ALTERA CORPORATION The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our audited consolidated financial
statements (and notes thereto) for the year ended
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 leverage computational science to drive innovation and intelligent decisions for a more connected, safe, and sustainable future.
Our simulation and AI-driven approach to innovation is powered by our broad portfolio of high-fidelity and high-performance physics solvers, our market-leading technology for optimization and HPC, and our end-to-end platform for developing AI and Internet of Things ("IoT") solutions. Our integrated suite of software optimizes design performance across multiple disciplines encompassing structures, motion, fluids, thermal, electromagnetics, system modeling, and embedded systems, while also providing AI solutions and true-to-life visualization and rendering. Our HPC solutions maximize the efficient utilization of complex compute resources and streamline the workflow management of compute-intensive tasks for applications including AI, modeling and simulation, and visualization. Our data analytics, AI and IoT products include data preparation, data science, MLOps, orchestration, and visualization solutions that fuel engineering, scientific, and business decisions.
Altair's software products represent a comprehensive, open architecture solution for simulation, HPC, data analytics, and AI to empower decision making for improved product design and development, manufacturing, energy management and exploration, financial services, health care, and retail operations. We believe Altair's solutions are compelling due to their openness and usability.
Altair's products offer a comprehensive set of technologies to design and optimize high-performance, efficient, innovative and sustainable products and processes in an increasingly connected world. Our products are categorized by:
•
Physics Simulation and Concept Design;
•
High Performance and Cloud Computing; and
•
Data Analytics, AI, IoT and Smart Product Development.
Altair also provides Client Engineering Services, or CES, to support our customers with long-term ongoing expertise. This has the benefit of embedding us within customers, deepening our understanding of their processes, and allowing us to more quickly perceive trends in the overall market. Our presence at our customers' sites helps us to better tailor our software products' research and development, or R&D, and sales initiatives.
Licensing
There are two licensing methods we employ to deliver our software solutions:
•
Most products are available under our unique, patented units-based licensing model known as Altair Units.
•
A small subset of our products is available on a node-locked, or hardware specific, and named-user basis. This is especially true for our high-performance computing solutions.
Altair pioneered Altair Units, a patented units-based subscription licensing model for software and other digital content. This units-based subscription licensing model allows flexible and shared access to our offerings, along with more than 150 partner products. Our customers license a pool of units for their organizations giving individual users access to our portfolio of software applications as well as our growing portfolio of partner products. We believe our units-based subscription licensing model lowers barriers to adoption, creates broad engagement, encourages users to work within our ecosystem, and increases revenue. This, in turn, helps drive our recurring software license rate which has been on average approximately 90% over the past five years. Historically, approximately 60% of new software revenue comes from expansion within existing customers.
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Table of Contents Recent Business Developments Business combinations
In
RapidMiner's low-code platform is used to develop production-scale data
pipelines and ML models, putting advanced data analytics into the hands of those
In
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 customer's 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.
Convertible Senior Notes
2027 Notes
In
We entered into an Indenture relating to the issuance of the 2027 Notes dated
The 2027 Notes mature on
The 2027 Notes have an initial conversion rate of 13.9505 shares of our Class A
common stock per
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
preceding
•
during any calendar quarter, 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
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of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
•
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
•
if we call the 2027 Notes for redemption (which we may not do prior to
•
upon the occurrence of specified corporate events.
On or after
2024 Notes
In
Credit Agreement
On
Impact of COVID-19
In
We have converted our business to being capable of operating nearly 100% remote as required or recommended under COVID-19 restrictions, leveraging our global technology infrastructure. Our culture, technology, and people allowed us to react quickly when the crisis initially emerged. As a result, we maintained high levels of productivity and employee engagement. As the COVID-19 pandemic continued to affect many global regions through 2022, our workforce remained in a hybrid mode of remote and in-person working. We have gradually resumed normal operations, when permitted, based on local conditions and restrictions, with the primary focus of preserving employee welfare, while continuing to support customers.
