Q2 2023 Altair Engineering Inc Earnings Call
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Good day, and thank you for standing by.
To Alterra <unk> second quarter 2023 earnings conference call.
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I'd now like to hand, the conference over to your Speaker today, David Simon Senior Vice President for Investor Relations. Please go ahead.
Good afternoon, welcome and thank you for attending all peers earnings call for the second quarter of 2023.
June 32023.
I'm, Dave Simon I'll Perez SVP for Investor Relations and with me on the call are Jim Scapa, founder, Chairman and CEO , and Matt Brown, Chief Financial Officer.
After market close today, we issued a press release with details regarding our second quarter 2023 performance.
Guidance for the third quarter and full year 2023.
Which can be accessed in the Investor Relations section of our website.
Investor that Altair Dot com.
This call is being recorded and a replay will be available on the IR section of our website.
Following the conclusion of this call.
During today's call, we will make statements related to our business that may be considered forward looking under federal securities 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.
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 reports filed with the SEC as well as other documents, we have filed or May file from time to time.
During the course of today's call, we will refer to certain non-GAAP financial measures.
A reconciliation of GAAP to non-GAAP measures is included in our press release.
Finally at times in our prepared comments or responses to your questions. We may offer metrics that are incremental to our usual presentation to provide greater insight into the dynamics of our business or our quarterly results.
Please be advised that we may or may not continue to provide this additional detail in the future.
Let me turn the call over to Jim for his prepared remarks, Jim.
Thank you, Dave and welcome to everyone on the call.
<unk> had a solid second quarter of 2023 with software product revenue total revenue and adjusted EBITDA all above the high end of our guidance.
Our Q2 performance aligns well with our guidance for the full year and demonstrates our continued success and strong as a company.
Adjusted EBITDA for Q2, 2023 grew year over year to $17 1 million.
Software product revenue as a percentage of total revenue for the second quarter continued a strong positive trends at 88, 8% compared to 88, 1% in the second quarter of 2022.
Software product revenue as a percentage of total revenue for the first half of 2023 increased to 89, 5% as compared to 88, 2% in the first half of 2022.
The recurring software license rate for the first half of 2023 was 94% an increase from 93% in the first half of 2022.
Total billings for Q2, 'twenty three was $147 8 million a year over year increase of 17, 8% in reported currency and 19, 6% in constant currency.
Software product revenue on a constant currency basis grew by nine 4% in the second quarter versus a year ago.
And nine 7% for the first six months of 2023 compared to 2022.
We saw strength in the quarter in our renewals base with customers choosing to renew and expand their usage of Altair units.
This growth was across many products and especially in the aerospace defense technology and automotive verticals.
We believe our second quarter performance positions the company well for the rest of 2023 and for next year.
<unk> portfolio for software for engineering simulation continues to demonstrate leadership and innovation.
Many new and significant products or in the last stages of development and planned for release at the beginning of Q4 2003 and.
And we are excited about their potential impact in the market.
We continue to integrate AI within our stimulation products, especially within our solvers.
Last week Altair acquired an exciting MBS see requirements management solution called omni be developed by two former general Motors executives.
The advantage of omni EV as it is easy to learn and use and naturally connects requirements to simulation and test validation solutions to achieve program goals.
<unk> is more accessible for product engineers designers and developers to use.
Whereas other MBS. These solutions are more abstract and geared for system engineers.
Omni be covers both process development and requirements connectivity and one vendor agnostic solution.
It connects to P. L M solutions, including team center, and <unk>, and windchill and to other mvsa tools, including <unk> IBM doors Mg and Jama software.
Making omni be easy to integrate into any engineering enterprise environment.
This technology enhances our ability to support the fast growing use of digital twin solutions simulation and test data management and AI with an open architecture that provides a traceable ecosystem to track performance cost and mass of a product.
We believe the addition of omni vision to our already powerful offering helps.
Helps to position Altair is having the most comprehensive digital twin solution in the market.
Omni V will be available via Altair units integrated into Algiers digital twin solution set and accessible via Altair, one alturas cloud innovation gateway.
This year, we are focusing on more enterprise selling and engaging at higher levels with our most important customers to build long term relationships and increased scope and scale in these accounts for the future.
