Ladies and gentlemen, thank you for standing by and welcome to the Altair Q3 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]. I would now like introduce your host for this conference call, Mr. Howard Morof. You may begin..

Good morning. Welcome and thank you for attending Altair's earnings conference call for the third quarter of 2020. I'm Howard Morof, Chief Financial Officer of Altair, and with me on the call is Jim Scapa, our Founder, Chairman and CEO.

After market closed yesterday, we issued a press release with details regarding our third quarter performance and updated guidance for 2020, 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 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 law.

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 yesterday.

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.

Jim?.

Univa and Ellexus. Univa's footprint in the market and unique technology enable Altair to grow in life sciences and financial services, and its experienced team further cements our leadership position in this fast-moving field.

Altair will continue to invest in Univa's technology to support existing customers and specific market verticals, while integrating with Altair's HPC and data analytics solutions, consistent with our vision toward the convergence of these technologies. Ellexus provides leading storage and input/output or I/O analysis solutions.

Their software is used for I/O diagnostics, optimization, and dependency detection by many enterprises with complex HPC environments. Ellexus delivers per job storage agnostic file and network I/O, real-time monitoring to identify latencies and bottlenecks for faster job execution times and better resource utilization.

Altair plans to offer Ellexus' solutions to our existing customers and integrate Ellexus technology to provide storage of our scheduling, critical and growing requirements to support modern workloads, including for big data analytics, AI and ADAS.

In early October, we announced the acquisition of M-Base, a leading international supplier of material information systems, with a focus on plastics. One of the most important decisions in product development is a selection of materials.

Altair has been investing significantly in the area of material modeling for several years as part of driving forward our vision of simulation-driven design. M-Base's offering covers the complete life cycle of material data from testing and test evaluation to computer-aided engineering interfaces.

The acquisition of M-Base is an important step to deliver comprehensive material guidance and infrastructure to predict and optimize product performance through simulation.

M-Base brings to Altair first rate plastics material data supplied directly by material producers, deep knowledge and material database technology and plastics material data preparation from raw data to data consumable by designers and engineers.

M-Base is the official software supplier to the computer-aided material pre-selection by uniform standards or campus, the world's most successful plastic material database, adhering to rigorous international standards.

Altair will continue to invest in campus to ensure consistent, high-quality material data for customers to drive accurate simulation results.

The integration of M-Base into the Altair ecosystem brings deep knowledge and experience and material database projects as well as the high-quality data our customers require to improve the design of their products. This has been a very busy period for new product launches.

Last week, Altair announced the launch of the Altair Material Data Center, the comprehensive material information management system, providing access to materials data for metals, polymers and composites, including data shoots, raw data and solver cards with full traceability back to the supplier source, ensuring balance assumptions and consistency across teams.

It enables designers, engineers and scientists to explore materials, including structural fatigue, fluid thermal, electromagnetic properties as well as manufacturing process specific data in a stand-alone application or through the interface of Altair's simulation and optimization tools.

Customers can seamlessly access the Altair Material Data Center as a SaaS solution posted by Altair or privately to manage proprietary information within the solution. Its intuitive web-based user experience allows users to browse, search, view and compare material data.

Through its open API, the Altair Material Data Center can integrate with any desktop solver for non-disruptive workflows. Material inputs can be efficiently and easily generated for all major solvers, including Altair's. Altair has established strong relationships with material manufacturers over many years.

And now with the acquisition of M-Base, we've expanded our presence in the plastics industry.

This week, we announced the launch of Altair Inspire mold, a revolutionary end-to-end solution for simulating injection molding from initial design through to material mapping of reinforced engineering polymers and optimizing the structural and fatigue performance of complex parts.

Inspire mold brings Altair's core philosophies, simulation-driven design and democratization of simulation to this $250 billion manufacturing sector where injection molded plastic components play a critical role in a vast array of applications from toys and consumer electronics to high performance, load bearing components in sectors like aerospace and automotive.

Inspire mold offers engineers, fast, highly capable tools with an optimized user experience and unrivaled solver performance from our brand new, extremely fast 3D solver technology.

With Inspire mold, experimental approximations of traditional 2.5D solvers are eliminated and support for advanced physics, empowers advanced and novice users with deeper insights and understanding.

Manufacturability of new components can now be evaluated at the also -- development process and the risk of defects such as warping, sync marks and short shots are mitigated before any costly investments are made in molds.

