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spk06: Good day and thank you for standing by. Welcome to Altair's third quarter 2022 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 the session, you'll need to press star 1 1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Dave Simon, Senior Vice President, Investor Relations. Please go ahead.
spk02: Good afternoon.
spk05: Welcome and thank you for attending Altair's earnings conference call for the third quarter of 2022 and it's September 30th, 2022. I'm Dave Simon, Altair's SVP for investor relations. And with me on the call are Jim Scappa, founder, chairman, and CEO, and Matt Brown, chief financial officer. After market closed today, we issued a press release with details regarding our third quarter performance and guidance for the fourth quarter and full year 2022, which can be accessed on the investor relations section of our website at investor.altair.com. This call is being recorded, and the 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 maturely from our expectations. These risks are summarized in the press release that we issued earlier today. 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.
spk11: Jim? Thank you, Dave, and welcome to everyone on the call. Altair had a strong quarter for software sales, showing exceptional momentum year to date, despite significant macroeconomic uncertainty throughout the year. Total revenue on a constant currency basis for the first nine months of 2022 grew by 10.4% over the same period in 2021. Software product revenue is percentage of total revenue first nine months of 2022 continued a strong positive trend of 87.8% compared to 84.7% during the same period in 2021. And our recurring software license rate remained high at 93% for 2022 year to date. Software product billings in the third quarter grew by more than 21% year-over-year on a constant currency basis, adding to the strong first half of the year. Through the first nine months of 2022, software product billings grew by more than 22% on a constant currency basis, and most impressively, at approximately this rate in the Americas, EMEA, and APAC. Altair continues to focus on growing our software business and driving our mixed shift towards software and higher gross margins. Client engineering services has trended down significantly this year. However, we do see this trend beginning to abate entering the fourth quarter. The software-related services business has declined slightly in 2022. We also continue to expand our profitability. Adjusted EBITDA for the first nine months of 2022 was 69.9 million, or 17% of revenue, versus 61.3 million, or 15.7% of revenue, in the same period for 2021, reflecting growth of 14% in a year in which exchange rates dramatically reduced our revenue numbers. The year-over-year constant currency headwind to adjusted EBITDA in the first nine months of 2022 was more than $4 million. In September, we completed the acquisition of RapidMiner, a leader in advanced data analytics and machine learning software. RapidMiner's low-code platform has been downloaded more than 1 million times and is used by hundreds of thousands of people of all skill levels to develop production-scale data pipelines and ML models. This acquisition significantly strengthens Altair's data analytics portfolio and gives Altair a best-in-class, end-to-end cloud-native solution. RapidMiner pioneered the concept of visual, explainable data science and was the first platform to introduce automatic data science, text analytics, automatic feature engineering, deep learning, and more. It provides hundreds of powerful drag-and-drop building blocks to transform and augment data, greatly accelerating work for coders and non-coders alike. RapidMiner's flexible delivery models provide users and enterprises with the scale they need from a user's desktop to on-premise service to secure multi-tenant cloud. Its best-in-class cloud offering leverages the same highly rated user experience as their desktop platform, so existing users can easily migrate to the cloud and new users of all levels can learn the application quickly. Altair plans to quickly integrate several of our other analytics tools, including decision trees and scorecards from Knowledge Studio, ML Ops from Smartworks, and our SAS language development and compiler environment, Altair SLC. And customers will soon be able to access existing Altair and RapidMiner products easily through Altair's unique units licensing model. We believe the addition of RapidMiner to the previously acquired technology from DataWatch and World Programming, the breadth and depth of Altair's data analytics portfolio, Our market reach, our deeply technical and passionate team worldwide, and the unit's business model positions us as a leader in supporting the data science and analytics requirements of clients across any market vertical. Specifically in manufacturing, RapidMiner brings deep technology and experience, including industry-specific machine learning techniques and data source connections, including OSI SoftPi, BrainCube, and many more. When combined with Altair's knowledge on technology and engineering and simulation, we believe Altair becomes the clear leader for data science and product engineering and manufacturing. While we are excited with this acquisition and other important acquisitions we've made so far this