UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM10-K
(Mark One)
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20172018
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number001-38263
ALTAIR ENGINEERING INC.
(Exact name of registrant as specified in its charter)
Delaware | 38-2591828 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
1820 East Big Beaver Road, Troy, Michigan | 48083 | |
(Address of principal executive offices) | (Zip Code) |
248-614-2400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Class A Common Stock, $0.0001 par value per share | The NASDAQ Stock Market LLC | |
(Title of each class) | (Name of exchange on which registered) |
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by a check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐☒ No ☒☐
Indicate by a check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of RegulationS-K (§229.405 of this chapter) is not contained herein and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in PART III of this Form10-K, or any amendment to this Form10-K. ☐
Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange Act. ☐
(Check one):
Large accelerated filer | ☒ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☐ | |||||
Smaller reporting company | ☐ | |||||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by a check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the voting andnon-voting common stock held bynon-affiliates of the registrant, based upon the closing sale price of a share of the registrant’s Class A common stock on DecemberJune 29, 2017 as reported on2018, the NASDAQ stock market, was $636.5 million. The registrant has elected to use December 29, 2017, which was the last business day of the registrant’s most recently completed fiscal year, as the calculation date because on June 30, 2017 (the last business day of the registrant’s most recently completed second fiscal quarter),quarter, as reported on the registrantNASDAQ stock market, was a privately-held company.$1.2 billion. Shares of the registrant’s Class A common stock and Class B common stock held by each executive officer, director, and each other person who may be deemed to be an affiliate of the registrant, have been excluded from this computation. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
On December 31, 2017,February 15, 2019, there were 26,725,48438,507,315 shares of the registrant’s Class A common stock outstanding and 36,507,67632,170,732 shares of the registrant’s Class B common stock outstanding.
Documents Incorporated By Reference:
Portions of the registrant’s Proxy Statement relating to the 20182019 Annual Meeting of Stockholders, scheduled to be filed with the Securities and Exchange Commission within 120 days after the end of the registrant’s fiscal year ended December 31, 2017,2018, are incorporated by reference into Part III of this Annual Report on Form10-K.
Annual Report on Form10-K for the Fiscal Year Ended December 31, 20172018
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form10-K contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as “may,” “can,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “seek,” “estimate,” “continue,” “plan,” “point to,” “project,” “predict,” “could,” “intend,” “target,” “potential” and other similar words and expressions of the future.
There are a number of important factors that could cause the actual results to differ materially from those expressed in any forward-looking statement made by us. These factors include, but are not limited to:
our ability to successfully integrate and realize the benefits of our past or future strategic acquisitions or investments;
demand for our software by customers other than simulation engineering specialists and in additional industry verticals;
our ability to integrate companies that we have acquired or may acquire in the future;
our susceptibility to factors affecting the automotive industryand financial services industries where we derive a substantial portion of our revenuesrevenues;
our susceptibility to foreign currency risks that arise because of our substantial international operations; and
The foregoing does not represent an exhaustive list of matters that may be covered by the forward-looking statements contained herein or risk factors that we are faced with that may cause our actual results to differ from those anticipated in our forward-looking statements. Please see “Risk factors” in this Annual Report onForm 10-K under Part I, Item 1A, for additional risks which could adversely impact our business and financial performance.
All forward-looking statements are expressly qualified in their entirety by this cautionary notice. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this report or the date of the document incorporated by reference into this report. We have no obligation, and expressly disclaim any obligation, to update, revise or correct any of the forward-looking statements, whether as a result of new information, future events or otherwise. We have expressed our expectations, beliefs and projections in good faith and we believe they have a reasonable basis. However, we cannot assure you that our expectations, beliefs or projections will result or be achieved or accomplished.
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PART ITable of Contents
General
Altair Engineering Inc. (“Altair,” the “Company,” “we,” “us” or “our”) is a leading providerglobal technology company providing software and cloud solutions in the areas of enterprise-class engineering software enabling innovation across the entire product lifecycle from concept design toin-service operation. Our vision is to transform product design and organizational decision making by applying simulation, optimization anddevelopment, high performance cloud computing, throughout product lifecycles.and data intelligence. We enable organizations across broad industry segments to compete more effectively in a connected world while creating a more sustainable future.
Our simulation-driven approach to innovation is powered by our broad portfolio of high-fidelity and high-performance physics solvers. Our integrated suite of software optimizes design performance across multiple disciplines encompassing structures, motion, fluids, thermal management, electromagnetics, system modeling, and embedded systems, while also providing data analyticsintelligence andtrue-to-life visualization and rendering. Our high-performance cloud computing solutions maximize the efficient utilization of complex compute resources and streamline the workflow management of compute-intensive tasks for applications including data intelligence, modeling and simulation, and visualization. Our data intelligence products include market leading data preparation, data science and visualization solutions that fuel engineering, scientific, and business decisions.
We believe a critical component of our success has been our company culture, based on our core values of innovation, envisioning the future, communicating honestly and broadly, seeking technology and business firsts, and embracing diversity. This culture is important because it helps attract and retain top people, encourages innovation and teamwork, and enhances our focus on achieving Altair’s corporate objectives.
Products
Rising expectations of end-market customers are causing expansion of the application of simulation and data intelligence across many industry verticals. Our engineering, simulation, and data intelligence software enables customers to enhance product performance, compress development time, and reduce costs. OurAltair’s thirty-year heritage is in solving some of the most challenging design problems faced by engineers and scientists. Altair is also a leading provider of high performance computing, or HPC, workflow tools which empower our customers to explore designs in ways not possible in traditional computing environments.
We believe we are unique in the industry for the depth and breadth of our engineering application software offerings combined with our domain expertise and proprietary technology for harnessing high-performance computing, or HPC and cloud infrastructures.infrastructures along with data intelligence.
Altair is a leading provider of modeling, visualization, and physics solver solutions with a broad portfolio of best-in-class technology across many engineering disciplines. Our primary userssimulation software offers manufacturing companies opportunities to achieve better, lower cost products with fewer physical prototypes and tests, and reduces the time required to bring products to market.
We are highly educateda leading provider of data intelligence technology for data preparation, management and technical engineers, commonly referred to as simulation specialists. We predominantly reach customers with simulation specialists through Altair’s experienced, direct sales force, especially in industries requiring highly engineered products,analysis. Financial services organization, such as automotive, aerospace, heavy machinery, railbanks, credit unions, and ship design. To enable concept engineering driven by simulation we make our physics solvers more accessible to designers, who may be less technical and not expert in simulation, by wrapping them in powerful, yet simple interfaces. We are increasing our use of indirect channels to more efficiently address a broader set of customers in consumer products, electronics, energy and other industries.
Altair pioneered a patented units-based subscription licensing model for software and other digital content. This units-based subscription licensing model allows flexible and shared access to all of our offerings, along with over 150 partner products. Our customers license a pool of units for their organizations giving individual users access to our entire portfolio of software applicationshealth care companies, as well as finance departments in various industries, including manufacturing, use our growing portfoliosoftware to capture disparate data streams and apply analytics to make more informed business decisions.
We are a leading provider of partner products. We believe our units-based subscription licensing model lowers barriershigh-performance and cloud computing workflow tools which empower customers to adoption, creates broad engagement, encourages users to work within our ecosystem,explore designs and increases revenue. This,analyze data in turn, helps drive our recurring software license rate which has been on average approximately 88% over the past five years. Each year approximately 60% of new software revenue comes from expansion within existing customers.ways not possible in traditional computing environments. Our customers include Universities, government agencies, manufacturers, pharmaceutical firms, weather prediction agencies, and electronics design companies.
Software productsProducts
Altair’s software products available under our HyperWorks, solidThinking, Altair PBS, and Carriots suites, represent a comprehensive, open architecture computer-aided engineering, or CAE,solution for simulation, platform.data intelligence and cloud computing to empower decision making for improved product design and development, manufacturing, energy management and exploration, financial services, health care, and retail operations. We believe our products offer the industry’s broadesta comprehensive set of technologies to design and optimize high performance, efficient, innovative and innovative products.sustainable products and processes in an increasingly connected world. Our products are categorized by:
•Physics Simulation;
•Data Intelligence;
•High Performance Cloud Computing; and
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SolversDesign, Modeling & optimization
Solvers are mathematical software “engines” that use advanced computational algorithms to predict physical performance. Optimization leverages solvers to derive the most efficient solutions to meet desired complex multi-objective requirements.Visualization
Altair’s solvers are a comprehensive set of fast, scalable and reliable physics solvers that can solve complex problems in linear andnon-linear mechanics, fluid dynamics, electromagnetics, motion, systems and manufacturing simulation.
Altair’s optimization technology is a key differentiator and spans our product offering. Our focus on optimization combined with multiphysics and multi-domain simulation has changed product development, and we believe customers using our technologies can gain a sustainable competitive advantage by developing better products in less time.
Modeling & visualization
Modelingdesign, modeling & visualization tools under the HyperWorks and solidThinking brands allow for advanced physics attributes to be modeled and rendered on top of object geometry in high fidelity. These tools are becoming more design-centric and relevant earlier in the development process.
Industrial & concept design
Industrial Our industrial & concept design tools that generate early concepts to address requirements for ergonomics, aesthetics, performance, manufacturing feasibility, and manufacturing feasibility.cost. These tools are simulation-drivenall driven by simulation and wemachine learning algorithms. We believe these products are emerging as a market force eclipsingwith the potential to eclipse traditional computer-aided design, or CAD.
Physics Simulation
At the core of Altair’s simulation software portfolios under the HyperWorks and solidThinking brands are mathematical software “solvers” that use advanced computational algorithms to predict physical performance. Optimization leverages these solvers to derive the most efficient solutions to meet desired complex multi-objective requirements.
Altair’s solvers are a comprehensive set of fast, scalable and reliable physics algorithms for complex problems in linear and non-linear mechanics, fluid dynamics, electromagnetics, motion, systems and manufacturing simulation.
Altair’s optimization technology combined with superior multi-physics and multi-domain simulation is a key differentiator and spans our product offering. We believe customers using our technologies gain a sustainable competitive advantage by developing better products in less time.
Data Intelligence
Altair’s data intelligence offering under the Knowledge Works brand includes market leading data preparation, data science and visualization solutions that fuel engineering, scientific, and business decisions. Our data preparation tools allow users to import, clean and organize structured and unstructured data for use in reporting and in data science applications. Our data science solutions allow users to develop machine learning work flows with best-in-class decision tree technology and scoring algorithms, and our visualization tools allow users to gain deep insights quickly with both live-streamed and historical data.
Today, Altair’s data intelligence tools are extensively used by banks, credit unions, health care, and other financial services organizations. They are also used in finance departments across many industries, including manufacturing.
There is growing demand for this technology in engineering to improve designs and processes, and to manage sensor data coming from live physical assets in the field. Going forward, development lifecycles will include digital replicas of complex processes, services and physical assets and systems, or what is known as “digital twins”. Use of digital twins will enable developers to integrate simulation and data intelligence to optimize product design and in-service operational performance. The convergence of simulation and machine learning is essential to creating better products, marketing them efficiently, and optimizing their in-service performance.
High-Performance Cloud Computing
Altair’s High-Performance Cloud Computing software applications, under the brand PBS Works, are designed to maximize the efficient utilization of complex compute resources and streamline the workflow management of compute-intensive tasks. Applications include data intelligence, modeling and simulation, and visualization in fields such as financial services, weather prediction, bio-informatics, electronic design analysis, product development and lifecycle management.
As predictive modeling and analysis are increasingly computationally intensive, and as computing environments become a mix of on-premise and cloud resources, Altair’s high-performance tools to manage and optimize where and when jobs are running are essential for customers and research organizations. Our powerful and easy to use solutions help IT administrators and business decision makers maximize throughput and minimize costs by leveraging sophisticated scheduling algorithms, enabling bursting to the cloud (or enabling applications to run on external data center resources to supplement internal data center capabilities), shifting workloads between different cloud providers depending on cost or resource availability and managing spot computing purchases.
Internet of Things
ToolsAltair offers tools under the SmartWorks brand to help customers develop new Internet of Things, or IoT, enabledconnected products, including device enablement, data capture and management, edge computing, digital twins, data management, system levelvisualization, and full three dimensional, or 3D, digital twin simulation, and exploration, predictive analysis, optimization, and visualization ofin-service performance. We expect our tools for multidisciplinary simulation and development to become increasingly important for product design.predictive/ prescriptive analytics. Our software is used to design and optimize IoT devices and connectivity, and for modelingin-service product performance.
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We believe Altair’s math and systemsdigital twin solutions are unique for their openness, usability, and ability to providedevelop signal-based controls, mixed physics models, and physical modeling from “0D” to “3D”electronics all within our units-based subscription licensing model. A truly simulation-driven design process means that simulation modelsone environment and at varying levels of fidelity to support decision making in each stage of the product development process.a product’s lifecycle. To support this, models need to be multidisciplinarymulti-disciplinary and may include mechanics, electrical andfluids, electronics, and software among other technical elements, and must encompass a scope of products ranging from components toIoT-enabled “systems of systems”. Varying degrees of fidelity aid the modeling process where computational requirements or data availability might otherwise prove to be obstacles.
We believe a key strength to Altair’s math and systems solutions is allowing development organizations to move seamlessly in this multi-discipline, multi-component, multi-detail space while integrating models from various authoring tools. With a broad range of multi-physics solvers based on an open-system approach, a strong set of model reduction techniques can be employed towardIoT-enabled product development which can then be carried forward into device management and application development on the Carriots platform.development.
High-performance computing
HPC software applications designed to streamline the workflow management of compute-intensive tasks including solvers, optimization, modeling, visualization and analytics in fields such as Product Lifecycle Management, or PLM, weather modeling,bio-informatics and electronic design analysis.
Altair’s HPC offerings support engineers and scientists across a wide range of industries including automotive, aerospace, academia, energy, electronic design automation, defense, and weather. Altair PBS Works is our secure workload management suite to improve HPC performance and reliability inon-premise, cloud, and hybrid environments.
Our simulation technology users are moving to ever-larger models to achieve higher-fidelity results for more realistic simulations. As these models are computationally intensive, they require special equipment and cloud access for deeper design exploration and optimization. We believe HPC addresses the performance needs of our users and is critical to companies and research organizations working on complex, simulation-intensive design problems.
Altair Partner Alliance
The Altair Partner Alliance, or APA, currently only available under the HyperWorks brand, provides access to a broad spectrum of complementary software products using customers’ existing HyperWorks Units.Units, our units-based subscription licensing model which allows flexible and shared access to our offerings. They can download and use partner product applicationson-demand. This constantly growing portfolio extends their simulation and design capabilities to help create better products faster.
Software products in the APA include technologies ranging from computational fluid dynamics and fatigue to manufacturing process simulation and cost estimation, with applications specific to industry verticals including marine, motorcycles, aerospace, chemicals, and architecture. Altair plans to continue to add valuable third-party software solutions to the HyperWorks platform to empower innovation with comprehensive enterprise analytic and data intelligence tools.
Software related servicesRelated Services
To ensure customer success and deepen our relationships with them, we engage with our customers to provide services related to our software including consulting, training, and implementation services, especially when applying optimization. We provide clients with technical services throughout their entire product development lifecycle including design, engineering,optimization and development.data science. Altair’s headquarters includes an industrial design studio, a prototype shop, and test facilities. We have expertise designing and working with controls, power electronics, traditional and composite structures, and total system level development in the automotive, aerospace, consumer products and other markets. Our team of data scientists is experienced with applications ranging from credit scoring to predictive analytics of physical assets.
Implementation and custom software services are available to help customers leverage their investment in Altair’s software to streamline CAE workflows and solve specialized industry vertical engineering and business problems. We work closely with our clients to increase organizational efficiency and decision making by tailoring these solutions to a client’s own environment and processes.
We believe the unique combination of our broad industry domain knowledge and software expertise has enabled Altair to enhance and replace customers’ legacy applications, integrate our software applications with client business systems, develop clean-sheet designs or custom software solutions, and transform their product development and business processes.
Client Engineering Services
Altair provides Client Engineering Services, or CES, to support our customers with long-term ongoing product design and development expertise. This has the benefit of embedding us within customers, deepening our understanding of their processes, and allowing us to more quickly perceive trends in the overall market. Our presence at our customers’ sites helps us to better tailor our software products’ research and development, or R&D, and sales initiatives.
We operate our CES business by hiring engineers and data scientists for placement at a customer site for specific customer-directed assignments. We employ and pay the engineersthem only for the duration of the placement.
We concentrate on placing simulation specialists, industrial designers, design engineers, materials experts, development and test engineers, manufacturing engineers and information technology specialists. As a leader in the simulation market,and data science technology markets, Altair attracts high caliber talent from around the world. CES is focused on placements that align strategically with customer usage of our software. We have a strong recruiting operation with over ten sourcing specialists who identify, attract, vet, and hire technical professionals for ourin-house and customer needs. We maintain a candidate database of over 80,000 highly qualified engineers, designers and designers.data scientists. Our CES candidates and placed employees are valuable sources of talent acquisition for Altair’s other business segments.
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Research and developmentDevelopment
Our research and development efforts are focused on enhancing the functionality, breadth and scalability of our software, addressing new use cases, and developing additional innovative simulation technologies. Timely development of new products is essential to maintaining our competitive position, and we release new versions of our software on a regular basis.
Customer feedback, combined with our roadmap, enables us to deliver long-term value and stay ahead of market trends. The majority of product enhancements and new capabilities added to our platform over the years have been developed internally, with acquisitions used to augment our capabilities with strategic technology.
Our research and development initiatives foster a culture of innovation within the organization, helping us attract and retain a highly motivated team. Altair’s research and development team consists of approximately 980 people worldwide. Most of our research and development team is based in Michigan and India; however, we also maintain research and development centers with specific technical expertise in other geographies. Research and development expenses were $93.2 million, $71.3 million, and $62.8 million in 2017, 2016 and 2015, respectively.
Fromtime-to-time, we incubate related technologies developed by our employees. For example, we developed and patented next-generation solid-state lighting technology as a result of an internal initiative. We commercialized this technology under our toggled subsidiary, which generated $6.6$7.5 million in revenue infor the twelve-month period endingyear ended December 31, 2017.2018. WEYV, a mobile application that brings our patented units-based business model to digital content distribution and delivery, was released commercially in December 2017.
Our research and development initiatives foster a culture of innovation within the organization, helping us attract and retain a highly motivated team. Altair’s research and development team consists of approximately 1,050 people worldwide. We maintain research and development centers with specific technical expertise in several geographies throughout the Americas, Asia-Pacific, Europe, the Middle East and Africa.
Our research and development efforts relating to our software focus on five areas:
Design, Modeling & Visualization: The graphical applications used to construct and visualize simulation models require continuous R&D in the areas of data structures, computational methods, graphics, geometric modeling, mesh generation, and user interface design. Altair’s modeling tools are becoming more design-centric and are adopting some of the capabilities of traditional CAD while leveraging simulation and optimization technology to drive design decisions rather than just simulate designs. Specific areas of R&D include handling large scale models of highly detailed and complex products, developing new methods to derive design geometry from optimizations, and unifying the modeling environment for multi-physics simulation. Adapting modeling and visualization technology for cloud deployment is also an area of active development as is supporting virtual and augmented reality hardware. Simulation-driven design requires tools to generate early concepts addressing requirements for ergonomics, aesthetics, performance, and manufacturing feasibility. We believe these tools are emerging as a market force eclipsing traditional CAD, and are key to the democratization of simulation capabilities across large groups of designers and engineers who are not simulation specialists.
Physics Simulation: At the core of Altair’s simulation software portfolio are mathematical software “solvers” that use advanced computational algorithms to predict physical performance. Altair initially specialized in structural simulation, and now we continuously develop our portfolio of solvers to simulate fluid dynamics, high and low frequency electromagnetics, mechanical systems, electronic controls and more. Altair also invests to “couple” our solvers to simulate multiple physics domains simultaneously, and is considered a world leader in the development of optimization technology, which drives solvers to find solutions to complex multi-objective design problems. R&D is also conducted to leverage high-performance computing technology for these compute intensive applications. Solver and optimization development is conducted by researchers with advanced degrees in engineering, physics, computer science and mathematics.
Data Intelligence: Altair’s offering includes market leading data preparation, data science and visualization solutions that fuel engineering, scientific, and business decisions. We develop and release new software on a regular basis to support existing data intelligence customers with enhancements and other requested features and technologies for data preparation, data science and visualization. We continue to invest aggressively to evolve our best-in-class decision tree technology, scoring algorithms, streaming, and visualization. In addition, we are integrating all of our data intelligence capabilities into a modern, cloud-based solution to deliver a more unified user experience for our users. This solution includes important enterprise level capabilities such as security, data discovery, collaboration, and operationalization of user developed machine learning work flows to gain deep insights quickly.