Inspire mold joins Altair's industry-leading Inspire manufacturing simulation portfolio, including casting, forming, extrusion, polyurethane form and additive manufacturing. In October, we held the first all virtual Global Altair Technology Conference, the GATC.

We hosted attendees from 121 countries and more than 2,500 companies in virtual sessions focused on the future of technologies driving decision-making. It was an invigorating three days of forward-looking presentations on topics, including empathetic AI, simulation-driven design and engineering education.

The GATC followed a short-form format this year and brought together thought leaders from academia, industry and from within Altair to speak about the future they envision for their area of expertise. We also held panel discussions covering data-driven enterprises, applying digital trends, and transforming knowledge to solutions.

I would like to thank all the presenters, organizers and attendees who made it happen. As we move into a post-COVID world, we are appreciative that many good things accelerated during the crisis, including our ability to broadly communicate and engage on a global basis.

Altair is truly impacting the world and transforming decision-making across many market sectors. Lower examples of our successes in Q3, which illustrate the value customers place on our solutions and the expertise we offer them.

The third quarter included six and seven-figure expansions in the automotive and aerospace sectors against a very tough macro environment. We believe this is a positive indicator related to the benefits customers are seeing from simulation-driven design.

We also inked an important new seven-figure software deal with a North American automotive light truck company, specifically to support electric vehicle development.

This EV relationship takes advantage of much of Altair's portfolio of multidisciplinary simulation tools and includes everything from structural performance and computational fluid dynamics to communications, controls and electronic systems development.

This electric vehicle development team is also using our Inspire platform for conceptual design and leveraging the power, accuracy and speed of SIMSOLID within that environment.

Our vision for multiphysics simulation is exemplified by a large order in APAC to support electromagnetic product development, including aerodynamic thermal, aerodynamic pressure and high-power microwave antenna array heating.

The simulations will be done using parallel computing across more than 2,000 cores by leveraging FICO's state-of-the-art scalability. We had several other wins for FICO and our strong electromagnetics portfolio in the quarter across multiple industries and geographies. Electronic systems design is an emerging growth area for Altair.

Now we have developed, acquired and integrated a complete portfolio of solutions in this arena. We see this as a large addressable market opportunity we are just beginning to expose as our field organization gains confidence in our very competitive products for customers in this space.

Initial meetings have resulted in a surprise from customers who are just beginning to appreciate the breadth and power of our solution portfolio for electronics design. Our HPC solutions had some excellent wins in the quarter. One technology company inked a 2020 contract that is more than two times larger than their 2019 licensing.

This account is a great example of Altair starting out with a single, small product used case and working with customers to show value, build trust and develop the infrastructure for growth. A Silicon Valley semiconductor company came on board as a brand-new customer for license management tools.

Also in the Valley, we are pleased to be supported on hardware emulation workflow for one of the major players. The third quarter included numerous data analytics wins in financial services, manufacturing, defense and public health. Many of these wins and expansions were six-figure deals.

In Q3, we released the beta version of Knowledge Works, our cloud-native end-to-end platform for data analytics. The Altair sales and field organization is excited about the opportunities for this solution, especially as they are sensing appreciation from customers and analysts.

Our pipeline for data analytics continues to grow strongly towards 2021 for all data products across all customers and verticals. Altair remains focused on delivering great technology and delighting customers, while we grow our scale as a software company and increase our gross margins and EBITDA margins.

Our balance sheet remains strong, and we are confident in our prospects for sustainable long-term growth. In closing, I want to express that we feel strongly positive about the current and future state of our company and products.

Now I will turn the call over to Howard to provide more details on our financial performance and our guidance for the fourth quarter and full-year 2020.

Howard?.

Thanks, Jim. As Jim mentioned, we delivered excellent third quarter results on the top and bottom lines, well in excess of our expectations going into the quarter.

We exceeded our revenue guidance for Q3 driven by strong growth in software product revenue and also handily exceeded our adjusted EBITDA guidance driven by the combination of strong revenue performance, coupled with continued controls over our operating expenses.

Before delving into further details, I would like to remind everyone that our seasonal billings patterns, coupled with the treatment of revenue under ASC 606, results in heightened seasonality in revenue and associated metrics, with higher software product revenue recorded in our first and fourth quarters of any given year.

And we expect this pattern to continue under present business conditions. Our third quarter results were driven by healthy demand for our software products. Software product revenue equaled $87.8 million compared to $77.8 million in the third quarter a year ago, growing by 13% year-over-year.

