Q2 2022 Altair Engineering Inc Earnings Call
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Yeah.
Good day, and thank you for standing by and welcome to the Old Care Q2, 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one one on your telephone.
Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Dave Simon SVP Investor Relations.
May begin.
Yeah.
Good afternoon, welcome and thank you for attending <unk> conference call for the second quarter of 2022 ended June 32022.
I'm, Dave Simon SVP Investor Relations and whats the on the call are Jim Scapa, founder, Chairman and CEO , and Matt <unk> Chief Financial Officer.
After market close today, we issued a press release with details regarding our second quarter performance and guidance for the third quarter and full year 2022.
Which can be accessed on the Investor Relations section of our website.
Investor Altair Dot com.
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.
These statements reflect our views only as of today and should not be considered representative 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 cause actual results to differ materially from our expectations.
These risks are summarized in the press release that we issued earlier today.
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 SEC as well as other documents that we have filed or may file from time to time.
During the course of today's call, we will refer to certain non-GAAP financial measures a reconciliation of GAAP to non-GAAP measures is included in our press release.
Finally at times in our prepared comments or responses to your questions. We may offer metrics that are incremental to our usual presentation to provide greater insight into the dynamics of our business 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.
Thank you, Dave and welcome to everyone on the call.
Today, I will discuss our results for the second quarter of 2022 exciting product momentum, including the recent acquisitions of Gen <unk> and concept engineering, some customer successes and other news.
The strong second quarter with all our key metrics coming in above our guidance ranges.
Total second quarter revenue equaled $132 7 million.
Software product revenue for the quarter was $116 9 million up from $99 6 million in Q2 of 2021.
Reflecting year on year growth of 17% or 23% in constant currency.
Adjusted EBITDA for Q2, 2022 was $16 4 million compared to $9 5 million in Q2 of 2021, an increase of 73% from the second quarter of 2021.
Software product revenue in <unk> 2022 was $257 8 million up from $229 1 million and <unk> hundred 2021, reflecting growth of 12, 5%.
Adjusted EBIT for <unk>, 2022 was $63 million versus $46 5 million and <unk> hundred 2021, reflecting growth of 35, 7%.
Software product revenue for the first half of 2022 continued a strong positive trend at 88% of total revenue compared to 85% during the first half of 2021.
Our recurring software license rate remains high at 93% for the first half of 2022 as compared to 92% for the first half of 2021.
Simulation software continued to grow nicely in Q2 2022 across all regions data analytics and HBC software had outstanding performance in the quarter and year to date with notable success outside of the Americas, where these businesses are generally less stream.
<unk>.
Our software related services revenue grew modestly for the first six months of 2022 with 6% growth compared to the first six months of 2021.
Client engineering services continues to be down significantly in the first six months of 2022 for the 28% reduction as compared to the first six months of 2021.
Reflecting market trends and our own strategic shift towards higher gross margin activities.
We feel tremendous excitement around the pace of our product development as we accelerate towards the next generation of solutions and technology for the hyper connected and converging markets we address.
Our design modeling and visualization products and solutions.
We're moving fast to seamlessly integrate user experiences shared data natively create easy workflows for difficult problems and operate in the cloud.
Our solver technology is maturing rapidly and we are beginning to look at multi physics capabilities for some solid which.
Which promise game changing performance in new markets like electronics.
Our <unk> solutions are working on extra scale performance and highly efficient cloud resource management.
And our data analytics offerings are on a path to deliver best in class.
Our price level, usability scalability and performance in public and private clouds.
Altair continues to focus on simulation driven design solutions rapidly, adding new geometry and design features.
Port for most traditional and additive manufacturing methods.
Additive manufacturing has the potential to transform a number of industries, including aerospace automotive medical and energy.
Allowing for fewer components and designs and highly efficient shapes not feasible with traditional manufacturing.
In June we acquired Gen. III D. A UK start up out of the University about and a pioneer implementing the implicit geometry method for describing highly complex geometries, such as lattice structures and additive manufacturing.