year, we're also continuing to push innovation organically. In Q3, we released Simulation 2022.1 with many powerful new updates to enable efficient, innovative products by applying advanced simulation, cloud-based computing, and optimization for cleaner, more sustainable product life cycles. Simulation 2022.1 helps companies meet corporate social responsibility objectives, drive better design decisions, and brings the power of open source technology to users around the world. In addition to many new capabilities, enhancements have been introduced to Altair Inspire for an improved design creation and optimization experience, as well as updates to Altair SimSolid for lightning-quick simulation-driven design. And a new HyperWorks workflow streamlines the process of building a reduced-order model for early conceptual optimization. Along with simulation 2022.1, we announced the release of Open Radios. With Open Radios, Altair aims to accelerate the global pace of innovation and address the ever-increasing multidisciplinary challenges faced by all industries. Staying true to Altair's open architecture philosophy, Open Radios allows everyone to contribute, drive their own innovations, develop and share their models, and experiment by getting inside the code. The release was met with significant community enthusiasm, with 43,000 visitors to openradios.org, 14,000 executable downloads, and over 100 forks of the source on GitHub. during the first three weeks after the release. For more than 30 years, Radios has been a successful commercial software product utilized around the globe to help major automotive OEMs develop five-star rated crash performance vehicles. Aerospace companies simulate hard landings and bird strikes, and consumer electronics manufacturers analyze impact events like cell phone drops. RADIOS is a leading technology for solving transient dynamic events with outstanding robustness, accuracy, and scalability. Additionally, OpenRADIOS can read and run models written with LS Dynas syntax, enabling the community to contribute and harmonize model building. With this move, OpenRADIOS is positioned to be the most accessible, powerful, open source software accurate simulation of complex multi-physics dynamic events. We believe this will enable a highly engaged community to make faster advances in technology and speed up research focused on solving today's most complex challenges. Bringing together many elements of our broad technologies, we announced Altair's digital twin solution, offering tool sets for pre-production, post-production, and in-service applications. These tool sets leverage the dynamic convergence of simulation and data science, and we look forward to seeing further customer successes in this arena. Reaffirming the power of our technology, I'm excited to share that Altair has been ranked the number one generative design software supplier based on a study conducted by ABI Research competitive ranking in this domain. This is a great recognition of our disruptive technology, innovation, and leadership within the scope of generative design, noting that when we introduced OptiStruct many years ago, we were setting a path for the powerful intersection of engineering simulation and design. It is especially gratifying for us when our simulation technology is chosen by companies clearly on the forefront of enabling a more sustainable world. And in Q3, we saw some notable customer successes. A European maker of solar trackers, one of the largest such companies in the market, has chosen Altair's simulation suite as it moves forward with new product development and services related to solar energy and distribution grids. We believe our many customers in wind, solar, and other renewable fields will increase their positive impact at an accelerated pace over the next few years with our solutions. We often speak about ESG impact as related to the sustainability gains in our engineering and manufacturing customers made through the application of simulation and optimization. I would like to highlight some activity in our banking, financial services, and insurance sector, which represent a different type of positive social uplift. This past quarter, we closed two deals in India related to data analytics for lending to micro, small, and medium enterprises. Providing efficient short-term working capital to such enterprises in developing nations is a key factor in nurturing healthy, and sustainable livelihoods in disadvantaged areas. Leveraging the power of data analytics to increase access to equitable financing is smart business and an intelligent approach to localized economic development. Along the same lines, in Q3, we provided data analytics technology to a lender focused on family housing in rural areas, small towns, and areas peripheral to cities where it has been previously difficult to efficiently deploy relatively small capital support for housing at scale. We are proud that our data analytics tools will help families in disadvantaged economies realize their lifelong dreams of home ownership. Also in the financial services market, a major European bank signed a renewal and expansion agreement with us. noting that a large percentage of its usage is for real-time data streaming and visualization of their trading desk dashboards. And a major U.S. bank has substantially increased its data analytics usage through