Altair Engineering Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2024

There are 9 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Alterra Engineering Inc. Q2 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session.

Operator

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Stephen Voluntag, Investor Relations. Please go ahead.

Speaker 1

Good afternoon. Welcome and thank you for attending Altair's earnings conference call for the Q2 2024 ended June 30. I am Stephen Palmtag, Altair's Head of Investor Relations. And with me on the call are Jim Scapa, Founder, Chairman and CEO and Matt Brown, Chief Financial Officer. After market close today, we issued a press release with details regarding our Q2 2024 performance and guidance for the Q3 and full year 2024, which can be accessed on our Investor Relations website at investor.

Speaker 1

Altera.com. This call is being recorded and a replay will be available on the IR section of our website following the conclusion of this call. During today's call, we will make statements related to our business that may be considered forward looking under federal securities laws. These statements reflect our views only as of today and should not be considered representative of our views as of any subsequent date. We disclaim any obligation to update any forward looking statements or outlook.

Speaker 1

These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from our expectations. These risks are summarized in the press release that we issued earlier today. For a further discussion of the material risks and other important factors that could affect our actual results, please refer to those contained in our quarterly and annual reports filed with the SEC as well as other documents that we have filed or may file from time to time. During the course of today's call, we will refer to certain non GAAP financial measures. A reconciliation of GAAP to non GAAP measures is included in our press release.

Speaker 1

Finally, at times in our prepared comments or responses to your questions, we may offer metrics that are incremental to our usual presentation to provide greater insight into the dynamics of our business or our quarterly results. Please be advised that we may or may not continue to provide this additional detail in the future. With that, let me turn the call over to Jim for his prepared remarks. Jim?

Speaker 2

Thank you, Stephen, and welcome to everyone on the call. During the Q2 of 2024, Altair maintained its strong trajectory. Total quarterly revenue was 148 $800,000 with software revenue accounting for $135,400,000 both surpassing the high end of our guidance for the quarter. Adjusted EBITDA was $17,300,000 above the midpoint of our guided range. Altair's Q2 results underscore the robustness of our software product lineup, which continues to empower customers with industry leading computational intelligence.

Speaker 2

Software revenue on a constant currency basis grew 10.6% year over year in the 2nd quarter. Software revenue as a percentage of total revenue grew to 91% compared to 88.8% in the Q2 of 2023. Altair's success in the quarter spanned broadly across technologies and industry verticals with notable strength in aerospace and defense. Last month, we unveiled exciting product enhancements with the release of Altair HyperWorks 2024, which includes substantial advancements in artificial intelligence. This further solidifies our platform status as a leading environment for AI powered simulation driven innovation.

Speaker 2

HyperWorks 2024 includes improvements in AI driven engineering, design of mechanical and electronic systems and design and optimization driven by simulation. It's the only platform that offers a unified modern user experience across any geometry, physics and complexity at every stage of the product development lifecycle from design to in service.

Speaker 3

With AI

Speaker 2

embedded workflows, photorealistic graphics and a unified back end data system, Altair HyperWorks is the foundation upon which many of the world's most innovative digital engineering practices are being built. In June, we announced that Altair was named the leader in the Gartner Magic Quadrant for data science and machine learning platforms for our offering Alta RapidMiner. Gartner's Magic Quadrant, especially for data related technologies, is widely regarded as an influential tool in the IT industry and serves as a key reference point for many organizations when evaluating technology vendors. The evaluation is based on specific criteria that analyzes the company's overall completeness of vision and ability to execute. Being named as a leader in this ranking report validates what we have known for years.

Speaker 2

Altair has one of the market's most unique and comprehensive offerings for data analytics and machine learning. For us, this placement is a testament to our unmatched vision and business model, which has defined us since our inception as pioneers at the forefront of technological innovation and computational intelligence. I am proud of where Altair stands today and look forward to the strides we continue to make each day. In July, we announced the acquisition of Metrix Design Automation, a Canadian company with a game changing simulation as a service business model for semiconductor electronic functional simulation and design verification. The Metrix Digital Simulator DSIM, when combined with Altair's silicon debug tools will deliver a world class advanced simulation environment with superior simulation and debug capabilities in the EDA and semiconductor space.

