Altair Engineering Inc. (ALTR) on Q1 2021 Results - Earnings Call Transcript

Operator: Good day, and thank you for standing by. Welcome to Altair's First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker today, Dave Simon, Chief Administration Officer. Please go ahead. Dave Simon: Good afternoon. Welcome and thank you for attending Altair's earnings conference call for the first quarter of 2021 ended March 31, 2021. I'm Dave Simon, Chief Administrative Officer of Altair. And with me on the call are Jim Scapa, Founder Chairman and CEO; and Matt Brown, Chief Financial Officer. Jim Scapa: Thank you, Dave, and welcome to everyone on the call. Altair had an excellent first quarter 2021. Our vision of the convergence of simulation HPC and AI driving enterprise decisions is emerging as a clear imperative embraced by customers. This technical direction which we identified early and have invested in significantly is important and manifest in all of the markets we serve. AI is becoming pervasive in our lives. Altair is integrating AI into all of our software applications and we are rapidly evolving our solution platforms to allow customers to implement this technology to benefit from the latest knowledge and algorithms throughout their organizations. We are pleased to report record quarterly results with total Q1 revenue of $150.2 million. Software product revenue for the quarter was $129.5 million versus $108.4 million from Q1 of 2020 reflecting year-on-year growth of 19.5%. Adjusted EBITDA was $37 million compared to $21.7 million in Q1 of 2020, an increase of more than 70% from the first quarter of 2020. All were well above our guidance ranges. Matt Brown: Thanks Jim. We're thrilled with our first quarter 2021 results coming in above the high end of the range on every metric we guided to for the quarter. We delivered record software product revenue of $129.5 million, an increase of 19.5% compared to Q1 2020. We also achieved record total revenue of $150.2 million, an increase of 14.2% compared to Q1, 2020 and we had record high adjusted EBITDA of $37 million or 24.6% of total revenue, an increase of 70.5% compared to Q1 2020. Total billings for the quarter were $145.8 million an increase of 14% compared to Q1 2020. Our results relative to prior year were primarily driven by strong software product billings where we saw solid new and expansion results, as well as healthy retention on our renewal base. We saw year-over-year increases balanced across all three geographic regions as well as across our product offerings. Our recurring software license rate which is the percentage of software product revenue that is recurrent continues to be strong and approximately 94% for the quarter as we continue to emphasize growth in our recurring revenue streams. Relative to our expectations for the quarter, we saw some of our software transactions, which were originally expected to close in the second quarter closed earlier than originally anticipated, driving some of the upside relative to the Q1 guidance. And as anticipated, the year-over-year strength in software product billings was partially offset by declines in client engineering services and other billings. It's worth reminding you of the seasonal nature of our business where our first and fourth quarters have higher software billings and revenue and we expect that pattern to continue. In addition, a significant portion of our billings in revenues are billed in currencies other than the US dollar and are therefore impacted by changes in FX rates. Relative to Q1 2020, our billings and revenues were favorably impacted by changes in FX rates of approximately $5 million during the quarter. Non-GAAP gross margin, which excludes stock-based compensation and restructuring expense improved to 79% in the first quarter compared to 74% in Q1 2020, an increase of 500 basis points, primarily as a result of the favorable trend in our software revenue mix which carries higher gross margin. Software product revenue as a percentage of total revenue increased to 86.3% compared to 82.5% in the year ago period, an increase of 380 basis points. Operator: Thank you. Our first question comes from Bhavan Suri with William Blair. Your line is open. Bhavan Suri: Hey, gents. Thanks for taking my question and congrats. That was a fantastic set of numbers in a result there. I guess, I wanted to touch at a high level maybe Jim for you initially. You commented on the adoption of data and AI tools. Rolls-Royce was a great deep dive, I think, David Simon did with us. But as you think about the broader trends of end-to-end AIML, and then you see the sort of digitization of industries and things like 5G IoT EV, how do you view the current product set being able to capture that market share, or do you think there's more stuff you need to add sort of truly capitalize on those opportunities? Jim Scapa: So, first of all, Bhavan, thank you and nice talking to you today. I’m calling – I’m speaking out of a hotel room by the way today. I have a new grand daughter. And we’re in kind of sitting in business meeting. So it’s been sort of a long week. It's a good question. I think that we obviously have a lot of work to do to bring these technologies to bear in all of these different places. And so we're working in small ways. Every single product that we have has sort of under the covers elements of neural nets and this sort of technology embedded within it at this point much more so than you might realize. And then we're also working on sort of generalized tools that customers can use on their own to be applying this sort of technology