Altair Engineering Inc. Q1 2023 Earnings Call

Yeah.

Good day and welcome to all tiers first quarter 2023 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 you will then hear an automated message advising that Youre Hain has been raised to lower your hand press star one one again please.

Please be advised that today's conference is being recorded it.

It is now my pleasure to introduce SVP of Investor Relations David Simon.

Good afternoon, welcome and thank you for attending all peers earnings conference call for the first quarter of 2023 ended March 31 2023.

And Dave Simon Alturas, SVP for Investor Relations and with me on the call are Jim Scapa, founder Chairman and CEO .

Hey, Matt Brown, Chief Financial Officer.

After market close today.

We issued a press release with details regarding our first quarter 2023 performance.

Guidance for the second quarter and full year 2023.

Which can be accessed on the Investor Relations section of our website.

Investor Altair.

<unk> Dot com.

Call is being recorded.

And 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.

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.

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 it may file from time to time.

During the course of today's call, we will refer to certain non-GAAP financial measures.

Reconciliation of GAAP to non-GAAP measures is included in our press release.

Finally.

At times in our prepared comments.

Our 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 Altair had a very strong start to 2023 with software product revenue total revenue and EBITDA above the high end of our guidance.

Q1 exceeded our expectations and represents an all time high for software product revenue and total revenue and continues our good momentum from 2022.

Demand for our products is strong and we're seeing the investments we've made in product development and our approach to customer success.

Bob.

Adjusted EBITDA for Q1, 2023 was $43 1 million well above our expectations.

Software product revenue as a percentage of total revenue for the first quarter continued a strong positive trend at 91%.

<unk> to 88, 2% in the first quarter of 2022, and 88, 5% for the full year 2022.

Our recurring software license rate was 295% for the quarter.

As compared to 93% in the first quarter of 2022 and 92% for the full year of 2022.

Software product revenue in the first quarter grew by 10% year over year on a constant currency basis led by strong renewals and expansion, especially in automotive and aerospace verticals.

We also continue to add several new and important logos in the first quarter.

And the number of significant deals continues to grow as we focus on selling our broad solution set.

Actually our data analytics offerings into existing and new customers.

We are experiencing a substantial increase in engagement from our traditional manufacturing customers to apply our data analytics portfolio and leverage AI to accelerate simulation using CA and test data.

This is translating into meaningful new opportunities.

Overall, we believe our strong first quarter performance positions the company well for the rest of 2023.

The core of Altair success, as the industry, leading breadth and depth of our technology.

We work hard to deliver awesome capabilities and our Hyperworks 2022, three platform release exemplifies this commitment.

<unk> 2000, 22.3 offers an enhanced altair one experience by providing users with flexible access to solutions.

Applications data and compute power.

Users can submit solver jobs, covering structural thermal computational fluid dynamics, and electromagnetics disciplines, and alterra scalable elastic cloud infrastructure.

Making it easier for organizations to meet budgets and demand.

The latest software updates.

Table product teams to collaborate on all aspects of electronic systems printed circuit board firmware and <unk> connectivity development and our connected end to end environment.

<unk> 2022, three features tighter integration between the Altair flux flux motor nano fluid ex some lab and material data center to help users streamline workflows and provide advanced modeling capabilities electrical system design exploration and <unk>.

Optimization and faster acoustic and thermal flow analysis.

Debugging and post production servicing updates are also available with Altair <unk> vision for.

For electronics system design.

Further improvements enable better modeling and analysis through low and no code design and engineering tools reduced pre and post processing lead times.

<unk> surface modeling integrated solver dashboard capabilities expanded fluid topology optimization coupling between active solvent and more.

<unk> has been augmented with AI to enhance the modeling experience with automated part identification characterization on grouping as well as geometry feature recognition and management for use in downstream processes and further end user recommendation.

In addition, we introduced physics, AI and all new module.

I'm Leslie integrated within our modeling environment to automatically train a neural net with previous stimulations to quickly project accurate results for our new cat or simulation model without running additional solver analysis.

Last week, we announced the release of some solid cloud, allowing users to access next generation stimulation technology through a web browser anywhere anytime.

Some solid cloud eliminates geometry, simplification and measuring the tune loss time consuming expertise intensive tasks and traditional finite element analysis.

Handles complex assemblies and delivers results with unprecedented ease and speed.

Some solid cloud is available via Altair, one <unk> cloud innovation Gateway and offers collaborative access to stimulation and data analytics technology, alongside scalable high performance computing and cloud resources.

We believe some solid cloud.

Has the potential to dramatically accelerate and simplify the daily work of structural analysis in all markets and that rapid adoption of this technology will become necessary for companies to maintain their competitive advantage and product development.

We reached a positive milestone for Altair related to our acquisition of World programming in 2021, and the establishment of Altair SLC.

On April six the U S Court of Appeals.

For the federal circuit.

The decision of the court for the Eastern District of Texas, which ruled in favor of Altair by dismissing the 2018 lawsuit initiated by the SaaS Institute against World programming for alleged copyright infringement of SaaS software.

After more than 10 years of litigation across multiple international venues. It was ruled that the SaaS language is not proprietary.

And companies other than the SaaS Institute or <unk> to provide compilers and development environments supporting the SaaS language as is.

The case with other languages, including Python, C, plus plus or trend and others in the public domain.

And so I'll see demonstrates our dedication to open architecture technology.

Which we believe is the best way for people to harness innovation improved products and get the most from their work.

Now companies in any industry across the globe can embrace open source languages and technology, while simultaneously leveraging the decades of investment they've put into the SaaS language.

Momentum in our data analytics business continues to be positive as companies look to modernize their data and analysis operations and standardized development primarily with Python.

Most popular language taught in universities.

The Altair rapid minor offers a unique solution.

To support companies converting a percentage of existing SaaS language code to Python, while leveraging alterra Src for the rest.

We want a multiyear seven figure software license for the Altair rapid minor platform with a major computational hardware company for its users and.

Marketing corporate Affairs data office engineering and E Commerce.

We are currently engaged with many BSI accounts on modernization projects, where SLC accelerates and de risks their move to Python and the cloud. We also have new revenue coming in for Altair Src from three financial sector companies in India.

And then insurance company in South America.

Bank in APAC founded more than 100 years ago has committed to Altair SLC and rapid miner to help their corporate credit check activities.

Our simulation business continues to grow with the convergence of data analytics, and AI and CAE workflows.

Every week, we hear more stories from our account teams about customers using AI combined with simulation to produce clear efficiency gains and product development.

Our government research organization is using the Altair Hyperworks and rapid minor platforms to acquire real world armored vehicle data.

Applying machine learning and develop predictive models.

Our passenger vehicle manufacturer is using altair, some solid and other altair stimulation tools combined with data analytics, including Altair Panopticon real time data streaming to develop operational digital twins for electric vehicles.

Another vehicle manufacturer is using altair as tools for machine learning to use historical simulation data for crash NBA edge and durability.

A global leader in power management is using Altair compose combined with data analytics to develop a digital test bench for electrical systems.

Stories from the field continue to build and the convergence of stimulation with AI as a reality for <unk> customers.

Alterra has HBC works platform for high performance computing continues to be a strong growth area for Altair.

One of the top five global Fabless semiconductor companies committed to a six figure expansion, representing a six tax year on year increase.

And in EMEA.

Major materials company awarded Altair, a multiyear seven figure deal for Altair is azure virtual appliance cloud solution.

On which you will run a broad spectrum of <unk> software, along with third party CAE offerings.

A recently published case study demonstrates the positive social impact of high performance computing.

Argonne National Laboratories, with University and industry collaborators one of 2022 Gordon Bell Special Prize for high performance Computing based COVID-19 research for its work using AI to track virus variants.

<unk> learning played an important role in the research and the researchers analyzed $1 5 million complete high quality Sars Covid two genome sequences.

