Altair Engineering Inc. (NASDAQ:ALTR) Q4 2023 Earnings Call Transcript
Altair Engineering Inc. (NASDAQ:ALTR) Q4 2023 Earnings Call Transcript February 22, 2024
Altair Engineering Inc. beats earnings expectations. Reported EPS is $0.46, expectations were $0.41. Altair Engineering Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and thank you for standing by. Welcome to the Altair Engineering Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be question-and-answer session. [Operator Instructions] 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, Altair's Senior Vice President for Investor Relations. Please go ahead.
Dave Simon: Good afternoon. Welcome, and thank you for attending Altair's earnings conference call for the fourth quarter of 2023, ended December 31, 2023. I'm Dave Simon, Altair's SVP for Investor Relations, and with me on the call are Jim Scapa, Founder, Chairman and CEO; and Matt Brown, Chief Financial Officer. After market close today, we issued a press release with details regarding our fourth quarter 2023 performance and guidance for the first quarter and full year 2024, which can be accessed on 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 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?
Jim Scapa: Thank you, Dave, and welcome to everyone on the call. The fourth quarter of 2023 carried positive momentum for Altair with record high total quarterly and full year revenue of $171.5 million and $612.7 million, respectively. Software product revenue and total revenue were both well within our guidance with adjusted EBITDA above the top end of the guided range. Altair's Q4 results continue our growth path of helping organizations succeed through computational intelligence. Adjusted EBITDA for Q4 2023 increased by 38.3% year-over-year to $53.6 million, or 31.2% of total revenue. Adjusted EBITDA grew 19% for the full year 2023 to $129.1 million, or 21.1% of total revenue, versus $108.6 million, or 19% of revenue in 2022, continuing our trend of increasing adjusted EBITDA margin by 200 to 300 basis points per year over the last four years.
Software product revenue for the full year 2023 grew by 8.6% compared to 2022 and 9.8% on a constant currency basis. Software product revenue as a percentage of total revenue for the full year 2023 increased to 90% as compared to 89% in 2022. And the recurring software license rate for 2023 was 93%, an increase from 92% during 2022. Altair's growth continues to be broad based across many geographies technologies and verticals. In the fall of 2023, we released what we believe was the most important update to our products in the last 10 years. Our upcoming release this spring is expected to take another leap forward, as we continue to bring all of our solutions for simulation under a common user framework, graphics engine and back-end data model.
In addition, we believe and many customers agree, our investments in engineering AI are positioning us as the leader in this important and growing domain, because of the enormous base of data science talent and technology, we are leveraging across our enterprise. Despite some recent uncertainties around EV sales, the transition of the automotive sector toward alternative power sources, including purely electric continues to present an exciting field of opportunities for Altair. In December we announced funding awarded for The UK Government's Faraday Battery Challenge to a consortium of three organizations: Altair, JLR and battery manufacturer Danecca. The project will leverage Altair's technology to develop vehicles with a new lighter body that offers more room for the battery without adding additional weight.
JLR will apply Altair's C123 process, a unique three-stage concept development process for body-in-white structures, and will utilize Altair's technologies for Structural Optimization and Electrothermal Simulation. Also in the Electric Powertrain space, a heavy duty Commercial Vehicle Manufacturer has substantially increased its commitment to Altair's simulation tools, for improving battery predictive analytics. In APAC, a leading manufacturer of Electric Vehicles has made an eight-figure commitment, to use a broad portfolio of Altair simulation and data analytics software in its multi-division product development processes. A US headquartered Electric Vehicle Manufacturer doubled its Altair technology purchases, bringing our annual revenue with them into seven figures.
And finally, another US headquartered EV Manufacturer signed a three-year seven-figure agreement with Altair, representing more than 100% growth over the previous three years. We had some good fourth quarter wins in the BFSI vertical and for our Data Analytics Solutions. One of the largest credit unions in the US aimed to renewal with 33% growth recognizing its increased usage and high value from our Data Analytics and AI platform, RapidMiner. A major European banking group, signed on to a major deployment of Altair SLC across many applications, throughout its organization. And a North American consulting organization has agreed to use Altair SLC, as a primary tool for its work, with many clients and supply chain analytics. Altair's High-Performance Computing solutions drove substantial activity in the Technology Vertical.