Speaker 2

The cloud based business model has the potential to transform the semiconductor space by making high caliber EDA design tools much more affordable and accessible for companies looking to aggressively scale out simulations to accelerate design cycles. Today, integrated circuit design verification has high licensing costs and may require 100 and sometimes thousands of seats to run a single chip simulation. Additionally, these tools run on desktop machines and are not typically cloud native or cloud enabled. The Altair metrics solution delivers the flexibility to run as a desktop app on your own servers or in the cloud and can run very large regressions with customers paying only for what they use. Customers will be able to run simulations concurrently and at scale removing massive amounts of time and cost from the traditional design cycle.

Speaker 2

By combining our best in class software with Metrix cloud based simulation as a service, we are excited to bring this groundbreaking technology to our EDA and semiconductor customers. We are unique in our ability to merge simulation with industry leading workload and workflow optimization technology, serving as a true partner for companies embracing innovative tools and resource delivery models in this highly specialized and high stakes industry. Customers now have a choice in design verification. DSIM will be available through Altair 1, Altair's cloud innovation gateway, where it will also be available for desktop download. Altair's software portfolio continues to demonstrate leadership across industries.

Speaker 2

This quarter, we were thrilled to highlight the technology is playing throughout the development cycle for many teams in their quest for victory in the 37th America's Cup beginning August 22. Our work with America's Cup teams demonstrates the power of Altair's computational intelligence vision on a global stage like no other. These are world class organizations always looking to find new ways to innovate and succeed just as Altair is. Their use of Altair solutions and expertise is helping design state of the art AC75 Yachts. Altair is the official computational science and artificial intelligence partner for the New York Yacht Club American Magic team as well as an official supplier of Luna Rossa Prada Barelli and we are excited to watch the races and experience the outcome of these remarkable athletes and technologists.

Speaker 2

In the Q2, we partnered with Hewlett Packard to enrich the Altair material data center with HP's proprietary material information, enhancing its utility for designers, engineers and scientists. This aims to overcome traditional 3 d printing challenges and improve component design for multi jet fusion and metal jet printers. The collaboration bridges the often siloed functions of design and production of 3 d printed parts. Now engineers with access to the Altair material data center will be able to use HP material data to design efficient components, conduct structural analysis using finite element analysis and predict and fix manufacturing defects during design and simulation. The collaboration will also benefit users of Altair Inspire Print 3d, which accelerates the creation, optimization and study of innovative, structurally efficient, additively manufactured parts by providing a fast and accurate toolset for the design and process simulation of parts made by metal binder jetting.

Speaker 2

Customers within our automotive vertical continue to adopt our cutting edge technology. In the quarter, a motorsports company with aspirations of joining the F1 grid signed a 6 figure 3 year deal to leverage our comprehensive suite of simulation and high performance computing solutions. The organization believes our simulation driven design philosophy and will use SimSolid and Inspire throughout the design process for rapid design exploration. The value, breadth and flexibility of the outer unit software licensing model continues to be an important factor in securing new deals. In the Banking, Financial Services and Insurance vertical, we welcomed 1 of the largest property and casualty insurance companies in the United States as a new customer.

Speaker 2

This organization will leverage Altair SLC, our powerful SaaS language compiler to construct advanced machine learning models, form data preparation and execute data transformations. Their decision not only emphasizes the quality of our data analytics and AI platform, but also highlights the significant potential for growth in this sector. In addition, Canadian bank leveraging our data analytics platform expanded its 6 figure annual spend with Altair by over 200%. We also maintained strong performance within the aerospace and defense vertical. We signed an 8 figure 3 year contract with a multinational aerospace company, our largest deal ever.