High-Performance Cloud Computing: Altair’s High-Performance Cloud Computing software applications are designed to maximize utilization of complex compute resources and streamline the workflow management of compute-intensive tasks for applications such as data intelligence, modeling and simulation, and visualization in fields such as financial services, weather prediction, bio-informatics, electronic design analysis, product development and lifecycle management.
Altair develops best-in-class HPC workload management technology for large scale, highly parallel job environments as well as solutions for chip design workloads which require massive numbers of jobs to be spawned and managed for relatively short durations on single core machines. We are exploring the application of the same technology developed for electronic design automation industry, or EDA, workloads to significantly impact financial technology, or fintech, computing as these compute environments have similar profiles.
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Compose, Activate,We develop solutions for both CPU and EmbedGPU architectures and support all of the major computer vendors. This requires ongoing collaboration with hardware suppliers who depend on our solutions to make their products run efficiently for customers.
Much of our more recent R&D investments allow customers to easily move and manage workflows in hybrid compute environments of on-premise and cloud resources.
Altair’s HPC development teams work closely with the simulation, data intelligence and IoT development teams to ensure that our overall technology portfolio interoperates effectively and shares a common infrastructure and user experience.
Internet of Things: Altair offers tools to help customers develop connected products, including device enablement, data capture and management, edge computing, digital twins, data visualization, and predictive/ prescriptive analytics. Our software is used to design and optimize IoT devices and connectivity, and for modeling in-service product performance. We are investing to deliver an end-to-end solution for customers developing connected products. We believe our products operate well as a complete and integrated suite, and are open such that they are designed to work seamlessly with other IoT or data intelligence solutions in a disaggregated fashion.
Our digital twin platform supports product development for the IoT through a math-based programming environment, multidisciplinarymulti-disciplinary system modeling, and control system development, and areis an important ongoing research and development effort. We support our own high levelhigh-level matrix-based numerical computing language, as well as more commonly used general purpose programming languages, like Python and Tcl, in an interactive programming environment for all types of math operations. We expect to add more language and library support, broaden the math libraries, and integrate these products more deeply with Altair’s other software.
In order to maintain and extend our technology leadership and competitive position, we intend to continue devoting significant effort to our research and development activities.
Sales
We serve customers in the product lifecycle management, or PLM, market. Rising expectations ofend-marketsimulation, data intelligence, and high-performance cloud computing markets. Our primary users are highly educated and technical engineers and data scientists.
HyperWorks and solidThinking
Under our HyperWorks brand, we engage with our enterprise customers new manufacturing methodsthrough Altair’s experienced direct sales force, especially in industries requiring highly engineered products, such as 3D printing, the abilityautomotive, aerospace, heavy machinery, rail and ship design. Under our solidThinking brand, we are increasing our use of indirect channels to design and process composites and new materials, combined with more powerful math-based computational technologies, are expanding the application of simulation across many industry verticals and throughout product life-cycles. CAE software offers companies opportunities to achieve better, lower cost products with fewer physical prototypes and tests, and reduces the time required to bring products to market. We are also expanding our market reach toefficiently address a broader set of customers in the Internet of Things, or IoT,consumer products, electronics, energy and analytics market without experience in simulation and HPC.other industries.
We take our products to market in different combinations, through several packaged offerings, each having defined channels and pricing strategies. The product “suites” are HyperWorks, solidThinking, Altair PBS Works and Carriots.
Product suites
HyperWorks
HyperWorks is a suite of software products which primarily targets simulation specialists and some test engineers at large enterprises, and users with deep technical needs at small and medium sized companies. HyperWorks Units, or HWUs, are an embodimentApproximately 90% of our patented units-based subscription licensing model, and provide access to all of Altair’s more than 302018 software products including those available in our solidThinking, Altair PBS Works, and Carriots suites, and all of the more than 150 APA products.
HyperWorks represents the majority of Altair’s revenue. To sell HyperWorks we primarily engage with our customersrevenue was generated through our direct global sales force. OurThese sales teams interact with key information technology, or IT, decision makers, engage deeply with users of our products by leveraging a team of Altair’s technical specialists, and work with user-group managers and executives to ensure they are maximizing the utility of our HyperWorks suite. Resellers of HyperWorks are mainly in APAC and Eastern Europe. They are managed by our direct field offices.
solidThinking
solidThinking is a more recent suite offering, a subset of our HyperWorks products focused on industrial design, concept engineering, manufacturing feasibility, and model-based design. solidThinking primarily targets designers, engineers and architects at small and medium enterprises. Historically, solidThinking hassoftware solutions. We have been offered under a traditional licensing model. We are currently transitioning to a units-based subscription licensing model similar to HyperWorks.
solidThinking Inc. is a wholly owned subsidiary of Altair, created to market this suite through resellers who provide sales and first line support for these customers.
Altair PBS Works
Altair PBS Works is a suite of three products including, Altair PBS Professional, Altair PBS Access, and Altair PBS Cloud, targeting IT professionals, engineers, and scientists at commercial enterprises, universities and research institutes. Altair PBS Works optimizes the use of HPC to design products, predict weather, perform drug discovery research, calculate financial risk, and support other compute intensive work. Altair PBS Works licensing and support is generally on a per node and per user subscription basis.
Altair PBS Works is sold by Altair’s global strategic sales force with sales overlay support from Altair HPC sales specialists and application engineers. Some major HPC hardware companies bundle Altair PBS Works on new HPC computer systems. We offer Altair PBS Professional as both an open source and a commercial solution. Commercial sites generally license the commercial version along with support. However, many universities, government agencies and small commercial sites prefer the open source version as their work often needs to be freely available for societal benefit. Large government and research installations generally still purchase support and often pay for specific development.
In September 2017, the Company acquired Runtime Design Automation, or Runtime. Runtime complements Altair’s PBS Works suite of products for comprehensive, secure workload management for HPC and cloud environments and has solutions to manage highly complex workflows. We believe both Runtime and PBS Works deliver innovative and mission critical technology to optimize the use of HPC for compute-intensive applications. PBS Works targets product design, weather prediction, oil exploration andbio-informatics, and Runtime primarily serves customers in Electronic Design Automation, or EDA.
Carriots
In May 2017, the Company acquired Carriots S.L, or Carriots. Carriots helps customers enable their products to communicate via numerous standard protocols, perform device and data management, visualize and analyze big data, develop applications, and perform digital twin simulations. Carriots is anend-to-end and open architecture IoT platform. It complements Altair’s other product suites to provide a comprehensive solution for customers to design and implement IoT enabled products. The solution is designed with Altair’s open philosophy to facilitate seamless integration of its platform elements within customer enterprises to share data and communicate with multiple Enterprise Resource Planning, or ERP, simulation and communication systems.
Carriots is sold byexpanding our direct sales force, supported by an overlay team including our inside sales operations aggressively to reach more customers where we have longstanding relationships as well as to customers in some markets new to Altair. We also sell through resellers and implementation consultants who sell and support Carriots in markets where they are strong.market verticals.
Carriots Analytics is designed to easily embed in other software products to provide analytics capabilities. We work with other software companies to implement Carriots Analytics in their applications focused on vertical domains where these companies have deep experience and customer relationships.
Direct and indirect sales channels
Direct sales channels
Approximately 90% of our 2017 software revenue was generated through our direct global sales force. Our direct sales force is responsible for developing new customers, ensuring high recurring rates from our existing customers, and expanding the use of Altair and partner products within customers’ environments through continuous training, support, and consulting engagements. Each of our field sales professionals are supported by technical specialists with deep knowledge of our products and the broader product development domain. We believe this approach differentiates Altair from our competitors, as our focus on establishing a strong working relationship with the user community has led to expanded usage of Altair and APA partner products. Our direct sales force is organized by geographic regions, consisting of Americas, EMEA, and APAC.
IndirectWe leverage strong indirect sales channels
Approximately 9% especially in APAC and Eastern Europe and have been investing to extend our reseller relationships in all markets by offering a subset of our 2017products focused on industrial design, concept engineering, manufacturing feasibility, and model-based design under solidThinking. solidThinking targets designers, engineers and architects at small and
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medium enterprises. Approximately 10% of our 2018 software revenue was generated through our growing network of indirect channel partners and resellers. These companies
Knowledge Works
There is segmentation in the data intelligence space by industry verticals where specific domain expertise is important for success. Altair’s primary data intelligence customer base is banks, credit unions, health care, and other financial services organizations along with finance departments across most industries including manufacturing. As we cross sell into Altair traditional manufacturing customer accounts, we are centraltargeting both the finance departments, leveraging the expertise of our financial markets sales and technical teams, as well as engineering departments looking to apply data intelligence to improve designs, manufacturing, and in-service operations. We intend to leverage our existing direct and indirect sales channels in order to support greater market opportunities.
High Performance Cloud Computing Solutions
Altair’s softwareHPC solutions are sold by our global strategic sales growth strategy by expanding our market reach to smallforce with sales overlay support from Altair HPC sales specialists andmedium-sized customers. As of December 31, 2017, we had approximately 300 reseller and application engineers. We have original equipment manufacturer, or OEM, relationships, including over 180 solidThinking resellers, primarily added in the last three years, and over 120 HyperWorks and Altair PBS resellers and OEMs. We are increasing our use of indirect channels in an effort to address a broader set of customers in consumer products, electronics, energy and other industries and expect the share of indirect channel sales to increase in the coming years.
To enable concept engineering driven by simulation we make our physics solvers more accessible to designers, who may be less technical and not expert in simulation, by wrapping them in powerful, yet simple interfaces. In addition to being available under the HyperWorks suite, these products are sold through resellers worldwide under the solidThinking brand.
solidThinking is sold by over 180 resellers worldwide. The solidThinking resellers in the Americas and EMEA are managed by the solidThinking corporate team, while in APAC these resellers are managed by Altair field offices. This channel is relatively new and beginning to produce meaningful results.
We have OEM arrangements for Altair PBS Worksthese solutions with most of the major HPC hardware companies when they sell new computer systems. We believe these arrangements reduce competition, grow our market share and improve sales efficiency.
Carriots is soldWe offer Altair PBS Professional as both an open source and supported by resellersa commercial solution. Commercial sites generally license the commercial version along with support. However, many universities, government agencies and implementation consultants in markets where theysmall commercial sites prefer the open source version as their work often needs to be freely available for societal benefit. Large government and research installations generally still purchase support and often pay for specific development.
Licensing
There are strong and have vertical domain expertise outside of Altair’s traditional manufacturing base. In additiontwo licensing methods we employ to beingdeliver our software solutions:
Most products are available under our unique, patented units-based licensing model.
A small subset of our products is available on a node-locked, or hardware specific, and named-user basis. This is especially true for our data intelligence solutions.
Altair pioneered a patented units-based subscription licensing model for software and other digital content. This units-based subscription licensing model allows flexible and shared access to our offerings, along with over 150 partner products. Our HyperWorks Carriots Analytics goescustomers license a pool of units for their organizations giving individual users access to market through OEMour entire portfolio of software applications as well as our growing portfolio of partner products. Our primarily mid-market solidThinking customers have access to a subset of the portfolio at a lower price point. We believe our units-based subscription licensing model lowers barriers to adoption, creates broad engagement, encourages users to work within our ecosystem, and strategic relationships worldwide including third partyincreases revenue. This, in turn, helps drive our recurring software companies seeking to embed analytics capabilities into their applications. We have established several key alliances inlicense rate which has been on average approximately 88% over the utility and smart building controls markets.past five years. Each year approximately 60% of new software revenue comes from expansion within existing customers.
Marketing
Altair’s global marketing team of approximately 6570 people is focused on generating new business opportunities by driving awareness, deepening customer engagement, and developing content specific to technical fields and industry verticals. Our corporate marketing programs include social media, earned media, and publications, including Concept to Reality magazine, blogs, white papers and case studies. Our regional marketing program supports working relationships with our user community through education, participation in local industry events, Altair technical conferences, and webinars.
We provide marketing support to our ecosystem of resellers and third-party technology partners on both a corporate and regional level.
In 20172018 our online activities included approximately:
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Approximately 7,400 customers8,300 users and prospects attended Altair’s user conferences in 2017.2018.
In order to continue to drive growth and extend our market position, we intend to continue to invest significant resources into our marketing initiatives.
Customers
As of December 31, 2017,2018, we had tens of thousands of users across approximately 5,000more than 8,000 customers worldwide. Our product lifecycle management, or PLM, customers are primarily large manufacturing enterprises. We haveenterprises, with a growing presence in small andmid-size companies and compete in markets beyond manufacturing including Architecture/Engineering/Construction, or AEC, energy, life and earth sciences, and government entities. In 2017, we generated 37%, 32%Our data intelligence customers include banks, credit unions, health care, and 31% of our total billings from customers in the Americas, APAC, and EMEA, respectively. None of our customers accounted for more than 10% of our 2017 billings. Billings consists of our total revenue plus the change in our deferred revenue in a given period and is discussed underKey metrics included in Part II, Item 6, Selected Financial Data of this Annual Report on Form10-K.other financial services organizations along with finance departments across most industries including manufacturing.
Automotive and aerospace combined account for over 50% of our 2017 software2018 billings, including 15 out of 15 of the world’s leading automotive manufacturers and 10 out of 10 of the world’s leading aerospace manufacturers. Other important industries include heavy machinery, rail and ship design, energy, government, life and earth sciences, and consumer electronics. No single customer, nor any of our approximately 300 resellers and OEMS, accounted for more than 3%2% of our 2017 software2018 billings. In 2018, we generated 35%, 33% and 32% of our total billings from customers in the Americas, EMEA, and APAC, respectively. Billings consists of our total revenue plus the change in our deferred revenue, excluding deferred revenue from acquisitions during the period, and is discussed under Key metrics included in Part II, Item 6, Selected Financial Data of this Annual Report on Form 10-K.
For a summary of our financial information by geographic location, see Note 1920 of Notes to consolidated financial statements in Item 15, Part IV of this Annual Report on Form10-K, which is incorporated by reference.
Competition
The market for CAEsimulation software is highly fragmented but has been undergoing significant consolidation. Our primary competitors include Dassault Systèmes, Siemens, Ansys and MSC Software, a Hexagon company. Dassault and SiemensAll are large public companies, with significant financial resources, whichresources. Dassault and Siemens have historically focused on CAD and product data management. More recently, these two companiesmanagement and have been investing in simulation software via acquisitions. Ansys and MSC are focused on CAE.simulation. In addition to these competitors, we compete with many smaller companies offering CAEsimulation software applications.
The market for data intelligence is large and generally very horizontal in nature. The company to whom Altair’s data intelligence solutions are most often compared to is Alteryx, a publicly traded company. There are other competitors in the data preparation and data science markets including SAS and several who received significant venture capital infusions.
We believe the breadth and depth of Altair’s software offering is unique in the PLM industry. We also believeand no single competitor addresses our entire solution set. Our integrated suite of software optimizes design performance across multiple disciplines encompassing structures (including crashworthiness and safety), motion, fluids, thermal management, electromagnetics, system modeling and embedded systems, while also providing data analytics andtrue-to-life visualization and rendering. The HyperWorks Unitsunits model further extends this advantage with a growing APA marketplace of third party software.
Our simulation solutions including modeling, visualization and solvers are noted in the market for their ability to handle large and complex models. Our software applications deliver high performance and high scalability, including massive parallelization, which is extremely important in the CAEhigh-end simulation market. Altair is a leader in integrating optimization technology across all our products, including multi-disciplinary applications.
We believe our solutions for data preparation are extremely strong and broadly adopted and have several unique capabilities including handling large, complex data sets coupled with our ability to intelligently import unstructured data. Our data science solutions are also considered easy to use and powerful. The market is converging toward integrated data prep and data science solutions, and we are well positioned for this future.
To ensure customer success and deepen our relationships with them, we engage with our customers to provide consulting, implementation services, training, and support, especially when applying optimization. We believe these services, combined with our ability to leverage HPC as the industry transitions to cloud computing, positions us for future success.
We compete on a variety of factors including the breadth, depth, performance, and quality of our technical solutions. We believe our patented units-based subscription licensing model provides us with a competitive advantage by lowering barriers to adoption, creating broad engagement, and encouraging users to work within our ecosystem.
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We believe that our intellectual property rights are valuable and important to our business. We actively protect our investment in technology through establishment and enforcement of intellectual property rights. We protect our intellectual property through a combination of patent, copyright, trademark and trade secret protections, confidentiality procedures, and contractual provisions. The nature and extent of legal protection associated with each such intellectual property right depends on, among other things, the type of intellectual property right and the given jurisdiction in which such right arises.
As of December 31, 2017,2018, we inclusive of our wholly-owned subsidiaries, have 165209 issued patents and more than 8076 published patent applications worldwide. These patents and patent applications seek to protect proprietary inventions relevant to our business. We intend to pursue additional patent protection to the extent we believe it would be beneficial and cost effective. Additionally, we are the registered holder of a variety of trademarks and domain names that include “Altair” and similar variations.
Nonetheless, our intellectual property rights may not be successfully asserted in the future or may be invalidated, circumvented or challenged. In addition, the laws and enforcement of the laws of various countries where our products are distributed do not protect our intellectual property rights to the same extent as United States laws. Our inability to assert or enforce our intellectual property rights could harm our business.
From time to time, we receive claims alleging infringement of a third party’s intellectual property rights, including patents. Disputes involving our intellectual property rights or those of another party have in the past and may in the future lead to, among other things, costly litigation, diversion of time, money and resources to develop or obtainnon-infringing products, or delay product distribution. Any significant impairment of our core intellectual property rights could harm our business or our ability to compete.
Our products are licensed to users pursuant to signed license agreements or ‘click through’ agreements containing restrictions on use, duplication, disclosure, and transfer. Cloud based products and associated services are provided to users pursuant to online or signed terms of service agreements containing appropriate restrictions on access and use.
We are unable to measure the full extent to which piracy of our software products exists. We believe, however, that software piracy is and can be expected to be a persistent problem that negatively impacts our revenue and financial results. We believe that our predominant subscription based business model combined with the change from desktop to cloud based computing will shift the incentives and means by which software is pirated.
In addition, through various licensing arrangements, we receive certain rights to intellectual property of others. We expect to maintain current licensing arrangements and to secure additional licensing arrangements in the future, as needed and to the extent available on reasonable terms and conditions, to support continued development and sales of our products and services. Some of these licensing arrangements require or may require royalty payments and other licensing fees. The amount of these payments and fees may depend on various factors, including but not limited to: the structure of royalty payments, offsetting considerations, if any, and the degree of use of the licensed technology.
Employees
As of December 31, 2017,2018, we had over 2,0002,500 in-house employees and over 400350 on-site Client Engineering Service employees globally. Overtwo-thirds of our employees are located in the United States, India, France, Germany and China. None of our employees in the United States are represented by a labor organization or are party to any collective bargaining arrangement. In certain of the European countries in which we operate, we are subject to, and comply with, local labor law requirements in relation to the establishment of works councils. We are often required to consult and seek the consent or advice of these works councils. We have never experienced a work stoppage and we believe our employee relations are good.
Acquisitions
We acquired 2025 companies or strategic technologies since 1996, including 1217 in the last threefour years. These acquisitions brought strategic IP assets, and approximately 200300 developers with expertise in disciplines ranging from electronics, material science, crash and safety to industrial design and rendering. Products which are commercially available as a result of these acquisitions include Click2Extrude, Altair PBS Professional, Radioss, Evolve, Acusolve, SimLab, Embed, Click2Cast, Multi-scale Designer, FEKO, FLUX, WinProp, Thea Render, Modeliis, Carriots,SmartWorks, ESAComp, SimSolid, Monarch, Knowledge Studio and ESAComp.Panopticon.
Our most recent2018 acquisitions include the following:
Datawatch: In December 2018, we acquired Datawatch Corporation, a provider of data intelligence software with market leading enterprise data preparation, predictive analytics and visualization solutions that fuel business analytics
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FluiDyna: In May 2018, we acquired Germany-based FluiDyna GmbH, a renowned developer of NVIDIA CUDA and GPU-based Computational Fluid Dynamics, or CFD, and numerical simulation technologies in whom Altair made an initial investment in 2015. FluiDyna’s simulation software products ultraFluidX and nanoFluidX have been available to Altair’s customers through the APA and also offered as standalone licenses.
CANDI Controls: In May 2018, we acquired all of the intellectual property assets of California-based CANDI Controls, Inc. and hired CANDI’s experienced software and technology team into Altair’s organization to strengthen and expand the scope of its IoT solution offerings. Founded in 2009 with significant start-up capital, CANDI developed a modern platform which supports multiple data protocols for edge gateway computers to communicate with a constellation of IoT devices.
For further information about our acquisitions, see Note 4 of the Notes to consolidated financial statements in Item 15, Part IV of this Annual Report on Form10-K.
