UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2023 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 001-38263 ALTAIR ENGINEERING INC. (Exact name of registrant as specified in its charter) Delaware 38-2591828 (State or other jurisdiction ...

Financial Data and Key Metrics Changes - Altair reported a solid second quarter of 2023 with adjusted EBITDA growing year-over-year to $17.1 million [7] - Total billings for Q2 2023 reached $147.8 million, a year-over-year increase of 17.8% in reported currency and 19.6% in constant currency [8][25] - Software product revenue for Q2 2023 was $125.3 million, a year-over-year increase of 7.2% in reported currency and 9.4% in constant currency [25][26] - Total revenue in Q2 2023 was $141.2 million, a year-over-year increase of 6.4% in reported currency and 8.4% in constant currency [26] - Non-GAAP gross margin increased to 80.0% in Q2 2023 from 79.3% in the prior year [27] - Free cash flow through the first half of 2023 was $83.0 million [28] Business Line Data and Key Metrics Changes - Software product revenue as a percentage of total revenue for Q2 2023 was 88.8%, up from 88.1% in Q2 2022 [7] - The recurring software license rate for the first half of 2023 was 94%, an increase from 93% in the first half of 2022 [7] Market Data and Key Metrics Changes - Strength was observed in the aerospace, defense, technology, and automotive verticals, with notable customer renewals and expansions [8][12] - A significant aerospace customer increased its software licensing commitment by over 50%, resulting in a seven-figure annual licensing agreement [12] - A major aircraft component supplier committed to a 44% increase in a multi-year software licensing deal [13] Company Strategy and Development Direction - The company is focusing on enterprise selling and engaging at higher levels with key customers to build long-term relationships [12] - Altair plans to release new significant products in Q4 2023, integrating AI within simulation products [9] - The acquisition of OmniV aims to enhance Altair's digital twin solutions and requirements management capabilities [10][11][76] Management's Comments on Operating Environment and Future Outlook - Management described the current macroeconomic environment as "lackluster," with expectations for stronger demand in 2024 and 2025 [21][38] - The company anticipates continued growth in adjusted EBITDA and aims for a 20% adjusted EBITDA margin this year [21][22] - Management expressed confidence in the pipeline and positioning for future growth despite current economic challenges [39][44] Other Important Information - Altair was named to Newsweek's Most Loved Workplaces list for the third consecutive year, reflecting employee satisfaction [18] - The company was recognized as the overall leader in the manufacturing data analytics sector by ABI Research [19][20] Q&A Session Summary Question: How resilient are R&D budgets in the current macro environment? - Management noted that while budgets are being watched closely, there is potential for significant customer interest and engagement [36][38] Question: What is the outlook for Q3 and Q4 revenue dynamics? - Management explained that Q3 is historically the smallest quarter due to summer holidays, but the overall pipeline for the second half looks strong [46][47] Question: What are the core drivers behind the momentum in renewals and expansions? - Management highlighted strong activity in aerospace and defense, with customers seeking more efficient and effective solutions [50][53] Question: How is the SimSolid Cloud performing in the market? - Management indicated that it is early days for SimSolid Cloud, but initial evaluations are positive, particularly for small to medium accounts [72][74] Question: What is the rationale behind the acquisition of OmniV? - The acquisition fills a gap in requirements management solutions and is expected to enhance Altair's offerings in digital twin technology [76][77]

PART I. FINANCIAL INFORMATION [Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) Unaudited consolidated financial statements show increased revenue and gross profit, but higher operating expenses resulted in an operating loss [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) Total assets increased to **$1.256 billion** as of June 30, 2023, driven by higher cash, with stockholders' equity also growing Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2023 (Unaudited) | December 31, 2022 | | :--- | :--- | :--- | | **Total Current Assets** | $586,781 | $526,826 | | Cash and cash equivalents | $418,338 | $316,146 | | **Total Assets** | **$1,255,807** | **$1,204,738** | | **Total Current Liabilities** | $319,248 | $232,738 | | Current portion of convertible senior notes, net | $81,161 | $0 | | **Total Liabilities** | **$635,592** | **$635,002** | | **Total Stockholders' Equity** | **$620,215** | **$569,736** | [Consolidated Statements of Operations](index=4&type=section&id=Consolidated%20Statements%20of%20Operations) Revenue increased for both three and six-month periods, but higher operating expenses led to an operating loss Statement of Operations Summary (in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | **Total Revenue** | $141,161 | $132,656 | $307,195 | $292,437 | | **Gross Profit** | $110,364 | $103,133 | $243,663 | $231,311 | | **Operating (Loss) Income** | $(16,269) | $(7,268) | $(11,083) | $13,443 | | **Net Loss** | $(22,280) | $(33,774) | $(24,239) | $(22,246) | [Consolidated Statements of Cash Flows](index=8&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Net cash from operating activities significantly increased to **$89.2 million**, primarily due to the absence of a prior-year legal payment Cash Flow Summary (in thousands) | Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $89,229 | $18,041 | | Net cash used in investing activities | $(8,357) | $(41,439) | | Net cash provided by financing activities | $21,001 | $31,918 | | **Net increase in cash** | **$101,829** | **$2,294** | [Notes to Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) Notes detail reclassification of costs, revenue disaggregation, convertible note status, tax rate changes, and legal proceedings - Beginning in Q1 2023, the company reclassified certain indirect IT, facilities, and depreciation expenses from being primarily in G&A to being allocated across R&D, S&M, and G&A based on headcount, with prior periods recast for comparability[23](index=23&type=chunk)[24](index=24&type=chunk) - Contracted revenue not yet recognized (remaining performance obligations) was **$198.6 million** as of June 30, 2023, up from **$147.6 million** a year prior, with approximately **74%** expected to be recognized over the next 12 months[35](index=35&type=chunk) - As of June 30, 2023, the **2024 Notes** were convertible at the option of the holders and reclassified to current liabilities, while the **2027 Notes** remained as long-term debt[55](index=55&type=chunk)[52](index=52&type=chunk) - The change in the effective tax rate was primarily due to new IRC Section 174 rules requiring capitalization and amortization of R&D expenses, which increased taxable income without a corresponding tax benefit due to the company's valuation allowance in the