Total revenue equaled $106.5 million versus $100.4 million in Q3 of last year, up 6%. Total revenue continued to be impacted by the reduction in software-related and client engineering services revenue due to the continuing impact from COVID-19 on the demand for these services.

Additionally, currency shifts accounted for $1.1 million of positive impacts on total revenue, predominantly from software product revenue. Acquisitions completed this year have not had a meaningful impact on revenues.

In line with our expectations and reflecting an uptick compared to Q2, our software-related services revenue declined about 22% in the quarter relative to the prior year. These results represent a slight improvement compared to Q2, which declined 31%.

Customers continue to adjust their external project spend in response to market conditions as a result of COVID-19.

Also as expected, our client engineering services revenue declined by 15% in the quarter compared to the prior year due to reductions imposed by some of our CES customers but also reflect a slight improvement compared to Q2, which declined 22%.

For the quarter, our revenue mix improved by 500 basis points with software product revenue equaling 82.5% of total revenue, up from 77.5% from Q3 of the prior year.

The revenue mix shift in Q3 is very consistent with our recent trends and demonstrates our continued progress toward increasing the mix of software product revenue, a key driver of expanding our operating margins going forward.

Note that for the quarter, software product revenue as a percentage of our software segment reached over 93% of segment revenue, up about 270 basis points compared to the third quarter 2019, consistent with the shift we have seen this year.

Our recurring software license rate, that is the percentage of software revenue that is recurring, continues to be strong at 92%, an increase of about four percentage points compared to 88% for the prior year period. The key driver of this increase is our continued emphasis on increasing recurring revenue licensing stream.

Third quarter billings were $107.7 million compared to $103.6 million in the year ago period. Billings increased by $4 million, driven by software momentum in the quarter. We tend to view billings over longer time periods due to the impact that variations in timing of renewals, expansions and new customer arrangements can have quarter-to-quarter.

For the year-to-date period, billings equaled $334.5 million compared to $345.6 million a year ago. Foreign currency effects had a negligible impact on year-to-date billings. I would like to move to the balance of the P&L results. Gross margin in the third quarter was 72.7%, reflecting an increase of over 400 basis points from Q3 2019.

This increase is mostly driven by the favorable revenue mix shift to software product revenue. Gross profit in the quarter was adversely impacted compared to the prior year by approximately $1 million directly attributable to the decline in software-related and client engineering services performance.

For the quarter, non-GAAP operating expenses, which excludes stock-based compensation, amortization of intangible assets and other operating income, decreased to $73 million from $74.3 million in Q3 2019. The reduction in operating expenses were largely due to the proactive steps we enacted as part of our early response to COVID-19.

While we will have incremental costs from our recently announced acquisitions, the impact to our non-GAAP operating expenses for the remainder of this year will be modest.

Some of the actions we undertook in late Q1 and throughout Q2 and Q3 will continue to mitigate increases in operating expenses as we look over the balance of the year, which we will speak about shortly.

Our adjusted EBITDA for the quarter exceeded the top of our guidance range at $8.2 million and reflects a $10.5 million increase from last year's third quarter. This increase is driven substantially by the positive shift in revenue mix, coupled with realizing reduced expenses in response to the COVID-19 environment. Turning to our balance sheet.

Consistent with the typical seasonality in our billings and collections activity, we ended the third quarter with $245 million in cash and cash equivalents and $120 million in undrawn capacity on our U.S. revolver. We did draw $30 million on our revolver to fund the acquisition of Univa.

Our liquidity position remains strong, and we feel well prepared to continue to invest in our business, along with navigating the uncertainties in the current business environment associated with COVID-19. Moving to our cash flows.

Cash flow used in operations in the third quarter was an outflow of $6 million compared to an outflow of $1.9 million for the third quarter of 2019. The decrease in cash flow was primarily related to normal variations in working capital elements and timing.

Free cash flows for the nine months slightly improved to $23.4 million compared to $21.9 million for the same period last year, with slightly lower cash flow from operations, offset by lower CapEx expenditures in the current year.

We are updating our guidance for 2020 to reflect our outperformance for Q3 and a more conservative outlook for Q4, given the uncertainty impact, secondary lockdowns may have on our customers around the globe.

We believe a conservative perspective is appropriate, especially since our fourth quarter typically includes a larger portion of new and expansion revenue. We expect to continue to see reductions in software-related services for the balance of this year, along with similar challenges for client engineering services.

We view Q4 in a cautious manner, especially as the impact of COVID-19 evolves into fall and winter period. We believe operating with a cautious and conservative posture is most prudent until we see tangible evidence that global economic conditions improve, translating into sustainable growth and investment in R&D technology.