The aerospace vertical had some notable wins for alterra in the quarter.
The space exploration company increased software licensing commitment by more than 50%, resulting in a seven figure annual licensing agreement.
Applications range across several physics disciplines, while deriving tremendous value from Altair units, which give us broad access to our deepest simulation technologies as well as our entire software portfolio, including data analytics and AI solutions.
In addition, we are engaged with the same company and a variety of leading edge consulting projects to push forward new product development opportunities with simulation driven design.
And another aerospace win a major aircraft component supplier.
Has committed to a 44% increase over a seven figure multiyear software licensing deal.
This account is especially meaningful as it is at the forefront of using simulation and Lewis of physical testing for certification.
Which is both a major challenge and opportunity and commercial aircraft development.
In the area of data analytics, and AI for business applications, a new <unk> customer signed onto a six figure annual software license.
<unk> two loan servicing within two months of its exposure to the Altair suite of tools.
A major European City has committed to out here as I'll say as it solution for analyzing demographic data with a goal of improving social services.
And a large U S manufacturer of building products signed a multi year six figure annual software license.
Accounting and finance teams to expand usage from data preparation to wide applications avail.
Available and the Altair rapid minor platform under Altair units.
We see great momentum in the convergence of simulation with AI.
A major automotive manufacturer in APAC as licensed additional Altair units, specifically, if we're using data science to design antennas.
Alterra has for many years been a leader in simulation software for antenna development and we have significant domain expertise and correlating test data with stimulation results.
We're more robust design guidance.
Using altair rapid miner, we helped this manufacturer reduced a test data analysis process from two weeks down to just a few minutes and use data science to drive rapid design exploration and optimization.
We continue to encourage diversity and inclusion to support the next generation of engineers and scientists.
Last quarter, we announced our stem education scholarship program with Columbia University.
We are pleased to have recently added the University of Michigan Dearborn to our Altair only forward scholarship program.
These scholarships focus on supporting underrepresented minorities, and women, which is especially meaningful as we seek to play a role in developing outstanding and diverse talent.
These scholarships will support students with a demonstrated interest in increasing diversity in stem fields.
Each recipient must be a full time students pursuing a four year degree in engineering or computer science.
And a member of one of the following organizations.
National Society of Black Engineers Society of Hispanic professional engineers or society of women engineers.
Scholarship recipients will be chosen by a committee of faculty and leadership and the college of Engineering and computer Science. This fall.
With nine recipients each receiving $25000.
Alpha was named for the third consecutive year to Newsweek's, most loved workplaces list.
As one of the top 100 companies measured by employee happiness and satisfaction at work.
Credit for the string of awards goes through our global management teams.
Our outstanding stewards of Altair is foundational values.
We have worked hard since our founding in $19 85 to create and maintain a workplace where employees can thrive in a supportive inclusive environment.
Our ability to maintain these values over 38 years of major shifts and technologies geopolitics and how we work is key to Altair success.
<unk> was also named as one of the 2023 Fortune best workplaces for millennials.
This award acknowledges companies that excel at providing younger employees with a sense of purpose in the workplace.
These workplace awards combined with our stem education commitments and strong global internship program are great indicators of our focus on talent development and sustainable work life balance.
Additionally, Altair was named the overall leader in the manufacturing data analytics sector and the latest report by Global Technology Intelligence firm Abi Research for advanced data collection normalization and analytics capabilities.
The report evaluated 10 data analytics vendors that enable industrial and manufacturing firms to proactively monitor their equipment and optimize their operations with the use of data analytics.
Abi research determined rankings by evaluating capabilities for data collection streaming analytics data normalization core analytics user experience commercial success and time to value.
The report Emphasises Alturas platform versatility and depth and made note of our huge array of modeling techniques and wide variety of options to display and share Iot sensor data.
With our deep expertise.
And understanding of manufacturing complexities and machine learning, we have developed solutions to easily build analytical applications with our low code platform to support faster more effective decision making.
Earlier this week the winners of the 2023 Altair Enlighten award were announced.
<unk> in association with the center for Automotive Research Enlighten Award program showcases how the automotive industry's leading mines are applying advanced technologies and responsible AI to create a better greener industry.
