.9 million, which was a liability we assumed as part of our acquisition and paid in January .
This payment was partially offset by strong cash flow from other operating activities.
Reflecting this payment free cashflow during the quarter with $3.6 million.
But excluding this one time payment are free cash flow for the quarter was $69.5 million compared to free cash flow of $33.5 million in Q1 2021.
So we're very pleased with our cash flow generation in the first quarter.
Turning to guidance for Q2 in full year 2022.
We are expecting software product revenue for Q2 in the range of 111.
$114 million.
For a year over year growth of 11.5% to 14.5%.
And we're maintaining our full year 2022 software product revenue guidance range.
496.
To $508 million, a year over year growth of 9.3% to 12.0%.
We continue to expect services and other revenue to be down slightly in 2022 compared to 2021 consistent with our previous guidance.
As a result, we expect total revenue for Q2 2022 in the range of $128 million to $131 million.
A year over year growth of 6.7% to 9.2%.
We're maintaining our four year 2022, total revenue guidance range of $568 million to $582 million or year over year growth of $6, 7% to 9.4%.
Our revenue guidance reflects currency headwinds relative to prior year as well as relative to the full year guidance given last quarter.
From a cost perspective, we continue to be disciplined in our approach, we're investing in product development and sales and marketing, while reducing our spend an administrative department, which is helping to drive increases and adjusted EBITDA.
Four Q2 2022, we expect adjusted EBITDA in the range of $12 million to $14 million or 9.4% to 10.7% of total revenue.
Compared to $9.5 million or 7.9% of total revenue in the year ago period.
And for full year 2022, we are slightly raising our adjusted EBITDA guidance at the mid point to a range of $98 million to $106 million.
417.3% to 18.2% of total revenue <unk>.
Compared to $85.3 million or 16.0% of total revenue in 2021.
We are also raising our full year 2022 free cash flow guidance.
To a range of $10 million to $17 million.
Which again includes the 65.9 million payment for the existing litigation judgment against W. P. L that we assumed as part of our acquisition and it was paid in January .
As a reminder, or cash flow expectations are sensitive to billing and collection pattern, which fluctuate seasonally.
In particular are historical pattern has shown a free cash inflow in the first half of the year, primarily from collections on billions from Q4 and Q1.
In a smaller free cash outflow in the second half of the year.
We're expecting that pattern to continue this year.
We've provided detailed guidance tables, and our earnings press release, including reconciliations to comparable gap amount, which was issued after close of market today.
I'm excited about our record high results in the first quarter.
Which puts us in an excellent position to achieve our financial goals for the year.
But I'm, even more excited about the software and services, we're offering into our customers, enabling them to make better products and make better decisions faster.
With that we'd be happy to take your questions operator.
Thank you as a reminder to ask a question you'll need to press star one on your telephone.
Dry your question press the pound key.
Our first question comes from Blair Abernethy with Rosenblatt you May proceed with your question.
Hi, guys hits, it's Blair from that Rosenblatt.
So great start to the year, just wanted to talk to a little bit actually a little bit more about what you're seeing in Europe .
You've.
Talked with earlier in the quarter about your your position in Russia, but just wondering it in terms of.
Across the simulation H P C and.
Your customers on the banking side in data and analytics, whether you're seeing any really change in a tenor telling us.
Projects or or budgets that they're looking at this year.
Forgive me because the the thyroid owned by [laughter].
Give it one second I apologize okay.
Were you specifically asking about Europe or was that globally I'm sorry.
Yeah, <unk> Europe gym.
Okay Europe , Okay that makes sense.
So you know.
In general we we don't have a lot of exposure to Russia first of all I mean, there's a little bit there obviously, we've got that down.
We.
We do have you know some things in eastern Europe , and there is a kind of stagnation around on that as well. So I mean, we're seeing some some impact.
You know in eastern Europe , and Russia.
There's no doubt about it it's not huge for us and and.
In the overall scheme of things and you know.
But.
You know it hasn't from what we see it hasn't really impacted the rest of Europe very much.
That could change we'd have to be.
Cautious about that and we are.
But.
But right now you know for the most part.
You know, obviously, Russia in in a bit in eastern Europe , but.
For the most part I think we're feeling like things are <unk>.