Its next generation implicit algorithms and modeling techniques.
Rapidly create complex geometry, not practical with traditional modeling approaches.
The powerful ability to support lattices to achieve optimum designs for fluid structure and thermal requirements is an important and exciting addition to our simulation driven design portfolio.
The current Gen. III V products will be available under Alterra units Jen <unk> underlying technology will be integrated into altura and inspire our highly differentiated family of simulation driven design products, giving customers a complete solution environment.
To rapidly create complex designs, while minimizing the risk of imprint failures during additive manufacturing processes.
Another important area of focus for Alterra is the convergence of electronics with mechanical designs and the predictive and prescriptive Antelope analysis.
Associated with this.
Electronic systems and controls are increasing in importance in semiconductors are evolving towards <unk> and chip lift technologies to increase speed and design flexibility.
New solutions to predict behavior, and optimize designs require deep expertise and cutting edge technology to solve new problems and pursue innovation.
Altra is excited about this shift in the electronics landscape.
And we are investing significantly to deliver truly disruptive solutions into this market by leveraging our experience in technology and novel ways.
We have also been acquiring important expertise and technology electronics over the last 10 years to carefully grow our electronics customer base knowledge and our ability to synthesize new solutions together with our very extensive mechanical experience and stimulation technology.
<unk>.
In June we acquired concept engineering, the leading provider of electronic system visualization software that accelerates the development manufacture and service of complex electrical and electronic systems.
It's technology includes automatic schematic generation tools as well as electronic circuit and wire harness visualization platforms that provide visual rendering and electronic design solutions.
Concept Engineering's electronics system visualization and semiconductor design verification technology is available as a standalone solution and is also tightly integrated into more than 40, EBITDA and CAD tools to provide end users with smart debugging functionality while se.
Living months of engineering time, and support for computer aided development teams.
Concept engineering addresses three primary markets semiconductor design EDA.
And capsule development in industries with complex electrical systems.
We are excited to integrate their technology into our care as electronics systems design suite.
To further capitalize on the acquisition of World programming, We recently announced the Altera unlimited data analytics appliance.
And all in one turnkey solution that gives organizations and users out of the box access to an unprecedented level of data analytics capabilities.
Organizations can develop and run multi language data analytics software solutions, including those written in the SaaS language in an interactive and secure manage production deployment infrastructure.
The Altair unlimited analytics appliance is built on Bel power edge, our 750 servers and designed to foster enterprise wide data driven strategies by giving teams the power to use data analytics and AI to drive next level business results.
Dell technologies as a longtime partner and we are pleased to take the Altair unlimited data analytics appliance to market with them.
We look forward to seeing how users maximize this technology and get the most from their data.
Stimulation continues to be the core growth engine for <unk> business globally.
We are proud to have supported the NASA jet propulsion laboratory is successful 15 months of operation of the Mars helicopter engines.
Our software was used to stimulate communication over the Martian landscape to help plan flight paths well beyond line of sight from the Rover base station.
The process employed RF modeling of the Rover and helicopter using Altair as FICO and wind prop and the parabolic equation full wave method to account simultaneously and accurately or waived to fraction refraction and scattering propagation mechanisms.
In less than two weeks, they developed and validated this model using 14 flight flight cases before integrating the telecom predictions into the ops tool.
With the 29 successful flight completed in June opt.
Operations are set to resume this month after the margins are storms of base.
Altura is excited to be part of the JPL effort advancing understanding of our neighboring planet.
We continue to build strength in the rail industry with a three year high seven figure expansion agreement from a global leader in rail transport systems.
The growth in this account is primarily driven by our solvers for structural and electromagnetics applications.
And a second rail system manufacturer expanded usage of our software with a target of leveraging digital twins and machine learning for real time monitoring and predictive maintenance.
Last year's acquisition of EFS frame substantially increased our presence in the civil engineering market.
The building construction industry is a growing focus on its carbon footprint, resulting in a movement toward the use of engineered wood products for sustainable building design.
