Altair Engineering Inc.

Welcome and thank you for attending Altair's Earnings Conference call for the fourth quarter and full year 2022, ended December 31st, 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 fourth quarter and full year 2022 performance, and guidance for the first quarter and full year 2023, which can be accessed in 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 earlier today. For a further discussion of the material risk, 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. The 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 re-advise 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, Dave, and welcome to everyone on the call. Altair had an outstanding fourth quarter, achieving record high software revenue and showing exceptional momentum for the full year. Software product revenue in the fourth quarter grew by more than 25% year over year on a constant currency basis, contributing to full year software product revenue growth on a constant currency basis of 17.6%. The strength in fourth quarter billings was led by software across all geographies and particular strength in our technology, automotive, and aerospace verticals. Software product revenue as a percentage of total revenue for 2022 continued a strong positive trend at 89% compared to 85% in 2021, and our recurring software license rate remains high at 92% for the year. Even in a year in which exchange rates had a material negative effect on revenue and profitability, Altair continued to significantly expand our margins and cash flow. Adjusted EBITDA margin for the fourth quarter was more than 24% versus 17% in the prior year. Adjusted EBITDA grew 27% in 2022 to $108.6 million or 19% of revenue versus 85.3 million or 16% of revenue in 2021. This performance is clearly well above expectations, and I am extremely proud of Altair's global team for their exceptional achievements. The full year results demonstrate a continuing trend of increasing mixed shift towards software revenue and higher gross margins. Matt will speak about this and other areas we are focusing on to drive our increasing margin profile. Altair continues to evolve its product to position as the leader in computational science and artificial intelligence. Our vision for convergence and the technologies we've brought together over the last 20 years in simulation, high-performance distributed computing, data analytics, and AI are maturing into a powerful and integrated offering. Altair One, our cloud innovation gateway, is rapidly gaining traction with over 150,000 users signed up and already using the application marketplace and self-service support and documentation. Altair One capabilities will include tracking user activity through a digital thread, interactive applications in the browser, data anywhere, and on-demand compute. The single pane of glass approach allows customers to efficiently leverage elastic on-demand multi-cloud architectures to avoid vendor lock-in and use Altair units for both software and hardware. Altair RapidMiner, our data analytics and AI platform, is integrating all capabilities, including data preparation, data science, deployment, monitoring, code-free and code-friendly development, and multi-language support, including the SAS language. We also support multi- or single-tenant cloud instances and installation on-premises. Altair Hyperworks, our design and simulation platform, is built around our Unity framework user experience with components of all three products, HyperMesh, SimLab, and Inspire moving to a common data model and shareable components to build solutions tailored for specific markets and ultimately to run natively in the cloud. Our solver teams are integrating as well and focused on multidisciplinary simulation and optimization and we are excited about our implementation of physics-based AI, which is releasing shortly. Altair HPC Works, our HPC and cloud platform, is similarly being componentized to deliver market-focused solutions more efficiently, including workflow dependency management, software license costs, and allocation management, and storage cost and management. The automotive vertical had some notable fourth quarter wins, including exceptional performance specific to electric vehicles. At one electric vehicle manufacturer, the number of users more than doubled through 2022. This led to an 88% expansion in revenue. Hundreds of users at the company are now using Altair's tools for many applications, including noise and vibration, chassis design, vehicle systems, structures, manufacturing cell design, and energy systems development. And at a second electric vehicle manufacturer, we saw a seven-figure expansion representing 50% year-on-year growth driven by a broad range of Altair simulation, high-performance computing, and data analytics tools. In the automotive racing sector, we received a seven-figure commitment for our software technology. Focused areas for the team include both combustion and electric drivetrain development. We are especially pleased to be core to efforts at driving electric vehicle performance as the carryover effects from racing will help move broader electrification forward. The aerospace vertical, including commercial aircraft, defense, and space systems, had a very strong fourth quarter for Altair. After extensive evaluation, a major European aerospace company selected SimSolid as its desktop solution for stress engineers to greatly accelerate the evaluation of designs by performing structural analysis on fully featured CAD assemblies without the need for time-consuming CAD cleanup and meshing. FIMSolid's incredible speed, accuracy, and rapidly expanding solution types is why it was selected by this and other major engineering organizations to enable simulation-driven design. Some of our other wins in the quarter included the following. A major aerospace company awarded Altera a seven-figure agreement for simulation and data analytics, representing 30% year-on-year growth in that account. government aerospace agency committed to Altair's data analytics tools to help develop avionics subsystems. A defense and space contractor signed a seven-figure deal that represented an 86% revenue increase. An EMEA aerospace company committed in the quarter to an increase which brings its annual Altair billings to more than a million euros. And finally, a space system supplier awarded Altair a seven-figure contract representing significant expansion centered on using Altair Unlimited Appliance for a broad range of activities, including the development and production of satellites, space transportation