We previously implemented adjustments to certain expenses to reflect the current demand environment. Going into Q4, we have reversed the prior adjustments to employees' compensation level as we believe it is important to compensate our workforce given their commitment to our company and our customers.

Adjustments to other expenses to correlate with business conditions, billings and cash collections from customers, such as reducing the use of outside contractors, along with consulting and professional fees remain in effect and continues to be fine-tuned as necessary.

As a result of travel restrictions, substantially all of our sales, professional services and other activities continues to be conducted remotely, also contributing to cost savings. Just note that with our broad global footprint, we adapt our policies to local or regional conditions.

With our long-term goals in mind, we will continue to strategically invest in certain R&D and technical support areas and selectively expand our sales capacity. Our recently announced acquisitions are evidence of our commitment to continue to invest in people and technologies we believe are important to support our growth objectives.

Importantly, we believe our performance in Q3 certainly highlights the value our technology and people bring to our customers and provide solid motivation to continue to invest in our business. The substantial level of uncertainty remains regarding the impact of COVID-19 on our customers and our business as we look to the balance of this year.

Significant geographic differences across the globe may impact when business conditions will normalize for our customers who are most heavily affected by the economic and business conditions through which we must all conduct business. Fortunately, we operate with a very diverse geographic and customer industry footprint.

Against this backdrop, we have updated our guidance for the year, which we believe reflects a prudent level of caution and conservatism necessary under today's uncertain and evolving circumstances.

Our recently announced acquisitions are not expected to have a significant impact on revenue for the fourth quarter, although will add modestly to our operating expenses, which is reflected in our guidance.

For the 2020 year, we presently expect software product revenue between $373 million and $377 million, representing growth of 2% to 3% year-over-year. Total revenue between $448 million and $453 million, representing a decrease of 1% to 2% from 2019, driven primarily by a reduction in software-related and client engineering services revenue.

Adjusted EBITDA between $40 million and $42 million representing an increase of 1% to 6% from 2019. Free cash flow between $5 million and $10 million. As mentioned before, our free cash flow expectations are sensitive to billings and collection patterns following the seasonality of our billings.

As to Q4 2020, our expectations are software product revenue between $95 million and $99 million, representing a decrease of 2% to 6% from the fourth quarter of 2019. Total revenue between $112 million and $117 million, representing a decrease between 6% and 10% from the same period last year.

Adjusted EBITDA between $5 million and $7 million, representing a decrease of about $5.7 million to $7.7 million from 2019. Further detailed guidance tables have been provided in the press release issued after close of market yesterday. Please note that these expectations assume stable foreign exchange rates.

Our expectations for the balance of 2020 calls for tax expense of between $2 million and $3 million for the fourth quarter. As a reminder, due to the valuation allowance position that we are in primarily in the U.S., we are not able to capture the value of foreign tax credits or operating losses for GAAP purposes in our financials.

As detailed in our prior filings, we issued approximately 2.1 million options in June at an average price of $39.48 per share, and we expect to issue approximately two million additional options in December of this year, a strong incentive to our global senior teams to continue to drive long-term value.

Our updated guidance takes into account the expected increase in share-based compensation expense on the relevant metrics from this issuance of options. We believe continuing with a very cautious and conservative view is the most appropriate perspective. COVID-19 developments are evolving at a rapid pace and in an unpredictable manner.

Our engineering technologies are essential to the R&D and product design activities of our customers across many industries. Our data analytics products respond to the important need for deep analysis and streams of information so that our customers can rapidly make better decisions, which can be critically important in today's environment.

Our licensing model is remarkably well suited to support our customers. And allows us to leverage the key benefits we provide to meet the expanding needs of our present and future customers. Our strong balance sheet gives us the flexibility to continue to pursue targeted M&A activities. And we expect to continue to do so opportunistically.

We are quite pleased at how resilient our business is, driven by the combination of our licensing model, technology investments, customer-centered focus and our employees around the globe. With that, operator, we can now open the call to questions..

[Operator Instructions]. Our first question comes from Rich Valera of Needham..

Thank you. Good morning, gentlemen. Question on your 4Q -- your apply 4Q guidance.

