Altair Engineering Inc.

Ladies and gentlemen, today's conference is scheduled to begin shortly. Please continue to stand by, and thank you for your patience. Thank you. Thank you. Ladies and gentlemen, thank you for standing by, and welcome to Altair Engineering Incorporated fourth quarter 2020 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. To ask a question during that session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, Please press star zero. I would like to hand the conference over to our Chief Financial Officer, Howard Moroff.

Good morning, welcome, and thank you for attending Altair's earnings conference call for the fourth quarter of 2020. I'm Howard Moroff, Chief Financial Officer of Altair, and with me on the call is Jim Scappa, our founder, chairman, and CEO, and Matt Brown, who assumes the CFO role on March 16th. After market closed yesterday, we issued a press release with details regarding our fourth quarter performance and guidance for Q1 in the full year 2021, which can be accessed on the investor relations section of our website at investor.altair.com. This call is being recorded, and a replay will be available on the IR section of our website following the conclusion of this call. During today's call, we will make statements related to our business that may be considered forward-looking under federal securities laws. These statements reflect our views only as of today and should not be considered representative of our views as of any subsequent date. we disclaim any obligation to update any forward-looking statements or outlook. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from our expectations. These risks are summarized in the press release that we issued yesterday. For a further discussion of the material risks and other important factors that could affect our actual results, Please refer to those contained in our quarterly and annual reports filed with the SEC, as well as other documents that we have filed or may file from time to time. During the course of today's call, we will refer to certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our press release. Finally, at times in our prepared comments or responses to your questions, We may offer metrics that are incremental to our usual presentation to provide greater insight into the dynamics of our business or our quarterly results. Please be advised that we may or may not continue to provide this additional detail in the future. With that, let me turn the call over to Jim for his prepared remarks. Jim?

