Good day, ladies and gentlemen, and welcome to Altair Fourth Quarter 2018 Earnings Conference Call. At this time all participants are in a listen-only mode. Later there will be a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder this call is being recorded.

I would now like to turn the conference over to Howard Morof, Chief Financial Officer. Sir, you may begin..

Thank you. Good afternoon. Welcome and thank you for attending Altair's earnings conference call for the fourth quarter 2018. I'm Howard Morof, Chief Financial Officer of Altair, and with me on the call is James Scapa, our Founder, Chairman and CEO.

After market close today we issued a press release with details regarding our fourth quarter and full-year performance which can be accessed on the Investor Relations section of our website at investor.altair.com. This call is being recorded and a replay will be available on our IR website following the conclusion of the 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. 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 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.

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..

Thank you, Howard, and thank you all for joining our call. Today we will talk about our quarterly and full year results and our outlook for 2019. We will discuss the integration and market traction we see for our two most recent acquisitions, Datawatch and SimSolid. We will talk about changes for our global marketing and compelling customer wins.

As 2019 will be our first year of reporting under the new 606 accounting standards, we will be careful to identify when we're talking about 605 versus 606 numbers. My remarks regarding fourth quarter and 2018 financials will use the 605 standard.

Our fourth quarter revenue and profitability exceeded expectations and demonstrated excellent year-on-year growth. We had total revenue for the quarter of $103.9 million, an increase of 16% from a year ago with 2018 revenue of $385.1 million, growing over 2017 by 16%. Our revenue growth was strong and powered by software product growth of 19%.

We produced adjusted EBITDA in the fourth quarter of $14.1 million with full year adjusted EBITDA of $38.5 million, both nicely above the upper end of our guidance range. We completed the acquisition of Datawatch on December 13, 2018 and have moved quickly to integrate it into Altair.

We made several important adjustments to the business while making sure to support customers, employees, and their ongoing efforts. We are moving quickly to streamline Datawatch brand offerings and merge their products with our other solutions and business models.

Our complete data intelligence offering includes market-leading data preparation, data science, streaming, and visualization solutions that fuel engineering, scientific, and business decisions.

We are integrating all of our data intelligence capabilities into a modern cloud-based solution, including important enterprise level capabilities, such as security, data discovery, collaboration, and operationalization of user-developed machine-learning workflows to deliver a more unified experience for users.

The Datawatch sales organization is strong and highly process centric. We have maintained and supported this team focused on their traditional markets and are strengthening them by looking to leverage Altair's more global footprint.

We established a small overlay team with expertise in data intelligence focused on supporting Altair's strategic account executives cross-selling Datawatch products into our manufacturing customers worldwide. The synergies are bidirectional.

For example, we are learning from and embracing several Datawatch sales processes across the broader Altair sales organization.

We're confident our combined global teams and infrastructure will continue to develop and deploy great products, grow sales, and delight customers as we move forward in an era where simulation and data intelligence are converging to drive many operational decisions.

We anticipate bookings from Datawatch products for 2019 to be consistent with the 2018 bookings, while significantly increasing the percentage of recurring revenues. We put in place several million dollars of synergies to be realized in 2019 from this business, including significant administrative and executive headcount reductions.

We also anticipate substantial external spend cost reductions, including public company expenses. We expect the financial contribution of the acquisition to be aligned with our overall adjusted EBITDA percentage targets. In October of 2018 we announced our exciting technology acquisition of SimSolid.

Since then we've moved to quickly release the product commercially and promote its game changing power with seminars, free trials, and special offers. The results have been extraordinary. Customers worldwide and in all vertical markets are impressed by the technology and taking initiatives to deploy SimSolid in their enterprises.

We believe SimSolid is a unique technology which allows users, mainly designers and design engineers, to accurately simulate simple to extremely complex assembly designs directly on their CAD geometry without the simplification or meshing required by other technologies.