A process that would have previously been time and labor intensive buy individually examining every protein and mapping mutation.

Instead, the teams streamline the process by developing the first genomes scale language model the.

The computing hardware used in the project is equipped with workload orchestration by Alterra PBS professional and we are pleased to have played a part in this important lifesaving work.

In addition to our technology Altair is culture has kept us moving in the right direction.

Our history, we have always prioritized diversity.

As it is a foundational pillar of our culture and thereby our success.

We have also long supported stem education.

Combining these two values. We recently established the Altair only forward scholarship and Columbia University School of Engineering and applied Science.

It is designed to assist incoming first year students pursuing an undergraduate degree in engineering and applied science, and who have demonstrated leadership and our support for the African American <unk> Latino community.

Ideally the scholarship will benefit first generation college students and students who are socio economically disadvantaged.

The scholarship award 10 students pursuing a four year engineering or stem related undergraduate degree with $25000 annually.

Which they will receive each year of their undergraduate studies until graduation.

Columbia Engineering will select and announced the first cohort of scholarship recipients in the fall of 2023.

We continue to invest and partner with companies developing leading edge technologies to remain on the forefront of innovation Altair.

Now I'll turn has a long history of creating and investing in <unk> technologies.

In the fourth quarter of 2022, we invested an escape photonics at Columbia University startup dramatically accelerating data transfer rates between various computing elements.

<unk> photonic chips for ultra high bandwidth connections inside data centers and HP.

More recently, we invested in River Lane, Cambridge University startup developing an operating system for quantum computers to support multiple hardware architectures for error corrected quantum computing.

Riverlands groundbreaking technology has the potential to accelerate the impact on scale of quantum computing.

Collaborating with escape and River Lane allows altair to stay ahead of the curve.

<unk> formative technologies to help our customers fast track their innovations.

In conclusion, Q1, 2023 was a strong quarter.

And we are optimistic that the value we bring to our customers will continue to help us perform well against the backdrop of global uncertainty.

We have been prudent in our hiring practices and we are investing to develop our exceptional workforce.

We're experiencing a less competitive hiring environment this year versus the last couple of years and our turnover rates have returned to our historically low pre pandemic levels.

Our summer internship program, which focuses on top tier educational institutions saw 100% acceptance rate.

As well above normal.

Now I will turn the call over to Matt to provide more details on our financial performance and our guidance for the second quarter and full year 2023, Matt.

Thank you Jenn and Hello to everyone on the call and thank you for joining us.

The first quarter was a great start to 2023 coming.

Coming right on the heels of a very strong fourth quarter and last year.

<unk> exceeded our expectation and represents an all time high for software product revenue and total revenue.

And we once again exceeded the high end of the range on software product revenue total revenue and adjusted EBITDA.

It's encouraging to see the continued momentum in our software products, where demand continues to be strong.

As I dive into the details of our financial results remember some of our revenues and expenses are transacted in currencies other than the U S dollar.

And therefore, our reported results may be significantly impacted by changes in foreign exchange rates.

To aid in the review of our results throughout my remarks, I will make reference to growth rates in both reported and constant currency.

Total billings for the quarter were $163 5 million a.

A year over year decrease of four 6% in reported currency and <unk>, 9% in constant currency.

Remember that in Q1 last year, we highlighted our largest ever data analytics and AI deal.

In the BSI vertical which was a five year eight figure deal.

So while we're pleased with this year's first quarter billing the significant multiyear deal from a year ago is impacting the year over year billings growth rates.

In Q1, 2023, we saw strength in our renewals base, especially in the automotive and aerospace verticals.

And I was pleased with our new customer growth, which increased compared to last year.

Software product revenue in Q1, 2023 was $149 6 million a.

A year over year increase of six 2% in reported currency and 10% in constant currency compared to Q1 2020 Q.

Software product revenue growth was led by strong renewals and expansion stimulation.

As Jim mentioned, a few moments ago, we continue to hear customer success story regarding continued convergence with data analytics and AI and simulation processes.

And this is showing up in our financial results.

Total revenue in Q1, 2023, which includes services and other revenue was $166.0 million a.

A year over year increase of three 9% in reported currency and.

Seven 5% in constant currency compared to Q1 2022.

Our recurring software license rate, which is the percentage of software product billings that are recurring continues to be strong at approximately 95% for the quarter.

non-GAAP gross margin, which excludes stock based compensation was 81, 9% in the first quarter compared to 81, 4% in the prior year.

An increase of 50 basis points.

Software product mix drove this increase as our software revenue, which carries higher gross margin increased as a percentage of total revenue.

Software revenue was 91% of total revenue in Q1 2023.

Compared to 88, 2% in the prior year.

Over the long term, we continue to expect a general mix shift towards software product revenue.

As growth there will outpace services and other revenue.

And as a result, we expect our non-GAAP gross margin to continue to increase modestly in the near term.

non-GAAP operating expenses, which excludes stock based compensation and amortization of intangible assets were $93 9 million compared to $84 9 million in the year ago period.

Beginning in Q1, 2023, we began to allocate certain indirect expenses such as facilities and it related expenses across our operating expenses to improve comparability with our peers presentation.

These costs were previously captured primarily in general and administrative costs.

But are now allocated across research and development sales and marketing and general and administrative costs.

Based on global head count.

We've made this change prospectively as well as to all prior comparable periods, which we've included in a supplemental table in our earnings release.

Adjusted EBITDA in Q1, 2023, with $43 1 million or 25, 9% of total revenue.

Care to $46 6 million or 29, 2% in Q1 2022.

This decrease compared to the prior year quarter was driven by an increase in year over year expenses.

But it is actually above our expectations heading into the quarter.

We had anticipated the increase in expenses year over year due primarily to acquisitions, we made throughout 2022.

In actual expenses for the quarter landed in line with our expectations.

The over performance in adjusted EBITDA relative to our expectations was driven by the increase in software revenue in the quarter, most of which dropped down to the bottom line.

Turning to our balance sheet, we ended the quarter with $378 4 million in cash and cash equivalents.

An increase of approximately $62 2 million from year end.

We're extremely pleased with our ability to generate free cash flow and were able to generate $57 5 million of free cash flow in the quarter.

The turmoil in the banking sector in March served as another reminder of the importance of a strong balance sheet.

We feel very comfortable with our significant cash balance relatively low levels of debt and access to an additional $200 million line of credit.

And that we're well positioned to withstand various types of market uncertainty.

Let's turn to guidance for Q2 and full year 2023.

We provided detailed guidance tables in our earnings press release, including a reconciliation to comparable GAAP amounts.

We are continuing to see an FX impact relative to 2022 as.

As foreign exchange rates changed throughout last year.

To provide more clarity on the FX impact to our expectations, we provided growth rates in both reporting currency and constant currency in our guidance tables.

Yes.

For Q2, we expect software product revenue in the range of $123 million to $125 million.

A year over year increase of five two to six 9% in reported currency.

And $6 seven to eight 4% in constant currency.

For full year 2023, we are maintaining our previous outlook for software product revenue in constant currency and slightly increasing our outlook in reported currency to a range of $551 million to $561 million a year over year increase of eight eight to 10, 8% in <unk>.

Currency and.

And $9, 1% to 11.0% in constant currency.

As expected services and other revenue has begun to stabilize in 2023 compared to the sharp declines we saw in 2022.

While services and other revenue was down slightly year over year in Q1.

We expect it to be flat year over year in Q2 and for the rest of the year.

As a result, we expect total revenue for Q2 2023 in the range of $138 million to $140 million.

A year over year increase of 4.0 to five 5% in reported currency.

Five four to six 9% in constant currency.

For full year 2023, we are maintaining our previous outlook for total revenue in constant currency.

And slightly increasing our outlook and reported currency to a range of $614 million to $624 million a year over year increase of seven 3% to 9.0% in reported currency.

And seven five to nine 3% in constant currency.