Moving relatively normally.
Emphasis on relatively.
Relative great just shifting gears two two world programming can you can you just talk about the.
Integration side of things what are your plans there on the product side, what should we be sort of watching for and then on the go to market side now that you have a free rein in the U S market. How how are you. How are you approaching that is it within your data and analytics teams or.
Or is it still stand alone it will programming.
Go to market just want to understand what's the status now.
I mean, we we have left the company in a standalone mode for now, but a lot of that is somewhat administrative we have a lot of things going on with the <unk> team Madison you're smiling.
But but that should start to happen. Later later this year as far as you know how we're operating in how we go to market. The teams are development teams are already pretty.
Pretty closely working together.
The the go to market teams are already working very closely together.
Organized so you know those folks are are part of our.
Go to market teams on the data analytic side and then the products, we're gonna make make those products available under our units model.
Which is this powerful because you know as you know we're we're as fast as we can we're moving customers into the units model and is there in the units model them than those products become incremental.
You know solutions that are available to customers and customers.
I think you're gonna really value of that quite frankly.
We are seeing a shift I sort of alluded to it in my script.
That you know when when there was the restriction and and selling in the United States that it doesn't just impact.
The United States. It impacts you know if you have a global enterprise, where they're headquartered in Europe .
But they're gonna have operations in the U S in the Americas, and so they might be more reluctant in fact, they were more reluctant to do something.
Because they want to one out of a global solution. So we are seeing a lot of opportunity pipelines growing pretty fast quite frankly, and whether or not you know how fast these things clothes, you know within 2022.
Not clear, but but we we are sending a very very significant increase to our pipeline.
So we're we're pretty happy we're very pleased about how things are gone.
Okay, great and and I'm just along the Altera units line, where are you at in on your data and analytics, our customer base, how much of the wait how much of those customers are now on an altar units model.
I'm Gonna take a stab here, there's a lot of different kinds of customers that came out of date or you know there were literally thousands of customers I'm I'm not sure people.
Realize the the the breath of customer base the data watch out when we acquired them. They were 30 your company several companies have been put together.
So you have kind of a mix of of accounts.
With the enterprise accounts I'm Gonna say and this is truly staff because I don't have a metric on and I just looked at the man and he doesn't really know so we're gonna have to do better with that but I think it's probably a third to half.
And but we are we are feeling a lot of momentum with that now and you know as you have more an interesting <unk>.
Products and the portfolio the units model becomes more and more interesting to customers as you can imagine.
So I think it's gonna start getting easier and easier.
Great. Thank you very much for that.
Sure.
Thank you and our next question comes from our Chapel with Luke Capital You May proceed with your question.
Hi, Thank you for taking my question and a nice job on the corner. Jim quick question for you around some solid not much discussion in your prepared remarks. So this quarter. Just wondering if you just give us a <unk> update on <unk>.
Yeah, we we continued to.
Honestly just crush it [laughter] solid both on the development side, we're adding more and more horsepower development team. We're we're you know investing.
Investing in our winters basically and that is a winner.
And so we're adding more and more capabilities to that product.
At a very very rapid pace.
And we're engaged with customers doing.
Things that probably two years ago, we thought might not be feasible to do.
And then just in terms of impact your usage, it's it's by far the fastest growing product portfolio.
Still great. Thanks, and then also with respect to new customers are using some solid and also inspire is there's kind of a starter or just kind of all of the product.
Some saw it as.
Is in fact, a really great lead and especially in the middle part of the market low to middle middle part of the market.
Because it's so easy to use and you know where you might have an account that have you know solid works or whatever.
It's it's it's very.
It's so powerful so fast so easy to use.
And and and frankly pretty reasonable.
I'm a package you know.
Alter units package that you do.
So it is a great entre into that market similar for inspire.
And so yes.
But it's also and you know in the very largest accounts you know automotive aerospace accounts.
That has tremendous traction people recognize.
More and more.
That this product is different and and.
It gets overused and and I hate I hate to say it but it is really sort of game changing.
Great. Thank you and then.
Bringing you in here with respect of guidance.
It was a very strong quarter, especially in the software Rutgers side and you know guys just pretty much staying put for the four year is is that largely due to you know the currency headwinds that you've addressed earlier.
