Altair Engineering Inc. (ALTR) Earnings Call Transcript & Summary

There's 2 aspects there. We, quite a few years ago, created this con -- So when a customer today gets a license file, they load it on servers on their own premises, basically. We created this concept of what we call hosted units where we do all the control of licensing from servers in the cloud. And we rolled that out about 8 years ago. We use that for our own internal use. We use it for all of our EDU stock. We use it for our reseller channel for the last several years. And some customers use that, but frankly, speaking, historically, our direct sales force has been reluctant to promote that. Although within the corporation, we prefer that because it actually reduces cost for us and it's much easier to manipulate and all of the tracking that we do is much easier to do now. With COVID, it's actually accelerated the take-up of the hosted units. We promoted them now and suddenly, our own sales force is embracing it, customers are embracing it, and that's been really positive. Beyond that, the whole concept of the units model, just in general, is a very flexible approach to licensing and really continues to give us the opportunity, particularly, at this moment, where customers are concerned about cost, they're coming to us more and more. In some cases, believe it or not, giving us a list of other applications and saying, which ones can you replace? I'm not kidding. And that, by the way, includes some data analytics. So that model is particularly, in a moment like this, I think, is really strong. And the hosted units was kind of a lifesaver for many customers who didn't -- Altair actually was very prepared coming in. We added about 2,500 VPN servers. So we were super prepared for this large-scale move to remote work. But with a lot of customers, they weren't. And with the other software, you're going to hit your VPN servers in a really big way. And many really just didn't have the bandwidth to handle that, so they needed temporary licenses. We also did a lot of temporary licenses for customers who weren't willing, for whatever reason, are able to go to hosted. So hope that answers your question.

Why was the direct sales force a little hesitant go to the hosted model? Are the commissions different?

No, not different commissions because I'll say that our sales force is very customer-oriented and they were concerned that the customers would be worried, which they are sometimes about security, this sort of stuff, if I'm going to the cloud for this thing. Actually, from a security standpoint, everything -- all your data, everything, still resides on-prem. It's just the licensing that's not, and it's actually very, very secure. For us, it's extremely well tested to over the last 8 years. So it was very easy for us to roll this out at this time in a pretty large-scale way. For another company to do that is, frankly speaking, much harder to do it rapidly, unless they are going to test it well.

Right. Okay. So it's not like you were doing it on the fly. You had this model already set up. Okay. That's helpful. So you serve obviously industries that have been hit hard by COVID: Automotive, aerospace, energy, maybe chemicals, retail. So what are customers saying? And actually, I want to layer one thing in here. One thing that you've always said, Jim, is that Altair really plays, in terms of simulation, in the high end of simulation. So I'm just curious, first of all, can you -- for those of us that may not be as well versed with what it means to be in the high end of simulation to begin with, can you give us a little bit of a definition there? And then also, would you expect the high end to be particularly hurt during this time frame? Or do you -- would you expect it to be maybe more resilient during COVID-19?

Okay. So high end to me is products that are more complex probably and require more complex types of simulation, system-level simulations as opposed to a little part that goes on a system, that goes on a car, if you will. So more to the buy end is that. High end to me is, as I usually describe it, is auto, aero, ship design, rail, heavy machinery. I mean, at our customers, every one of the big names in Silicon Valley that you wouldn't think would be customers of Altair are all customers of Altair and in Washington state. So all of the high-tech companies are our customers as well. They're all making pretty complex products these days. And then they use us for a variety of other technology, HPC technology and others as well. Electronic chip design, all of that uses our technology. So as far as how hurt they are, yes, their businesses are very significantly impacted. There's no doubt about that. But engineering -- the engineering spend in these companies is a relatively small percentage of the total. And so -- and even more important today than it's ever been because it's such a competitive market right now, you have to really have products that are at the leading edge, and everyone is investing in that direction. So somewhat surprisingly almost to me, one of the leading indicators is the staffing or the CES part of our business, which is smaller and smaller percentage-wise, but it's still a substantive business, a rent close to $50 million. That business is usually like hit very hard first because they'll cut people that are contract people. We've really not seen -- like in '08, '09, that was decimated. But now, in this market, the customers are clearly recognizing that getting that talent is so challenging, they don't want to lose it. Only one of our customers, and I think they made a really large error, has cut a lot of their engineering contracting staff, and we've been placing some of those people at some other companies already. And they actually have called some of them back now because I think they're beginning to realize maybe not such a good move, plus some time has passed. So some have done some pay cuts, both to their salary people and some contractors. That's why you'll see our projections to be down a little bit. But we balance that 100% on the cost side as well. And just in general, I'm seeing pretty much strength in that part of the business. All the renewals are coming in, as you would expect. There is opportunity, as I mentioned, for some displacement of other things with the strength of our model and the breadth of what we do. But it probably won't drive a lot of expansion in new business in this year. This is a very unusual year. But it's not that we're sitting here going, "Oh, we're going to lose a huge amount of revenue there." It's more on the sort of this year things will be much more stable, but not growing as it has been.

Yes. Howard, just quickly to follow up on that. Maybe average deal size or average sales cycle, have you seen anything from the pipeline metrics that have changed materially from what you would have expected?