And the 3Q, I mean, I understand you're taking a conservative stance there on the fourth quarter and tried to understand if that's more conservative than you were taking previously, if there was any kind of pull forward or earlier than expected renewal in 3Q, which kind of optically is the way it might look that maybe you got some visits in 3Q that you expected in 4Q and kind of left the year relatively unchanged, just trying to understand those two dynamics, sort of maybe early recognitions 4Q revenue versus taking a more conservative stance on the 4Q and how that plays out the guidance?.

Howard, you want to take that?.

Sure, absolutely. Rich, no, there was no meaningful shift among a Q4 to Q3. So no revenue pull forward, if you will. We're just -- we pay close attention to the events that are occurring as we see them unfold here. And with the lockdowns that are reoccurring, that we've all heard about the trends that we're seeing.

We just think it's really important to be very cautious and conservative as we're heading into fall winter..

Okay. And as the follow-up on that.

So have you actually seen any changes in purchasing behavior or diminishing of your funnel, or this is just kind of an abundance of caution here, given the macro events out there?.

It's mostly just caution here, to be honest with you, Rich. We -- there's just so much uncertainty we kind of learn that we're better to be very cautious about the future.

There's nothing on untoward happening in our numbers, really?.

Fair, fair enough. And then, Jim, last quarter, you said you had some optimism that maybe your the services side of the house would actually show some improvement in the backup, you actually did see that quarter-over-quarter both your software and client engineering services actually improved.

Is just want to get your sense of how that part of the business is? And have you seen any changes, there is any reason to think that that might not continue to improve? Or you'd be kind of taking a cautious stance there as well?.

I mean, services did improve of that. But in general, we are still printing services are going to remain somewhat muted, certainly for the rest of the year..

Got it. And then just on the on the product side. Jim, it sounds like you were getting some good traction with your electromagnetics portfolio.

Can you give any more color on that? I mean, how significant of a business is that? Is that something that can be a needle mover and maybe take it up a level to just that the solid portfolio in general, which I know has been an area of focus, and maybe higher than the overall portfolio growth for you.

So first of all, electromagnetics has been pretty strong part of our business for the last few years, made the acquisition of FICO in 2014. And then we've continued to invest pretty significantly, both organically and also through M&A activities in that space. So that is already a pretty significant piece of business.

What -- what's different is we've been investing in additional tools and technologies. And finally, these things are sort of coming together.

And so if I look more broadly at electronics or what we're calling electronic system design and even the factoring side, we're now just beginning to get some recognition from customers and actually recognition internally from our Salesforce, that we actually have this really powerful, portfolio of tools.

In many cases, the customers are surprised my own team is surprised. I think when they're seeing the reaction of some customers, and, it's just sort of coming together. So we -- electromagnetics has been strong, I think the broader electronics when you think about thermal, all the things that we can do on a PCB world. And, going on from there.

So, yes, I think there's a really big opportunity for us..

Thank you. Our next question comes from Jackson Ader with JPMorgan..

Great. Good morning, guys. Thanks for taking my question. Just a quick follow-up I guess on the software license, Pete, it's nice to see that the recurring part ticked up in the quarter and it's trending in the right direction.

But how should we be thinking about perpetual licenses during the fourth quarter, we saw your typical seasonal jumping perpetual licenses in the fourth quarter of 2019.

But just curious, what's kind of baked into your thoughts as we head into this one?.

Do you want to answer that Howard?.

Yes. So Jackson, we -- we've continued to emphasize shifting, as much as we can, obviously into the recurring world, and we've been quite successful in doing so, both in terms of product line and in geography, they'll continue to be a little bit of perpetual. Now that occurs, some of that is, is driven a little bit more of our HPC universe and such.

But the reality is, we'll continue to see, incremental improvements, inching the percentage to recurring, a little bit higher, and that should, I would think also in Q4 as well..

Perfect. Makes sense. And how about, we talked a lot of things on last quarter call about suits and the new Altair units model, kind of, maybe switching it to that. So the, the company gets to participate in some of the growth in usage. Right.

So just any update, Jim that you have on those two fronts?.

I'm sorry. Could you repeat the first part of your question? I didn't pick it up. I'm really sorry..

No, no problem.

I'm just saying that the suit, so focusing on specific users in the units model, and then also kind of the relaunching the revamping of the Altair units model that that you spoke about last quarter?.

Yes, sorry. So yes, I mean, I think that's, that's starting to really come together. We've -- we've reorganized the resellers, for example, so that they are tiered, able to sell certain suits and not others. And that's actually coming together in a very nice way. And we are beginning to shift customers to the new units model.

I think beginning this quarter, it's the only way that they can they can go. And yes, it's having good traction. I think customers are positive data understand that. And sales organization is very, very positive about it..