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. See Part I, Item 1A. - Risk Factors included elsewhere in this Annual Report on Form 10-K.
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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 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. Furthermore, we may choose to grow our business for the long-term rather than 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.
Foreign currency fluctuations
Because of our substantial international operations, we are exposed to foreign currency risks that arise from our normal business operations, as well as 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. Our 2022 revenue and profit were adversely affected relative to the prior year by changes in foreign currency rates and we anticipate that this may continue in 2023.
Business segments
We have identified two reportable segments: Software and Client Engineering Services:
•
Software -Our Software segment includes software, software services, 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
•
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 their development stages.
For additional information about our reportable segments and other businesses, see Note 17 in the Notes to consolidated financial statements in Item 15, Part IV of this Annual Report on Form 10-K.
Components of results of operations
Revenue
We primarily derive revenue from the licensing of our software, which includes our units-based subscription licensing model for term and perpetual software licenses, as well as software related services. Our CES business derives revenue from providing engineers and data scientists to support our customers' long-term, ongoing projects.
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Table of Contents Software
Software revenue is principally comprised of subscription licenses, and to a lesser extent, perpetual licenses and associated maintenance and support fees. Subscriptions are typically governed by contracts with annual terms which include product updates, maintenance and support. We generally recognize software license revenue up front, while maintenance and support revenue are generally recognized over the term of the contract. To a much lesser extent, Software also includes revenue from the sale of hardware products.
Software includes consulting, implementation services and training. We generally recognize revenue for software services as those services are performed.
Software related services
Consulting services from product design and development projects are considered distinct performance obligations and are provided to customers on a time-and-materials, or T&M, or fixed-price basis. Altair recognizes services revenue from our T&M contracts using input-based estimates, utilizing direct labor and contractually agreed-upon hourly rates as the input measure. For fixed-price contracts, software services revenue is recognized over time using a method that measures the extent of progress towards completion of a performance obligation, generally using a cost-input method where revenue is recognized based on the proportion of total cost incurred to estimated total costs at completion. If output or input measures are not available or cannot be reasonably estimated, revenue is recognized upon completion of the services.
Client engineering services
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 CES business generates revenue from placing simulation specialists, industrial designers, design engineers, materials experts, development engineers, manufacturing engineers, and information technology specialists. We recognize CES revenue based upon hours worked and contractually agreed-upon hourly rates.
Other
Our Other revenue consists primarily of revenue related to our LED lighting business operated out of our wholly-owned subsidiary, toggled. toggled designs, and sources through contract manufacturers, LED lighting and related products for sale to consumers and businesses. We also generate revenue through royalties from licensing toggled technology to third-party manufacturers and resellers.
Cost of revenue
Cost of software
Cost of software revenue consists of expenses related to software licensing, hardware sales and customer support. Significant expenses include employee compensation and related costs for support team members, including salaries, benefits, bonuses and stock-based compensation, as well as hardware costs, travel costs, certain data center and facility costs and royalties for third-party software products available to customers through our products or as part of our APA.
Cost of software related services
Cost of software related services revenue consists of personnel and related costs, such as salaries, benefits, bonuses and stock-based compensation, as well as travel expenses.
Cost of client engineering services
Cost of engineering services revenue consists primarily of employee compensation and related costs. We employ and pay them only for the duration of the placement at a customer site.
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Table of Contents Cost of other
Cost of other revenue includes the cost of LED lighting products and freight related to products sold to retail and commercial sales channels.
Operating expenses
Operating expenses, as defined and discussed below, support all the products and services that we provide to our customers and, as a result, they are presented in aggregate.
Research and development
Research and development expenses consist primarily of employee compensation and related costs associated with our development team, including salaries, benefits, bonuses, professional consulting and development fees, and stock-based compensation expense. Our research and development efforts are focused on enhancing the functionality, breadth and scalability of our software, addressing new use cases, and developing additional innovative technologies. Timely development of new products is essential to maintaining our competitive position, and we release new versions of our software on a regular basis. All software development costs are expensed as incurred as our current software development process is essentially completed concurrent with the establishment of technological feasibility.