From a cost perspective, we are on track with our spending goals for 2023, continuing to invest in areas for growth for example in additional sales capacity, while cutting back on administrative costs and overhead.

For Q2, 2023, we expect adjusted EBITDA in the range of $15 million to $17 million.

Or $10 nine to 12, 1% of total revenue compared to $16 4 million or 12, 4% of total revenue in Q2 2022.

For the full year 2023, we are maintaining our outlook from last quarter for adjusted EBITDA, which we expect to be in the range of $120 million to $130 million or 19, 5% to 28% of total revenue.

Compared to $108 6 million or 19.0% of total revenue in 2022.

And finally for the full year 2023, we are maintaining our outlook from last quarter for free cash flow, which we expect to be in the range of $108 million to $116 million.

Which represent a substantial increase year over year.

As a reminder, our cash flow expectations are sensitive to billings and collections patterns, which fluctuate seasonally.

In particular, our historical pattern has shown a larger free cash inflow in the first half of the year, primarily from collections on billings from Q4 and Q1.

And a smaller free cash inflow in the second half of the year.

We're expecting that pattern to continue this year.

We're excited to be starting the year with an all time high in quarterly revenue, which we feel gives us momentum and helped to achieve our financial goals for the year.

With that we'd be happy to take your questions.

Operator.

Thank you.

As a reminder to ask a question you will need to press star one one on your telephone.

If your question has been answered or you wish to remove yourself from the queue Press Star one again one moment please.

And our first question comes from the line of Blair Abernethy with Rosenblatt Securities.

Alright, Thanks, nice quarter guys.

Thank you Blair. Thank.

Thank you.

Matt just said.

One for you if you could could you just.

Walk us through a little bit of your thinking on the on the Q2.

Guide and.

It's sort of down.

Down sequentially a fair bit is this partially.

Performance in Q1, just sort of your thinking of how you got there for Q2 and also just in terms of the.

The linearity you saw in deals in Q1 and that would be helpful.

Sure Yes. Thanks for the question Blair. So what we ended up seeing.

The dynamic that we're seeing from Q1 into Q2, it's actually very similar to our historical pattern.

As you know, we typically have our quarters.

Seasonally Q1, and Q4, our highest quarters, whereas we.

We ended up having Q2 and Q3 being somewhat lower and so what youre seeing here in 2023 and what's embedded in the guide is that same pattern continuing for 2023.

And then when we sort of look broadly over the full year, which is really how we're we're looking at things.

We ended up seeing growth in Q1 in software product revenue in constant currency of about 10%.

And then if you sort of look at the midpoint of the guide and what that implies for full year growth.

Very consistent with what we're expecting for full year.

So nothing to point out in particular for Q2.

Sort of similar to some of the remarks, we made.

Quarter ago, you really are looking at things one year at a time and not focusing on.

On the ins and outs of one particular quarter.

Okay, great. Thanks, Thanks for clarifying and just one for you Jim if I might just.

Rapid minor deal closed in September .

At September .

Is that performing for you know how are those.

Those components of the AI analytics business coming together now that you've had them for for another quarter.

We feel really really great about that acquisition to be honest with you.

We've been bringing these pieces together.

The rapid minor piece.

It was sort of.

The final unnecessary element to bring it all together.

And as we go out to customers. It's just extremely well received now and beyond that the sales force is just super confident on these days and thats across the entire sales force selling into our traditional manufacturing customers. There is a noticeable.

<unk>.

The uptick in the number of discovery calls were having.

The level of interest and our credibility is just really soared in that space.

Great. Thanks, very much nice job guys sure. Thank you.

Thank you.

Please.

And our next question comes from the line of Ahmad.

With Oppenheimer.

Hey.

Thanks for taking my question guys.

Nice quarter.

First question for Jim.

Really really impressive.

Commentary coming out of the manufacturing side in terms of demand and for analytics.

I guess are you noticing any changes in dynamics outside of manufacturing I know you had a peer report it seems like theyre seeing the opposite.

So you mean like in the banking and financial services sector. For example, yes.

Yes, yes.

To be honest, we're we're feeling relatively positive.

Really in all of those accounts I was just on a call with one of the major banks.

I think theres a lot of opportunity for us our business model is a really unique model and we're into all of these accounts, we've been converting most of them to our units model.

And.

With the rapid minor element.

I think we're extremely well positioned.

Our differentiated platform.

We've got like all the right answers to all the questions.

That they are asking.

I think.

They are even surprised and we were just at the Gartner conference a month or so ago.

We got a very very strong reception.

So yes, the financial sector, obviously, having some challenges but for us.

Actually.

The team that we have focused on <unk> is very energized.

I think actually doing pretty well.

That's great to hear and thanks for elaborating.

And then secondly, also a question for Jim.

For you again, Tim solid cloud you had some pretty.

I guess prosthetic comments there.

What makes you so confident in.

And the technology.

Because.

It sounds like a lot of marketing, Paul, but but some solid is.

Is just so powerful.

I mean, you're importing.

Complete the CAD.

Model, there's no modeling and meshing necessary you push a button.

<unk>.

Very very quickly youre getting very accurate.

On our results.

<unk> on very complex assemblies with thousands of parts and it's only getting faster and we're adding more and more capabilities to it.

We've added thermal we've added a lot of non linear.

We're looking at other physics as well.

And so I think.

Especially in the mid market.

Lower end of the market.

We're frankly speaking of Alterra has not historically played big but others have.

I think those customers, which.

We will say are less even less sophisticated.

A tool like this.

Can you give them.

Such a fast turn.

Turnaround.

Is real it's magical actually I think.

It's a matter of.

Getting the opportunity to get into these accounts getting the.

The <unk>.

Eyeballs the awareness of it.

The biggest challenge and we're working hard on that.

And the competition is.

Trying to.

Make similar claims but.

Frankly speaking when you when you dig in it's just not true.

What we're doing is really quite special.

Thank you and congrats again.

Kim.

Thank you one moment for our next question.

Our next question comes from the line of Andrew the gas free with Baron Berg.

Thanks.

My question.

Maybe the first one Jim on the topic of AI, you mentioned have you added those capabilities of Hyperworks.

I was just wondering is.

Potentially adding that took some solid as well something in the cards.

And longer term.

Yes, there is no reason the same fundamental.

Technology that we're using some we've been working on a long time by the way.

We're feeling very excited.

About the quality of the results that we're getting we've completely integrated.

In hyper mass actually so that.

There are a lot of startups in this space.

All of that but.

It's quite important that is.

Easy to to use if you will and sort of integrated in the users' workflows and we've done that.

There is absolutely no reason you can't.

You can't use those with some solid as well.

Okay. That's helpful and then maybe on the.

Figure rapid minor deal the <unk> win that you've had.

This quarter I was just wondering in terms of.

How accretive these are relative to your broader simulation portfolio.

Would you say these tend to fall on the higher end.

The deal size.

And then I'll, let Matt answer that question.

Thanks, Jim.

So clearly there is there are large opportunities and particularly when we're looking at.

At our data analytics suite and in the larger BSS ice basins, where some of the larger deal.

But that's one of the things that makes it exciting about integrating this technology not just standalone and data analytics, but also within our stimulation customers. So yes, I think there is opportunity.

Our deal size is increasing.

The network that we're happy about.

And I think that that that continues to present opportunities as we as we continue to integrate.

And push forward in the space.

Thanks, Matt and Jim I appreciate it.

<unk>.

Thank you.

One moment for our next question.

And our next question comes from the line of Dylan Becker with William Blair.

Okay.

Hi, guys its Steve on for Dylan I mean, you touched on this in a previous question, but can you just provide some color on how this.

Solid plays into the longer term strategy of targeting those less technical user than just driving incremental usage of the platform through democratization of simulation in lower end market audiences.

Sure.

Thanks for the question.

So I mean, we're mostly focused we've talked a lot about <unk>.

