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

Yes. I think that's something that you've spoken about a lot in the past about this trend of trying to move simulation earlier into the design process. When you look at the structure of your customers, are the design teams and engineering teams typically fully separate functions? Is that a barrier at all to moving it into design process? And is that something that you see changing?

It really depends on the organization on smaller companies that are much more agile. It's really all integrated into 1 person. And that's the way it kind of should be actually. But in larger companies, you have more silos for sure. Yes.

Great. So shifting over to the HPC market. Can you talk about how quickly is that market growing? What is the broader opportunity there for Altair?

So when we first got into the HPC market, it was -- I'm trying to look [indiscernible]. When we first got into the HPC market, it was primarily simulation. So you were scheduling jobs. Early on in the world of high-performance computing, you would submit a job and say, "I wanted to run on that computer over there, go in a queue and wait until it could run. " With the scheduling technology, you essentially are managing and very efficiently managing where and when jobs are running. And it was primarily for our world of simulation, a little bit in the life science area for sure. So if you're running a crash simulation, massively parallel, you're determining where and when these jobs are going to run. It's also a play in the electronic design automation market, where you're running thousands of runs, single core typically, in that case, and there, you also want to manage the licensing -- software licensing very efficiently. And that's what we do, and that's why our tools are used there. So as time is going on, it's going to lead you to the third leg here. We see more and more analytics coming into play, and that dramatically opens up the opportunity for managing HPC jobs running.

Yes, you read my mind. I want to move to analytics. But I first want to just pause and remind the audience that you can submit any questions online through the conference website, but also feel free to raise your hand, and we can have microphones come around at any point. So moving to analytics. How do your customers typically use the data and analytics solutions?

So there's 2 primary markets for us really in the analytics world. It's primarily what I'll call our traditional engineering and manufacturing customers for the most part. And the other is the banking and financial services customers, all the banks, the American Express and MasterCard and those kind of customers. In the engineering world, of course, you have traditional back-office opportunities. But in the true engineering world, there is the opportunities around data. So if you think of warranty analysis, for example, we have a lot of really interesting projects running. So a tremendous amount of data, tremendous opportunity to leverage that data to more efficiently make decisions around design, around supply base, all of those sorts of things. And that's the kind of place that we can play, is actually leveraging existing data. There's also a lot of test data. If you think of aerospace, they have years of flight test data that they really do nothing with. And so we're beginning to harvest that and do interesting things. At the same time, you have the opportunity to leverage synthetic data so we can run thousands and thousands of simulations for a crash simulation, build a neural net model and now you can actually predict and design using data science, using machine learning which is actually predicting crash results. So we're doing really both of these things. And a lot of the work going on today is led by engineering services applications. As we begin to explore these use cases, we're learning a lot -- the customers are learning a lot. We have quite a big lead, I would say, in these kinds of accounts just because of years now, 2, 3 years of working with them, and now we're looking at scaling these applications and doing more. And we're also building confidence in those customers to do more data science applications. In the traditional banking world, we have a lot of point solutions in these accounts, and we're trying to bring that together under our units model and we're beginning to bring new products into that solution, and we're building out like everyone else, a platform, end-to-end cloud solution. The challenge in the world of data analytics is that it's very hard to differentiate. Everybody is kind of writing the same thing and selling the same thing. It's an enormous addressable market, but it's hard to differentiate. I think Altair is very well positioned, is the technology we picked up from Datawatch for data prep, has a lot of differentiated technology for how it deals with certain types of data basically. We also have some really differentiated real-time visualization technology for stream data, like trading desks. I think it's best-in-class technology that we have there. We just acquired the world programming technology which is a completely unique technology to basically compile and execute SaaS models, which a lot of our customers are very, very interested in doing. And I think we've been building out some really unique elements that kind of cross over some of our expertise from engineering. So the trick is to build out that platform that everyone is trying to get to, but to have some really unique elements and the business model that I think is going to make us pretty interesting.

And you mentioned the pretty massive addressable market within data and analytics. And I think at the Analyst Day last year, not only was it the largest TAM out of the 3 segments, but also the fastest-growing. So can you maybe add in from a financial perspective, what you see as the long-term attractiveness of the data and analytics component compared to your core platform.?

Do you want to answer that?

Yes, I can chime in there. So we've actually seen for the last few quarters now in terms of our product portfolio and verticals. It is our fastest-growing segment right now. So we're definitely encouraged with what we're seeing. We do believe it's the biggest TAM that's growing the fastest. And now it's coming from a smaller portion of our business. It is driving a good portion of the growth there. And we're optimistic about that going forward as well. I think in at least the medium term, we're going to continue to see that, and it continues to become a bigger part of our business.