Sales and marketing
Sales and marketing expenses consist primarily of employee compensation and related costs associated with our sales and marketing staff, including salaries, benefits, bonuses, commissions and stock-based compensation, as well as costs relating to our marketing and business development programs including trade shows and events. We intend to continue to invest resources in our sales and marketing initiatives to drive growth and extend our market position.
General and administrative
General and administrative expenses consist of employee compensation and related costs for executive, finance, legal, human resources, recruiting, and employee-related information technology and administrative personnel, including salaries, benefits, bonuses and stock-based compensation expense, professional fees for external legal and accounting services, depreciation, facilities, recruiting and other consulting services.
Amortization of intangible assets
Amortization of intangible assets consists primarily of amortization of intangibles associated with acquisitions. We expect to incur additional amortization expense resulting from future strategic acquisitions.
Other operating income, net
Other operating income, net consists primarily of government subsidies,
primarily in
Interest expense
Interest expense consists of interest expense on our outstanding indebtedness and amortization of debt issuance costs.
Other expense, net
Other expense, net is comprised primarily of foreign currency exchange gains and losses generated from the settlement and remeasurement of transactions denominated in currencies other than the functional currency of our operating units, expense on the repurchase of our 2024 Notes, and interest income on invested cash.
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Table of Contents Income tax expense
Income tax expense is comprised primarily of income taxes related to
Our future effective annual tax rate may be materially impacted by the amount of
benefits and charges from tax amounts associated with our foreign earnings that
are taxed at rates different from the federal statutory rate, the taxation of
the foreign earnings in the
As of
For tax years beginning on or after
Based on the evidence available, including a lack of taxable earnings in
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Table of Contents Results of operations
The following table sets forth our results of operations and certain financial
data for the years ended
Year ended December 31,
(in thousands) 2022 2021
Revenue:
Software $ 506,508 $ 453,746
Software related services 30,661 31,823
Total software and related services 537,169 485,569
Client engineering services 28,883 39,282
Other 6,169 7,328
Total revenue 572,221 532,179
Cost of revenue:
Software 72,443 67,791
Software related services 21,858 23,205
Total software and related services 94,301 90,996
Client engineering services 23,577 31,710
Other 5,011 6,960
Total cost of revenue 122,889 129,666
Gross profit 449,332 402,513
Operating expenses:
Research and development 185,863 151,049
Sales and marketing 155,245 132,750
General and administrative 97,606 91,500
Amortization of intangible assets 27,510 18,357
Other operating income, net (9,955 ) (3,482 )
Total operating expenses 456,269 390,174
Operating (loss) income (6,937 ) 12,339
Interest expense 4,377 12,065
Other expense, net 16,899 562
Loss before income taxes (28,213 ) (288 )
Income tax expense 15,216 8,506
Net loss $ (43,429 ) $ (8,794 )
Other financial information:
Billings (1) $ 607,602 $ 539,855
Adjusted EBITDA (2) $ 108,600 $ 85,253
Net cash provided by operating activities
$ 29,922 $ 53,774 (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 to the most directly comparable financial measure calculated and presented in accordance with GAAP, see "Non-GAAP financial measures" contained herein.