in their own work. And as we go, I think, we're going to keep learning and together with customers quite frankly and finding more and more applications where we can just accelerate the work that we're doing. I'm not sure, I'm answering your question, but that's the answer the way I think about it. Bhavan Suri: No, that's helpful. And at least the components seem to be there. I guess, let's turn to the sales force, because obviously you had a great quarter. You saw some deals come in early. But you and I have talked about restructuring efforts around sales to drive efficiencies in the past. I'd love to understand sort of what process you put in place. How have those efforts progressed? Because they seem to have sort of spiked and done well, spiked in a positive fashion. But then you've also commented, I think, Matt did in terms of hiring and increase in capacity. So how do you think about sort of the restructuring efforts? How has capacity played out? And sort of what does the hiring time look like? Thank you. Jim Scapa: Sure. So what we're doing is we're organizing. First of all, a huge amount of training is going on with our sales organization. Lots of new methodologies have been brought in and brought across the team over the last two years. We've also brought more tools in that sort of help us to mechanize and just be more process-centric. And all that is starting to pay dividends. At the same time, we're doing a better job of sort of dividing and conquering the market space. So the direct sales force has much more clarity around, which accounts we're going after where we see growth opportunities and they're typically the larger enterprise-type accounts. We have a lot of focus on the indirect channels and that's really starting to come together for us. And then we have a lot of mechanization between our marketing and all the marketing activities that we're doing for lead generation moving that through the pipeline, a lot of inside sales activity that we've rolled out across the world. So, I mean, I think you're beginning to see the results of all that mechanization and sort of creating the swim lanes that everybody knows to operate on. Bhavan Suri: Fair enough. That's very helpful. Thanks, Jim. Congrats again. Talk to you soon. Thank you guys. Jim Scapa: Thank you. Appreciate it. Operator: Thank you. Our next question comes from Jackson Ader with JPMorgan. Your line is open. Jackson Ader: Great. Thanks for taking my question guys. Jim really nice to -- well, first of all, congratulations on the new grand daughter. I should start off saying that. Thank you. Jim Scapa: Thank you. The number is fine by the way. Jackson Ader: Wow, excellent. Growing family. Jim Scapa: That for a record. Jackson Ader: Yes. Okay. So deep dive on the Polliwog products. That was great. I don't think we'd really dug into those in a while maybe even since you guys acquired them a couple of years ago. But the question is, how easy is it to kind of sell across products into the semiconductor space? If you're selling something like PollEx that might be a little bit more like EDA, is it a completely different buyer or user who you're trying to then sell your electromagnetics solvers into? Jim Scapa: It is for sure. It's different groups, different departments. And these are departments that we've been sort of walking the halls making our way across to. We first got into all the electromagnetics just sort of one layer outside of what we did historically. We've been doing that for about seven years now and we have pretty significant success. Coming into the groups that are designing all the printed circuit boards and the electronic systems is in fact new departments in customers that we have quite a bit of credibility inside of. I mean, when we go to one of the guys that we've been working with a long time they tend to trust us and so the introductions are getting made. And I have to be honest. I wasn't sure how the customers would respond to what we're bringing in, but the response has been quite positive. And the reality when you get into these departments there's just a whole -- that's why I laid it out a little bit. They're not just doing the printed circuit board, but there's the packaging. There's thermal. There's CFD. There's the electromagnetics. There's the system modeling system of systems and the embedded stuff. And I think they've been quite surprised at the breadth and depth of our offering, and so we're getting a good response there. So I'm really optimistic. And it's a whole additional set of customers within our existing accounts. Jackson Ader: Yes. That's great. That's really helpful color. Matt just a modeling question. How much was actually pulled forward? You said, some deals came in 1Q that you weren't expecting? Matt Brown: Yeah. Thanks Jackson for your question. First of all, we were super-happy with the way that this quarter worked out for us. Seeing us come in high above the high end of the range was nice to see and again records on revenue and profitability front. In terms of amounts that we saw closed in Q1 that originally were thinking was in Q2, it's in that few million dollar range. It's not the entire amount by any stretch. So, we saw a nice healthy upside in Q1 above and beyond what was pulled in. And one thing, I would add too is, yeah, it's an encouraging thing when we see some of those deals closing early, because it really speaks to the health of the pipeline there. So we were happy to see that as well. Jackson Ader: Okay. Fair. Thank you. Operator: Thank you. Our next question comes from Ken Wong with Guggenheim. Your line is