Speaker 2

The commitment was driven by Altair HyperMesh, part of the Altair HyperWorks design and simulation platform, which continues to provide superior capabilities for structural modeling and analysis. With HyperMesh, we continue to expand our presence in mission critical workflows at some of the world's most important companies. In addition, a European aerospace, defense and security company signed a 7 figure agreement representing a 49% year on year expansion compared to 2023. This agreement grows our presence in simulation, high performance computing and data analytics, underscoring the convergence of these domains and Altair's unique ability to deliver comprehensive solutions. This year, Altair established a new vertical focused on Healthcare and Life Sciences, where we already had significant business in the areas of HPC and simulation and won our first data analytics deal in Q1 2024.

Speaker 2

During the Q2, we saw several new sales in our pipeline of data science activities significantly grow in this vertical, especially for our SaaS language solutions and our graph database technology. Our indirect sales channel remains an important contributor to our overall revenue and a priority moving forward. A clear testament of this commitment is the addition of 3 new channel partners during the Q2. Backspam based in Seattle will offer customers Altair's full suite of comprehensive data analytics and AI solutions found in the Altair RapidMiner platform. Devo team and Symantec partners will extend the reach of Altair's data analytics and AI solutions to customers across the EMEA region.

Speaker 2

And ATEC will bolster Altair's expansion into the Northwest and Central African regions, dynamic areas, prime for swift adoption of technological solutions. The first half of twenty twenty four was a strong start to the year. We are confident Altair is well positioned for future growth and we remain committed to delivering best in class technology to our customers. I will now turn the call over to Matt to provide more details on our financial performance and our guidance for the Q3 and full year 2024. Matt?

Speaker 4

Thank you, Jim. Hello to everyone on the call and thank you for joining us. Altair had a strong Q2, exceeding the high end of the guidance range for software revenue and total revenue and adjusted EBITDA was above the midpoint of our guidance range. Our first half performance was driven by growth across multiple products and verticals with especially strong performance in aerospace and defense, where demand for our products continues to be robust. Altair's solutions are fundamental to our customers' mission critical workflows spanning design, simulation and data analytics.

Speaker 4

As we look forward, we remain committed to innovation and product excellence, striving to exceed our customers' expectations. As a reminder, some of our revenues and expenses are transacted in currencies other than the U. S. Dollar. And therefore, our reported results may be impacted by changes in foreign exchange rates.

Speaker 4

To aid in the review of our results, throughout my remarks, I will reference growth rates in both reported and constant currency. For the Q2, calculated total billings were 154,500,000 dollars a year over year increase of 4.5 percent in reported currency and 7.1% in constant currency. Software revenue in Q2 was $135,400,000 a year over year a year over year increase of 8.1% in reported currency and 10.6% in constant currency compared to Q2 2023. The year over year increase in software revenue was driven by high retention rates and new and expansion business with notable strength in aerospace and defense, where customers are increasingly leveraging the convergence of capabilities in our software. For instance, 1 aerospace customer is using Ram AI for multidisciplinary optimization of an avionic system, while another is using RapidMiner for predictive maintenance and root cause analysis.

Speaker 4

Our unique ability to deliver these comprehensive AI powered engineering solutions gives us great confidence in the long term trajectory of our software offerings. Additionally, our strength in software continues to be broad based with gains across the Americas, EMEA and APAC. Total revenue in Q2, which includes engineering services and other revenue was 148,800,000 a year over year increase of 5.4% in reported currency and 7.8% in constant currency compared to Q2 2023. Non GAAP gross margin, which excludes stock based compensation, was 80.9% in the 2nd quarter compared to 80.0% in the prior year period, an increase of 90 basis points. The year over year increase in non GAAP gross margin in Q2 was driven by the mix shift towards software revenue, where gross margins are higher than our engineering services and other revenue margins.