We recently published a case study around the application of our S. Timber software by Bush Fulminant partners Canadian structural engineering firm for the British Columbia Institute of Technology.
To utilize timber and the construction of a new students plaza pedestrian walkway and public transport gateway.
We're excited to see these applications, where we are not just optimizing for material use reduction, but also enabling the use of fundamentally sustainable materials.
And along these lines earlier this week, we announced the winners of the 10th annual Enlighten Award.
Presented in association with the center of automotive research.
The alternate lighten award on our sustainability and light weighting advancements that successfully reduced carbon footprint mitigate water and energy consumption and leverage material reuse and recycling efforts.
Congratulations to this year's winners for Ford Motor Company knee, Mac Shiloh industries Mcmaster University.
Yes.
Toyota and <unk> products as we celebrate our 10th anniversary and have evaluated hundreds of worthy entries.
We have seen this award and the automotive industry evolved from showcasing vehicle light weighting initiatives to companies now fully embracing sustainability and the commitment to building a net zero environment, particularly as the world transitions to electric vehicles.
Enlightened award has been an outstanding success and highlighting the incredible achievements made over the years not just by Oems, but also suppliers of materials companies collectively taking on the challenge of creating a more energy efficient world.
And momentum continues to build for the convergence of simulation and AI at customers.
In APAC, our major electronics manufacturer is ramping up the use of our data analytics software to apply machine learning CAE results files in an effort to accelerate its product design process.
Also in APAC, a manufacturer of rolled metal products is using altair predictive analytics technology to improve its coil manufacturing business as it competes in the global market.
Its goals include reducing scrap rate optimizing manufacturing operation, reducing downtime due to inspection halls, and improving predictive maintenance.
In the agricultural equipment sector, a significant global player is using Altair is artificial intelligence and machine learning technologies to substantially reduce simulation time requirements.
We announced a memorandum of understanding with LG for collaborative research and development promote acceleration of product development and digital transformation.
This cooperation around AI based stimulation technology is exciting and we're very appreciative of the opportunity to work so closely with the LG team in this important area.
Our customers are doing great work and I look forward to sharing more of their stories around convergence in the future.
At the end of June we held our future Dot AI event.
<unk> included presentations on human centered AI to the enterprise and taking an AI first strategy for growth.
With record attendance of both manufacturing and banking and financial services customers and prospects alike. We are delighted with the interactive engagement, we have with our global attendees.
The remainder of 2022 looks solid even while we were in a period of geopolitical and economic uncertainty with near term impact of rapidly changing.
Currency exchange rates.
<unk> strong culture customer relationships excellent recurring revenue and utilization high value business model and exceptional technology will help us power through this brief period.
Now I will turn the call over to Matt to provide more details on our financial performance and our guidance for the third quarter and full year 2022, Matt.
Thank you, Jim and Hello to everyone on the call. Thank you for joining us.
The strength and momentum we saw in 2021 and the first quarter of 2022 continued into our second quarter, marking an impressive first half of 2022.
Demand for our products in Q2, particularly our software solution was very strong.
Fight significant currency headwinds, we delivered year over year 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 $125 4 million, an increase of six 5% compared to Q2 2022.
Including software billings growth of more than 11%.
The strength in billings growth was supported by software growth across all geographies and is partially offset by a decrease in services. Another billion, primarily as a result of declines in our CES business, which was expected heading into the quarter.
In total the strength in our billing resulted in software product and total revenue exceeding our expectation for the second quarter 2022.
Software product revenue was $116 9 million.
Or an increase of 17, 4% compared to Q2 2021.
Total revenue, which include services and other revenue was $132 7 million or an increase of 10, 6% compared to Q2 2021.
Our recurring software license rate, which is the percentage of software product billings are recurring continues to be strong at approximately 93% for the first half.
As a reminder, a significant portion of our revenues are billed in currencies other than the U S. Dollar and are therefore impacted by changes in FX rates.