Congratulations to the winners of the 11th annual Enlighten Awards.
All Star Nicola Arcelor Mittal, Voltaire us Toyota the ASF U S ferrous thin.
And multi manager and marelli.
2023 is an important year of complex transitions for Altair in the midst of a lackluster macroeconomic environment hampered by inflation and uncertainty to set ourselves up for very strong growth in 2024 and 2025.
We are managing expenses aggressively to achieve a 20% adjusted EBITDA margin this year and to position. The company for continued adjusted EBITDA increases for the next three to five years.
Shifting our organization to focus more on selling our entire portfolio in key vertical markets and customers compete.
Completing the software development of several strategic.
Significant initiatives and establishing partnerships with key system integrators and Hyperscale.
To elevate our position and grow our share of wallet across key accounts.
As we take stock of where we are at the halfway point in the year. We are very satisfied that we have been extremely successful in every one of these endeavors. All while we continue to meet the quantitative financial objectives, we established for 2023.
As a result, we feel the company is going to be well positioned to take significant advantage of the strong demand we anticipate beginning in 2024.
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 2023.
Matt.
Thank you, Jim and Hello to everyone on the call and thank you for joining us.
Q2 was another solid quarter for out there.
Once again exceeding the high end of the guidance range on software product revenue total revenue and adjusted EBITDA.
Our strong first half performance has been fueled by growth across a number of vertical and particularly in aerospace.
Technology, and automotive where demand for our products is robust.
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 $147 8 million an impressive year over year increase of 17, 8% in reported currency.
And 19, 6% in constant currency.
In Q2, 'twenty three we saw particular strength in our renewals base.
We had meaningful expansions in some of our top tier accounts as customers are broadening their usage of application across several physical discipline.
In addition, we had notable new customer wins for our data analytics products as customers are realizing the power of Altair SLC and the Altair rapid minor platform.
This strength in billings led the software product revenue in Q2, 2023 of $125 3 million a.
A year over year increase of seven 2% in reported currency and nine 4% in constant currency compared to Q2 2022.
Total revenue in Q2, 2023, which includes services and other revenue was $141 2 million.
The year over year increase of six 4% in reported currency and eight 4% in constant currency compared to Q2 2022.
Our recurring software license rate, which is the percentage of software product billings that are recurring continues to be strong at approximately 94% for the first half of 2023.
non-GAAP gross margin, which excludes stock based compensation was.
With 80.0% in the second quarter.
<unk> to 79, 3% in the prior year.
An increase of 70 basis points.
Software product mix and an increase in our software product gross margin drove this increase.
Our software product revenue, which carried higher gross margin was 88, 8% of total revenue in Q2 2023 compared to 88, 1% 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.
As a result, we expect our non-GAAP gross margin to continue to increase modestly in the near term.
non-GAAP operating expenses, which exclude stock based compensation and amortization of intangible assets.
Were $96 9 million.
Compared to $90 3 million in the year ago period.
The year over year increase was in line with our expectation.
And was driven by increases in research and development and sales capacity.
Partially offset by decreases in general and administrative costs.
Adjusted EBITDA in Q2, 2023 was $17 1 million.
Or 12, 1% of total revenue.
Compared to $16 4 million.
Or 12, 4% in Q2 2022.
Turning to our balance sheet, we ended the quarter with $418 3 million in cash and cash equivalents.
An increase of approximately 40.0 million from the prior quarter.
The increase was driven primarily by cash from operating activities.
And we continue to be pleased with our cash flow generation.
Free cash flow through the first half of 2023 with 83.0 million.
Let's turn to guidance for Q3 and full year 2023.
We've provided detailed guidance table in our earnings press release, including reconciliations to comparable GAAP amounts.
We're continuing to see an FX impact relative to 2022.
As foreign exchange rates have changed throughout last year.
To continue to provide more clarity on the FX impact to our expectations.
We have provided growth rates in both reported currency and constant currency and our guidance tables.
For Q3, we expect software product revenue in the range of $111 million to $113 million.
The year over year increase of 7.0 to eight 9% in reported currency.
Five eight to seven 7% in constant currency.
