Altair Engineering Stock: An Information Problem

All content we produce at Nanalyze assumes the reader needs no technical background of any kind to understand it. We’ve opted to categorize our tech stock catalog in a similar fashion with three possible classifications for any given stock – love, like, or avoid. If we love a stock, that means we’re holding it. We may not be buying more of it, or we may not think it’s the bee’s knees based on the latest information, but we are holding it in a real-money portfolio.

If a stock is classified as “avoid,” we wouldn’t buy it for reasons noted in our catalog under the “Nanalyze Notes” field. And if we like a stock, it’s one we’d consider holding but don’t. In the coming weeks, we’re going to peruse our “likes” and see if any quality companies merit a place in the four remaining open slots in our tech stock portfolio. One of those stocks is Altair Engineering (ALTR).

About Altair Engineering Stock

The last time we looked at Altair was late 2019 in a piece titled Altair Engineering Stock is a Play on Simulated Design. Since going public in 2014, the company has managed to grow revenues at a compound annual growth rate (CAGR) of almost 9%.

Bar chart showing Altair's Revenue Growth 2015-2021
Credit: Nanalyze

It’s a respectable growth number because the company has characteristics of a conglomerate, operating across a variety of industry segments while acquiring as they go along – 43 companies or strategic technologies since 1996, including 24 in the last five years and two this year so far.

Automotive and aerospace combined account for approximately 41% of their 2021 billings, including 15 of the world’s leading automotive manufacturers and 10 of the world’s leading aerospace manufacturers. They’re all purchasing software and services from Altair’s three primary areas of business – Physics Simulation and Conceptual Design, High-Performance Computing, and Data Analytics & Artificial Intelligence. The firm started in the world of simulation and they’re now moving to a “smart connected everything” future which sounds a lot like the digital twins concept.

Altair's three primary areas of business
Credit: Altair Engineering

Simulation and HPC customers are primarily large manufacturing enterprises while their AI solutions are sold to banks, credit unions, and health care organizations along with finance departments across most industries. International diversification in 2021 was well distributed: Americas (38%), EMEA (30%), and APAC (32%). But that’s where the insightful metrics stop.

Altair’s Fearless Leader

This is where the information problem starts. We have absolutely no idea where that growth comes from. Is it organic, or does it come from the dozens of acquisitions they’ve made over the past decades? We’re only told that, “each year approximately 60% of new software revenue comes from expansion within existing customers.” In other words, 40% of revenue growth is acquisitive or from new customers.

Slide showing the areas in which Altair has been expanding over the years
Credit: Altair Engineering

Above you can see the areas in which Altair has been expanding over the years. It’s from a slide the Chairman and CEO of Altair presented at a Nasdaq investor conference, and it’s impossible to listen to this guy without thinking about Bill Lumbergh. He’s gonna need you to come in on Sunday too, mmmkay? Joking aside, we get the feeling that Altair’s leader – James R. Scapa – has final say on everything regarding the company he co-founded 37 years ago. In the ESG world, such consolidated control is considered a red flag. When you have a CEO who also happens to be Chairman of the Board, it “can deny the organization talent at the top and lead to blind spots that undermine the organization’s ability to manage risks.” That’s according to a piece by Harvard Business Review which explains why the CEO shouldn’t also be the Board Chair, especially when said person happens to be a founder:

Even the most extraordinary founder’s talent set will likely not include both a CEO’s ability to establish a shared set of values, practices, and goals that enables the company to build a meaningful future and a board chair’s ability to direct the board in its oversight and strategy advisory roles. By monopolizing both jobs, the Founder-CEO-Board Chair denies the company the opportunity to benefit from the skills, experience and capacity a second corporate leader could provide.

Credit: Harvard Business Review

When the CEO and Chairman of the Board also happens to be a co-founder with a 37-year tenure (as is the case with Altair’s Mr. Scapa), it can lead to a “we’ve always done it that way” mindset which can stall innovation.

In his presentation, Mr. Scapa described the company’s business model as something he introduced twenty years ago. Altair customers buy usage units using single-year subscription contracts and then choose the apps they want to use over the year. The average Altair customer uses more than 20 products from the portfolio of 77 products on offer. Such a configuration is fine and dandy, but we’re not provided with SaaS metrics that show how healthy this business is. Net and gross retention show how sticky the platform is, while revenue buckets could show how their 13,000 customers are increasing their spend over time. Is the 80/20 rule in effect here? We just don’t know, though we’re told no single customer accounts for more than 2% of total software billings. Below, we’re shown the breakdown between software revenues which constitute 84% of total revenues (outlined in red) compared to services which constitute the rest.

The breakdown between software revenues which constitute 84% of total revenues (outlined in red) compared to services which constitute the rest.

Just because their business model is unique doesn’t mean they can’t provide SaaS-like metrics such as annual recurring revenues (ARR) buckets with numbers of customers for each, or retention metrics. In fact, they provide investors with very little information relative to most software firms we cover.

The Importance of Investor Relations

Harvard Business Review published a piece last year talking about how the changing role of the Investor Relations Officer demands taking an active role in articulating company strategy and purpose to all classes of investors. Perhaps the most concise description of investor relations can be found below:

They help the company to attain an optimum share price that portrays its fundamental value.

Market Media Connect

The best way to articulate a strategy is by providing simple quarterly/annual metrics for investors to follow that measure the success of that strategy. Sophisticated investors don’t receive a lot of value from hearing company executives take turns droning on about how great their sacred cow is. Investor relations teams will train certain members of the company to speak with media, so you’re essentially listening to a bunch of actors telling you what the legal team thinks you ought to hear. Pointless.

Earnings releases should be accompanied by a deck that includes key metrics investors should be watching. Most firms offer this, especially high-growth SaaS firms that understand the importance of sharing metrics with shareholders. Altair’s unique business model may not lend itself to SaaS metrics, but anything is better than the nothing sandwich we’re offered up today.

  • Companies with recurring revenues coming from software should adopt what SaaS metrics make sense. Altair offers none.
  • Quarterly/annual reports should come with a basic deck that contains key metrics investors should be watching. Altair does not provide this.
  • A general investor deck should be available. Altair used to have one, but nothing appears available today.
  • None of the above should be embedded in some blurry 30-minute recording that you’re forced to sit through to capture slides. Altair’s investor conferences are taped and you can watch them and screenshot slides which is less than optimal.
  • 10-Q and 10-K filings should include as much revenue segmentation as possible so that investors can see where growth is coming from. Altair includes no segmentation outside of geography and what’s listed above.

Many companies provide enough detail in their SEC regulatory filings that you don’t even need to flip open an investor deck. That’s not Altair Engineering, and we’re not sufficiently able to understand where our exposure is coming from to make an investment here.

Conclusion

There’s a hypothesis in the finance world called the “conglomerate discount.” Perhaps there’s a similar discount associated with companies that choose to don’t provide investors with sufficient information to make an informed investment decision. We love software companies because they’re able to realize such high margins, and Altair is no different with gross margins approaching 80%. However, we’re not comfortable running blind with so few health metrics and no indicator as to where their growth is coming from.

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