ALTERA CORPORATION The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this quarterly report and with our audited consolidated financial statements (and notes thereto) for the year endedDecember 31, 2021 , included in our Annual Report on Form 10-K filed with theSEC . This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. All statements in this quarterly report regarding the future impact of COVID-19 are forward-looking in nature and thus subject to the safe harbor provisions described below.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions, and future performance, and involve known and unknown risks, uncertainties, and other factors, which may be beyond our control, and which may cause our actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as "may," "can," "anticipate," "assume," "should," "indicate," "would," "believe," "contemplate," "expect," "seek," "estimate," "continue," "plan," "point to," "project," "predict," "could," "intend," "target," "potential," and other similar words and expressions of the future. There are a number of important factors that could cause the actual results to differ materially from those expressed in any forward-looking statement made by us. These factors include, but are not limited to:
• our ability and the time it takes to acquire new customers;
• reduced spending on product design and development activities by our
customers;
• our ability to successfully renew our outstanding software licenses;
• our ability to maintain or protect our intellectual property;
• our ability to retain key executive members;
• our ability to internally develop new software products, inventions and
intellectual property;
• our ability to successfully integrate and realize the benefits of our past
or future strategic acquisitions or investments;
• demand for our software by customers other than simulation engineering
specialists and in additional industry verticals;
• acceptance of our enhanced business model by customers and investors;
• our susceptibility to factors affecting the automotive, aerospace and
financial services industries where we derive a substantial portion of our
revenues;
• the accuracy of our estimates regarding expenses and capital requirements;
• our susceptibility to foreign currency risks that arise because of our
substantial international operations;
• the significant quarterly fluctuations of our results; and
• the uncertain effect of COVID-19 or other future pandemics or events on our
business, operating results, and financial condition, including disruption
to our customers, our employees, the global economy, and financial markets.
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The foregoing does not represent an exhaustive list of matters that may be
covered by the forward-looking statements contained herein or risk factors that
we are faced with that may cause our actual results to differ from those
anticipated in our forward-looking statements. For additional risks which could
adversely impact our business and financial performance please see "Risk
Factors" in our Annual Report on Form 10-K for the year ended December 31, 2021 ,
which was filed with the SEC on February 28, 2022 , and other information
appearing elsewhere in our Annual Report on Form 10-K, this report on Form 10-Q
and our other filings with the SEC .
All forward-looking statements are expressly qualified in their entirety by this
cautionary notice. You are cautioned not to place undue reliance on any
forward-looking statements, which speak only as of the date of this report or
the date of the document incorporated by reference into this report. We have no
obligation, and expressly disclaim any obligation, to update, revise or correct
any of the forward-looking statements, whether as a result of new information,
future events or otherwise. We have expressed our expectations, beliefs, and
projections in good faith, and we believe they have a reasonable basis. However,
we cannot assure you that our expectations, beliefs, or projections will result
or be achieved or accomplished.
Overview
We are a global leader in computational science and artificial intelligence
enabling organizations across broad industry segments to drive smarter decisions
in an increasingly connected world. We deliver software and cloud solutions in
the areas of simulation, high-performance computing ("HPC"), data analytics, and
artificial intelligence ("AI"). Our products and services help create a more
sustainable future for our planet.
Impact of COVID-19
InMarch 2020 , TheWorld Health Organization declared the outbreak of COVID-19, a pandemic and a public health emergency of international concern. The global spread of COVID-19, including new and emerging variants, has created significant volatility and uncertainty sinceMarch 2020 and may continue into the future. We are unable to accurately predict the full impact that COVID-19 will have due to numerous uncertainties, including the full scope of the disease, the duration of the outbreak, the number and intensity of subsequent waves of infections, actions that may be taken by governmental authorities, the impact to the businesses of our customers and partners, the development of treatments and vaccines, and other factors identified in Part I, Item 1A - Risk Factors included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . We will continue to evaluate the nature and extent of the impact to our business, consolidated results of operations, and financial condition.
Factors Affecting our Performance
We believe that our future success will depend on many factors, including those described below. While these areas present significant opportunity, they also present risks that we must manage to achieve successful results. If we are unable to address these challenges, our business, operating results and prospects could be harmed. Please see "Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 .
Seasonality and quarterly results
Our billings have historically been highest in the first and fourth quarters of
any calendar year and may vary in future quarters. The timing of recording
billings and the corresponding effect on our cash flows may vary due to the
seasonality of the purchasing and payment patterns of our customers. In
addition, the timing of the recognition of revenue, the amount and timing of
operating expenses, including employee compensation, sales and marketing
activities, and capital expenditures, may vary from quarter-to-quarter which may
cause our reported results to fluctuate significantly. In addition, we may
choose to grow our business for the long-term rather than to optimize for
profitability or cash flows for a particular shorter-term period. This
seasonality or the occurrence of any of the factors above may cause our results
of operations to vary and our financial statements may not fully reflect the
underlying performance of our business.