open. Ken, Wong, your line is open. Ken Wong: Sorry about that. You got me. Jim, I just wanted to check in on just some of the drivers of growth. It sounds like it's fairly broad-based. But perhaps, if we dive in a little just wondering what new activity looked like versus expansion. What were you seeing on retention trends? Any color there kind of deal sizes? Are those ticking up relative to internal expectations would be helpful? Jim Scapa: Sure. So retention, last year retention there was a little more attrition last year than we're used to. This year very, very little attrition actually. It's just very clear this is a much more robust year even as good as we've ever seen so very, very strong in the retention side this year. And we weren't sure, if that was going to be the case, but in fact it does appear that way. It is very broad-based. It's coming across – all the verticals are actually very healthy in this year. All regions are growing very, very healthfully as well. What was your last question? I forgot what you were asking me at the end there. Ken Wong: Yeah. And then, I guess just in terms of just new business activity, are you finding that that top of funnel is kind of tracking to plan? Is it maybe coming in a little better with opening up? Would just love a sense of kind of what the net new run rate's starting to look like. Jim Scapa: Yeah. I mean, the macro picture I think this year is generally very, very positive. As I said in my prepared remarks, there is still, look at what's happening in India. That's a bit crazy. You do have this chip shortage that is happening in the market, and it affects a number of our customers, but thus far neither one of those seems to be having much impact for us. So in general, pipelines are very healthy and we feel – yeah, very, very positive about this year. Ken Wong: Got it. Just super helpful. And then Matt, for you just kind of a bit of a follow-up on what Jackson was asking but maybe looking at it from a full-year basis. Just wanted to make sure I heard you correctly. It sounds like so this quarter you had a $5 million tailwind. And is it for the full year? It sounds like it's potentially reversing to be a $5 million headwind. One I want to clarify that. And then in terms of just how we think about the guidance upwards it sounds like a few million beat a few million pull-forward in the quarter, but kind of net-net, if we factor in all the FX stuff it feels like it's still kind of a mid-single-digit rate. Is that the rough math that I should be thinking? Matt Brown: Not quite. So the FX picture is understandably confusing. But the $5 million tailwind that we realized in Q1 of this year is relative to last year not relative to the guide, right? So you have to separate those two concepts. The $5 million full-year FX headwind is relative to prior quarter's guide a full year, right? So does that make sense? Ken Wong: Yes it does. Matt Brown: Okay. Perfect. So in terms of the full-year guide, yeah, we're feeling really, really good about the year. And so we took full-year revenue guide up by $2 million. That is inclusive of that $5 million headwind. And so sort of when I think about our guidance relative to the full-year guide that we gave last quarter we're up $7 million when you exclude that FX difference. So yeah, we continue to feel good about Q2 through Q4. We're excited about the opportunities that we have and pipeline looks good and healthy. And as Jim just mentioned a moment ago, the macroeconomic trends seem to be holding. But of course, we've got our eye on the types of things that are happening in India, and elsewhere but generally feel really good about the year. Ken Wong: Got it. And then a quick clarification on that. On first quarter, I guess was there any meaningful headwind/tailwind relative to, what you guys were thinking from an FX perspective at the start of the quarter? Matt Brown: No. Yeah, so important clarification there not a meaningful FX impact. So when we think about the over performance in Q1 relative to the guide that we gave in Q1, there's that couple-few million dollars that we originally thought was going to close in Q2 that ultimately closed in Q1. Everything else is just true upside to the quarter, and no meaningful FX impact relative to the guide. So, just a really solid quarter. We were hitting on all cylinders. Ken Wong: Great. Thanks for the clarification. Operator: Thank you. Our next question comes from Gal Munda with Berenberg. Your line is open. Gal Munda: Hi. Thank you for taking my questions. And congrats on the results. The first one is just a little bit clarification of the guidance. You obviously, especially on the software side I'm thinking, Matt if I think about the outperformance that you delivered in Q1 balancing that with a little bit of a worsening FX outlook for the rest of the year and a few million of pull-forward, there's still a big chunk kind of left out there based on what you raised. Is that just kind of feeling a little bit more conservative, especially because as Jim mentioned, we're still in a very uncertain environment and we don't know how it's going to be like, or any other factors that I'm not aware of that potentially make you a little bit more cautious for the rest? Matt Brown: No. So we can make sure that the math is coming across clearly, but our outlook for the rest of the year is still very positive. And when we take in -- there's a lot of different factors that you just mentioned there, but you can sort of sum them up like this. FX-neutral is you get to a $7 million increase relative to the prior guide. We came in over