Seasonal variations
We have experienced and expect to continue to experience seasonal variations in the timing of customers’ purchases of our software and services. Many customers make purchase decisions based on their fiscal year budgets, which often coincide with the calendar year. These seasonal trends materially affect the timing of our cash flows, as license fees become due at the time the license term commences based upon agreed payment terms that customers may not adhere to. As a result, new and renewal licenses have been concentrated in the first and fourth quarter of the year, and our cash flows from operations have been highest late in the first quarter and early in the second quarter of the succeeding fiscal year.
Backlog
We generally enter into single year term-based software licensing subscription contracts for our solutions. The timing of our invoices to the customer is a negotiated term and thus varies among our subscription contracts. For multi-year agreements, it is common to invoice an initial amount at contract signing followed by subsequent annual invoices. At any point in the contract term, there can be amounts that we have not yet been contractually able to invoice. Until such time as these amounts are invoiced, they are not recorded in revenues, deferred revenue or elsewhere in our consolidated financial statements and are considered by us to be backlog. As we generally enter into single year subscription contracts for our platform, backlog is not significant.
Segments
We have identified two reportable segments: Software and Client Engineering Services. For additional information about our reportable segments, see Note 1920 of the Notes to consolidated financial statements in Item 15, Part IV of this Annual Report on Form10-K, which is incorporated by reference.
Corporate information
We were incorporated in Michigan in 1985 and became a Delaware company in October 2017. Our principal executive offices are located at 1820 E. Big Beaver Road, Troy, Michigan 48083.
Unless the context otherwise requires, the terms “Altair,” “the Company,” “we,” “us” and “our” in this Annual Report on Form10-K refers to Altair Engineering Inc. and its subsidiaries. The Altair design logo and the marks “OptiStruct,” “RADIOSS,” “AcuSolve,” “FEKO,” “Flux,” “WinProp,” “Multiscale Designer,” “HyperStudy,” “HyperMesh,” “HyperView,” “SimLab,” “HyperCrash,” “HyperGraph,” “Inspire,” “solidThinking Evolve,” “Thea Render,” “Click2Cast,” “Click2Extrude,” “Click2Form,” “Carriots,” “solidThinking Compose,” “solidThinking Activate,” “solidThinking Embed,” “Altair PBS Works,” “Altair PBS Professional,” “Altair PBS Cloud,” “MotionView,” “MotionSolve,” “Altair PBS Access”Access,” “SimSolid,” “Knowledge Studio,” “Monarch,” “Panopticon” and our other registered or common law trade names, trademarks or service marks appearing in this Annual Report on Form10-K are our property.
Available information
We file annual reports on Form10-K, quarterly reports on Form10-Q, current reports on Form8-K, proxy and information statements and amendments to reports filed or furnished pursuant to Sections 13(a), 14 and 15(d) of the Securities Exchange Act of 1934, as amended. The public may obtain these filings at the Securities and Exchange Commission Public Reference Room at 100 F Street, NE, Washington, DC 20549 or by calling the SEC at1-800-SEC-0330. The SEC also maintains a website at http://www.sec.gov that contains reports, proxy and information statements and other information regarding Altair Engineering Inc. and other companies that file materials with the SEC electronically. Copies of Altair’s reports on Form10-K, Forms10-Q and Forms8-K, may be obtained, free of charge, electronically through our internet website, http://investor.altair.com under the Financials tab.
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Our website iswww.altair.com. Investors and others should note that we announce material financial information to investors using press releases, SEC filings and public conference calls. The information contained on our website is not incorporated by reference into this Annual Report on Form10-K or in any other report or document we file with the SEC.
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An investment in our Class A common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all the other information in this Annual Report on Form10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes. If any of the following risks actually occurs, our business, reputation, financial condition, results of operations, revenue, and future prospects could be seriously harmed. Unless otherwise indicated, references to our business being seriously harmed in these risk factors will include harm to our business, reputation, financial condition, results of operations, revenue, liquidity and future prospects.
Risks relating to our business and industry
We have experienced significant revenue growth and we may fail to sustain that growth rate or may not grow in the future.
We were founded in 1985 and launched our first commercial software in 1990. Our growth has primarily been attributed to the increasing reliance of manufacturerscustomers on our engineering and simulation technologies to enhance product performance, compress development time, and optimization software to support development of their products and designs.reduce costs. Revenue from our software segment has historically constituted a significant portion of our total revenue. Our revenue growth could decline over time as a result of a number of factors, including increasing competition from smaller entities and well-established, larger organizations, limited ability to, or our decision not to, increase pricing, contraction of our overall market, the manner in which the markets for our products, including our data intelligence products, evolve or our failure to capitalize on growth opportunities. Other factors include managing our global organization, revenues generated outside the United States that are subject to adverse currency fluctuations, and uncertain international geopolitical landscapes.landscapes and the acquisition of businesses which may grow more slowly than our business. Accordingly, we may not achieve similar growth rates in future periods, and you should not rely on our historical revenue growth as an indication of our future revenue or revenue growth.
If we cannot maintain our company culture of innovation, teamwork, and communication our business may be harmed.
We believe that a critical component to our success has been our company culture, which is based on our core values of innovation, envisioning the future, communicating honestly and broadly, seeking technology and business firsts, and embracing diversity. We have invested substantial time and resources in building a company embodying this culture. As we develop the infrastructure of a public company and continue to grow, we may find it difficult to maintain these valuable aspects of our corporate culture. Any failure to preserve our culture, or embed our culture in our acquired businesses, could negatively impact our future success, including our ability to attract and retain personnel, encourage innovation and teamwork, and effectively focus on and pursue our corporate objectives.
If our existing customers or users do not increase their usage of our software, or we do not add new customers, the growth of our business may be harmed.
Our software includes a multitude of broad and deep design, simulation, optimization, and analysis applications and functionalities.
Our future success depends, in part, on our ability to increase the:
In addition, through our Altair Partner Alliance, or APA, our customers have access to additional software offered by independent third parties, without the need to enter into additional license agreements.
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If we fail to increase the number of customers or users and/or application usage among existing users of our software and the software of our APA partners, our ability to license additional software will be adversely affected, which would harm our operating results and financial condition.
Our ability to acquire new customers is difficult to predict because our software sales cycle can be long.
Our ability to increase revenue and maintain or increase profitability depends, in part, on widespread acceptance of our software bymid-to-large-size mid- to- large-size organizations worldwide. We face long, costly, and unpredictable sales cycles. As a result of the variability and length of the sales cycle, we have only a limited ability to forecast the timing of sales. A delay in or failure to complete sales could harm our business and financial results, and could cause our financial results to vary significantly from period to period. Our sales cycle varies widely, reflecting differences in potential customers’ decision-making processes, procurement requirements, and budget cycles and the specific software or products being purchased, and is subject to significant risks over which we have little or no control, including:
To the extent any of the foregoing occur, our average sales cycle may increase and we may have difficulty acquiring new customers.
Reduced spending on product design and development activities by our customers may negatively affect our revenues.
Our revenues are largely dependent on our customers’ overall product design and development activities, particularly demand frommid-to-large-size mid- to- large-size organizations worldwide and their supplier base. The licensing of our software is discretionary. Our customers may reduce their research and development budgets, which could cause them to reduce, defer, or forego licensing of our software. To the extent licensing of our software is perceived by existing and potential customers to be extraneous to their needs, our revenue may be negatively affected by our customers’ delays or reductions in product development research and development spending. Customers may delay or cancel software licensing or seek to lower their costs. Deterioration in the demand for product design and development software for any reason would harm our business, operating results, and financial condition in the future.
Our business largely depends on annual renewals of our software licenses.
We typically license our software to our customers on an annual basis. In order for us to maintain or improve our operating results, it is important that our customers renew and/or increase the amount of software licensed on an annual basis. Customer renewal rates may be affected by a number of factors, including:
If our customers fail to renew their licenses or renew on terms that are less beneficial to us, our renewal rates may decline or fluctuate, which may harm our business.
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We believe our future success will depend, in part, on the growth in demand for our software by customers other than simulation engineering specialists and in additional industry verticals.
Historically, our customers have been simulation engineering specialists. To enable concept engineering, driven by simulation, we make our physics solvers more accessible to designers by wrapping them in powerful simple interfaces. We believe our future success will depend, in part, on growth in demand for our software by these designers, which could be negatively impacted by the lack of:
If some or all of this software does not achieve widespread adoption, our revenues and profits may be adversely affected.
Our ability to grow our business may be adversely impacted by difficulties we may experience in integrating recent acquisitions or in integrating future acquisitions.
We believe that our recent acquisitions result in certain benefits, including expanding our portfolio of software and products and enabling us to better serve our customers’ requests for data intelligence and simulation technology. However, to realize some of these anticipated benefits, the acquired businesses must be successfully integrated. The success of these acquisitions will depend in part on our ability to realize these anticipated benefits. We may fail to realize the anticipated benefits of these acquisitions for a variety of reasons, including the following:
failure to successfully manage relationships with new or potential customers;
failure of existing customers to accept new service and product offerings from us;
revenue attrition in excess of anticipated levels;
unanticipated incompatibility of technologies and systems;
failure to leverage the increased scale of our business quickly and effectively;
potential difficulties integrating and harmonizing financial reporting systems;
the loss of key employees;
failure to effectively coordinate sales and marketing efforts to communicate the capabilities of our enhanced portfolio of software and products;
failure to combine product offerings and product lines quickly and effectively;
failure to convert an increasing amount of new or acquired customer relationships revenue from perpetual to annual recurring revenue streams; or
failure to effectively invest in further sales, marketing, and research and development efforts that lead to increased revenues.
We face significant competition, which may adversely affect our ability to add new customers, retain existing customers, and grow our business.
The market for CAE software is highly fragmented but has been undergoing significant consolidation. Our primary competitors in this market include Dassault Systèmes, Siemens, Ansys and MSC Software, a Hexagon company. Dassault and Siemens are large public companies, with significant financial resources, which have historically focused on CAD and product data management. More recently, these two companies have been investing in simulation software through acquisitions. Ansys and MSC are focused on CAE. In addition to these competitors, we compete with many smaller companies offering CAE software applications.
The market for data intelligence is large and generally very horizontal in nature. The company to whom Altair’s data intelligence solutions are most often compared to is Alteryx, a publicly traded company. There are other competitors in the data preparation and data science markets including SAS and several who received significant venture capital infusions.
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A significant number of companies have developed or are developing software and services that currently, or in the future may, compete with some or all of our software and services. We may also face competition from participants in adjacent markets, includingtwo-dimensional, or 2D, and three-dimensional, or 3D, CAD, and broader PLM competitors and others that may enter our markets by leveraging related technologies and partnering with or acquiring other companies.
The principal competitive factors in our industry include:
price.
Many of our current and potential competitors have longer-term and more extensive relationships with our existing and potential customers that provide them with an advantage in competing for business with those customers. They may be able to devote greater resources to the development and improvement of their offerings than we can. These competitors could incorporate additional functionality into their competing products from their wider product offerings or leverage their commercial relationships in a manner that uses product bundling or closed technology platforms to discourage enterprises from purchasing our applications.
Many existing and potential competitors enjoy competitive advantages over us, such as:
These competitive pressures in our markets or our failure to compete effectively may result in fewer customers, price reductions, licensing of fewer units, increased sales and marketing expenses, reduced revenue and gross profits and loss of market share. Any failure to address these factors could harm our business.
Because we derive a substantial portion of our revenues from customers in the automotive industry, we are susceptible to factors affecting this industry.
TheBillings in the automotive industry accounted for approximately 50% of our total revenueincreased for the year ended December 31, 2017.2018 and accounted for approximately 45% of our 2018 billings. An adverse occurrence, including industry slowdown, recession, political instability, costly or constraining regulations, excessive inflation, prolonged disruptions in one or more of our automotive customers’ production schedules or labor disturbances, that results in a significant decline in the volume of sales in this industry, or in an overall downturn in the business and operations of our customers in this industry, could adversely affect our business.
The automotive industry is highly cyclical in nature and sensitive to changes in general economic conditions, consumer preferences and interest rates. Any weakness in demand in this industry, the insolvency of a manufacturer or suppliers, or constriction of credit markets may cause our automotive customers to reduce their amount of software licensed or services requested or request discounts or extended payment terms, any of which may cause fluctuations or a decrease in our revenues and timing of cash flows.
Our quarterly results may fluctuate significantly and may not fully reflect the underlying performance of our business.
Our quarterly results of operations and our key metrics, including billings,Billings, Adjusted EBITDA and Free Cash Flow, may vary significantly in the future.Period-to-period comparisons of our operating results may not be meaningful. The results of any one
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quarter should not be relied upon as an indication of future performance. Our quarterly financial results and key metrics may fluctuate as a result of a variety of factors including:
the length of sales cycles;
significant security breaches, technical difficulties or unforeseen interruptions to the functionality of our software;
Billings have historically been highest in the first and fourth quarters of any calendar year and may vary in future quarters. This seasonality or the occurrence of any of the factors above may cause our results of operations to vary and our financial statements may not fully reflect the underlying performance of our business.
In addition, we may choose to grow our business for the long-term rather than to optimize for profitability or cash flows for a particular shorter-term period. If our quarterly results of operations fall below the expectations of investors or securities analysts, the price of our Class A common stock could decline and we could face lawsuits, including securities class action suits.
Seasonal variations in the purchasing patterns of our customers may lead to fluctuations in the timing of our cash flows.
We have experienced and expect to continue to experience seasonal variations in the timing of customers’ purchases of our software and services. Many customers make purchase decisions based on their fiscal year budgets, which often coincide with the calendar year. These seasonal trends materially affect the timing of our cash flows, as license fees become due at the time the license term commences based upon agreed payment terms that customers may not adhere to. As a result, new and renewal licenses have been concentrated in the first and fourth quarter of the year, and our cash flows from operations have been highest late in the first quarter and early in the second quarter of the succeeding fiscal year.
In connection with the preparation of our consolidated financial statements in recent years, we and our independent registered public accounting firm identified material weaknesses in our internal control over financial reporting.reporting, one of which has not been remediated as of December 31, 2018. If we are not able to remediate the material weaknessesweakness and otherwise maintain an effective system of internal control over financial reporting, the reliability of our financial reporting, investor confidence in us and the value of our common stock could be adversely affected.
As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal controls. Section 404 of SOX, or Section 404, requires that we evaluate and determine the effectiveness of our internal controls over financial reporting and, beginning with ourthis annual report, for the year ending December 31, 2018, provide a management report on internal control over financial reporting and a corresponding report by our independent auditors with respect to the effectiveness of our internal control over financial reporting. An independent assessment of the effectiveness of our internal control over financial reporting could detect problems that our management’s assessment might not. A material weakness is a deficiency, or combination of deficiencies, in
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internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected and corrected on a timely basis.
In connection with the preparation of our fiscal years 2015,2016, 2017 and 2018 financial statements, we and our independent registered public accounting firm identified a material weakness over the income tax process as of December 31, 2018. We determined that management’s review controls over income taxes are not operating effectively to detect a material misstatement in the financial statements related to income tax accounting around acquisitions, as well as routine and non-routine transactions. Based on the material weakness described above, we have concluded that internal control over financial reporting was ineffective as of December 31, 2018. We have developed a remediation plan to address this material weakness. The plan includes enhancing our preparation and review procedures around income tax accounting, which includes supplementing our resources using an independent consultant with technical expertise in the tax accounting over acquisitions and routine and non-routine transactions.
In connection with the preparation of our fiscal years 2016 and 2017 financial statements, we and our independent registered public accounting firm identified two material weaknesses in our internal controls over financial reporting. The firsta material weakness pertained to controls over accounting for income taxes. Specifically, that: (i) certain misstatements were either not identified by management or were not identified timely by management; and (ii) additional technical resources were necessary to enable timely and sufficient review controls over accounting for income taxes. We have taken steps to remediate this by hiring additional technical resources and increasing management review and oversight over the income tax process.
The second material weakness pertained toin our internal controls over the financial statement close process, which were not designed to be precise enough to detect a material error in the financial statements in a timely manner. Specifically, certain misstatements were either not identified by management or were not identified timely by management. We have takentook steps to remediate this material weakness, by hiring additional personnel and increasing management review and oversight over the financial statement close process.In the fourth quarter of fiscal year 2018, we completed the testing of the design and operating effectiveness of the new procedures and controls. Management has concluded that this material weakness has been remediated as of December 31, 2018.
If our steps are insufficient to successfully remediate the material weaknessesweakness in income taxes and otherwise establish and maintain an effective system of internal control over financial reporting, the reliability of our financial reporting, investor confidence in us and the value of our common stock could be materially and adversely affected. The process of designing and implementing internal control over financial reporting required to comply with Section 404 will beis time consuming, costly and complicated. Our independent registered public accounting firm was not engaged to audit the effectiveness of our internal control over financial reporting. We may discover other control deficiencies in the future, and we cannot assure you that we will not have a material weakness in future periods.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements of our financial statements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Effective internal control over financial reporting is necessary for us to provide reliable and timely financial reports and, together with adequate disclosure controls and procedures, are designed to reasonably detect and prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations.
For as long as we are an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404. We will remain an emerging growth company until the earliest of (i) the end of the fiscal year in which the market value of our common stock that is held bynon-affiliates exceeds $700 million as of June 30, (ii) the end of the fiscal year in which we have total annual gross revenues of $1.07 billion or more during such fiscal year, (iii) the date on which we issue more than $1.0 billion innon-convertible debt in a three-year period or (iv) December 31, 2022. The market value of common stock held by non-affiliates may be greater than $700 million by June 30, 2018. Should this occur, we will no longer qualify for the various exemptions available to emerging growth companies, including the exemption from the auditor attestation requirement under Section 404(b), as of December 31, 2018. An independent assessment of the effectiveness of our internal control over financial reporting could detect problems that our management’s assessment might not. Undetected material weaknesses in our internal control over financial reporting could lead to financial statement restatements and require us to incur the expense of remediation.
Fluctuations in foreign currency exchange rates could result in declines in our reported revenue and operating results.
As a result of our international activities, we have revenue, expenses, cash, accounts receivable and payment obligations denominated in foreign currencies including Euros, British Pounds Sterling, Indian Rupees, Japanese Yen, and Chinese Yuan. Foreign currency risk arises primarily from the net difference betweennon-United States dollar receipts from customers andnon-United States dollar operating expenses. The value of foreign currencies against the United States dollar can fluctuate significantly, and those fluctuations may occur quickly. We cannot predict the impact of future foreign currency fluctuations.
Further strengtheningStrengthening of the United States dollar could cause our software to become relatively more expensive to some of our customers leading to decreased sales and a reduction in billings and revenue not denominated in United States dollars. A reduction in revenue or an increase in operating expenses due to fluctuations in foreign currency exchange rates could have an adverse effect on our financial condition and operating results. Such foreign currency exchange rate fluctuations may make it more difficult to detect underlying trends in our business and operating results.
We do not currently, and do not have plans to, engage in currency hedging activities to limit the risk of exchange rate fluctuations. In the future, we may use derivative instruments, such as foreign currency forward and option contracts, to hedge certain exposures to fluctuations in foreign currency exchange rates. The use of such hedging activities may not offset any or more than a portion of the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place, and the cost of those hedging techniques may have a significant negative impact on our operating results. The use of hedging instruments may introduce additional risks if we are unable to structure effective hedges with such instruments. If we are not able to successfully manage or hedge against the risks associated with currency fluctuations, our financial condition and operating results could be adversely affected.
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If we fail to attract new or retain existing third party independent software vendors to participate in the APA, we may not be able to grow the APA program.
TheOur APA program allows our customers to use third party software that may be unrelated to our software, without the need to enter into additional license agreements. The APA program results in increased revenues through revenue sharing, and encourages users to stay within the Altair software ecosystem. If third party software providers are unwilling to join the APA on appropriate terms, including agreeing with our revenue share allocations, or if we are unable to retain our current APA participants, we may not be able to grow the APA program.
Licensing ofunder our solidThinking softwarebrand is dependent on performance of our distributors and resellers.
We have historically licensed our software primarily through our direct sales force. Our solidThinking offerings arebrand is primarily licensed through a recently expanded network of distributors and resellers. If these distributors and resellers are unable to successfully adjust their sales methods to support our annual recurring licensing model, or become unstable, financially insolvent, or otherwise do not perform as we expect, our revenue growth derived from solidThinking could be negatively impacted.
If we fail to adapt to technology changes our software may become less marketable, less competitive, or obsolete.
Our success depends in part on our ability to:
We may not be able to develop or market new or enhanced software in a timely manner, which could result in our software becoming less marketable, less competitive, or obsolete.
We believe our long-term value as a company will be greater if we focus on growth, which may negatively impact our profitability in the near term.