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Years ended
Revenue
Software
Year ended
December 31, Change
(dollars in thousands) 2022 2021 $ %
Software revenue $ 506,508 $ 453,746 $ 52,762 12 %As a percent of software segment revenue 94 % 93 % As a percent of consolidated revenue
89 % 85 %
Software revenue increased 12% for the year ended
Software related services
Year ended
December 31, Change
(dollars in thousands) 2022 2021 $ %
Software related services revenue
5 % 6 %
Software related services revenue decreased 4% for the year ended
Client engineering services
Year ended
December 31, Change
(dollars in thousands) 2022 2021 $ %
Client engineering services revenue
CES revenue decreased 26% for the year ended
Other
Year ended
December 31, Change
(dollars in thousands) 2022 2021 $ %
Other revenue $ 6,169 $ 7,328 $ (1,159 ) (16 %)As a percent of consolidated revenue 1 % 1 %
Other revenue decreased 16% for the year ended
Cost of revenue
Software
Year ended
December 31, Change
(dollars in thousands) 2022 2021 $ %
Cost of software revenue $ 72,443 $ 67,791 $ 4,652 7 %
As a percent of software revenue 14 % 15 %
As a percent of consolidated revenue 13 % 13 %
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Cost of software revenue increased
Software related services
Year ended
December 31, Change
(dollars in thousands) 2022 2021 $ %
Cost of software related services
revenue $ 21,858 $ 23,205 $ (1,347 ) (6 %)
As a percent of software related
services revenue 71 % 73 %
As a percent of consolidated revenue 4 % 4 %
Cost of software related services revenue decreased 6% for the year ended
Client engineering services
Year ended
December 31, Change
(dollars in thousands) 2022 2021 $ %
Cost of client engineering services
revenue $ 23,577 $ 31,710 $ (8,133 ) (26 %)
As a percent of client engineering
services segment revenue 82 % 81 %
As a percent of consolidated revenue 4 % 6 %
Cost of CES revenue decreased 26% for the year ended December 31, 2022 , as
compared to the year ended December 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.
Other
Year ended
December 31, Change
(dollars in thousands) 2022 2021 $ %
Cost of other revenue $ 5,011 $ 6,960 $ (1,949 ) (28 %)
As a percent of other revenue 81 % 95 %As a percent of consolidated revenue 1 % 1 %
Cost of other revenue decreased 28% for the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 . This decrease was primarily a result of the decrease in revenue and reduction in inventory obsolescence in the current year. Gross profit Year ended December 31, Change (dollars in thousands) 2022 2021 $ % Gross profit$ 449,332 $ 402,513 $ 46,819 12 %
As a percent of consolidated revenue 79 % 76 %
Gross profit increased
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Operating expenses
Operating expenses, as discussed below, support all the products and services
that we provide to our customers and, as a result, they are reported and
discussed in the aggregate.
Research and development
Year ended
December 31, Change
(dollars in thousands) 2022 2021 $ %
Research and development $ 185,863 $ 151,049 $ 34,814 23 %As a percent of consolidated revenue 32 % 28 %
Research and development expenses increased
In addition, cloud hosting and software maintenance expense, facilities costs, and travel costs increased$1.3 million ,$0.9 million , and$0.6 million , respectively, in the current year. These increases were partially offset by decreases in consulting fees and restructuring costs of$1.9 million and$1.7 million , respectively. Sales and marketing Year ended December 31, Change (dollars in thousands) 2022 2021 $ % Sales and marketing$ 155,245 $ 132,750 $ 22,495 17 %
As a percent of consolidated revenue 27 % 25 %
Sales and marketing expenses increased
General and administrative
Year ended
December 31, Change
(dollars in thousands) 2022 2021 $ %
General and administrative $ 97,606 $ 91,500 $ 6,106 7 %As a percent of consolidated revenue 17 % 17 %
General and administrative expenses increased
Amortization of intangible assets
Year ended
December 31, Change
(dollars in thousands) 2022 2021 $ %
Amortization of intangible assets
Amortization of intangible assets increased
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Other operating income, net
Year ended
December 31, Change
(dollars in thousands) 2022 2021 $ %
Other operating income, net $ (9,955 ) $ (3,482 ) $ 6,473 186 %As a percent of consolidated revenue (2 %) (1 %)
Other operating income, net increased
Interest expense
Year ended
December 31, Change
(dollars in thousands) 2022 2021 $ %
Interest expense $ 4,377 $ 12,065 $ (7,688 ) (64 %)
As a percent of consolidated revenue 1 % 2 %
Interest expense decreased
Other expense, net
Year ended
December 31, Change
(dollars in thousands) 2022 2021 $ %
Other expense, net $ 16,899 $ 562 $ 16,337 NMAs a percent of consolidated revenue 3 % 0 %
Other expense, net increased by
Income tax expense
Year ended
December 31, Change
(dollars in thousands) 2022 2021 $ %
Income tax expense $ 15,216 $ 8,506 $ 6,710 79 %
The effective tax rate was (54%) and (2,953%) for the year ended
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Net loss
Year ended
December 31, Change