the top end of the guide on revenue by about $10 million, so you're left with $3 million; and essentially that's kind of what I signaled is the pull-in. So we basically have a situation where we're guiding up, based on the over performance in Q1 and we're still really feeling very good about the rest of the year. So I think the math works out pretty well. Jim Scapa: But Gal, just to add I think you did sum it up correctly that that balance is just a little bit of conservatism around some of the things that are happening and some of the uncertainty. So for the most part, I think what Matt is saying is we went up by more than two because of the FX piece, but we didn't go all the way to the 10. And there's a little bit of conservatism there. Gal Munda : Got you. That’s really helpful. And then just as a follow-up. Jim, last year, pretty much at the same time last year you talked a little bit about end-market weakness, the fact that people are still focused on the old programs and kind of old tag that they're working on. Today it was a market different the way you talked about all the new use cases. I'm wondering this acceleration grows how much of it has to do with the fact that there's activity happening R&D activity on the new stuff like electric vehicles and things like that and that really has helped to increase the usage and it's now generating that growth that you're seeing versus kind of just doing more of the same what happened over the last decade or so? Jim Scapa: I mean, I think there's a lot of activity in the R&D world in general. I mean, we're coming off of COVID obviously and sort of a weird year. But in general, all the customers are hiring. People are designing much more complex connected devices, lots of activity in the automotive industry because it's so competitive lots of activities. There's lots of new aircraft companies. I don't know if you've been paying attention. And there's a lot of really interesting -- I mean it's a fun time. And I think we have the right tools for the right moment. I did want to -- my prepared remarks went a little deeper into the electronics offering because I think that sometimes the community may not recognize that we've been investing for almost 10 years to build basically this end-to-end solution portfolio. We're not doing integrated circuit design, but we are very focused on these electronic systems. And that's just a perfect fit with everything that we do as an organization. It's sort of that next layer out. And the breadth of the offering that we have and we've poured investment into it in the last three years especially we feel great about. Gal Munda : It's very helpful. Thank you so much and congrats, again. Jim Scapa: Thank you. Operator: Our next question comes from Matt Hedberg with RBC Capital Markets. Your line is open. Dan Bergstrom : Yeah. Hi. It's Dan Bergstrom for Matt Hedberg. Thanks for taking our questions. Jim, you just mentioned chip shortages in the Q&A here not much impact. And then maybe to connect that with the last question, you've also talked about headwinds in the automotive industry for most of last year. Recently in the news here, we're hearing stories about automotive makers seeing some disruption due to trouble sourcing chips. I guess the question is, are you seeing that at all with automotive customers? Does it even impact you, or is that just part of the headwinds you're seeing in that sector overall? Jim Scapa: So we are actually not seeing headwinds related to that. I will be honest that I have some concerns, how would that affect us. But I've done a lot of pulse checking and it doesn't seem to be affecting us at all. So it is certainly affecting our customers. But from what we see it's just not have any impact on the design side of things. Dan Bergstrom : Great. Very helpful. And then maybe a question on return to work and what you're seeing, you touched on that in the prepared remarks. You've kind of talked to a hybrid work model for yourself. Just curious what you're hearing from customers on the topic? It sounds like you're expecting some increased travel here based on the prepared remarks. Jim Scapa: I think we're going to see a little bit of increased travel. It depends region-by-region. Some of the APAC regions rely even more heavily than other regions on sort of face-to-face contact a little more in certain other markets like Germany. I'm not seeing huge international travel coming back this year. I think it will start to come back next year mainly because there's such a difference in terms of where -- Israel is completely vaccinated. The US has been doing really well, but starting to slow down. And other markets it's very, very hard to get a vaccine at this point and India is just really in dire straits. So I don't see a lot of international travel. I think that you're seeing like in banking where Jamie Dimon is saying everyone's going to come back to the office, it's a little bit old-school. I think that most of the automotive companies or aerospace companies I think are going to have some level of hybrid for their engineering build. They'll come back a lot more. Certain activities have to be done onsite I think eventually again. But I think it's going to be relatively hybrid. Not a big impact for us if anything it just pushes more and more to the virtual world, which is good for us. Dan Bergstrom : Great. Thank you. Jim Scapa: Yeah. Operator: Thank you. Our next question comes from Brian Essex with Goldman Sachs. Your line is open. Brian Essex: Great. Thank you for taking the question and congratulations on the results, another great