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

Good morning. Welcome, everybody. I'm Johannes Schaller, Head of Software Research at Deutsche Bank in Europe. I have with me on the line here today, Howard Morof, CFO of Altair; and also Dave Simon, Chief Administrative Officer of Altair. We're going to do a fireside chat. There is a question-and-answer tool on the web. Please feel free to submit any of your questions as we speak, and I will ask them on your behalf.

I think with that, probably, we kick off with the first question. So thank you, both, for joining. And maybe could you start giving us, really, just to start with a bit of a quick overview of the Altair business model, your key strategic objectives and also the medium-term goals you have for the business?

Sure.

Go ahead, David.

Howard, do you want to take that one? I'll say -- I'll take the business model. And then as we get into some objectives and a bit of the financial framework, we'll turn it to Howard. So Altair is a leading company in data analytics, simulation and high-performance computing. We very much see those 3 things as converging. We've -- we come from a 35-year history, beginning with roots in engineering, simulation, very physics-based analysis; saw the convergence of simulation and high-performance computing in the early 2000s, and that really informed how our simulation software was developed and is offered out. And then more recently, as we have the ability to generate very large data sets through simulation and high-performance computing in response to a lot of customer pull toward what do we do with all this data, how do we implement machine learning and artificial intelligence made a very deliberate move into data analytics. The Altair business model is very unique, a key strength for the company and something that we believe very strongly in 2 reasons. One, it has demonstrated for literally decades now the ability to deliver consistent, organic, double-digit software revenue growth, emphasis on organic there. And the second reason is it delivers a tremendous amount of value to our customers, and that's a good thing. It just helps the world move forward. The business model is really centered around Altair units in that when you're purchasing software from Altair, you're not buying a specific software title tied to a specific number of seats. You're buying a license to the entire -- or subsets but a broad Altair portfolio that gives you access to all the software that you may want. And therefore, as you try to move from one technology to the other, there's no friction. If you're doing work in computational fluid dynamics and now you want to work in antenna placement, electromagnetics, it's right there. No additional licensing required. This leads to and circles around on a couple of key metrics. One, our software at this point is around 83% of revenue. Of that 83% revenue that is software, over 90% is recurring revenue. And the preponderance of that is 1-year annual lease subscription. The other interesting number, we have more than 11,000 customers. Of our double-digit organic revenue software growth every year, 60% of that growth comes from existing customers. So we're very much about land, expand and then continue expanding inexorably. Howard, I think that's the point where I usually say Howard is filling the gaps and maybe extend out a little bit in terms of other metrics you think we should be talking about.

Sure. Our -- we continue to grow on -- pretty substantially on an organic basis. Although over the course of time, we've done 33 or 34 acquisitions, the vast majority of which are technology tuck-ins that add breadth or depth or some fascinating technologies, for example, like SIMSOLID or the most recent acquisition in S&WISE. We've been very clear about our objective to continue to grow the business in an industry that grows at about 8% as measured by some data, at least, on the CAE side. We've been able to outrun that growth rate pretty substantially. And as software continues to be more and more dominant in our revenue mix, that will add to margin expansion for us, driving us towards our long-term targets of 20% or better on an adjusted EBITDA basis and potentially beyond.

Great. Thank you, Dave. Thank you, Howard. So I mean you basically already said you think Altair has a pretty unique offering, pretty unique company. But how do you see yourself placed against competition? I mean who are the main peers you're competing with? And how do you actually differentiate versus those peers?

Sure. So stepping back a little bit to the landscape of enterprise software, particularly in the PLM space and also on the data and analytics space. At a typical large-ish enterprise, the software landscape is very, very crowded because there's a lot of tools being used at companies. It's not uncommon to have literally hundreds of pieces of software being used throughout a PLM process. Altair has always been a company that works well with other software. We have as our hallmark interoperability and open architecture that stems from our roots as a modeling and visualization company, where we, by definition, have to work with all of the CAD companies and simulation companies. So absolutely, we compete head on head with other companies in the PLM space, different areas of simulation and the same on the data side. At the same time, we understand that to be useful to our customers, we are never asking them to stop doing things and throw a bunch of software out in order to use Altair software. We're saying, "Look, we can be useful within your very heterogeneous or very software complex space." And we make it in because, "Oh, Altair's software is better for computational fluid dynamics than the other guys or why we really love Altair's structural optimization or the SIMSOLID stuff is really great for extremely rapid simulation directly off CAD data." Whatever the initial reason is we get in and then just, again, continue growing usage very easily because of the licensing model that makes it easy to do so. So kind of -- we look at everybody in the PLM space, in the data analytics space, both as a competitor and as somebody that we need to work well with on a technical basis in order to make things best for our customers.