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--------------------------------------------------------------------------------Integration of recent acquisitions
We believe that our recent acquisitions result in certain benefits, including expanding our portfolio of software and products and enabling us to better serve our customers' requests for data analytics and simulation technology. However, to realize some of these anticipated benefits, the acquired businesses must be successfully integrated. The success of these acquisitions will depend in part on our ability to realize these anticipated benefits. We may fail to realize the anticipated benefits of these acquisitions for a variety of reasons.
Foreign currency fluctuations
Because of our substantial international operations, we are exposed to foreign currency risks that arise from our normal business operations, including in connection with our transactions that are denominated in foreign currencies, including the Euro, British Pound Sterling, Indian Rupee, Japanese Yen, and Chinese Yuan. To identify changes in our underlying business without regard to the impact of currency fluctuations, we evaluate certain of our operating results both on an as reported basis, as well as on a constant currency basis.
Business Segments
We have identified two reportable segments: Software and Client Engineering Services:
• Software -Our Software segment includes software and software related
services. The software component of this segment includes our portfolio of
software products including our solvers and optimization technology
products, high-performance computing software applications and hardware
products, modeling and visualization tools, data analytics and analysis
products, IoT platform and analytics tools, as well as support and the
complementary software products we offer through our
Alliance, or APA. The APA includes technologies ranging from computational
fluid dynamics and fatigue, to manufacturing process simulation and cost
estimation. The software related services component of this segment includes
consulting, implementation services, and training focused on product design
and development expertise and analysis from the component level up to
complete product engineering at any stage of the lifecycle.
• Client Engineering Services -Our client engineering services, or CES,
segment provides client engineering services to support our customers with
long-term, ongoing expertise. We operate our CES business by hiringengineers and data scientists for placement at a customer site for specific
customer-directed assignments. We employ and pay them only for the duration
of the placement.
Our other businesses which do not meet the criteria to be separate reportable
segments are combined and reported as "Other" which represents innovative
services and products, including toggled, our LED lighting business. toggled is
focused on developing and selling next-generation solid state lighting
technology along with communication and control protocols based on our
intellectual property for the direct replacement of fluorescent light tubes with
LED lamps. Other businesses combined within Other include potential services and
product concepts that are still in development stages.
For additional information about our reportable segments and other businesses,
see Note 14 in the Notes to consolidated financial statements in Item 1, Part I
of this Quarterly Report on Form 10-Q.
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--------------------------------------------------------------------------------Results of operations
Comparison of the three months ended
The following table sets forth the results of operations and the
period-over-period percentage change in certain financial data for the three
months ended
Three Months Ended Increase /
March 31, (decrease)
(in thousands) 2022 2021 %
Revenue:
Software $ 140,897 $ 129,541 9 %
Software related services 9,061 8,098 12 %
Total software and related services 149,958 137,639 9 %
Client engineering services 8,012 10,677 (25 %)
Other 1,811 1,847 (2 %)
Total revenue 159,781 150,163 6 %
Cost of revenue:
Software 17,406 16,950 3 %
Software related services 6,035 6,122 (1 %)
Total software and related services 23,441 23,072 2 %
Client engineering services 6,641 8,888 (25 %)
Other 1,521 1,462 4 %
Total cost of revenue 31,603 33,422 (5 %)
Gross profit 128,178 116,741 10 %
Operating expenses:
Research and development 43,094 38,276 13 %
Sales and marketing 35,682 32,070 11 %
General and administrative 23,569 23,926 (1 %)
Amortization of intangible assets 5,903 4,877 21 %
Other operating income, net (781 ) (617 ) 27 %
Total operating expenses 107,467 98,532 9 %
Operating income 20,711 18,209 14 %
Interest expense 585 2,973 (80 %)
Other expense, net 2,068 835 148 %
Income before income taxes 18,058 14,401 25 %
Income tax expense 6,530 41 NM
Net income $ 11,528 $ 14,360 (20 %)
Other financial information:
Billings(1) $ 171,337 $ 145,813 18 %
Adjusted EBITDA(2) $ 46,590 $ 36,960 26 %
Net cash provided by operating activities
(84 %)
Free cash flow(3) $ 3,596 $ 33,532 (89 %)
NM Not meaningful.
