Altair Engineering Inc.

Good day and thank you for standing by. Welcome to the Altair Engineering Inc. Q2 2024 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 will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Stephen Palntag, Invest Regulations. Please go ahead.

Good afternoon. Welcome and thank you for attending Altair's earnings conference call for the second quarter 2024, end of June 30th. I am Stephen Palntag, Altair's head of investor relations. And with me on the call are Jim Scaffa, founder, chairman, and CEO, and Matt Brown, chief financial officer. After market closed today, we issued a press release with details regarding our second quarter 2024 performance and guidance for the third quarter and full year 2024, which can be accessed on our investor relations website at .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 just claim 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 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, Stephen,

and welcome to everyone on the call. During the second quarter of 2024, Altair maintained its strong trajectory. Total quarterly revenue was $148.8 million, with software revenue accounting for $135.4 million, both surpassing the high end of our guidance for the quarter. Adjusted EBITDA was $17.3 million, above the midpoint of our guided range. Altair's Q2 results underscore the robustness of our software product lineup, which continues to empower customers with industry-leading computational intelligence. Software revenue on a constant currency basis grew .6% year over year in the second quarter. Software revenue as a percentage of total revenue grew to 91% compared to .8% in the second quarter of 2023. Altair's success in the quarter spanned broadly across technologies and industry verticals, with notable strength in aerospace and defense. Last month, we unveiled exciting product enhancements with the release of Altair Hyperworx 2024, which includes substantial advancements in artificial intelligence. This further solidifies our platform status as a leading environment for AI powered simulation driven innovation. Hyperworx 2024 includes improvements in AI driven engineering, design of mechanical and electronic systems, and design optimization driven by simulation. It's the only platform that offers a unified, modern user experience across any geometry, physics, and complexity at every stage of the product development lifecycle, from design to in-service. With AI embedded workflows, photorealistic graphics, and a unified backend data system, Altair Hyperworx is the foundation upon which many of the world's most innovative digital engineering practices are being built. In June, we announced that Altair was named a leader in the Gartner Magic Quadrant for data science and machine learning platforms for offering Altair RapidMiner. Gartner's Magic Quadrant, especially for data related technologies, is widely regarded as an influential tool in the IT industry, and serves as a key reference point for many organizations when evaluating technology vendors. The evaluation is based on specific criteria that analyzes a company's overall completeness of vision and ability to execute. Being named as a leader in this ranking report validates what we have known for years. Altair has one of the market's most unique and comprehensive offerings for data analytics and machine learning. For us, this placement is a testament to our unmatched vision and business model, which has defined us since our inception as pioneers of the forefront of technological innovation and computational intelligence. I am proud of where Altair stands today and look forward to the strides we continue to make each day. In July, we announced the acquisition of Metrix Design Automation, a Canadian company with a game-changing simulation as a service business model for semiconductor electronic functional simulation and design verification. The Metrix Digital Simulator, DSIM, when combined with Altair silicon debug tools, will deliver a world-class advanced simulation environment with superior simulation and debug capabilities in the EDA and semiconductor space. The cloud-based business model has the potential to transform the semiconductor space by making high-caliber EDA design tools much more affordable and accessible for companies looking to aggressively scale out simulations to accelerate design cycles. Today, integrated circuit design verification has high licensing costs and may require hundreds and sometimes thousands of seats to run a single-chip simulation. Additionally, these tools run on desktop machines and are not typically cloud native or cloud enabled. The Altair and Metrix solution delivers the flexibility to run as a desktop app on your own servers or in the cloud and can run very large regressions with customers paying only for what they use. Customers will be able to run simulations concurrently and at scale, removing massive amounts of time and cost from the traditional design cycle. By combining our -in-class software with Metrix cloud-based simulation as a service, we are excited to bring this groundbreaking technology to our EDA and semiconductor customers. We are unique in our ability to merge simulation with industry-leading workload and workflow optimization technology, serving as a true partner for companies embracing innovative tools and resource delivery models in this highly specialized and high-stakes industry. Customers now have a choice in design verification. DSIM will be available through Altair One, Altair's cloud