Speaker 4

Software revenue was 91.0 percent of total revenue in Q2 compared to 88.8% in the prior year. We expect software revenue growth will continue to outpace that of engineering services and other revenue and therefore continue to push our blended gross margins higher. GAAP operating expenses were $128,200,000 compared to $126,600,000 in the prior year period, reflecting growth of just 1.2% due to the continued and sustained year over year reduction in stock based compensation expense. Non GAAP operating expenses, which exclude stock based compensation and amortization of intangible assets, were $105,300,000 compared to $96,900,000 in the prior year period, reflecting the planned investments we're making in product development and sales capacity to capitalize on the large and exciting opportunities we're seeing ahead of us. Adjusted EBITDA in Q2 was $17,300,000 or 11.7 percent of total revenue compared to $17,100,000 or 12.1 percent in the prior year.

Speaker 4

Moving to our balance sheet. We ended the quarter with $507,000,000 in cash and cash equivalents, an increase of approximately $88,700,000 from the prior year period and $39,500,000 from year end. These increases in cash and cash equivalents were despite us paying $81,700,000 for the settlement of our 2024 convertible notes in the 2nd quarter. Free cash flow continues to be strong and was the primary driver of our cash and cash equivalents balance. Free cash flow was $97,000,000 for the 6 months ended June 30, compared to $83,000,000 in the prior year period, an increase of 16.8%.

Speaker 4

We expect to continue to generate significant free cash flow going forward and we will continue to allocate capital with focus and discipline to drive long term shareholder value. Turning to guidance for Q3 and full year 2024. We've provided detailed tables in our earnings press release including reconciliation to comparable GAAP amounts. To provide clarity on the FX impact to our expectations, we've provided growth rates in both reported currency and constant currency in our guidance tables. For Q3, we expect software revenue in the range of 130 $1,000,000 to $133,000,000 a year over year increase of 9.2% to 11.7% in reported currency and 11.1% to 13.7% in constant currency.

Speaker 4

For full year 2024, we are raising our previous outlook in constant currency for software revenue and also adjusting for changes in foreign currency exchange rates over the past quarter. These amounts are offsetting and therefore we expect full year software revenue in reported currency to be a range of $590,000,000 to 600,000,000 a year over year increase of 7.3 percent to 9.1% in reported currency and 8.9% to 10.8% in constant currency. We expect Q3 total revenue, which includes engineering services and other revenue in the range of $145,000,000 to 148,000,000 a year over year increase of 8.2 percent to 10.4% in reported currency and 10.0% to 12.3% in constant currency. For full year 2024, we are maintaining our previous outlook in constant currency for total revenue. This includes the increase in our full year software revenue outlook in constant currency and an offsetting reduction in engineering services and other revenue.

Speaker 4

However, due to changes in our foreign currency exchange rates over the past quarter, we are adjusting our full year outlook in reported currency to a range of $648,000,000 to $658,000,000 a year over year increase of 5.8% to 7.4% in reported currency and 7.5% to 9.1% in constant currency. For Q3, we expect adjusted EBITDA in the range of $16,000,000 to $19,000,000 or 11.0 percent to 12.8 percent of total revenue compared to 15,500,000 or 11.5 percent of total revenue in Q3 2023. For full year 2024, changes in foreign currency exchange rates have also impacted adjusted EBITDA. And therefore, we are adjusting our outlook to a range of $136,000,000 to $144,000,000 or 21.0 percent to 21.9 percent of total revenue compared to $129,100,000 or 21.1 percent of total revenue in 2023. And finally, for the full year 2024, we expect free cash flow in the range of $122,000,000 to $130,000,000 which has also been impacted by changes in foreign exchange rates and therefore has been adjusted in line with the change in our full year adjusted EBITDA guidance.

Speaker 4

As a reminder, our cash flow expectations are sensitive to billings and collections patterns, which fluctuate seasonally. We continue to be pleased with the high free cash flow as a percentage of adjusted EBITDA at approximately 90%. We are excited about our strong Q2 and first half performance to start the year and we are looking forward

Operator

Thank Our first question comes from Matt Hedberg with RBC. Your line is now open.