Simulation driven design, so we've been very focused through our inspire platform.

Sort of the design and the engineering community.

Particularly in sort of the more sophisticated enterprise large enterprise customers.

But theres really an also a variable and that's a large opportunity.

You could argue it's 5% or <unk> bigger than just the.

The.

The analyst community within those companies.

But there is also a very very large opportunity at the mid and small market.

Customers, but again, we have not historically been as large into we are definitely focused they're more and more.

And so for them you have less sophisticated users often it's the same guy who is designing whatever they're working on and doing simulation.

And for those guys I think the technology really.

Makes it great.

A great tool for them.

Awesome. Thank you.

Thank you.

Thank you one moment for our next question.

Our next question comes from the line of Charles <unk> with Needham <unk> Company.

Hi, Jim and Matt. Thank you for letting me ask a question at two one.

Ask you about what.

<unk> automotive end market I know, it's probably a declining.

Revenue contributor to your overall business, but that Scott It was about roughly 30% of your business at all.

Fiscal 2022.

Jim I think you being very vocal way Youll see some early warning signs in the past or you did gave analyst community.

Early warning when you are seeing something that's what's not turning in the right direction roughly I think two to three years ago, but how do you feel about Scott.

The automotive end market going into the end up a year I think going into next year, especially now with kind of.

Continue to feel a little bit nervous about the macro environment.

With the recent added certainty side related to the banking crisis.

So one I wanted to get your thoughts on what you're seeing what you hear from automotive customers. Thank you.

Okay.

Charles Thank you for the question.

<unk>.

It's interesting because I live in the Bay area right now.

All around me all the tech companies are land people off they bought were hired.

Their businesses are very significantly affected.

But I was just back in Detroit, We did I spent a week there.

And it's very very clear of that.

And the sort of main street world.

Manufacturer.

It's sort of business as usual, they're doing some trimming.

Of their own in certain areas there are always.

These companies know how to manage cost because they've been doing it so long they don't go out and over higher.

But the demand is still really high for new cars.

And so right now.

That whole that whole market I think is still very solid.

<unk>.

For us you're right, it's declining as a percentage of the total for us every year.

But it's still growing now if you look at the startup.

EV community.

I think.

That community of company is feeling probably more strain.

As the more traditional players are really starting to come in and test was cutting prices and so on.

But right now I think the demand is still very very high for their products and I don't see it.

Is it really a problem for us.

Thank you.

Yeah. Thanks, So maybe a follow up.

But maybe this is for Matt.

Basically reiterated your 2023 guidance may be taken about a little bit on the U S dollar basis.

But given the seasonality pattern, we're seeing Q2 seems to be a little bit.

Well.

It's relative to at least my expectations, a little bit more stable now than I thought, which would have would have been a little bit more steady button.

Got it for.

Which kind of implies Q3 may be follow the same seasonality pattern by Q4.

Kind of suggests we cannot need a very strong double digit sequential growth into the year end to really meet what we get pocket.

I know Jim just provided.

Some commentary around automotive.

But how do you think about that trajectory is that.

We'll give you what gives you the confidence that that same pattern will.

Key going into the year and double digit sequential growth into Q4. Thank you.

Yes, Thanks, Charles Yes, it's actually interesting.

Look back at 2022.

And look to see what happened in 2022 Q1 to Q2.

Software product revenue in particular.

<unk> was down.

Fairly.

Additionally, with with where we're projecting our guidance to be sequentially. This year.

So it's actually fairly.

In line with historical.

But just kind of stepping back if we look at first half second half dynamic, which I think is sort of useful here.

We feel pretty good about how the first half is balancing the second half we're not expecting it to.

You have to go out and get a big number in the second half for example in order to make our guidance I mentioned, a moment ago that in Q1, we got to 10.

And 10% in software product revenue growth in the first quarter in constant currency.

And that for full year at the midpoint, we're at $10. One so that certainly consistent but even when you look at just first half versus second half whats implied at the midpoint of the guide, yes, roughly 9% in first half which of course includes at Q2 guide.

And a little over 11% in second half. So we're not we're really not talking about a big ramp in second half, but something that we feel that we feel is manageable and we have got is on and deal is attainable. So.

Yes, not expecting a significant ramp in the second half from our perspective.

Got it thank you Jim and Matt.

Thank you. Thank you. Thank you.

One moment for our next question.

Our next question comes from the line of Mark Schappell with loop capital markets.

Okay.

Hi, Good afternoon. Thank you for taking my question.

Jim just wanted to build off one of the earlier questions on some solid cloud I was wondering if you could just give us some additional details into the go to market model our strategy for the product and how you plan to kind of take that solution down to smaller and mid market customers.

Well, there's a lot of discussion to be honest, where the internally around.

How we do that a lot of it really comes down to more marketing.

We really have to promote a.

And a fairly substantial way.

And.

That's that's what we're planning to do so.

There is no brilliant.

Sure.

But we really have to promotive somewhat aggressively I think so that it gets the visibility at that mid market. We're also obviously pushing very very hard through our indirect channels, which are getting more robust year by year.

And those relationships are getting much much better for us. So that's that's how we do it.

Okay, great. Thank you and then.

Second question one of your sales strategy has been to push your cellular data analytics products into the engineering simulation customer base. Just wondering if you just give us a little bit of an update on those efforts I know it's relatively early days.

Well actually it's.

It's sort of turning a corner I would say and there is a couple of reasons why.

We made the decision to bring the data analytics products into.

Our suite.

It's sort of our upper end suite of simulation products. So it's not across everything but it's into the upper level suite, where you got electromagnetics and things like that.

And so now those products are available to us.

And in that customer base, that's already paying sort of a premium.

For their solution not only get access to this and Theres a lot of interest.

Much much more than I think we were we're perceiving before but I think what's most important is that our technical teams have been training across all the different products Panopticon rapid miner.

Monarch and there.

Our.

Finding use cases.

I just saw one that was super interesting.

We're looking at Wells for example, and enabled to plot the results beautifully and panel.

Across the whole model in three D and there's just there's just so many applications that were starting to come upon and the customers are really very hungry for how they can apply this kind of technology as well.

So the sales force the technical engagement for us all kind of coming up to speed their learning.

And I think the customers are very very interested in an environment, where everybody is watching cost whatever I think our offering.

Makes it easy for them to slide into.

Using some of these these tools and technology. So I think we are turning a corner now.

Thank you.

Sure.

Thank you one moment for our next question. Please.

Our next question comes from the line of our Sydney metal weak with Wolfe research.

Hi, This is <unk> on for Josh just one for Matt just to confirm.

Constant currency software revenue total revenue has been <unk>.

Maintain right because I'm looking at previous guidance and I think it suggests a 40 basis point decrease on software revenue on a constant currency basis. So I just wanted to make sure I had that message.

Yes, that's right <unk>, so when we when we roll up our guidance in constant currency consistent for the year.

Quarter over quarter. We include this table.

On the back of our earnings release, it sort of has this walk from midpoint of guidance in February to mid point of.

Guidance in May and then you can see the fluctuation there due to currency. So so yes, you've got the message correct.

Instant currency.

Change in full year guidance, but on a reported currency basis, it's up just slightly.

Okay, and then just on indirect channel sales I think it's down sequentially as a portion of revenue is this is driven mainly by strength in large customers and renewals that maybe what's the outlook on renewables down market and has this changed maybe versus initial expectations given the background.

Yes.

Did you say indirect.

Yes, yes, so indirect is performing well.

Yes.

It's been a focus of ours to continue to grow that.

Relatively actually consistent year on year with what we saw in terms of percentage of indirect.

But we expect to continue to expand there.

Yes, it's a focus of ours to eventually grow that.

More in the 20% range of course, that's a multiyear project run.

But yes overall indirect channels performing well.

As is our direct channel.

Got it alright, thank you.

Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating and you may now disconnect.