units licensing model, resulting in a 73% year-on-year increase for Altair. Application successes for data analytics also continue to build momentum in our manufacturing, and engineering customer base. A major aerospace manufacturer is working with our AI tools to improve helicopter blade manufacturing. And in APAC, a leading electronics manufacturer is now using Altair's data analytics and AI tools to improve its product performance with a digital twin strategy. Turning to high-performance computing, that business continues to grow well especially related to technology companies engaged in chip manufacturing, where we have a very healthy pipeline. One major player awarded Altair a seven-figure contract representing over 150% year-on-year growth. We also inked a seven-figure deal representing significant growth in a European chip design company. One of our long-term goals is to continue increasing the percentage of our sales attributable to indirect sales channels. We made several recent announcements about new channel partners, including Flow Numerics in Switzerland, Amdosoft in the UK and Germany, Symmetry in the Nordic region, Simutron in South Africa, Virtual CAE in Brazil, and Sextant Consulting in France. As we support these high-quality organizations, we look forward to accelerated growth as we build our bright future together. We remain positive about the remainder of 2022 despite continued global uncertainty and foreign currency exchange rate headwinds. Altair's dedicated teams worldwide are truly a source of inspiration as we continue doing the right things for our customers and the world while we push forward with our outstanding technology developments and applications. Now I will turn the call over to Matt to provide more details on our financial performance and our guidance for the fourth quarter and full year of 2022. Matt?
spk10: Thank you, Jim, and hello to everyone on the call. Thank you for joining us. Altair had a strong third quarter, continuing the success we had in the first half of the year. Despite significant currency headwinds and an increasingly uncertain economic environment, demand for our products remained high, enabling us to deliver year-over-year revenue growth and a meaningful increase in cash flow, driving results above the midpoint of the range on every metric we guided to for the quarter. Calculated total billings for the quarter were $122.9 million. a year-over-year increase of 4.9% in reported currency and 13.3% in constant currency. The strength in billings, and especially in software billings, was supported by increased demand across all geographies and particular strength in our BFSI, technology, and aerospace verticals, all leading to software product and total revenue at the high end of our guidance range for the third quarter. Software product revenue was 103.8 million, or an increase of 1.4%, compared to Q3 2021 in reported currency. Total revenue, which includes services and other revenue, was 119.4 million, or a decrease of 1.6%, compared to Q3 2021 in reported currency. Our recurring software license rate, which is the percentage of software product billings that are recurring, continues to be strong at approximately 93% for the first nine months of the year. As a reminder, a significant portion of our revenues are billed in currencies other than the U.S. dollar and are therefore impacted by changes in FX rates. This was particularly true the past nine months, as we saw the dollars significantly strengthen against other major currencies. Relative to Q3 2021, our software product revenues and total revenues were unfavorably impacted by changes in FX rates of approximately 8.9 million and 9.6 million, respectively. Therefore, on a constant currency basis, In the third quarter 2022, we saw year-over-year software product revenue growth and total revenue growth of 10.1% and 6.3%, respectively. Non-GAAP growth margin, which excludes stock-based compensation and restructuring expense, was 78.6% in the third quarter, compared to 75.2% in the prior year. an increase of 340 basis points, as our software revenue mix, which carries higher gross margins, increased as a percentage of total revenue. In addition, our non-GAAP gross margin, specific to software product revenue, continued to improve as our support costs trended down. Software revenue was 86.9% of total revenue in Q3 2022, compared to 84.3% in the prior year. Over the long term, we continue to expect a general mix shift towards software product revenue, as growth there will outpace services and other revenue. Non-GAAP operating expenses, which exclude stock-based compensation, amortization of intangible assets, and restructuring charges, were $91.7 million compared to 77.9 million in the year-ago period. Adjusted EBITDA in Q3 2022 was 6.8 million or 5.7% of total revenue compared to 14.8 million or 12.2% in the prior year quarter. Adjusted EBITDA was higher than expected in the quarter due to slightly higher than expected revenue combined with our discipline spending. For the nine-month ended Q3 2022, adjusted EBITDA grew 14% to $69.9 million, or 17.0% of total revenue, from $61.3 million, or 15.7% of total revenue, for the nine-month ended Q3 2021. Turning to our balance sheet, we ended the third quarter with $311.9 million in cash and cash equivalents, a decrease of approximately $104.3 million from the prior