This is particularly true over the past six months as we saw the dollar significantly strengthened against other major currencies.
Relative to Q2 2021, our software product revenue and total revenues were unfavorably impacted by changes in FX rates of approximately $6 million and $6 6 million respectively.
Therefore on a constant currency basis in the second quarter of 2022, we thought year over year software product revenue growth and total revenue growth of 23, 4% and 16, 1% respectively.
non-GAAP gross margin, which excludes stock based compensation and restructuring expense was 79, 3% in the second quarter.
Compared to 74, 5% in the prior year.
An increase of 480 basis points.
As our software revenue mix, which carries higher gross margin increase as a percentage of total revenue.
In addition, our non-GAAP gross margin specific to software product revenue continued to improve as our support cost as a percentage of revenue trended down.
Software revenue was 88, 1% of total revenue in Q2 2022 compared to 83.0% in the prior year.
Over the long term, we continue to expect and general mix shift towards software product revenue as growth there will outpace services and other revenue.
non-GAAP operating expenses, which excludes stock based compensation amortization of intangible assets and restructuring charges were $90 3 million compared to $80 9 million in the year ago period.
Adjusted EBITDA in Q2, 2022 was $16 4 million or 12, 4% of total revenue compared to $9 5 million or seven 9% in the prior year quarter, an increase of 73, 1%.
This increase compared to the prior year quarter as well as relative to our expectation.
It was driven by the increase in software revenue combined with our disciplined spending.
We continued to drive higher adjusted EBITDA as we saw a greater percentage of our incremental revenue growth dropping to the bottom line.
Turning to our balance sheet, we ended the second quarter with $416 1 million in cash and cash equivalents.
An increase of approximately $10 6 million from the prior quarter.
The quarter over quarter increase is primarily due to free cash flow generated in the quarter.
The net cash increase as a result of our new convertible note and partial repurchase of our existing convertible notes.
And it was partially offset by cash outflows for the acquisitions of Gen <unk> and concept engineering.
We were extremely pleased to issue $230 million in new convertible notes with a 175% coupon and 30% conversion premium.
Putting the conversion price at $71 68 per share.
At the same time, we retired over 64% of our existing convertible note.
That have a conversion price of $46 50 per share.
And we are deeply in the money.
This was primarily a liability management effort, which allowed us to enter into a new convert with more favorable terms and extend the maturity date.
At the same time, adding approximately $30 million of cash to our balance sheet.
Turning to guidance for Q3 and full year 2022.
We are seeing a significant FX impact relative to prior year and our previous guidance.
In just the past several months the U S. Dollar has strengthened meaningfully against other major currencies, which drive the significant impact on our results in reported currency.
With that backdrop, we are expecting software product revenue for Q3 to be in the range of $99 million to $104 million.
Our year over year change of minus three to plus one 7%.
And are now expecting our full year 2022 software product revenue to be in the range of $487 million to $498 million or year over year growth of seven three to nine 8%.
Compared to prior year, our Q3 expected software product revenue is being negatively impacted by approximately $7 million.
Or six 5% of growth.
Due to changes in foreign exchange rates.
And on a full year basis compared to prior year, our 2022 expected software product revenue.
Being negatively impacted by approximately $23 million or 5% of growth.
Due to changes in foreign exchange rates.
We continue to expect services and other revenue to be down in 2022 compared to 2021.
System with our previous guidance.
As a result, we expect total revenue for Q3 2022 in the range of $115 million to $120 million.
Our year over year decrease of five two to one 1%.
And we're now expecting our full year 2022 total revenue to be in the range of $555 million to $566 million or year over year growth of four three to six 4%.
Compared to prior year, our Q3 expected total revenue has been negatively impacted by more than $7 million or six 5% of growth.
Due to changes in foreign exchange rates.
And on a full year basis compared to prior year. Our 2022 expected total revenue is being negatively impacted by more than $25 million or almost 5% of growth due to changes in foreign exchange rates.
