Altair(ALTR) - 2022 Q4 - Annual Report

Part I Business 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] - The company operates through two reportable segments: Software and Client Engineering Services (CES)[98] - 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][70] - 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] - 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] Products and Services 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] - 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][41] - Software services include consulting, training, and implementation to help customers leverage Altair's software[42] - 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] Research and Development 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] - R&D focus areas are: Physics Simulation and Concept Design, High-performance Computing, and Data Analytics, AI, IoT, and Smart Product Development[50][52][55] - A key R&D initiative is adapting modeling and visualization technology for cloud deployment and supporting virtual/augmented reality hardware[51] - Recent R&D investments focus on allowing customers to easily move and manage workflows in hybrid on-premise and cloud compute environments[53] Sales, Marketing, and Customers 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][62] - The company has over 13,000 customers as of December 31, 2022[69] 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] Competition and Intellectual Property 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] - Competitive advantages are cited as the breadth and depth of its software offering, integrated optimization technology, and the unique units-based licensing model[73][74] - As of December 31, 2022, Altair holds 287 issued patents and has 66 published patent applications worldwide[77] Risk Factors 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][119][122] - 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] - 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][166][172] - 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][195][207] - 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][237] - 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] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - None[250] Properties 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] - All other domestic and international offices are operated under lease or sublease agreements[250] Legal Proceedings 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] - 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] Mine Safety Disclosures This item is not applicable to the company - Not applicable[255] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 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] - The company has never declared or paid cash dividends and does not intend to in the foreseeable future[258] - A stock repurchase program authorizing up to $50.0 million was approved in February 2022[259] 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 This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations 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] - Client Engineering Services (CES) revenue decreased by 26% to $28.9 million due to fluctuating customer demand and a challenging labor market[321] - 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][281] - 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] Results of Operations 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][332] - 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] Non-GAAP Financial Measures 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] Liquidity and Capital Resources 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] - The company has a $200.0 million revolving credit facility, with no outstanding borrowings as of year-end 2022[358] - 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] - 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] Quantitative and Qualitative Disclosures About Market Risk 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] - 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] Financial Statements and Supplementary Data 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][405] - The auditor issued an unqualified opinion on both the financial statements and the company's internal control over financial reporting[405][417] - 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][412] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[392] Controls and Procedures 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] - 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][396] - A new enterprise resource planning (ERP) system was implemented in July 2022, leading to changes in internal controls over financial reporting[397] Other Information The company reports no other information for this item - None[398] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections The company reports no information for this item - None[398] Part III Directors, Executive Officers and Corporate Governance 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] Executive Compensation 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] Security Ownership of Certain Beneficial Owners and Management, and Related Stockholder Matters 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] Certain Relationships and Related Transactions, and Director Independence 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] Principal Accounting Fees and Services 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] Part IV Exhibits, Financial Statement Schedules 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] Form 10-K Summary The company reports no Form 10-K summary - None[663]