Speaker 5

Yes.

Speaker 6

Thank you so much for taking my questions. This is Matt Swanson on for Matt. It was great to hear about the success in the aerospace and defense. And Jim, I think you mentioned big hyper mesh win, has always been kind of seen as a best of breed products for the space. And then, Matt, I think in some of your examples, we talked about some of the newer products like RapidMiner.

Speaker 6

Could you guys just talk a little bit about the go to market and the ability to be able to sell both those things and kind of interconnectedness from your traditional products and some of these newer data focus and just how the sales force is doing ramping on that?

Speaker 2

Sure. First of all, thank you. Yes, I mean, the go to market, first of all, in general, we've moved to this vertical market orientation for all the strategic accounts. So in the aerospace and defense vertical, we have a global team that is managed by 1 individual and then the account teams are spread throughout the world. When you think about an account, one of the major aerospace accounts, most of them are using hyper mesh and it just continues to expand and now we're expanding out to many of the other products.

Speaker 2

Rapid miners are pretty natural next step because if they have a lot of test data or they're trying to process material data, for example, coming in for example, if they want to project what our values that maybe didn't come in through testing and they want to project those using some AI technology. I just saw that this morning. So it's fresh in my mind. It's just a great tool for doing that. So we're seeing more and more applications throughout our traditional engineering customer base.

Speaker 2

And I would say that the account teams that are traditionally selling simulation applications are becoming more and more comfortable as they see more of these applications, understand them and can really just talk about them. And we bring experts in of course, more and more. The other big application is a solution called physics AI or RAM AI, reduced order modeling. So when we're doing digital twins, very often we're creating these reduced order models that are typically neural net type models to simulate a part of the system in the digital twin. Similarly, physics AI lets you run a number of simulations and then run it through the neural nets of Physics AI, build an AI model, if you will.

Speaker 2

The next simulation just simply runs the AI model. So it's really starting to take off. We have a lot of technology just embedded in our tools also. There's all built on machine learning and AI. So it's sort of permeating throughout the products.

Speaker 2

And I think we have frankly speaking quite a big lead on our competition and applying this kind of technology. It does take time for everyone to come up to speed, the tech support guys, the sales guys, but we've been at this for 5, 6 years now. And so we are just really running with it. We've been running these seminars, AI for engineering and we have in some cases thousands of people signing up for them. So it's been very, very positively received.

Speaker 6

That's super helpful. And then my follow-up question was actually kind of on that getting up to speed standpoint and just the idea of kind of the push and pull of AI with your customers right now. It was great to hear about those updates that came for the HyperWorks 2024 around AI. But I'm just curious, like is AI something that your customers are looking to as a must have

Speaker 2

when you enter into a new deal process? Or are you really like a sell side? I think so and I think it's what's putting us really in the lead at this point. We see our position in many of these accounts where typically there's multiple vendors in each one of these accounts ourselves and competitors. But we see our position sort of rising across the board actually.

Speaker 2

And a lot of the reason for that is the AI technology that we're bringing, I think. So yes, I think it's very important. Thank you. Sure.

Operator

Thank you. Our next question comes from Blair Abernathy with Rosenblatt Securities. Your line is now open.

Speaker 7

Thanks for taking the questions guys. Jim, just wanted to drill in a little bit more on your comments about the channel and adding some new capacity there. Are you looking at emphasizing the channel more now that you have more products? Just kind of what are your thoughts there? And I'm not sure what the current percentage revenue from the channel is for Ultera?

Speaker 2

We are trying to emphasize the channel more. It's particularly important on the data side to be honest with you, but it's also important on the simulation side in many of the regions that we probably historically have not gone to market indirectly as much. So some of the larger markets where we were selling a lot directly, we were underserving, I would say the small, medium accounts and we need to get to those through indirect channels and that's what we're doing. The other thing very, very important for us is data modernization program, moving their SaaS estate into Python in some cases or into a mix of Python and R and SaaS. We're really well positioned for those deals, but they have to be done through systems integrators.