For full year 2023, we are maintaining our previous outlook for software product revenue in constant currency.
And slightly decreasing our outlook in reported currency due to changes in foreign exchange rates.
Through a range of 548.
To $558 million a.
A year over year increase of $8 two to 10, 2% in reported currency and nine 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 year over year in the first half of this year.
We expect it to be roughly flat in the second half of the year.
As a result, we expect total revenue for Q3 2023 in the range of $120 million to $128 million.
A year over year increase of five six to seven 2% in reported currency and.
And for four to six 1% in constant currency.
For full year 2023, we are maintaining our previous outlook for total revenue in constant currency.
And slightly decreasing our outlook in reporting currency due to changes in foreign exchange rates to a range of $611 million to $621 million.
Our year over year increase of six eight to.
To eight 5% in reported currency and.
Seven five to nine 3% in constant currency.
Moving to adjusted EBITDA.
For Q3, 2023, we expect adjusted EBITDA in the range of $3 million to $5 million.
Our two four to three 9% of total revenue.
Compared to $6 8 million or five 7% of total revenue in Q3 2022.
For full year 2023, we are maintaining our previous outlook for adjusted EBITDA in constant currency and slightly decreasing our outlook in reported currency due to changes in foreign exchange rates.
For a range of $119 million to $129 million.
Our 19, 5% to 28% of total revenue.
Compared to $108 6 million or 19% of total revenue in 2022.
And finally for the full year 2023, we are maintaining our outlook from the last quarter for free cash flow, which we expect to be in the range of $108 million to $116 million.
And represents a substantial increase year over year.
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 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 are pleased with the outperformance we've seen in the first half of the year and look forward to a strong second half.
With that we'd be happy to take your questions.
Operator.
If you'd like to ask a question at this time. Please press star one one on your Touchtone telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Matt Hedberg with RBC capital markets.
Matt Your line is now open.
Yes. Thanks, this is actually Matt Swanson on for Matt.
This is kind of a question for Jim and Matt.
Jim You mentioned I think the word you used was lackluster to describe the macro environment right now and I think that's kind of been reflected in PMI. So I mean could you talk a little bit about how resilient the budgets both R&D budgets that youre selling into are in this type of macro and then maybe Matt if you could extrapolate a little bit more on how.
Youre thinking about the macro for guidance.
Sure Hi, Matt.
Swanson.
Yes lackluster.
From my point of view, just means fireworks arent really gone off so it's not.
It's not a down market.
In the sense of a 2009.
But it's it's kind of a sideways market from my point of view.
When I think about R&D budgets, I think everybody is watching costs more of them.
More than they are in a more dynamic market frankly, and I think the economy.
<unk> to ebb and flow.
Click on a little bit.
And I think 2023 in general is on the lower part of that cycle.
Anticipating 24 and 25 to be.
Basically.
That cycle.
Again it is not.
I mean, you can see our numbers, we had very solid billings growth, we're seeing a lot of potential actually in the market and actually increasing potential towards the second half of this year.
As I think we start.
Emerge if you will from a little bit of a lackluster feeling but every customer is certainly.
Just as we are managing our costs very closely I think our customers are doing that as well for us that creates opportunities. We're seeing many very significant customers coming to us very much more interested than they were before.
And.
And maybe making a switch to our platform and of course that that's very very promising but those take a little bit longer and I think we're going to start seeing the results of that in 'twenty four more so than in 'twenty three.
So yes.
I hope that was clear.
Yes, and Matt I would just add on.
To answer the second part of your question there Jim.
Jim just described is embedded in the guide for the year, so where you're seeing us coming out and guiding the midpoint constant currency for software product revenue growth at about 10%.
That's not quite what we saw last year right. So that's reflected a little bit, but having said that we're looking all the time at pipeline and we feel very very good about our positioning and the way that our pipeline is shaping up for the year end.
And in particular, I think we're doing all the right things to make sure that we're investing.
For a really fantastic future as well so.
We feel very very good about the position that we're in and looking forward to continue to capitalize on that part of the future.
Yes.
Perplex me answer really helpful. And then Jim. Thank you for the additional color on some of your AI initiatives that you are going through right now if I could a SaaS provider.
