Altair(ALTR) - 2024 Q4 - Annual Report

Part I Business Overview Altair is a global leader in computational intelligence, providing software and cloud solutions in simulation, high-performance computing (HPC), data analytics, and AI - Altair is a global leader in computational intelligence, offering software and cloud solutions in simulation, HPC, data analytics, and AI[18] - On October 30, 2024, Altair entered into a merger agreement with Siemens Industry, anticipated to close in the first half of 2025, with stockholders receiving $113.00 per share in cash[22][23] - As of December 31, 2024, the company had over 13,000 customers worldwide, with automotive and aerospace being the largest industries[84][85] - The company operates through two reportable segments: Software and Client Engineering Services (CES)[117] Products and Services Altair offers a comprehensive suite of software and services across physics simulation, high-performance computing, and data analytics/AI/IoT - Product categories include Physics Simulation and Concept Design; High Performance and Cloud Computing; and Data Analytics, AI, IoT, and Smart Product Development[34] - The Altair Partner Alliance (APA) extends offerings by providing customers access to over 150 complementary third-party software products using existing Altair Units[52][81] - The company provides Client Engineering Services (CES), placing engineering, IT, and data science talent at customer sites for specific assignments[59][60] - Altair One serves as a cloud innovation gateway for customers to access, download, and run Altair and partner applications[30] Sales, Licensing, and Customers Altair primarily uses a direct sales force and a unique units-based subscription model, achieving high recurring software license rates - Approximately 87% of 2024 software revenue was generated through the direct sales force, with the remaining 13% from indirect channels[75][77] - The company's unique "Altair Units" subscription model provides flexible access to its software portfolio and partner products, driving a recurring software license rate of approximately 92% over the last five years[81] - In 2024, software billings were geographically distributed with 32% in the Americas, 31% in EMEA, and 37% in APAC[85] - No single customer accounted for more than 2% of 2024 software billings[85] Competition and Intellectual Property Altair competes in a fragmented market, leveraging its broad software offering, integrated optimization, and unique licensing model, protected by a substantial patent portfolio - Primary competitors include Dassault Systèmes, Siemens AG, Ansys, MSC Software (a Hexagon company), SAS Institute, and Alteryx[87] - Competitive advantages are cited as the breadth and depth of its software, integrated optimization technology, and the patented units-based subscription model[88][92] - As of December 31, 2024, Altair holds 303 issued patents worldwide and has eight published patent applications[94] Acquisitions Altair strategically acquires companies to enhance its technology portfolio, strengthening capabilities in data analytics, electronic design, and simulation - Acquired KSK Analytics, a Japanese AI and data analytics consulting and training firm[112] - Acquired Metrics Design Automation Inc., a Canadian company specializing in semiconductor electronic functional simulation and design verification[112] - Acquired Research in Flight, maker of FlightStream CFD software, strengthening its presence in the aerospace and defense sector[112] - Acquired the assets of Cambridge Semantics, a data fabric provider, to be integrated into the Altair RapidMiner platform[112] Risk Factors The company faces numerous risks, including those related to the pending Siemens merger, business operations, intellectual property, and financial obligations - Significant risks are associated with the pending merger with Siemens, including potential failure to complete the transaction, business disruptions, and restrictions on business activities[124][134][137] - Business and industry risks include failure to sustain revenue growth, intense competition, reduced customer spending on R&D, and dependence on the cyclical automotive industry[125][143][160] - Intellectual property and technology risks include potential defects in complex software, failure to protect proprietary technology, and vulnerability to cybersecurity incidents like hacking and malware[126][195][204] - The company is subject to risks from its substantial debt, including the effective subordination of its Convertible Notes and limitations on its ability to pay cash upon conversion[131][262] Cybersecurity Altair's cybersecurity program, overseen by the Board and managed by the CISO, focuses on prevention, resilience, and continuous monitoring, while acknowledging complex threat environments - Cybersecurity oversight is provided by the Board of Directors, with day-to-day management led by the CISO, who has over 35 years of IT experience[288][289] - The company has a formal governance structure to assess, identify, and manage cybersecurity risks, including threat intelligence and insider threat programs[290][293] - Altair engages third-party services for penetration testing and utilizes a SOC-as-a-Service provider for continuous monitoring and rapid threat response[292] - The company acknowledges that despite its efforts, it may not be successful in preventing a material cybersecurity incident and that its insurance may not fully cover all related costs[295] Legal Proceedings Three lawsuits were filed against Altair and its directors in connection with the pending Siemens merger, with one already dismissed, while other ordinary course legal matters persist - Three lawsuits were filed by stockholders in January 2025 in connection with the pending merger, alleging the Proxy Statement was materially incomplete; one lawsuit has