SimSolid is robust and extremely fast and in our estimation will finally allow the market to realize its ambition to have meaningful simulation at the design stage. SimSolid is available under HyperWorks Units, as a stand-alone solution sold by resellers, and as a pure cloud SaaS offering.

We are integrating SimSolid into our Inspire platform where it will complement Altair's other simulation technologies for simulation-driven design. We believe some SimSolid will deliver meaningful new revenue over the next three years and has the potential to disrupt the current market for simulation at the design stage.

We believe it's important that our marketing and demand generation efforts are aligned with our growing product portfolio and expanded value proposition. To lead that effort, we were excited to welcome Amy Messano to Altair at the beginning of 2019 as our new Chief Marketing Officer.

Her extensive experience and expertise in technology marketing is an important addition to our executive team, especially at a time of rapid growth in our product portfolio. She has already moved to reorganize global marketing, including Datawatch, to elevate Altair's brand and align with sales objectives. The fourth quarter was strong.

We continue to win across the board in new and existing accounts. Our core products of design, modeling, visualization solvers continue to perform well and we saw growth in new areas, including electromagnetics, model-based design, data intelligence, and high-performance cloud computing.

I would like to highlight some of our successes today as they indicate fundamental strength in our business. In aerospace, our second largest industry sector, a major supplier committed to nearly $2 million agreement, driven by the replacement of Nastran and Patran with OptiStruct and HyperMesh.

A major global automotive supplier headquartered in Europe signed a multimillion euro renewal for 2019. That represents a nearly 20% increase as they continue to use HyperWorks for a broader range of product development challenges.

Also in Europe two different automotive OEMs signed three-year deals each worth seven figures annually, representing a 38% and a 27% annual increase over their previous multiyear agreements. This was driven by large expansions in the usage of Altair solvers and optimization products with many hundreds of users in the organizations.

The fourth quarter was excellent for our high-performance computing sales teams across a diverse set of industry verticals, including energy, automotive, defense, electronics, and data storage. There were several expansions including a large one in the defense sector.

Product sales in the electronics industry are growing, including a 74% increase at a chip maker on several hundred thousand dollars in revenue, while another customer nearly tripled their usage commitment. Finally, an important energy customer in the Americas made a new commitment of over $650,000.

We are beginning to see immediate customer success with SimSolid. In the four months since the acquisition, there have been over 5,200 downloads, including almost -- at almost 500 unique existing customer companies. We have trained more than 1,400 individuals. We can see usage growing globally at several accounts across most verticals.

Our data intelligence team joined Altair during the final two weeks of the year and quickly contributed some important wins. Topping the quarter was a seven-figure expansion deal with a major banking customer. This is a historically strong market for Datawatch, and we expect this to continue.

A longtime healthcare customer decided to upgrade to our cloud offering and agreed to transition to an annual subscription. We had a very strong fourth quarter and 2018, delivered on our stated objectives, and made meaningful acquisitions, including SimSolid and Datawatch.

We are well-positioned because of our large recurring revenue base, and we are diversified through geographic and vertical markets. We remain optimistic about our outlook and look forward to the future. Now I will turn the call over to Howard for details on our financial performance during the fourth quarter and full-year as well as guidance for 2019.

Howard?.

software product revenue to be between $99 million and $101 million, representing growth of 24% to 26% from 2018; total revenue to be between $123 million and $125 million, representing growth of 19% to 21% from 2018; adjusted EBITDA of between $23 million and $25 million.

Our revenue outlook for 2019 includes contribution from Datawatch based on our initial expectations of flat to slightly down compared to 2018 as mentioned before. As a reminder, this reflects the continuing transition to licensing of Datawatch products on a subscription basis.

We have successfully realized in excess of $5 million of synergies virtually immediately upon closing. To summarize, we continue to be very pleased with the performance of the business for the fourth quarter and full year of 2018.