innovation gateway, where it will also be available for desktop download. Altair's software portfolio continues to demonstrate leadership across industries. This quarter, we were thrilled to highlight the role our technology is playing throughout the development cycle for many teams in their quest for victory in the 37th America's Cup beginning August 22. Our work with America's Cup teams demonstrates the power of Altair's computational intelligence vision on a global stage like no other. These are world-class organizations always looking to find new ways to innovate and succeed just as Altair is. Their use of Altair's solutions and expertise is helping design -the-art AC75 yachts. Altair is the official computational science and artificial intelligence partner for the New York Yacht Club American Magic team, as well as an official supplier of LunaRosa product Borelli, and we are excited to watch the races and experience the outcome of these remarkable athletes and technologists. In the second quarter, we partnered with Hewlett-Packard to enrich the Altair Material Data Center with HP's proprietary material information, enhancing its utility for designers, engineers, and scientists. This aims to overcome traditional 3D printing challenges and improve component design for multi-jet fusion and metal jet printers. The collaboration bridges the often siloed functions of design and production of 3D printed parts. Now engineers with access to the Altair Material Data Center will be able to use HP material data to design efficient components, conduct structural analysis using finite element analysis, and predict and fix manufacturing defects during design and simulation. The collaboration will also benefit users of Altair-inspired Print3D, which accelerates the creation, optimization, and study of innovative, structurally efficient, additively manufactured parts by providing a fast and accurate toolset for the design and process simulation of parts made by metal binder jetting. Customers within our automotive vertical continue to adopt our cutting edge technology. In the quarter, a motorsports company with aspirations of joining the F1 grid signed a six-figure, three-year deal to leverage our comprehensive suite of simulation and high-performance computing solutions. The organization believes our simulation-driven design philosophy and will use SimSolid and Inspire throughout the design process for rapid design exploration. The value, breadth, and flexibility of the Altair Unit software licensing model continues to be an important factor in securing new deals. In the banking, financial services, and insurance vertical, we welcomed one of the largest property and casualty insurance companies in the United States as a new customer. This organization will leverage Altair SLC, our powerful SAS language compiler, to construct advanced machine learning models, perform data preparation, and execute data transformations. Their decision not only emphasizes the quality of our data analytics and AI platform, but also highlights the significant potential for growth in this sector. In addition, a Canadian bank leveraging our data analytics platform expanded its six-figure annual spend with Altair by over 200%. We also maintained strong performance within the aerospace and defense vertical. We signed an eight-figure, three-year contract with a multinational aerospace company, our largest deal ever. The commitment was driven by Altair HyperMesh, part of the Altair HyperWorks design and simulation platform, which continues to provide superior capabilities for structural modeling and analysis. With HyperMesh, we continue to expand our presence in mission-critical workflows at some of the world's most important companies. In addition, a European aerospace, defense, and security company signed a seven-figure agreement representing a 49% -on-year expansion compared to 2023. This agreement grows our presence in simulation, high-performance computing, and data analytics. Underscoring the convergence of these domains and Altair's unique ability to deliver comprehensive solutions. This year, Altair established a new vertical focused on healthcare and life sciences, where we already had significant business in the areas of HPC and simulation, and won our first data analytics deal in Q1 2024. During the second quarter, we saw several new sales in our pipeline of data science activities significantly grow in this vertical, especially for our SAS language solutions and our graph database technology. Our indirect sales channel remains an important contributor to our overall revenue and a priority moving forward. A clear testament of this commitment is the addition of three new channel partners during the second quarter. Backspan, based in Seattle, will offer customers Altair's full suite of comprehensive data analytics and AI solutions found in the Altair RapidMiner platform. DevoTeam and Symantec Partners will extend the reach of Altair's data analytics and AI solutions to customers across the EMEA region. And A-Tech will bolster Altair's expansion into the Northwest and Central African regions, dynamic areas, primed for swift adoption of technological solutions. The first half of 2024 was a strong start to the year. We are confident Altair is well positioned for future growth, and we remain committed to delivering -in-class technology to our customers. I will now turn the call over to Matt to provide more details on our financial performance and our guidance for the third quarter and full year 2024. Matt?