Maybe a slightly different way for some indirect benefits one being are you seeing any increased conversations around the HPLC business or people trying to figure out the compute side and then the second would be if this is finally at the moment, we start to see more generative design, which might increase the pace of design cycle more designs.
What does that mean to the simulation business is that possibly a catalyst sometime.
Extrapolating a lot right now in general, but yes.
No. It's a great question I actually asked that question. This morning.
Because we have a customer that went through a whole benchmark.
There's a number of little players in the space.
Coming out with AI solutions physics based AI solutions on Altair.
<unk> launched our physics, AI solution like a quarter ago or two quarters ago.
And they selected us.
The first question I asked is that they selected us because of our units model or because we are bigger or because of the technology and he said because of the technology. We are clearly.
Emily.
It was a great answer I loved hearing that answer.
But then I asked is that going to reduce the amount of stimulation.
Because we dramatically are reducing.
The the time it takes to validate.
<unk> designs.
He said no absolutely not.
They are just doing more of it which is obviously the answer I want to hear but I think that's it.
Drew answer.
I mean, I just think the technology as it always has is continuing to get better.
And people are going to do more and more simulation, whether they are using AI embedded or integrated or as part of it.
I think theyre going to the use of this kind of algorithmic technology is only going to continue to grow in my in my view.
I think we're in a great spot, we have a lot of really amazing stuff coming.
This has been an absolute year.
Investing.
Which is what I tend to do in the US if you will lackluster cycle.
And then come out swinging so.
Yes, we're very excited about product as well.
Thank you.
Sure.
Our next question comes from the line of Ken Wong with Oppenheimer.
Great. Thanks for taking my question.
Jim just touching on just the macro a little bit I think when you are closing out your prepared remarks, you mentioned.
Take advantage of strong demand that you anticipate in 2024 was that just kind of general again expectations that youll youll start to see.
More fireworks or is there something in your pipeline something that you guys are in like internally that gives you that comfort in saying that the strong demand in 'twenty four.
It's both.
I've been doing this for a long time and so I have.
A pretty good feel for what happens.
Macro to.
Alterra if you will.
But we do see a lot of really big opportunities that are building in the pipeline that are a little bit longer.
Take a little bit longer to gel.
We feel excited about where things are going.
So it's a combination.
Okay, Perfect and then Matt.
If I could just as we look at the outlook I realize that you or your revenue is probably a little lumpier than let's say a traditional SaaS company, but I guess <unk> does look a little lighter or a little more back end loaded into Q4 and any any slippage some timing stop or help just help us walk through the <unk>.
Behind that.
<unk> dynamic.
Yes, no problem.
So first off what we're seeing this year has been playing out generally how we've been guiding since the beginning of the year. So we've been guiding software product revenue growth of about 10% at the midpoint in constant currency.
And so far we've been we've seen constant currency growth of about nine 7% in the first half and we're expecting about 10, 3% at the midpoint in the second half so actually a pretty reasonable first half second half dynamic there.
So.
In other words, not specifically backend loaded certainly not not with respect to first half second half.
And then when you look specifically at the Q3 Q4 dynamic.
It really just comes down to a somewhat difficult nature of guiding Q3. So in Q3, you've got the summer holiday.
It has historically been our smallest quarter of the year. So we're only several million dollars can can make a seemingly large impact on percentages and so you sometimes get a strange set of comparisons there.
But again when you look at the pipeline for the second half and what we're seeing in the second half in total we feel really good about how the year shaping up so.
Nothing more to read into it than that.
Okay fantastic. Thank you Curt.
Our next question comes from the line of Dylan Becker with William Blair.
Yeah, Hey, guys. Thanks for taking the question, Jim maybe on kind of the vendor consolidation aimed to obviously customers love the unit's model.
But I guess the dynamic that you guys are seeing healthy renewals I'm wondering if you could kind of help us parse through.
Is that the momentum coming from again expansion across new teams for design different design workflows is it customers switching it team that consolidation play out is it has it elevated compute intensity I guess kind of help us think through what maybe some of the core drivers are there.
So so I mean, there is an overarching.
Activity happening.
Our most important markets aerospace.
It is very very active right now.