quarter. Jim, maybe for you, I mean, the sales motion that you walked through in a previous question seemed very familiar where you're penetrating a division or you're penetrating a business unit. And the question I have is, as you improve your channel presence, do you see or do you anticipate seeing that sales penetration point changing where maybe you can come in at a different level maybe the c-level or slightly below that where you sell the vision of the Altair platform and more efficient consumption across the platform? Just wondering if that might really accelerate the sales efficiency on that front. Jim Scapa: We do need to sell at higher levels and we are selling at higher levels for sure than we used to. And I'm sure you've heard this before. You have to sell top-down and bottom-up to be successful. A lot of companies are very top-down sellers. But if the products aren't really performing if you will, eventually the rank and file are going to throw it out or it's just going to sit on the shop and not get used. So, historically, if you go way back we're very much bottom-up sellers. Through the years we've been getting better and better at selling at more senior levels. And I think we're getting more and more proficient at it now yes. Brian Essex: And then maybe for Matt to beat you over the head with the guidance again. On the profitability side, so you beat EBITDA by I think over $10 million. You're raising the full year guide by about $1 million, but you also talked about investment initiatives. So, maybe if you could point us in the direction of where you might be investing, how much you might be reinvesting, and how much cushion might be in that number given that obviously you can control where you spend more than perhaps you can control what your customers buy. So, maybe a little bit more certainty there. Matt Brown: Yes. I mean so when we think about the profitability and how that played out in Q1 obviously super-happy with the result. Much of that the over-achieve in the form of revenue makes its way down to EBITDA. And our expense expectations were slightly better than expected based on just the speed with which we moved through the restructuring activities that we began about midway through the quarter. So, real happy about the results there. And really the way that we're thinking about it is we're now looking at raising the full-year revenue guide by $2 million raising the full year EBITDA guide by $1 million. And what that really means is sort of the outlook from an expense picture has not changed much based on our prior guide. There's some timing movement between reinvestments and the restructuring activities that we're undertaking. But big picture we're really just saying we had roughly 12.3% adjusted EBITDA margin at the midpoint in our last guide. We're taking that up now to 12.4% at the midpoint. And so in other words, not seeing a big change in the form of our expense picture versus what we had guided to last quarter. Brian Essex: Got it. That’s helpful. Thank you very much. Operator: Thank you. Our next question comes from Mark Schappel with Benchmark. Your line is open. Mark Schappel: Hi, thank you for taking my questions and congratulations on the quarter and Jim, congratulations on your new granddaughter. So, Jim a question for you. It was good to hear the positive commentary around SimSolid in your prepared remarks. And the idea of introducing engineering simulation in the upfront design process has been something that's been talked about for decades now but rarely has been followed through with. It sounds like that's changing. And according to your comments it sounds like SimSolid's a good part of that change. I was wondering if you could just talk a little bit more about what you're seeing with organizations product development organizations embrace upfront design. Are you seeing it more in certain industries than others? And look I'll just let you talk about that. Jim Scapa: Okay. Thanks for the -- thank for the congratulations all the way around. Yes. So, you are right. So, you've obviously been around this industry because people have talked about simulation upfront for a long time and people have tried to do it for a long time. I think there's a great desire for simulation to be part of the design groups and I think SimSolid is actually kind of a catalyst because you don't have to do all this complex modeling in order to do this work. It handles the assemblies amazingly and it's very accurate and it's just blazing fast. But it's not just fast because there's other things that do things fast but you get chunky results. Here you're getting very, very accurate results. And so it's sort of transformative. And we have a lot of large customer organizations who are intending to really roll this across their design teams in a way that I've not seen before. So, this is part of why I decided to put that in my talk track today. I think we are beginning to see some movement, if you will, coming. So, it's exciting. Mark Schappel: Great. Thank you. That’s all for me. Jim Scapa: Thank you. Operator: Thank you. And there's no other questions in the queue. I'd like to turn the call back to Jim Scapa for any closing remarks. That’s all the questions we have. I'd like to turn the call back to Jim Scapa for closing remarks. Matt Brown: Okay. Well, thanks everybody for joining the call. Really, really appreciate it and look forward to speaking with you all soon. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.
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Altair Engineering's Financial Performance and Market Position