quarter. The quarter-over-quarter decrease is primarily due to cash used in our acquisition of RapidMiner and other strategic investments, partially offset by free cash flow generated in the quarter. We generated free cash flow of $5.2 million in the third quarter. And when excluding the payment in the first quarter of the legal settlement assumed as part of the World Programming Acquisition, we generated free cash flow of $85.7 million for the first nine months ended 2022, compared to $48.8 million in the nine months ended 2021, an increase of more than 75% year over year. Turning to guidance for Q4 and full year 2022. We are continuing to see a significant FX impact relative to prior year and our previous guidance. In the past several months, the U.S. dollar has continued to strengthen meaningfully against other major currencies, which has a significant impact on our results in reported currency. However, on a constant currency basis, We are encouraged by the strength of our pipeline and resilience of our business model. With that backdrop, we are expecting software product revenue for Q4 in the range of $126 to $131 million, or year-over-year increase of 3.0 to 7.1%. The year-over-year percentage increase is being negatively impacted by more than 10 percentage points due to changes in foreign currency exchange rates. For full-year 2022 software product revenue, we are raising the guidance at the midpoint in constant currency. We are now expecting full-year 2022 software product revenue to be in the range of $488 to $493 million, or a year-over-year increase of 7.5 to 8.7%. the year-over-year percentage increase is being negatively impacted by approximately seven percentage points due to changes in foreign currency exchange rates. At the midpoint, when compared to the guidance we gave last quarter, this represents an increase of $4.2 million, offset by a decrease of $6.2 million due to changes in foreign currency exchange rates over the last three months. We continue to expect services and other revenue to be down in 2022 compared to 2021, consistent with our previous guidance. As a result, we expect total revenue for Q4 2022 in the range of $143 to $148 million, or year-over-year increase of 1.6 to 5.1%. The year-over-year percentage increase is being negatively impacted by approximately 10 percentage points due to changes in foreign currency exchange rates. For full year 2022 total revenue, we are also raising the guidance at the midpoint in constant currency. We are now expecting our full year 2022 total revenue to be in the range of $555 to $560 million. or year-over-year growth of 4.3 to 5.2%. A year-over-year percentage increase is being negatively impacted by approximately six percentage points due to changes in foreign currency exchange rates. At the midpoint, when compared to the guidance we gave last quarter, this represents an increase of 3.7 million, offset by a decrease of 6.7 million, due to changes in foreign currency exchange rates over the last three months. From a cost perspective, we continue to be disciplined in our approach and are especially mindful of the economic uncertainty heading into next year. While we're investing in areas that are driving the business forward, we're reducing our spend as a percentage of revenue in administrative departments, which is helping to drive increases in adjusted EBITDA. For Q4 2022, we expect adjusted EBITDA in the range of 22 to 25 million or 15.4 to 16.9% of total revenue compared to 24.0 million or 17.0% of total revenue in the year-ago period. And for full year 2022, We are also raising guidance for adjusted EBITDA at the midpoint in constant currency. We are now expecting adjusted EBITDA to be in the range of 92 to 95 million or 16.6 to 17.0% of total revenue compared to 85.3 million or 16.0% of total revenue in 2021. At the midpoint, when compared to the guidance we gave last quarter, this represents an increase of $1 million, offset by a decrease of $1.5 million due to changes in foreign currency exchange rates over the last three months. Compared to prior year, our 2022 expected adjusted EBITDA is being negatively impacted by more than $7.5 million due to changes in foreign currency exchange rates. And finally, we are also raising the guidance for full year 2022 free cash flow by 4 million at the midpoint to a range of 14 to 18 million, which includes the 65.9 million payments for the existing litigation judgment against World Programming that we assumed as part of our acquisition and was paid in January. Excluding this payment, we're expecting free cash flow for the year of approximately 82 million at the midpoint, compared to 53.8 million in 2021, representing an increase of 52%. As a reminder, our cash flow expectations are sensitive to billings and collections patterns, which fluctuate seasonally. In particular, our historical pattern has shown free cash inflow in the first half of the year primarily from collections on billings from Q4 and Q1, and a smaller free cash outflow in the second half of the year. We're expecting that pattern to continue this year. We've provided detailed guidance tables, including reconciliations to comparable GAAP amounts and the impact of changes in foreign currency exchange rates in our earnings press release, which was issued after close of market today. With that, we'd be happy to take your questions. Operator?