Thank you, Howard, and welcome to everyone on the call. Altair had an excellent fourth quarter and full year 2020, especially given the global COVID-19 pandemic and economic uncertainty. I am proud of what our team accomplished in 2020. In a year of business disruptions and personal challenges, Altair brought to market broad and deep additions and enhancements to our product portfolio while delivering solid financial results. Though some challenges remain due to the pandemic, 2020 has positioned us well for 2021. As we demonstrate successes around our vision for the convergence of simulation, high performance computing, and artificial intelligence, we will continue supporting our customers with industry leading technology and unparalleled engineering and data science expertise. We have never been in such an energized position regarding our software offerings. Our integrated suite of software optimizes design performance across multiple disciplines encompassing structures, motion, fluids, thermal management, electromagnetics, system modeling, and embedded systems, while also providing AI solutions and true-to-life visualization and rendering. Our HPC solutions maximize the efficient utilization of complex compute resources and streamline the workflow management of compute intensive tasks for applications including AI, modeling and simulation, and visualization. Our data analytics and AI products include data preparation, data science, and visualization solutions that fuel engineering, scientific, and business decisions. We were pleased to report Q4 results with total revenue of $133.4 million. Software product revenue for the quarter was $113.6 million, reflecting year-on-year growth of 12 percent. Adjusted EBITDA was $21.7 million, an increase of 70 percent in the fourth quarter of 2019. All were well above our guidance ranges. For the year 2020, software product revenue grew to $391.7 million from $366.7 million the prior year, an increase of 7%. Total revenue equaled $469.9 million compared to $458.9 million, a small increase recognizing a continued softness in services. Software product revenue is 85.2% of total revenue for the fourth quarter compared to 81.7% in the prior year period. For the full year of 2020, software product revenue increased to 83.4% of our total revenue from 79.9% in 2019. Our recurring software license rate was 92% for the full year of 2020 versus 87% in 2019. Software renewals in the quarter continued to come in as expected with several significant expansions, and new customer activity remained healthy. As we drive the convergence of simulation, HPC, and AI into 2021, I feel it might be helpful if this quarter's customer stories focused on momentum toward this convergence. And Opticon, our solution for real-time data streaming and visualization, was selected by a European company specializing in retail customer behavior analysis. Their work includes biometric measures, which can in turn lead to predictions around buying preferences. The application supports a multi-format dashboard with data visualization, photos, video, and audio. Technical domain knowledge is key in the effective implementation of AI toward engineering applications. A defense agency is implementing a great example of AI converged with system modeling to support work including radio signals, satellite communications, and electromagnetic spectrum performance. Our work with them started a year ago around electromagnetic simulations. As we help them develop a cloud-based real-time telemetry data processing, data analytics, and archiving system, it will include elements of data acquisition, real-time data science and visualization, simulation models in a closed loop, and predictive analytics. In the food industry, a large multinational company has been a longtime user of Monarch data preparation tools licensed on a traditional named user basis. After an M&A event, we met with the new parent company and opened conversations around Altair Unit's licensing model, especially with regard to the ability of the enterprise to access all of Altair's tools, including data preparation, data science and AI, as well as real-time data streaming and visualization. This dialogue turned into a true win-win. with the customer now accessing the entire suite of our data analytics and AI tools across many additional users while seeing value in a substantially increased financial commitment. In a similar fashion, a large financial services organization has been using Monarch for data preparation for more than 20 years. The relationship has been completely restructured from named users on a single application licensing to a broad deployment of Altair Units for all of their data analytics and AI needs. The result is significantly more users and nice growth in the relationship. We believe the Altair Units licensing model has potential for disruption in the data analytics and AI software marketplace. global leader in agricultural machinery committed to Altair units for the application of AI to engineering with a goal of using digital twins to improve predictive maintenance and reduce the time and cost required for testing. A European manufacturer of metal parts for the automotive industry is using Altair's AI and engineering capabilities to diagnose, predict, and reduce production anomalies. These wins are great examples of Altair's deep engineering knowledge, helping customers to bring the power of AI to their enterprises. One of our larger data analytics deals to close out 2020, a major technology company inked a seven-figure purchase agreement with initial use cases around payroll optimization. Along with the matching and reconciliation process, the customer will be using Altair for visualization and scoring analysis. Their internal ROI calculations on this implementation are impressive, and we are delighted to see a customer so emphatic about their ability to get an outstanding financial return on our data analytics and AI tools. A great example of our vision of converging AI with engineering was expressed in the press release we issued last month discussing our MOU with Rolls-Royce Germany to collaboratively connect artificial intelligence and engineering to derive business value across Rolls-Royce's engineering, testing, and design of aerospace engines. The collaboration will address a wide variety of use cases, including applying data science for the vast amounts of engineering testing data which can lead to a significantly reduced number of sensors needed. This single use case alone has the potential to reduce recurring costs by millions of euros. As a pioneer of the convergence of AI and engineering, Altair is honored to be the technology partner of choice to help Rolls-Royce Germany make better daily data-driven decisions and transform their business and products. On the topic of acquisition, I am pleased to announce we have acquired Flow Simulator from GE Aviation. Flow Simulator is an integrated flow, heat transfer, and combustion design software which enables mixed fidelity simulations to optimize machine and systems design. As organizations are increasingly simulating complex duty cycles, Solutions like Flow Simulator are needed to model an entire system, including rapid iteration concept modeling and understanding of system simulation and system behavior, and virtually anything that encompasses thermal management. Bringing Flow Simulator to the Altair software set will allow us to expand its capabilities in the aerospace market and make it available to new industries, including defense, renewable energy, automotive, and electromobility. In addition to the acquisition, Altair and GE Aviation have signed an MOU to facilitate a higher level of collaboration and establish a long-term strategic partnership. I am thrilled to strengthen our relationship with GE Aviation, a longtime customer, and equally excited about the future of Flow Simulator, as we will bring the simplification of modeling complex thermal systems to new industries. We continue to evolve Altair's organization and processes toward more operational efficiency and believe these changes are resulting in more effective delivery of technology and expertise to our customers. One example is with our global technical support organization. Infrastructure and organizational changes are allowing us provide deep knowledge and expertise to customers regardless of geography, even as our technology portfolio expands in breadth. In addition to leveraging global capabilities for customer-facing roles, we continue a path of internal digital transformation. In 2020, Altair, like many companies navigating COVID-19, shifted to a remote model for work and communications with customers and coworkers. Going forward, we expect to return to a hybrid model, remote work and traditional office and travel. We believe these changes, while not affecting our external relationships, will play a role for EBITDA expansion as we scale revenue. As announced in December in a December press release, Howard Moroff is in the process of transitioning the CFO role to Matt Brown. I am deeply grateful to Howard for his many years of great leadership and guidance for Altair, especially as we made the transition from a privately held company of many decades to an organization ready for an IPO, and then to an operating public company. In the three years since we went public, Howard has been a straight and steady voice for Altair, and I wish him well in his next adventures, especially those involving his family, and his work with charitable organizations. In choosing our next CFO, it was important to me that we have someone with an operational focus and enthusiasm for doing the right things as we grow the company to the next level of revenue and profitability. Matt is clearly on target in this regard, given his financial expertise and large scale software company experience. Matt will officially take over from Howard on March 16, and both of them are to be congratulated on their superb process of transitioning the role in a way that has truly benefited the Altair organization. I look forward to working with Matt as we remain focused on delivering great technology to our customers while we scale our software revenues and increase EBITDA for sustainable long-term growth. Now I will turn the call over to Howard and Matt provide more details on our financial performance and our guidance for the first quarter and full year of 2021. Howard and Matt.