So the only thing we've really seen is a little bit of an elongation in the sales cycle. If you think about where we are and the nature of maybe some of the comments over the last few minutes, the last weeks, maybe a little over a month, whatever the case may be, what we've really seen is our customer base pivot from working essentially in-premise to working virtual. So the focus there has been just enable me to continue to do the things that we need to do and want to do to continue to move forward with product design, development activities and such. So from there, we've not really seen a change in the sales metrics and things like that of any real significance other than more about help me shift and manage in a virtual environment, and then we'll continue to, I'll say, engage on the sales side. To me, the 2 things that are most notable, and Jim mentioned this -- the impact on the CES business, that shows that our customers have spent a decade building deeply technical teams and capabilities and such. And they're really trying to hold on to those resources, not shun them quickly apart from it because they recognize how important that is moving forward. So that's a real nice positive from a sales cycle perspective because they're keeping their channel pool. The second is all the huge amount of time and attention to webinars and training and things like that shows, again, real serious interest in using tools and technologies, ours in particular, to drive forward even in this type of environment. So it's a nice way of saying, no, really not seeing anything other than Q -- end of Q1, Q2-ish seems a pause on the expansion opportunities while everybody has pivoted and is pivoting into the virtualized environment.

Okay. Understood. So Jim, I just want to revisit something you brought up earlier, that's simulation-driven design. Taking simulation, moving it up in the product design, even maybe -- even, as you mentioned, ahead of CAD or embedding it into computer-aided design. What solutions is Altair rolling out really in the next few months that are going to hit the market in this area?

Right. What Altair really did probably 10 years ago or so as we -- things sort of grew up in this market. People used to design on drafting boards and they did testing in the lab. And then you move from drafting boards to 2D CAD systems and then ultimately to 3D and the 3D with services and simulation sort of grew up alongside of 3D CAD. What we -- and it just sort of came along and the way things are done, that process, and it's a little bit of throwing things over the wall process, just sort of evolved. We said -- we sat down 10, 12 years ago, and we said, if we had a blank sheet of paper, we were going to develop an approach to designing things from a concept stage completely new, knowing what we know now, how would we do it? And what we created, and it's a long process, but the product today, if you come online and look at some videos and see where we're going, you're going to see something that's beginning to really flower. And this is not that we're putting simulation on to CAD. We're actually creating a solution that is a simulation solution that has geometry and CAD-like functionality within it. So it's a little bit different, we're flipping it around a little bit. And that's really what the Inspire product is. Within Inspire and in that same framework, you have all the ability to develop your controls, same user experience. And then motion simulations, you automatically transfer loads from the motion to the structure. Then you do generative design and full simulation, multidisciplinary simulations. And ultimately, you end up with a design that you can either take to CAD and detail it further, if you want, but ultimately, maybe even stay longer in that solution. So that's the vision that we have for simulation-driven design. And by the way, AI and machine learning begins to enter into that. We've recently developed a new technology that we think is going to play pretty interestingly there. It's under the covers, but that's all machine learning technology. That also is going to drive these designs, these shapes, to do best-in-class. So one of the technologies that I know you guys are very interested in, so I'll mention it here before you ask me, is SIMSOLID. We went out and we acquired SIMSOLID. And it was a risky acquisition in a way. There was almost no revenue there. There was huge buzz in the market, though. There were a lot of really major corporations that were evaluating it. It was a little bit on the buggy side still, it's a very tiny company, and we evaluated it. And my guys came to me and they're like, this stuff is amazing. I mean it's -- and I didn't trust them, and we went through this whole long 6-month process, all the way up to -- one of my Board members is the dean at Columbia Engineering school and one professor at Columbia actually dove deep into the math. And they came back and they said, this is a really rare technology here that is really game changing. And I completely overpaid for it. They didn't want to sell the company, by the way. So I bought it. They're all excited nowadays, and SIMSOLID is taking the market by storm. But the solution itself is in an environment which doesn't have, if you will, the geometry capabilities. So now we've -- and many of the customers are like, yes, but we need to be able to change it and then rerun it and make evaluations or whatever. So now we brought it into Inspire. We have other simulation technologies there, too. But bringing SIMSOLID into Inspire gives us like this next-generation super-fast technology to do that as well. And so that's just launching now. And so the simulation-driven design portfolio -- and by the way, inside of there, we have every manufacturing simulation. I had a lot of customers early days of Inspire tell me, it's all great, we can do the generative design in there. But if we can't manufacture it, it's not useful to us. I mean I had VPs of major suppliers, I'm thinking I won't say the name of the companies, and we began aggressively adding manufacturing simulation, the same beautiful lightweight designer-level user experience around very high-end manufacturing and the integration of all that into optimization to synthesize designs. So you can decide is it cast, is it extruded, is it formed, is it additive. We just launched additive. All of that is available in the same framework. That is simulation-driven design. It's across the board.

Great. We did get a question from the audience, and I love its simplicity. And maybe if you could answer this, not just in relation to maybe what your competitors are doing in simulation-driven design, but can you talk about your competition with ANSYS? I think many investors are focused on the Altair ANSYS dynamic in the marketplace.

I didn't see that question. How come it didn't come up on mine? But okay. I'm not sure what you want me to say. So ANSYS is a terrific company. It's extremely well-run. It is very investor-focused. I would say, we're a lot more customer-focused, for good or bad. I think they have a great portfolio of products and a very strong customer base. They have historically played in the middle part of the market, but they are pushing to the upper end of the market, mainly through some M&A. And they're a great competitor. I think that Altair is fundamentally a much more technology- and product-driven company. The breadth of our offerings and the depth and the innovation in our offerings, I think, is substantially higher. We play in some different spaces. They got into the EDA space with integrated circuit design. So now they compete with Cadence, for example, on that side of things, and that's not a space we play in. And we play in some spaces that they don't play in. And so there's -- it's not an exact overlap in terms of what the companies do. But both of us play in a market which is, honestly, going to continue to grow because we're both in a space where math and algorithms are driving decisions for our customers. And so I think we're both in a great market.

Okay. We're getting the wrap-up signal from our producers. So Jim, Howard, thank you so much for joining us this morning. Really appreciate you being with us in the conference, and glad all is well. We'll talk to you soon.

Thank you.

Jackson, thank you very much. Bye now. take care.

Yes. See you.