Altair’s Q2 beat expectations; leads to slight raise in 2020 guidance

Aug 11, 2020 | Hot Topics

Altair reported results last week that continue the PLMish theme of “it could have been much much worse”. First, the details:

  • Total revenue was $98.6 million, down 8% as reported (and down 6% in constant currencies, cc) but ahead of the company’s guidance
  • Software revenue was $81.8 million, down 3% (down 2cc)
  • Within the software total, license revenue was $51.0 million, down 10%; and within that term license revenue of $43.3 was down 6%, while perpetual revenue was $7.8 million, down 27%. Maintenance revenue was $28.9 million, up 13%
  • Software-related services revenue was $5.4 million, down 31% (down 30% cc)
  • Revenue from client engineering services was $9.6 million, down 22% as reported and cc. CES is Altair’s outsourcing business, and should have been dramatically affected by the shutdown –after all, contractors are often the first let go–but CEO Jim Scapa said he was surprised at how many clients elected to keep these highly skilled people on the payroll, even at reduced hours.

So, what does it all mean? Altair is conservative to its core, at least when it comes to forecasting results. It’s newly a publicly-traded company and was badly bitten last year when customers converted to term licenses (meaning lower perpetual upfront revenue) more quickly than expected, leading to guidance misses. The caution isn’t surprising but don’t read too much into the fact that the company beat its forecast.

Mr. Scapa told investors that “manufacturing customers, especially in automotive, are investing in creating next-generation new products … and continue to aggressively compete for top talent and invest in tools and technologies to drive innovation … COVID-19 is accelerating the transition to digital solutions like simulation and data analytics [and] driving the need for cloud computing and tools to help collaboration and data management for dispersed workforces.” That’s consistent with what we’re hearing from vendors and users alike.

Later, he said that “key technical executives at manufacturing customers [are interested in adding] the power of data analytics to their product development, manufacturing and field service operations. The workflows for gathering and making use of data are not yet mature and we are playing a role both in developing these workflows and providing the technologies to support them. … We are increasingly optimistic that our solutions are finding numerous applications in manufacturing and the industrial IoT.” That’s also consistent with many of the questions I get around using data analytics to improve all sorts of business-related processes, from design to costing, risk management and more. What makes Altair unique, in my view, is that its solutions can both examine existing data and simulate to create much more training data –for example, if we have N data points about the function of a mechanical system, we can run simulations to create dozens/hundreds/thousands more data points to train an AI algorithm–to inform design processes. It’s early days for this type of analytics, but it’s an exciting path forward.

Put that all together and it explains Mr. Scapa’s assertion that Altair’s sales pipeline is growing “in line with previous years”,

Mr. Scapa added that he believes Altair is “through the worst of [Covid-related effects]. It’s been eye-opening. We weren’t really sure how things would proceed for the most part and our customers are continuing to do their business. The engineers in R&D that we work with are continuing to be very productive … I think we’ve even been surprised a bit at how solid all the recurring, all the renewals have been. There’s a tiny bit more attrition than usual in some of the smaller accounts that are struggling but in the lion’s share of the business it’s very, very solid”.

Asked about deal flows and if it’s harder to close deals in this economic climate, Mr. Scapa said that “On some of the larger deals where we see an expansion opportunity, we do see them going a tiny bit slower. We had one that actually should have gone in Q2 — a pretty large one — that we’ve already closed [in Q3]. It’s a very nice addition to the business but it did delay a bit. So there is some of that. There is no doubt about it.”

Altair is playing with its HyperWorks Units model, expanding it to encompass more of the portfolio. CFO Howard Morof said that “Our customers use on average something in the neighborhood of 20 different applications over the course of a cycle.” Mr. Scapa added that the new Altair Units model has sets for “industrial designers, mechanical designers, concept engineers, mechanical engineers, mechatronics engineers, data analysts and the enterprise suite. Each of those actually is additive to the solutions that are available in the previous. That fits well within most of our customers.”

Altair didn’t give geo or vertical breakouts, but Mr. Scapa did say that “the business is pretty consistent across the board, between the Americas, EMEA and APAC. The America is a little stronger — think things hit overseas harder earlier in the year and then they’ve come to the U.S. So I think it’s going to balance out.”

As I said, Altair is a conservative forecaster. CFO Howard Morof said that the company “anticipate[s] stable software product revenue and continued reductions in software-related services for the balance of this year, along with similar challenges for client engineering services, although it is possible that both will start to see minor improvements as we approach Q4 of this year”.

For the fiscal third quarter, Altair expects revenue of $96 million to $100 million; for the year, $443 million to $455 million, down 2%ish at the midpoint from last year’s $459 million. That’s up a couple of million dollars for the year from earlier guidance. Some of the analysts whose forecasts I can see are modeling fiscal 2020 revenue over $460 million, clearly thinking that Altair’s own forecasts are conservative.