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

All right. Great. Welcome, everyone, to this morning's Altair session. We are pleased to have Jim Scapa and Matt Brown here from Altair from the company. So we'll just let Jim and Matt briefly introduce themselves and the company. [Operator Instructions] But we're running a little -- a couple of minutes late here. So I don't want to be too long-winded. Jim, Matt, if you want to take it away very quickly, go ahead.

Sure, sure. So I'm Jim Scapa. I'm the founder and CEO of Altair, founded the company 36 years ago, based in Detroit, Michigan, started as a consulting business, very quickly evolved into a software company. And we've grown the company for many years since then. And I'll let Matt introduce himself now.

Yes, Matt, the newcomer.

Yes. Yes. Yes. Thank you for having me. So joined out Altair in January and took over as CFO in the official capacity in March. So happy to be here and happy to discuss and answer any questions.

Great. Jim, just right off the top, you mentioned, started out in consulting. You still have a consulting -- of your CES, Client Engineering Services business. But if you don't mind, just running through, what does Altair look like today? What are all the different segments for your software business as well as?

Sure. I mean, the software business has kind of evolved for 30-plus years at this point, where today, it's probably 85-or-more percent of our business and continuing to eclipse the services business. Services for us is still a very strategic part of the business. And typically, the kinds of projects that we're doing are related to our software and relatively complex, often driving where the software is going in the future and helping our customers to learn how to do new things, frankly.

And part of the split between the software, you have your -- I think, what many people that are familiar with Altair over the years know, it's your 3D simulation software and then via acquisition a couple of years ago, you added Data Analytics from Datawatch. So where do those businesses now fit in, in terms of relative size, growth rates, that sort of thing?

Yes. Sorry, I'm a little slow this morning. Yes. So the business historically is focused on simulation, starting with structures and modeling visualization. And then we've evolved through the years to add a really very broad and deep array of application software for everything from fluid mechanics, electromagnetic simulation, motion simulation and many more. And then in the early 2000s, with the changeover in computing. We live in a world of HPC, used to be very specialized computers like Craze, however, in the early 2000s, you saw this change over to commodity clusters or servers. And we saw the need for managing the workloads. So we spun a team out of NASA Ames with 0 revenue. There was 9 people in Mountain View and began kind of a journey in the world of workload and workflow management. We've been acquisitive in that space beyond that and acquired a few companies in that space as well to really strengthen the team and portfolio. And today, we're the leading player for workload and workflow management in HPC. And then we spent maybe 10 years -- over the last 10, 11 years, trying to learn and invest in the world of analytics. And ultimately, we made an acquisition after we were public of a company called Datawatch in December 2018. And that brought in some really first rate technology for data preparation, for data science, decision tree technology and then also real time analytics. So the array of technology that Altair brings is pretty broad, pretty deep in the customer base that we have goes everywhere from manufacturing to banking, to life sciences, weather sciences, architectural engineering a very, very broad customer base.

Okay. Great. Yes. No, that's a really helpful overview. I want to go a little bit deeper on some of the secular growth drivers, focusing more on simulation. If we think about replacement of physical testing, expanding into the designers, not just your simulation engineers, but kind of moving what we would call up into the design platform. And then maybe even new use cases of the same technology, but being applied to new use cases. Which of those drivers are still the strongest, if you think about kind of rank ordering, where would they sit? And what have I missed? I mean, I'm sure that there are others.

Sure. So I mean, historically, simulation came on to the scene, if you will, because it was a replacement for testing. So in the old days, you would design some -- you would design on paper, actually, and then you would build a prototype and then you would take it to the shop or the lab and test it. In came CAD basically and also in came simulation and simulation essentially was replacing tests. And you could iterate on designs much faster, and it became an area of specialization within many large corporations. So it's typically being used primarily at the high end and at the high end within high end or enterprise-type companies. Over the years, I would say that simulation is sort of permeating out into the middle and low end of the market where it's much more accessible, still to specialists, but within those organizations. And then at the same time, and especially as you move to those types of companies, but also into groups within these enterprise or high-end customers where you have designers, there's a real opportunity to have simulation, really play a part much earlier in the design phase and being used by the designer community. And that's sort of been the holy grail in our industry, can we get to the designers, everyone saw that opportunity. But it's really more than just a matter of bolting on today's type simulation onto a CAD tool and then tell the designers to use it. So I think that Altair has really led a movement, frankly, more recently, to bring simulation to the designer community, and it's through a variety of different products and technologies that we've brought there.