Thanks, Jim. I appreciate the kind words and am delighted to have contributed to the growth and success of Altair over the course of the past decade. I will cover our Q4 and full year 2020 results, while Matt will detail our expectations for 2021. As Jim mentioned, we delivered excellent fourth quarter results on the top and bottom lines, driven by software product revenue, well in excess of our expectations going into the quarter. I would like to remind everyone that our seasonal billing patterns, coupled with the treatment of revenue under ASC 606, results in heightened seasonality in revenue and associated metrics with higher software product revenue recorded in our first and fourth quarters of any given year, and we expect this pattern to continue. We exceeded our revenue guidance for Q4 driven by strong growth in software product revenue and handily exceeded our adjusted EBITDA guidance driven by the combination of strong software revenue performance and continued controls over our operating expenses. We entered the quarter with a conservative perspective due to the uncertainties arising from COVID-19. since our Q4 typically includes a greater proportion of expansion and new revenue compared to other quarters. We are delighted to see that the strong software growth we generated in Q3 carried through to Q4. We previously noted that changes in certain currencies can have an impact on our revenue, expenses, and cash flows, especially when those changes occur over relatively shorter time periods. or when currency changes are more pronounced over time. Accordingly, we believe it is meaningful to measure aspects of our performance on a constant currency basis. For 2020, currencies did have a positive impact of $3.8 million on billings and an insignificant impact on revenue and adjusted EBITDA for the year. For Q4, currency positively impacted revenue by $3.2 million and had a nominally positive impact on adjusted EBITDA. Billings benefited in the quarter by $7.5 million due to currency moves compared to Q4 2019, primarily driven by moves in the Euro. Our fourth quarter results are attributed to continuing solid demand for our software products that exceeded our expectations. software product revenue reached $113.6 million, an increase of 12.3% from a year ago, and over 9% on a constant currency basis, while total revenue equaled $133.4 million, representing growth of almost 8% from the fourth quarter of 2019 and over 5% on a constant currency basis. acquisitions did not have a meaningful impact on revenue for the quarter. Total revenue continued to be impacted by the reduction in software-related and client engineering services revenue, resulting from the continuing impact of COVID-19 on the demand for these services. Reflecting continued modest recovery compared to Q3, our software-related services revenue declined about 12% in the quarter relative to the prior year. These results represent improvement compared to Q3, which declined 22% compared to the prior year. As expected, our client engineering services revenue declined by 15% in the quarter compared to the prior year due to reductions imposed by some of our CES customers consistent with the prior quarter. Our 2020 results benefited from demand for our software products. Software product revenue reached $391.7 million, an increase of almost 7% from a year ago, while total revenue equaled $469.9 million, representing growth of 2.4% from 2019, both exceeding guidance provided last quarter. Software-related services declined by 23.5% compared to a year ago, primarily impacted by the headwinds in our automotive customer base. Our growth and investment strategies remain targeted on higher margin software product revenue opportunities. Revenue mix continued its favorable trend in the fourth quarter. Software product revenue increased to 85.1% of total revenue, up almost 350 basis points from 81.7% last year, without any adjustment for currency or acquisition-related impacts, which were minimal. This continues the important long-term trend of an increasing mix of software product revenue, the key driver to expansion of our operating margins. For the full year, software product revenue progressed to 83.4% of our total revenue from 79.9% for the prior year. Our recurring software license rate, that is the percentage of software product revenue that is recurring, continues to be strong with a healthy increase to 92% for the year as we continue to emphasize growth in our recurring revenue streams. Fourth quarter billings were $146 million, an increase of 12% from a year ago driven by software momentum, indicative of the strong growth in our software product business. For the year, Billings were $480.4 million, an increase of about 1% from a year ago, driven by the growth in our software product business offset in part by declines in software-related and client engineering services. We tend to view billings over longer time periods due to the impact variations in timing of renewals, expansions, and new customer arrangements can have quarter to quarter. I would like to shift to the balance of the P&L results. Gross margin in the fourth quarter improved to 75.5%, consistent with the revenue mix shift to software product revenue. On a full year basis, gross margin improved by over 300 basis points to 74.2% compared to prior year gross margin driven by the positive shift in revenue mix. For the quarter, Non-GAAP operating expenses, which exclude stock-based compensation, amortization of intangible assets, and other operating income, were $81.9 million. The increase from $73 million in Q3 is consistent with our expectations of the impact of our acquisitions later in 2020, as well as restoring certain cost reduction efforts undertaken earlier in the year. Adjusted EBITDA for the quarter equaled $21.7 million, a terrific increase of over 70% from last year, driven predominantly by the increase in software product revenue, along with the benefit of reduced travel and selling expenses operating under COVID-19 restrictions. In Q4, we did realize some revenue and incurred expenses related to the acquisitions of Univa, Alexis, and Enbase. The magnitude of these inclusions did not significantly impact our results, either on the top line or bottom line. Adjusted EBITDA for the year grew over 45% to $57.3 million compared to adjusted EBITDA of $39.5 million a year ago, driven by healthy software momentum in the second half of the year, along with cost reductions over part of 2021. arising from COVID-19 actions we have spoken about previously. Our performance in 2020 pushed adjusted EBITDA margins in 2020 to 12.2%, up from 8.6% in 2019. Turning to our balance sheet, consistent with the typical seasonality in our billings and collections activities, We ended the fourth quarter with $241 million in cash and cash equivalents. We had $120 million in undrawn capacity on our U.S. revolver. Just note that in early January 2021, we repaid the $30 million we had drawn on the line of credit during 2020. We generated cash flow from operations for the year of $32.9 million compared to $31.4 million for 2019. Our free cash flow improved to $26.8 million compared to $21.7 million for the prior year due in part to reduction in cash expenditures for property and equipment. It has been a pleasure to have been a part of Altair the past decade, working with Jim, the entire Altair team, and more recently the investment community. Having spent much time with Matt during our transition, I am completely confident that the finance function will be in great hands going forward. I would now like to turn the call over to Matt to discuss expectations for 2021. Matt?