Part of our business strategy is to focus on our long-term growth. As a result, our profitability may be lower in the near term than it would be if our strategy waswere to maximize short-term profitability. Expanding our research and development efforts, sales and marketing efforts, infrastructure and other such investments may not ultimately grow our business or cause higher long-term profitability. If we are ultimately unable to achieve greater profitability at the level anticipated by analysts and our stockholders, our Class A common stock price may decline.
Our research and development may not generate revenue or yield expected benefits.
A key element of our strategy is to invest significantly in research and development to create new software and enhance our existing software to address additional applications and serve new markets. Research and development projects can be technically challenging and expensive, and there may be delays between the time we incur expenses and the time we are able to generate revenue, if any. Anticipated customer demand for any software we may develop could decrease after the development cycle has commenced, and we could be unable to avoid costs associated with the development of any such software. If we expend a significant amount of resources on research and development and our efforts do not lead to the timely introduction or improvement of software that is competitive in our current or future markets, it could harm our business.
Our continued innovation may not generate revenue or yield expected benefits.
As a business focused on innovation, we expect to continue developing new software and products both internally and through acquisitions. These offerings may focus either on our existing markets or other markets in which we see opportunities. We may not receive revenue from these investments sufficient to either grow our business or cover the related development or acquisition costs.
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If we lose our senior executives, we may be unable to achieve our business objectives.
We currently depend on the continued services and performance of James Scapa, our chief executive officer, and other senior executives. Many members of this executive team have served the Company for more than 15 years, with Mr. Scapa having served since our founding in 1985. Loss of Mr. Scapa’s services or those of other senior executives could delay or prevent the achievement of our business objectives.
If we are unable to attract and retain key personnel, we may be unable to achieve our business objectives.
Our business is dependent on our ability to attract and retain highly skilled software engineers, salespeople, and support teams. There is significant industry competition for these individuals. We have many employees whose equity awards in our company are fully vested and may increase their personal wealth after giving effect to our offering, which could affect their decision to remain with the Company. Failure to attract or retain key personnel could delay or prevent the achievement of our business objectives.
Defects or errors in our software could result in loss of revenue or harm to our reputation.
Our software is complex and, despite extensive testing and quality control, may contain undetected or perceived bugs, defects, errors, or failures. From time to time we have found defects or errors in our software and we may discover additional defects in the future. We may not find defects or errors in new or enhanced software before release and these defects or errors may not be discovered by us or our customers until after they have used the software. We have in the past issued, and may in the future need to issue, corrective releases or updates of our software to remedy bugs, defects and errors or failures. The occurrence of any real or perceived bugs, defects, errors, or failures could result in:
Any of these problems could have a material adverse effect onharm our business, financial position, results of operations and cash flows.business.
Acquisitions may dilute our stockholders, disrupt our core business, divert our resources, or require significant management attention.
Most of our software has been developed internally with acquisitions used to augment our capabilities. We may not effectively identify, evaluate, integrate, or use acquired technology or personnel from prior or future acquisitions, or accurately forecast the financial impact of an acquisition, including accounting charges.
After the completion of an acquisition, it is possible that our valuation of such acquisition for purchase price allocation purposes may change compared to initial expectations and result in unanticipated write-offs or charges, impairment of our goodwill, or a material change to the fair value of the assets and liabilities associated with a particular acquisition.
We may pay cash, incur debt, or issue equity securities to fund an acquisition. The payment of cash will decrease available cash. The incurrence of debt would likely increase our fixed obligations and could subject us to restrictive covenants or obligations. The issuance of equity securities would likely be dilutive to our stockholders. We may also incur unanticipated liabilities as a result of acquiring companies. Future acquisition activity may disrupt our core business, divert our resources, or require significant management attention.
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Failure to protect and enforce our proprietary technology and intellectual property rights could substantially harm our business.
The success of our business depends, in part, on our ability to protect and enforce our proprietary technology and intellectual property rights, including our trade secrets, patents, trademarks, copyrights, and other intellectual property. We attempt to protect our intellectual property under trade secret, patent, trademark, and copyright laws. Despite our efforts, we may not be able to protect our proprietary technology and intellectual property rights, if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property. It may be possible for unauthorized third parties to copy our technology and use information that we regard as proprietary to create products and services that compete with ours. Provisions in our licenses protect against unauthorized use, copying, transfer and disclosure of our technology, but such provisions may be difficult to enforce or are unenforceable under the laws of certain jurisdictions and countries. The laws of some countries do not protect proprietary rights to the same extent as the laws of the United States. Our international activities expose us to unauthorized copying and use of our technology and proprietary information.
We primarily rely on our unpatented proprietary technology and trade secrets. Despite our efforts to protect our proprietary technology and trade secrets, unauthorized parties may attempt to misappropriate, reverse engineer or otherwise obtain and use them. The contractual provisions that we enter into with employees, consultants, partners, vendors and customers may not be sufficient to prevent unauthorized use or disclosure of our proprietary technology or trade secrets and may not provide an adequate remedy in the event of unauthorized use or disclosure of our proprietary technology or trade secrets.
Policing unauthorized use of our technologies, software and intellectual property is difficult, expensive and time-consuming, particularly in countries where the laws may not be as protective of intellectual property rights as those in the United States and where mechanisms for enforcement of intellectual property rights may be weak. We may be unable to detect or determine the extent of any unauthorized use or infringement of our software, technologies or intellectual property rights.
From time to time, we may need to engage in litigation or other administrative proceedings to protect our intellectual property rights or to defend against allegations by third parties that we have infringed or misappropriated their intellectual property rights, including in connection with requests for indemnification by our customers who may face such claims. We have been approached and may be approached in the future by certain of our customers to indemnify them against third party intellectual property claims. Litigation and/or any requests for indemnification by our customers could result in substantial costs and diversion of resources and could negatively affect our business and revenue. If we are unable to protect and enforce our intellectual property rights, our business may be harmed.
Intellectual property disputes could result in significant costs and harm our business.
Intellectual property disputes may occur in the markets in which we compete. Many of our competitors are large companies with significant intellectual property portfolios, which they may use to assert claims of infringement, misappropriation or other violations of intellectual property rights against us, or our customers. Any allegation of infringement, misappropriation or other violation of intellectual property rights by a third party, even those without merit, could cause us to incur substantial costs defending against the claim, could distract our management from our business, and could cause uncertainty among our customers or prospective customers, all of which could have an adverse effect on our business or revenue. We are currently engaged in ongoing litigation with MSC, a competitor of ours, who brought suit against us in 2007 alleging misappropriation of trade secrets, breach of confidentiality and other employment-related claims. A jury returned a verdict against us in April 2014. After a successful challenge by us in November 2014, this verdict was partially vacated except for damages for $425,000 related to certain employment matters and the court ordered a new trial on damages for the trade secrets claims. On August 21, 2017, the court granted Altair’s motion to strike the testimony of MSC’s damage expert. On October 11, 2017, the court mooted the remainingpre-trial motions and allowed us to file a motion for summary judgment on the issue of whether MSC can prove damages. On December 13, 2017, the court granted us summary judgment and dismissed MSC’s claim of trade secret misappropriation. On January 5, 2018, MSC filed a notice of appeal of the final judgement entered on December 13, 2017 and prior orders in this action to the Sixth Circuit Court of Appeals.On January 19, 2018, Altair filed a cross-appeal. No briefing schedule or argument date has been set by the Appeals Court. We cannot be certain of the outcome of this matter. We agreed to indemnify our employees named in the MSC litigation.
Our agreements may include provisions that require us to indemnify others for losses suffered or incurred as a result of our infringement of a third party’s intellectual property rights infringement, including certain of our employees and customers.
An adverse outcome of a dispute or an indemnity claim may require us to:
develop non-infringing technologies;
Any of the foregoing or other damages could harm our business, decrease our revenue, increase our expenses or negatively impact our cash flow.
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Security breaches, computer malware, computer hacking attacks and other security incidents could harm our business, reputation, brand and operating results.
Security incidents have become more prevalent across industries and may occur on our systems. Security incidents may be caused by, or result in but are not limited to, security breaches, computer malware or malicious software, computer hacking, unauthorized access to confidential information, denial of service attacks, security system control failures in our own systems or from vendors we use, email phishing, software vulnerabilities, social engineering, sabotage anddrive-by downloads. Such security incidents, whether intentional or otherwise, may result from actions of hackers, criminals, nation states, vendors, employees or customers.
We may experience disruptions, data loss, outages and other performance problems on our systems due to service attacks, unauthorized access or other security related incidents. Any security breach or loss of system control caused by hacking, which involves efforts to gain unauthorized access to information or systems, or to cause intentional malfunctions or loss, modification or corruption of data, software, hardware or other computer equipment and the inadvertent transmission of computer malware could harm our business.
In addition, our software stores and transmits customers’ confidential business information in our facilities and on our equipment, networks and corporate systems. Security incidents could expose us to litigation, remediation costs, increased costs for security measures, loss of revenue, damage to our reputation and potential liability. Our customer data and corporate systems and security measures may be compromised due to the actions of outside parties, employee error, malfeasance, capacity constraints, a combination of these or otherwise and, as a result, an unauthorized party may obtain access to our data or our customers’ data. Outside parties may attempt to fraudulently induce our employees to disclose sensitive information in order to gain access to our customers’ data or our information. We must continuously examine and modify our security controls and business policies to address new threats, the use of new devices and technologies, and these efforts may be costly or distracting.
Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently or may be designed to remain dormant until a predetermined event and often are not recognized until launched against a target, we may be unable to anticipate these techniques or implement sufficient control measures to defend against these techniques. Though it is difficult to determine what harm may directly result from any specific incident or breach, any failure to maintain confidentiality, availability, integrity, performance and reliability of our systems and infrastructure may harm our reputation and our ability to retain existing customers and attract new customers. If an actual or perceived security incident occurs, the market perception of the effectiveness of our security controls could be harmed, our brand and reputation could be damaged, we could lose customers, and we could suffer financial exposure due to such events or in connection with remediation efforts, investigation costs, regulatory fines and changed security control, system architecture and system protection measures.
Adverse global conditions, including economic uncertainty, may negatively impact our financial results.
Global conditions, including the effects of the outcome of the United Kingdom’s referendum on membership inexit from the European Union, or Brexit, dislocations in the financial markets or any negative financial impacts affecting United States corporations operating on a global basis as a result of tax reform or changes to existing trade agreements or tax conventions, could adversely impact our business in a number of ways, including longer sales cycles, lower prices for our software license fees, reduced licensing renewals, customer disruption or foreign currency fluctuations.
The long term effects of Brexit will depend on any agreements the United Kingdom makes to retain access to European Union markets either during a transitional period or more permanently. The measures could potentially disrupt some of the markets we serve and may cause those customers to closely monitor their costs and reduce their spending budget on our products and services. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the United Kingdom determines which European Union laws to replace or replicate. Given the lack of comparable precedent, it is unclear what financial, trade and legal implications the withdrawal of the United Kingdom from the European Union will have on us.
The United Kingdom Financial Conduct Authority, or the FCA, has announced its intention to phase out LIBOR rates by the end of 2021. It is not possible to predict the effect of this change, or other reforms or the establishment of alternative reference rates in the United Kingdom or elsewhere. We currently expect that, as a result of any phase out of LIBOR, the interest rates under our loan agreement would be amended as necessary to provide for an interest rate that approximates the existing interest rate as calculated in accordance with LIBOR, but could result in an increase in the cost of our variable rate indebtedness.
During challenging economic times our customers may be unable or unwilling to make timely payments to us, which could cause us to incur increased bad debt expenses. Our customers may unilaterally extend the payment terms of our invoices, adversely affecting our short-term or long-term cash flows.
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International operations expose us to risks inherent in international activities.
Operating in international markets requires significant resources and management attention and subjects us to regulatory, economic and political risks that are different from those in the United States. We face risks in doing business internationally that could adversely affect our business, including:
Our inability to manage any of these risks successfully, or to comply with these laws and regulations, could reduce our sales and harm our business.
We may lose customers if our software does not work seamlessly with our customers’ existing software.
Our customers may use our software, which in many instances has been designed to seamlessly interface with software from some of our competitors, together with their own software and software they license from third parties. If our software ceases to work seamlessly with our customers’ existing software applications, we may lose customers.
OurMany of our customers use our software and services to design and develop their products, which when built and used may expose us to claims.
Many of our customers use our software and services, together with software and services from other third parties and their own resources, to assist in the design and development of products intended to be used in a commercial setting. To the extent our customers design or develop a product that results in potential liability, including product liability, we may be included in resulting litigation. We may be subject to litigation defense costs or be subject to potential judgments or settlement costs for which we may not be fully covered by insurance, which would result in an increase of our expenses.
We also license certain of our software on Altair branded computer hardware, which we acquire from an original equipment manufacturer,manufacturers, which we refer to as an OEM,OEMs, exposing us to potential liability for the hardware, such as product liability. To the extent this liability is greater than the warranty and liability protection from our OEM, we may incur additional expenses, which may be significant.
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If we fail to educate and train our users regarding the use and benefits of our software, we may not generate additional revenue.
Our software is complex and highly technical. We continually educate and train our existing and potential users regarding the depth, breadth, and benefits of our software including through classroom and online training. If these users do not receive education and training regarding the use and benefits of our software, or the education and training is ineffective, they may not increase their usage of our software. We may incur costs of training directly related to this activity prior to generating additional revenue, if any.revenue.
If we are unable to match engineers to open positions in our CES business or are otherwise unable to grow our CES business, our revenue could be adversely affected.
We operate our client engineering services business by hiring engineers and data scientists for placement at a customer site for specific customer-directed assignments and pay them only for the duration of the placement. The success of this business is dependent upon our ability to recruit and retain highly skilled, qualified engineers to meet the requirements of our customers and to maintain ongoing relationships with these customers. OurUnder ASC 606, our CES business constituted approximately 15% of our total revenues for each of the years ended December 31, 2015 and 2016, and 14%12% of our total revenues for the year ended December 31, 2017.2018. Under ASC 605, our CES business constituted approximately 15% and 14% of our total revenues for the years ended December 31, 2016 and 2017, respectively. Some of our customers operate their engineering personnel needs through managed service providers, or MSPs. A significant percentage of the engineers we place, either directly or through MSPs, are with U.S.-based customers and are citizens of countries other than the United States. In the event these engineers are unable to enter into, or remain in, the United States legally, we may be unable to match engineers with the appropriate skill sets matched to open customer positions. If we are unable to attract highly skilled, qualified engineers because of competitive factors or immigration laws, or otherwise fail to match engineers to open customer positions, our revenue may be adversely affected.
Our sales to United States government agencies and their suppliers may be subject to reporting and compliance requirements.
Our customers include agencies of the various governments, including, but not limited to the United States, government and their suppliers of products and services. These customers may procure our software and services through United States government mandated procurement regulations. Because of United States government reporting and compliance requirements we may incur unexpected costs. United States government agencies and their suppliers may have statutory, contractual or other legal rights to terminate contracts for convenience or due to a default, and any such termination may adversely affect our future operating results.
Our sales tonon-United States government agencies and their suppliers may be subject to reporting and compliance requirements.
Our customers include agencies of variousnon-United States governments and their suppliers of products and services. These customers procure our software and services through various governments’ mandated procurement regulations. Because of governmental reporting and compliance requirements, we may incur unexpected costs. Government agencies and their suppliers may have statutory, contractual or other legal rights to terminate contracts for convenience or due to a default, and any such termination may adversely affect our future operating results.
We may require additional capital to support our business, which may not be available on acceptable terms.
We expect to continue to make investments in our business, which may require us to raise additional funds. We may raise these funds through either equity or debt financings. Issuances of equity or convertible debt securities may significantly dilute stockholders and any new equity securities could have rights, preferences and privileges superior to those holders of our Class A common stock. In addition to the restrictions under our current credit agreement, any future debt
financings could contain restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital, manage our business and pursue business opportunities, including potential acquisitions.
We may not be able to obtain additional financing on terms favorable to us. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our growth, develop new software or add capabilities and enhancements to our existing software and respond to business challenges could be significantly impaired, and our business may be adversely affected.
Our loan agreements contain operating and financial covenants that may restrict our business and financing activities.
Upon closing of our IPO, we entered into a newOur credit agreement, whichas amended, provides for an initial aggregate commitment amount of $100$150 million, with a sublimit for the issuance of letters of credit of up to $5 million and a sublimit for swing line loans of up to $5 million and matures on October 18, 2022 (the “2017 Credit Agreement”). Our 2017 Credit Agreement is unconditionally guaranteed by us and all existing and subsequently acquired controlled domestic subsidiaries. It is also collateralized by a first priority, perfected security interest in, and mortgages on, substantially all of our tangible assets. The 2017 Credit Agreement contains operating financial restrictions and covenants, including liens, limitations on indebtedness, fundamental changes, limitations on guarantees, limitations on sales of assets and sales of receivables, dividends, distributions and other restricted payments, transactions with affiliates, prepayment of indebtedness and limitations on loans and investments in each case subject to certain exceptions. In addition, the 2017 Credit Agreement contains financial covenants relating to maintaining a minimum interest coverage ratio of 3.0 to 1.0 and maximum leverage ratio of 3.0 to 1.0, as defined in the 2017 Credit Agreement The restrictions and covenants in the 2017 Credit Agreement, as well as those contained in any future debt financing agreements that we may enter into, may restrict our ability to finance our operations and engage in, expand or otherwise pursue our business activities and strategies. Our ability to comply with these covenants and restrictions may be affected by events beyond our control, and breaches of these covenants and restrictions could result in a default under the loan agreement and any future financing agreements that we may enter into.
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We operate internationally and must comply with employment and related laws in various countries, which may, in turn, result in unexpected expenses.
We are subject to a variety of domestic and foreign employment laws, including those related to safety, discrimination, whistle-blowing, privacy and data protection, employment of illegal aliens,unauthorized or undocumented employees, classification of employees, wages, statutory benefits, and severance payments. Such laws are subject to change as a result of judicial decisions or otherwise, and there can be no assurance that we will not be found to have violated any such laws in the future. Such violations could lead to the assessment of significant fines against us by federal, state or foreign regulatory authorities or to the award of damages claims, including severance payments, against us in judicial or administrative proceedings by employees or former employees, any of which would reduce our net income or increase our net loss.
Changes in government trade, immigration or currency policies may harm our business.
We operate our business globally in multiple countries that have policies and regulations relating to trade, immigration and currency, which may change. Governments may change their trade policies by withdrawing from negotiations on new trade policies, renegotiating existing trade agreements, imposing tariffs or imposing other trade restrictions or barriers. Any such changes may result in:
Any of these changes, changes in immigration policies, government intervention in currency valuation or other government policy changes may adversely impact our ability to sell software and services, which could, in turn, harm our revenues and our business. We are headquartered in the United States and may be particularly impacted by changes affecting the United States.
Our use of open source technology could impose limitations on our ability to commercialize our software.
We use open source software in some of our software and expect to continue to use open source software in the future. Although we monitor our use of open source software to avoid subjecting our software to conditions we do not intend, we may face allegations from others alleging ownership of, or seeking to enforce the terms of, an open source license, including by demanding release of the
open source software, derivative works, or our proprietary source code that was developed using such software. These allegations could also result in litigation. The terms of many open source licenses have not been interpreted by United States courts. There is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our software. In such an event, we may be required to seek licenses from third parties to continue commercially offering our software, to make our proprietary code generally available in source code form, tore-engineer our software or to discontinue the sale of our software ifre-engineering could not be accomplished on a timely basis, any of which could adversely affect our business and revenue.
The use of open source software subjects us to a number of other risks and challenges. Open source software is subject to further development or modification by anyone. Others may develop such software to be competitive with or no longer useful by us. It is also possible for competitors to develop their own solutions using open source software, potentially reducing the demand for our software. If we are unable to successfully address these challenges, our business and operating results may be adversely affected, and our development costs may increase.
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We currently open source certain of our software and may open source other software in the future, which could have an adverse effect on our revenues and expenses.
We offer our open matrix language, or OML, source code and a portion of our Altair PBS workload management software in an open source version to generate additional usage and broaden user-community development and enhancement of the software. We offer related software and services on a paid basis. We believe increased usage of open source software leads to increased purchases of these related paid offerings. We may offer additional software on an open source basis in the future. There is no assurance that the incremental revenues from related paid offerings will outweigh the lost revenues and incurred expenses attributable to the open sourced software.
Our revenue mix may vary over time, which could harm our gross margin and operating results.
Our revenue mix may vary over time due to a number of factors, including the mix of term-based licenses and perpetual licenses. Due to the differing revenue recognition policies applicable to our term-based licenses, perpetual licenses and professional services, shifts in the mix between subscription and perpetual licenses from quarter to quarter, or increases or decreases in revenue derived from our professional engineering services, which have lower gross margins than our software services, could produce substantial variation in revenues recognized even if our billings remain consistent. Our gross margins and operating results could be harmed by changes in revenue mix and costs, together with other factors, including: entry into new markets or growth in lower margin markets; entry into markets with different pricing and cost structures; pricing discounts; and increased price competition. Any one of these factors or the cumulative effects of certain of these factors may result in significant fluctuations in our gross margin and operating results. This variability and unpredictability could result in our failure to meet internal expectations or those of securities analysts or investors for a particular period. If we fail to meet or exceed such expectations for these or any other reasons, the market price of our common stock could decline.
