Altair Engineering Inc.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Altair Engineering Inc. is a global leader in computational science and artificial intelligence, providing software and cloud solutions that enable engineering, manufacturing, and other industries to innovate in a sustainable manner, and also focuses on AI and high-performance computing.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Altair Engineering Inc. (ALTR) operates as a global technology company that specializes in providing software and cloud solutions, high-performance computing (HPC), and AI-driven tools. Their solutions cater to various industries, including automotive, aerospace, healthcare, and high-tech manufacturing. The company’s core offerings revolve around enabling their customers to simulate, analyze, optimize, and improve product designs and development processes using a combination of software and HPC.

  • Software Products: ALTR’s software product offerings are comprised of simulation and modeling software, CAE (Computer-Aided Engineering) Software and cloud-based software solutions. Their solutions, including Altair HyperWorks and Altair Inspire, help engineering teams improve time-to-market and enhance product efficiency. These software packages include the simulation tools, optimization tools and the visualization features that help designers in understanding the complex real world physical systems.
  • Services: The company also offers engineering services and software service solutions to their clients. These services include implementation and management of engineering projects, helping customers in creating new products and helping improve current products. They also help in data preparation, visualization, and management. These services help provide a stable revenue stream for the company.
  • Artificial Intelligence and High-Performance Computing: Altair leverages AI and HPC technology to provide customers with advanced analytics and simulation capabilities. They are focused on bringing AI models and high-performance computing to all the industries and sectors that they work in, allowing them to improve their operations and optimize their outputs. With the adoption of AI in the workplace, their software also automates many of the repetitive tasks which used to be done manually.

Industry Trends:

The industries in which ALTR operates are undergoing massive changes. Many companies are adopting Artificial Intelligence and Machine Learning solutions to better their production lines and automate their processes. This is leading to an increasing demand for software and simulation packages from companies like ALTR. Furthermore, with companies becoming increasingly global and interconnected, they are in need of software and tools that enable seamless collaboration and data exchange. The companies are always looking to innovate and offer new things for their clients. This is leading to the development of more and more specialized and new AI and HPC applications.

Competitive Landscape: The competitive landscape of ALTR is highly fragmented. Competitors range from large diversified companies that provide a wide range of software solutions to small specialized companies that operate in niches of their markets. Key competitors include Autodesk, Ansys, Siemens, and Dassault Systemes which are much bigger companies, making their competitive landscape even more challenging for ALTR. Many newer companies also provide innovative AI solutions and can become competitors to the company.

What Makes ALTR Different? While many companies provide only simulation or analysis software, ALTR provides a combination of software, services, artificial intelligence and high-performance computing, which is an attractive differentiator to many clients. The company has also developed partnerships with other leading companies, creating a better ecosystem for their clients. They also focus on a holistic approach, integrating their different products and services to provide a superior product suite than many of their rivals, and have long maintained a strong focus on innovation, developing new and better technologies.

Moat Analysis:

Based on these considerations, ALTR can be attributed a moat rating of 3 out of 5. Here’s why:

  • Intangible Assets: ALTR possesses valuable intangible assets in the form of their robust software platform, AI models, and large proprietary datasets. However, it is possible for competing firms to develop similar capabilities and features. As such, their patents and licenses are hard to be as strongly protected as a Pharmaceutical company. The strength and durability of this type of moat is highly dependent on the ability to keep innovating, and maintain a technological lead over competitors. Strength: Medium.
  • Switching Costs: Their software is often deeply integrated with the clients’ operations and engineering workflows, which may provide significant switching costs as moving over to a competitor’s software can create huge headaches. However, ALTR’s client base includes both large corporations who are unwilling to change softwares after putting down significant capital for its implementation and smaller niche players where cost-competitiveness matters much more than switching costs, which makes their switching costs less robust than software providers. Strength: Medium.
  • Network Effects: While ALTR benefits from its extensive partnership networks, a true network effect, where the platform’s value increases exponentially with each additional user or partner, is not applicable to them. However, their data and analytics products and AI solutions will slowly begin to benefit from network effects, as the more data they gather from their operations, the smarter the AI becomes and the more value it can give for clients. Strength: Weak.
  • Cost Advantages: While ALTR is efficient at maintaining cost structures and operations, it does not show a clear and sustainable low-cost advantage compared to its rivals. They mostly aim for product differentiation, and their cost structures are similar to the rest of their peer groups. Strength: Low.
  • Overall: The economic moat is a combination of technology moat and switching costs. Overall, their moat is somewhat sustainable, given the difficulty of switching and their technology superiority, but it is not wide enough to give a higher moat rating.