U.S[79](index=79&type=chunk)[134](index=134&type=chunk)[159](index=159&type=chunk) - On April 6, 2023, the U.S. Court of Appeals affirmed a lower court's dismissal of SAS's copyright claims against the company's subsidiary, World Programming[83](index=83&type=chunk)[199](index=199&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=20&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses revenue growth driven by software, increased operating expenses, and strong liquidity position [Results of Operations](index=23&type=section&id=Results%20of%20operations) Total revenue increased **5%** to **$307.2 million**, but operating expenses rose **17%**, resulting in an operating loss Revenue by Type - Six Months Ended June 30 (in thousands) | Revenue Type | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Software | $274,964 | $257,790 | 7% | | Software related services | $13,764 | $16,437 | (16%) | | Client engineering services | $15,810 | $15,059 | 5% | | **Total Revenue** | **$307,195** | **$292,437** | **5%** | Operating Expenses - Six Months Ended June 30 (in thousands) | Expense Category | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Research and development | $108,528 | $97,516 | 11% | | Sales and marketing | $88,474 | $78,993 | 12% | | General and administrative | $36,573 | $35,796 | 2% | | Amortization of intangible assets | $15,439 | $12,111 | 27% | | **Total Operating Expenses** | **$254,746** | **$217,868** | **17%** | - The increase in R&D and Sales & Marketing expenses was primarily driven by higher employee compensation from annual merit increases and increased headcount from acquisitions, along with increased travel and IT-related costs[150](index=150&type=chunk)[152](index=152&type=chunk) [Non-GAAP Financial Measures](index=31&type=section&id=Non-GAAP%20financial%20measures) Non-GAAP metrics show **Billings** increased **5%**, **Adjusted EBITDA** decreased **5%**, and **Free Cash Flow** significantly improved Key Non-GAAP Metrics (in thousands) | Metric | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | % Change | | :--- | :--- | :--- | :--- | | Billings | $311,282 | $296,759 | 5% | | Adjusted EBITDA | $60,111 | $63,030 | (5%) | | Free Cash Flow | $83,045 | $14,584 | 469% | - The recurring software license rate, a key metric for the company, was **94%** for the first six months of 2023, compared to **93%** for the same period in 2022[174](index=174&type=chunk) [Liquidity and Capital Resources](index=33&type=section&id=Liquidity%20and%20capital%20resources) The company maintains strong liquidity with **$418.3 million** in cash and a **$200.0 million** credit facility - As of June 30, 2023, principal sources of liquidity included **$418.3 million** in cash and cash equivalents and **$200.0 million** available under a credit facility[175](index=175&type=chunk) - The stock repurchase program was increased to **$75.0 million**, with the company repurchasing **$4.3 million** of its Class A Common Stock during the first six months of 2023[176](index=176&type=chunk) - The **2024 Notes** became convertible at the option of holders and were classified as current liabilities, while the **2027 Notes** remained long-term debt[175](index=175&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=35&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company faces market risks primarily from foreign currency exchange fluctuations and interest rate changes affecting its Convertible Notes - The company has substantial international operations and is exposed to foreign currency risk from transactions denominated in currencies like the Euro, British Pound, Indian Rupee, Japanese Yen, and Chinese Yuan[191](index=191&type=chunk) - The fair market value of the company's fixed-rate Convertible Notes is exposed to interest rate risk (value decreases as rates rise) and is also affected by the company's stock price[193](index=193&type=chunk) [Controls and Procedures](index=36&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective with no material changes to internal controls - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2023[195](index=195&type=chunk) - No changes occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[196](index=196&type=chunk) PART II. OTHER INFORMATION [Legal Proceedings](index=37&type=section&id=Item%201.%20Legal%20Proceedings) A favorable appeal ruling dismissed copyright claims against the company's subsidiary, World Programming - On April 6, 2023, the U.S. Court of Appeals issued a decision in favor of the company's subsidiary, World Programming, by affirming the dismissal of copyright claims brought by SAS Institute, Inc[199](index=199&type=chunk)[83](index=83&type=chunk) [Risk Factors](index=37&type=section&id=Item%201A.%20Risk%20Factors) There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2022 - No material changes to risk factors from the Annual Report on 10-K for the year ended December 31, 2022[201](index=201&type=chunk) [Other Items (Items 2, 3, 4, 5, 6)](index=38&type=section&id=Other%20Items) This section covers standard reporting items, including no unregistered equity sales, defaults, or material trading plan changes - Items 2, 3, and 4 (Unregistered Sales of Equity Securities, Defaults Upon Senior Securities, Mine Safety Disclosures) are not applicable[203](index=203&type=chunk) - During the quarter ended June 30, 2023, no directors or officers adopted or terminated a Rule 10b5-1 trading arrangement[204](index=204&type=chunk)

Financial Data and Key Metrics Changes - Altair reported a strong start to 2023 with software product revenue, total revenue, and adjusted EBITDA exceeding guidance, marking an all-time high for both software product revenue and total revenue [6][21] - Adjusted EBITDA for Q1 2023 was $43.1 million, representing 25.9% of total revenue, compared to $46.6 million or 29.2% in Q1 2022 [27] - Total billings for the quarter were $163.5 million, a year-over-year decrease of 4.6% in reported currency and 0.9% in constant currency [22] - Software product revenue in Q1 2023 was $149.6 million, a year-over-year increase of 6.2% in reported currency and 10.0% in constant currency [23] - Total revenue in Q1 2023 was $166.0 million, a year-over-year increase of 3.9% in reported currency and 7.5% in constant currency [24] Business Line Data and Key Metrics Changes - Software product revenue as a percentage of total revenue for Q1 2023 was 90.1%, up from 88.2% in Q1 2022 [6][25] - The recurring software license rate was 95% for the quarter, compared to 93% in Q1 2022 [6] - The company experienced strong renewals and expansion in the automotive and aerospace verticals, contributing to software product revenue growth [23] Market Data and Key Metrics Changes - The automotive sector remains a significant market for Altair, with high demand for new cars despite a decline in revenue contribution as a percentage of total business [54] - The banking and financial services sector is showing positive dynamics, with the company converting accounts to its units model and receiving strong interest in its offerings [40] Company Strategy and Development Direction - Altair is focused on expanding its data analytics offerings and integrating them with simulation tools to enhance customer engagement and drive growth [62] - The company is