One of the leading companies in the power semiconductor field placed an order for Altair's workload and workflow management software based on experiencing a 20% throughput increase. This not only enhances its operational efficiency, but also leads to substantial cost savings, given the high cost of EDA application software. An EMEA semiconductor company renewed with a 127% annual increase. We also received a three-year agreement with seven-figures of annual revenue from a US Semiconductor Manufacturer based on its desire to leverage Cloud Computing for design and development, while effectively managing cloud usage costs. Indirect sales, continues to represent an important percentage of our overall revenue and we look forward to further success in that regard, especially for our Data Analytics Solutions.
We welcomed three new channel partners to the Altair sales team, in the fourth quarter. Do IT Now, is focused on high performance computing applications in EMEA. Neyond in Portugal and Matogen Applied Insights of South Africa are both focused on data analytics and artificial intelligence. Altair has expanded its relationship with the FIRST technology organization founded by Dean Kamen where Altair technology is now available to all teams in the FIRST Robotics Competition Kit of Parts. More than 3,500 high school teams across 26 countries competing in this year's first robotics competition will have free access to Altair software. Altair's collaboration with FIRST will bolster students' technical skills and support a diverse community of students by building citizenship, self-esteem and leadership through hands-on experiences and project-based learning.
Furthering our collaboration with FIRST is a perfect example of Altair's commitment to students and the role they have in technology both today and in the future. Combining our academic focus with work on e-mobility Altair India recently formalized a strategic partnership with the Indian Institute of Technology, Madras to establish an e-mobility simulation lab within the department of engineering design. This collaborative initiative under Altair's Corporate Social Responsibility program, includes grant money from Altair along with simulation and design software and high performance computing infrastructure. Exclusively powered by Altair technologies, the lab's goal is to support startups, researchers and students in advancing the study and development of electric vehicles.
We are pleased to be supporting IIT Madras, a clear global leader in educating the world's best and brightest young minds. 2023 for Altair was a year of hard work significant investments in new software technologies sales team alignment into market verticals, steady focus and ultimately outstanding execution from our stellar global teams amidst a lot of economic and geopolitical uncertainty. I am proud of the individual and group accomplishments of our people and appreciative of the strong Altairian culture that keeps us moving forward in ways that benefit our customers, employees, partners and shareholders. We believe the culmination of our organizational advancements combined with the power of our technology portfolio positions Altair well for the future.
We are holding an Altair Investor Day, the morning of March 20 in Santa Clara, California, where we will discuss our vision for the future and our plans to capitalize on our growing market opportunity. We will also introduce what we believe to be a very exciting and disruptive technology for the electronics market. I hope all of our investors and prospective investors as well as the analysts who cover Altair and the markets we compete in will attend. 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 of 2024. Matt?
Matt Brown : Thank you, Jim. Hello to everyone on the call, and thank you for joining us. We are pleased with our strong fourth quarter results, which continued to demonstrate the importance of our products to our customers in leveraging computational intelligence to solve the important challenges they face. Despite the somewhat difficult macroeconomic environment that we discussed throughout 2023, we finished the year with record high revenue and adjusted EBITDA margin of 21.1% well exceeding the 20% goal we had long established for 2023. As I dive into the details of our financial results remember some of our revenues and expenses are transacted in currencies other than the U.S. dollar, and therefore, our reported results may be significantly 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. Starting with Q4 numbers. Calculated total billings for the quarter were $196.1 million a year-over-year increase of 4.4% in reported currency and 3.6% in constant currency. As a reminder, we exited a lower margin hardware business in 2023 that had historically been weighted most heavily in the fourth quarter, therefore impacting the Q4 year-over-year growth rates. The increase in billings was led by software across all geographies and we saw billings growth across our verticals with particular strength in automotive aerospace and technology. Software revenue in Q4 was $155.9 million a year-over-year increase of 7.6% in reported currency and 6.7% in constant currency compared to Q4 2022.
Software revenue growth was led by new customer growth and expansion in existing accounts and supported by a robust renewal base that continues to have a very high rate of retention. Total revenue in Q4, which includes services and other revenue was $171.5 million, a year-over-year increase of 6.9% in reported currency and 6.0% in constant currency compared to Q4 2022. Non-GAAP gross margin which excludes stock-based compensation and restructuring expense was 84.3% in the fourth quarter compared to 80.2% in the prior year quarter, an increase of 410 basis points. The year-over-year increase in non-GAAP gross margin in Q4 was partially due to our exit from the lower margin hardware business that was present in the year ago period. Software mix also contributed slightly to the increase in blended non-GAAP gross margin, as our software revenue which carries a higher gross margin increased as a percentage of total revenue.