spk06: As a reminder, if you'd like to ask a question at this time, you'll need to press star 1 1 on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from the line of Dylan Becker with William Blair. Your line is now open.
spk09: Hey, guys. Thanks for taking the questions and a nice job here. Maybe starting off with you, Jim, if you think about the outlook and kind of perception you're hearing from the core customer base, sounds like the demand environment still remains pretty healthy despite everything that's going on. But Q4, Q1, typically fairly seasonal for you guys and important as well, too. So as those customers are aligning budgets, love to get a sense of what you're hearing, how they're prioritizing budgetary allocation, too. simulation types of tools and how you can kind of help support the operational efficiency needs that they're trying to address.
spk11: Hi, Dylan. First of all, I just want to let you know that it's late in Thessaloniki, Greece, so you may hear my voice a little raspy here this evening. I'm speaking from a hotel room, traveling here, visiting my team here. So, As you can imagine, I'm asking this question all day long of my chief revenue officer, of all my country managers, of the people who run the indirect business, because I'm reading the newspapers just like you guys are. It's somewhat surprising to me, if I'm really honest, but the pipeline remains extremely strong. we're not seeing like any sense, any hint of, you know, deals, you know, being delayed or, you know, slowed down or taken back or any of that. It just somewhat surprisingly continues to be, you know, fairly robust. And I think, you know, the rationale is just that, you know, customers feel so much pressure to, continue to put out competitive products and we actually help them to reduce cost and there's this whole move towards applying data science and digital twin technology as well and so that's really kind of giving us almost a renaissance that we see so it continues to be actually very very strong for us
spk09: That's encouraging and good to hear. You touched on the data analytics piece there and highlighted the rapid miner acquisition and your prepared remarks. I wanted to maybe dig in to the value proposition there as well, too, how you think about that kind of coalescing and fitting into the broader data analytics vision. Sounds like it really kind of helps round out the functionality of the suite, but maybe how you're thinking about what customers are saying there and maybe how that can help incentivize the data analytics conversion towards the unit model as well.
spk11: Yeah, the unit model really works when you have a sufficient number of products that are available for the customer to use with their units, first of all. And so I think we finally sort of crossed that threshold where we have a really nice array of technology across a lot of different areas of interest for these customers. The rapid miner acquisition brings some overlap with what we had before, but we think their technology is superior, frankly. They also had a very, very deep install base in the manufacturing sector, which of course is very, very important for us. And just a lot of years, 20 years of experience with a lot of use cases in the manufacturing sector that really helps us to sort of cement what we're trying to do. And they, and they built, you know, all the major connectors, you know, that are relevant to manufacturing, but lots and lots of smaller connectors as well in the manufacturing space. So very, very strong, you know, in that direction. Then the last piece is they, you know, we were working on our own cloud platform, but frankly speaking, what they've built, we think is, is just really world-class. and frankly, better than what we were building. And so, you know, we just made the decision. This is just a really great team, great products, going to fit really well. We're going to sunset a couple of our products and move some of our technology that is really great. I mentioned it during the call, decision tree technology, for example, into RapidMiner product. But now we have this just absolutely best-in-class array from the data prep side all the way through data science. Pentopticon gives us best-in-class visualization tools, and we're just really well-prepared for the whole digital twin revolution because our SmartWorks IoT platform is also very, very strong now. We're starting to just see a lot of traction. I mean, it's just a great, great position for us.