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Good day and welcome to all tiers first quarter 2023 earnings conference calls.

At this time all participants are in a listen only mode.

After the speaker 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 you will then hear an automated message advising that Youre Hain has been raised to lower your hand press star one one again.

Please be advised that today's conference is being recorded.

It is now my pleasure to introduce SVP of Investor Relations David Simon.

Good afternoon, welcome and thank you for attending all peers earnings conference call for the first quarter of 2023 ended March 31 2023.

Dave Simon Alturas, SVP for Investor Relations and with me on the call are Jim Scapa, founder Chairman and CEO .

And that Brown Chief Financial Officer.

After market close today.

We issued a press release with details regarding our first quarter 2023 performance.

Guidance for the second quarter and full year 2023.

Which can be accessed in the Investor Relations section of our website.

Investor Altair Dot com.

This call is being recorded in.

And 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.

Uncertainties that could cause actual results to differ materially from our expectations.

Risks are summarized in the press release that we issued earlier today.

For a further discussion of.

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.

<unk> may file from time to time.

During the course of today's call, we will refer to certain non-GAAP financial measures.

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.

<unk> had a very strong start to 2023 with software product revenue total revenue and EBITDA above the high end of our guidance.

Q1 exceeded our expectations and represents an all time high for a software product revenue and total revenue and continues our good momentum from 2022.

Demand for our products is strong and we're seeing the investments we've made in product development and our approach to customer success.

<unk>.

Adjusted EBITDA for Q1, 2023 was $43 1 million well above our expectations.

<unk> product revenue as a percentage of total revenue for the first quarter continued a strong positive trend at 91% compared to 88, 2% in the first quarter of 2022 and 88, 5% for the full year 2022.

Our recurring software license rate was 295% for the quarter as compared to 93% in the first quarter of 2022 and 92% for the full year 2022.

Software product revenue in the first quarter grew by 10% year over year on a constant currency basis led by strong renewals and expansion, especially in automotive and the aerospace verticals.

We also continue to add several new and important logos in the first quarter.

And the number of significant deals continues to grow as we focus on selling our broad solution set, especially our data analytics offerings into existing and new customers.

We are experiencing a substantial increase in engagement from our traditional manufacturing customers to apply our data analytics portfolio and leverage AI to accelerate simulation using CA and test data.

This is translating into meaningful new opportunities.

Overall, we believe our strong first quarter performance positions the company well for the rest of 2023.

The core of Altair success, as the industry, leading breadth and depth of our technology.

We work hard to deliver awesome capabilities and our Hyperworks 2022, three platform release exemplifies this commitment.

<unk> 2000, 22.3 offers an enhanced altair one experience by providing users with flexible access to solutions applications data and compute power.

Users can submit solver jobs, covering structural thermal computational fluid dynamics and electromagnetics disciplines, and the alterra scalable elastic cloud infrastructure.

Making it easier for organizations to meet budgets and demand.

The latest software updates enabled product teams to collaborate on all aspects of electronic systems printed circuit board firmware and fiber connectivity development that connected end to end environment.

<unk> 2000, 22.3 features tighter integration between the Altair blocks blocks motor nano fluid ex some lab and material data center to help users streamline workflows and provide advanced modeling capabilities electrical system design exploration and <unk>.

Optimization and faster acoustic and thermal flow analysis.

Debugging and postproduction servicing updates are also available with Altair E vision for.

For electronics system design.

Further improvements enable better modeling and analysis through low and no code design and engineering tools reduced pre and post processing lead times.

<unk> surface modeling integrated solver dashboard capabilities expanded fluid topology optimization coupling between <unk> and.

And more.

<unk> has been augmented with AI to enhance the modeling experience with automated part identification characterization of grouping as well as geometry feature recognition and management for use in downstream processes and further end user recommendation.

<unk>.

In addition, we introduced physics, AI and all new module.

Seamlessly integrated within our modeling environment to automatically train a neural that with previous stimulations to quickly predict accurate results for our new cat or a simulation model without running additional solver analyses.

Last week, we announced the release of some solid cloud, allowing users to access next generation simulation technology through a web browser anywhere anytime.

Some solid cloud eliminates geometry, simplification and lessening the tune last half with similar expertise intensive tasks and traditional finite element analysis.

Handles complex assemblies and delivers results with unprecedented ease and speed.

Some solid cloud is available the Altair, one healthcare's cloud innovation gateway and.

It offers collaborative access to stimulation and data analytics technology, alongside scalable high performance computing and cloud resources.

We believe some solid cloud.

Has the potential to dramatically accelerate and simplify the daily work of structural analysis in all markets and that rapid adoption of this technology will become necessary for companies to maintain their competitive advantage and product development.

We reached a positive milestone for Altair related to our acquisition of World programming in 2021, and the establishment of Altair SLC.

On April six the U S Court of Appeals.

The federal circuit.

Affirmed the decision of the court for the Eastern District of Texas, which ruled in favor of Altair by dismissing the 2018 lawsuit initiated by the SaaS Institute against World programming for alleged copyright infringement of SaaS software.

After more than 10 years of litigation across multiple international venues. It was ruled that the SaaS language is not proprietary.

And companies other than the SaaS Institute or <unk> to provide compilers and development environments supporting the SaaS language.

The case with other languages, including Python, C, plus plus or trend and others in the public domain.

And so I'll see demonstrates our dedication to open architecture technology, which.

Which we believe is the best way for people to harness innovation improved products and get the most from their work.

Now companies in any industry across the globe can embrace open source languages and technology, while simultaneously leveraging the decades of investment they've put into the SaaS language.

Momentum in our data analytics business continues to be positive as companies look to modernize their data analysis operations and standardized development, primarily with Python and most popular language taught in universities the.

The Altair rapid minor offers a unique solution.

To support companies converting our percentage of existing SaaS language code to Python, while leveraging Altair Src for the rest.

We want a multiyear seven figure software license for the Altair rapid minor platform with a major computational hardware company for its users.

Marketing corporate Affairs data office engineering and E Commerce.

We are currently engaged with many BSI accounts on modernization projects.

<unk> accelerates and de risks their move to Python and the cloud. We also have new revenue coming in for Altair Src from three financial sector companies in India.

And then insurance company in South America.

Bank in APAC founded more than 100 years ago has committed to our pair SLC and rapid miner to help their corporate credit check activities.

Our simulation business continues to grow with the convergence of data analytics, and AI and CAE workflows.

Every week, we hear more stories from our account teams about customers using AI combined with simulation to produce clear efficiency gains and product development.

Our government research organization is using the Alterra hyperworks and rapid minor platforms to acquire real world armored vehicle data.

Apply machine learning and develop predictive models.

Our passenger vehicle manufacturer is using altair, some solid and other altair stimulation tools combined with data analytics, including Altair Panopticon real time data streaming to develop operational digital twins for electric vehicles.

Another vehicle manufacturer is using altair as tools for machine learning to use historical stimulation data for crash NBA edge and durability.

A global leader in power management is using Altair compose combined with data analytics to develop a digital test bench for electrical systems.

The stories from the field continue to build and the convergence of stimulation with AI as a reality for <unk> customers.

Alterra has HBC works platform for high performance computing continues to be a strong growth area for Altair.

One of the top five global Fabless semiconductor companies committed to a six figure expansion, representing a six tax year on year increase.

And in EMEA, a major materials company awarded Altair, a multiyear seven figure deal for Altair is azure virtual appliance cloud solution of which.

It will run a broad spectrum of <unk> software, along with third party CAE offerings.

A recently published a case study demonstrates the positive social impact of high performance computing.

Argonne National laboratories, with the University and industry collaborators one of 2022 Gordon Bell Special Prize for high performance computing.

First COVID-19 research for its work using AI to track virus variants.

<unk> learning played an important role in the research and the researchers analyzed $1 5 million complete high quality Sars Covid two genome sequences.