(1) Billings consists of our total revenue plus the change in our deferred
revenue, excluding deferred revenue from acquisitions. For more information
about Billings and our other non-GAAP financial measures and reconciliations
of our non-GAAP financial measures to the most directly comparable financial
measures calculated and presented in accordance with GAAP, see "Non-GAAP
financial measures" contained herein.
(2) We define Adjusted EBITDA as net income (loss) adjusted for income tax
expense (benefit), interest expense, interest income and other, depreciation
and amortization, stock-based compensation expense, restructuring charges,
asset impairment charges and other special items as determined by management.
For more information about Adjusted EBITDA and our other non-GAAP financial
measures and reconciliations of our non-GAAP financial measures to the most
directly comparable financial measure calculated and presented in accordance
with GAAP, see "Non-GAAP financial measures" contained herein.
(3) We define Free Cash Flow as net cash provided by operating activities less
capital expenditures. For a reconciliation of Free Cash Flow, see "Non-GAAP
financial measures" contained herein.
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Three months ended
Revenue
Software
Three Months Ended
March 31, Period-to-period change
(in thousands) 2022 2021 $ %
Software revenue $ 140,897 $ 129,541 $ 11,356 9 %As a percent of software segment revenue 94 % 94 % As a percent of consolidated revenue
88 % 86 %
The 9% increase in our software revenue for the three months ended March 31,
2022 , as compared to the three months ended March 31, 2021 , was primarily the
result of an increase in software license revenue. The increase was driven by
growth across all three geographic regions, and supported by increases in new
and expansion business, as well as retention in our renewal base.
Software related services
Three Months Ended
March 31, Period-to-period change
(in thousands) 2022 2021 $ %
Software related services revenue
963 12 %
As a percent of software segment revenue 6 % 6 %
As a percent of consolidated revenue 6 % 5 %
Software related services revenue increased 12% for the three months ended March
31, 2022 , as compared to the three months ended March 31, 2021 . This increase
was primarily the result of an increase in customer demand for these services.
Client engineering services
Three Months Ended
March 31, Period-to-period change
(in thousands) 2022 2021 $ %
Client engineering services revenue
(2,665 ) (25 %)
As a percent of consolidated revenue 5 % 7 %
CES revenue decreased 25% for the three months ended March 31, 2022 , as compared
to the three months ended March 31, 2021 . This decrease was the result of
fluctuations in customer demand for these services and reduced CES staff working
hours. In addition, we had some difficulty fillings some CES positions due to a
challenging labor market in the U.S.
Other
Three Months Ended
March 31, Period-to-period change
(in thousands) 2022 2021 $ %
Other revenue $ 1,811 $ 1,847 $ (36 ) (2 %)
As a percent of consolidated revenue 1 % 1 %
Other revenue remained consistent for the three months ended
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Cost of revenue
Software
Three Months Ended
March 31, Period-to-period change
(in thousands) 2022 2021 $ %
Cost of software revenue $ 17,406 $ 16,950 $ 456 3 %
As a percent of software revenue 12 % 13 %
As a percent of consolidated revenue 11 % 11 %
Cost of software revenue increased $0.5 million , or 3%, for the three months
ended March 31, 2022 , as compared to the three months ended March 31, 2021 .
Employee compensation and related expense increased $1.3 million , primarily due
to increased headcount in the current year and stock-based compensation expense
increased $0.7 million . These increases were partially offset by decreases in
hardware costs of $0.9 million and restructuring costs of $0.8 million . The
decrease in hardware costs was because of reduced sales of hardware products and
the restructuring costs were non-recurring in the current period.
Software related services
Three Months Ended
March 31, Period-to-period change
(in thousands) 2022 2021 $ %
Cost of software related services
revenue $ 6,035 $ 6,122 $ (87 ) (1 %)
As a percent of software related
services revenue 67 % 76 %
As a percent of consolidated revenue 4 % 4 %
Cost of software related services revenue remained consistent for the three
months ended March 31, 2022 , as compared to the three months ended March 31,
2021 .
Client engineering services
Three Months Ended
March 31, Period-to-period change
(in thousands) 2022 2021 $ %
Cost of client engineering services
revenue $ 6,641 $ 8,888 $ (2,247 ) (25 %)
As a percent of client engineering
services revenue 83 % 83 %
As a percent of consolidated revenue 4 % 6 %
Cost of CES revenue decreased 25% for the three months ended March 31, 2022 , as
compared to the three months ended March 31, 2021 , consistent with the change in
CES revenue. We have managed CES headcount and compensation to match our
customers' demand for our staffing resources, and therefore our costs have moved
accordingly.
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