Thank you, Jim. Hello to everyone on the call, and thank you for joining us. Altair had a strong Q2, exceeding the high end of the guidance range for software revenue and total revenue. And adjusted EVITA was above the midpoint of our guidance range. Our first half performance was driven by growth across multiple products and verticals, with especially strong performance in aerospace and defense, where demand for our products continues to be robust. Altair's solutions are fundamental to our customers' mission-critical workflows, spanning design, simulation, and data analytics. As we look forward, we remain committed to innovation and product excellence, striving to exceed our customers' expectations. As a reminder, some of our revenues and expenses are transacted in currencies other than the US dollar, and therefore our reported results may be impacted by changes in foreign exchange rates. To aid in the review of our results, throughout my remarks, I will reference growth rates in both reported and constant currency. For the second quarter, calculated total billings were $154.5 million, a -over-year increase of .5% in reported currency, and .1% in constant currency. Software revenue in Q2 was $135.4 million, a -over-year increase of .1% in reported currency, and .6% in constant currency, compared to Q2 2023. The -over-year increase in software revenue was driven by high retention rates and new and expansion business with notable strength in aerospace and defense, where customers are increasingly leveraging the convergence of capabilities in our software. For instance, one aerospace customer is using ROM AI for multidisciplinary optimization of an avionic system, while another is using RapidMiner for predictive maintenance and root cause analysis. Our unique ability to deliver these comprehensive AI-powered engineering solutions gives us great confidence in the long-term trajectory of our software offerings. Additionally, our strength in software continues to be broad-based, with gains across the Americas, EMEA, and APAC. Total revenue in Q2, which includes engineering services and other revenue, was $148.8 million, a -over-year increase of .4% in reported currency, and .8% in constant currency, compared to Q2 2023. Non-GAAP gross margin, which excludes stock-based compensation, was .9% in the second quarter, compared to .0% in the prior year period, an increase of 90 basis points. The -over-year increase in non-GAAP gross margin in Q2 was driven by the mix shift towards software revenue, where gross margins are higher than our engineering services and other revenue margins. Software revenue was .0% of total revenue in Q2, compared to .8% in the prior year. We expect software revenue growth will continue to outpace that of engineering services and other revenue, and therefore continue to push our blended gross margins higher. GAAP operating expenses were 128.2 million, compared to 126.6 million in the prior year period, reflecting growth of just .2% due to the continued and sustained -over-year reduction in stock-based compensation expense. Non-GAAP operating expenses, which excludes stock-based compensation and amortization of intangible assets, were 105.3 million, compared to 96.9 million in the prior year period, reflecting the planned investments we're making in product development and sales capacity to capitalize on the large and exciting opportunities we're seeing ahead of us. Adjusted EBITDA in Q2 was 17.3 million, or .7% of total revenue, compared to 17.1 million, or .1% in the prior year. Moving to our balance sheet, we ended the quarter with 507.0 million in cash and cash equivalents, an increase of approximately 88.7 million from the prior year period, and 39.5 million from year end. These increases in cash and cash equivalents were despite us paying 81.7 million for the settlement of our 2024 convertible notes in the second quarter. Free cash flow continues to be strong and was the primary driver of our cash and cash equivalents balance. Free cash flow was 97.0 million for the six months ended June 30th, compared to 83.0 million in the prior year period, an increase of 16.8%. We expect to continue to generate significant free cash flow going forward, and we will continue to allocate capital with focus and discipline to drive long-term shareholder value. Turning to guidance for Q3 and full year 2024, we've provided detailed tables in our earnings press release, including reconciliation to comparable gap amounts. To provide 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 Q3, we expect software revenue in the range of $130 million to $133 million, a -over-year increase of .2% to .7% in reported currency, and .1% to .7% in constant currency. For full year 2024, we are raising our previous outlook in constant currency for software revenue, and also adjusting for changes in foreign currency exchange rates over the past quarter. These amounts are offsetting, and therefore we expect full year software revenue in reported currency to be a range of $590 million to $600 million, a -over-year increase of .3% to .1% in reported currency, and .9% to .8% in constant currency. We expect Q3 total revenue, which includes engineering services and other revenue, in the range of $145 million to $148 million, a -over-year increase of .2% to .4% in reported currency, and .0% to .3% in constant currency. For full year 2024, we are maintaining our previous outlook in constant currency for total revenue. This includes the increase in our full year software revenue outlook in constant currency, and an offsetting reduction in engineering services and other revenue. However, due to changes in our foreign currency exchange rates over the past quarter, we are adjusting our full year outlook in reported currency to a range of $648 million to $658 million, a -over-year increase of .8% to .4% in reported currency, and .5% to .1% in constant currency. For Q3, we expect adjusted EBITDA in the range of 16 to 19 million, or .0% to .8% of total revenue, compared to 15.5 million, or .5% of total revenue, in Q3 2023. For full year 2024, changes in foreign currency exchange rates have also impacted adjusted EBITDA, and therefore we are adjusting our outlook to a range of 136 to 144 million, or .0% to .9% of total revenue, compared to 129.1 million, or .1% of total revenue, in Q3 2023. And finally, for the full year 2024, we expect free cash flow in the range of 122 to 130 million, which has also been impacted by changes in foreign exchange rates, and therefore has been adjusted in line with the change in our full year adjusted EBITDA guidance. As a reminder, our cash flow expectations are sensitive to billings and collections patterns, which fluctuate seasonally. We continue to be pleased with the high free cash flow as a percentage of adjusted EBITDA at approximately 90%. We are excited about our strong Q2 and first half performance to start the year, and we are looking forward to maintaining that momentum in the second half. With that, we'd be happy to take your questions. Operator?