A process that would have previously been time and labor intensive buy individually examining every protein and mapping mutation.

Instead, the teams streamline the process by developing the first Gino scale language model the.

The computing hardware used in the project is equipped with workload orchestration by Altair PBS professional and we are pleased to have played a part in this important life saving work.

In addition to our technology Altair is culture has kept us moving in the right direction.

Our history, we have always prioritized diversity.

As it is a foundational pillar of our culture and thereby our success.

We have also long supported stem education.

Combining these two values. We recently established the Altair on link forward scholarship, and Columbia University School of Engineering and applied Science.

It is designed to assist incoming first year students pursuing an undergraduate degree in engineering and applied science and his demonstrated leadership and or support for the African American <unk> Latino community.

Ideally the scholarship will benefit first generation college students and students who are associate economically disadvantaged.

The scholarship reward 10 students pursuing a four year engineering or stem related undergraduate degree with $25000 annually.

Which they will receive each year of their undergraduate studies until graduation.

Columbia Engineering will select and announced the first cohort of scholarship recipients in the fall of 2023.

We continue to invest and partner with companies developing leading edge technologies to remain on the forefront of innovation.

<unk> has a long history of creating and investing in HBC technologies.

In the fourth quarter of 2022, we invested an escape photonics at Columbia University startup dramatically accelerating data transfer rates between various computing elements leveraging photonic chips for ultra high bandwidth connections inside data centers.

<unk>.

More recently, we invested in River Lane at Cambridge University startup developing an operating system for quantum computers to support multiple hardware architectures for Ara corrected quantum computing.

Riverlands groundbreaking technology has the potential to accelerate the impact on scale of quantum computing.

Collaborating with escape and River Lane allows Altair to stay ahead of the curve of transformative technologies to help our customers fast track their innovations.

In conclusion, Q1, 2023 was a strong quarter.

And we are optimistic that the value we bring to our customers will continue to help us perform well against the backdrop of global uncertainty.

We have been prudent in our hiring practices and we are investing to develop our exceptional workforce.

We are experiencing less competitive hiring environment. This year versus the last couple of years and our turnover rates have returned to our historically low pre pandemic levels.

Our summer internship program, which focuses on top tier educational institutions saw 100% acceptance rate, which is well above normal.

Now I will turn the call over to Matt to provide more details on our financial performance and our guidance for the second quarter and full year 2023, Matt.

Thank you Jenn and Hello to everyone on the call and thank you for joining us.

The first quarter was a great start to 2023.

Coming right on the heels of a very strong fourth quarter and last year.

Q1 exceeded our expectation and represents an all time high for software product revenue and total revenue.

And we once again exceeded the high end of the range on software product revenue total revenue and adjusted EBITDA.

It is encouraging to see the continued momentum in our software products, where demand continues to be strong.

As I dive into the details of our financial results remember some of our revenues and expenses are transacted in currencies other than the U S dollar.

And therefore, our reported results may be significantly impacted by changes in foreign exchange rates.

To aid in the review of our results throughout my remarks, I will make reference to growth rates in both reported and constant currency.

Total billings for the quarter were $163 5 million a year over year decrease of four 6% in reported currency in Europe , 9% in constant currency.

Remember that in Q1 last year, we highlighted our largest ever data analytics and AI deal.

In the BSI vertical which was a five year eight figure deal.

So while we're pleased with this year's first quarter billing the significant multiyear deal from a year ago is impacting the year over year billings growth rates.

In Q1, 2023, we saw strength in our renewals base, especially in the automotive and aerospace verticals.

And I was pleased with our new customer growth, which increased compared to last year.

Software product revenue in Q1, 2023 was $149 6 million.

A year over year increase of six 2% in reported currency and 10% in constant currency compared to Q1 2022.

Software product revenue growth was led by strong renewals and expansion stimulation.

As Jim mentioned, a few moments ago, we continue to hear customer success story regarding continued convergence with data analytics and AI and simulation processes.

And this is showing up in our financial results.

Total revenue in Q1, 2023, which includes services and other revenue was $166.0 million a.

A year over year increase of three 9% in reported currency and seven 5% in constant currency compared to Q1 2022.

Our recurring software license rate, which is the percentage of software product billings that are recurring continues to be strong at approximately 95% for the quarter.

non-GAAP gross margin, which excludes stock based compensation was 81, 9% in the first quarter compared to 81, 4% in the prior year.

An increase of 50 basis points.

Software product mix drove this increase as our software revenue, which carries higher gross margins increased as a percentage of total revenue.

Software revenue was 91% of total revenue in Q1 2023.

Compared to 88, 2% in the prior year.

Over the long term, we continue to expect a general mix shift towards software product revenue as.

As growth there will outpace services and other revenue.

And as a result, we expect our non-GAAP gross margin to continue to increase modestly in the near term.

non-GAAP operating expenses, which excludes stock based compensation and amortization of intangible assets were $93 9 million compared to $84 9 million in the year ago period.

Beginning in Q1, 2023, we began to allocate certain indirect expenses such as facilities and it related expenses.

Across our operating expenses to improve comparability with our peers presentation.

These costs were previously captured primarily in general administrative cost.

But are now allocated across research and development sales and marketing and general and administrative costs.

Based on global head count.

We've made this change prospectively as well as to all prior comparable periods, which we've included in a supplemental table in our earnings release.

Adjusted EBITDA in Q1, 2023, with $43 1 million or 25, 9% of total revenue.

Third to $46 6 million or 29, 2% in Q1 2022.

This decrease compared to the prior year quarter was driven by an increase in year over year expenses.

So it is actually above our expectations heading into the quarter.

We had anticipated the increase in expenses year over year due primarily to acquisitions, we made throughout 2022.

In actual expenses for the quarter landed in line with our expectation.

The over performance in adjusted EBITDA relative to our expectations was driven by the increase in software revenue in the quarter, most of which dropped down to the bottom line.

Turning to our balance sheet, we ended the quarter with $378 4 million in cash and cash equivalents.

An increase of approximately $62 2 million from year end.

We're extremely pleased with our ability to generate free cash flow and were able to generate 57 5 million of free cash flow in the quarter.

The turmoil in the banking sector in March served as another reminder of the importance of a strong balance sheet.

We feel very comfortable with our significant cash balance relatively low levels of debt and access to an additional 200 million line of credit.

And that we're well positioned to withstand various types of market uncertainty.

Let's turn to guidance for Q2 and full year 2023.

We provided detailed guidance tables in our earnings press release, including reconciliations to comparable GAAP amounts.

We are continuing to see an FX impact relative to 2022.

As foreign exchange rates changed throughout last year.

To provide more clarity on the FX impact to our expectations, we provided growth rates in both reporting currency and constant currency in our guidance tables.

For Q2, we expect software product revenue in the range of $123 million to $125 million.

A year over year increase of five two to six 9% in reported currency.

And $6 seven to eight 4% in constant currency.

For full year 2023, we are maintaining our previous outlook for software product revenue in constant currency and slightly increasing our outlook in reporting currency to a range of 551 $561 million a year over year increase of eight eight to 10, 8% in <unk>.

Currency in.

And nine 1% to 11% in constant currency.

As expected services and other revenue has begun to stabilize in 2023 compared to the sharp declines we saw in 2022.

While services and other revenue was down slightly year over year in Q1.

We expect it to be flat year over year in Q2 and for the rest of the year.

As a result, we expect total revenue for Q2 2023 in the range of $138 million to $140 million a year over year increase of 4.0 to five 5% in reported currency.

Five four to six 9% in constant currency.

For full year 2023, we are maintaining our previous outlook for total revenue in constant currency.

And slightly increasing our outlook and reported currency to a range of $614 million to $624 million.

A year over year increase of seven 3% to nine zero percent in reported currency.

And seven five to nine 3% in constant currency.

From a cost perspective, we are on track with our spending goals for 2023, continuing to invest in areas for growth for example in additional sales capacity, while cutting back on administrative costs and overhead.