Yeah, you've got it exactly right so the.
The amount that we over achieved on on Q1 total revenue almost exactly is offset by country headwinds that were seen.
Just quarter on quarter relative to the Guy that we gave for full year, just three months ago. So on a constant currency basis. You can read that is taking up guidance for the full year for revenue.
But when we factor in at reported currency, we're we're right back down to what we got it last quarter.
Great. Thank you that's all for me.
Take your next question comes from David Becker was William Blair. You May proceed with your question.
Hey, guys I'm appreciate taking the questions here next job Jim maybe we I think you just touched on the data analytic side, a second ago, but I'm thinking about the app like epica barely hear of bringing stimulation earlier throughout the design process and help us get a sense of maybe how are.
Usage dynamics can come into play here write some more simulations requiring more data you've got the units component to but is there any any other separate can a unit dynamic on leveraging more data maybe it's the sophistication complexity, there but to kind of capture both aspects of this tailwind.
Capturing especially though what was that last word I'm so sorry.
The the the <unk> the tailwind around again more data being leverage not only in simulation, but but across enterprises.
So I had a little thing in my prepared remarks.
About the design explore and actually that that brings in some solid because we built a design explore it's kind of a tool that.
Once you've got your model now you can very very quickly do you know setup.
Well you know, what's the impact of you know changing engages or what the impact of changing almost anything in your model and you can set objective functions maths or or volumes or whatever you want displacements.
You know originally we put that into a hyper match, which is primarily.
It's a module, but but it's primarily funded ulman based solution and we had a whole element of a either by the way because what we can do is we can take all the data from all these runs.
And then we run it through a neural net and now we also can.
Predict changes you know using that now we've put it into inspire and and we have some solid which is blazing fast drum gazillions of simulations.
We can again do you know the always and you know I use all these other methods, but one of the methods as to run it through.
Run it through hang on a second cause my wife is calling me she doesn't realize I have earnings call for that.
So.
So yeah, we we can run a three year old enough there as well and of course some salad.
You know allows us to run.
A huge number of very very fast of simulations and and inspire what's cool about it is you're you're able to parameterized the geometry as opposed to the mesh.
So yeah, we have that additional power as well.
So I'm not sure I'm answering your question completely but but yeah, yeah, I know that that that's super helpful. I Hope helpful. Backdrop overall, maybe switching to integration and and you guys just kind of M&A strategy as well, maybe a reminder, I've I've kind of the existing cross-sell opportunity for for W. P. L cause you any of these some of these other guy.
<unk> as they're layering an incremental simulation functionality, maybe who are some of the other simulation providers that they may be worked with in the past and how that have that platform of your kind of portfolio of solutions, maybe continues to resonate as maybe some of these customers as well are looking to to standardized and leverage the units model, giving you can.
Offer so much across your existing sweet thanks.
So I'm not sure I fully got back cause we had a fire engine a cast and I'm, having a lot of interference challenges for that but I think that what I heard of you know do I seaworld programming playing into a lot of the the accounts.
That we have cross selling into a lot of these accounts.
And.
Let me break it into two things on the bank.
Banking and financial services market, which is you know.
Very big and important market.
You know for the analytic stop there's definitely big cross-sell opportunities there.
There's almost.
Basically every every customer you can think of you know is is using the fast fast programming language.
Probably pretty extensively so there is a significant opportunity and to all those accounts. There's also a pretty significant opportunity into our traditional base of manufacturing customers because believe it or not many of those are using you know the fast language as well.
And you know.
Frankly speaking early on in my career I used staff, you know to take test data and do statistical analysis on it I think you know.
So I I think there is a lot of opportunity the the code Ah you know the compiler.
Produce a very very efficient Ah Ah the algorithms are extremely efficient.
So I think there's a youth there's use cases in the engineering world. There's obviously a lot of use cases.
In the in the business World and just the plain old data processing world.
Got it very helpful. Thanks for taking the questions get.
Thank you and that concludes our Q&A session I would now like to turn the call back over to James Castle for any closing remarks.
Just just want to express their appreciation for all the interest in and out there on the sport for our company to our investors and and to the analyst as well so into my team of course.
Thank you.
Thank you.
This concludes today's conference call. Thank you for participating you may not disconnect.
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