Thank you, Howard. I want to start by thanking Howard for providing a very thorough and seamless transition over these past two months. When I started on January 4th, I could not have imagined a better handover of CFO responsibilities. He's left us in a great spot for the future. And he's assured me that if we need to call him, he'll still pick up the phone. So, Howard, thank you. I very much appreciate it. As you just heard, we're coming off a very successful fiscal year 2020, and especially Q4, in what was a challenging COVID-19 environment. We saw record software product revenue in Q4 and for the full year, with fiscal 2020 software product revenue growing 6.8% year over year. Total revenue in 2020 grew 2.4% year over year. And while also a record high, we saw declines in our service revenue that partially offset the software product revenue growth, as some customers pulled back on their services and contract spend. As we look ahead to Q1 and fiscal year 2021, we expect to continue the momentum we saw at the end of 2020 and carry that into 2021 and are expecting software product revenue for Q1 21 in the range of 118 to 120 million or year over year growth of 8.8 to 10.7%. And for fiscal year 2021, in the range of $423 to $431 million, or a year-over-year growth of 8.0 to 10.0%. In looking at total revenue for 2021, we believe our services revenue has stabilized. And although we do not expect to see service revenue declines in 2021 like we did in 2020, we are not expecting service revenue growth either as we continue into what is likely another mixed COVID-19 year. As a result, we are forecasting total revenue for Q1 2021 in the range of $138 to $140 million, or year-over-year growth of 5.0 to 6.5%. And for fiscal year 2021, in the range of $502 to $510 million, or year-over-year growth of 6.8 to 8.5%. We believe our revenue guidance is balanced, but will depend on the levels and speed of the post-COVID recovery, particularly in the later part of the year. From a cost perspective, the company succeeded in limiting expenditures during 2020 while in the midst of COVID-19 uncertainty. In particular, during 2020, we reduced marketing and trade show costs by almost 40% relative to the prior year, and reduced travel and entertainment costs by 68%. In 2021, we expect some of this activity to return to normal, resulting in an increase in costs year over year, particularly in Q2 through Q4 21, as we anniversary some of those cost cuts and as travel resumes. However, we will continue to be disciplined in our expenditures. We are currently looking at targeted reductions in employee costs, contractor costs, and professional services spend as we reorganize within the business. We expect these reductions to be substantially complete in the first half of 2021, freeing up capacity for investments in our product technology and sales capacity. As a result, we expect to incur cash reorganization costs in the first half of between $5 to $7 million, which is excluded from our adjusted EBITDA. For Q1 2021, we expect adjusted EBITDA in the range of $24 to $26 million, or year-over-year growth of 10.7 to 20.0 percent, which translates to adjusted EBITDA margin of 17.4 to 18.6%. And for fiscal year 2021, we expect adjusted EBITDA in the range of 58 to 66 million, or year-over-year growth of 1.2 to 15.2%, which translates to adjusted EBITDA margin of 11.6 to 12.9%. Our expectations on adjusted EBITDA are inclusive of the cost reductions and investments I mentioned a moment ago. We expect free cash flow for the year to increase in line with the increase in adjusted EBITDA and will be impacted by the reduction related cash costs and are forecasting free cash flow for fiscal year 2021 in the range of 26 to 34 million. As a reminder, our cash flow expectations are sensitive to billings and collection patterns, which fluctuate seasonally. We've provided detailed guidance tables in our earnings press release, which was issued after close of market yesterday and includes guidance on non-GAAP net income. Moving forward, when measuring non-GAAP net income, we will exclude non-cash interest expense and will apply a consistent non-GAAP income tax rate. We've made these changes to reflect management's view of the business and to be more consistent with our peers. These changes will be applied to comparable prior periods to aid in comparability and have been provided in the supplemental tables in our earnings press release. COVID-19 developments continue to evolve. but we are cautiously optimistic on a broad economic recovery as we look ahead to 2021. Altair has never been better positioned to support our customers on solving some of the most challenging problems faced by engineers, scientists, and data analysts. Our simulation products are being increasingly adopted earlier in the design process, improving product performance and reducing costs for our customers. Our HPC products are enabling customers to maximize their compute resources. And our data science and preparation tools are leveraging AI to enable customers to organize and visualize data to make important decisions quickly. We see these solutions converging and providing real value to our customers. With that, we'd be happy to take your questions. Operator?