Speaker 2

And the other one that heavily relies on systems integrators is the graph technology. We have a lot of activity happening with that in pharma and in our own defense. And in those opportunities, very often it's a system integrator that's heavily involved in the implementations. So yes, indirect is really important for us.

Speaker 7

Okay, great. Thank you. And just one other, if I could, the called out the HP partnership and with your material solutions. Is that strictly a product arrangement or is there some go to market there as well?

Speaker 2

There is no go to market there at least that I'm aware of. Maybe I'm missing something. Other than the fact that now their material data is available in our material database modeler, which is really important. We have about 400 different providers. HP is a new one that's added, but a very, very important That solution has been maturing and I think it's going to really take off.

Speaker 2

We're going to move it into a unit model approach coming up pretty soon here. And I think that's going to be very, very transformational. I think most of our existing customers are going to start using it and when they do, I think it's going to really change the game. It's a gorgeous product and it uses AI as part of it as well. So there's some new things coming that are rather cool.

Speaker 7

That's great. Thanks very much.

Speaker 2

Sure.

Operator

Thank you. Our next question comes from Charles Hsieh with Needham and Company. Your line is open.

Speaker 3

Hi, Jim, Matt. Thanks for taking my questions. I know we're in the well, middle part of the year, still a little bit away from 2025. But Jim, Matt, any initial thoughts on next year at this point, given there seems to be some renewed concerns about the macroeconomic environment, particularly we're seeing news, Stellantis, for example, I'm sure it's probably one of your large customers in automotive seems to be that there's some rumored layoffs there. I'm not so sure if this is isolated case or not, but I want to get your thoughts in the middle part of 2024, any initial view on 2025 macro environment, automotive and what you think about the Altair business?

Speaker 2

No, that's a good question. In general, I feel like these companies have no choice but to continue to innovate aggressively. And so my feeling is that these downturns aren't necessarily bad for my business because I think I bring a lot of value to the customers. And I think the customers are going to choose to work more and more with Altair as time goes on. But of course, when there if there is an overall malaise or whatever, I suppose it can have some effect.

Speaker 2

But generally, I'm not that concerned. I feel really, really optimistic coming into 2025. The product lineup that we're bringing at the end of this year into next year, There's it's just second to none across the board on the simulation side, all the modeling and visualization, all the work we've done on the modeling and visualization is essentially complete. And we are seeing ourselves very, very competitive against really, really everyone. Similarly, on the data side and the HPC stuff, we're launching a product called NavOps.

Speaker 2

We've got a huge number of customers lined up. It lets you get to the cloud basically, it works with any of the different cloud providers. Every customer is interested in being able to do that managing cost and performance. So I just think we're in a great spot. Of course, macro can have some overarching effect, but it's my job to plow us through whatever and I'm pretty confident about it.

Speaker 3

Got it. Thanks, Jim. Maybe a second question. Glad to see you at the Design Automation Conference. I can feel like Altair has a bigger presence at that EDA Industry Trade Show.

Speaker 3

And I do want to ask maybe first off, can you kind of help us give us a reminder what are the Altair business, Altair exposure to the semiconductors at this point. And it's interesting to see Optair announced acquiring this company called the Matrix Design Automation. But also want to check with you because that company, the founder, Joe Costello is very famous for his different thinking along the business model, charge by the minute rather than charge by the seat that has been his pitch to the EDA industry. But that does echo some of the new point based business model you have been promoting for over the years. So I wonder if we can get a comment from you on that as well.

Speaker 3

Thank you.

Speaker 2

Yes. We've been building our portfolio in electronics starting with printed circuit boards and now more and more in the semiconductor space. Obviously, we're not a major player there yet, but we're coming with a lot of, I think, interesting technology that DSM probably tested the hell out of it and it's very, very competitively performing to the best in class logic simulators. And we have really nice digital debug technology, honestly best in class there. We plan to integrate that stuff, make it available so people can run desktop on their servers or in the cloud with business models and technology that makes it very interesting.