investing in marketing and indirect channels to promote new products like SimSolid Cloud, targeting smaller and mid-market customers [60] - Altair aims to maintain a strong balance sheet and is well-positioned to withstand market uncertainties, with a cash balance of $378.4 million [28] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the company's performance against a backdrop of global uncertainty, highlighting strong customer demand and successful product integrations [19] - The company anticipates continued growth in software product revenue, maintaining guidance for Q2 and full year 2023 [29][30] Other Important Information - Altair's acquisition of World Programming was affirmed by the U.S. Court of Appeals, allowing the company to leverage open-source technologies [12] - The company is investing in cutting-edge technologies, including quantum computing and high-performance computing, to stay ahead of industry trends [19] Q&A Session Summary Question: Insights on Q2 guidance and sequential performance - Management indicated that the Q2 guidance reflects historical seasonal patterns, with Q1 and Q4 typically being stronger quarters [34] Question: Performance of RapidMiner post-acquisition - Management expressed confidence in the RapidMiner acquisition, noting increased customer interest and sales force confidence [37] Question: Demand dynamics outside manufacturing - Management reported positive engagement in the banking and financial services sector, despite challenges in the broader market [40] Question: Confidence in SimSolid technology - Management highlighted the unique capabilities of SimSolid, emphasizing its ease of use and rapid results for complex assemblies [42] Question: Long-term strategy for targeting less technical users - Management acknowledged the opportunity in mid and small market customers, focusing on democratizing simulation technology [50] Question: Outlook on the automotive end market - Management noted that while automotive revenue is declining as a percentage of total business, demand for new cars remains strong [54]

Financial Performance - Total revenue for the three months ended March 31, 2023, was $166,034 thousand, representing a 4% increase compared to $159,781 thousand for the same period in 2022[110]. - Adjusted EBITDA for the three months ended March 31, 2023, was $43,055 thousand, down 8% from $46,590 thousand in the same period of 2022[111]. - Net loss for the three months ended March 31, 2023, was $(1,959) thousand, compared to a net income of $11,528 thousand for the same period in 2022[111]. - Billings for the three months ended March 31, 2023, were $163,517 thousand, a decrease of 5% from $171,337 thousand in the same period of 2022[111]. - Gross profit increased by $5,121,000, or 4%, to $133,299,000 for the three months ended March 31, 2023, compared to $128,178,000 for the same period in 2022[126]. - Free cash flow for the three months ended March 31, 2023, was $57.5 million, a significant increase from $3.6 million in the same period of 2022[152]. - For the three months ended March 31, 2023, the company reported a net loss of $2.0 million, a significant decrease from a net income of $11.5 million in the same period of 2022, representing a change of NM[140][142]. Revenue Breakdown - Software revenue increased by 6% to $149,643 thousand, driven by growth in software license revenue, particularly in the automotive and aerospace sectors[111]. - Software related services revenue decreased by 22% to $7,100,000 for the three months ended March 31, 2023, compared to $9,061,000 for the same period in 2022[116]. - Client engineering services revenue decreased by 3% to $7,776,000 for the three months ended March 31, 2023, compared to $8,012,000 for the same period in 2022[117]. - Other revenue decreased by 16% to $1,515,000 for the three months ended March 31, 2023, compared to $1,811,000 for the same period in 2022[120]. Expenses and Costs - Research and development expenses increased by 13% to $53,251 thousand, compared to $47,079 thousand in the same period of 2022[111]. - Sales and marketing expenses increased by $5,652,000, or 15%, to $43,492,000 for the three months ended March 31, 2023, compared to $37,840,000 for the same period in 2022[129]. - Interest expense increased by $941,000, or 161%, to $1,526,000 for the three months ended March 31, 2023, compared to $585,000 for the same period in 2022[135]. - Other operating expense increased by $6,386,000 for the three months ended March 31, 2023, primarily due to a $7,000,000 loss on the mark-to-market adjustment of contingent consideration[133]. - Amortization of intangible assets increased by $1,911,000, or 32%, to $7,814,000 for the three months ended March 31, 2023, compared to $5,903,000 for the same period in 2022[131]. - Cost of software related services revenue decreased by $419,000, or 7%, to $5,616,000 for the three months ended March 31, 2023, compared to $6,035,000 for the same period in 2022[122]. Cash and Financing - The company had cash and cash equivalents of $378.4 million as of March 31, 2023, with an additional $200.0 million available under its credit facility[155][159]. - Net cash provided by operating activities for Q1 2023 was $59.2 million, an increase of $53.4 million compared to Q1 2022[163]. - Net cash used in investing activities for Q1 2023 was $3.1 million, a decrease of $12.4 million compared to Q1 2022[164]. - Net cash provided by financing activities for Q1 2023 was $5.5 million, an increase of $2.9 million compared to Q1 2022[165]. - The company had no outstanding borrowings under its 2019 Amended Credit Agreement as of March 31, 2023[172]. - The company issued $230.0 million of 1.750% convertible senior notes due in 2027 and $230.0 million of 0.250% convertible senior notes due 2024, with $81.8 million remaining outstanding as of March 31, 2023[171]. Strategic Outlook - The integration of recent acquisitions is expected to expand the portfolio of software and products, enhancing customer service capabilities[104]. - The company continues to evaluate potential acquisitions and strategic transactions to expand its business, which may impact its cash position and debt obligations[157]. - The company anticipates that revenues and profits may be impacted by changes in foreign currency rates due to substantial international operations[105]. - The effective tax rate increased to 127% for the three months ended March 31, 2023, compared to 36% in the same period of 2022, primarily due to changes in tax regulations affecting R&D expense capitalization[139]. Market and Risk Factors - The recurring software license rate improved to 95% for the three months ended March 31, 2023, up from 93% in the same period of 2022, indicating stronger customer retention[154]. - Interest rate risk is present due to potential fluctuations in interest income on invested cash balances[172]. - The company does not have any foreign currency hedging contracts as of March 31, 2023[169]. - The company does not plan on engaging in hedging activities in the near future based on current international operations[169]. - There was a favorable effect of exchange rate changes on cash of $0.4 million for Q1 2023, compared to an adverse effect of $1.0 million in Q1 2022[165].