We are executing well on our strategic priorities and generating an attractive combination of growth, profitability, and cash flow. We are optimistic about our ability to drive revenue growth in 2019 based on our market momentum and ongoing investments that are leading to continued progress toward our long-term target.

With that operator, can we now open up the call to questions?.

Thank you. [Operator Instructions] Our first question comes from Sterling Auty with JPMorgan. Your line is open..

Yes, thanks. Hi, guys. I think looking at 2019, the two moving parts I want to make sure I fully understand is you mentioned Datawatch flat to slightly down. I think that's very consistent.

But what does that actually mean in terms of the actual dollar contribution within the guidance that you've provided? As well as, is there -- as we think about the 606, everything should be annualized, so there's no additional tailwind or headwinds from 606 to the top line, correct?.

Sorry, I missed your second half of your question there, Sterling. Would you mind repeating it? I apologize..

Yes. Let's start with the first part being Datawatch..

Okay, yes..

You mentioned flat to slightly down.

So what does that mean in dollars to the guidance?.

Right. I know you're going to hate this answer, but to be honest with you, the way that we manage our software business, we integrate all of the products under our Units model. And so we expect by basically beginning of the second quarter to have the Datawatch products running under the Units model.

And so you're going to have a mix through the year of sort of the historical stand-alone stuff, because there's some of that, as well as a lot of HyperWorks Units revenue. And so we really aren't breaking it out.

I know you hate that because you want to break it out, but what we do is we look at the overall picture and we look at the overall picture of expenses as well and we try and manage our business. So I'll let Howard add to that if he wants to..

The add is simply we've -- as we've converted prior acquisitions as well, although not obviously quite the same size as the Datawatch, it's been essentially the same fundamental process for us converting into a HyperWorks Units and then we clearly lose the individualized revenue streams that are acquired..

All right, understood. And then just the other part was again now that we're four quarters into 606, there is no additional headwind or tailwind impact to the top line from that. Everything should be normalized.

Correct?.

Yes, that's absolutely correct..

All right, great. Thank you, guys..

Thank you. Our next question comes from Rich Valera with Needham & Company. Your line is open..

Thank you. Just a follow-up on the Datawatch contribution. For 4Q, I think you said it wasn't meaningful, Howard, but I think Jim actually referred to a seven-figure deal that you got during the quarter.

So I'm just wondering did they contribute maybe $2 million in 4Q in that couple weeks or if there is any color you could give on Datawatch's contribution to 4Q?.

Rich, it's -- there really was a pretty negligible impact overall on the revenue in Q4. We owned them for essentially 18 days, of which it includes Christmas and New Year. So I would -- I'm not going to say it's zero dollars but really quite negligible..

And then just on the expense side, the non-GAAP net income I think came in lower than we expected, despite a decent top line beat.

Was there something acquisition related that you didn't back out of that non-GAAP net income?.

No, not acquisition related; actually tax related. Specifically as I think you're aware, we're in a full valuation allowance on our US tax attributes because of our NSO deductions and such.

So the foreign taxes that we pay -- the foreign taxes withheld at source and our US tax credits, we don't get to, if you will, recognize the value of that, and that was really accelerated in Q4. So that's really the impact there. It's all about tax..

And then, Jim, just wanted to ask a question about SimSolid. Obviously, some pretty exciting initial results there. And you talked about I think kind of a three-year timeframe thinking that could be really significant.

Is there any kind of range you'd be willing to put on the kind of revenue potential you see for this down the road? If it's -- if it's not specifically three years, just how material do you think that could be relative to your current product revenue run rate?.

I guess I'd rather not put a very specific figure on there. Yes, I'd rather not do that. I apologize, Rich..

Another thought on that. Just you've -- sounds like as a stand-alone product, it's getting a lot of uptake. But I think you alluded to the potential for that to be used more in a design environment and integrating it into the Inspire products.