Speaker 2

And there's the market I think for semiconductor design is exploding starting from universities and small companies. And I do think that there's been a bit of a duopoly there with very expensive software that is sort of anathema to the creative power of the market to be able to go out and innovate. So I think we're going to bring some disruption there. I don't mean that we're going to completely change the world in 6 months. I think we are going to see a lot of traction around the stuff we're bringing.

Speaker 2

And you also have this move to 3 d IC and healthcare is very well positioned with some really nice technology in that direction as well. I think it's going to be more and more important. What we do, obviously, we play big on the HPC side there as well. So bringing all that convergence, if you will, is going to be important. And I think some of the expertise and technology we bring on the AI side as well is going to bring some interesting innovation.

Speaker 2

I think that particular market, the EDA market is right for some disruption. We're going to try and bring some.

Operator

Thank you. And our next question comes from Steve Tusa with JPMorgan. Your line is open.

Speaker 5

Hey, good evening.

Speaker 4

Hey, there. Good evening.

Speaker 8

Just a question on the guidance and the margins. I would assume that part of the margin tweak down is due to foreign exchange. Can you just confirm that? Or is there something else in the business that you're seeing on the cost side?

Speaker 4

Yes. Thank you for the question. If you look at the full year guide and we have a table that's there that's helpful in getting you to bridge from sort of 1 quarter to the next. The full year guide from an EBITDA perspective in constant currency is unchanged. So you're correct that the only impact to EBITDA is due to FX.

Speaker 8

Okay, great. And then as far as the Aerospace strength is concerned, it's kind of as juxtaposed against I know you're not like direct competitors on certain fronts, but juxtaposed against Dassault who called out aerospace and defense as being headwind. Is there anything to kind of like directly read through there to market share? Are these just on like very obviously, they're a large company with many different product lines. But is there anything to kind of read through from that to like a direct project win or direct deal win for you guys?

Speaker 2

I don't think there's anything direct out here versus Dassault, if you will. But I do think some of the players are rising and some are slipping some and I would say Altair is gaining and others are perhaps slipping some. So without calling out names, not sure what else I can say there. But it's part of why I don't concern myself with some of the macro because I think it can create new opportunities and I think Altair is rising irrespective of where the tide is going.

Speaker 8

Great. Thanks a lot. Congrats.

Speaker 2

Thank you.

Operator

Thank you. And our next question comes from Mark Schappel with Loop Capital Markets. Your line is now open.

Speaker 6

Hi, thank you for taking my question. Nice job on the software revenue print. Jim, question for you on metric design. I appreciate your color on that in your prepared remarks. You mentioned that you thought the technology was groundbreaking.

Speaker 6

I mean, would you consider their technology groundbreaking in the EDA space in the same way that maybe SimSolid is disruptive in mechanical simulation?

Speaker 2

No. So I said it's groundbreaking, the business model that they're applying here because with the cloud, you can scale up to 1,000 of simulations simultaneously. And so you can basically do in a very, very short amount of time, which you could do in much, much longer period of time because you perhaps don't have enough licenses or enough computing hardware to scale out as fast. So the business model and the approach I think is what's groundbreaking and can really accelerate designs. But general technology of the logic simulator, I think it's a really excellent logic simulator, which I admit before a lot of testing that we did, we were a little skeptical, but it's really quite strong.

Speaker 2

In fact, at the DAC conference, one of the gentlemen that does all this evaluations and whatever actually wrote similarly he was quite surprised with its performance and we were as well. We tested it with a team overseas. So no, I don't think the simulator itself is groundbreaking. I think it's a very competitive simulator. I think the business model is what's groundbreaking.

Speaker 6

Great, thanks. And then on physics AI, that was a big topic during the user conference and Investor Day. What kind of an uptake rate are you seeing with your physics AI tools?