Aerospace and defense in General is is probably the strongest sector right now that we say technology may be number two.
But even in automotive there is still a lot of.
Competitive drive to get some new products to get to electric and all of that.
So theres still a lot of a lot of sort of overarching.
Demand just because people are our customers are trying to get to new products.
What was the second part of your question sorry.
Yes, I think that kind of.
I guess spending consolidation and how that plays into the units model vertical consolidation piece, yes. So.
I mean, when you're in this.
Down part of the cycle as I'm describing it.
It takes a little bit of a while there is a lot of religion in our world of technical computing.
Simulation and all that.
But as as.
As customers are looking deeper.
How do we do all the work we need to do but how do we do it more efficiently and more effectively more cost effectively.
As as the cycle sort of gets towards the end.
They start really looking more closely at.
What can we do competitively is there is there a different partner that we should be working more with and we're in every one of these accounts already all of these accounts are very competitive.
Customers are deciding who is the better partner right and so I think theres more opportunity right now for us.
Okay, Alright Super helpful.
Thanks for that and then maybe Matt again kind of touching back on.
The guidance framework it looks like the seasonality is kind of aligning with the prior year period, and I think Jim made a comment around kind of more of an <unk>.
Enterprise emphasis from the sales force is that naturally maybe a function to a kind of a little bit of shift in the model of just aligning with kind of the purchasing decision decisioning for those larger scale customers.
With respect to the Q3 Q4 dynamic.
No not really actually it really is just a function of some timing of deals when when youre trying to project when deals are going to close in late September versus early October .
And again, a fairly smaller base at least from US it's our it's our smallest seasonal quarter back.
That just can drive some some of those dynamics to note.
He doesn't have much to do with the with the dynamic that Jim touched on.
Okay, all right Super helpful. Thanks, guys. Thanks, John .
Okay. Thank you.
Yeah.
Our next question comes from the line of Josh Tilton with Wolfe Research.
Hi, This is Luke <unk> on for Josh Thanks for taking my question.
You said earlier, you expect adjusted EBIT to increase for the next three to five years any details you could provide on that or what will drive it and any more color you could give around the magnitude of those increases would be very helpful. And then I had a follow up thank you.
You get that one Matt sorry.
Yes so.
A lot of what we've been what we've been saying over the last couple of years here around our ability to just continue to incrementally add to our adjusted EBIT margin is something that we believe we can continue and into the future.
Certainly in the next three to five years, but frankly and beyond.
And the way that we're doing that is we're continuing to increase our our proportion of software revenue as a percentage of total and that is having.
A benefit.
Our gross margins, which is reflected for example in this quarter where were able to increase our non-GAAP gross margins year over year.
But we expect that that's going to continue so thats one helpful driver and then of course. The other is we're continuing to manage our opex expenses. So.
We without putting any any kind of quantifiable metric side, which which we'll do after we after we get through the end of this year.
Really the game plan is what you've seen over the last couple of years here, where we're going to continue to drive revenue growth fueled primarily by software revenue growth and keep our costs in check.
Great. Thank you so much and then just kind of circling back to.
Some of the earlier questions and commentary around your existing automotive accounts I was wondering if for some of those legacy customers how much more room, you see for cross sell or upsell, there and how much more room. There is to run not just within the.
Stimulation side, but also with the data products.
Yes, I think theres a lot of.
We've been looking.
Customers like the large Oems in Detroit for years.
Let's just continues to grow year on year for 25 30 years.
And I think thats going to continue this huge amount of opportunity on the data side.
A lot of opportunity on the designer side as well with products like some solid and inspire.
So.
If you look at the number of designers compared to the number of simulation engineer.
<unk> six seven to one.
So lots of opportunity there a lot of opportunity with data side as well and even on a manufacturing plant floor ESR Abi.
If you look at the at the companies we were compared against.
If you look at they do have kind of.
I don't know if I should say magic quadrant, but like a magic quadrant and we're way at the upper right hand corner and Theres a lot of well known names that you might have thought of in that space that we beat out.
So.
I think theres, a huge amount of opportunity there.
Thank you.
Sure.
Our next question comes from the line of Charles <unk> with Needham <unk> Company.