spk02: Great to hear. Thanks for taking the questions, guys.
spk06: Our next question comes from the line of Ahmad Khalil with Oppenheimer. Your line is now open.
spk04: Hey, thanks for taking my question, and congrats on the quarter. I guess just a more nuanced follow-up to Dylan's question, Jim, would you say there are differences among your different customer verticals?
spk11: terms of how they're viewing the macro environment so it's a good question to be honest it seems to be uh pretty solid across the board um i'm i'm not really uh getting getting any input, and I perhaps am not asking the right questions, so I'm going to probably need to dig further now that you've asked this. But frankly speaking, I'm just not seeing, for example, auto or aero. If you look at our numbers, our expansion numbers, our new account numbers, and all the renewals, you know, they're all robust, and, you know, the tech business, very, very strong. And then a lot of strength, you know, across simulation, our HPC business, and the data analytics business. So it's, I mean, it's fairly across the board, frankly, right now. You know, one can never, you know, know, you know, there's all kinds of macro things out there, of course. But right now, you know, the pipeline just feels very, very solid.
spk04: That's great. Thank you. And then one for Matt. I don't know if this was disclosed. I didn't see it in the press release, but is RapidMiner adding any revenue to this year?
spk10: Yeah, it's adding very little this year, almost nothing in Q3, but we're expecting a couple million to come in in Q4. Thanks, and that's all for me.
spk06: Our next question comes from a line of Blair Abernethy with Rosenblatt. Your line is now open.
spk03: Hi, guys. Nice quarter. Can you hear me okay?
spk02: Yeah, hi. Hi, Blair. Thank you.
spk03: Hey, Jim. Sorry, I just was getting cut off there. Just another question on RapidMiner, if I could. As you look down the road, sort of three or four years down the road, Jim, is this potentially a platform where you can consolidate all of your various data analytics and ML offerings?
spk11: The answer simply is yes. So yes, that's exactly right. Especially as the market and customers, especially enterprise customers, want to move to cloud. It just really gives us a fantastic platform for bringing everything in. And we were already developing. So I mean, everything we've developed, such as our whole ML Ops capability that was in SmartWorks Analytics, It's just going to plug right in to the RapidMiner cloud solution. So, in fact, that is exactly where we see things going, and pretty quickly, actually.
spk03: Okay, great.
spk11: By the way, one other thing I was just going to mention, one other thing I didn't mention earlier with Dylan's questions, RapidMiner is a great brand. It's just extremely well-known. I'm here in Greece and was at the university the other day in one of the data science departments with a lot of students, and they had all heard of RapidMiner. So it's just really nice to have a brand that strong because I think it will help us
spk03: Okay, excellent, excellent. And what's the sort of the, you know, just in the next, let's just say the next year, the next few quarters, what's sort of the go-to-market plan with the RapidMiner product today, and at what stage do you move it into the Altair units model?
spk11: Oh, it's going to move into the units model very, very quickly here, and We're basically pushing units across the board now with all the customers for data analytics. We're pretty much moving away from any named user business. Most of the renewals, we're trying to move them over to the units model as well. And that way, they have access to all the applications. It's just much easier for us to grow the business going forward. And we're making a couple of other adjustments to make that easier and to accelerate that, which you'll begin to see basically throughout 2023. And I think it's going to dramatically increase the opportunities that we have for grabbing share
spk03: Okay, great. Just shifting gears a little, in your prepared remarks, you called out a few larger deals in data analytics side of things and elsewhere. And I'm just wondering, given the cloudy macro environment, are you seeing a change here at all? Are you seeing more large deals happening because you've got more product to offer or Any sort of change in terms of the size of things you guys are booking?