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. In the interest of time, we ask that you please limit yourself to one question and one follow-up. Please stand by while we

compile the Q&A roster. Our first question comes from Matt

Hedberg with RBC. Your line is now open.

Yeah, thank you so much for taking my questions. This is Matt Swanson. It was great to hear about the success in the aerospace and defense. Jim, I think you mentioned a big hypermesh win, which has always been seen as the best of three products in the space. Matt, I think in some of your examples, we talked about some of the newer products like RapidMiner. Could you guys just talk a little bit about the -to-market and the ability to be able to sell both those things and kind of interconnectedness from your traditional products and some of these newer data focus and just how the sales force is doing ramping on that?

Sure. First of all, thank you. Yeah, I mean, the -to-market, first of all, in general, we've moved to this vertical market orientation for all the strategic accounts. So in the aerospace and defense vertical, we have a global team that is managed by one individual and then the account teams are spread throughout the world. When you think about an account, one of the major aerospace accounts, most of them are using hypermesh and it just continues to expand and now we're expanding out to many of the other products. RapidMiner is a pretty natural next step because if they have a lot of test data or they're trying to process material data, for example, coming in for, for example, if they want to project what are values that maybe didn't come in through testing and they want to project those using some AI technology. I just saw that this morning, so it's fresh in my mind. You know, it's just a great tool for doing that. So we're seeing more and more applications throughout our traditional engineering customer base. And I would say that the account teams that are traditionally selling simulation applications are becoming more and more comfortable as they see more of these applications, understand them, and can really just talk about them. And we bring experts in, of course, more and more. The other big application is a solution called Physics AI or ROM AI, reduced order modeling. So when we're doing digital twins, very often we're creating these reduced order models that are typically neural net type models to simulate a part of the system in the digital twin. Similarly, Physics AI lets you run a number of simulations and then run it through the neural nets of Physics AI, build up an AI model, if you will. The next simulation just simply runs the AI model. So, you know, it's really starting to take off. We have a lot of technology just embedded in our tools also. It is all built on machine learning and AI. So it's sort of permeating throughout the products. And I think we have, frankly speaking, quite a big lead on our competition in applying this kind of technology. It does take time for everyone to come up to speed, the tech support guys, the sales guys, but we've been at this for five, six years now. And so we are, you know, we're just really running with it. We've been running these seminars, AI for Engineering, and we have in some cases thousands of people signing up for them. So it's been very, very positively received.