Okay, great..

Does that answer your questions?.

Yes, yes. Thanks..

Yes. Okay, good..

Our next question comes from Bhavan Suri with William Blair..

Hey, guys, thanks for taking my question. And congrats on being really good quarter there. I wanted to touch really quickly, given sort of your butter soldier to automotive and aerospace. Are you starting to teach those I know you're crushed Q4.

But broadly speaking, you post April, you started to see stability, and you start to see some of those guys start to invest more.

Obviously, the light truck went around innovation seems to suggest that you are seeing pockets open up I'd love to get, Jim, from you just a picture of sort of what you're seeing the manufacturers that there is big exposure there. And then sort of improvement even in sentiment or from some of the suppliers or from factories opening.

How should we think about those markets..

So I mean, for us, it's been a fairly stable part of the business. I mean, we have very, very high recurring revenues in those accounts and those have been pretty stable. There has been more softness and in terms of growth in those accounts.

For sure this year, I am seeing improve sentiment in the automotive and aerospace markets there; there's no doubt about that, especially in the supply base. And, yes, I mean, I think there's going to be, I think it's going to get better as time goes on.

Again, we're super cautious for Q4 when we see, the largest number of new cases of COVID, yesterday and, big resurgence. So we're more thinking about the macro. When we're, you know, thinking about being cautious for guidance, there's nothing, in our pipeline, for example, that that's really, affecting that. That's question there..

Yes, no, no, it's more in the broader stuff than content near term stuff. In case it didn't concern for everybody. I want to touch a little bit on the pricing model introduced in summer.

So making it easier for landing with the less technical design and during base, can you just talk about uptake there, it's a slightly lower entry point, but much broader sort of overall base and really technical people, how customers view that and sort of how do you view that not today again, so over the next two to three years for upsell, once you sort of gotten into the other areas? How do you think about sort of that, potentially driving a layer of revenue that maybe you hadn't seen until you change your pricing on summer? So a little bit of the uptake? And then and then how do you see it going forward? Thank you..

Right. So the lower priced suites, you know, you're, you're able to access a smaller subset of the applications. And so that really helps us to penetrate into some of these small medium types of accounts, or even within a larger account, into a department we might not have gotten into before.

And then as the account is interested in using additional products that don't fall within that suite, they can either upgrade some of their units, add additional units, or upgrade all their units, to the higher level suite, and have access to all those products.

So we think that, it's actually going to help us to get the right value out of -- out of certain customers that maybe we're getting too much value, and I think a high enough price for the products that they were getting from us, but at the same time, giving more value to customers that don't need, the entire set of products.

So we can get it broadens the -- the addressable market for us both, down and up. And, gives us the opportunity to essentially get the right value from every customer..

Our next question comes from Ken Wong with Guggenheim Securities..

Great, thanks for taking my question. I wanted to maybe just touch on customer expansions, kind of new customer activity. And it's always tricky to kind of gauge kind of where those trends are relative to pre-COVID.

But in any color you can get with in terms of how those have rebounded in 3Q?.

Yes. Actually, the number of new customers in Q3 was very similar to the prior year. And year-to-date things have worse off because of Q2 in general. But, in general, things were pretty, pretty normal in Q3, for the most part..

Got it.

And then what about the, I guess, willingness for customers to potentially kind of run the existing renewal? Is that -- is that something that you're getting as much pushback as you were on earlier? Or are people more receptive now that things have I guess macros? Either they've -- they've gotten used to it, or things have gotten a little better any color there?.

Things have gotten a little better again I'm not sure how people are going to react with the increase in COVID here. It's sort of a wait and see for me, but till now everything has gotten a bit better. Yes, I mean, in general, where we're feeling cautiously optimistic about the future and in general, just feeling very, very solid..

Got it. Got it. And then, Howard, one for you, you mentioned that Q1, Q4 typically does see an uptick in terms of that 606 tailwind; I guess how should we be thinking about deal duration deal sizes.

Has that started to pick back up? Is that something that we could potentially be surprised by and? Or any thoughts there?.

Well as far as deal --.

[Indiscernible]..

No, sure. Well as far as deal duration, we're an annual recurring model. We have been for -- since essentially the beginning of time. So deal duration is, you're not going to see anything significant because we are what we are, which is an annual recurring model.

As far as average transaction size or what have you, I wouldn't necessarily look anything significantly different in Q4, this year versus last year..

Our next question comes from Matt Hedberg with RBC Capital Markets..