spk11: I mean, it's a natural transition that we as a company have been making from selling, if you will, individual tools to solutions to really selling the whole portfolio into accounts. And more and more, we're selling a little higher level, more top-down into accounts. We still do a lot of bottom up, but it's bottom up top down and we are selling the entire portfolio. And we think that, that, uh, you know, the data science and data analytics offering combined with everything else that we do as, as a business is very, very attractive now to, uh, to customers and our simulation products are really, really advancing. Um, it, it, it sort of goes unnoticed, but we've been re architecting everything. and modernizing everything. So there's just real strength across the product portfolio.
spk03: Okay, great. Thanks, Jim.
spk02: Thank you.
spk06: Our next question comes from the line of Matthew Murakami with RBC Capital Markets. Your line is now open.
spk12: Hi, this is Matt Murakami on for Matt Hedberg. Thank you for taking my call. We just wanted to ask, you know, when looking out at some major themes that you're seeing from your customers and in the market, what areas of the market do you feel an emphasis to invest in either organically or inorganically?
spk11: So we're seeing a lot of opportunity in technology and aerospace and in banking. You know, those three sectors are you know, growing really, really well. And we just see a lot of headroom in all three of those. Automotive still has headroom because, uh, you know, we're just beginning to penetrate. We just had a win on the data analytics side in Europe. Um, The rapid miner technology is very, very interesting and attractive to a lot of customers in automotive as well, as well as all the manufacturing customers. But if you're asking me where we're really seeing the most headroom, it's those first three. But if I look at new accounts, we're seeing a lot of new architectural engineering accounts. there's a lot of business really across the board.
spk12: Perfect. Thank you so much. And I'm just going to follow up on that. You know, with M&A being, you know, part of your guys' strategy, you know, the past few years, you know, as we approach this more uncertain macro, does this kind of create, you know, some pause in the M&A strategy or do you think this is an opportunity or, you know, from a value perspective, creating some more opportunity in M&A?
spk11: I think it may create some more opportunity as time goes on. In general, I'm feeling like there's no really huge moves that we're going to make in 2023. I think we have some things to digest now. We needed to do some of these moves to fill out the solution set, particularly in data analytics. And I think we've done a lot of good work there. There's still obviously a pipeline of things that we're looking at, but it's smaller, quite frankly. And now we need to digest and, frankly, just put our heads down and grow the business.
spk12: Thank you so much, and congrats on the good quarter.
spk02: Thank you.
spk06: Our next question comes from the line of Gal Munda with Wolf Research. Your line is now open.
spk08: Hi, everyone. Thanks for taking my questions. So the first one, maybe, Matt, for you, just thinking about the digestion period that Jim mentioned and the fact that RapidMiner will contribute a little bit to the top line but also brings in the cost base. How are you thinking or how are you feeling about the next year in terms of this call space when you look into, especially in light of the, you know, the 23 targets they introduced a year ago?
spk10: Yeah. Hey, y'all. Thanks for the question. So, when we're looking at RapidMiner, it is such a great piece of technology that we were able to acquire and bring in. you know, obviously contribute some top line, not a lot. But one of the things that we're doing is looking at cost synergies in terms of other open positions that are already existing within the business. And there's quite a bit of very technical talent that exists at RapidMiner that we now get the benefit of. But I do think that there's some opportunity for some cost synergies to fold in now and bring the teams together and maybe positions that we would have hired for before, we can now fill with just a really, really talented team. And so, you know, sort of the short answer is RapidMiner alone. I don't see significantly impacting our 2023 target materially one way or the other, actually. I think we can bring it into our portfolio and make it work. from a cost structure such that it's not a drag on our EBITDA target.
spk08: That's really clear. Thank you. And then, Jim, maybe just focusing on SYNFOL, as you mentioned, you know, continuous progress. In the past, you've also talked about any types of physics that you're trying to introduce. Can you talk a little bit more about that? And, you know, maybe the good question, the overarching kind of question that I have is, at what stage do you think, or maybe it has happened already with when your sales force goes out and kind of offers the suite of products, at what stage SimSolid becomes a normal part of the inclusion of the contract discussions? So it becomes more of a mainstream product rather than a novelty, something to show, something to walk customers with?