Great. And so last quarter, you reported software revenue of about 9%, and you've spoken to a double-digit revenue CAGR over the next several years. What gives you confidence in meeting that target? And what are some of the main drivers there?

Yes. So Q1, as you mentioned, we're about 9%, constant currency probably more like 12%. And so FX is having a bit of an impact on Q1, and it will continue to have an impact on the rest of the year. Midpoint of the guide that we gave, for example, is about 11%, again impacted by about 3 percentage points year-on-year of constant currency. So that takes that more to being about 14% at the midpoint of our guide for the year. And we think that, that's sustainable into the future. We feel pretty confident about our ability to continue to grow software at that level. The rest of our business is not growing as fast. And so when you put that growth together, it's still at a constant currency basis, is at about 11% in total revenue year-on-year. But what we're seeing is because our software revenue is growing faster than the remainder of the business, our software revenue carries much higher margins. We're actually seeing really great gross margin expansion. So we saw -- for example, in Q1, we saw about a 240 basis point increase year-on-year. Now I don't expect that we're going to see a 240 basis point increase throughout the year. But I do think that we are going to see some expansion there on gross margin. And at the same time, we're making sure that we're spending wisely in OpEx. And so that's helping drive our expansion and adjusted EBITDA.

Okay. And if we...

Can I add 2 things? Maybe it's clear, but we have very, very high recurring revenues. So we are primarily subscription. It's about 93% recurring and very sticky, so very little loss, very little attrition off of that. And a lot of our growth is actually expansion in the existing accounts. About 60% of our growth is just expansion. And this is why we're really able to predict it pretty well what we're expecting to see.

And if we do head into a full recession, do you still see that revenue CAGR that you outlined, is that still attainable?

So I don't -- we're not -- nobody is immune from a recession. So to the extent that, that recession is especially if it's severe, we're not going to be immune to that. But I would say that we have generally fared better than most in times of recession. While others are counting on very large growth numbers and those growth numbers come down very, very quickly, the growth that we're expecting, I think, is pretty modest and actually in very difficult times, though we may not be growing as much as we generally do or would like to, it's generally more of a flattening than a decline in revenue. And that, again, is due to the stickiness of our products and the fact that we really do drive usage and our customers need what -- need our products. So it's a good place to be.

Great. So talking about the actual delivery methods for the software, can you talk about on-premise versus the cloud? What are you seeing there? Yes, that would be great.

Okay. So vast majority of what we're delivering is on-prem still. There's a lot of transformational work going on with products, to move them to cloud in some phases. Until now, the customers are not pushing that hard, frankly, but I think we need to be the right at the correct moments. And I think we will be.

And so what do you think needs to change from the customer perspective to have your customers be more ready to move to the cloud or to start pushing for it?

What do I think they need to be more ready. Well, some of it's security, but I think they're going to get past that. Their designs are top secret to them and depending on the country and the industry and all that, there's quite a bit of secretiveness around that. Cost, frankly, nobody talks about it, but -- I hope none of the cloud guys are listening to me. But cloud is more expensive. So if you're going to run in the cloud, it's more expensive than on-prem. And so you should have a good reason for doing it. And that means you want to -- you really want to burst with large-scale simulations. Data science starts to bring some of those opportunities to really burst up with a huge number of runs -- thousands of runs and then it's going to come down. You want to manage that cost very well, and that's part of what Altair does. So I think it's going to sort of naturally trend towards hybrid world. I don't think it's going to be all cloud. I think it's going to be a hybrid world in the future and cloud is going to be utilized where it makes sense. On-prem is going to be utilized where it makes sense. There's going to be a lot of analysis done digital twins and analytics, really at the edge, which is really going to be a whole different play.

Great. Just want to check again to see if we have any questions from the audience.

So [indiscernible] your products that is quite diverse. So also, your sales organization must be relatively diverse. What does it mean for the sales organization to really sell into all these different categories? And how can you make that efficient over time?

Yes. No, that's a great question. So first of all, we have strategic account managers that are covering our traditional accounts like the manufacturing customers primarily. We have an overlay team for high-performance computing. So when there's an opportunity on the HPC side, typically, those guys come in. But those guys also typically are directly selling into the EDA market, into the life science market, into some of the specialized markets that we play in. And then we have an overlay team also on the data analytics side. Those guys are partnering in certain accounts. And then they are typically the lead into the banking financial services sector. Believe it or not, it works pretty well. We've reorganized all the support that we do because that is one of the challenges with the broad solution set. And so we have a centralized team, a global technical team that actually can bring pre- and post-sale support for any product, anywhere in the world. And that's brought tremendous efficiencies. We're continuing to roll that out even further.

All right. Jim, Matt, thank you so much. Thank you, everyone, for joining.

Thank you.

Thank you.