For full year 2022 software product and total revenue our guidance at the midpoint is consistent with the guidance, we issued last quarter in constant currency. However.
However, further changes in FX rates have resulted in a reduction to midpoint in reported currency.
From a cost perspective, we're seeing some increases in employee related costs due to inflation related pressure.
But at the same time, we're seeing some offsetting benefit in expense due to changes in FX rates.
For Q3, 2022, we expect adjusted EBITDA in the range of zero to $4 million.
Zero to three 3% of total revenue compared.
Compared to $14 8 million or 12, 2% of total revenue in the year ago period.
And for full year 2022, we are now expecting adjusted EBITDA to be in the range of $89 million to $99 million or 16.0 to 17, 5% of total revenue.
Compared to $85 3 million or 16% of total revenue in 2021.
The changes in FX rates and their impact to revenue or having a direct impact on adjusted EBITDA as.
As we're only seeing a partial offset an expense benefit.
For the year FX rate are negatively impacting adjusted EBITDA by more than $6 million.
We expect full year 2022 free cash flow in the range of $8 million to $16 million.
Each include the $65 9 million payment for the existing litigation judgment against <unk> that we.
Assumed as part of our acquisition and was paid in January .
As a reminder, our cash flow expectations are sensitive to billings and collections pattern, which fluctuate seasonally.
In particular, our historical pattern has shown a free cash inflow in the first half of the year, primarily from collections on billings from Q4 and Q1.
And 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 in our earnings release, including reconciliations to comparable GAAP amounts, which was issued after close of market today.
While changes in FX rates are having an impact on reporting currency results, we're extremely confident in the ever expanding competitive strength of our product and continued demand from our customers.
With that we'd be happy to take your questions operator.
As a reminder to ask a question. Please press star one on your telephone please standby, while we compile the Q&A roster.
No man.
And our first question will come from Ahmad <unk> of Oppenheimer. Your line is open.
Yes.
Hi, This is Ken Wong from from Oppenheimer.
Just a quick question, Matt just for clarification it sounded like the full year revenue guide it.
Purely.
That means.
To make sure that that was accurate.
And then beyond that any any changes in terms of collections or any pressure youre seeing from your customer base in terms of.
In terms of the sales cycle.
Yes.
Good question.
You get that right, especially when you look at our.
The revenue line for the full year guide.
We saw meaningful FX impact just quarter over quarter.
So as a result.
Now when we sort of map that forward.
FX had a negative impact of about $12 million or so on our software product revenue.
From the last time, we gave guidance for full year.
And it's actually at the midpoint on a constant currency basis actually guiding up slightly on software product revenue.
About just about flat on total revenue.
With FX.
Having any package $13 million to $14 million year on total revenue.
So yes, you've got that right now with respect to our customers no we're not seeing any kind of.
Elongated collection patterns nothing unusual with DSO no difficulties at all there.
Got it and then maybe a quick one for you.
Wondering as far as.
M&A.
Quite a lot recently.
I guess, what do you think that kind of growth.
That has gone smoothly and then.
Appetite for potential.
The more given given valuations in this market a little more yes.
A little lower than what used to scan.
Okay.
Thanks, so much.
Getting used to this new new system that we're using here.
Appreciate the question.
As far as.
As far as M&A and integration.
Really.
Usually able to integrate most of the companies that we.
Wire in two to three months. So it's a very very quick for us.
Obviously world programming more visible.
Larger bi, but even world program and it was primarily comprised of development.
And being honest with you and so integrated very very nicely to culture, it's very similar.
We really.
Generally do that easily and we continue to have an appetite for M&A and you are right.
Valuations have been exceedingly high for a while.
Personally I kind of look forward to some of that coming down now.
Yeah.
Okay. Thanks, a lot Jim.
Sure.
Thank you.
And our next question will come from Blair Abernethy of Rosenblatt. Your line is open.
Hi can you hear me.
Yes Blair.
Alright, sorry, cutting out a little bit.