That's super helpful. And then my follow up question was actually kind of on that getting up to speed standpoint and just the idea of kind of the push and pull of AI with your customers right now. It was great to hear about those updates that came for the Hyperworks 2024 around AI. But I'm just curious, like, is AI something that your customers are looking to as a must have when you enter into a new deal process? Or are you really like self-improvement and informing

them? I think so. And I think it's what's putting us really in the lead at this point. We see our position in many of these accounts where, you know, typically there's multiple vendors in each one of these accounts, ourselves and competitors. But we see our position sort of rising across the board, actually. And a lot of the reason for that is the AI technology that we're bringing, I think. So, yes, I think it's very important.

Thank you.

Sure. Thank you. Our next question comes from Blair Abernethy with Rosenblatt Securities. Your line is now open.

Thanks for taking the questions, guys. Jim, just wanted to drill in a little bit more on your comments about the channel and adding some new capacity there. Are you looking at emphasizing the channel more now that you have more product? Just kind of what are your thoughts there? And I'm not sure what the current percentage revenue from the channel is for Altera.

We are trying to emphasize the channel more. It's particularly important on the data side, to be honest with you. But it's also important on the simulation side in many of the regions that we probably historically have not gone to market indirectly as much. So some of the larger markets where we were, you know, selling a lot directly, we were under-serving, I would say, the small medium accounts. And we need to get to those through indirect channels, and that's what we're doing. The other thing very, very important for us is systems integrators on the data side, particularly, you know, when a customer wants to do like a data modernization program, moving, you know, moving their SaaS estate into Python in some cases or into a mix of Python and R and SaaS. You know, we're really well positioned for those deals, but they have to be done through systems integrators. And the other one that heavily relies on systems integrators is the graph technology. We have a lot of activity happening with that in pharma and in heroin defense. And in those opportunities, very often it's a system integrator that's heavily involved in the implementation. So, yes, indirect is really important for us.

Okay, great. Thank you. And just one other, if I could be called out the HP partnership with your material solutions. Is that strictly a product arrangement or is there some -to-market there as well?

There's no -to-market there, at least that I'm aware of. Maybe I'm missing something other than the fact that, you know, now their material data is available in our material database modeler, which is really important. We have about 400 different providers. HP is a new one that's added, but a very, very important one. You know, that solution has been maturing. And I think it's going to really take off. We're going to move it into a units model approach coming up pretty soon here. And I think that's going to be very, very transformational. I think most of our existing customers are going to start using it. And when they do, I think it's going to really change the game. It's a gorgeous product. And it uses AI as part of it as well. There's some new things coming that are rather cool.

That's great. Thanks very much.

Sure. Thank you. Our next question comes from Charles Chi with Needham Company. Your line is open.

Hi, Jim, Matt. Thanks for taking my questions. I know we're in the middle part of the year, still a little bit away from 2025. But Jim, Matt, any initial thoughts on next year at this point, given there seems to be some renewed concerns about the macroeconomic environment? Particularly we're seeing news. Stellantis, for example, I'm sure it's probably one of your large customers in automotive. Seems to be that there's some rumored layoffs there. Not so sure if this is an isolated case or not. But I want to get your thoughts in the middle part of 2024. Any initial view on 2025, the macro environment, automotive, and what you think about the whole business?

No, that's a good question. In general, I feel like these companies have no choice but to continue to innovate aggressively. And so, you know, my feeling is that these downturns aren't necessarily bad for my business because I think I bring a lot of value to the customers. And I think the customers are going to choose to work more and more with Altair as time goes on. But of course, you know, if there is an overall malaise or whatever, I suppose it can have some effect. But generally I'm not that concerned. I feel really, really optimistic coming into 2025. The product lineup that we're bringing at the end of this year into next year, it's just second to none across the board on the simulation side. All the modeling and visualization, all the work we've done on the modeling and visualization is essentially complete. And we are seeing ourselves very, very competitive against really, really everyone. Similarly on the data side and the HPC stuff, we're launching a product called NavOps. We've got a huge number of customers lined up. It lets you get to the cloud, basically. It works with any of the different cloud providers. Every customer is interested in being able to do that, managing cost and performance. So I just think we're in a great spot. Of course, you know, macro can have some overarching effect, but it's my job to plow us through whatever. And I'm pretty confident about it.