(dollars in thousands) 2022 2021 $ %
Net loss $ (43,429 ) $ (8,794 ) $ (34,635 ) (394 %)
Net loss increased by
For information regarding the comparison of results of operations for the years
ended
Non-GAAP financial measures
We monitor the following key non-GAAP (
Year ended December 31 ,
(in thousands) 2022 2021 2020
Billings
Billings. Billings consists of our total revenue plus the change in our deferred revenue, excluding deferred revenue from acquisitions during the period. Given that we generally bill our customers at the time of sale but typically recognize a portion of the related revenue ratably over time, management believes that Billings is a meaningful way to measure and monitor our ability to provide our business with the working capital generated by upfront payments from our customers.
Billings increased by
Adjusted EBITDA. 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. We believe that Adjusted EBITDA is a meaningful measure of performance as it is commonly utilized by us and the investment community to analyze operating performance in our industry.
Adjusted EBITDA increased by
Free Cash Flow. Free Cash Flow is a non-GAAP financial measure that we calculate as cash flow provided by operating activities less capital expenditures. We believe that Free Cash Flow is useful in analyzing our ability to service and repay debt, when applicable, and return value directly to stockholders.
Net cash provided by operating activities for the year ended
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These non-GAAP financial measures reflect an additional way of viewing aspects of our business that, when viewed with our GAAP results and the accompanying reconciliations to corresponding GAAP financial measures included in the tables below, may provide a more complete understanding of factors and trends affecting our business. These non-GAAP financial measures should not be relied upon to the exclusion of GAAP financial measures and are by definition an incomplete understanding of the Company and must be considered in conjunction with GAAP measures.
We believe that the non-GAAP measures disclosed herein are only useful as an additional tool to help management and investors make informed decisions about our financial and operating performance and liquidity. By definition, non-GAAP measures do not give a full understanding of the Company. To be truly valuable, they must be used in conjunction with the comparable GAAP measures. In addition, non-GAAP financial measures are not standardized. It may not be possible to compare these financial measures with other companies' non-GAAP financial measures having the same or similar names. We strongly encourage investors to review our consolidated financial statements and the notes thereto in their entirety and not to rely on any single financial measure.
Reconciliation of non-GAAP financial measures
The following tables provide reconciliations of revenue to Billings, net loss to
Adjusted EBITDA, and net cash provided by operating activities to Free Cash
Flow:
Billings
Year ended December 31,
(in thousands) 2022 2021 2020
Revenue $ 572,221 $ 532,179 $ 469,921
Ending deferred revenue 144,460 106,032 95,079
Beginning deferred revenue (106,032 ) (95,079 ) (83,567 )
Deferred revenue acquired (3,047 ) (3,277 ) (986 )
Billings $ 607,602 $ 539,855 $ 480,447
Adjusted EBITDA
Year Ended December 31,
(in thousands) 2022 2021 2020
Net loss $ (43,429 ) $ (8,794 ) $ (10,500 )
Income tax expense 15,216 8,506 12,532
Stock-based compensation 84,787 44,549 21,355
Interest expense 4,377 12,065 11,598
Depreciation and amortization 35,504 25,644 23,806
Restructuring expense - 5,053 -
Special adjustments, interest income and other (1) 12,145 (1,770 ) (1,503 ) Adjusted EBITDA
$ 108,600 $ 85,253 $ 57,288
(1)
The year ended
Free Cash Flow
Year ended December 31,
(in thousands) 2022 2021 2020
Net cash provided by operating activities $ 39,570 $ 61,623 $ 32,882
Capital expenditures (9,648 ) (7,849 ) (6,093 )
Free Cash Flow $ 29,922 $ 53,774 $ 26,789 Recurring Software License Rate. A key factor to our success is our recurring software license rate which we measure through billings, primarily derived from annual renewals of our existing subscription customer agreements. We calculate our recurring software license rate for a particular period by dividing (i) the sum of software term-based license billings, software license maintenance billings, and 20% of software perpetual license billings which we believe approximates maintenance as an element of the
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arrangement by (ii) the total software license, including all term-based
subscriptions, maintenance and perpetual license billings from all customers for
that period. Our recurring software license rate was 92% for each of the years
ended
Liquidity and capital resources
As of
During the period ended
During the year ended
We continue to evaluate possible acquisitions and other strategic transactions designed to expand our business. As a result, our expected uses of cash could change, our cash position could be reduced, or we may incur additional debt obligations to the extent we complete additional acquisitions.
