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:
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our ability and the time it takes to acquire new customers;
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reduced spending on product design and development activities by our customers;
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our ability to successfully renew our outstanding software licenses;
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our ability to maintain or protect our intellectual property;
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our ability to retain key executive members;
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our ability to internally develop new software products, inventions and intellectual property;
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our ability to successfully integrate and realize the benefits of our past or future strategic acquisitions or investments;
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demand for our software by customers other than simulation engineering specialists and in additional industry verticals;
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acceptance of our enhanced business model by customers and investors;
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our susceptibility to factors affecting the automotive, aerospace and financial services industries where we derive a substantial portion of our revenues;
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the accuracy of our estimates regarding expenses and capital requirements;
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our susceptibility to foreign currency risks that arise because of our substantial international operations;
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the significant quarterly fluctuations of our results; and
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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 ("AI") that provides software and cloud solutions in simulation, high-performance computing ("HPC"), data analytics, and AI. We enable organizations across all industries to compete more effectively and drive smarter decisions in an increasingly connected world - all while creating a greener, more sustainable future.
Acquisitions
InSeptember 2022 , we acquired RapidMiner, a leader in advanced data analytics and machine learning software. RapidMiner will be integrated with existing tools, such asAltair Knowledge Studio , Altair SmartWorks, and Altair SLC, to provide a comprehensive, code-optional, multi-language, SaaS-ready, cloud-scale platform for enterprise data analytics and data science. InJune 2022 , we acquired Concept Engineering, a leading provider of electronic system visualization software that accelerates the development, manufacture, and service of complex electrical and electronic systems. Concept Engineering's software will be integrated into Altair's Electronic System Design suite and will be available via Altair Units. InJune 2022 , we acquired Gen3D, a startup out of the University ofBath, U.K. Gen3D is a pioneer implementing the implicit geometry method for describing highly complex geometries such as lattice structures in additive manufacturing. The technology will be integrated into Altair Inspire, an intuitive and powerful family of software products that enables simulation-driven design throughout the entire product lifecycle, from concept to reality. InMarch 2022 , we acquired Powersim, a market-leading provider of simulation and design tools for power electronics, including power supplies, motor drives, control systems, and microgrids. This acquisition expands Altair's electronic system design technology into the domain of power electronics. Powersim's software will be integrated into Altair's Electronic System Design suite and will be available via Altair Units. InFebruary 2022 , we acquired Cassini, a next-generation cloud native technology for Industry 4.0. With this acquisition, we deepen our expertise and strengthen our ability to offer digital thread solutions via the Altair One cloud platform. Convertible Senior Notes 2027 Notes InJune 2022 , we issued$230.0 million aggregate principal amount of 1.750% convertible senior notes due in 2027 (the "2027 Notes"), which includes the initial purchaser's exercise in full of its option to purchase an additional$30.0 million principal amount of the 2027 Notes, in a private offering. The net proceeds from the issuance of the 2027 Notes was approximately$224.3 million after deducting discounts, commissions and estimated issuance costs. We entered into an Indenture relating to the issuance of the 2027 Notes datedJune 14, 2022 (the "Indenture"), by and between the Company andU.S. Bank Trust Company, National Association , as trustee. The Indenture includes customary covenants and sets forth certain events of default after which the 2027 Notes may be declared immediately due and payable and sets forth certain types of bankruptcy or insolvency events of default involving the Company after which the 2027 Notes become automatically due and payable. The 2027 Notes are senior unsecured obligations of the Company. 27 -------------------------------------------------------------------------------- The 2027 Notes mature onJune 15, 2027 , unless earlier repurchased, redeemed or converted. We may redeem for cash all or, subject to certain limitations, any portion of the 2027 Notes, at our option, on or afterJune 20, 2025 if the last reported sale price of our Class A Common Stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period, at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. The 2027 Notes bear interest at a rate of 1.750% per year, payable semiannually in arrears onJune 15 andDecember 15 of each year, beginning onDecember 15, 2022 . The 2027 Notes have an initial conversion rate of 13.9505 shares of our Class A common stock per$1,000 principal amount of 2027 Notes, which is equivalent to an initial conversion price of approximately$71.68 per share of Class A common stock. The conversion rate will be subject to adjustment upon the occurrence of certain events specified in the Indenture but will not be adjusted for any accrued and unpaid interest. In addition, upon the occurrence of a make whole fundamental change or a redemption period (each as defined in the Indenture), we will, in certain circumstances, increase the conversion rate by a specified number of additional shares for a holderwho elects to convert its 2027 Notes in connection with such make whole fundamental change or during the relevant redemption period. Holders of the 2027 Notes may convert all or any portion of their 2027 Notes at any time prior to the close of business on the business day immediately precedingDecember 15, 2026 , in integral multiples of$1,000 principal amount, only under the following circumstances:
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during any calendar quarter commencing after the calendar quarter ending onSeptember 30, 2022 , if the last reported sale price of the Class A Common Stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
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during the five business day period after any five consecutive trading day period (the "measurement period") in which the trading price (as defined in the Indenture) per$1,000 principal amount of the 2027 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Class A Common Stock and the conversion rate on each such trading day;
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if we call the 2027 Notes for redemption (which the Company may not do prior toJune 20, 2025 ), at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date but only with respect to the 2027 Notes called (or deemed called) for redemption; or
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upon the occurrence of specified corporate events.