The estimates of market opportunity and forecasts of market growth included in our periodic reports or other public disclosures may prove to be inaccurate, and even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all.
Market opportunity estimates and growth forecasts included in our periodic reports or other public disclosures, including those we have generated ourselves, are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. Even if the market in which we compete meets the size estimates and growth forecasted in our periodic reports or other public disclosures, our business could fail to grow for a variety of reasons, which would adversely affect our results of operations.
We are subject to governmental export and import controls that could impair our ability to compete in international markets due to licensing requirements and subject us to liability if we are not in compliance with applicable laws.
Our software, services and hardware are subject to export control and import laws and regulations. As a company headquartered in the United States we are subject to regulations, including the International Traffic in Arms Regulations, or ITAR, and Export Administration Regulations, or EAR, United States Customs regulations and various economic and trade sanctions regulations administered by the United States Treasury Department’s Office of Foreign Assets ControlsControl, presenting further risk of unexpected reporting and compliance costs. Compliance with these regulations may also prevent and restrict us from deriving revenue from potential customers in certain geographic locations for certain of our technologies.
If we fail to comply with these laws and regulations, we and certain of our employees could be subject to substantial civil or criminal penalties, including the possible loss of export or import privileges, fines which may be imposed on us and responsible employees or managers and, in extreme cases, the incarceration of responsible employees or managers. Obtaining the necessary authorizations, including any required license, for a particular sale may be time-consuming, is not guaranteed and may result in the delay or loss of sales opportunities. In addition, changes in our software or changes in applicable export or import regulations may create delays in the introduction and sale of our software in international markets, prevent our customers with international operations from deploying our software or, in some cases, prevent the export or import of our software to certain countries, governments or persons altogether.
We incorporate encryption technology into portions of our software. Various countries regulate the import of certain encryption technology, including through import permitting and licensing requirements, and have enacted laws that could limit our ability to distribute our software or could limit our customers’ ability to implement our software in those countries. Encrypted software and the underlying technology may also be subject to export control restrictions. Governmental regulation of encryption technology and regulation of imports or exports of encryption products, or our failure to obtain required import or export approval for our software, when applicable, could harm our international sales and adversely affect our revenue. Compliance with applicable regulatory requirements regarding the export of our software, including with respect to new releases of our software, may create delays in the introduction of our software in international markets, prevent our customers with international operations from deploying our software throughout their globally-distributed systems or, in some cases, prevent the export of our software to some countries altogether.
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United States export control laws and economic sanction programs prohibit the shipment of certain software and services to countries, governments and persons that are subject to United States economic embargoes and trade sanctions.sanctions, including, but not limited to, Iran, Cuba, North Korea, Syria and Sudan. Any violations of such economic embargoes and trade sanction regulations could have negative consequences, including government investigations, penalties and reputational harm.
Any change in export or import regulations, economic sanctions or related legislation, shift in the enforcement or scope of existing regulations, or change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our software by, or in our decreased ability to export or license our software to, existing or potential customers with international operations. Any decreased use of our software or limitation on our ability to export or license our software could adversely affect our business.
Our business is subject to a wide range of laws and regulations, and our failure to comply with those laws and regulations could harm our business.
Our business is subject to regulation by various federal, state, local and foreign governmental agencies, including agencies responsible for monitoring and enforcing employment and labor laws, workplace safety and environmental laws, privacy and data protection laws, financial services laws, anti-bribery laws, import and export controls, federal securities laws and tax laws and regulations. In certain foreign jurisdictions, these regulatory requirements may be more stringent than those in the United States. These laws and regulations are subject to change over time and thus we must continue to monitor and dedicate resources to ensure continued compliance.Non-compliance with applicable regulations or requirements could subject us to investigations, sanctions, mandatory product recalls, enforcement actions, disgorgement of profits, fines, damages, civil and criminal penalties or injunctions. If any governmental sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, operating results, and financial condition could be materially adversely affected. In addition, responding to any action will likely result in a significant diversion of management’s attention and resources and an increase in professional fees. Enforcement actions and sanctions could harm our business, operating results and financial condition.
If we or any of our employees violate the United States Foreign Corrupt Practices Act,FCPA, the U.K. Bribery Act or similar anti-bribery laws we could be adversely affected.
The United States Foreign Corrupt Practices Act, or FCPA, the U.K. Bribery Act and similar anti-bribery laws generally prohibit companies and their intermediaries from authorizing, offering or providing, directly or indirectly, improper payments or benefits for the purpose of obtaining or retaining business to government officials, political parties and private-sector recipients. United States based companies are required to maintain records that accurately and fairly represent their transactions and have an adequate system of internal accounting controls. We operate in areas of the world that potentially experience corruption by government officials to some degree and, in certain circumstances, compliance with anti-bribery laws may conflict with local customs and practices. We cannot assure that our employees, resellers or distributors will not engage in prohibited conduct. If we are found to be in violation of the FCPA, the U.K. Bribery Act or other anti-bribery laws, we could suffer criminal or civil penalties or other sanctions.
Business interruptions could adversely affect our business.
Our operations and our customers are vulnerable to interruptions by fire, flood, earthquake, power loss, telecommunications failure, terrorist attacks, wars and other events beyond our control. A catastrophic event that results in the destruction of any of our critical business or information technology systems could severely affect our ability to conduct normal business operations, including system interruptions, reputational harm, delays in our software development, breaches of data security and loss of critical data.
We rely on our network and third-party infrastructure and applications, internal technology systems, and our websites for our development, marketing, operational support, hosted services and sales activities. If these systems were to fail or be negatively impacted as a result of a natural disaster or other event, our ability to deliver software and training to our customers could be impaired.
Our business interruption insurance may not be sufficient to compensate us fully for losses or damages that may occur as a result of these events, if at all.
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Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.
GAAP are subject to interpretation by the Financial Accounting Standards Board, or FASB, the United States Securities and Exchange Commission, or the SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results for periods prior and subsequent to such change. We will need to comply with the FASB issued Accounting Standards UpdateNo. 2014-09, Revenue from Contracts with Customers.Customers (Topic 606). This standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most existing revenue recognition guidance under GAAP. The core principle of the guidance is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the companyCompany expects to be entitled in exchange for those goods and services. We expect the timing of revenue recognition to be accelerated because we anticipate that license revenue will be recognized at a point in time, rather than over time, which iswas our current practice. Generally, the license revenue component of an arrangement represents a significant portion of the overall fair value of a software arrangement. While we continue to assess the potential impacts, under the new standards there is the potential for significant impacts on the consolidated financial statements.
The application of this new guidance may resulthas resulted in a change in the timing and pattern of revenue recognition, including the retrospective recognition of revenue in historical periods that may negatively affect our future revenue, trend,comparable performance, reduce revenue visibility and increase quarterly variability in results, which, despite no change in associated cash flows, could have a material adverse effect on our net income (loss). in any particular period. The adoption of new standards may potentially requirehas required enhancements or changes in our systems and will continue to require significant time and cost on behalfeffort of our financial management.
As an “emerging growth company” the JOBS Act allows us an extended transition period for complying with new and revised accounting standards that have different effective dates for public and private companies until the earlier of the date (i) we are no longer an emerging growth company, or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. We have elected to use this extended transition period under the JOBS Act, including with respect to ASU2014-09.management team.
We cannot predict the impact of all of the future changes to accounting principles or our accounting policies on our consolidated financial statements going forward, which could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of the change. In addition, if we were to change our critical accounting estimates, including those related to the recognition of license revenue and other revenue sources, our operating results could be significantly affected.
If our goodwill or intangible assets become impaired, we may be required to record a significant charge to earnings, which could harm our business.
Under GAAP, we review our intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. As of December 31, 20172018, and 2016,2017, respectively, we had $62.7$210.8 million and $36.6$62.7 million of goodwill and $24.5$69.8 million and $11.2$24.5 million of other intangible assets—net. An adverse change in market conditions, particularly if such change has the effect of changing one of our critical assumptions or estimates, could result in a change to the estimation of fair value that could result in an impairment charge.
We have significant deferred tax assets in the United States, which we will not use in future taxable periods.
As of December 31, 20172018 and 2016,2017, we had gross deferred tax assets, or DTAs, of $73.6$92.6 million and $75.0$73.6 million, respectively, primarily related to net operating loss carryforwards, tax credits, share-based compensation, deferred revenue, and capitalized research and development expenses. We are entitled to a United States federal tax deduction whennon-qualified stock options, or NSOs, are exercised. In connection with our IPO, a significant number of NSOs were exercised resulting in a tax deduction for United States income tax purposes. This deduction, in conjunction with our other expected deferred tax asset reversals, resulted in our needing to establish a valuation allowance for $47.0 million in 2017 for the United States DTAs. Our ability to utilize any net operating losses or tax credits may be limited under provisions of the Internal Revenue Code of 1986, or the Code, if we undergo an ownership change after our IPO (generally defined as a greater than50-percentage-point cumulative change, by value, in the equity ownership of certain stockholders over a rolling three-year period). We also inherited net operating losses, or NOLs, from the acquisition of Datawatch, which are subject to specific limitations on usage. We may or may not be able to realize the benefits of the acquired NOLs due to a number of factors, including those enumerated above. We may also be unable to realize our tax credit carryforwards as they beginprior to expire in 2018.their expiry.
If our global tax methodology is challenged our tax expense may increase.
As a global business headquartered in the United States, we are required to pay tax in a number of different countries, exposing us to transfer pricing and other adjustments. Transfer pricing refers to the methodology of allocating revenue and expenses for tax purposes to particular countries. Taxing authorities may challenge our transfer pricing methodology, which if successful could increase our professional expenses and result inone-time or recurring tax charges, a higher worldwide effective tax rate, reduced cash flows, and lower overall profitability of our operations.
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Our tax expense could be impacted depending on the applicability of withholding and other taxes including taxes on software licenses and related intercompany transactions under the tax laws of jurisdictions in which we have business operations. Our future income taxes may fluctuate if our earnings are either lowerthere is a change in countries that have low statutorythe mix of income in the applicable tax rates or higherjurisdictions in countries that have high statutory tax rates.which we operate. We are subject to review and audit by the United States and other taxing authorities. Any review or audit could increase our professional expenses and, if determined adversely, could result in unexpected costs.
Sales and use, value-added and similar tax laws and rates vary by jurisdiction. Any of these jurisdictions may assert that such taxes are applicable, which could result in tax assessments, penalties and interest.
New legislation ortax-reform policies that would change U.S. or foreign taxation of international business activities, including uncertainties in the interpretation and application of the 2017 Tax Cuts and Jobs Act, could materially affect our tax obligations and effective tax rate.
We are subject to income tax in the numerous jurisdictions in which we operate. Reforming the taxation of international businesses has been a priority for politicians, and a wide variety of potential changes have been proposed. Some proposals, several of which have been enacted, impose incremental taxes on gross revenue, regardless of profitability. Furthermore, it is reasonable to expect that global taxing authorities will be reviewing current legislation for potential modifications in reaction to the implementation of the 2017 Tax Cuts and Jobs Act (the “Tax Act”) in the U.S. Due to the large and expanding scale of our international business activities, any changes in the taxation of such activities may increase our worldwide effective tax rate and the amount of taxes we pay and seriously harm our business.
In the U.S., the Tax Act enacted on December 22, 2017 significantly affected U.S. tax law by changing how the U.S. imposes income tax on multinational corporations. The U.S. Department of Treasury has broad authority to issue regulations and interpretative guidance that may significantly impact how we will apply the law and impact our results of operations in the period issued.
The Tax Act requires complex computations not previously provided in U.S. tax law. As such, the application of accounting guidance for such items is currentlyremain uncertain. Further, compliance with the Tax Act and the accounting for such provisions requirerequires an accumulation of information not previously required or regularly produced. As additional regulatory guidance is issued by the applicable taxing authorities, as accounting treatment is clarified, and as we perform additional analysis on the application of the law, and as we refine estimates in calculating the effect, our final analysis, which will be recorded in the period completed, may be different from our current provisional amounts, which could materially affect our tax obligations and effective tax rate.rate could be materially different.
In addition to our software, we manufacture, distribute and sell products, which may expose us to product liability claims, product recalls, and warranty claims that could be expensive and harm our business.
We manufacture, distribute and sell products through two wholly owned subsidiaries, Altair Product Design, Inc., which we refer to as APD, and Ilumisys, Inc. doing business as toggled and which we refer to in this annual report as toggled. Generally, APD supports our customers with engineering and design services, which may include the fabrication of equipment and prototypes that are sold to businesses but not sold to consumers. From time to time, certain customers may contract directly with us for services similar to those provided by APD. toggled designs, sources through contract manufacturers, and assembles in our own facilities LED lighting and related products for sale to consumers and businesses.
To the extent these products do not perform as expected, cause injury or death or are otherwise unsuitable for usage, we may be held liable for claims, including product liability and other claims. A product liability claim, any product recalls or an excessive warranty claim, whether arising from defects in design or manufacture or otherwise could negatively affect our APD or toggled sales or require a change in the design or manufacturing process of these products, any of which may harm our reputation and business.
Failure to protect and enforce toggled’s proprietary technology and intellectual property rights could substantially harm toggled’s lighting business.
Part of the success of toggled’s lighting business depends on our ability to protect and enforce toggled’s proprietary rights, including its patents, trademarks, copyrights, trade secrets and other intellectual property rights. As of December 31, 2017,2018, toggled had 141168 issued patents and 4541 published patent applications worldwide. We attempt to protect toggled’s intellectual property under patent, trademark, copyright, and trade secret laws. However, the steps we take to protect its intellectual property may be inadequate. We will not be able to protect toggled’s intellectual property if we are unable to enforce its rights or if we do not detect unauthorized use of its intellectual property. It may be possible for unauthorized third parties to copy toggled’s technology and use information that it regards as proprietary to create products that compete with toggled’s products. Some license provisions protecting against unauthorized use, copying, transfer and disclosure of toggled’s technology may be unenforceable under the laws of certain jurisdictions and foreign countries. Further, the laws of some countries do not protect proprietary rights to the same extent as the laws of the United States.
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The process of obtaining patent protection is uncertain, expensive and time-consuming, and we may not be able to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. In addition, issuance of a patent does not guarantee that we have an absolute right to practice our patented technology, or that we have the right to exclude others from practicing our patented technology. As a result, we may not be able to obtain adequate patent protection or to enforce our issued patents effectively.
From time to time, toggled enforces its patents and other intellectual property rights including through initiating litigation. Any such litigation could result in substantial costs and diversion of resources and could negatively affect toggled’s business, operating results, financial condition and cash flows. If toggled is unable to protect toggled’s intellectual property rights, its business, operating results and financial condition will be harmed.
Assertions by third parties of infringement or other violations by toggled of their intellectual property rights, or other lawsuits brought against toggled, could result in significant costs and substantially harm toggled’s business.
Patent and other intellectual property disputes are common in the markets in which toggled competes. Some of toggled’s competitors, own large numbers of patents, copyrights, trademarks and trade secrets, which they may use to assert claims of infringement, misappropriation or other violations of intellectual property rights against toggled or its customers. As the number of patents and competitors in this market increases, allegations of infringement, misappropriation and other violations of intellectual property rights may increase. Any allegation of infringement, misappropriation or other violation of intellectual property rights by a third party, even those without merit, could cause toggled to incur substantial costs and resources defending against the claim, which could have an adverse effect on toggled’s business.
Some of our businesses may collect personal information and are subject to privacy laws.
Companies that collect personal information are required to comply with the privacy laws adopted by United States and various state and foreign governments, including member states of the European Union. These privacy laws regulate the collection, use, storage, disclosure and security of data, such as names, email addresses and, in some jurisdictions, Internet Protocol addresses, that may be used to identify or locate an individual, including a customer or an employee.
Our Company includes the WEYV business, a consumer music and content service, which in the course of providing its service directly to consumers, collects and stores consumer information. Currently we expect to operate WEYV only within the United States and are only subject to the United States privacy laws. To the extent we expand our WEYV offering beyond the United States we will need to comply with the privacy laws of every country in which we operate. Some of our other products may collect personal data and would also be subject to these privacy laws.
These laws and regulations may require us to implement privacy and security policies, permitend-customers to access, correct and delete personal information stored or maintained by us, inform individuals of security breaches that affect their personal information, and, in some cases, obtain individuals’ consent to use personally identifiable information for certain purposes. Governments could require that any personally identifiable information collected in a country not be disseminated outside of that country. We also may find it necessary or desirable to join industry or other self-regulatory bodies or other information security, or data protection, related organizations that require compliance with their rules pertaining to information security and data protection. We may agree to be bound by additional contractual obligations relating to our collection, use and disclosure of personal, financial and other data. Our failure to comply with these privacy laws or any actual or suspected security incident may result in governmental actions, fines andnon-monetary penalties, which may harm our business.
Additionally, California recently enacted legislation, the California Consumer Privacy Act, or the CCPA, which goes into effect in January 2020, with a lookback to January 2019, and places additional requirements on the handling of personal data. The CCPA also provides for civil penalties for violations, as well as a private right of action for data breaches that may increase data breach litigation. The potential effects of this legislation are potentially far-reaching and may require us to modify our data processing practices and policies and incur substantial costs and expenses in an effort to comply. Legislators have stated that they intend to propose amendments to the CCPA before it goes into effect, and it remains unclear what, if any, modifications will be made to this legislation or how it will be interpreted. We may also from time to time be subject to, or face assertions that we are subject to, additional obligations relating to personal data by contract or due to assertions that self-regulatory obligations or industry standards apply to our practices. Our failure to comply with these privacy laws or any actual or suspected security incident may result in governmental actions, fines and non-monetary penalties, which may harm our business.
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Proposed or new legislation and regulations could significantly affect our business.
The new European General Data Protection Regulation, or GDPR, will taketook effect in May 2018 and will applyapplies to all of our business conducted in Europe. Generally acceptedThe GDPR introduces a number of new obligations for subject companies and we will need to continue dedicating financial resources and management time to GDPR compliance policiesin the coming months. The GDPR enhances the obligations placed on companies that control or process personal data including, for example, expanded disclosures about how personal data is to be used, new mechanisms for obtaining consent from data subjects, new controls for data subjects with respect to their personal data (including by enabling them to exercise rights to erasure and processes are not yet well established,data portability), limitations on retention of personal data and mandatory data breach notifications. Additionally, the GDPR places companies under new obligations relating to data transfers and the security of the personal data they process. The GDPR provides that supervisory authorities in the European Union may impose administrative fines for certain infringements of the GDPR of up to EUR 20,000,000 or 4% of an undertaking’s total, worldwide, annual turnover of the preceding financial year, whichever is higher. Individuals who have suffered damage as a result of a subject company’s non-compliance with the GDPR also have the right to seek compensation from such company. Given the breadth of the GDPR, compliance with its requirements is likely to continue to require significant expenditure of resources on an ongoing basis, and there can be no assurance that the measures we have taken for the purposes of compliance will be successful in preventing breach of the GDPR. Given the potential fines, liabilities and damage to our reputation in the event of an actual or perceived breach of the GDPR, such a breach may have an adverse effect on our business and operations.
Catastrophic events may adversely affect our business
Our company is a highly automated business which relies on our network infrastructure and enterprise applications, cloud-based services, internal technology systems and website for development, marketing, operational, support and sales activities. A disruption or failure of these systems or in those of our external service providers, in the event of a major storm, earthquake, fire, telecommunications failure, cyber-attack, terrorist attack or other catastrophic event could cause system interruptions, reputational harm, delays in our product development and loss of critical data and could impose significant new requirements on how we collect, processmaterially and transfer personal data, as well as impose significant fines fornon-compliance. Compliance with GDPR or changes in privacy and information security laws and standards in European Union member states or other countries in which we transactadversely affect our business may result in significant expense dueability to increased investment in technology and the development of new operational processes and failure to comply with GDPR may harmoperate our business.
Risks related to ownership of our Class A common stock
An active public trading market for our Class A common stock may not be sustained.
Prior to our initial public offering in the fourth quarter of 2017, there had been no public market or active private market for trading shares of our Class A common stock. Our Class A common stock is listed on the Nasdaq Global Select Market under the symbol “ALTR.” However, we cannot assure you that an active trading market will be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active
market may also reduce the price of shares of Class A common stock. An inactive market may impair our ability to raise capital by selling shares and our ability to use our capital stock to acquire other companies or technologies. We cannot predict the prices at which our Class A common stock will trade.
