Altair(US:ALTR)2022-11-03 16:00PART I. FINANCIAL INFORMATION Financial Statements 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 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 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 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 202129 - Financing activities included $224.3 million in proceeds from new convertible senior notes, offset by a $192.4 million repurchase of existing convertible notes29 Notes to Consolidated Financial Statements 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 liability36 - In September 2022, Altair acquired RapidMiner for approximately $100.0 million in cash to strengthen its data analytics portfolio6163 - 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 20248393 - 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 2021117 - The company paid the outstanding balance of $65.9 million on the World Programming (NC Judgment) legal case on January 3, 2022131 Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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) | $(7,397) | NM | - Software revenue grew 15% in constant currency for the nine months ended Sep 30, 2022, driven by growth across all geographic regions and increases in new and expansion business199 - Operating expenses for the nine-month period were significantly impacted by increased stock-based compensation ($+31.3 million), higher employee-related costs, and acquisition-related amortization211212214 - 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 losses219 Non-GAAP Financial Measures 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 2021234 - Free Cash Flow for the nine months ended September 30, 2022, includes a $65.9 million payment for a legal judgment acquired in December 2021231 Liquidity and Capital Resources 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 facility235 - 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 Programming244 - 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 available236 Quantitative and Qualitative Disclosures About Market Risk 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 income251 - The fair value of the company's fixed-rate Convertible Notes is exposed to interest rate risk and fluctuations in the company's stock price252 - As of September 30, 2022, the company had no outstanding borrowings under its revolving credit facility, limiting exposure to variable interest rate risk253 Controls and Procedures 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, 2022256 - A new enterprise resource planning (ERP) system was implemented in Q3 2022, leading to changes in reporting processes and internal controls over financial reporting257 PART II. OTHER INFORMATION Legal Proceedings 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 Programming261 - A separate litigation by SAS against World Programming in Texas is pending a decision from the U.S. Court of Appeals for the Federal Circuit262 Risk Factors 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 subsidiaries266 - 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 sufficient269 - 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 so272273 - Conversion of the 2027 Notes will dilute the ownership interest of existing stockholders and could depress the price of the Class A common stock280 - The implementation of a new ERP system in Q3 2022 presents a risk of business disruption if technical problems or other significant issues arise281 Other Information (Items 2, 3, 4, 5, 6) 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 - Item 6 provides a list of exhibits filed with the Form 10-Q, including merger agreements and officer certifications285