Hey, guys. Great. Thanks for taking my question. I think Jimmy you mentioned, maybe it was you, Howard. But I wanted to ask about your comment, it sounded like you were suggesting that your data analytics pipeline is improving.

Just sort of wondering if you could unpack that comment a little bit more -- what's sort of buying that? And what sort of durability might we see in that trend, obviously, COVID uncertainty aside?.

Well, the integration of the data analytics team, and it took us a while to get going, we dropped some people and then we've added some new people onto the team. And I think that's all begun to gel. And sort of the go-to-market strategies come together, confidence around the products and trust and all that in the organization.

And so I just think, now that things are operating in a very positive way, in our machine, if you will, we're beginning to see the pipeline grow. And the rest of the organization is beginning to understand how to speak about data analytics, as well.

And so it's -- it's just beginning to be a healthy part of the business where we see the pipeline really, really coming together. It's nothing more exciting than that. Sorry. Operator Thank you. Our next question comes from Brian Essex with Goldman Sachs..

Hi, good morning, and thank you for taking the question.

Jim, I just had a question for you, particularly based on some of the acquisitions that you've done, like pollywog in Asia, what do you see from a macro perspective? Is it really it sounds like things are relatively stable, in spite of some of the kind of industry volatility that we see seeing, particularly in aerospace and auto.

But from a macro perspective, any insight you can offer by geo and where you might be seeing pockets of perhaps better strength, or I know, a pile you acquired access to some pretty large customers on that side, is that getting better traction, maybe offsetting some of the macro that would be really helpful to understand..

I mean, in general, I think, China was really down in Q1, and so was Korea and they've come back very, very strongly. And that's, frankly, important for Q4, China's always important in Q4, and it's also there was previous question around perpetual, we do have a little higher perpetual in China.

So, Asia Pacific in general, I think has done well, India, obviously, has suffered a lot with COVID. But they've -- they've hung in there pretty well through that as well. So in general, I mean, I think things are operating reasonably well across the world for us and across all the different verticals.

And across the different solutions that we have, everyone is coming in pretty normally a little bit muted. Obviously, we would love to see a lot more growth. But not it's an unusual time. But in general it's fairly stable across the world..

Got it. That's -- that's good to hear. And then maybe want to touch quickly on HPC services. Sounds like you're making kind of incremental investments in that segment. And I thought that your model of being able to utilize or enabling customers utilize HPC compute power across your platform was pretty interesting.

How is that progressing? Is it a meaningful contributor to the platform and how do your customers think about that versus maybe other either dedicated or hosted HPC solutions, they may have access to?.

So HPC is, is very, very healthy actually part of the business for us and growing, probably ahead of the other parts of the business and in many ways. For us, it just makes sense to continue to invest there because all of the things that our customers do really leverage HPC.

And as HPC moves from on-prem to the cloud, we are pouring investment into that, as HPC is moving from just simulation to a lot of data science. This is why you see in storage scheduling, as a big focus for us.

So, I mean, HPC is certainly a meaningful part of our business and growing and we continue to see it, it's important to understand not just the applications, but also the way these things are running. Frankly, it's just a really, really critical part of the business. I'm not trying to answer your question, but I've tried to give you a little insight..

Yes. So that's really helpful. I guess I was trying to get to like how much easier is it for your customers to consume HPC across your platform, as opposed to other resources they may have access to.

I mean, you get pricing power, because you can consolidate the usage and make it more efficient to kind of put models over onto the platform on the Altair platform, as opposed to using another service?.

I say. So, I mean, what we -- what we're really doing is we have a lot of technology that lets you move the workloads wherever you want to move on.

So you're not confined to, Azure, or AWS or even on-prem, you can very efficiently understand costs and efficiencies and response times and all of that to very efficiently schedule, where you're going to run on jobs. The level of technology that we have is really pretty sophisticated at this point.

And this idea of just running in the cloud, for example sort of Back To The Future of timeshare, if you go back 30 years ago, but timesharing just letting your engineers throw jobs into the cloud, and run up bells really fast.

So needing technology that helps you to manage your licenses, which are very expensive, your software licenses, and technology that that helps you to manage the cost side, only the performance side is going to be really critical.

So for us, we see that as a really key element of being able to do a huge amount of analytics, parametric studies, running optimizations, running data science applications you really need to use a huge amount of computing, and you just have to manage that in very, very efficient ways..

Thank you. Our next question comes from Gal Munda with Berenberg..