spk11: Well, it's not a novelty at this point. And it's It is the fastest growing product from a usage standpoint in the portfolio by far and continues to really run. Most of the success we're having is in the design community, coupled with the Inspire product or on a standalone basis. And we're just beginning to start to really poke into the traditional analyst community as well. We do three releases of some solid a year, and every one of them is just chock full of capabilities. And it's just an extremely impressive tool. So at this point, it's sort of mainstream. But it's also a great discussion starter. It's similar to the SAS language compile capability. The pipeline is very robust for those discussions as well. And then they bring us to look at the entire portfolio, use the units model. And so both of those products are really nice for generating activity to fill the funnel. I don't know if I answered your question, but... It is.
spk06: No, you're good. Our next question comes from a line of Mark Schappel with Loop Capital. Your line is now open.
spk01: Hi, thank you for taking my questions. And just building on the earlier question around SimSolid, you know, Jim, in your prepared remarks, you noted new innovations in your simulation portfolio, particularly around Radios and Simulation 2022. Did you release any new product, significant or meaningful product innovations around SimSolid this quarter? If I recall correctly, you know, multi-physics capabilities were something that were being looked at for that product.
spk11: So there's nothing... Nothing in that arena. We have had some breakthroughs, you know, in the lab, if you will, around electronics, for example. But it's going to take, you know, probably a year or so before we release something that, you know, may, you know, that the market is going to see. So, yeah. At the same time, though, we're constantly releasing new capabilities, particularly in the nonlinear space and contact and all of that. So SimSolid continues to really go fast, and we're adding developers to it. We're adding electronics developers now to it and just really focused on doing some really interesting things going forward.
spk01: Great, thank you. And then, Matt, in your prepared remarks, you noted that you're looking to reduce some spend in some administrative areas. I was wondering if you could provide a little bit more color around that.
spk10: Yeah, and that's really much more to just talk about where we plan to invest and where we plan to cut back as a percentage of revenue. And so as we look ahead to the future, we're just very mindful about the need to to continue to invest in product development. That's important for us. And in sales capacity, that's also important for us. But areas like G&A, as a percentage of revenue, we expect that to just continue to come down. So absolute dollar spend, of course, will increase, continue to increase a bit, but at least in terms of a percentage of revenue, we're expecting that to come down faster than we would say in in development or in our sales capacity. So, yeah, and when I think about those departments, I'm thinking about the typical back office functions that you would expect, so finance, legal, you know, HR, things of that nature where really we can just start to make use of our scale. Great. Thank you.
spk06: Our next question comes from the line of Andrew Diggisberry with Barenburg. Your line is now open.
spk07: Hi, this is Stephanie on for Andrew Diggisberry. Thank you for taking the question. So are you concerned about any indirect impact from U.S. export control rules that were imposed a few weeks ago for tech transfers to China? Thank you.
spk11: Thanks, Stephanie. I mean, we're paying attention and we obviously have to follow the rules. You know, for Altair, relative to some of the other, let's say, more EDA-oriented companies, China's a relatively smaller percentage of our business. And a lot of our business is in sort of the commercial enterprises like automotive and such, heavy equipment, those sorts of things. So, you know, there has been impact for us, no doubt, you know, as the number of customers that we can or cannot sell to continues to decline. There's certainly some impact, but we see, you know, business out of China will continue to grow even throughout, you know, even with those restrictions.
spk02: Thank you. Thank you.
spk06: That concludes today's question and answer session. I'd like to turn the call back to Jim Scappa for closing remarks.
spk11: I just want to say thank you for everyone's attention and interest in Altair, and thanks to my team for all the work preparing everything and having another great quarter. Thank you.
spk06: this concludes today's conference call you may now disconnect
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