Great. Before we go a little bit deeper into the details of your business, I mean, could you maybe discuss really how you see the current macro outlook? Maybe you can give us a sense also how you're looking at the world now coming into September where the lockdown restrictions seem to have eased globally and whether that has improved your visibility for the full year.

So the -- yes, obviously, we're a company that with terrific geographic spread, we're roughly about 1/3, 1/3, 1/3. It's hard to paint the globe in a unified picture. Certainly, there are signs that things are improving compared to where we were, certainly 3 months and certainly 6 months ago. I think our view is to continue to be pretty cautious and conservative in terms of the overall view because in this environment, a day is like a week, a week is like a month. I mean there's a lot of still uncertainty out there. That said, there's -- what's proven true, and this is very different. It's a very different perspective compared to the '08, '09 cycle, where we had an even heavier concentration, for example, on the automotive side to our CES side of the business, the technical staffing side of the business, where we're staffing engineers and data scientists and such. In the '08, '09 cycle, the pretty quick reaction from -- which is -- and this is predominantly a North America business, was to reduce headcount by our customers. These are people on full-time assignment at company locations and such. There was a significant contraction in the number of people employed in those deeply technical areas. This time around, what we have seen with the exception of one customer who actually -- it's really a mistake on their behalf, our customers have really wrapped their arms solidly around their deeply technical teams and have done everything possible to avoid the types of layoffs or contractions that we saw in the last really difficult business cycle and granted the genesis of '08, '09, and today's environment is certainly very different. But the behavior is notably different in the sense that it's taken these entities the better part of a decade to build these teams of technical specialists, realizing the full benefit of simulation and analytics and high-performance computing, helping compress design cycle times, take -- and create more value for their customers, for their end customers in a more quick and efficient way. So that, to us, is a real telling indicator that just as when we emerged out of the '08, '09 cycle with significant opportunities in 2010, '11 and 12, long before we were public, we expect that the realization of the value of broadly simulation and analytics and such, it resonates really strongly. So prior to us going public, our customers used, on average, just under 15 applications across the course of a year, a licensing cycle. Today, those same customers are using 20-plus applications over the course of just a given year, as our -- even as our customer base has broadened over that time period. So our view, long term, is really quite optimistic in terms of the types of tools and technologies that we bring and what it enables our customers across a wide range of industries to do, especially now in an environment where virtual really matters.

Great. That sounds very promising. Before I go more into your specific products and product suites, can you generally talk a little bit about renewal rates and how they look currently? I mean I think you said 60% of your revenue growth is coming from existing customers. And has the situation around deals somewhat normalized now? Or do you still see some larger deals maybe being pushed out a little bit in your pipeline?

So renewals have continued to come in, in what I would consider to be due course. Our type of technology is not something that it's not an on/off switch. R&D, which is actually a relatively small part of our customers' overall spend, it's really not a toggle switch that's on/off. So renewals continue on in pretty fair step, so we've not really seen any significant change or disruption or any insight into any of that. The earlier part of COVID-19 for many of our customers wasn't so much about renewals. It was about organizations that were very accustomed to working with large groups in person and larger facilities, having to pivot to work on a virtual basis, so a lot of our efforts, sales that, secondary to simply enablement of our customers, to operate in a virtual basis. We offer something called hosted units, hosted Altair units, where we can actually manage the licensing challenges for our customers. So a lot of folks converted over into that environment to make it very seamless and easy for their broad teams to operate on a virtual basis. So now we're pivoting back to normal sales and marketing activities. The amount of engagement from a virtual perspective far exceeds what we could have achieved in a physical presence side. So again, optimistic as we look forward. Renewal rates, like I said, holding up. I think the expansion part of the land and expand, that will start to come. As a reminder, we're pretty large in terms of our renewal time lines in Q1 and Q4 with Q2 and Q3 being more modest in terms of that overall level of business activity. So again, we've been kind of cautious looking at Q4 or the balance of this year, which we do think is prudent. On the other hand, we're, like I said, pretty optimistic looking forward.