Hi, good morning. Thanks for taking my questions. Just a quick few ones, the first one, maybe Jim for you. You guys have been kind of thinking about the ghost market for the last couple of years.

And it looks like on this floor and SMBs, like you said; you've kind of written record a little bit the pricing model, and also the goes to market for channels.

Can you give us a little update on that? And then on the high end of the market what I'm what I'm hearing is you mentioned a lot of six and seven digit deals, which kind of sounds more like what you guys have been trying to achieve for last few years in order to increase the adoption of the broader float platform.

Can you give us a little bit of an update? If that's kind of a result of the platform coming together? And the UI and everything you've done around that? Or is it just more focused go-to-market, which kind of you've reallocated some of the resources to kind of key account management? Thank you..

So, on high-end I think we are focusing on key accounts for sure. And we're very focused on selling the entire portfolio as opposed to sort of tools or single point solutions. And we do have without question with the broadest portfolio technology in the market. So I think that's what's happening there.

We're also beginning to as I said earlier; really appreciate the power that we had on the electronics side. I think it's a new area for us. We're a mechanical company by history, but we've poured investment over the last 10 years into the electronics, fronds and it's really coming together and so that is just really, really key for us.

On the small and medium side, we have a lot of investment into our indirect business, and we're certifying resellers.

We've been very efficient working with the right resellers dropping some resellers that really didn't contribute, organizing them in ways that make the most sense, if you will, in terms of which products they take to market training them, investing together with them, co-selling with them, doing marketing together with them. And we are saying move.

Our goal is to grow the percentage of revenue that's coming from indirect salts substantially, actually over the next three years. And we are seeing that beginning to take hold..

That's really helpful. And then just as a follow-up, gross margins continue to expand significantly as your software portfolio -- software revenue grows based on the portfolio adoption, which is great to see.

How much of that margin explained? How to think about when we move into kind of next few years, just directionally in terms of the margin, considering the fact that software continues to grow faster than the services part. And potentially, some of the travel comes back so maybe under OpEx, you do have a little bit more investment.

Do you think the margin expansion continues to be sustainable as we move into the next few years, say after the COVID?.

Our intention is for it to be sustainable. On the travel expenses, we honestly don't expect it to get back to where it was before quite honestly we're pretty focused. We're focused coming into the year on reducing it and to some extent COVID accelerated that.

And a lot of positives came in, and that the customers are more comfortable working with us more remotely, and we're more comfortable doing the same. And so we're just trying to be more efficient in terms of how we support customers. And so we think we can do things in a more centralized manner.

I'll let Howard contribute to that answer as well, if you want..

Sure. Because very briefly, the certainly there's potential for incremental improvement in gross and gross margins. As Jim said, as we look over the course of time with software growing as a software product growing, obviously, at a rate faster than related services.

And as we look forward part of the understanding here is, are we likely to travel more at some point in the future than we did this year? The answer is, it's probably yes. But certainly, we've proven, as many others have that you don't need to travel quite as much as we had been doing before to support the objectives of our business.

So little early to really call them the right balance there. But certainly big opportunities, there's no doubt..

Thank you. Our next question comes from Mark Schappel with Benchmark..

Hi, good morning. And thank you for taking my question.

Jim, just one question with respect to your core engineering, simulation product portfolio, where are you seeing pockets of strength? Is it in Inspire and some solid solution areas would be hypermesh? Your solvers?.

Jim, are you going to take that one or you want me? We may have lost, Jim. So Mark thanks for the question.

As some of the prepared remarks reflected, obviously a lot of strength down on the electronics and electromagnetic side for sure from our software portfolio and any absolutely continued great uptake and expansion driven by some solid and broadly within the Inspire portfolio.

So, those are two areas and as well, one of one of the key points here is, is selling the entire breadth of the portfolio which includes beyond just electro electronics or electro magnetics, including CFD and such. So that's really what's been driving a lot of the success here in Q3..

Great, thank you. Thank you..

You're welcome..

Sorry, I got dropped off the call, so apologize for that..

And I'm not showing any further questions at this time. I'd like to turn call back over to Jim..

Okay. Again, sorry for dropping off the call. They're not sure what I missed. Only -- only comment I'd like to make is just I've never felt more excited about the products that we have and the opportunities we have in the market right now.

I just want to thank all of you for your interest in Altair and -- and know thanks to my team and also to our customers for their support. So thank you very much. Have a great day..

Ladies and gentleman that concludes today's presentation. You may now disconnect. And have a wonderful day..