Thank you. And ladies and gentlemen, as a reminder, to ask a question, you will need to press star 1 on your telephone. To remove yourself from the queue, press the hash or pound key. One moment while we compile the Q&A roster. Our first question comes from Rich Valera with Needham. Your question, please.

Thank you. Good morning, and congratulations on a strong finish to the year. And, Howard, best wishes on your next chapter, and welcome, Matt. And with that, I wanted to just talk about how the quarter played out for issue expectations. Really nice upside in the quarter, and I'm wondering, was that a result of things, coming in, have you actually seen improvements during the quarter, or just conservatism yet embedded into the guidance because you were kind of concerned about a COVID second wave, which I think you'd mentioned on last quarter's call? Just wondering where that upside came from on the quarter relative to your expectations.

We're on different places.

Jim, go ahead, or I'm happy to answer.

Yeah, why don't you answer that, Howard? That would be great.

Sure, sure. So, Rich, and thank you for the nice words. You know, we certainly entered with, you know, a sense of conservatism as we've, you know, frankly been pretty cautious over the course of the entire year for obvious reasons, or most of 2020 for obvious reasons. So we entered the quarter conservative, we know that in Q4, you know, we have a little higher proportion of new and expansion revenue as is typical in our Q4. So, you know, the conservatism that we thought was very well warranted, you know, against that backdrop, you know, the quarter continued to, I would say, improve as the quarter navigated along, reflecting, you know, growth, investment, strength in our customer base, and frankly, you know, continued use and growth and adoption of technologies that are ever so critical to our customers. So I think it was really sort of a combination of conservatism and as well, you know, new and expansion in the way that, you know, you would hope to see.

That's great. Thank you. And then maybe for you, Jim, great to hear about your success selling kind of converged analytics and simulation solutions, but just wanted to get your sense of where you are in that path towards creating that converged model, you know, kind of relative to maybe where you thought you were going to be when you made the acquisition and where you think it could be, you know, say five years from now, what you've done so far and maybe what you're doing to further that integration and then just where you are in sort of the model transition for that analytics business. Thanks, John.

Thanks, Rich. Nice to hear your voice. So, I mean, I think that the model transition is largely done at this point. We've really moved things over to subscription pretty well at this point and where it's kind of on par with the rest of this year. But that part is done. As far as sort of this convergence between the engineering and the data analytics. I think it's a very natural transformation that's really happening. It's happening within our products and in ways that customers and users don't even know it's happening to some extent. And it's also happening for customers who really are beginning to recognize the opportunity. So we have almost every one of our account managers has opportunities at this point that are really taking advantage of this convergence. And it's really starting to engage. We're starting to understand use cases that make sense as we have success and point those use cases to other customers. So five years from now, I don't think we're going to be talking about sort of a difference between simulation and AI. I think it's all going to be you know, computational science, basically, that we're talking about.

That's great. Thanks for that, Jim, and congrats again on a nice performance. Thank you.

Our next question comes from Jackson Adair with J.P. Morgan. Your question, please.

Great. Good morning, guys, and I'll echo Rich's thoughts. Howard, it's been a lot of fun, and welcome, Matt, First question on the reorganization, what areas of the sales force or, I guess, what types of sales investments will you guys be making? You know, where are you going to be shifting chips away from and being placing bets? Yeah, Jackson, thanks for the question. Jim, you want to take a stab at that and you can pass it to me?

Yeah, yeah, I think I should answer that question. Sorry, Matt. So in terms of where we're continuing to invest, we are continuing to invest in enterprise-level customers who we see large opportunities with. So we're beginning to target our direct account managers more and more at those opportunities and create more focus for them. We're creating swimlanes. really in the market and working the direct account managers at the accounts that make sense for these enterprise opportunities. We have inside sales and business development working more down market and indirect also down market in combination with them. So we're continuing to make investments. We think we're just getting smarter at how we're organizing and leveraging the sales resources and the capacity that we have. Matt can answer something there. I'm not sure what he's going to answer.