Altair Engineering Inc. (NASDAQ:ALTR) Q4 2022 Earnings Conference Call February 23, 2023 5:00 PM ET Company Participants Dave Simon - Senior Vice President, Investor Relations Jim Scapa - Founder, Chairman, and Chief Executive Officer Matt Brown - Chief Financial Officer Conference Call Participants Ken Wong - Oppenheimer Matt Swanson - RBC Capital Markets Dylan Becker - William Blair Andrew DeGasperi - Berenberg Charles Shi - Needham & Company Blair Abernethy - Rosenblatt Mark Schappel - Loop Capital Dave ...

Part I [Business](index=6&type=section&id=Item%201.%20Business) Altair is a global computational science and AI company offering software and cloud solutions for simulation, HPC, and data analytics - Altair is a global leader in computational science and AI, offering software and cloud solutions in simulation, HPC, and data analytics[18](index=18&type=chunk) - The company operates through two reportable segments: Software and Client Engineering Services (CES)[98](index=98&type=chunk) - As of December 31, 2022, Altair had over **13,000 customers** worldwide, with the automotive and aerospace industries accounting for approximately **39% of 2022 billings**[69](index=69&type=chunk)[70](index=70&type=chunk) - The company utilizes a patented units-based subscription licensing model, which allows flexible access to its software portfolio and partner products, contributing to a recurring software license rate averaging **90%** over the past five years[66](index=66&type=chunk) - Altair has a strong history of acquisitions, with **48 companies** or technologies acquired since 1996, including **23 in the last five years**; key 2022 acquisitions include RapidMiner, Concept Engineering, Gen3D, Powersim, and Cassini[91](index=91&type=chunk) [Products and Services](index=6&type=section&id=Item%201.%20Business%20-%20Products%20and%20Services) Altair offers software and services in simulation, HPC, and data analytics, accessible via Altair One, plus client engineering services - Product categories include: Physics Simulation and Concept Design; High Performance and Cloud Computing; and Data Analytics, AI, IoT, and Smart Product Development[24](index=24&type=chunk) - The Altair Partner Alliance (APA) extends the company's offerings by providing access to complementary third-party software products through the same units-based licensing model[40](index=40&type=chunk)[41](index=41&type=chunk) - Software services include consulting, training, and implementation to help customers leverage Altair's software[42](index=42&type=chunk) - Client Engineering Services (CES) involves placing Altair-employed engineers and data scientists at customer sites for specific assignments, which helps deepen customer relationships and market understanding[45](index=45&type=chunk) [Research and Development](index=9&type=section&id=Item%201.%20Business%20-%20Research%20and%20Development) Altair's R&D, with 1,200 global staff, enhances software functionality, scalability, and integrates AI across its product portfolio - The R&D team consists of approximately **1,200 people worldwide**[50](index=50&type=chunk) - R&D focus areas are: Physics Simulation and Concept Design, High-performance Computing, and Data Analytics, AI, IoT, and Smart Product Development[50](index=50&type=chunk)[52](index=52&type=chunk)[55](index=55&type=chunk) - A key R&D initiative is adapting modeling and visualization technology for cloud deployment and supporting virtual/augmented reality hardware[51](index=51&type=chunk) - Recent R&D investments focus on allowing customers to easily move and manage workflows in hybrid on-premise and cloud compute environments[53](index=53&type=chunk) [Sales, Marketing, and Customers](index=11&type=section&id=Item%201.%20Business%20-%20Sales%2C%20Marketing%2C%20and%20Customers) Altair uses a direct global sales force, serving over 13,000 customers, with 2022 software billings distributed across Americas, EMEA, and APAC - Approximately **86% of 2022 software revenue** was generated through the direct sales force, with the remaining **14% from indirect channels**[60](index=60&type=chunk)[62](index=62&type=chunk) - The company has over **13,000 customers** as of December 31, 2022[69](index=69&type=chunk) 2022 Software Billings by Geography | Region | Percentage of Billings | | :--- | :--- | | Americas | 32% | | EMEA | 34% | | APAC | 34% | - No single customer accounted for more than **2% of 2022 software billings**[70](index=70&type=chunk) [Competition and Intellectual Property](index=13&type=section&id=Item%201.%20Business%20-%20Competition%20and%20Intellectual%20Property) Altair competes in a fragmented market, leveraging its software, optimization technology, and patented licensing model, protected by 287 patents - Primary competitors include Dassault Systèmes, Siemens, Ansys, MSC Software, SAS Institute, and Alteryx[72](index=72&type=chunk) - Competitive advantages are cited as the breadth and depth of its software offering, integrated optimization technology, and the unique units-based licensing model[73](index=73&type=chunk)[74](index=74&type=chunk) - As of December 31, 2022, Altair holds **287 issued patents** and has 66 published patent applications worldwide[77](index=77&type=chunk) [Risk Factors](index=18&type=section&id=Item%201A.%20Risk%20Factors) The company faces business, industry, IP, regulatory, indebtedness, and capital structure risks that could materially affect its operations - **Business Risks:** The company's growth depends on increasing software usage by existing customers and acquiring new ones; it faces a long and unpredictable sales cycle and is heavily reliant on annual license renewals[115](index=115&type=chunk)[119](index=119&type=chunk)[122](index=122&type=chunk) - **Industry Concentration Risk:** A substantial portion of revenue comes from the automotive industry (**29% of 2022 billings**), making the company vulnerable to downturns in that sector[133](index=133&type=chunk) - **Intellectual Property & Cybersecurity Risks:** The business is exposed to risks from potential software defects, failure to protect proprietary technology, intellectual property disputes, and security incidents like cyber-attacks[165](index=165&type=chunk)[166](index=166&type=chunk)[172](index=172&type=chunk) - **Regulatory Risks:** The company must comply with a wide range of complex regulations, including data privacy laws like GDPR, anti-bribery laws (FCPA), and export/import controls, with non-compliance posing significant financial and reputational risks[189](index=189&type=chunk)[195](index=195&type=chunk)[207](index=207&type=chunk) - **Indebtedness Risks:** The company has outstanding convertible senior notes (due 2024 and 2027), which are effectively subordinated to secured debt and subsidiary liabilities; covenants in its loan agreements may restrict business and financing activities[229](index=229&type=chunk)[237](index=237&type=chunk) - **Capital Structure Risk:** The dual-class stock structure concentrates approximately **84% of voting power** with holders of Class B common stock, limiting the influence of Class A stockholders on corporate matters[224](index=224&type=chunk) [Unresolved Staff Comments](index=43&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports no unresolved staff comments from the Securities and Exchange Commission - None[250](index=250&type=chunk) [Properties](index=43&type=section&id=Item%202.