Matt, before we go a little a deeper into simulation. Just from a high level, you guys reported results just -- was it last week, a couple of weeks ago, raising the guidance range. Now it looks like organically, you'll be growing kind of high single digits, maybe low double digits. How should investors be thinking about all the different areas that Altair now is in, whether it's Data Analytics, simulation, even CES or the consulting business, what are the different layers? What should be growing the fastest and the puts and takes there before we move on?

Yes. I mean, I think we were really, really pleased with our Q1 results and pleased we're able to raise the full year guide as well. And what we're seeing is that our expectations around software revenue growth leading the charge is exactly what's happening. So we saw really nice growth in Q1, 19.5% in fact, on our software revenue. And we expect that for the rest of the year, that software is going to continue to be the leader there in terms of growth. Our CES business and other revenue is -- we're in a COVID -- partial COVID year this year where it's much more impacted in the first half of the year. We expect it to be less impacted in the second half. And compare that to last year, where we were less impacted in the first half and more impacted in the second half. And so at least on a year-on-year basis when it comes to CES and other revenue, we expect it to be relatively flat year-on-year. But that growth that you mentioned in the full year guide, for example, that's really being driven by our software segment. And the benefit there is that our software segment carries really healthy gross margins. So it's an important driver for us for gross margin growth.

Yes. Okay. So I mean, you guys touch a number of cyclical industries, industrials, broadly, automotive is one of your leading verticals. So you've got a great view, right, into how the macro economy is kind of shaping up. So how are customer conversations going? And are you able to pick up any discernible trends based on the end markets from what customers are saying to you guys?

So I mean in general, I think it's a very exciting time in automotive. You have a big transformation happening. So you have the transformations moving from internal combustion engines to electronics, electric motors, you have transformations just in the world of software and IoT, if you will, because there's so many sensors tracking everything and all that. And then autonomous, obviously, is a really big trend as well. So -- and you have a lot of start-ups, and you have had a lot of start-ups. And in particular, obviously, Tesla has put a lot of pressure on the traditional companies. And so most of these companies are still investing pretty significantly to be competitive. Some might say to stay alive. It's frankly an exciting time on the engineering front. Engineering, in general, is a very, very small percentage of the spend in an automotive company. I mean I think on the order of maybe 3%, I may have that wrong, but it's a very small percentage of the overall spend. It's mostly spent on manufacturing and making tools and dies and these sorts of things and all the human capital. So I think that our business is just in a really great place. And frankly, I think speaking, a lot of what we do used to be done by physical testing where you've built an entire car and you crashed it or this sort of stuff, bill goes on. And so we're in a great position because we help these companies to go faster, to design faster, to achieve the transformations that they want to achieve. So I'm very bullish, actually.

Any end markets, whether it's, I don't know, aerospace or maybe electronics or semiconductors, any particular markets that you would expect to rebound more quickly or less quickly?

I'm not an expert, so I don't want to pretend to be. But I think aerospace is going to come back in a pretty interesting way. There's a lot of start-ups in the aerospace world as well right now, which is kind of interesting because that market is also thinking about the transformation and how has that affected. Obviously, COVID dramatically affected travel and purchase of airplanes. But I think that's going to come back in a pretty strong way towards the end of this year and into next year. And so I think that business is going to take flight again soon. Yes. I mean, just in general, I think the economy has had a really tough -- except for some companies that really benefited, including Zoom some that we're on here during this time. I think, in general, many of the companies that we work with have had their challenges. But on the other hand, I think it's going to come out really strong now. So I'm generally very optimistic. Sorry, I'm not giving you a very effective answer here.

No, that's all right. How about -- if we think about the simulation market, I think people tend to think of as a high single-digit grower. Altair has aspirations and plans, I guess, guidance to outgrow that market. What is it about -- what are Altair's particularly strong areas or competitive strengths? And what gives you the confidence to be able to say, yes, we see the market, but we're going to be taking share and outgrowing that market?

