Altair(ALTR) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements Unaudited consolidated financial statements show increased revenue and gross profit, but higher operating expenses resulted in an operating loss Consolidated Balance Sheets 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 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 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 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][24] - 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] - 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][52] - 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][134][159] - 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][199] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses revenue growth driven by software, increased operating expenses, and strong liquidity position Results of Operations 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][152] Non-GAAP Financial Measures 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] Liquidity and Capital Resources 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] - 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] - 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] Quantitative and Qualitative Disclosures About Market Risk 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] - 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] Controls and Procedures 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] - 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] PART II. OTHER INFORMATION Legal Proceedings 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][83] Risk Factors 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] Other Items (Items 2, 3, 4, 5, 6) 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] - During the quarter ended June 30, 2023, no directors or officers adopted or terminated a Rule 10b5-1 trading arrangement[204]