systems, and defensive systems with a heavy focus on electromagnetic simulation. Furthering our aerospace industry relationships, We recently announced that Altair has become a partner of the Campania Aerospace District, one of Italy's and Europe's most important aerospace districts. ZHC was established in 2012 with the objective of stimulating collaboration between research centers, universities, and companies in Campania to create business and growth opportunities. The Altair partnership aims to bring reliable, cutting-edge technology solutions and digital twin and data analytics to support and empower the aerospace industry in Campania and around the world. In the BFSI vertical, our growth path continues to progress rapidly. We signed a new logo, one of the top five insurance multinationals in EMEA, to a significant purchase order to effectively leverage its existing SAS language tools with Altair's modern and cost-effective RapidMiner platform. Cost reduction and key business strategies included migrating data and analytics platforms to a third-party cloud provider, providing an on-premise capability in parallel to accommodate transition to cloud, and delivering democratization of data and analytics business users which increased the value and efficiencies of self-service. Another seven-figure data analytics deal in BFSI converted an existing financial services customer from a named user licensing structure to Altair units. This allowed for a significant broadening of portfolio applications and an enterprise-wide standardization direction for Altera's tools. We believe that as we continue converting data analytics customers to units-based licensing, we will see a common theme of application expansion and user-based growth. Our HPC business had some notable wins in EMEA in the fourth quarter, including two seven-figure deals, one with a major semiconductor company and another with a major materials supplier. and we were excited to announce the U.S. Department of Energy Argonne National Lab deployed Altair HPC Works to fast track scientific discoveries on its supercomputing systems. Argonne is utilizing the technology to help scientists find ways to slash greenhouse gas emissions through research into fusion energy, better biofuels, safer, more reliable next-generation nuclear-efficient reactors. Altra has often been well ahead of market technology trends. This has consistently been true when HPC computer hardware innovations drive next-generation computational science software. We recently announced a $10 million investment in Xscape Photonics, a Columbia University startup led by three of the leading researchers in the field of photonics and advanced semiconductor design. XSCAFE is focused on commercializing innovative photonic technology for ultra-high bandwidth connections in high-performance computing systems. The emphasis in HPC over the last 25 years has been on increasing compute performance. We believe significantly increasing data transmission speed and throughput is now essential as applications scale exponentially, especially in data science and AI. The traditional electronic method of moving vast amounts of data requires significant space and power and produces substantial heat, leading to performance challenges. Xscape's novel approach uses photonics chip technology to drastically reduce power consumption and heat while increasing speed. As part of our ongoing effort to strengthen our ties with educational institutions, we were pleased to announce that Altair and TU Delft signed a campus-wide license agreement. TU Delft is the Netherlands' oldest and largest public technical university, with 30,000 students. This new agreement with TU Delft underscores our commitment to top-level research and high-quality education to prepare future engineers, data scientists, and developers for success. We are excited that the America's Cup sailing competition team, New York Yacht Club American Magic, recently announced a major partnership with Altair to leverage Altair's technology for computational science and AI. Our work with them includes a predictive data analytics system to analyze and understand sailing vessel performance and a custom-made AI bot to enable the control and monitoring of sailboat simulations. The 2023 Enlighten Award honors the greatest sustainability and lightweighting advancements that reduce carbon footprint, mitigate water and energy consumption, and leverage material reuse and recycling efforts. This year, we established a new award category for Responsible AI to recognize exemplary use of data analytics and AI that delivers substantial sustainability benefits through the automotive value chain. 2022 was a year of extraordinary achievement for Altair as we navigated continued global uncertainty and foreign currency exchange rate headwinds. We entered 2023 with significant optimism for continued progress and a sincere belief that our work helps the world be healthier and more sustainable for everyone. Now I will turn the call over to Matt to provide more details on our financial performance and our guidance for the first quarter and full year 2023. Matt?

Thank you, Jim. Hello to everyone on the call, and thank you for joining us. We are very pleased with our strong fourth quarter results, which capped off what was one of the most successful years in our long history. Demand for our products continued to be strong, and despite significant currency headwinds, We ended 2022 with record high annual revenue and adjusted EBITDA. Since our revenues and expenses are transacted in currency other than the U.S. dollar, our reported results may be significantly impacted by changes in foreign exchange rates. Therefore, throughout my remarks, I will make reference to growth rates in both reported and constant currency. Starting with Q4 numbers, calculated total billings for the quarter, were $187.9 million, a year-over-year increase of 18.1% in reported currency and 23.2% in constant currency. The strength in billings was led by software across all geographies and with significant customer wins in our technology, automotive, and aerospace verticals, all leading to software product and total revenue above the high end of our guidance range for the fourth quarter. Software product revenue in Q4 22 was 145.0 million, a year-over-year increase of 18.5% in reported currency and 25.5% in constant currency compared to Q4 2021. Software product revenue growth was led by expansion in simulation and new customer acquisitions in high-performance computing. while renewals continue to be strong across all product lines. Total