Our Class A common stock has only recently become publicly traded, and theThe market price of our Class A common stock maycan be volatile.
The market price of our Class A common stock has fluctuated substantially since our IPO. Our market price may continue to fluctuate substantially depending on a number of factors, many of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose all or part of your investment in our Class A common stock, since you might not be able to sell your shares at or above the price you paid for our Class A common stock. Factors that could cause fluctuations in the market price of our Class A common stock include the following:
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In addition, the stock market in general, and the market for technology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may affect the market price of our Class A common stock, regardless of our actual operating
performance. In the past, following periods of volatility in the overall market and the market prices of a particular company’s securities, securities class action litigation has often been instituted against that company. We may become the target of this type of litigation in the future. Securities litigation, if instituted against us, could result in substantial costs and divert our management’s attention and resources from our business.
We do not intend to pay dividends in the foreseeable future. As a result, your ability to achieve a return on your investment will depend on appreciation in the price of our Class A common stock.
We have never declared or paid any cash dividends on our Class A common stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any dividends on our Class A common stock in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors. Consequently, your only opportunity to achieve a return on your investment in our company will be if the market price of our Class A common stock appreciates and you sell your shares at a profit. There is no guarantee that the price of our Class A common stock that will prevail in the market will ever exceed the price that you paid.
Our management team has limited experience managing a public company.
Most members of our management team have limited experience managing a publicly-traded company, interacting with public company investors, and complying with laws pertaining to public companies. Our management team may not successfully or efficiently manage our transition to beingrole as a public company subject to significant regulatory oversight and reporting obligations under the federal securities laws and the continuous scrutiny of securities analysts and investors. These new obligations and constituents will require significant attention from our senior management and couldmay divert their attention away from theday-to-day management of our business, which could adversely affect our business, financial condition, and operating results.
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We are incurring increased costs and devote additional management time as a result of operating as a public company.
As a public company, we are incurring legal, accounting and other expenses that we did not incur as a private company. We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and are required to comply with the applicable requirements of the Sarbanes-Oxley Act of 2002, or SOX, and the Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank, as well as rules and regulations subsequently implemented by the SEC and the Nasdaq Global Select Market, including the establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. We expect that
As of December 31, 2018, we ceased to be an “emerging growth company”, as defined by the JOBS Act, which has the effect of expanding disclosure and other obligations applicable to us, including, but not limited to, enhanced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved, along with accelerated compliance with SOX and earlier implementation of certain changes in GAAP such as revenue recognition and leasing standards. Compliance with these requirements will increaseincreases our legal and financial compliance costs and will make makes some activities more time consuming and costly. In addition, we expect that our management and other personnel will need to divert attention from operational and other business matters to devote additional time to these public company requirements. In particular, we have incurred, and expect to continue to incur, additional expenses and have devoted, and expect to continue to devote, additional management effort toward ensuring compliance with the requirements of Section 404 of SOX, which will increase when we are no longeras a result of our ceasing to be an emerging growth company, as defined by the JOBS Act. We will remain an emerging growth company until the earliest of (i) the end of the fiscal year in which the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of June 30, (ii) the end of the fiscal year in which we have total annual gross revenues of $1.07 billion or more during such fiscal year, (iii) the date on which we issue more than $1.0 billion in non-convertible debt in a three-year period or (iv) December 31, 2022.company. Although we have already hired additional employees to help comply with these requirements, we may need to further expand our legal and finance departments in the future, particularly after we are no longer an emerging growth company, which will increase our costs and expenses.
If we fail to maintain effective internal controls, we may not be able to report financial results accurately or on a timely basis, or to detect fraud, which could have a material adverse effect on our business or share price.
Effective internal controls are necessary for us to provide reasonable assurance with respect to our financial reports and to effectively prevent financial fraud. Pursuant to SOX, we will beare required to periodically evaluate the effectiveness of the design and operation of our internal controls. Internal controls over financial reporting may not prevent or detect misstatements because of inherent limitations, including the possibility of human error or collusion, the circumvention or overriding of controls, or fraud. If we fail to maintain an effective system of internal controls, our business and operating results could be harmed, and we could fail to meet our reporting obligations, which could have a material adverse effect on our business and our share price.
As a public company, we are required to maintain internal controls over financial reporting and to report any material weaknesses in such internal controls. Section 404 of SOX requires annual management assessments of the effectiveness of our internal controls over financial reporting beginning with ourthis Annual Report for the year ending December 31, 2018.Report. We are in the process of designing, implementing,have designed, implemented and testingtested the internal control over financial reporting required to comply with this obligation, which was and is time consuming, costly, and complicated. We have identified material weaknesses in our internal controls over financial reporting for the fiscal years ended December 31, 2015, 2016 and 2017.2017, one of which has not been remediated as of our fiscal year 2018. If we identify material weaknesses in our internal control over financial reporting in the future or if we are unable to successfully remediate the identified material weaknesses or, if we are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Class A common stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC, or other regulatory authorities, which could require additional financial and management resources.
We are an emerging growth company and we cannot be certain if (i) the reduced disclosure requirements or (ii) extended transition periods for complying with new or revised accounting standards applicable to emerging growth companies will make our common stock less attractive to investors.
We qualify as an emerging growth company. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company, or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
For as long as we continue to be an emerging growth company, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
We will remain an emerging growth company until the earliest of (i) the end of the fiscal year in which the market value of our common stock that is held bynon-affiliates exceeds $700.0 million as of June 30, (ii) the end of the fiscal year in which we have total annual gross revenues of $1.07 billion or more during such fiscal year, (iii) the date on which we issue more than $1.0 billion innon-convertible debt in a three-year period or (iv) December 31, 2022.
We cannot predict the impact our capital structure may have on our stock price.
In July 2017, S&P Dow Jones, a provider of widely followed stock indices, announced that companies with multiple share classes, such as ours, will not be eligible for inclusion in certain of their indices. As a result, our Class A common stock will likely not be eligible for these stock indices. Additionally, FTSE Russell, another provider of widely followed stock indices, recentlyhas stated that it plans to require new constituents of its indices to have at least five percent of their voting rights in the hands of public stockholders. Many investment funds are precluded from investing in companies that are not included in such indices, and these funds would be unable to purchase our Class A common stock. We cannot assure you that other stock indices will not take a similar approach to S&P Dow Jones or FTSE Russell in the future. ExclusionGiven the sustained flow of investment funds into passive strategies that seek to track certain indexes, exclusion from indices could make our Class A common stock less attractive to investors and, asinvestors. As a result, the market price of our Class A common stock could be adversely affected.
33
If financial or industry analysts do not publish research or reports about our business or if they issue inaccurate or unfavorable commentary or downgrade our Class A common stock, our stock price and trading volume could decline.
The trading market for our Class A common stock willmay be influenced by the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts, or the content and opinions included in their reports. As a relatively new public company, we may be slow to attract research coverage, and the analysts who publish information about our Class A common stock willstill have had relatively little experience with our company, which could affect their ability to accurately forecast our results and make it more likely that we fail to meet their estimates. In the event we obtain industry or financial analyst coverage, ifIf any of the analysts who cover us issue an inaccurate or unfavorable opinion regarding our stock price, our stock price would likely decline. In addition, the stock prices of many companies in the technology industry have declined significantly after those companies have failed to meet, or often times exceeded,failed to exceed, the financial guidance publicly announced by the companies or the expectations of analysts. If our financial results fail to meet, or fail to significantly exceed, our announced guidance or the expectations of analysts or public investors, analysts could downgrade our Class A common stock or publish unfavorable research about us. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
Future sales of substantial amounts of our Class A common stock may cause our stock price to decline.
Future sales of a substantial number of shares of our Class A common stock, particularly sales by our directors, executive officers and significant stockholders could adversely affect the market price of our Class A common stock and may make it more difficult to sell Class A common stock at a time and price that you deem appropriate. As of December 31, 2017,2018, we had an aggregate of 26,725,48438,348,711 shares of Class A common stock and 36,507,67632,170,732 shares of Class B common stock outstanding.
All of the shares of Class A common stock sold in our initial public offering and June 2018 follow-on public offering are freely tradable without restrictions or further registration under the Securities Act of 1933, as amended, or the Securities Act, except for any shares held by our affiliates as defined in Rule 144 under the Securities Act.
A substantial majority our outstanding shares of common stock outstanding prior to our initial public offering are currently restricted from resale as a result of market standoff and“lock-up” agreements.
These shares will become available to be sold in the second quarter of 2018. Shares held by directors, executive officers and other affiliates will beare subject to volume limitations under Rule 144 under the Securities Act and various vesting agreements. In addition, the underwriters may, in their sole discretion, release all or some portion of the shares subject to market standoff orlock-up agreements prior to the expiration of thelock-up period. Sales of a substantial number of such shares upon expiration of the market standoff andlock-up agreements, or the perception that such sales may occur, or early release of these agreements, could cause our market price to fall or make it more difficult for you to sell your Class A common stock at a time and price that you deem appropriate.
We have registered the offer and sale of an aggregate of approximately 15,948,25217,845,247 shares of Class A common stock that have been issued or reserved for future issuance under our equity compensation plans on a FormS-8 registration statement. These shares can be freely sold in the public market upon issuance, subject to the market standoff orlock-up agreements or unless they are held by “affiliates,” as that term is defined in Rule 144 of the Securities Act. Additionally, the number of shares of Class A common stock available for grant and issuance under our 2017 Equity Incentive Plan is subject to an automatic annual increase on January 1 of each year beginning in 2018 by an amount equal to the lesser of (i) 3% of the number of shares of all classes of our common stock outstanding on December 31 of the preceding calendar year or (ii) a lesser number of shares of Class A common stock determined by our board of directors. We also intend to register the offer and sale of any shares of Class A common stock resulting from such increases. If the holders of these shares choose to sell a large number of shares, they could adversely affect the market price for our Class A common stock.
We may also issue shares of our Class A common stock or securities convertible into shares of our Class A common stock from time to time in connection with a financing, acquisition, investment or otherwise. Any such issuance could result in substantial dilution to our existing stockholders and cause the trading price of our Class A common stock to decline.
The dual class structure of our common stock has the effect of concentrating voting control with certain stockholders who hold shares of our Class B common stock, including our founders, certain of our directors and executive officers and affiliates, who hold in the aggregate approximately 95%90% of the voting power of our capital stock. This will limit or preclude your ability to influence corporate matters, including the election of directors, amendments of our organizational documents, and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction requiring stockholder approval.
Our Class B common stock was grantedhas ten votes per share, and our Class A common stock has one vote per share. Our Class B stockholders, including our founders, certain of our directors and executive officers, and affiliates, hold, in the aggregate approximately 95%90% of the voting power of our capital stock. Theten-to-one voting ratio between our Class B and Class A common stock, results in the holders of our Class B common stock collectively controlling a majority of the combined voting power of our common stock and therefore being able to control all matters submitted to our stockholders for approval until 2029, or upon the occurrence of a triggering event at which time all shares of our Class B common stock will automatically convert into shares of our Class A common stock, or on an earlier date, as set forth in our Delaware certificate of incorporation.
This concentrated control will limit or preclude your ability to influence corporate matters for the foreseeable future, including the election of directors, amendments of our organizational documents, and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction requiring stockholder approval. In addition, this may prevent or discourage unsolicited acquisition proposals or offers for our capital stock that you may feel are in your best interest as one of our stockholders.
34
Future transfers by holders of our Class B common stock will generally result in those shares converting to Class A common stock, subject to the specific exceptions set forth in our Delaware certificate of incorporation, such as certain transfers effected for estate planning purposes and between or among our founders. The conversion of Class B common stock to Class A common stock will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock who retain their shares in the long-term.
Certain provisions in our charter documents and Delaware law could prevent an acquisition of our company, limit attempts by our stockholders to replace or remove members of our board of directors or current management and may adversely affect the market price of our Class A common stock.
Our Delaware certificate of incorporation and bylaws contain provisions that could delay or prevent a change in control of our company that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions may also prevent or delay attempts by stockholders to replace or remove our current management or members of our board of directors. These provisions include:
requiring the affirmative vote of holders of at least 66 2 / 3 % of the voting power of all of the then outstanding shares of the voting stock, voting together as a single class, to adopt, amend, or repeal provisions of (i) our certificate of incorporation relating to the issuance of preferred stock without stockholder approval, voting rights of our Class A common stock and our Class B common stock, and management of our business, and (ii) our bylaws relating to the ability of stockholders to call a special meeting and amending our bylaws in their entirety, which may inhibit the ability of an acquirer to effect such amendments to facilitate an unsolicited takeover attempt;
In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a certain period of time.
These and other provisions in our certificate of incorporation, our bylaws and under Delaware law could discourage potential takeover attempts, reduce the price that investors might be willing to pay for shares of our Class A common stock in the future and result in the market price being lower than it would be without these provisions.
Item 1B. Unresolved Staff Comments
None.
35
Our corporate headquarters are located in Troy, Michigan. We own our corporate headquarters facility consisting of 132,900 square feet of office space. In addition, we maintain 1721 domestic offices some of which are subject to master leases or subleases with multiyear lease terms in Alabama, Arizona, California, Massachusetts, Michigan, New York, North Carolina, Texas, Virginia, Washington, and Wisconsin. We maintain an office in ArizonaNew York which is leased under an annual lease.
In 2016, we acquired an undeveloped parcel of land adjacent to our headquarters, which we expect to develop over the next few years. In 2010, we acquired 136,000 square feet of industrial space in Troy, Michigan that is now used as the headquarters of our wholly-owned subsidiary toggled. We plan to sell this facility and move toggled into our corporate headquarters building.
We maintain 5260 international offices in Australia, Austria, Brazil, Canada, China, Finland, France, Germany, Greece, India, Israel, Italy, Japan, Malaysia, Mexico, Philippines, Singapore, South Africa, South Korea, Spain, Sweden, Taiwan, the United Kingdom and Vietnam. We lease all of our international facilities and do not own any real property outside of the United States. We expect to add facilities as we grow our employee base and expand geographically. We believe that our facilities are adequate to meet our needs for the immediate future, and that, should it be needed, suitable additional space will be available to accommodate expansion of our operations.
From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. We have received, and may in the future continue to receive, claims from third parties asserting, among other things, infringement of their intellectual property rights. Future litigation may be necessary to defend ourselves, our partners and our customers by determining the scope, enforceability and validity of third party proprietary rights, or to establish and enforce our proprietary rights. The results of any current or future litigation cannot be predicted with certainty and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
Swedish Tax Litigation
The Swedish Tax Authorities, or STA, have assessed tax, penalties and interest in the amount of $6.7 million related to the acquisition of Panopticon AB by Datawatch Corporation, or Datawatch, in 2013 for the years 2013, 2014 and 2015. The STA, upon auditing the acquisition transaction, reached a conclusion that post acquisition, certain assets were removed from Sweden, triggering the tax obligation. The STA is also of the opinion that some services related to product development provided to the new parent company in the U.S. were performed by Panopticon AB at a price below market price triggering a tax obligation. Datawatch contested the findings by the STA throughout the audit process and is now contesting the STA position in the first level of administrative courts. An Administrative Court hearing had been set for January 2019; however, upon Altair acquiring Datawatch and engaging new Swedish tax counsel, the Administrative Court agreed to a short postponement. A new hearing date is expected to be established no earlier than May or June of 2019. This tax controversy is a long-standing tax matter related to a unique combination of complex tax laws and regulations coupled with unusual facts and circumstances for which there appears to be little or no precedence in prior case law in this jurisdiction. Ultimate resolution of this matter, which could be several years from this point, inclusive of applicable appellate procedures, will be based upon significant judgment and interpretation by the parties involved, especially as this matter progresses through the court process.
MSC Litigation
On July 5, 2007, MSC Software Corporation, or MSC, filed a lawsuit against us and certain of our named employees in the United States District Court for the Eastern District of Michigan, asserting, among other things, that we and certain of our employees misappropriated alleged trade secrets that certain of our employees breached contractualnon-solicitation and confidentiality obligations owed to MSC and that we tortiously interfered with MSC’s contractual relations with these employees. In April 2014, a
jury returned a $26.1 million verdict against us on three trade secrets claims and a tortious interference claim as well as against certain of our employees for breach of contractual obligations to MSC. In November 2014, this verdict was partially vacated except for damages of $425,000 related to the employment matters, and the Court ordered a new trial on damages for the trade secrets claims. On August 21, 2017, the court granted Altair’s motion to strike the testimony of MSC’s damage expert. On October 11, 2017, the court mooted the remainingpre-trial motions and allowed us to file a motion for summary judgment on the issue of whether MSC can prove damages. On December 13, 2017, the court granted Altair’s motion for summary judgment and dismissed MSC’s claim of trade secret misappropriation. On January 5, 2018, MSC filed a notice of appeal of the final judgment entered on December 13, 2017 and prior orders in this action to the Sixth Circuit Court of Appeals. On January 19, 2018, Altair filed a cross-appeal. No briefing schedule or argument date has been set byThe Sixth Circuit referred the Appeals Court.case to mediation. On August 28, 2018, the parties filed stipulations of dismissal with both the District Court and the Court of Appeals. The matter is settled.
We can express no opinion regarding the ultimate resolution of this matter. Litigation is inherently uncertain, and any judgment or injunctive relief entered against us or any adverse settlement could negatively affect our business, results of operations and financial condition.
Item 4. Mine Safety Disclosures
Not applicable.
36
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information for Common Stock
Our Class A common stock began trading on the Nasdaq Global Select Market under the symbol “ALTR” on November 1, 2017. Prior to that date, there was no public trading market for our Class A common stock.
The following table sets forth for the indicated periods the high and low sales prices of our Class A common stock as reported by the Nasdaq Global Select Market since our initial public offering, or IPO:
High | Low | |||||||
Year ended December 31, 2017 | ||||||||
Fourth quarter (beginning November 1, 2017) | $ | 25.59 | $ | 16.55 |
Our Class B common stock is not listed nor traded on any stock exchange.
Holders
As of December 31, 2017,February 15, 2019, there were 474 registered stockholders of record of our Class A common stock, 54 registered stockholders of record of our Class B common stock, and we believe a substantially greater number of beneficial owners who hold shares through brokers, banks or other nominees.
Dividends
We have never declared or paid any cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any dividends on our common stock in the foreseeable future. The terms of our 2017 Credit FacilityAgreement also restrict our ability to pay dividends, and we may also enter into credit agreements or other borrowing arrangements in the future that will restrict our ability to declare or pay cash dividends on our capital stock. Any future determination regarding the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects, and other factors our board of directors may deem relevant. There can be no assurance that any dividends will be paid in the future.
Use of Proceeds
Initial public offering
On October 31, 2017, the Registration Statement on FormS-1 (FileNo. 333-220710) for our initial public offering was declared effective by the SEC. On November 3, 2017 we closed the initial public offering and sold 9,865,004 shares of our Class A common stock at a public offering price of $13.00 per share for an aggregate offering price of approximately $128.2 million.
The remainder of the information required by this item regarding the use of our IPO proceeds has been omitted pursuant to SEC rules because such information has not changed since our last periodic report was filed.
Unregistered Sales of Equity Securities
None.
37
The following shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any of our other filings under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended..
The graph below compares the cumulative total stockholder return on our Class A common stock with the cumulative total return on the Nasdaq Composite Index and the Nasdaq Computer Index. The graph assumes $100 was invested at the market close on November 1, 2017, which was our initial trading day, in our Class A common stock, the Nasdaq Composite Index and the Nasdaq Computer Index.
Data for the Nasdaq Composite Index and the Nasdaq Computer Index assumes reinvestment of dividends. The offering price of our Class A common stock in our IPO, which had a closing stock price of $18.31, was $13.00 per share.
The comparisons in the graph below are based upon historical data and are not indicative of, nor intended to forecast, future performance of our Class A common stock.
38
Item 6. Selected Financial Data
The following tables summarize the consolidated financial data for our business. You should read this summary of consolidated financial data in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form10-K. We derived the The consolidated statements of operations data for the fiscal years ended December 31, 2018, 2017 and 2016, and the consolidated balance sheet data as of December 31, 2018 and 2017 are derived from our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. The consolidated statements of operations data for the fiscal year ended December 31, 2015, and the consolidated balance sheet data as of December 31, 2017 and 2016 are derived from our audited consolidated financial statements that are not included elsewhere in this Annual Report on Form10-K. Our historical results are not necessarily indicative of the results that may be expected in the future. The summary consolidated financial data in this section are not intended to replace our consolidated financial statements and the related notes, and are qualified in their entirety by the consolidated financial statements and related notes included elsewhere in this Annual Report on Form10-K.