Perfect. So now going a bit deeper into the business and do different offerings. I mean maybe we can start, if you can talk a little bit more about Altair One and where maybe you -- whether you're seeing an acceleration in demand for that marketplace solution, considering the cloud-enabled, remote-friendly nature of that product in the current environment?

Yes. So look, the move to cloud is very long term. There's a lot more discussion and recognition of the potential of cloud, then there is probably actual percentage of work that gets done in cloud. I think a lot of companies still kind of have an on-premise computing mindset, and it's evolving, right, over time, right. And Altair is always very long-term focused, right? So for us, when we talk about 5 years, that's not very long. So that's our time frames, right? We think that, over time, the cloud will become much more seamless. So that whatever device somebody is working on, it's going to be treated as a very thin client, where they're really not even aware of whether their computations are being done on-premise, in the cloud, on their local device. It's going to be very seamless thinking toward that. And I think that's, in a lot of ways, how we know it's successful is that users aren't really aware of where their computing is being done. Specific to COVID, one of the things that we did to take advantage of our cloud offerings were hosted units. So one of the bottlenecks as people began working at home was the VPN pipeline into on-premise computing. It sounds great, oh, everybody just work at home and grab their -- whatever softer they need from the service network, but VPN pipelines were not designed for the -- for this sort of bandwidth. The Internet appears to have held up really nicely in terms of work bandwidth, but VPNs were really choked. With hosted units, it separates the license server from computational location, and it allowed our customers to go out and very easily grab license files and run locally or at work premise or cloud and then move data around sort of in burst instead of a content stream. So it was a really good way to help our customers through the COVID transition, not necessarily an inflection point, but more of a demonstration point that, hey, this is really enabling some seamless workflows. And that as time goes on, we think cloud relevance just continues to increase.

And when we speak about the cloud and maybe specific to Altair units, do you see a kind of profitability difference between a customer coming to you using the cloud or going the more traditional way? I mean does that make any difference for you from a margin perspective? And how should we think about that?

No, no, no. It's not a margin thing. We think about it in terms of what is the best way for our customers -- for the world, right, to make the most use of data analytics, simulation, high-performance computing? What is the way that those technologies can do the most work? And clearly, having cloud enablement is key to that picture, right? So we think that customers are more profitable when they're doing more simulation and doing more data analytics. We think as time goes on, cloud is going to become a bigger part of that strategy. So it's more of a usage increase view for us, certainly, than it is than a sort of a margin view.

Understood. Maybe could you follow up a little bit on the progress within data analytics at Altair, specifically with regards to Datawatch and also whether there's been any progress with the migration over to unit-based pricing and if you still see a lot of opportunity for Altair in this segment?

Yes. Howard, do you want to take that? I mean it's easy for you to say yes, but I'll let you fill in the gaps.

Yes. No. The progress on the acquisition at this point, I mean, it's rare that you'll actually hear us use the word Datawatch anymore. It's all about data analytics. The -- so we're really excited to have the full suite embedded within Altair units. All of the work necessary in that regard has been done, and I would say well behind us. A lot of other developments into the technology, whether it be the Panopticon technology in terms of real-time streaming on really high-value information, which is used by many of the largest financial institutions, trading desks, for example, to the upgrades and such in terms of Monarch and such, in terms of the data prep side, and of course, the immense amount of interest in the AI/ML applications. So all of that's behind us. The sales force is full and engaged and such. So really, it's now just as much in the natural part of our business as any other of the key technologies that we deliver to our customers. So it wasn't necessarily the most elegant road to get there, lots of challenges in terms of the acquisition and such but well behind us, including embedded within the licensing model and what have you. Anything further to add on that, Dave?