Speaker 2

I think a huge percentage of the customers are beginning to use it. So it's getting a lot of uptake.

Speaker 6

Great. Thank you.

Speaker 2

Sure.

Operator

Thank you. And our final question comes from Dylan Becker with William Blair. Your line is now open.

Speaker 5

Hey, gentlemen. Nice job here. Jim, maybe touching on kind of the HyperWorks 24 rollout, any kind of additional color you could give us around maybe added functionality for customers, how they're thinking about adoption of this, what that can mean for incremental usage or units, kind of the right way of thinking about what that means for the business?

Speaker 2

I think it's sort of a broad based release with a lot of really great things tough in it. The HyperMesh product, which is our flagship product has gone through this complete transformation. It's a new user experience. It's all Python, all that and there's a lot of underlying stuff that you can't see that we are taking out, if you will, because we have 2 processes running simultaneously. So the performance is dramatically improving.

Speaker 2

It improved dramatically with the 4.0 release and the 4.0 release, which is right now and the 4.2 release in a few months. Each one of these is giving us a lot of new performance and that is extremely important, a lot of robustness as well. So brand new user experience, much higher performance. Some of the products have the new graphics engine in it, which is gorgeous. And so it's full time real time rendering, it's really beautiful stuff.

Speaker 2

The Inspire product continues to really just be groundbreaking for simulation driven design. And I think over the next 6 months to 12 months, I think we're going to see a lot more take up of Inspire and that addresses the design community and I'm very excited about that as well, especially some of the new technology for implicit design is I think very interesting as well. So there's a lot, I mean it's hard to pinpoint lots of new things in SimSolid, the electronics, the electromagnetics and SimSolid continues to evolve here. And we're continuing to benchmark run against our traditional electromagnetic solver FECO and getting very, very good results. So we are excited about where things are going.

Speaker 5

Okay. That sounds great. Yes, I appreciate the depth there. Maybe 2 for Jim, maybe or Matt as well too. On that kind of push to new verticals, obviously, we've kind of restructured and verticalized the sales force, but it sounds like there's some key wins in some of those segments as well.

Speaker 5

I guess, how should we think about kind of the evolution of those pockets of strength within some of these new markets and how to kind of fully capitalize on the potential in each of those as well?

Speaker 2

I answer that. I don't know if Matt has a different answer here. But I think some of them are have matured faster or really hitting their stride, aerospace and defense for sure. Some of them are continuing to mature and we're continuing to tune them. Some of the people that we might have selected whatever, we're making little changes here and there and kind of learning from the ones that are doing well.

Speaker 2

We're also adding more folks with domain expertise, But some But some of the acquisitions that we've made, for example, the graph database acquisition had a lot of life science expertise in it. And so that's really shored up that new healthcare life science vertical, which really looks like it's taken off for us. So in general, I mean, I think it's coming along and it's only a year and a half into this new organization. And I think an organizational transformation like this probably takes 3, 4 years to really completely hit its stride.

Speaker 4

Yes. I mean, the only thing I would add there, Dylan, is just that I think the momentum we're seeing is really, really strong. And Jim called out in his prepared remarks in Q2, we signed our largest deal ever, and that has a lot to do with us moving to verticals. So a lot of these verticals are starting to hit their stride. We were pleased with our Q2 software revenue performance, getting to 10.6% in constant currency.

Speaker 4

And we're excited about our guide for Q3 at the midpoint of 12.4% in constant currency. So just we're pleased with how momentum is building here and feel very good about it.

Speaker 5

Okay, great. Sounds good. Thanks, guys.

Operator

Thank you. This concludes our question and answer session. I would now like turn it back to Jim Scapa for closing remarks.

Speaker 2

Okay. Well, thank you very much. I want to just express appreciation to the team because everyone worked really hard on the healthcare team and appreciate everyone's interest in our company and look forward to continued success here. Thank you.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Altair Engineering Q2 2024
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