Yeah, I mean, I would just chime in and say, you know, from a high-level context, right, I mean, this is, you know, over the past five years, we've done, you know, 23 or so acquisitions and, you know, continue to really refine our operating model. And so that's how I would characterize this. We're going to continue to invest in our product technology and in our sales engine moving forward. And so this is really a refocusing is the way that I would characterize it. Okay. And then a follow-up, I guess, directly from that, what's the FX tailwind in 2021 for the revenue growth guidance? You know, it's a couple of points. You know, I think we are, obviously, as we guide 21, we're using today's rates on the FX. So, you know, you're not, we're not anticipating movement in the FX rates. But within the, you know, comparable to the sort of year-over-year impact of It's worth a couple of points of FX on the revenue line, but next to nothing on EBITDA. Those naturally offset. Sure. All right. Great. Thank you.

Our next question comes from Ababan Ansuri with William Blair. Your question, please.

Great. Thanks for taking my question, and I'll let go of my congrats on the quarter. Welcome, Matt and Howard. We will miss you. I'm sure we'll run into each other again, but best of luck. I guess I want to touch on a couple quick things. One, maybe this one's for Jim. Jim, the services business naturally, obviously, this year or in 2020 had challenges, just COVID, et cetera. But as you think about it, one of the great things about that business was you got really intimate with customers. Like, you got to understand what they were doing, what they wanted. It drove some product development or at least ideas around innovation. And as you think about 21 and 22, do you think you reinvest in that business a little bit to sort of keep that customer intimacy, to keep those guys at the customers, to help them with their solutions, but also to help guide and drive product innovation? How should we think about that playing out?

We are still very, very actively engaged with a lot of customers on, I'll say, you know, very advanced projects. in electric motors, batteries, you know, those kinds of things, additive manufacturing, simulation, all of that. You know, the service business that declined, if you will, last year is closer to, you know, it's a continuum of super advanced stuff that we do down to more commodity level. And we don't do the very commodity anymore over the last, you know, five or ten years. But still, the things that are being lost, if you will, are more the things on the commodity level side. So we're still very engaged with customers. Customers still recognize, you know, the technical superiority of Altair. And, you know, it's advancing our products still, but it's also advancing these relationships.

Got it. Got it. And then maybe one for Howard and Matt combined maybe, but You know, Howard's had a philosophy over the X number of years about guidance with Jim and team. And I guess, Matt, as you look at the guidance for 2021, you know, given there is still risk in COVID, you know, and you think about sort of, you know, Billings is up 1% or a little above that in constant currency. I guess, what are you seeing in pipeline or are customers in the auto space hiring more engineers? Are you seeing close rates improve, lands improve, the size of the initial land improve, expands improve? That sort of gives you that visibility confidence. Again, the business itself is not choppy, but the customer adoption, customer buying behavior can be choppy. So just trying to understand how you guys have thought about that guidance and sort of what you bring to the table in terms of visibility. I'd love to sort of think about that both tactically for 2021 and then strategically how you think about guidance. Thank you.

Yeah, yeah. No, I appreciate the question. You know, I would say that we are cautiously optimistic about 2021. You know, and you can kind of separate top line at least into the two sections, one being software product revenue and the other being all else, right? So if we start with all else, we're still in a mixed COVID year. You know, as you know, last year, Q1, not really impacted by COVID. This year, Q1 is. And as we move forward throughout the rest of the year, we're expecting some bit of recovery. But net-net, our expectations on everything other than software product revenue is that the year is going to be basically flat to 2020. And so then that leaves you with software product revenue. And we're pretty optimistic there. We're seeing... good engagement from our customers. Um, we're seeing a healthy pipeline and we feel very strongly about our technology and how we compete. Um, and so that's where you're seeing the growth. Um, and you know, of course we'll have to see how the year plays out, but, but like I said, we're, we're cautiously optimistic there.

If I could add to that, you know, uh, I think sometimes it's undervalued by you guys, but our recurring revenues, I think in 2020 it was something over 92%. So we go into the year and very, very sturdy, even in 2020. So we go into the year with a pretty high recurring revenue. We expect the attrition on that to be a little bit better than in the prior year. And when we look at new and expansion, of course, we were a little bit weaker last year there. But we can judge how weak we were against, you know, where we expect we might be. And, you know, all of that together gives us that cautious optimism as well.

Gotcha. Gotcha. Really helpful, guys. Thanks for taking my questions. Appreciate it.

Thank you.

Thank you. Our next question comes from Ken Wong with Guggenheim Securities. Your question please.