For Q2, 2023, we expect adjusted EBITDA in the range of $15 million to $17 million.

Or $10 nine to 12, 1% of total revenue compared to $16 4 million or 12, 4% of total revenue in Q2 2022.

For the full year 2023, we are maintaining our outlook from last quarter for adjusted EBITDA, which we expect to be in the range of $120 million to $130 million or 19, 5% to 28% of total revenue.

Compared to $108 6 million or 19.0% of total revenue in 2022.

And finally for the full year 2023, we are maintaining our outlook from last quarter for free cash flow, which we expect to be in the range of $108 million to $116 million.

Which represent a substantial increase year over year.

As a reminder, our cash flow expectations are sensitive to billings and collection patterns, which fluctuate seasonally.

In particular, our historical pattern has shown a larger free cash inflow in the first half of the year, primarily from collections of billings from Q4 and Q1.

And a smaller free cash inflow in the second half of the year.

We're expecting that pattern to continue this year.

We're excited to be starting the year with an all time high in quarterly revenue, which we feel gives us momentum and helped to achieve our financial goals for the year.

With that we'd be happy to take your questions.

Operator.

Thank you.

As a reminder to ask a question you will need to press star one on your telephone.

Your question has been answered or you wish to remove yourself from the queue Press Star one again one moment please.

And our first question comes from the line of Blair Abernethy with Rosenblatt Securities.

Alright, Thanks, nice quarter guys.

Thank you Blair.

Thank you.

Matt just said.

One for you if you could could you just.

Walk us through a little bit of your thinking on the on the Q2.

Guide and.

It's sort of.

Down sequentially a fair bit.

Partially this outperformance in Q1, just sort of your thinking of how you got there for Q2 and also just in terms of that.

The linearity you saw in deals in Q1 and that would be helpful.

Sure Yes, thanks for the question Blair.

What we ended up seeing the dynamic that we're seeing from Q1 into Q2, it's actually very similar to our historical pattern.

You typically have our quarters.

Seasonally Q1, and Q4, our highest quarters, whereas.

We end up having Q2 and Q3 being somewhat lower.

What youre seeing here in 2023, and what's embedded in the guide is that feed pattern continuing for 2023.

And then when do we sort of look broadly over the full year, which is really how we're we're looking at things.

We ended up seeing growth in Q1 in software product revenue in constant currency of about 10%.

And then if you sort of look at the midpoint of the guide and what that implies for full year growth.

Very consistent with what we're expecting for full year.

So nothing to point out in particular for Q2.

Sort of similar to some of the remarks, we made a quarter ago. We really are looking at things one year at a time and not focusing on.

On the ins and outs of one particular quarter.

Okay, great. Thanks, Thanks for clarifying and just one for you Jim if I might just.

Rapid minor deal closed in September .

In mid September .

How is that performing for you know how how are those.

Those components of the AI analytics business coming together now that you've had them for for another quarter.

We feel really really great about that acquisition to be honest with you Blair.

We've been bringing these pieces together.

The rapid minor piece was sort of.

The final unnecessary element to bring it all together.

And as we go out to customers, it's just extremely well received now and beyond that.

The sales force is just super confident on these days and thats across the entire sales force selling into our traditional manufacturing customers. There is there is a noticeable.

The uptick in the number of discovery calls were having.

The level of interest and our credibility is just really soared in that space.

Great. Thanks, very much nice job guys sure. Thank you.

Thank you.

One please.

And our next question comes from the line of Ahmad <unk> with Oppenheimer.

Hey.

Thanks for taking my question guys.

Nice quarter.

First question for Jim.

Really really impressive.

Commentary coming out of the manufacturing side in terms of demand for analytics.

I guess are you noticing any changes in dynamics outside of manufacturing I know you had a peer report seems like theyre, saying the opposite.

So you mean like in the banking and financial services sector. For example, yes.

Yes, yes.

To be honest, we're we're feeling relatively positive.

Really in all of those accounts side I was just on a call with one of the major banks.

I think theres a lot of opportunity for us our business model is a really unique model and we're into all of these accounts, we've been converting most of them to our units model.

With the rapid minor element.

I think we're extremely well positioned.

Sort of a differentiated platform.

We've got like all the right answers to all the questions.

That they are asking.

Thank God.

Surprised and we were just at the Gartner conference a month or so ago.

And.

We got a very very strong reception.

So yes, the financial sector, obviously, having some challenges but for us <unk>.

Actually.

The team that we have focused on <unk> is very energized.

Thanks.

Actually doing pretty well.

That's great to hear and thanks for elaborating.

And then secondly, also a question for Jim.

For you, Jim Tim solid cloud.

You had some pretty.

I guess, the pathetic comments there.

What makes you so confident.

And the technology.

Because.

It sounds like a lot of marketing, Paul, but but some solid as.

Is just so powerful.

I mean, you're importing.

Complete the CAD CAD model.

No modeling and meshing necessary you push a button.

<unk>.

Very very quickly youre getting very accurate.

In our results.

<unk> on very complex assemblies with thousands of parts and it's only getting faster and we're adding more and more capabilities to it.

We've added thermo we've added a lot of non linear we're looking at other physics as well.

And so I think.

Especially in the mid market.

Lower end of the market.

We're frankly speaking Alterra has not historically played big but others have.

I think those customers, which.

We will say are less even less sophisticated.

A tool like this.

Can you give them.

Such a fast.

Turnaround.

Is real it's magical actually I think.

It's a matter of.

Getting the opportunity to get into these accounts getting the.

The <unk>.

Eyeballs the awareness of it.

The biggest challenge and we're working hard on that.

And the competition is.

Trying to.

Make similar claims but but.

Frankly speaking when you when you dig in it's just not true.

What we're doing is really quite special.

Thank you and congrats again.

Kim.

Thank you one moment for our next question.

Our next question comes from the line of Andrew the gas free.

Aaron Berg.

Thanks.

My question.

Maybe the first one Jim on the topic of AI, you mentioned have you added those capabilities of Hyperworks.

I was just wondering is.

Potentially adding that it's been solid as well something in the cards that you're thinking longer term.

Yes, there is no reason the same fundamental.

The technology that we're using some we've been working on a long time by the way.

We're feeling very excited.

About the quality of the results that we're getting we've completely integrated it.

In hyper mash actually so that.

There are a lot of startups in the space.

All of that but.

It's quite important that is.

Easy to to use if you will and sort of integrated in the users' workflows and we've done that.

Theres absolutely no reason you can't.

You can't use those with some solid as well.

Okay. That's helpful and then maybe on the.

Figure rapid minor deal the <unk> win that you've had.

This quarter I was just wondering in terms of.

How accretive these are relative to your broader stimulation portfolio.

Would you say these tend to fall on the higher end.

The deal size.

And I'll, let Matt answer that question.

Thanks, Jim.

So clearly there is there are large opportunities and particularly when we're looking at.

At our data analytics suite and in the larger vehicles ice basins, where some of the larger deal.

But that's one of the things that makes it exciting about integrating this technology not just stand alone and data analytics, but also within our stimulation customers. So yes, I think there is opportunity.

Our deal size is increasing that's something that we're that we're happy about.

And I think that that that continues to present opportunities as we as we continue to integrate.

And push forward in the space.

Thanks, Matt and Jim I appreciate it.

<unk>.

Thank you.

Moment for our next question.

And our next question comes from the line of Dylan Becker with William Blair.

Okay.

Hi, guys its Steve on for gallon I mean, you touched on this on the previous question, but can you just provide some color on how this.

Solid plays into the longer term strategy of targeting those less technical users and just driving incremental usage of the platform through democratization of simulation.

Lower end market audiences.

Sure.

Thanks for the question.

So I mean, we're mostly focused we've talked a lot about <unk>.

Simulation driven design, so we've been very focused through our inspire platform.