Our existing cash and cash equivalents may fluctuate during fiscal 2023, due to changes in our planned cash expenditures, including changes in incremental costs such as direct costs and integration costs related to acquisitions. Cash from operations could also be affected by various risks and uncertainties, including, but not limited to, the effects of COVID-19 and global unrest. It is possible that certain customers may unilaterally decide to extend payments on accounts receivable, however our customer base is comprised primarily of larger organizations with typically strong liquidity and capital resources.
We believe that our existing cash balances, together with funds generated from operations and amounts available under our credit facility, will be sufficient to finance our operations and meet our foreseeable cash requirements for the next twelve months. We also believe that our financial resources, along with managing discretionary expenses, will allow us to manage the impact of COVID-19 on our business operations for the foreseeable future and withstand global unrest, which could include reductions in revenue and delays in payments from customers and partners. We will continue to evaluate our financial position as developments evolve relating to COVID-19 and global unrest.
Revolving credit facility
On
As of
The 2019 Amended Credit Agreement is secured by collateral including (i)
substantially all of our properties and assets, and the properties and assets of
our domestic subsidiaries but excluding any patents, copyrights, patent
applications or copyright applications or any trade secrets or software products
and (ii) pledges of the equity interests in all present and future domestic
subsidiaries (subject to certain exceptions as provided for under the 2019
Amended Credit Agreement). Our direct and indirect domestic subsidiaries are
guarantors of all of the obligations under the 2019 Amended Credit Agreement. In
addition, the 2019 Amended Credit Agreement contains financial covenants which
require, as of the end of each fiscal quarter, a Senior Secured Leverage Ratio
not greater than 3.0 to 1.0, as such terms are defined in the 2019 Amended
Credit Agreement. As of
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As of
Other than statutory limitations, there are no significant restrictions on the ability of our subsidiaries to pay dividends or make other distributions to Altair. Based on our current liquidity needs and repatriation strategies, we expect that we can manage our global liquidity needs without material adverse tax implications.
The following table summarizes our cash flows for the periods indicated:
Year ended December 31,
(in thousands) 2022 2021 2020 (1)
Net cash provided by operating activities
(154,511 ) (62,482 ) (49,092 )
Net cash provided by financing activities 22,981 175,947 31,250
Effect of exchange rate changes on cash, cash
equivalents and restricted cash (5,094 ) (2,623 ) 3,010
Net (decrease) increase in cash, cash
equivalents and restricted cash $ (97,054 ) $ 172,465 $ 18,050 _____________________________
(1)
For information regarding a comparison of net cash provided/used in operating
activities, investing activities and financing activities for the years ended
Net cash provided by operating activities
Net cash provided by operating activities for the year ended
Net cash used in investing activities
Net cash used in investing activities for the year ended
Net cash provided by financing activities
Net cash provided by financing activities for the year ended
Effect of exchange rate changes on cash, cash equivalents and restricted cash
There were adverse effects of exchange rate changes on cash, cash equivalents
and restricted cash of
Commitments
As of
As of
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As of
We have non-cancelable contractual agreements primarily related to the hosting
of our data storage processing, storage, and other computing services, as well
as other commitments. We had
We also have approximately
Critical accounting estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting estimates discussed below are critical to understanding our historical and future performance, as these estimates relate to the more significant areas involving management's judgments and assumptions. Refer to Note 2 to our consolidated financial statements for our significant accounting policies related to our critical accounting estimates.