Got it. Thanks, Jim. Maybe a second question. Glad to see you at the Design Automation Conference. I can feel like Optair has a bigger presence at that EDA industry trade show. And do you want to ask, maybe first off, can you kind of help us give us a reminder, what are the Optair business, Optair exposure to the semiconductors at this point? Yeah, it's interesting to see Optair announce acquiring this company called the Metrix Design Automation. But I also want to check with you because that company, the founder, Joe Costello, is very famous for his different thinking along the business model, charge by the minute rather than charge by the seed. That has been his pitch to the EDA industry. But that does echo some of the new point-based business model you have been promoting for over the years. I wonder if we can get a comment from you on that as well. Thank you.

We've been building our portfolio in electronics, starting with printed circuit boards and now more and more in the semiconductor space. Obviously, we're not a major player there yet, but we're coming with a lot of, I think, interesting technology that DSIM probably tested the hell out of it. And it's very, very competitively performing to the -in-class logic simulators. And we have really nice digital debug technology, honestly -in-class there. We plan to integrate that stuff, make it available so people can run desktop on their servers or in the cloud with business models and technology that makes it very interesting. And there's the market, I think, for semiconductor design is exploding, starting from universities and small companies. And I do think that there's been a bit of a duopoly there with very expensive software that is sort of anathema to the creative power of the market to be able to go out and innovate. So I think we're going to bring some disruption there. I don't mean that we're going to completely change the world in six months. But I think we are going to see a lot of traction around the stuff we're bringing. And you also have this move to 3DIC, and Altera is very well positioned with some really nice technology in that direction as well. So I think it's going to be more and more important. Well, we do, obviously, we play big on the HPC side there as well. So bringing all that, that convergence, if you will, is going to be important. And I think some of the expertise and technology we bring on the AI side as well is going to bring some interesting innovation. I think that particular market, the EVA market, is ripe for some disruption. We're going to try and bring some.

Thank you. And our next question comes

from

Steve

Tusa with JPMorgan. Your line is open.

Hey, good evening.

Hey there. Good evening.

Just a question on the guidance and the margins. I would assume that part of the margin tweak down is due to foreign exchange. Can you just confirm that? Is there something else in the business that you're seeing on the call side?

Yeah, it is. Thank you for the question. If you look at the full year guide, and we have a table that's there that's helpful in getting you to bridge from sort of one quarter to the next, the full year guide from an EBITDA perspective and constant currency is unchanged. So you're correct that the only impact to EBITDA is due to FX. Okay, great.

And then as far as the aerospace strength is concerned, it's kind of as juxtaposed against – I know you're not like direct competitors on certain fronts – but juxtaposed against Dessau, who called out aerospace and defense as being headwind. Is there anything to kind of like directly read through there to market share? Are these just on like very – obviously they're a large company with many different product lines. But is there anything to kind of read through from that to like a direct project win or direct deal win for you guys?

I don't think there's anything direct. Altear versus Dessau, if you will. But I do think some of the players are rising and some are slipping. I would say Altear is gaining and others are perhaps slipping some. So without calling out names, I'm not sure what else I can say there. But it's part of why I don't concern myself with some of the macro because I think it can create new opportunities. And I think Altear is rising irrespective of where the tide is going.

Great. Thanks a lot. Congrats.

Thank

you.

Thank you. And our next question comes from Mark Schappell with Loop Capital Markets. Your line is now open.

Hi. Thank you for taking my question. Nice job on the software rather than the print. Jim, question for you on metric design. I appreciate your color on that and your prepared remarks. You mentioned that you thought the technology was groundbreaking. I mean, would you consider their technology groundbreaking in the EDA space in the same way that maybe SimSolid is disruptive in mechanical simulation?

No. So I said it's groundbreaking, the business model that they're applying here. Because, you know, with the cloud, you can scale up to thousands of simulations simultaneously. So you can basically do in a very, very short amount of time what you could do in much, much longer period of time because you perhaps don't have enough licenses or enough computing hardware to scale out as fast. So the business model and the approach, I think, is what's groundbreaking and, you know, can really accelerate designs. The general technology of the logic simulator, I think it's a really excellent logic simulator, which I admit before a lot of testing that we did, we were a little skeptical, but it's really quite strong. In fact, at the DAT conference, one of the gentlemen that does all of this, you know, evaluations and whatever actually wrote similarly, he was quite surprised with its performance. And we were as well. We tested it with a team overseas. So no, I don't think the simulator itself is groundbreaking. I think it's a very competitive simulator. I think the business model is what's groundbreaking.