39
Year ended December 31, | ||||||||||||
(in thousands, except share data) | 2017 | 2016 | 2015 | |||||||||
Consolidated statements of operations data: | ||||||||||||
Revenue: | ||||||||||||
Software | $ | 244,817 | $ | 223,818 | $ | 205,567 | ||||||
Software related services | 35,397 | 35,770 | 37,294 | |||||||||
|
|
|
|
|
| |||||||
Total software | 280,214 | 259,588 | 242,861 | |||||||||
Client engineering services | 46,510 | 47,702 | 45,075 | |||||||||
Other | 6,609 | 5,950 | 6,193 | |||||||||
|
|
|
|
|
| |||||||
Total revenue | 333,333 | 313,240 | 294,129 | |||||||||
|
|
|
|
|
| |||||||
Cost of revenue: | ||||||||||||
Software(1) | 36,360 | 31,962 | 27,406 | |||||||||
Software related services | 26,888 | 27,653 | 30,079 | |||||||||
|
|
|
|
|
| |||||||
Total software | 63,248 | 59,615 | 57,485 | |||||||||
Client engineering services | 38,131 | 38,106 | 36,081 | |||||||||
Other | 5,212 | 4,879 | 5,642 | |||||||||
|
|
|
|
|
| |||||||
Total cost of revenue | 106,591 | 102,600 | 99,208 | |||||||||
|
|
|
|
|
| |||||||
Gross profit | 226,742 | 210,640 | 194,921 | |||||||||
Operating expenses: | ||||||||||||
Research and development(1) | 93,234 | 71,325 | 62,777 | |||||||||
Sales and marketing(1) | 79,958 | 66,086 | 63,080 | |||||||||
General and administrative(1) | 87,979 | 57,202 | 54,069 | |||||||||
Amortization of intangible assets | 5,448 | 3,322 | 2,624 | |||||||||
Other operating income | (6,620 | ) | (2,742 | ) | (2,576 | ) | ||||||
|
|
|
|
|
| |||||||
Total operating expenses | 259,999 | 195,193 | 179,974 | |||||||||
|
|
|
|
|
| |||||||
Operating (loss) income | (33,257 | ) | 15,447 | 14,947 | ||||||||
Interest expense | 2,160 | 2,265 | 2,416 | |||||||||
Other expense (income), net | 994 | (520 | ) | 782 | ||||||||
|
|
|
|
|
| |||||||
(Loss) income before income taxes | (36,411 | ) | 13,702 | 11,749 | ||||||||
Income tax expense | 62,996 | 3,539 | 818 | |||||||||
|
|
|
|
|
| |||||||
Net (loss) income | $ | (99,407 | ) | $ | 10,163 | $ | 10,931 | |||||
|
|
|
|
|
| |||||||
(Loss) income per share: | ||||||||||||
Net (loss) income per share attributable to common stockholders, basic(2) | $ | (1.89 | ) | $ | 0.21 | $ | 0.23 | |||||
Net (loss) income per share attributable to common stockholders, diluted(2) | $ | (1.89 | ) | $ | 0.18 | $ | 0.19 | |||||
Weighted average shares outstanding: | ||||||||||||
Weighted average number of shares used in computing net (loss) income per share, basic(2) | 52,466 | 48,852 | 46,609 | |||||||||
Weighted average number of shares used in computing net (loss) income per share, diluted(2) | 52,466 | 57,856 | 58,709 | |||||||||
Other financial information: | ||||||||||||
Net cash provided by operating activities | $ | 16,431 | $ | 21,385 | $ | 10,838 |
|
| Year ended December 31, |
| |||||||||||||
(in thousands, except share data) |
| 2018 (1) |
|
| 2017 (1) |
|
| 2016 (1) |
|
| 2015 (1) |
| ||||
Consolidated statements of operations data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License |
| $ | 207,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance and other services |
|
| 97,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total software |
|
| 304,361 |
|
| $ | 244,817 |
|
| $ | 223,818 |
|
| $ | 205,567 |
|
Software related services |
|
| 36,945 |
|
|
| 35,397 |
|
|
| 35,770 |
|
|
| 37,294 |
|
Total software and related services |
|
| 341,306 |
|
|
| 280,214 |
|
|
| 259,588 |
|
|
| 242,861 |
|
Client engineering services |
|
| 47,852 |
|
|
| 46,510 |
|
|
| 47,702 |
|
|
| 45,075 |
|
Other |
|
| 7,221 |
|
|
| 6,609 |
|
|
| 5,950 |
|
|
| 6,193 |
|
Total revenue |
|
| 396,379 |
|
|
| 333,333 |
|
|
| 313,240 |
|
|
| 294,129 |
|
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License |
|
| 16,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance and other services |
|
| 29,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total software (1) |
|
| 45,774 |
|
|
| 36,360 |
|
|
| 31,962 |
|
|
| 27,406 |
|
Software related services |
|
| 26,415 |
|
|
| 26,888 |
|
|
| 27,653 |
|
|
| 30,079 |
|
Total software |
|
| 72,189 |
|
|
| 63,248 |
|
|
| 59,615 |
|
|
| 57,485 |
|
Client engineering services |
|
| 38,979 |
|
|
| 38,131 |
|
|
| 38,106 |
|
|
| 36,081 |
|
Other |
|
| 4,805 |
|
|
| 5,212 |
|
|
| 4,879 |
|
|
| 5,642 |
|
Total cost of revenue |
|
| 115,973 |
|
|
| 106,591 |
|
|
| 102,600 |
|
|
| 99,208 |
|
Gross profit |
|
| 280,406 |
|
|
| 226,742 |
|
|
| 210,640 |
|
|
| 194,921 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development (2) |
|
| 97,592 |
|
|
| 93,234 |
|
|
| 71,325 |
|
|
| 62,777 |
|
Sales and marketing (2) |
|
| 80,277 |
|
|
| 79,958 |
|
|
| 66,086 |
|
|
| 63,080 |
|
General and administrative (2) |
|
| 79,751 |
|
|
| 87,979 |
|
|
| 57,202 |
|
|
| 54,069 |
|
Amortization of intangible assets |
|
| 7,739 |
|
|
| 5,448 |
|
|
| 3,322 |
|
|
| 2,624 |
|
Other operating income |
|
| (9,597 | ) |
|
| (6,620 | ) |
|
| (2,742 | ) |
|
| (2,576 | ) |
Total operating expenses |
|
| 255,762 |
|
|
| 259,999 |
|
|
| 195,193 |
|
|
| 179,974 |
|
Operating income (loss) |
|
| 24,644 |
|
|
| (33,257 | ) |
|
| 15,447 |
|
|
| 14,947 |
|
Interest expense |
|
| 200 |
|
|
| 2,160 |
|
|
| 2,265 |
|
|
| 2,416 |
|
Other (income) expense, net |
|
| (2,580 | ) |
|
| 994 |
|
|
| (520 | ) |
|
| 782 |
|
Income (loss) before income taxes |
|
| 27,024 |
|
|
| (36,411 | ) |
|
| 13,702 |
|
|
| 11,749 |
|
Income tax expense |
|
| 13,309 |
|
|
| 62,996 |
|
|
| 3,539 |
|
|
| 818 |
|
Net income (loss) |
| $ | 13,715 |
|
| $ | (99,407 | ) |
| $ | 10,163 |
|
| $ | 10,931 |
|
Income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to common stockholders, basic (2) |
| $ | 0.20 |
|
| $ | (1.89 | ) |
| $ | 0.21 |
|
| $ | 0.23 |
|
Net income (loss) per share attributable to common stockholders, diluted (2) |
| $ | 0.18 |
|
| $ | (1.89 | ) |
| $ | 0.18 |
|
| $ | 0.19 |
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares used in computing net income (loss) per share, basic (3) |
|
| 67,468 |
|
|
| 52,466 |
|
|
| 48,852 |
|
|
| 46,609 |
|
Weighted average number of shares used in computing net income (loss) per share, diluted (3) |
|
| 74,878 |
|
|
| 52,466 |
|
|
| 57,856 |
|
|
| 58,709 |
|
Other financial information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
| $ | 36,230 |
|
| $ | 16,091 |
|
| $ | 21,385 |
|
| $ | 10,838 |
|
40
(2) | Includes stock-based compensation expense as follows: |
Cost of revenue—software Research and development Sales and marketing General and administrative Total stock-based compensation expense Year ended December 31, (in thousands) 2017 2016 2015 $ 350 $ 22 $ 44 12,540 1,370 149 7,693 775 109 26,698 2,965 295 $ 47,281 $ 5,132 $ 597
|
| Year ended December 31, |
| |||||||||||||
(in thousands) |
| 2018 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
| ||||
Cost of revenue—software |
| $ | 31 |
|
| $ | 350 |
|
| $ | 22 |
|
| $ | 44 |
|
Research and development |
|
| 740 |
|
|
| 12,540 |
|
|
| 1,370 |
|
|
| 149 |
|
Sales and marketing |
|
| 910 |
|
|
| 7,693 |
|
|
| 775 |
|
|
| 109 |
|
General and administrative |
|
| 1,658 |
|
|
| 26,698 |
|
|
| 2,965 |
|
|
| 295 |
|
Total stock-based compensation expense |
| $ | 3,339 |
|
| $ | 47,281 |
|
| $ | 5,132 |
|
| $ | 597 |
|
(3) | See Note |
As of December 31, |
| As of December 31, |
| |||||||||||||||||||||
(in thousands) | 2017 | 2016 | 2015 |
| 2018 |
|
| 2017 |
|
| 2016 |
| ||||||||||||
Consolidated balance sheet data: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Cash and cash equivalents | $ | 39,213 | $ | 16,874 | $ | 13,756 |
| $ | 35,345 |
|
| $ | 39,213 |
|
| $ | 16,874 |
| ||||||
Working capital | $ | (53,575 | ) | $ | (52,902 | ) | $ | (55,097 | ) |
| $ | 26,276 |
|
| $ | (53,575 | ) |
| $ | (52,902 | ) | |||
Total assets | $ | 287,871 | $ | 250,776 | $ | 221,850 |
| $ | 483,216 |
|
| $ | 287,871 |
|
| $ | 250,776 |
| ||||||
Deferred revenue, current andnon-current | $ | 139,762 | $ | 113,929 | $ | 106,516 |
| $ | 66,519 |
|
| $ | 139,762 |
|
| $ | 113,929 |
| ||||||
Debt | $ | 410 | $ | 85,241 | $ | 83,177 |
| $ | 31,748 |
|
| $ | 410 |
|
| $ | 85,241 |
| ||||||
Total stockholders’ equity (deficit) | $ | 60,591 | $ | (34,653 | ) | $ | (42,039 | ) |
| $ | 286,782 |
|
| $ | 60,591 |
|
| $ | (34,653 | ) |
Key metrics
We monitor the following keynon-GAAP, (United States generally accepted accounting principles), financial and operating metrics to help us evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions. In addition to our results determined in accordance with GAAP, we believe the followingnon-GAAP financial and operating metrics are useful in evaluating our operating performance.
Billings.Billings consists of our total revenue plus the change in our deferred revenue, in a givenexcluding deferred revenue from acquisitions during the period. AsGiven that we generally bill our customers at the time of sale but typically recognize a majorityportion of the related revenue ratably over time, management believes that Billings is a meaningful way to measure and monitor our ability to provide our business with the working capital generated by upfront payments from our customers. While we believe that billingsBillings provides valuable insight into the cash that will be generated from sales of our software and services, this metric may vary fromperiod-to-period for a number of reasons including the impact of changes in foreign currency exchange rates and the potential impact of acquisitions. See the section entitled “Reconciliation ofnon-GAAP financial measures” for a reconciliation of Billings to revenue, the most directly comparable financial measure calculated in accordance with GAAP.
Our Billings were as follows:
Year ended December 31, |
| Year ended December 31, |
| |||||||||||||||||||||
(in thousands) | 2017 | 2016 | 2015 |
| 2018 |
|
| 2017 |
|
| 2016 |
| ||||||||||||
Billings | $ | 359,166 | $ | 320,653 | $ | 297,358 |
| $ | 401,913 |
|
| $ | 357,212 |
|
| $ | 320,299 |
|
Adjusted EBITDA. We define Adjusted EBITDA as net income (loss) income adjusted for income tax expense (benefit), interest expense, interest income and other, depreciation and amortization, stock-based compensation expense, restructuring charges, asset impairment charges and other special items as determined by management. We believe that Adjusted EBITDA is a meaningful measure of performance as it is commonly utilized by us and the investment community to analyze operating performance in our industry. See the section entitled “Reconciliation ofnon-GAAP financial measures” for a reconciliation of Adjusted EBITDA to net income (loss) income,, the most directly comparable financial measure calculated in accordance with GAAP.
41
Our Adjusted EBITDA was as follows:
Year ended December 31, |
| Year ended December 31, |
| |||||||||||||||||||||
(in thousands) | 2017 | 2016 | 2015 |
| 2018 |
|
| 2017 |
|
| 2016 |
| ||||||||||||
Adjusted EBITDA | $ | 22,517 | $ | 30,830 | $ | 22,949 |
| $ | 50,180 |
|
| $ | 22,517 |
|
| $ | 30,830 |
|
Free Cash Flow. Free Cash Flow is anon-GAAP financial measure that we calculate as cash flow provided by operating activities less capital expenditures. We believe that Free Cash Flow is useful in analyzing our ability to service and repay debt, when applicable, and return value directly to stockholders. See the section entitled “Reconciliation ofnon-GAAP financial measures” for a reconciliation of Free Cash Flow to net cash provided by operating activities, the most directly comparable financial measure calculated in accordance with GAAP.
Our Free Cash Flow was as follows:
Year ended December 31, |
| Year ended December 31, |
| |||||||||||||||||||||
(in thousands) | 2017 | 2016 | 2015 |
| 2018 |
|
| 2017 |
|
| 2016 |
| ||||||||||||
Free Cash Flow | $ | 8,569 | $ | 11,941 | $ | 5,605 |
| $ | 29,571 |
|
| $ | 8,569 |
|
| $ | 11,941 |
|
Recurring Software License Rate. A key factor to our success is our recurring software license rate which we measure through billings, primarily derived from annual renewals of our existing subscription customer agreements. We calculate our recurring software license rate for a particular period by dividing (i) the sum of software term-based license billings, software license maintenance billings, and 20% of software perpetual license billings which we believe approximates maintenance as an element of the arrangement by (ii) the total software license, billings including all term-based subscriptions, maintenance and perpetual license billings from all customers for that period. For the years ended December 31, 2018, 2017 2016 and 2015,2016, our recurring software license rate was 89%, 90%89% and 88%90%, respectively.
Thesenon-GAAP financial measures reflect an additional way of viewing aspects of our business that, when viewed with our GAAP results and the accompanying reconciliations to corresponding GAAP financial measures included in the tables below, may provide a more complete understanding of factors and trends affecting our business. Thesenon-GAAP financial measures should not be relied upon to the exclusion of GAAP financial measures and are by definition an incomplete understanding of the Company and must be considered in conjunction with GAAP measures.
We believe that thenon-GAAP measures disclosed herein are only useful as an additional tool to help management and investors make informed decisions about our financial and operating performance and liquidity. By definition,non-GAAP measures do not give a full understanding of the Company. To be truly valuable, they must be used in conjunction with the comparable GAAP measures. In addition,non-GAAP financial measures are not standardized. It may not be possible to compare these financial measures with other companies’non-GAAP financial measures having the same or similar names. We strongly encourage investors to review our consolidated financial statements and the notes thereto in their entirety and not to rely on any single financial measure.
Reconciliation ofnon-GAAP financial measures
The following tables provide reconciliations of revenue to Billings, net income (loss) income to Adjusted EBITDA and net cash provided by operating activities to Free Cash Flow:
Billings
Year ended December 31, |
| Year ended December 31, |
| |||||||||||||||||||||
(in thousands) | 2017 | 2016 | 2015 |
| 2018 |
|
| 2017 |
|
| 2016 |
| ||||||||||||
Revenue | $ | 333,333 | $ | 313,240 | $ | 294,129 |
| $ | 396,379 |
|
| $ | 333,333 |
|
| $ | 313,240 |
| ||||||
Ending deferred revenue | 139,762 | 113,929 | 106,516 |
|
| 66,519 |
|
|
| 139,762 |
|
|
| 113,929 |
| |||||||||
Adoption of ASC 606 on beginning deferred revenue |
|
| 82,909 |
|
|
| — |
|
|
| — |
| ||||||||||||
Beginning deferred revenue | (113,929 | ) | (106,516 | ) | (103,287 | ) |
|
| (139,762 | ) |
|
| (113,929 | ) |
|
| (106,516 | ) | ||||||
|
|
| ||||||||||||||||||||||
Acquisition related deferred revenue |
|
| (4,132 | ) |
|
| (1,954 | ) |
|
| (354 | ) | ||||||||||||
Billings | $ | 359,166 | $ | 320,653 | $ | 297,358 |
| $ | 401,913 |
|
| $ | 357,212 |
|
| $ | 320,299 |
| ||||||
|
|
|
42
Adjusted EBITDATable of Contents
Year Ended December 31, | ||||||||||||
(in thousands) | 2017 | 2016 | 2015 | |||||||||
Net (loss) income | $ | (99,407 | ) | $ | 10,163 | $ | 10,931 | |||||
Income tax expense | 62,996 | 3,539 | 818 | |||||||||
Stock-based compensation | 47,281 | 5,132 | 597 | |||||||||
Interest expense | 2,160 | 2,265 | 2,416 | |||||||||
Interest income and other(1) | (2,260 | ) | (249 | ) | (191 | ) | ||||||
Depreciation and amortization | 11,747 | 9,980 | 8,378 | |||||||||
|
|
|
|
|
| |||||||
Adjusted EBITDA | $ | 22,517 | $ | 30,830 | $ | 22,949 | ||||||
|
|
|
|
|
|
|
| Year Ended December 31, |
| |||||||||
(in thousands) |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
Net income (loss) |
| $ | 13,715 |
|
| $ | (99,407 | ) |
| $ | 10,163 |
|
Income tax expense |
|
| 13,309 |
|
|
| 62,996 |
|
|
| 3,539 |
|
Stock-based compensation |
|
| 3,339 |
|
|
| 47,281 |
|
|
| 5,132 |
|
Interest expense |
|
| 200 |
|
|
| 2,160 |
|
|
| 2,265 |
|
Interest income and other (1) |
|
| 4,883 |
|
|
| (2,260 | ) |
|
| (249 | ) |
Depreciation and amortization |
|
| 14,734 |
|
|
| 11,747 |
|
|
| 9,980 |
|
Adjusted EBITDA |
| $ | 50,180 |
|
| $ | 22,517 |
|
| $ | 30,830 |
|
|
| Three months ended |
| |||||||||||||
|
| ASC 606 |
| |||||||||||||
(in thousands) |
| March 31, 2018 |
|
| June 30, 2018 |
|
| September 30, 2018 |
|
| December 31, 2018 |
| ||||
Net income (loss) |
| $ | 24,684 |
|
| $ | (1,080 | ) |
| $ | 934 |
|
| $ | (10,823 | ) |
Income tax expense |
|
| 2,345 |
|
|
| 1,387 |
|
|
| 1,885 |
|
|
| 7,692 |
|
Stock-based compensation |
|
| 216 |
|
|
| 434 |
|
|
| 563 |
|
|
| 2,126 |
|
Interest expense |
|
| 16 |
|
|
| 45 |
|
|
| 31 |
|
|
| 108 |
|
Interest income and other (1) |
|
| (1,255 | ) |
|
| 536 |
|
|
| (4,384 | ) |
|
| 9,986 |
|
Depreciation and amortization |
|
| 3,543 |
|
|
| 3,982 |
|
|
| 3,370 |
|
|
| 3,839 |
|
Adjusted EBITDA |
| $ | 29,549 |
|
| $ | 5,304 |
|
| $ | 2,399 |
|
| $ | 12,928 |
|
(1) | Includes the |
March 31, 2018 includes a non-recurring adjustment for a change in estimated legal expenses resulting in $2.0 million of income and an impairment charge for royalty contracts resulting in $0.9 million of expense.
June 30, 2018 includes an impairment charge for royalty contracts resulting in $0.9 million of expense.
September 30, 2018 includes a gain on the sale of a building for $4.4 million and an impairment charge for royalty contracts and trade names resulting in $0.8 million of expense.
December 31, 2018 includes a non-recurring costs from the acquisition of Datawatch of $10.4 million and an impairment charge for royalty contracts resulting in $0.2 million of expense.