Revenue recognition
We generate revenue from our Software and CES segments and our other businesses. Revenue is recognized by identifying a contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations in the contract, and recognizing revenue when (or as) we satisfy a performance obligation.
Software
Software revenue includes product revenue from software product licensing arrangements, related services consisting of software maintenance and support in the form of post-contract customer support (PCS or maintenance) and professional services such as consulting and training services. Software products are sold to customers primarily under a term-based software licensing model and to a lesser degree, perpetual software licenses. We enter into contracts that include combinations of products, maintenance and services, which are accounted for as separate performance obligations with differing revenue recognition patterns.
Most term-based software license agreements include our patented units-based subscription model which allows customers to license a pool of units for their organizations, providing individual users flexible access to our portfolio of engineering software applications as well as to our growing portfolio of partner products. The amount of software usage is limited by the number of the units licensed by the customer. Revenue from these arrangements is fixed (based on the units licensed) and is not based on actual customer usage of each software product.
Revenue from term-based software licenses is classified as license software revenue. Term-based licenses are sold only as a bundled arrangement that includes the rights to a term software license and PCS, which includes unspecified technical enhancements and customer support. Maximizing the use of observable inputs, we determined that a majority of the estimated standalone selling price of the term-based license is attributable to the term license and a minority is attributable to the PCS. The license component is recognized as revenue upon the later of delivery of the licensed product or the beginning of the license period. The PCS is classified as maintenance revenue and is recognized ratably over the term of the contract, as we provide the PCS benefit over time.
In addition to term-based software licenses, we sell perpetual licenses. Typically, our perpetual licenses are sold with PCS, which includes unspecified technical enhancements and customer support. Revenue from the software component is classified as license software revenue and is recognized upon the later of delivery of the licensed product or the beginning of the license period. We allocate values in bundled perpetual and PCS arrangements based on the standalone selling prices of the perpetual license and PCS. Revenue from PCS is classified as maintenance revenue and is recognized ratably over the term of the contract, as we satisfy the PCS performance obligation over time.
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Revenue from training, consulting and other services is recognized as the services are performed. For contracts in which the service consists of a single performance obligation, such as providing a training class to a customer, we recognize revenue upon completion of the performance obligation. For service contracts that are longer in duration and often include multiple performance obligations (for example, both training and consulting), we measure the progress toward completion of the obligations and recognize revenue accordingly. In measuring progress towards the completion of performance obligations, we typically utilize output-based estimates for services with contractual billing arrangements that are not based on time and materials, and estimate output based on the total tasks completed as compared to the total tasks required for each work contract. Input-based estimates are utilized for services that involve general consultations with contractual billing arrangements based on time and materials, utilizing direct labor as the input measure.
We also execute arrangements through indirect channel partners in which the channel partners are authorized to market and distribute our software products to end users of our products and services in specified territories. In sales facilitated by channel partners, the channel partner generally bears the risk of collection from the end-user customer. We recognize revenue from transactions with channel partners in a manner consistent with the direct sales described above for both perpetual and term-based licenses. Revenue from channel partner transactions is the amount remitted to us by the channel partners. This amount includes a fee for PCS that is compensation for providing technical enhancements and the second level of technical support to the end user, which is recognized over the period that PCS is to be provided. We do not offer right of return, product rotation or price protection to any of its channel partners.