Great. Thank you for taking my question. This one probably for you, Jim. In the data space, you have a Southern California-based competitor that saw a little bit of softness. And just based on what we're hearing from you guys, it looks like you feel that your business has powered forward quite nicely. Just wondering maybe what some of the trends you're seeing there, maybe what some of the differences are in terms of why you guys seem to be surging forward whereas they seem to be seeing a little bit of weakness.

so I can't speak to the other guys. But for us, I think we have a very, very strong solution on the data prep side that just continues to go forward. But I think the rest of our offering, frankly speaking, is quite a bit deeper and broader than the guys I assume you're alluding to. And frankly, all of that integrated with the rest of our business and how we're targeting things gives us this optimism.

Got it, got it. And then this one for the Matt and Howard combo, I guess on the EBITDA guide, it doesn't look like you guys are getting much leverage next year on the full year basis. It looks like it's going to be flat from a margin perspective. Can you maybe just walk us through some of the moving pieces on the spend side, whether it's reinvestment versus a rebound in discretionary or anything else we might be missing from a spend perspective that maybe keeps us from getting more leverage on EBITDA?

Yeah, sure, Ken. I'll take that. So, You may be underestimating that a little bit. I think if you look at how we exited Q4 from a spend perspective, that really is probably your best basis as you move forward through the year. And so you can see we carried that into the Q1 guide in terms of the spend. It's not much incremental spend from Q4 to Q1 at the midpoint of the guide. But then as you look forward through the year, you actually will see off of that run rate, you will see a reduction in our expected spend that's implicit in the guide. So make sure that you're taking that into account. There's some nice efficiencies there that are coupled with investments in our technology and in sales and some headwinds that we're seeing from some return to normal on travel and marketing expenses. So So I think it's a pretty fair guide, and actually I'm pretty happy with that outcome.

Great. Thanks a lot for that, Matt.

Thank you. Our next question comes from Brian Essex with Goldman Sachs. Your question, please.

Hi, good morning, and thank you for taking the question. Maybe, Jim, a question for you. In your prepared remarks, you gave several nice examples of customers significantly restructuring their relationships. But what are the overall trends with regard to adoption of product groups within the Altair unit platform? Are you seeing a meaningful number of enterprises buy for greater flexibility? Maybe, for example, buying multi-physics instead of mechanical engineering to enable usage of you know, perhaps SimLab and Spire and other adjacent applications?

So the answer is yes. Actually, the Altria Units model is being very, very well received. It's well received by my, you know, account management team. they really appreciate it because it gives them the ability to get the right value out of customers that are willing to pay more for, you know, the extra service, features, you know, products. And it lets us, you know, basically be competitive and gain new markets where the customers are more price sensitive. So I think, you know, our guys are seeing it well. I think the customers are appreciating it as well, actually, because it's a very, very fair model for them. And we are seeing adoption, for sure.

Great. That's good to hear. And maybe just to follow up to Bhavan's question on services, is the bench of services talent that you have access to limited to a certain group of businesses or verticals or perhaps certain technology versus some emerging technology? In other words, how applicable – are those services as you, you know, continue to extend your model into emerging businesses or, or additional incremental technology through acquisitions?

We have very, very significantly, uh, shifted bill sets that we have. I mean, if you look at the projects that we're doing in electronics, electric vehicle, you know, electric motor sensors, uh, IOT devices, um, You know, we're at the state-of-the-art for battery design. I think you'd be surprised at the expertise that we have now. Great. That's super helpful.

Thank you very much, and congrats on the results.

Thank you.

Thank you.

Our next question comes from Matt Hedberg with RBC Capital Markets. Your question, please.

Hey, thank you, and congrats from me as well. And obviously, Howard, great working with you, and Matt, look forward to working with you again. I just had one question, and it's really a follow-up to Brian's question on Altair Units. Obviously, you're seeing success there, and it opens up new opportunities. I guess the question is, you know, when you think about the 2021 guide, how do you contemplate how pervasive – or maybe said differently, you know, the impact on top-line growth with increasing usage of Altair units. Just wondering how you sort of conceptually thought about that as you contemplated the outlook for 21. Yeah.

Maybe Matt will answer that, but I personally am not thinking about it. at that sort of granular level and trying to model that. I don't know if Matt or Howard have been trying to do that. For us, we're strictly looking at what we see the pipeline looking like.

Yeah, I can chime in there too, Jim. So, Matt, good to hear from you. So, you know, some helpful context, I think. So far, you know, as of now, roughly a third of our customers have actually already converted. So I think that's important to note. And we're going to expect the rest of those customers to be substantially completed within the next year. So we'll see that throughout the year. The way that I'm thinking about it is – is that as these customers convert, they're finding their way into the suite that makes the most sense for them. In some cases, it ends up being a slight price increase. In other instances, they're finding a suite that makes sense for them where they can utilize exactly the products that they want. And so in the first year, I'm not expecting a meaningful impact. But what I think it does is it sets us up for the future to in a way that allows these users to expand within the suites that they're really using. And it allows us to get the value for that, particularly at the enterprise level. So hopefully that answers your question. We're not baking in a meaningful impact in a year. And so far, we've seen a third of our customers already converted. Super helpful. Thanks, Esther.