Quick questions.
Just first on.
On the data science.
Business.
Wondering if you could just walk through sort of where you're at now with the adoption of the altera units and how.
It's just starting to have an impact in terms of consumption.
<unk>.
Analytics data science portfolio.
So.
We are making progress.
First thing is to sell them internally.
We're we're very successful at that now so the whole sales organization is really really support a very excited about the model as we continue to have more capabilities more solutions.
Model really starts to make more and more some some.
Salesforce caps.
I personally would like it to be going faster.
I'm planning.
To make.
Make some changes actually when we move to the model or stimulation, we were sort of at the same moment. If you will everyone got it finally, because I have to do the same kind of convincing internally.
Customers are beginning to understand and I wanted to accelerate it.
Essentially just moved 100% of the customers to the model.
I am leaning towards toward doing that.
Here again.
And.
Doing a couple of things that would accelerate letting that happen. There are a couple of things we need to actually change.
Looking at the trough for.
Certain products that sort of thing.
To meet some analysis on that.
So I expect to.
Dramatically accelerate the adoption of <unk>.
And the.
And the data analytics business.
Great.
Jim.
How is the traction.
Coming on the World programming.
Yeah.
So traction is good actually.
Some very very nice wins, a tremendous interest the pipeline is really.
Pretty strongly I will say that.
It's a longer sales cycle.
And.
We're all we're all sort of learning.
About the process I think it's going to start to tick up a lot more interest in the next year.
Because the pipeline is getting fallen we're doing some things that are going to.
It makes it easier to succeed here.
So, yes, that's where we are.
Sorry for the <unk>.
Side of my window, it's very interesting to do these things from your own.
I have a landscaping company so I apologize.
Okay.
Can't hear them yelling at each other now.
Just shifting gears for one second my last question right now is just around the high performance computing segment.
Just wondering what youre seeing there in terms of.
And markets.
So.
Steady demand.
Any macro.
Disruptions impacting this segment at all from that because.
Because it is so tied to hardware.
Okay.
It's an interesting mix because actually that business is extremely robust, particularly in the technology sector.
And we've.
We've actually been doing some work too.
So basically grow out.
All of the.
The team overseas.
In that business, we're seeing a lot of results of.
A lot of good things coming as a result.
At the same time there is.
If a customer doesn't take delivery of hardware and there is some delays on some of that.
They don't need the software, but overall frankly speaking that that businesses.
Exceeding expectations right now is just doing great. Thank you.
Great. Thanks very much.
Again, ladies and gentlemen, if you do have a question. Please press star one on your Touchtone telephone.
As a reminder, if you have any questions. Please press star one one.
Yes.
And our next question will come from Dylan Becker.
Of William Blair. Your line is open.
Okay faith Bruner on for Dylan, just kind of wanted to touch I know you mentioned briefly youre not seeing any macro impacts in your customer conversations, but just looking into the near term.
Much emphasis or customers kind of placing on your units model and the ability the ability to consolidate.
Spend across your platform to deliver value first in its kind of stitching together multiple vendors.
Don't integrate as well.
So.
Through the years is that alternative.
Some more.
Strategic enterprise.
Customers.
I think it's really evolved for US we were more tactical I'll say in certain accounts, but we're becoming more and more strategic.
The model.
Especially as things start to get a little tighter becomes more and more interest from the customers and customers.
Tend to see the value of partnering with out there.
Both because we're just a very strong customer engagement organization actually not we're talking about and the customers value.
Integrity.
Which is and then the product portfolio is so broad and deep.
So they really really value them very often choose awesome.
Make decisions not to continue with certain others.
<unk> software.
Alright, thanks for the color.
Thank you.
Thank you.
I would now like to turn the call back to Jim <unk> for closing remarks.
Okay.
Appreciate everybody's interest in <unk>.
And the Altair.
Or from our Investor community.
Thank you also so my team.
Accordingly, there as well.
Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
Central team to raise your hand during Q&A you can dial one one.
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