Altair’s Q3 soft, guidance for Q4 disappoints — but diversification will boost 2020
Altair reported results last week for its fiscal Q3 and, while they weren’t awful, they didn’t do much to reassure investors about the rest of the year. The details and then some thoughts:
- GAAP revenue for Q3 was $100 million, up 18% and up 17% in constant currencies (cc)
- Non-GAAP revenue for the quarter was $103 million, up 18% but still about 3% below consensus
- GAAP software revenue was $78 million, up 21% (up 23% cc). CFO Howard Moriff noted that $4m in revenue was not recognized in the quarter due to accounting under the ASC 606 rule, and noted that Altair would have reached its guidance if not for this accounting quirk
- Within the software total, license revenue was $47 million, up 15%, while maintenance revenue was $31 million, up 33%
- Software-related services revenue was $8 million, down 8%
- Client engineering services revenue was up 5% to $13 million
Altair also announced that it has acquired EDEM, makers of discrete element method (DEM) simulation tools targeted at mining, pharmaceutical and other process manufacturing industries. Two things: First, DEM is used to model how objects react to one another inside a machine, such as gravel and coal, tablets, powders and other things that are not quite liquids but also not stationary objects. As Altair’s press release puts it, “With this acquisition, Altair customers now have the ability to design and develop power machinery while simultaneously optimizing how this equipment processes and handles bulk materials.”
Second, this acquisition further diversifies Altair’s customer base away from automotive. And that has two implications: the first is positive, in that Altair remains over-reliant on the auto industry, though less than it used to be, at 35% of total revenue. EDEM will help Altair weather storms in this potentially slowing market. But of course, that leads to a concern: can Altair sell to these new industries? TBD. EDEM is not expected to have an impact on revenue for 2019.
The acquisition is positive news. The real problem with the earnings report was Altair’s outlook: The company now expects Q4 non-GAAP revenue to be $109 million at the midpoint, well below Wall Street’s consensus of $125 million. Disappointed investors dropped the share price by as much as 20%, though it has recovered a wee bit since the news broke.
Why so underwhelming? CEO Jim Scapa said that the company underanticipated how quickly customers would switch to subscriptions, which lowered expected revenue for Q4 about $4 million (and $9 million for the year in total). One investor on the call asked how Altair could have missed these signs when it looked across its pipeline, and Mr. Scapa replied that they were surprised by customers’ choices. We’ve seen this before, say when PTC’s customers went to subs far faster than anyone thought likely. The lesson: customers value choice and it’s not always possible to predict how a sale will go. In the greater scheme of things, $9 million out of Altair’s projected revenue of $440 million in 2019 just 2%. While i’d love have in my pocket, it’s just that big a deal and it means more recognized revenue later.
Of greater concern are Mr. Scapa’s comments about a slowdown in Altair’s pipeline of automotive deals in Japan and Germany, as OEMs and their partners shift focus from traditional powertrain to newer ares such as electrification. Mr. Moroff estimated that this could affect revenue by about $11 million for 2019. Mr. Scapa told investors that Altair had typically sold into those traditional disciplines and is just now releasing products to support newer initiatives. He said that customers aren’t reducing the number of units they’re buying or choosing competitors’ products, Altair is not yet selling effectively into those new departments and disciplines. That’s an interesting take, especially as the customers I spoke with at Altair’s user conference last month didn’t mention this —and it makes sense that the ones presenting would be talking about past work, not necessarily using Altair’s newest offerings.
For Q4, Mr. Moroff sees total revenue of around $107 million (up 4%) with software revenue of about $85 million (up 7%). That means total revenue of around $440 million in 2019, up 11%, with software revenue of about $350 million up 15% or so. Back in Q1 Altair thought revenue for the year would be $472 million, so we can see why investors might be disappointed.
That said, Mr. Scapa summed it all up this way: “This is the second quarter that we’re guiding down. We’re not happy about it but we need to be conservative … We’re getting pretty robust growth numbers [from sales teams, for 2020], so are very, very optimistic about 2020 despite what we’re seeing in Q4.”
I’d temper that a bit–but what I saw at the user conference does give every reason for optimism. Between SimSolid and DataWatch, and now Polliwog and EDEM, there’s lots of room for growth.