I mean I think we have gradually, through many, many years. We've always grown a little bit faster than the overall market. And we've taken a little bit of share. These are sticky markets. Customers don't just run all on mass from one thing to the next. Even if you have the latest and greatest of whatever, it still takes time to win those customers over, and you have to sort of understand that and be patient. We have, I think, made the right investments through the years moving from structures. We moved into electromagnetics in a pretty big way around 2013, 2014, and we continue to invest significantly in that direction. And that business has really been growing strongly and will continue to grow very, very strongly into the future right now. We've invested a lot in computational fluid dynamics. If you look at the array of CFD tools that we have, for external aerodynamics, for internal oiling, for general purpose CFD, the system modeling technology for thermal and cooling, the discrete element modeling that gives you sort of a combined fluid structure technology with motion as well. We've really integrated these technologies. So I think CFD is a really big opportunity for us. And now we're moving hard or harder into electronic systems design with printed circuit boards, and we've built out a complete solution portfolio in that direction. That's a really huge new opportunity. And then, of course, we talked about moving to the designer world and SimSolid, which we acquired a couple of years ago is a real -- it changes the game. I know it sounds cliché, whatever to say. But there's nothing like that technology, and that technology is such a differentiator as companies continue to evaluate it. They want to roll it out to their entire designer organizations. And that's going to be bigger than anything we've done before in many ways, in my opinion. It takes time. It really does because you got a -- when I came with HyperMesh into the market in 1990, all the competitors were public companies. It was very sticky. HyperMesh was 30x faster than everything else on the market, we would go and do a demo and the other software would have to load the graphics model for an hour. And we would do our entire demo, spinning the model, animating, whatever. And the customer would go, wow, maybe we should look at one copy. And we were like, what is the matter with these people, the nature of the stickiness, right? So similarly, today, I think, with SimSolid, I think it's very, very disruptive, quite frankly, for many of the players who have been playing in the mid or lower end of the market, there's just nothing like this. It's so fast and it's so accurate. And it does -- you can deal with thousands of parts. And we're making it better literally every day. We're just continuing to invest in it. So I think that's just going to be a huge game changer.

If you go back to HyperMesh in 1990, do you think about maybe the tipping point when you kind of reach critical mass and things started to go from, yes, we'll try one copy to, this is our new modeling -- finite element analysis modeling tool. What time line are we talking about? I mean, are we going to be talking about SimSolid that's still in early stages, 5 years from now? I don't know.

Yes, it took about from 0 in 1990 -- beginning in 1990 to like '95. You'd have to look it up, but there was another publicly traded company that we competed with, and we ate the entire market in the automotive industry from that company. And they were forced to sell to another company, actually, another public company who became our next enemy, by the way, that we went after. And so I really believe SimSolid -- first of all, the modeling and visualization part of the market, simulation market, if you look at that as a pie, modeling and simulation is a relatively small slice. The vast majority is the solver area. And that's where Altair has been really pouring investment into and sort of gaining share into the solver. We are the leader in the MOD biz, but now we've been moving into that area. And then the pie just gets bigger with designers, I think. So I just think it's a really big opportunity.

Yes. Is -- would it be as simple as things, we think about the solvers and the different physics disciplines, is it as simple as electronics is the future, electrifying everything seems to be on every industrial company's top of their list. So should we just say, all right, well, then electromagnetics or the PCB design studio that you talked about, that's going to really be driving the growth going forward. Does that logic follow? Is it that simple?

Well, the one thing about talking about electronics is there's a lot of mechanical stuff that goes on even within electronics design. This is part of what people miss. And part of why you're seeing some of the companies in the electronics space starting to invest in things like fluid mechanics, because the total system design right, involves electromagnetic simulation, power integrity and signal integrity, spice type simulations, thermal simulations, fluid simulations. They're structural concerns is reliability of the structure because with vibration, it can crack one of these connectors. And so there's a whole lot more the packaging that goes around it is really important. So it's a full -- that's why I like to call it, system. It's a system-level design. And so I think Altair is really well placed for that. And the acquisition we made out of Korea is purely a good piece of technology actually. And into that technology, we're bringing our very high-end simulation tools. They already had a lot of simulation. But we're actually bringing another level of simulation. So you can dial it in and customers are surprised, I think, to see the breadth and depth of the offering that Altair brings to the space. And so I think, it is a big opportunity. It doesn't mean that no one's going to dine anything mechanical anymore. Both are going to go on, and we're going to be in both spaces. And by the way, I think that simulation-driven design is relevant on the electronics side, not just on the mechanical side. I think both are pretty important.

Great. So let's transition then to the designer, right? The competitive landscape with designing with design and simulation is pretty similar, right? You have -- Dassault has both capabilities. Siemens has both. Autodesk has a little bit of both. And then PTC and ANSYS have their partnership. So what is Altair's strategy here? Would a partnership be on the horizon? How do you find yourself being able to get in at the design level when you've mostly been, as you said, be very high level with the engineers?