So have you looked at also just sort of integrating that into other perhaps third-party 3D CAD tools as kind of an embedded simulation engine? Is that -- just wonder where you're thinking on that front?.

So we're open to that actually, but we haven't specifically explored that yet. We're not close to it, but it's for us..

And then just one final question on kind of the general environment -- sort of general demand environment relative to the last couple of quarters and where you guys are in kind of the process of increasing your go-to-market capacity, which you really started I think a couple years ago.

But can you just give us a sense, any change -- it sounds like the environment continues to be very good, so my sense is no changes if I had to reach your tone.

But if you could give us a sense on that and sort of where you are in kind of that sales force ramp-up you've been undertaking?.

So we are -- we are still pretty focused on growing the capacity for sure. One of the key things we are focused a lot on, though, is process. And so we are looking to, if you will, structure the sales process a little more and actually the Datawatch acquisition's helpful for us.

They were very organized and very process-centric group, and we see a lot of learning from them, particularly the way they do inside sales. And we've made some moves including a recent executive that we brought in who has, let's say, more process orientation to his sales experience.

So that, combined with some other things we've been doing over the last couple years. Also on the tools that we use, we see continuing to grow the capacity, but also grow the structure, if you will, around and the infrastructure around sales..

Got it. Okay. Thank you..

Sure, Rich. Thank you..

Thank you. [Operator Instructions]. Our next question comes from Matt Hedberg with RBC Capital Markets. Your line is open..

Thanks. This is actually Matt Swanson on for Matt.

Jim, I know it's really early days here, but can you comment on kind of the early reaction you're getting from your installed base on Datawatch and how that's kind of impacted your ideas around cross selling?.

It is very, very early days. We created this sort of SWAT team, just a few people. And they've been out to several of the regions already. We've had a lot of interest, actually more than I might have even expected. And there's a lot of interest from my own organization as well, and we want to manage that carefully.

So the reaction in general is pretty positive. I think we have to take our time a bit, get our arms around. Some of the go-to market there, we're just learning and exploring, but by middle of the year, I think we're going to be able to go much faster..

That's great. And then -- and then it was also great to hear about all the large auto deals that you won in Europe. Just kind of looking at the general PMI data recently, it seems like there might be a little general manufacturing softness in the EMEA region.

Have you noticed anything, customer conversations? It sounds like generally things are looking good, but [indiscernible] see any macro specific concerns in the region?.

We're not seeing that and we have a particularly strong organization, I would say, in the EMEA region. Sometimes a downturn actually helps us. I've talked about that before. But right now, frankly, we're still seeing a lot of strength. So I don't know what will happen next year, but this year things look very solid..

Thank you..

Thank you..

Thank you. Our next question comes from Josh Tilton with Berenberg. Your line is open..

Hi. Thanks for taking my question.

In regards to the go-to-market strategy for Datawatch within the Altair customer base, is there a plan to expand beyond this overlap theme (ph)? And then how fast can the sale force ramp behind the strategy?.

one is traditional Datawatch customers which is financial organizations and data scientists; and then the second is some of the engineering opportunities and the synergies that we've talked about. So it's a mix.

We are beginning to train and we're going to build some materials to bring our own account executives up to speed, and they are joining some of the meetings little by little and that's how they're learning. Frankly speaking, the products I think are quite good. Under the Units model, I think it's going to be a very compelling story.

And I think we're going to be able to communicate pretty effectively what the strengths and weaknesses of these products are very soon..

Thank you. And I'm currently showing no further questions at this time. I'd like to turn the call back over to James Scapa for closing remarks..

Oh! Okay, I'm sorry, I thought there was one more. So thank you all very much for joining the call. Appreciate the interest in our company and our business. I do want to point out that we are going to have an Analyst Day on March 12 at our headquarters in Troy, Michigan. And so we invite those interested to attend. Thank you very much..

Ladies and gentlemen, this concludes today's conference. Thanks for your participation and have a wonderful day..