  • Altair Engineering (NASDAQ:ALTR) surpasses Zacks Consensus Estimate with third-quarter earnings per share of $0.24.
  • The stock price of ALTR reflects a decrease, currently at $108.63, amidst market volatility.
  • Despite a downgrade by William Blair, Altair's strong financial health and growth potential may continue to attract investors.

Altair Engineering (NASDAQ:ALTR) is a global technology company that provides software and cloud solutions in the areas of product development, high-performance computing, and data analytics. The company competes with other tech firms like ANSYS and Dassault Systèmes. On October 30, 2024, William Blair downgraded ALTR from "Buy" to "Market Perform," with the stock priced at $108.63.

Despite the downgrade, Altair Engineering has shown strong financial performance. The company reported third-quarter earnings per share of $0.24, surpassing the Zacks Consensus Estimate of $0.16. This is a significant improvement from the $0.14 per share reported in the same quarter last year, indicating robust financial health and growth.

The stock price of ALTR is currently $108.63, reflecting a decrease of 1.84% or $2.04. Today, the stock has fluctuated between $107.87 and $110.60. Over the past year, ALTR has seen a high of $113.12 and a low of $57.59, showing considerable volatility in its stock price.

Altair Engineering's market capitalization stands at approximately $9.22 billion, indicating its substantial size in the tech industry. The trading volume for ALTR today is 860,457 shares, suggesting active investor interest. Despite the recent downgrade, the company's strong earnings performance may continue to attract investors.

JPMorgan Bullish on Altair Stock

JPMorgan started its coverage of Altair (NASDAQ:ALTR) with an Overweight rating and a price target of $86 per share, as indicated in a recent client note on Friday. The firm's positive stance is based on Altair's robust free cash flow and its growth potential.

The analysts highlighted Altair's strong position in the stable and growing field of simulation and analysis. They project a significant growth in free cash flow (FCF) for the company, anticipating an increase of around 20% in the coming years. This growth is expected to be fueled by higher-than-average revenue increases, driven by Altair's expanding market share in simulation and analysis, leveraging its unique capabilities in high-performance computing (HPC) and data analytics/artificial intelligence.

Additionally, JPMorgan pointed out Altair's notably high operating leverage. While the firm anticipates a contraction in ALTR's market multiple as margins align more closely with those of its peers, the overall outlook remains positive. JPMorgan forecasts an attractive potential upside of approximately 15% for Altair, positioning it for relative outperformance in the market.

Altair Engineering Acquires World Programming

Altair Engineering Inc. (NASDAQ:ALTR) made an announcement on Wednesday, according to which it has acquired the UK-based World Programming (WP).

The acquisition will significantly expand the company’s portfolio in the data analytics space and provide material cross-selling opportunity for the Altair Knowledge Works suite of products.

Analysts at Berenberg Bank believe that SAS-heavy legacy workloads are being slowly transitioned into other programming languages (such as R and Python) and WP’s World Programming System (WPS) software is a big enabler of the migration to the modern and hybrid data environments. The acquisition is material and the analysts believe it has potential to be accretive to Altair’s growth and margin profile.