%20Properties) Altair owns its Troy, Michigan headquarters, while all other domestic and international offices are leased and deemed adequate - The company owns its corporate headquarters in Troy, Michigan[250](index=250&type=chunk) - All other domestic and international offices are operated under lease or sublease agreements[250](index=250&type=chunk) [Legal Proceedings](index=43&type=section&id=Item%203.%20Legal%20Proceedings) The company is involved in ongoing legal matters related to its World Programming acquisition, including a $65.9 million judgment payment - On January 3, 2022, the company paid the outstanding balance of **$65.9 million** on a judgment against its subsidiary, World Programming, in a case with SAS Institute, Inc[253](index=253&type=chunk) - A separate lawsuit filed by SAS in 2018 is pending a decision from the U.S. Court of Appeals for the Federal Circuit after a lower court ruled in favor of World Programming on copyright claims[254](index=254&type=chunk) [Mine Safety Disclosures](index=43&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[255](index=255&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=44&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Altair's Class A common stock trades on Nasdaq; the company has never paid dividends and initiated a **$50.0 million** stock repurchase program - Class A common stock trades on the Nasdaq Global Select Market under the symbol 'ALTR'; Class B common stock is not listed[256](index=256&type=chunk) - The company has never declared or paid cash dividends and does not intend to in the foreseeable future[258](index=258&type=chunk) - A stock repurchase program authorizing up to **$50.0 million** was approved in February 2022[259](index=259&type=chunk) Issuer Purchases of Equity Securities (Q4 2022) | Period | Total Shares Purchased | Average Price Paid per Share (in dollars) | Approx. Dollar Value Remaining (in dollars) | | :--- | :--- | :--- | :--- | | Oct 1 - Oct 31, 2022 | 0 | N/A | $45,612,733 | | Nov 1 - Nov 30, 2022 | 0 | N/A | $45,612,733 | | Dec 1 - Dec 31, 2022 | 375,831 | $45.95 | $28,341,822 | | **Total Q4** | **375,831** | **$45.95** | **$28,341,822** | [Reserved](index=45&type=section&id=Item%206.%20Reserved) This item is reserved [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=46&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Altair's 2022 total revenue grew to **$572.2 million**, but a net loss of **$43.4 million** was recorded due to debt repurchase and compensation Key Financial Results (2022 vs 2021) | Metric (in thousands) | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | $572,221 | $532,179 | 7.5% | | Gross Profit | $449,332 | $402,513 | 11.6% | | Operating (Loss) Income | $(6,937) | $12,339 | N/A | | Net Loss | $(43,429) | $(8,794) | 394% | | Adjusted EBITDA | $108,600 | $85,253 | 27.4% | | Billings | $607,602 | $539,855 | 12.5% | - Software revenue increased by **12%** (**18% in constant currency**) to **$506.5 million** in 2022, driven by growth across all geographic regions[318](index=318&type=chunk) - Client Engineering Services (CES) revenue decreased by **26%** to **$28.9 million** due to fluctuating customer demand and a challenging labor market[321](index=321&type=chunk) - The company issued **$230.0 million** of 1.750% convertible senior notes due 2027 and used proceeds to retire approximately **$148.2 million** of its convertible notes due 2024[274](index=274&type=chunk)[281](index=281&type=chunk) - Free Cash Flow decreased by **44%** to **$29.9 million** in 2022, primarily due to a **$65.9 million** payment for a damages judgment related to the World Programming acquisition[346](index=346&type=chunk) [Results of Operations](index=53&type=section&id=Item%207.%20MD%26A%20-%20Results%20of%20Operations) In 2022, total revenue grew to **$572.2 million**, but increased operating expenses led to an operating loss of **$6.9 million** and a net loss of **$43.4 million** Revenue by Segment (2022 vs 2021) | Revenue Segment (in thousands) | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Software | $506,508 | $453,746 | 12% | | Software related services | $30,661 | $31,823 | (4%) | | Client engineering services | $28,883 | $39,282 | (26%) | | Other | $6,169 | $7,328 | (16%) | | **Total Revenue** | **$572,221** | **$532,179** | **7.5%** | Operating Expenses (2022 vs 2021) | Expense Category (in thousands) | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Research and development | $185,863 | $151,049 | 23% | | Sales and marketing | $155,245 | $132,750 | 17% | | General and administrative | $97,606 | $91,500 | 7% | | Amortization of intangible assets | $27,510 | $18,357 | 50% | - The increase in R&D and Sales & Marketing expenses was primarily driven by higher stock-based compensation (**$19.8 million** and **$15.6 million** increase, respectively) and increased employee compensation due to headcount growth[331](index=331&type=chunk)[332](index=332&type=chunk) - Other expense, net, increased by **$16.3 million**, mainly due to a **$16.6 million** expense recognized on the repurchase of a portion of the 2024 Notes[337](index=337&type=chunk) [Non-GAAP Financial Measures](index=58&type=section&id=Item%207.%20MD%26A%20-%20Non-GAAP%20Financial%20Measures) Non-GAAP measures show 2022 Billings increased to **$607.6 million**, Adjusted EBITDA grew to **$108.6 million**, and Free Cash Flow decreased to **$29.9 million** Reconciliation of Net Loss to Adjusted EBITDA (in thousands) | Line Item (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Net loss | $(43,429) | $(8,794) | | Income tax expense | 15,216 | 8,506 | | Stock-based compensation | 84,787 | 44,549 | | Interest expense | 4,377 | 12,065 | | Depreciation and amortization | 35,504 | 25,644 | | Restructuring expense | — | 5,053 | | Special adjustments, interest income and other | 12,145 | (1,770) | | **Adjusted EBITDA** | **$108,600** | **$85,253** | Reconciliation of Net Cash from Operating Activities to Free Cash Flow (in thousands) | Line Item (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $39,570 | $61,623 | | Capital expenditures | (9,648) | (7,849) | | **Free Cash Flow** | **$29,922** | **$53,774** | - The recurring software license rate was **92%** for each of the years ended December 31, 2022, 2021, and 2020[353](index=353&type=chunk) [Liquidity and Capital Resources](index=60&type=section&id=Item%207.