Risks to the Moat and Business Resilience:

While ALTR presents a compelling investment case, several risks could threaten its moat and long term performance. 1. Technological Disruption: The rapid pace of technological change in the software, AI, and HPC sectors could potentially render their current products or services obsolete if newer firms provide significantly better or cheaper solutions. Competitors can also make similar software and AI solutions very quickly, which can make it difficult for ALTR to remain on top. 2. Competitive Pressures: The competitive landscape is highly dynamic. There is significant pressure from larger companies that develop their own internal solutions, making it even more difficult to maintain their market position. They need to constantly innovate and improve to not lose to upstarts or older, better established companies that might have bigger R&D budgets. 3. Macroeconomic Slowdowns: An economic slowdown or a recession can lead to budget cuts among their clients, which could impact their product sales and new growth opportunities. This is particularly true of companies that operate in the cyclical sectors, including manufacturing and automotive. 4. Acquisition Risks: While ALTR has made a few small acquisitions, larger acquisitions are always at risk of not delivering the needed integration, and can reduce the profitability of the combined firm. They need to ensure that they do not get overburdened and misaligned as the company grows, and must take care of not overpaying. 5. Talent Retention: As ALTR is a knowledge based business, retaining the top quality engineering and software talent that it employs is critical. If the company fails to retain key personnel, it can suffer an intellectual brain drain and impact its performance.

Financial Overview: ALTR’s financial performance shows high growth, but also fluctuating margins. * Revenue: The company’s revenue has been steadily increasing. The company reported 50.6 million in revenues for the quarter ended September 30, 2022 which grew to 123.1 million for the quarter ended September 30, 2023. The growth is primarily being driven by the software segment, while the services segment is a smaller contributor to the revenue. Revenue increased YoY by 20% and 14% for FY 2022 and FY 2021, respectively.

  • Profitability: Gross profit margin has always remained steady around 75%. While, operating expenses have been increasing at a faster rate than revenues, due to increasing R&D and other expenses. The operating margins have come down from about 21% in 2021 to about 12% in 2023.
  • Cash Flow: The company’s free cash flow has also significantly increased, due to the growing profitability of their products and business.
  • Debt: They are carrying a significant debt on their balance sheet, primarily due to acquisitions and operating leases. In Q3 2024, they had 260 million in short and long term liabilities and roughly 58 million in cash, cash equivalents and investments.
  • Earnings: Net loss for Q3 2024 was 4.78 million, whereas it was 14.98 million in Q3 2023, which highlights that the company is rapidly growing and is getting close to profitability.
  • Recent Challenges:
    • The company is making great effort to reduce its operating expenses and has increased focus on margin improvements, even if that means lower revenues.
  • The company still has long way to go to become profitable, but management believes they will become profitable in the coming year.
  • There was also some controversy regarding their partnership with SolidThinking and how the company was structured, but ALTR claims that this issue has been solved.
  • In their most recent earnings call, they reiterated that they will achieve their 2024 guidance even though there was some uncertainty with the new macro environment and changing economic circumstances.

Understandability:

ALTR receives a 3 out of 5 for understandability. While the company is engaged in a complex industry with highly technical aspects, their business model is fairly easy to understand. They create software, solutions, and they provide specialized services to help clients solve problems. However, understanding their financials can require some time and efforts. Their focus on multiple different sectors and their highly technical products could make it hard for an average investor to fully understand their operations.

Balance Sheet Health: ALTR receives a 4 out of 5 for its balance sheet health. The company has been growing rapidly, and they have also utilized debt financing to acquire other firms. As a result, debt levels are high, which may affect its financial position in the event of a recession. But with their growing profitability, and improving cash-generating ability, they can make a reduction in their long-term debt a priority and improve the company’s solvency. The company is also cash-rich, which helps to buffer the impact of debt payments and allows room for future acquisitions.

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