Software revenue was 90.9% of total revenue in Q4 compared to 90.4% in the prior year. Over the long term, we continue to expect a general mix shift towards software revenue, as growth there will outpace services and other revenue. Non-GAAP operating expenses which excludes stock-based compensation and amortization of intangible assets were $94.0 million compared to $92.6 million in the year ago period. Adjusted EBITDA in Q4 was $53.6 million or 31.2% of total revenue compared to $38.7 million or 24.1% in the prior year, an increase of 38.3%. This increase compared to the prior year quarter as well as relative to our expectations was driven by the increase in gross profit in the quarter combined with a disciplined approach to spending. Now looking at the full year results for 2023.
Calculated billings for the year were $631.8 million, a year-over-year increase of 4.0% in reported currency or 4.8% in constant currency. Remember that in Q1 of last year we highlighted our largest ever data analytics and AI deal in the BFSI vertical, which was a five-year eight-figure deal. So this significant multiyear deal in 2022 is impacting the 2023 year-over-year billings growth rates. Software revenue for the year was $550.0 million a year-over-year increase of 8.6% in reported currency and 9.8% in constant currency. And total revenue for the year was $612.7 million, a year-over-year increase of 7.1% in reported currency and 8.2% in constant currency. Our recurring software license rate which is the percentage of software billings that are recurring continues to be strong at approximately 93% for the year.
The strength in software revenue helped drive our non-GAAP gross margins for the year to 81.8% compared to 80.0% in 2022, a 180 basis point increase. In addition, non-GAAP operating expenses as a percentage of total revenue declined year-over-year due to reductions in general and administrative costs. This helped drive adjusted EBITDA for the year to $129.1 million or 21.1% of total revenue compared to $108.6 million or 19.0% in 2022 a year-over-year increase of $20.5 million or 18.9%. We set out a vision three years ago of achieving 20% adjusted EBITDA margin exiting 2023 and I'm proud of our entire team for rallying around that goal and executing to exceed this important milestone. In 2023 we saw more than half of our year-over-year increase in total revenue make its way down to adjusted EBITDA.
Turning to our balance sheet. We ended the year with $467.5 million in cash and cash equivalents, an increase of approximately $151.3 million from the prior year. Free cash flow was $117.1 million for the year exceeding our expectations and driven by the increase in profitability. This represents a substantial increase year-over-year and demonstrates our ability to generate significant free cash flow. Let's turn to guidance for Q1 and full year 2024. We've provided detailed guidance tables in our earnings press release including reconciliations to comparable GAAP 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. Over the past couple of years we've seen a gradual shift in our revenue seasonality away from Q1 and into the remaining three quarters as we've continued to broaden our customer base.
We are expecting that trend to continue in 2024 and have therefore guided Q1 revenue in a prudent manner. For Q1 we expect software revenue in the range of $152 million to $155 million a year-over-year increase of 1.6% to 3.6% in reported currency and an increase of 0.8% to 2.8% in constant currency. For full year 2024 we expect software revenue in the range of $600 million to $610 million a year-over-year increase of 9.1% to 10.9% in reported currency and 8.3% to 10.1% in constant currency. We expect services and other revenue to be flat year-over-year in 2024 compared to the declines we saw over the past couple of years. As a result, we expect total revenue for Q1 in the range of $167 million to $170 million, a year-over-year increase of 0.6% to 2.4% in reported currency and negative 0.1% to positive 1.7% in constant currency.
For the full year 2024, we expect total revenue in the range of $663 million to $673 million, a year-over-year increase of 8.2% to 9.8% in reported currency and 7.5% to 9.1% in constant currency. For Q1 we expect adjusted EBITDA in the range of $37 million to $40 million or 22.2% to 23.5% of total revenue compared to $43.1 million or 25.9% of total revenue in Q1 2023. For full year 2024 we expect adjusted EBITDA in the range of $143 million to $151 million or 21.6% to 22.4% of total revenue compared to $129.1 million or 21.1% of total revenue in 2023. And finally, for the full year 2024 we expect free cash flow in the range of $129 million to $137 million. As a reminder, our cash flow expectations are sensitive to billings and collection patterns, which fluctuate seasonally.
We are pleased with overachieving our profitability goals for 2023 and we're excited about the tremendous opportunity that lies ahead as we continue to execute on our future financial targets. With that, we'd be happy to take your questions. Operator?
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