%20MD%26A%20-%20Liquidity%20and%20Capital%20Resources) As of December 31, 2022, Altair had **$316.1 million** in cash and **$200.0 million** available credit, with net cash from operations decreasing due to a legal judgment - As of December 31, 2022, the company had **$316.1 million** in cash and cash equivalents[354](index=354&type=chunk) - The company has a **$200.0 million** revolving credit facility, with no outstanding borrowings as of year-end 2022[358](index=358&type=chunk) - Net cash provided by operating activities decreased by **$22.1 million** to **$39.6 million** in 2022, primarily due to a **$65.9 million** payment on a damages judgment[362](index=362&type=chunk) - Net cash provided by financing activities was **$23.0 million**, resulting from **$224.3 million** in proceeds from new 2027 Notes, offset by a **$192.4 million** repurchase of 2024 Notes and **$19.7 million** in stock repurchases[364](index=364&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=64&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company is exposed to foreign currency exchange risk from international operations and interest rate risk related to its fixed-rate convertible notes - The company is exposed to foreign currency risk from its international operations; appreciation of the U.S. dollar negatively impacts reported revenue and operating income[387](index=387&type=chunk) - The company has fixed-rate convertible notes (**$81.8 million** due 2024, **$230.0 million** due 2027), so it does not have direct interest rate exposure on interest expense, but the fair value of the notes is sensitive to interest rate changes and the company's stock price[388](index=388&type=chunk) [Financial Statements and Supplementary Data](index=65&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section includes consolidated financial statements and an unqualified auditor's report, highlighting software revenue and RapidMiner acquisition as critical audit matters - The consolidated financial statements and the report of the independent registered public accounting firm (Ernst & Young LLP) are included in this section[392](index=392&type=chunk)[405](index=405&type=chunk) - The auditor issued an unqualified opinion on both the financial statements and the company's internal control over financial reporting[405](index=405&type=chunk)[417](index=417&type=chunk) - Critical Audit Matters highlighted by the auditor include: - **Software Revenue Recognition:** Challenging due to the complexity of estimating standalone selling prices (SSP) for performance obligations - **Business Combination (RapidMiner):** Challenging due to significant estimation uncertainty in determining the fair value of acquired intangible assets like developed technology and customer relationships[409](index=409&type=chunk)[412](index=412&type=chunk) [Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=65&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[392](index=392&type=chunk) [Controls and Procedures](index=65&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2022, despite a new ERP system implementation - Management concluded that disclosure controls and procedures were effective as of December 31, 2022[393](index=393&type=chunk) - Management concluded that internal control over financial reporting was effective as of December 31, 2022; recent acquisitions (RapidMiner, Concept Engineering, Gen3D, Powersim) were excluded from this assessment, as permitted[395](index=395&type=chunk)[396](index=396&type=chunk) - A new enterprise resource planning (ERP) system was implemented in July 2022, leading to changes in internal controls over financial reporting[397](index=397&type=chunk) [Other Information](index=66&type=section&id=Item%209B.%20Other%20Information) The company reports no other information for this item - None[398](index=398&type=chunk) [Disclosure Regarding Foreign Jurisdictions that Prevent Inspections](index=66&type=section&id=Item%209C.%20Disclosure%20Regarding%20Foreign%20Jurisdictions%20that%20Prevent%20Inspections) The company reports no information for this item - None[398](index=398&type=chunk) Part III [Directors, Executive Officers and Corporate Governance](index=67&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information for this item is incorporated by reference from the company's 2023 Proxy Statement - Information is incorporated by reference from the 2023 Proxy Statement[400](index=400&type=chunk) [Executive Compensation](index=67&type=section&id=Item%2011.%20Executive%20Compensation) Information for this item is incorporated by reference from the company's 2023 Proxy Statement - Information is incorporated by reference from the 2023 Proxy Statement[400](index=400&type=chunk) [Security Ownership of Certain Beneficial Owners and Management, and Related Stockholder Matters](index=67&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%2C%20and%20Related%20Stockholder%20Matters) Information for this item is incorporated by reference from the company's 2023 Proxy Statement - Information is incorporated by reference from the 2023 Proxy Statement[400](index=400&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=67&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information for this item is incorporated by reference from the company's 2023 Proxy Statement - Information is incorporated by reference from the 2023 Proxy Statement[401](index=401&type=chunk) [Principal Accounting Fees and Services](index=67&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) Information for this item is incorporated by reference from the company's 2023 Proxy Statement - Information is incorporated by reference from the 2023 Proxy Statement[401](index=401&type=chunk) Part IV [Exhibits, Financial Statement Schedules](index=67&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists documents filed with the Form 10-K, including consolidated financial statements and a comprehensive list of exhibits - This item includes the consolidated financial statements and the list of exhibits filed with the Form 10-K[401](index=401&type=chunk) [Form 10-K Summary](index=116&type=section&id=Item%2016.%20Form%2010-K%20Summary) The company reports no Form 10-K summary - None[663](index=663&type=chunk)

Financial Data and Key Metrics Changes - Total revenue for the first 9 months of 2022 grew by 10.4% year-over-year on a constant currency basis [7] - Adjusted EBITDA for the first 9 months of 2022 was $69.9 million, representing 17% of revenue, compared to $61.3 million or 15.7% in the same period of 2021, reflecting a growth of 14% [9] - Calculated total billings for Q3 2022 were $122.9 million, a year-over-year increase of 4.9% in reported currency and 13.3% in constant currency [23] - Non-GAAP gross margin was 78.6% in Q3 2022, up from 75.2% in the prior year, an increase of 340 basis points [24] - Free cash flow for the first 9 months of 2022 was $85.7 million, an increase of more than 75% year-over-year [26] Business Line Data and Key Metrics Changes - Software product revenue as a percentage of total revenue for the first 9 months of 2022 was 87.8%, up from 84.7% in the same period in 2021 [8] - Software product billings in Q3 grew by more than 21% year-over-year on a constant currency basis [8] - Client engineering services have trended down significantly, but the trend is expected to stabilize entering Q4 [9] Market Data and Key Metrics Changes - Software product revenue was $103.8 million in Q3 2022, an increase of 1.4% compared to Q3 2021 in reported currencies [23] - Total revenue, including services and other revenue, was $119.4 million in Q3 2022, a decrease of 1.6% compared to Q3 2021 in reported currency [23] - The Americas, EMEA, and APAC regions all showed impressive growth rates in software product billings, approximately 22% year-over-year [8] Company Strategy and Development Direction - The acquisition of RapidMiner enhances Altair's data analytics portfolio and positions the company as a leader in supporting