since been dismissed[299] - The company acknowledges that it may be subject to other legal proceedings and intellectual property infringement claims in the ordinary course of business[300] Part II Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) For fiscal year 2024, Altair reported total revenue of $665.8 million and net income of $14.2 million, driven by software growth and improved profitability, with strong liquidity Results of Operations (2024 vs. 2023) In fiscal year 2024, total revenue grew to $665.8 million, driven by an 11% increase in Software revenue, leading to a net income of $14.2 million from a prior-year loss Consolidated Results of Operations (2024 vs. 2023) (in thousands) | Financial Metric | 2024 | 2023 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenue | $665,788 | $612,701 | 8.7% | | Software Revenue | $611,900 | $549,974 | 11.3% | | Engineering services and other | $53,888 | $62,727 | (14.1%) | | Gross Profit | $540,985 | $490,910 | 10.2% | | Total Operating Expenses | $523,300 | $490,667 | 6.6% | | Research and development | $221,161 | $212,645 | 4.0% | | Sales and marketing | $184,280 | $176,138 | 4.6% | | General and administrative | $90,150 | $70,887 | 27.2% | | Operating Income | $17,685 | $243 | NM | | Net Income (Loss) | $14,175 | $(8,926) | NM | - Software revenue increased by 11% (13% in constant currency), driven by strong retention and expansion within existing accounts, particularly in aerospace & defense[363] - General and administrative expenses increased by 27%, primarily due to a $16.4 million rise in professional fees related to the pending merger with Siemens Industry[371] Non-GAAP Financial Measures Altair's non-GAAP metrics for 2024 show positive trends, with Billings increasing to $667.9 million, Adjusted EBITDA growing to $149.9 million, and Free Cash Flow rising to $140.0 million Non-GAAP Financial Measures (2022-2024) (in thousands) | | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Billings | $667,876 | $631,795 | $607,602 | | Adjusted EBITDA | $149,912 | $129,138 | $108,600 | | Free Cash Flow | $139,998 | $117,114 | $29,922 | - Free Cash Flow for 2024 was adversely impacted by approximately $13.2 million of expenses paid related to the pending Merger with Siemens Industry[390] - The recurring software license rate was 93% for the year ended December 31, 2024, consistent with 93% in 2023 and up from 92% in 2022[392] Liquidity and Capital Resources Altair maintains strong liquidity with $561.9 million in cash and equivalents and an undrawn $200.0 million revolving credit facility, supported by increased operating cash flow - As of December 31, 2024, cash and cash equivalents were $561.9 million, up from $467.5 million at year-end 2023[393][400] - The company has $230.0 million in convertible notes due 2027 and access to a $200.0 million revolving credit facility, which was undrawn as of year-end 2024[393][398] Summary of Cash Flows (in thousands) | | 2024 | 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $154,084 | $127,307 | | Net cash used in investing activities | $(46,130) | $(15,852) | | Net cash (used in) provided by financing activities | $(7,035) | $37,766 | Critical Accounting Estimates Altair's critical accounting estimates involve significant judgment in revenue recognition, business acquisitions, and income taxes, particularly regarding deferred tax assets - Revenue recognition requires significant judgment in determining the standalone selling price (SSP) for distinct performance obligations, typically based on historical observable prices or an adjusted market assessment approach[416][421][542] - Accounting for acquisitions involves complex estimates for the fair value of identifiable assets and liabilities, with goodwill tested for impairment annually in the fourth quarter[423][424][526] - Income tax accounting requires assessing the need for a valuation allowance against deferred tax assets; due to a lack of sustainable earnings in the U.S., the company maintains a valuation allowance against substantially all of its net deferred tax assets in the United States[425][627] Financial Statements and Supplementary Data This section presents Altair's audited consolidated financial statements for the three years ended December 31, 2024, including an unqualified auditor's opinion and detailed notes - The independent auditor, Ernst & Young LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2024[462][473] - The auditor identified Software Revenue Recognition as a Critical Audit Matter, citing the complexity and judgment involved in estimating the standalone selling prices for performance obligations in software contracts[466][467] Consolidated Balance Sheet Highlights (in thousands) | | Dec 31, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Total Assets | $1,445,647 | $1,363,493 | | Cash and cash equivalents | $561,898 | $467,459 | | Goodwill | $462,459 | $458,125 | | Total Liabilities | $588,458 | $652,162 | | Total Stockholders' Equity | $857,189 | $711,331 | Consolidated Statement of Operations Highlights (in thousands) | | Year Ended Dec 31, 2024 | Year Ended Dec 31, 2023 | | :--- | :--- | :--- | | Total Revenue | $665,788 | $612,701 | | Gross Profit | $540,985 | $490,910 | | Operating Income (Loss) | $17,685 | $243 | | Net Income (Loss) | $14,175 | $(8,926) | Part III Directors, Executive Officers, Compensation, and Governance Information for Items 10-14, covering directors, executive officers, compensation, security ownership, related transactions, and accountant fees, is incorporated by reference from the forthcoming 2025 Proxy Statement - Information regarding directors, executive officers, corporate governance, executive compensation, security ownership, related transactions, and principal accountant fees and services is incorporated by reference from the forthcoming 2025 Proxy Statement[449][450][451][452][453]