Hi, good afternoon.
First I want I wanted to clarify a little bit maybe this is an accounting question it may be too Matt.
It looks like about third quarter guidance, you're still seeing foreign exchange as a tailwind it's not that but I think you did lower your annual guidance.
To be.
Some point exchange relates to Taiwan.
It turns out that you is that what was the assumption that wet.
Little bit.
Yes.
Let's say three months ago.
In terms of the foreign exchange rate.
The clients are certainly exposed to thank you.
I'm not sure I caught all of that are you referring to the to the.
Changing guidance at the midpoint from full year guidance that we gave last quarter to this quarter.
Yes, Okay got it so.
Yes, so what we're pointing out there is that.
As a result of changes in FX rates that we witnessed over the last quarter.
The change in guidance and reported currency from a software product revenue and total revenue perspective.
Is now down by $3 million on a reported currency basis, but it's exactly what it was on a constant currency basis.
We gave last quarter, so no change in constant currency.
That impact flows down to EBITDA, but it's partially offset actually by some FX benefit that you get inexpensive and so while the impact to revenue is $3 million the impact to adjusted EBIT was only $1 million because you get sort of a <unk>.
Natural hedge there.
Expenses.
Again, that's all in reported currency in constant currency. The guide is the same guide that we gave last quarter for full year.
Got it.
And our next question to Jim Jim.
Your discussion with that Amit.
<unk>. Another question in terms of lackluster versus fireworks going up I want to be a little bit more specific.
To ask you about automotive walk us maybe might say great question every quarter, but.
What are you thinking about plenty plenty core in terms of that vertical still your largest one auto contributions coming lower by about 24, a lackluster or you think of our <unk> clinical off just as the high level questions directional color Barry will be really want to hear that thank you.
Should I use that word.
I mean, I think generally.
We're going to start seeing an uptick in.
And the spending for a lot of these companies I think <unk> been holding a little bit tighter.
Through this year.
I think they're going to loosen up next year and it's not just about the sales that they make because the amount that they spend on engineering is actually a very tiny percentage of their total revenue.
And total expenses even.
But I.
I do think budgets have been and are a little bit more restricted theyre also figuring out.
How to play the data game right now so a lot of companies are selecting.
<unk> solution corporate wide for data analytics and data science.
We're in a lot of these conversations and a lot of and a lot of companies and I think that as they start to figure out what are the applications and how can they really have an impact.
A lot of hype is a big hype cycle around generative AI.
But there is real meaningful opportunities to apply this technology and have an impact on their businesses and I think we're really well placed understanding their demand. So I think we're going to start seeing more and more growth.
Coming out of this year personally.
I don't have a crystal ball any more than you do so I could be wrong here.
But I do have a lot of experience and I think that our products.
That we're developing right.
Are really going to position us in not just the products, but our go to market approach.
And a much more meaningfully organized towards specific verticals all of that's really coming together in a very nice way for us as well a lot of work going on this year to sort of reorient the company.
And we're just seeing.
The results of that I think is going to is going to continue to grow the pipeline coming into next year and it's just.
The big opportunity.
Thanks, Jim really looking forward to a plenty and plenty of four thank you. That's all my questions. Thank you.
Our next question comes from the line of Blair Abernethy with Rosenblatt Securities.
Thanks very much.
<unk>.
Jim wondering if you can give us.
A sense of how solid cloud.
I know it just launched in April .
But just want to get some color about how that's.
During in the market.
Yes.
Okay. So it's still very very early days for some solid cloud.
But some solid.
Is is really going well actually.
And we just have a lot of companies that are beginning to really recognize the power of some solid.
A lot of companies have done significantly valuation we understand the concerns that they have for example around how we do adaptively in and we've been really tuning that.
For designers, so that there's a lot more automation and setting parameters and all of that.
So we're.
We're seeing this as one of the products that we're excited about.
Really continuing to take off continuing to take us into a lot of places we haven't been before.
So some solid cloud.
The opportunity in the small medium accounts.
We're trying to partner with some of the Hyperscale is around that.
It's also a great opportunity to sort of evaluate the software even for a large corporation. They want to run a couple of models quickly and in the cloud.