data science and analytics requirements across various market verticals [10][11] - The company is focusing on organic innovation while integrating acquired technologies to strengthen its product offerings [12] - Altair aims to increase the percentage of sales from indirect sales channels and has announced new partnerships to support this strategy [20] Management's Comments on Operating Environment and Future Outlook - Management remains positive about the remainder of 2022 despite global uncertainty and foreign currency exchange rate headwinds [21] - The pipeline remains strong, with no signs of deals being delayed, as customers continue to prioritize competitive product development [35] - The company expects software product revenue for Q4 2022 to be in the range of $126 million to $131 million, reflecting a year-over-year increase of 3.0% to 7.1% [27] Other Important Information - The company is raising guidance for full year 2022 total revenue to a range of $555 million to $560 million, representing year-over-year growth of 4.3% to 5.2% [29] - Adjusted EBITDA guidance for Q4 2022 is expected to be in the range of $22 million to $25 million, or 15.4% to 16.9% of total revenue [30] Q&A Session Summary Question: How is the demand environment perceived by core customers? - Management noted that the pipeline remains strong, with no signs of deals being delayed, as customers feel pressure to continue competitive product development [35] Question: What is the value proposition of the RapidMiner acquisition? - The acquisition enhances Altair's technology offerings and provides a strong platform for data analytics, particularly in the manufacturing sector [37] Question: Are there differences among customer verticals regarding the macro environment? - Management indicated that the demand appears solid across all verticals, including automotive and aerospace [41] Question: Is RapidMiner adding any revenue this year? - RapidMiner is expected to contribute a couple of million in Q4, but had minimal impact in Q3 [43] Question: What is the go-to-market plan for RapidMiner? - RapidMiner will quickly move into the units model, with a focus on transitioning existing customers to this model [48] Question: How does the company view M&A opportunities in the current macro environment? - Management sees potential for more M&A opportunities as time goes on, but plans to focus on digesting recent acquisitions [56] Question: What is the impact of U.S. export control rules on business? - While there is some impact, management believes business from China will continue to grow despite restrictions [68]

PART I. FINANCIAL INFORMATION [Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) The unaudited consolidated financial statements for the period ended September 30, 2022, reflect decreased total assets and a widened net loss, primarily due to a significant legal judgment payment [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) As of September 30, 2022, Altair's total assets decreased to **$1.12 billion**, while total liabilities increased, leading to a reduction in stockholders' equity Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2022 (Unaudited) | Dec 31, 2021 | | :--- | :--- | :--- | | **Total Current Assets** | $465,731 | $588,221 | | Cash and cash equivalents | $311,853 | $413,743 | | Goodwill | $455,211 | $370,178 | | **Total Assets** | **$1,124,928** | **$1,163,275** | | **Total Current Liabilities** | $198,476 | $473,978 | | Convertible senior notes, net (non-current) | $305,158 | $— | | **Total Liabilities** | **$589,399** | **$549,294** | | **Total Stockholders' Equity** | **$535,529** | **$613,197** | [Consolidated Statements of Operations](index=4&type=section&id=Consolidated%20Statements%20of%20Operations) For the nine months ended September 30, 2022, despite a 5% revenue increase, significant operating expense growth led to a widened net loss of **$55.5 million** Statement of Operations Summary (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | **Total Revenue** | $119,351 | $121,307 | $411,788 | $391,382 | | Gross Profit | $91,442 | $89,806 | $322,753 | $294,513 | | Operating (Loss) Income | $(24,996) | $(1,926) | $(11,553) | $7,692 | | **Net Loss** | **$(33,248)** | **$(8,109)** | **$(55,494)** | **$(7,397)** | | Net Loss Per Share, basic | $(0.42) | $(0.11) | $(0.70) | $(0.10) | [Consolidated Statements of Cash Flows](index=8&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) For the nine months ended September 30, 2022, net cash from operating activities decreased, and significant cash was used for acquisitions, resulting in a **$101.6 million** overall decrease in cash Cash Flow Summary (in thousands) | Activity | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $26,534 | $55,594 | | Net cash used in investing activities | $(151,173) | $(12,911) | | Net cash provided by financing activities | $35,152 | $173,735 | | **Net (decrease) increase in cash** | **$(101,629)** | **$214,467** | - Payments for acquisitions of businesses totaled **$134.1 million** in the first nine months of 2022, a substantial increase from **$5.5 million** in the same period of 2021[29](index=29&type=chunk) - Financing activities included **$224.3 million** in proceeds from new convertible senior notes, offset by a **$192.4 million** repurchase of existing convertible notes[29](index=29&type=chunk) [Notes to Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes detail significant accounting policies, recent acquisitions, and debt structure, including the adoption of ASU 2020-06, key acquisitions, new convertible note issuance, and the **$65.9 million** payment for a legal judgment - The company adopted ASU 2020-06 for convertible instruments, resulting in a **$23.9 million** decrease to accumulated deficit and simplifying debt accounting by reporting it as a single liability[36](index=36&type=chunk) - In September 2022, Altair acquired RapidMiner for approximately **$100.0 million** in cash to strengthen its data analytics portfolio[61](index=61&type=chunk)[63](index=63&type=chunk) - In June 2022, the company issued **$230.0 million** of 1.750% convertible senior notes due 2027 and used part of the proceeds to repurchase **$148.2 million** of its 0.25% notes due 2024[83](index=83&type=chunk)[93](index=93&type=chunk) - Stock-based compensation expense for the nine months ended Sep 30, 2022, was **$62.5 million**, a significant increase from **$31.2 million** in the same period of 2021[117](index=117&type=chunk) - The company paid the outstanding balance of **$65.9 million** on the World Programming (NC Judgment) legal case on January 3, 2022[131](index=131&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=26&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses performance, highlighting Software segment revenue growth, significant operating expense increases due to compensation and acquisitions, and strong liquidity despite cash usage for acquisitions and a legal judgment payment [Results of Operations](index=31&type=section&id=Results%20of%20Operations) For the nine months ended September 30, 2022, total revenue increased 5% to **$411.8 million**, but a 17% rise in operating expenses led to an operating loss and a **$55.5 million** net loss Nine-Month