On or afterDecember 15, 2026 until the close of business on the business day immediately preceding the maturity date, holders may convert their 2027 Notes at any time, regardless of the foregoing circumstances. Upon conversion, we will pay or deliver, as the case may be, cash, shares of Class A Common Stock or a combination of cash and shares of Class A Common Stock, at our election, in the manner and subject to the terms and conditions provided in the Indenture.
2024 Notes
InJune 2022 , using proceeds from the issuance of the 2027 Notes, we retired approximately$148.2 million principal amount of our convertible senior notes which mature in 2024 (the "2024 Notes" and together with the 2027 Notes, the "Convertible Notes"), by paying cash of approximately$192.4 million including accrued and unpaid interest. Credit Agreement
In
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. 28 -------------------------------------------------------------------------------- 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.
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.
For the remainder of our current fiscal year, we anticipate that our revenues
and profit may be adversely impacted by changes in foreign currency rates.
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--------------------------------------------------------------------------------Business Segments
We have identified two reportable segments: Software and Client Engineering Services:
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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 ourAltair Partner 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, 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.
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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 hiring engineers 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 and nine 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 and
nine months ended
Three Months Ended Increase / Nine Months Ended Increase /
September 30, (decrease) September 30, (decrease)
(in thousands) 2022 2021 % 2022 2021 %
Revenue:
Software $ 103,765 $ 102,289 1 % $ 361,555 $ 331,388 9 %
Software related services 6,706 7,650 (12 %) 23,143 23,229 (0 %)
Total software and related
services 110,471 109,939 0 % 384,698 354,617 8 %
Client engineering services 7,355 10,060 (27 %) 22,414 31,005 (28 %)
Other 1,525 1,308 17 % 4,676 5,760 (19 %)
Total revenue 119,351 121,307 (2 %) 411,788 391,382 5 %
Cost of revenue:
Software 15,604 16,464 (5 %) 50,014 49,074 2 %
Software related services 5,240 5,707 (8 %) 16,739 17,560 (5 %)
Total software and related
services 20,844 22,171 (6 %) 66,753 66,634 0 %
Client engineering services 5,835 7,982 (27 %) 18,390 25,163 (27 %)
Other 1,230 1,348 (9 %) 3,892 5,072 (23 %)
Total cost of revenue 27,909 31,501 (11 %) 89,035 96,869 (8 %)
Gross profit 91,442 89,806 2 % 322,753 294,513 10 %
Operating expenses:
Research and development 48,781 35,839 36 % 138,352 112,872 23 %
Sales and marketing 39,244 30,589 28 % 114,042 94,568 21 %
General and administrative 24,677 22,196 11 % 72,613 67,983 7 %
Amortization of intangible assets 6,571 4,432 48 % 18,682 13,924 34 %
Other operating income, net (2,835 ) (1,324 ) 114 % (9,383 ) (2,526 ) 271 %
Total operating expenses 116,438 91,732 27 % 334,306 286,821 17 %
Operating (loss) income (24,996 ) (1,926 ) 1,198 % (11,553 ) 7,692 NM
Interest expense 1,566 3,037 (48 %) 2,851 8,998 (68 %)
Other expense, net 2,107 124 NM 26,082 1,667 NM
Loss before income taxes (28,669 ) (5,087 ) 464 % (40,486 ) (2,973 ) 1,262 %
Income tax expense 4,579 3,022 52 % 15,008 4,424 239 %
Net loss $ (33,248 ) $ (8,109 ) NM $ (55,494 ) $ (7,397 ) NM
Other financial information:
Billings(1) $ 122,939 $ 117,156 5 % $ 419,698 $ 380,731 10 %
Adjusted EBITDA(2) $ 6,829 $ 14,832 (54 %) $ 69,859 $ 61,288 14 %
Net cash provided by operating
activities $ 26,534 $ 55,594 (52 %)
Free cash flow(3) $ 19,813 $ 48,783 (59 %)
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
September 30, Period-to-period change
(in thousands) 2022 2021 $ %
Software revenue $ 103,765 $ 102,289 $ 1,476 1 %As a percent of software segment revenue 94 % 93 % As a percent of consolidated revenue
87 % 84 %
Software revenue increased 1% or for the three months ended September 30, 2022 ,
as compared to the three months ended September 30, 2021 , or 10% in constant
currency. 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
September 30, Period-to-period change
(in thousands) 2022 2021 $ %
Software related services revenue
(944 ) (12 %)
As a percent of software segment revenue 6 % 7 %
As a percent of consolidated revenue 6 % 6 %
Software related services revenue decreased $0.9 million for the three months
ended September 30, 2022 , as compared to the three months ended September 30,
2021 . The decrease was a result of fewer projects in the current quarter.
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