Our next question comes from Dalmunda with Berenberg Capital. Your question, please.

Hey, good morning. Thank you for taking my questions. The first one is just a little bit in the past you've talked about how the usage has trended, especially towards the end of the year, kind of give us a little bit of an update over the year. And maybe I'm not specifically asking about the quarter itself, but just in general, what how have you seen usages on solvers evolving throughout the 2020? That'd be very helpful.

First of all, good morning to you. I think your question was, how do we see the usage of solvers evolving? Is that correct?

No, how has evolved in how did you see it? How, you know, what was kind of the performance in 2020, just as an overall considering the fact that, you know,

Sorry. The solver suite that we have continues to gain share, we think, and grow almost in every area for us, actually. If you went back 10 years ago, we were primarily a pre-post company. Today, a very significant part of our business is really on the physics side of business, and that's going to continue to grow even more as time goes on. So solvers are an ever-increasing part of our overall business and strategy.

Okay, that's helpful. Thank you. Thanks, Jim. And then in light of your comments about kind of being a little bit more mindful of the way you invest in sales and really trying to attack those enterprise-level sales, I and rebasing some of the other efforts either into the indirect channel or BizDev. How far would you say you've progressed on the indirect sales channel? Now, you've talked in the past about your ambitions to significantly increase contribution to revenue from that side. Was 2020 kind of a year of foundation and you expect that to come through in 21? Any color in that? Thank you.

Sure. We've made some progress, I would say, and it depends on the geography. But, you know, from my point of view, not as much progress as I would like to see, particularly in the Americas. So, you know, I think the inside sales and business development piece of the business has really gotten a lot of traction for us. I think the indirect is getting traction more and more in Europe and continuing APAC. And in the Americas, I think we have some more work to do, quite frankly.

Thank you, Jim. That's very helpful.

Thank you. Our next question is from Mark Chappell from Benchmark. Your question, please.

Hi, thank you for taking my questions. First off, Howard, the best to you going forward. It was good working with you. But, Jim, question for you. I was wondering if we could dig a little bit deeper into your strategic partnership with GE as part of the acquisition. I was wondering if you just could provide some additional details on the arrangement and what we should expect from it going forward.

So, I mean, this is a long-coming project. partnership for us. We've been working with GE for a couple of years now. With this technology, it was actually part of the Altair Partner Alliance. And now the spin-out from GE to be something that we've taken over responsibility for 100%. There's a very, very large user base of this technology inside of GE. It's in the thousands. and they're excited, I think, about having a commercial software company take responsibility for it, and there's a lot of opportunities to leverage this to grow the partnership in many different directions with GE around all of our software. So that part we're very excited about. There's other projects that we actually have been doing with GE in the area of rotating machinery and others, independent of the Flow Simulator project. Coming to Flow Simulator, it's a really terrific piece of technology that was developed inside of GE. Very often, if I can be candid, the OEMs have a lot of internal development that they do, but very often it's not all commercial grade. and they often are looking to spin it out, and very often it's not really competitive. This is not the case here. This is a great piece of technology. It's getting traction in a lot of customers for us, and we're very, very excited to have it with us. So it's just a very nice partnership with GE. It's a great piece of technology, and it's a model that, for things that we think we can do with some other customers as well.

Great. Thank you. Very helpful. And then an additional question here. A quarter or two ago, you released your Inspire Mold solution. I was wondering, and that was a pretty significant capability for the plastics industry, and I know it's still early, but I was wondering if you've had any Inspire Mold wins at the end of the year here that you could talk about.

We have some wins, but probably nothing that I and reach into my bag of tricks and speak about in a coherent way. It's pretty early days, and we see a lot of interest in the product, and we're pretty hopeful that we're going to see a lot of traction around it, but it's frankly a little early. Ask me in another quarter or two, and I'll tell you how we're doing. I'll make sure to study it more before the next call.

Okay, great. I'll make sure to do so. Thank you. That's all for me. Thank you.

Thank you. And this concludes our Q&A session for today. I would like to turn the call back to our CEO, James Gappa, for his final remarks.

Thank you. So in conclusion here, I just want to thank everyone for their support and feeling encouraged feeling great about 2020 with so many challenges and very excited about 2021. And once again, just want to say a final thank you to Howard for just being a wonderful partner for me for so many years, initially on the board and then coming in as CFO for the company, helping me to transform our finance department, helping us to go public and just being a wonderful partner for me. for so many years. So wishing Howard the best and thanks to everyone else. So long.

Ladies and gentlemen, thank you for your participation in today's program. You may now disconnect. Have a wonderful day.