Performance Comparison (in thousands) | Metric | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | $411,788 | $391,382 | 5% | | - Software Revenue | $361,555 | $331,388 | 9% | | - Client Engineering Services | $22,414 | $31,005 | (28%) | | Gross Profit | $322,753 | $294,513 | 10% | | Total Operating Expenses | $334,306 | $286,821 | 17% | | Operating (Loss) Income | $(11,553) | $7,692 | NM | | Net Loss | $(55,494) | $(7,397) | NM | - Software revenue grew **15%** in constant currency for the nine months ended Sep 30, 2022, driven by growth across all geographic regions and increases in new and expansion business[199](index=199&type=chunk) - Operating expenses for the nine-month period were significantly impacted by increased stock-based compensation (**$+31.3 million**), higher employee-related costs, and acquisition-related amortization[211](index=211&type=chunk)[212](index=212&type=chunk)[214](index=214&type=chunk) - Other expense, net, for the nine-month period included a **$16.6 million** expense on the repurchase of convertible senior notes and a **$9.5 million** increase in net foreign currency losses[219](index=219&type=chunk) [Non-GAAP Financial Measures](index=40&type=section&id=Non-GAAP%20Financial%20Measures) For the nine months ended September 30, 2022, non-GAAP Billings increased 10% and Adjusted EBITDA grew 14%, but Free Cash Flow decreased 59% to **$19.8 million** due to a legal judgment payment Non-GAAP Metrics (in thousands) | Metric | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | % Change | | :--- | :--- | :--- | :--- | | Billings | $419,698 | $380,731 | 10% | | Adjusted EBITDA | $69,859 | $61,288 | 14% | | Free Cash Flow | $19,813 | $48,783 | (59%) | - The recurring software license rate for the nine months ended September 30, 2022, was **93%**, an increase from **91%** in the same period of 2021[234](index=234&type=chunk) - Free Cash Flow for the nine months ended September 30, 2022, includes a **$65.9 million** payment for a legal judgment acquired in December 2021[231](index=231&type=chunk) [Liquidity and Capital Resources](index=42&type=section&id=Liquidity%20and%20Capital%20Resources) As of September 30, 2022, Altair maintained strong liquidity with **$311.9 million** in cash and **$150.0 million** available credit, despite significant cash usage for acquisitions and a legal judgment payment - Principal sources of liquidity as of September 30, 2022, are **$311.9 million** in cash and cash equivalents and **$150.0 million** available on the credit facility[235](index=235&type=chunk) - Net cash from operating activities decreased by **$29.1 million** year-over-year, mainly due to a **$65.9 million** payment in January on a legal judgment against World Programming[244](index=244&type=chunk) - The company repurchased **85,119 shares** for **$4.4 million** under its stock repurchase program in the first nine months of 2022, with **$45.6 million** remaining available[236](index=236&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=44&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company faces foreign currency exchange risk from international operations and market risk from fixed-rate convertible notes, with minimal direct interest rate risk on debt due to no outstanding variable-rate borrowings - The company has substantial international operations and is exposed to foreign currency risk; appreciation of the USD against foreign currencies negatively impacts reported revenue and income[251](index=251&type=chunk) - The fair value of the company's fixed-rate Convertible Notes is exposed to interest rate risk and fluctuations in the company's stock price[252](index=252&type=chunk) - As of September 30, 2022, the company had no outstanding borrowings under its revolving credit facility, limiting exposure to variable interest rate risk[253](index=253&type=chunk) [Controls and Procedures](index=45&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded disclosure controls were effective as of September 30, 2022, following the implementation of a new ERP system in Q3 2022 that changed reporting processes and internal controls - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2022[256](index=256&type=chunk) - A new enterprise resource planning (ERP) system was implemented in Q3 2022, leading to changes in reporting processes and internal controls over financial reporting[257](index=257&type=chunk) PART II. OTHER INFORMATION [Legal Proceedings](index=46&type=section&id=Item%201.%20Legal%20Proceedings) This section details legal proceedings involving World Programming, including the **$65.9 million** payment of a judgment to SAS Institute, Inc., and ongoing copyright and patent litigation pending a Court of Appeals decision - On January 3, 2022, the company paid the outstanding **$65.9 million** balance on the NC Judgment against its subsidiary World Programming[261](index=261&type=chunk) - A separate litigation by SAS against World Programming in Texas is pending a decision from the U.S. Court of Appeals for the Federal Circuit[262](index=262&type=chunk) [Risk Factors](index=46&type=section&id=Item%201A.%20Risk%20Factors) This section supplements previously disclosed risks, focusing on new risks associated with the 2027 Convertible Senior Notes, including subordination and potential dilution, and the business disruption risk from the recent ERP system implementation - The 2027 Notes are effectively subordinated to secured debt (like the revolving credit facility) and structurally junior to all liabilities of the company's subsidiaries[266](index=266&type=chunk) - The company's ability to service its debt, including the 2027 and 2024 Notes, depends on future performance and cash flow, which may not be sufficient[269](index=269&type=chunk) - The company may not have sufficient cash to repurchase the 2027 Notes upon a fundamental change or to pay cash upon conversion, and existing debt agreements may limit its ability to do so[272](index=272&type=chunk)[273](index=273&type=chunk) - Conversion of the 2027 Notes will dilute the ownership interest of existing stockholders and could depress the price of the Class A common stock[280](index=280&type=chunk) - The implementation of a new ERP system in Q3 2022 presents a risk of business disruption if technical problems or other significant issues arise[281](index=281&type=chunk) [Other Information (Items 2, 3, 4, 5, 6)](index=50&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section indicates no unregistered sales of equity securities, no defaults, and no mine safety disclosures, concluding with a list of exhibits filed with the report - Items 2, 3, 4, and 5 are noted as 'Not applicable'[283](index=283&type=chunk) - Item 6 provides a list of exhibits filed with the Form 10-Q, including merger agreements and officer certifications[285](index=285&type=chunk)

Altair Engineering, Inc. (NASDAQ:ALTR) Q2 2022 Earnings Conference Call August 4, 2022 5:00 PM ET Company Participants Dave Simon - SVP, Investor Relations Jim Scapa - Founder, Chairman & CEO Matt Brown - CFO Conference Call Participants Ken Wong - Oppenheimer Blair Abernethy - Rosenblatt Operator Good day, and thank you for standing by. Welcome to the Altair Q2 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question ...