But for now I think the bigger business opportunity for us still.
If you will on Prem quite frankly.
Okay, great. Thank you and then just a question on <unk>.
On the recent acquisition omni EV.
Just last week.
<unk>.
Maybe just some rationale as to why.
Why do you purchase this.
Did they have.
And the way of customers or revenue prior to the acquisition.
Sure So I mean all.
<unk> are starting to think more about.
System level design.
Building out digital twins to.
To model, an entire system and we're in the circa that in many many accounts. So that is that's just a really important piece of the business. We had a gap. There you guys often asked me well I'm wondering you're trying to fill and I never want to answer those questions for you.
But this was a gap we didn't have a requirements management solution.
And we we have been working with for several years now and.
And we do believe that this is a tool that's quite differentiated know customers love it.
Started to see it.
It's very very easy to learn.
Learn how to use and to implement.
Does the two main things that customers need it helps you set up the process.
In auto <unk>.
<unk> of your system now.
Our models and then very very nicely connects to simulation.
And test data for validation.
Which is exactly what you need to do with these tools.
So youre setting up upfront here are the requirements and then here is how are you going to validate these requirements.
So it's just a key element.
I think.
The products that are out there in the market today are.
Somewhat.
Difficult for product engineers to really grasp im going to say.
<unk>.
I think this product is going to take off actually.
That's great. Thanks, very much for that color.
Sure. Thank you.
Our next question comes from the line of Mark Schappell with loop capital markets.
Hi, Thank you for taking my question, Jim It's nice to see the growing success that youre, having with cross selling your data analytics products into your simulation of installed base I was wondering if you could.
Give us a sense of how much of this success.
You would attribute to say the changes you've made to the sales teams at the beginning of the year.
Or versus just customers, becoming more comfortable with combining simulation data analytics.
Yes, it's a great question.
Combination of things I mean.
Any of these things require.
You have to sell it within your own organization.
The teams have to actually learn what these tools to our technical teams have mostly been trained now with with rapid minor with monarch panopticon. So even the stimulation guys are all very well versed in using and applying these tools the sales guys similarly need to understand that.
Use cases on how to sell these products and I think we've come a long way in the last two and a half years.
They can do that.
We did do some crossing creating these vertical teams.
Crossing some of the leadership from the data teams.
Into the different verticals and I think that leadership is making a pretty big difference.
But it's also the customers are as we.
As we get into customers and as we solve a problem over here and they go Wow you just saved US we went from two weeks to two hours doing this thing or that thing.
Could we apply it here or can we apply it there. So we're starting to see the customers sort of at the grassroots level beginning to grasp that in Ghana.
And the real power for US is that the rapid minor platform is a true no code platform, there's a lot of.
Other products will remain nameless, but a lot of other products that claim to be no code.
You never can get to the end unless you get a Python program.
Writing some code and rapid minor really isn't all code platform. It's just extremely easy to implement and it is very broad and deep. So I just think we're in a great spot we understand the domain and we've got just an offer that crossing.
Cross Cros.
<unk> and all of that happening in our in our organization that it is.
Starting to get traction.
Great. Thank you that's helpful. Thank you.
Our next question comes from the line of Andrew de Gasperi with Aaron Berg.
Hi, This is Stephanie on for Andrew. Thank you for taking my question.
In terms of your acquisition strategy do you expect any shift in when you think about acquisitions and further what areas specifically are you looking at.
Thank you.
Sure. Thank you for the question.
I generally try not to tell you.
Looking at.
That doesn't.
Usually work for me.
And I don't see a big change.
I think we are.
Very clear internally in the areas that are.
Are interesting to us and we're paying attention and we look at a lot of different companies.
And.
But at the same time, we're value players as well.
And we're very focused on the quality of the technology and also the.
The culture of <unk>.
So a lot of stuffs.
So we're looking at quite frankly, right now we have a lot of different opportunities.
And we're going to continue to probably mostly just tuck things.
And continuing to grow.
Grow the solution side, so sorry for not answering the question but.
But that's that's probably the best I can do.
Got it thank you.
Thank you.
That concludes today's question and answer session.
This concludes today's conference call.
You for participating you may now disconnect.
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