Great. Thanks. And then on physics AI, that was a big topic during the user conference at Buster Day. What kind of an uptake rate are you seeing with your physics AI tools?

I think a huge enough percentage of the customers are beginning to use it. So it's getting a lot of uptake.

Great. Thank you.

Sure.

Thank you. And our final question comes from Dylan Becker with William Blair. Your line is now open.

Hey, gentlemen. Nice job here. Jim, maybe touching on kind of the HyperWorks 24 rollout. Any kind of additional color you could give us around maybe added functionality for customers, how they're thinking about adoption of this, what that can mean for incremental usage or units, kind of the right way of thinking about what that means for the business.

I think it's sort of a broad-based release with a lot of really great new stuff in it. You know, the HyperMesh product, which is our flagship product, has gone through this complete transformation. It's a new user experience. It's all Python, all that. And there's a lot of underlying stuff that you can't see that we are taking out, if you will, because we have two processes running simultaneously. So the performance is dramatically improving. It improved dramatically with the 4.0 release and the 4.1 release, which is right now, and the 4.2 release in a few months. Each one of these is giving us a lot of new performance. And that is extremely important, a lot of robustness as well. So brand new user experience, much higher performance. Some of the products have the new graphics engine in it, which is gorgeous. And so it's full-time, real-time rendering. It's really beautiful stuff. The Inspire product continues to really just be groundbreaking for simulation-driven design. And I think over the next six months to 12 months, I think we're going to see a lot more take-up of Inspire. And that addresses the design community. And I'm very excited about that as well, especially some of the new technology for implicit design, is I think very interesting as well. So there's a lot. It's hard to pinpoint lots of new things in some solid. The electronics, the electromagnetics in some solid continues to evolve here. And we're continuing to benchmark runs against our traditional electromagnetic solver, FECO, and getting very, very good results. So we're excited about where things are going.

Okay, that sounds great. Yeah, appreciate the depth there. Maybe for Jim, maybe we're mad as well, too. On that kind of push to new verticals, obviously we've kind of restructured and verticalized the sales force, but it sounds like there's some key wins in some of those segments as well. I guess how should we think about kind of the evolution of those pockets of strength within some of these new markets and how to kind of fully capitalize on the potential in each of those as well?

I can answer that. I don't know if Matt has a different answer here, but I think some of them have matured faster, are really hitting their stride aerospace and defense for sure. Some of them are continuing to mature, and we're continuing to tune them. We're adding some of the people that we might have selected, whatever. We're making little changes here and there and kind of learning from the ones that are doing well. We're also adding more folks with domain expertise, for example, in the life science space. We've had to add a couple people that really deeply know that space, particularly on the data science side. But some of the acquisitions that we've made, for example, the Grab database acquisition, had a lot of life science expertise in it. And so that's really shored up that new healthcare life science vertical, which really looks like it's taken off for us. So in general, I mean, I think it's coming along and it's only a year and a half into this new organization. And I think an organizational transformation like this probably takes three, four years to really completely hit its stride.

Yeah, I mean, the only thing I would add to this, Dylan, is just that I think the momentum we're seeing is really, really strong. And Jim called out in his prepared remarks in Q2, we signed our largest deal ever. And that has a lot to do with us moving to verticals. So a lot of these verticals are starting to hit their stride. We were pleased with our Q2 software revenue performance, you know, getting a 10.6 percent in constant currency. And we're excited about our guide for Q3 at the midpoint at 12.4 percent in constant currency. So just we're pleased with how momentum is building here and feel very good about it.

OK, great. Sounds good. Thanks, guys. Thank you.

This concludes our question and answer session. I would now like to turn back to Jim Scappa for closing remarks.

OK, well, thank you very much. I want to just express appreciation to the team because everyone worked really hard on the Altair team and appreciate everyone's interest in our company. And I look forward to continued success here. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.