Some of our contracts with customers contain multiple performance obligations. Judgment is required in determining whether each performance obligation is distinct. We allocate the transaction price for each contract to each performance obligation based on the relative standalone selling price, or SSP, for each performance obligation within each contract. The SSP is the price that we would sell a promised service separately to one of our customers. Judgment is required to determine the SSP for each distinct performance obligation. We estimate SSP using information such as past transactions, internally approved pricing guidelines related to the performance obligations and other information reasonably available to us.
Non-income related taxes collected from customers and remitted to governmental authorities are recorded on the consolidated balance sheet as accounts receivable, net and other accrued expenses and current liabilities. These amounts are reported on a net basis in the consolidated statements of operations and do not impact reported revenues or expenses. Certain hardware revenue is included within software revenue and is recognized when all revenue recognition criteria stated above are met, which is generally when the products are delivered to end customers.
Acquisitions
We account for acquisitions of entities that include inputs and processes and have the ability to create outputs as business combinations. We allocate the fair value of purchase consideration of acquired businesses to the identifiable tangible and intangible assets acquired and liabilities assumed in the transaction based upon their estimated fair values as of the acquisition date. The excess of the purchase price over those fair values is recorded as goodwill. During the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations.
We determine the estimated fair values using information available to us and engage independent third-party valuation specialists when necessary. We generally use an income approach to determine the fair value of intangible assets acquired. Estimating fair values can be complex and subject to significant business judgment. Critical estimates in valuing certain of the intangible assets we have acquired include, but are not limited to, future expected cash flows from product sales, customer contracts and acquired technologies, expenses to operate the acquired business, and discount rates. Unanticipated events and circumstances may occur that could affect either the accuracy or validity of such assumptions, estimates or actual results. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, these estimates are based on historical experience and information obtained from the management of the acquired companies and are inherently uncertain.
Income taxes
We utilize the asset and liability method of accounting for income taxes in accordance with ASC 740, Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates and statutes that will be in effect when those differences are expected to reverse. Deferred tax assets can result from unused operating losses, research and development credits, foreign tax credit carryforwards, and deductions recorded for financial statement purposes prior to them being deductible on a
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tax return. Valuation allowances are provided against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of taxable temporary differences. We consider, among other available information, scheduled reversals of deferred tax liabilities, projected future taxable income, limitations on the availability of tax credit carryforwards, and other evidence assessing the potential realization of deferred tax assets. Adjustments to the valuation allowance are included in the tax provision in our consolidated statements of operations in the period they become known or can be estimated.
The valuation allowance is based on our estimates of taxable income for
jurisdictions in which we operate and the period over which our deferred tax
assets may be recoverable. Historically, we have had substantial
We apply a more-likely-than-not recognition threshold to our accounting for tax uncertainties. We review all of our tax positions and make determinations as to whether our tax positions are more likely than not to be sustained upon examination by the relevant taxing authorities. Only those benefits, or exposures, that have a greater than fifty percent likelihood of being sustained upon examination by taxing authorities are recognized. Interest and penalties related to uncertain tax positions are recorded in income tax expense (benefit) in the consolidated statements of operations.
Recently issued accounting pronouncements
For information regarding recent accounting guidance and the impact of this guidance on our consolidated financial statements, see Note 2 of the Notes to consolidated financial statements in Item 15, Part IV of this Annual Report on Form 10-K, which is incorporated by reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain global market risks, including foreign currency exchange risk and interest rate risk associated with our debt.
Foreign Currency Risk
As a result 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.
In addition, we translate sales and financial results denominated in foreign
currencies into
As of
Market Risk and Interest Rate Risk
In
As of
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Interest rate risk relates to the gain/increase or loss/decrease we could incur on our debt balances and interest expense associated with changes in interest rates. Changes in interest rates would impact the amount of interest income we realize on our invested cash balances. It is our policy not to enter into derivative instruments for speculative purposes, and therefore, we hold no derivative instruments for trading purposes.
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