revenue in Q4 2022, which includes services and other revenue, was $160.4 million, a year-over-year increase of 13.9% in reported currency and 20.6% in constant currency compared to Q4 2021. Our recurring software license rate which is the percentage of software product billings that are recurring, continues to be strong at approximately 92% for the year. Non-GAAP gross margin, which excludes stock-based compensation and restructuring expense, was 80.2% in the fourth quarter, compared to 78.1% in the prior year, an increase of 210 basis points. Software product mix helped drive this increase, as our software revenue, which carries higher gross margins, increased as a percentage of total revenue. Software revenue was 90.4% of total revenue in Q4 2022, compared to 86.9% in the prior year. Over the long term, we continue to expect a general mixed 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 92.6 million, compared to 87.4 million in the year-ago period. Adjusted EBITDA in Q4 2022 was 38.7 million, or 24.1% of total revenue, compared to 24.0 million or 17.0% in Q4 2021, an increase of 61.7%. This increase compared to the prior year quarter, as well as relative to our expectations, was driven by the increase in software revenue in the quarter, combined with a disciplined approach to spending. Now looking at the full year, 2022 was one of the most successful years in our history, and we made considerable progress towards our goal of 20% adjusted EBITDA exiting 2023. Calculated billings for the year were $607.6 million, a year-over-year increase of 12.5% in reported currency or 18.5% in constant currency. Software product revenue for the year was $506.5 million, a year-over-year increase of 11.6% in reported currency and an impressive 17.6% in constant currency. And total revenue for the year was $572.2 million, a year-over-year increase of 7.5% in reported currency and 13.1% in constant currency. The strength in software revenue helped drive our non-GAAP growth margins for the year to 80.0%, compared to 76.9% in 2021, a 310 basis point increase, and marking the first time our non-GAAP gross margins have reached 80% in any fiscal year. Turning to operating expenses, we invested in areas for growth, focusing on expanding our sales capacity by more than 10% year over year, and driving product development, both organically and through strategic acquisitions. At the same time, we're continuing to reduce costs in select other areas. This helped to drive adjusted EBITDA for the year to 108.6 million, or 19.0% of revenue, compared to 85.3 million, or 16.0% in 2021, a year-over-year increase of 27.4%. We set out a vision almost two years ago of achieving 20% adjusted EBITDA margin exiting 2023 by driving software revenue growth and adding 200 to 300 basis points of margin each year. I'm proud to say we're well on our path to achieving that goal and beyond. Turning to the balance sheet, we ended the year with $316.1 million in cash and cash equivalents, a decrease of approximately $97.6 million from the prior year. Some of the larger impacts to our cash balance in 2022 include approximately $145 million paid for acquisitions, a $66 million payment for the existing litigation judgment against world programming that we assumed as part of our acquisition, and $20 million in share repurchases, which were partially offset by a net increase of $32 million as a result of new convertible notes and partial retirements of old converts, and strong cash flow during the year. Free cash flow for the year was $29.9 million, which included the $66 million world programming judgment. When excluding this acquired judgment, free cash flow was almost $96 million, an increase of 78% year over year. We're very pleased with our increase in profitability and our ability to generate significant free cash flow in 2022. Let's turn to guidance for Q1 and full year 2023. We've provided detailed guidance tables in our earnings press release, including reconciliations to comparable GAAP amounts. We're continuing to see an FX impact relative to 2022 as foreign exchange rates changed throughout last year. To provide more clarity on the FX impact to our expectations, we've provided growth rates in both reported currency and constant currency in our guidance tables. For Q1, we expect software product revenue in the range of $139 to $142 million, a year-over-year change of negative 1.3%, to positive 0.8% in reported currency, and an increase of 3.7 to 5.9% in constant currency. For full year 2023, we expect software product revenue in the range of 550 to 560 million, a year-over-year increase of 8.6 to 10.6% in reported currency, and 9.5 to 11.4% in constant currency. Beginning in January 2023, we discontinued reselling a non-strategic lower margin product line resulting from a prior acquisition, which contributed approximately $7 million of software product revenue in 2022, and therefore the discontinuance impacts 2023 growth rate by slightly more than one percentage point. We expect services and other revenue to stabilize in 2023 compared to the sharp declines we saw in 2022, though still slightly down year-over-year, particularly in the first half of the year. As a result, we expect total revenue for Q1 2023 in the range of $155 to $158 million, a year-over-year decrease of 3.0 to 1.1% in reported currency, and an increase of 2.0 to 3.9% in constant currency. For the full year 2023, we expect total revenue in the range of 613 to 623 million, a year-over-year increase of 7.1 to 8.9% in reported currency, and 8.0 to 9.7% in constant currency. From a cost perspective, we've been successful in our disciplined approach to spending and expect to carry that approach into 2023. For Q1 2023, we expect adjusted EBITDA in the range of 34 to 36 million or 21.9 to 22.8% of total revenue compared to 46.6 million or 29.2% of total revenue in Q1 2022. For the full year 2023 we expect adjusted EBITDA in the range of 120 to 130 million or 19.6 to 20.9 percent of total revenue compared to 108.6 million or 19.0 percent of total revenue in 2022. And finally for the full year 2023 we expect free cash flow in the range of 108 to 116 million, which represents a substantial increase year over year. As a reminder, our cash flow expectations are sensitive to billings and collection patterns, which fluctuate seasonally. In particular, our historical pattern has shown a larger free cash inflow in the first half of the year, primarily from collections on billings from Q4 and Q1, and a smaller free cash inflow in the second half of the year. We're expecting that pattern to continue this year.