Sort of the design and engineer community.

Particularly in sort of the more sophisticated enterprise large enterprise customers.

But theres really an also a variable and that's a large opportunity.

You could argue it's five or 10 X bigger than just the.

No.

The analyst community within those companies.

There is also a very very large opportunity at the mid and small market.

Customers, but again, we have not historically been.

Then as large into we are definitely focused they're more and more.

And so for them you have less sophisticated users often it's the same guy who is designing whatever they're working on and doing simulation and.

For those guys I think the technology really mixed.

Makes it great.

A great tool for them.

Awesome. Thank you.

Q.

Thank you.

Our next question.

Our next question comes from the line of Charles <unk> with Needham <unk> Company.

Hi, Jim Mcnab. Thank you for letting me ask a question on <unk> one.

Ask you about what.

Automotive end market I know, it's probably a declining.

Revenue contributor to your overall business, but as Scott It was about roughly 30%.

That's all.

Just a couple of in 'twenty two.

Jim I think you being very vocal wag youll see some early warning signs in the past or you did gave at the analyst community.

Early warning when you are seeing something that's what's not turning in the.

Right direction, roughly I think two to three years ago, but how do you feel about that.

The automotive end market going into the end of the year I think going into next year, especially now with kind of <unk>.

Continue to feel a little bit nervous about the macro environment.

With the recent added certainties drag related to the banking crisis.

So one I wanted to get your thoughts on what you're seeing what you hear from the off market costume group. Thank you.

Okay.

Thank you for the question.

It's interesting because I live in the Bay area now.

And in all around me all the tech companies are laying people off they bought were hired.

Our businesses are very significantly affected.

But I was just back in Detroit, We did I spent a week there.

And it's very very clear of that.

And the sort of main street world.

<unk>.

Manufacturer.

It's sort of business as usual there theyre doing some trimming.

Their own in certain areas.

<unk>.

These companies know how to manage costs, because they've been doing it so long they don't go out and over ire.

But the demand is still really high for new cars.

And so right now.

That whole that whole market I think is still very solid.

<unk>.

For us you're right, it's declining as a percentage of the total for us every year.

But it's still growing now if you look at the startup EV.

<unk> community.

Thank you.

That community of company is feeling.

More strain.

As the more traditional players are really starting to come in and test was cutting prices and so on.

But but right now I think the demand is still very very high for their products and I don't see it.

Is it really a problem for us.

Q.

Yeah. Thanks, So maybe a follow up.

Maybe this is for Matt.

Basically reiterated your 2023 guidance may be taken about a little bit on the U S dollar basis.

Bob.

But given the seasonality pattern, we're seeing Q2 seems to be a little bit.

Well it's.

It's relative to at least my expectations, a little bit more stable now than I thought which would have been a little bit more.

The button.

Guided for.

Which kind of implies Q3 might be follow the same seasonality pattern by Q4.

Kind of suggests we cannot need a very strong double digit sequential growth into the year and to really meet OEM pocket.

I know, Jim just provided some commentary around automotive.

But how do you think about that trajectory is that.

We will give you is what gives you the confidence that that same pattern will work with.

With key going into the year and double digit sequential growth into Q4. Thank you.

Yeah. Thanks, Charles Yes, it's actually interesting if you just look back at 2022.

And look to see what happened in 2022 Q1 to Q2.

Software product revenue in particular.

Was down.

Jeremy.

Additionally, with with where we're projecting our guidance to be sequentially. This year.

It's actually fairly.

In line with historical.

But just kind of stepping back if we look at first half second half dynamic, which I think is sort of useful here.

We feel pretty good about how the first half is balanced in the second half we're not expecting.

They have to go out and get a big number in the second half for example in order to make our guidance I mentioned, a moment ago that in Q1, we got to.

10% and software product revenue growth in the first quarter in constant currency.

And that for full year at the midpoint, we're at $10. One so that certainly consistent but even when you look at just first half versus second half whats implied at the midpoint of the guide, yes, roughly 9% in first half which of course includes at Q2 guide.

And a little over 11% in second half. So we're not we're really not talking about a big ramp in second half of two that we feel that we feel is manageable and we have got is on and feel is attainable. So.

Yes, not expecting a significant ramp in the second half from our perspective.

Got it thank you Jim and Matt.

Thank you. Thank you. Thank you.

One moment for our next question.

Our next question comes from the line of Mark Schappell with loop capital markets.

Okay.

Hi, Good afternoon. Thank you for taking my question.

Jim just wanted to build off one of the earlier questions on some solid cloud I was wondering if you could just give us some additional details into the go to market model our strategy for the product and how you plan to kind of take that solution down to smaller and mid market customers.

Well, there's a lot of discussion to be honest, where the internally around.

How we do that a lot of it really comes down to more marketing.

I think we really have to promote it.

Currently substantial way.

And.

That's what we're planning to do so.

Theres no brilliant.

Sure.

But we really have to promote it somewhat aggressively I think so that it gets the visibility at that mid market. We're also obviously pushing very very hard through our indirect channels, which are getting more robust year by year.

And those relationships are getting much much better for us. So that's that's how we do it.

Okay, great. Thank you and then.

Second question one of your sales strategy has been to push your cellular data analytics products into the engineering simulation customer base. Just wondering if you could just give us a little bit of an update on those efforts I know it's relatively early days.

Well actually.

<unk>.

Turning a corner I would say and there is a couple of reasons why.

We made the decision to bring the data analytics products into.

Sweet.

It's sort of our upper end suite of simulation products. So it's not across everything but it's into the upper level suite, where you got on electromagnetics and things like that.

And so now those products are available to us.

In that customer base, that's already paying sort of a premium.

For their solution not only get access to this and Theres a lot of interest.

Much much more than I think we were we are perceiving before but I think what's most important is that our technical teams.

Have been training across all the different products Panopticon rapid miner.

Monarch and there they are.

Finding use cases.

I just saw one that was super interesting.

We're looking at Wells for example, and enabled to plot the results beautifully and Pan out.

Across the whole model in three D and there's just there's just so many applications that were starting to come upon and the customers are really very hungry for how they can apply this kind of technology as well.

So the sales force the technical engagement for us all kind of coming up to speed they are learning it.

And I think the customers are very very interested in an environment, where everybody is watching cost whatever I think our offering.

Makes it easy for them to slide into used.

Using some of these tools and technology. So I think we are turning a corner now.

Thank you.

Sure.

Thank you.

Our next question please.

Our next question comes from the line of our Sydney metal weak with Wolfe research.

Hi, This is <unk> on for Josh just one for Matt just to confirm.

Constant currency software revenue total revenue has been <unk>.

Maintain right because I'm looking at previous guidance and I think it suggests a 40 basis point decrease on software revenue on a constant currency basis. So I just wanted to make sure I had that.

<unk>.

Yes, that's right our Sydney, so when we when we roll up our guidance in constant currency consistent for the year.

Quarter over quarter, we included a table.

On the back of our earnings release, it sort of has this walk from midpoint of guidance in February to mid point.

And May and then you can see the fluctuation there due to currency. So so yes, you've got the message correct constant.

Constant currency no change in full year guidance, but on a reported currency basis, it's up just slightly.

Okay, and then just on indirect channel sales I think it's down sequentially as a portion of revenue is this is driven mainly by strength in large customers and our yields and maybe what's the outlook on renewables down market and has this changed maybe versus initial expectations given the background.

Yes. It was it did you say indirect.

Yes, yes, so so indirect is performing well.

Yes.

It's been a focus of ours to continue to grow that.

It's relatively actually consistent year on year with what we saw in terms of percentage of indirect but.

But we expect to continue to expand there.

Yes, it's a focus of ours to eventually grow that up.

More in the 20% range of course, that's a multiyear project Ron.

But but yes overall indirect channel is performing well.

As is our direct channel.

Got it alright, thank you.

Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating and you may now disconnect.