Free Cash Flow
Year ended December 31, |
| Year ended December 31, |
| |||||||||||||||||||||
(in thousands) | 2017 | 2016 | 2015 |
| 2018 |
|
| 2017 |
|
| 2016 |
| ||||||||||||
Net cash provided by operating activities | $ | 16,091 | $ | 21,385 | $ | 10,838 |
| $ | 36,230 |
|
| $ | 16,091 |
|
| $ | 21,385 |
| ||||||
Capital expenditures | (7,522 | ) | (9,444 | ) | (5,233 | ) |
|
| (6,659 | ) |
|
| (7,522 | ) |
|
| (9,444 | ) | ||||||
|
|
| ||||||||||||||||||||||
Free Cash Flow | $ | 8,569 | $ | 11,941 | $ | 5,605 |
| $ | 29,571 |
|
| $ | 8,569 |
|
| $ | 11,941 |
| ||||||
|
|
|
43
Item 7.Management’s7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements (and notes thereto) for the year ended December 31, 20172018 included elsewhere in this Annual Report on Form10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in “Risk factors” and “Cautionary Note Regarding Forward-Looking Statements” included elsewhere in this Annual Report on Form10-K.
Overview
We are a leading providerglobal technology company providing software and cloud solutions in the areas of enterprise-class engineering software enabling innovationproduct design and development, high performance computing, or HPC, and data intelligence. We enable organizations across the entire product lifecycle from concept designbroad industry segments toin-service operation. compete more effectively in a connected world while creating a more sustainable future.
Our simulation-driven approach to innovation is powered by our broad portfolio of high-fidelity and high-performance physics solvers. Our integrated suite of software optimizes design performance across multiple disciplines encompassing structures, motion, fluids, thermal management, electromagnetics, system modeling, and embedded systems, while also providing data analyticsintelligence andtrue-to-life visualization and rendering.
Our engineeringAltair’s software products represent a comprehensive, open architecture solution for simulation, data intelligence and cloud computing to empower decision making for improved product development, manufacturing, energy management and exploration, financial services, health care, and retail operations. We believe our products offer a comprehensive set of technologies to design platform offers a wide range of multi-disciplinary computer aided engineering, or CAE, solutions which we believe is one of the mostand optimize high performance, efficient, innovative and comprehensive offerings availablesustainable products and processes in the market. To ensure customer success and deepen our relationships with them, we engage with our customers to provide consulting, implementation services, training, and support, especially when applying optimization. We participate in five software categories related to CAE and high-performance computing, or HPC:
an increasingly connected world. Our products are categorized by:
Physics Simulation;
Data Intelligence;
High Performance Cloud Computing; and
Internet of Things, or IoT; andIoT.
Altair also provides client engineering services, or CES, to support our customers with long-term ongoing product design and development expertise. This has the benefit of embedding us within customers, deepening our understanding of their processes, and allowing us to more quickly perceive trends in the overall market. Our presence at our customers’ sites helps us to better tailor our software products’ research and development, or R&D, and sales initiatives.
We had total revenue of $333.3 million, $313.2 million and $294.1 million for the years ended December 31, 2017, 2016 and 2015, respectively, reflecting year-over-year increases of 6% and 7%. We had a net loss of $99.4 million for the year ended December 31, 2017, and generated net income of $10.2 million and $10.9 million for the years ended December 31, 2016 and 2015, respectively.
WeAltair pioneered a patented units-based subscription licensing subscription model for software and other digital content. This units-based subscription licensing model allows flexible and shared access to our offerings, along with over 150 partner products. Our HyperWorks customers license a pool of units for their organizations which allowsgiving individual users within the organization to have flexible and shared access to our entire portfolio of software applications along with over 150as well as our growing portfolio of partner products. Our primarily mid-market solidThinking customers have access to a subset of the portfolio at a lower price point. We believe our units-based subscription licensing model lowers barriers to adoption, creates broad engagement, encourages users to work within our ecosystem, and increases revenue. This, in turn, helps drive our recurring software license rate which has been on average approximately 88% over the past five years. Each yearIn each of the last three fiscal years, approximately 60% of new software revenue comes from expansion within existing customers.
Initial public offering
On November 3, 2017, we closed our initial public offering and sold 9,865,004 shares of our Class A common stock at a public offering price of $13.00 per share for an aggregate offering price of approximately $128.2 million. We received net proceeds of $114.4 million, after deducting underwriting discounts, commissions and offering expenses.
Follow-on public offering
On June 11, 2018, we closed our follow-on public offering and sold 4,056,004 shares of our Class A common stock at a public offering price of $35.00 per share for an aggregate offering price of approximately $142.0 million. We received net proceeds of $135.2 million, after deducting underwriting discounts, commissions and offering expenses.
44
The follow-on public offering also included the sale of 2,307,420 shares of Class A common stock by selling stockholders, giving effect to the conversion of 1,675,420 shares of Class B common stock into an equivalent number of shares of Class A common stock, and the exercise of 257,000 options to purchased Class A common stock. We did not receive any proceeds from the sale of shares of Class A common stock by the selling stockholders other than the $0.5 million in proceeds from exercises of stock options by certain selling stockholders.
Factors affecting our performance
We believe that our future success will depend on many factors, including those described below. While these areas present significant opportunity, they also present risks that we must manage to achieve successful results. If we are unable to address these challenges, our business, operating results and prospects could be harmed. See Part I, Item 1A. – Risk Factors included elsewhere in this Annual Report on Form10-K.
Seasonality and quarterly results
Our billings have historically been highest in the first and fourth quarters of any calendar year and may vary in future quarters. The timing of recording billings and the corresponding effect on our cash flows may vary due to the seasonality of the purchasing patterns of our customers. In addition, the timing of the recognition of revenue, the amount and timing of operating expenses, including employee compensation, sales and marketing activities, and capital expenditures, may vary fromquarter-to-quarter which may cause our reported results to fluctuate significantly. In addition, we may choose to grow our business for the long-term rather than to optimize for profitability or cash flows for a particular shorter-term period. This seasonality or the occurrence of any of the factors above may cause our results of operations to vary and our financial statements may not fully reflect the underlying performance of our business.
Integration of recent acquisitions
We believe that our recent acquisitions result in certain benefits, including expanding our portfolio of software and products and enabling us to better serve our customer’s requests for data intelligence and simulation technology. However, to realize some of these anticipated benefits, the acquired businesses must be successfully integrated. The success of these acquisitions will depend in part on our ability to realize these anticipated benefits. We may fail to realize the anticipated benefits of these acquisitions for a variety of reasons.
Foreign currency fluctuations
Because of our substantial international operations, we are exposed to foreign currency risks that arise from our normal business operations, as well as our transactions that are denominated in foreign currencies, including the Euro, British Pound Sterling, Indian Rupee, Japanese Yen, and Chinese Yuan. To present the changes in our underlying business without regard to the impact of currency fluctuations, we evaluate certain of our operating results both on an as reported basis, as well as on a constant currency basis.
Constant currency amounts exclude the effect of foreign currency fluctuations on our reported results. Our comparative financial results were impacted by fluctuations in the value of the United States dollar relative to other currencies during the year ended December 31, 2017,2018, as compared to the year ended December 31, 2016.2017. To present this information, the results for 20172018 for entities whose functional currency is a currency other than the United States dollar were converted to United States dollars at rates that were in effect for 2016.2017. These adjusted amounts are then compared to our current period reported amounts to provide operationally driven variances in our results.
The net positive effects of currency fluctuations on our Revenue and Adjusted EBITDA are reflected in the table below. Amounts in brackets indicate a net adverse impact from currency fluctuations.
(in thousands) | Year ended December 31, 2017 |
| Year ended December 31, 2018 |
| ||||
Revenue | $ | 967 |
| $ | 4,027 |
| ||
Adjusted EBITDA | $ | (474 | ) |
| $ | 1,422 |
|
Expanded use of our software applications
Our ability to grow our revenue is affected, in part, by the pace at which our customers continue to expand their use of our design, simulation, optimization and analysis applications, and suite of data intelligence products and the degree to which prospective customers realize the benefit of using our software applications. To grow our presence within our customers and attract new customers, we devote substantial sales and marketing resources to drive increased adoption across our existing customers and encourage new customers to commence using our software. As a result of this “land and expand” business model, we expect to
45
generate additional revenue from our current and future customer base. To the extent our sales and marketing efforts do not translate into customer retention or expansion, or if we do not allocate those expenses efficiently, our financial performance may be adversely affected. Therefore, our financial performance will depend in part on the degree to which our “land and expand” strategies are successful.
Investments for growth
We have made and plan to continue to make investments for long-term growth, including investments in our ongoing research and development activities seeking to create new software and to enhance our existing applications to address emerging technology trends and additional customer needs. Generally, the development of new or improved applications in our software can result in the expansion of our user base within an organization and a potential increase in revenue over time, although the expenditures associated with such developments may adversely affect our performance in the near term. We intend to continue to invest resources in sales and marketing, by further expanding our sales teams and increasing our marketing activities. Our ability to continue to grow revenue from our current and potential customer base is dependent, in part, upon the success of our current and future research and development and sales and marketing activities.
Business segments
We have identified two reportable segments: Software and Client Engineering Services:
Software —Our Software segment includes software and software related services. The software component of this segment includes our portfolio of software products including our solvers and optimization technology products, modeling and visualization tools, data intelligence and analysis products, high performance computing, or HPC, software applications and hardware products, IoT platform and analytics tools as well as support and the complementary software products we offer through our Altair Partner Alliance, or APA. The APA includes technologies ranging from computational fluid dynamics and fatigue to manufacturing process simulation and cost estimation. The software related services component of this segment includes consulting, implementation services, and training focused on product design and development expertise and analysis from the component level up to complete product engineering at any stage of the lifecycle.
Client Engineering Services —Our client engineering services, or CES, segment provides client engineering services to support our customers with long-term, ongoing expertise. We operate our CES business by hiring engineers and data scientists for placement at a customer site for specific customer-directed assignments. We employ and pay them only for the duration of the placement.
Our other businesses which do not meet the criteria to be separate reportable segments are combined and reported as “Other” which represents innovative services and products, including toggled, our LED lighting business. toggled is focused on developing and selling next-generation solid state lighting technology along with communication and control protocols based on our intellectual property for the direct replacement of fluorescent light tubes with LED lamps. Other businesses combined within Other include our WEYV business, a consumer music and content service, and potential services and product concepts that are still in their development stages.
For additional information about our reportable segments and other businesses, see Note 1920 in the Notes to consolidated financial statements in Item 15, Part IV of this Annual Report on Form 10-K.
Adoption of ASC 606
Effective January 1, 2018, we adopted ASC 606 as a result of no longer qualifying as an Emerging Growth Company. The adoption of ASC 606 accelerates the recognition of revenues compared to ASC 605. 10-K.Under ASC 605, we did not have vendor-specific objective evidence, or VSOE, of fair value for post-contract customer support, or PCS, sold along with software products licenses; therefore, revenues for the software products licenses (including perpetual licenses), PCS and professional services, if applicable, were considered to be one accounting unit and, once all services have commenced, were recognized ratably over the remaining period of the arrangement (the longer of the contractual service term or PCS term). Under ASC 606, the concept of assessing VSOE has been eliminated and we determined standalone selling price and allocated transaction price associated with each performance obligation within an arrangement. As a result, the timing of revenue recognition was accelerated because license revenue will be recognized at a point in time, rather than over time.
Results for reporting periods beginning on or after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with ASC 605, and other industry specific guidance. The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the transfer of promised goods or services to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 606 requires an entity to evaluate revenue recognition by identifying a contract with a customer, identifying
46
the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations in the contract, and recognizing revenue when (or as) the entity satisfies a performance obligation. Topic 606 also includes Subtopic 340-40 which provides accounting guidance for incremental costs of obtaining a contract with a customer. We refer to Topic 606 and Subtopic 340-40 collectively as “ASC 606.”
|
| Year Ended December 31, 2018 |
| |||||||||
(dollars in thousands) |
| As Reported under ASC 606 |
|
| Adjustments for ASC 606 |
|
| ASC 605 |
| |||
Revenue |
| $ | 396,379 |
|
| $ | 11,317 |
|
| $ | 385,062 |
|
Gross profit |
| $ | 280,406 |
|
| $ | 11,317 |
|
| $ | 269,089 |
|
Net income |
| $ | 13,715 |
|
| $ | 10,816 |
|
| $ | 2,899 |
|
Adjusted EBITDA |
| $ | 50,180 |
|
| $ | 11,653 |
|
| $ | 38,527 |
|
We had total revenue of $396.4 million, $333.3 million and $313.2 million for the years ended December 31, 2018, 2017 and 2016, respectively, reflecting year-over-year increases of 19% and 6%. The net increase in software revenue due to the adoption of ASC 606 was $11.3 million for the year ended December 31, 2018. Excluding the impact of ASC 606, revenue increased 16% for the year ended December 31, 2018. We reported net income of $13.7 million for the year ended December 31, 2018, a net loss of $99.4 million for the year ended December 31, 2017, and net income of $10.2 million for the year ended December 31, 2016.
The following table set forth selected quarterly information. The information for each of these quarters has been prepared on the same basis as the audited annual consolidated financial statements and, in the opinion of management, includes all adjustments, which consist only of normal recurring adjustments, necessary for the fair presentation of the results of operations for these periods in accordance with GAAP.
|
| Three months ended |
| |||||||||||||
|
| ASC 606 |
| |||||||||||||
(in thousands) |
| March 31, 2018 |
|
| June 30, 2018 |
|
| September 30, 2018 |
|
| December 31, 2018 |
| ||||
Software product revenue |
| $ | 89,670 |
|
| $ | 70,606 |
|
| $ | 64,182 |
|
| $ | 79,903 |
|
Total revenue |
| $ | 113,257 |
|
| $ | 93,360 |
|
| $ | 86,751 |
|
| $ | 103,011 |
|
Net income (loss) |
| $ | 24,684 |
|
| $ | (1,080 | ) |
| $ | 934 |
|
| $ | (10,823 | ) |
Adjusted EBITDA |
| $ | 29,550 |
|
| $ | 5,303 |
|
| $ | 2,399 |
|
| $ | 12,928 |
|
Components of results of operations
Revenue
We primarily derive revenue from the licensing of our software, which includes our units-based subscription licensing model and for term and perpetual software and other digital content, other software licensing, andlicenses, as well as software related services. Our CES business derives revenue from providing engineers and data scientists to support our customers’ long-term, ongoing product design and development projects.
Software segment
Software segment revenue consists of revenue from software licenses and software related services including consulting, implementation services, training, and support. To a much lesser extent, the Software segment also includes revenue from the sale of hardware products, primarily as a result of recent business acquisitions.
Software
Software revenue is principally comprised of subscription license agreements, typically with12-month terms, which include maintenancelicenses, and support. Software revenue is also comprised ofto a lesser extent, perpetual license agreements,licenses and associated maintenance and support agreements. Wefees. Subscriptions are typically governed by contracts with annual terms which include product updates, maintenance and support. With the adoption of ASC 606, we generally recognize software license revenue ratablyup front, while maintenance and support revenue is generally recognized over the periodterm of the arrangement. Each year approximately 60% of our new revenue comes from expansion within existing customers.contract.
Software related services includes consulting, implementation services and training. Our software related services team is comprised of almost 700350 highly technical people globally. We focus on establishing a strong working relationship with the user community
47
allowing us to offer guidance and expertise throughout their product creation process. We generally recognize revenue for software related services on a time and materials or, for fixed price arrangements, on a proportional performance basis.as those services are performed.
Client engineering services segment
We provide CES to support our customers with long-term, ongoing product design and development expertise. We operate our CES business by hiring engineers and data scientists for placement at a customer site for specific customer-directed assignments. We employ and pay the engineersthem only for the duration of the placement.
Our CES business generates revenue from placing simulation specialists, industrial designers, design engineers, materials experts, development and test engineers, manufacturing engineers, and information technology specialists and data scientists on-site with our customers in businesses operating in the virtual simulation, product design and development, software development, and high-performance computing and data intelligence spaces. We recognize CES revenue based upon hours worked and contractually agreed-upon hourly rates.
The average CES assignment was 1.5 years during the period from 2011 through 2017, with a current average length of service for all CES employees of 1.9 years. As of December 31, 2017, 53% of CES employees were in their assignments for over two years. The terms of our CES arrangements generally provide that our customers pay us within 30 days of invoice. The amount and timing of CES revenue depends on our customers demand for engineering services and the number of available qualified employees to service our customers’ needs.
Other
Our Other revenue consists primarily of revenue related to our LED lighting business operated out of our wholly-owned subsidiary, toggled. toggled designs, and sources through contract manufacturers, and assembles in our own facilities, LED lighting and related products for sale to consumers and businesses. We also generate revenue through royalties from licensing ourtoggled technology to third party manufacturers and resellers.
Cost of revenue
Software segment
Cost of software revenue consists of expenses related to software licensing, hardware sales and customer support. Significant expenses include employee compensation and related costs for support team members, travel costs, and royalties for third-party software products available to customers through our products or as part of our APA.
Software
Cost of software revenue consists of the cost of personnel and related costs, such as salaries, benefits, bonuses and stock-based compensation, as well as travel expenses, hardware costs and certain data center and facility costs, and substantially all royalty expenses.
Software related services
Cost of software related services revenue consists of the cost of personnel and related costs, such as salaries, benefits, bonuses and stock-based compensation, as well as travel expenses and certain data center and facility costs.
Cost of client engineering services
Cost of engineering services revenue consists primarily of employee compensation and related costs. We operate our CES business by hiring engineers for placement at a customer site for specific customer-directed assignments. We employ and pay the engineersthem only for the duration of the placement.placement at a customer site.
Cost of other
Cost of other revenue includes the cost of LED lighting products and freight related to products sold to retail and commercial sales channels and third-party royalty expense related to our WEYV business.channels.
Operating expenses
Operating expenses, as defined and discussed below, support all the products and services that we provide to our customers and, as a result, they are presented in an aggregate total.
Research and development
Research and development expenses consist primarily of expenses ofemployee compensation and related costs associated with our development team, including salaries, benefits, bonuses, stock-based compensation expense and allocated overhead costs. Our research and development efforts are focused on enhancing the functionality, breadth and scalability of our software, addressing new use cases, and developing additional innovative simulation technologies. Timely development of new products is essential to maintaining our competitive position, and we release new versions of our software on a regular basis. All software development costs are expensed as incurred as our current software development process is essentially completed concurrent with the establishment of technological feasibility.
48
Sales and marketing expenses consist primarily of the cost of personnelemployee compensation and related costs associated with our sales and marketing staff, including salaries, benefits, bonuses, commissions and stock-based compensation, andas well as costs relating to our marketing and business development programs including trade shows and events. We intend to continue to invest resources in our sales and marketing initiatives to drive growth and extend our market position.
General and administrative
General and administrative expenses consist of personnel costsemployee compensation and related expensescosts for executive, finance, legal, human resources, recruiting, and employee-related information technology and administrative personnel, including salaries, benefits, bonuses and stock-based compensation expense, professional fees for external legal and accounting services, depreciation, facilities, recruiting and other consulting services, allocated overhead costs, and legal settlements.
Amortization of intangible assets
Amortization of intangible assets consists primarily of amortization of intangibles associated with acquisitions. We expect to incur additional amortization expenses resulting from future strategic acquisitions.
Other operating income
Other operating income consists primarily of government subsidies, primarily in France, in the form of grant income associated with certain of our research and development activities.activities and other items as disclosed.
Interest expense
Interest expense consists of interest expense on our outstanding indebtedness and accretionamortization of interest expense on debt issuance costs.
Other (income) expense, (income), net
Other (income) expense, (income), net is comprised primarily of foreign currency exchange gains and losses generated from the settlement and remeasurement of transactions denominated in currencies other than the functional currency of our operating units.units and interest income on invested cash.
Income tax expense
Income tax expense is comprised primarily of income taxes related to United States, foreign, and state jurisdictions in which we conduct business. We record interest and penalties related to income tax matters as income tax expense. We expect the amount of income tax expense (benefit), if any, to vary each reporting period depending upon fluctuations in our income.quantum and tax jurisdictional mix of income (loss). We have substantial United States net operating loss carryforwards with no expiration period for losses generated 2018 onwards, and tax credit carryforwards which if not utilized, will beginbegan to expire in 2018. The ability to utilize these tax credit carryforwardsattributes is highly dependent upon our ability to generate taxable income in the United States in the future.
Our future effective annual tax rate may be materially impacted by the amount of benefits and charges from tax amounts associated with our foreign earnings that are taxed at rates different from the federal statutory rate, the taxation of the foreign earnings in the U.S. under the Global Intangible Low-Taxed Income, or GILTI, regime, changes in valuation allowances, level of profit before tax, accounting for uncertain tax positions, stock-based compensation, business combinations, closure of statute of limitations, or settlements of tax audits, and changes in tax laws including United States tax law changes that were enacted in December 2017, and change how United States multinational companies are taxed on foreign subsidiary earnings.2017. A significant amount of our earnings is generated in theour EMEA and APAC regions. Our future effective tax rates may be adversely affected to the extent earnings are lower than anticipated in countries where we have lower statutory tax rates or we repatriate certain foreign earnings on which United States taxes have not previously been provided.rates.
As of December 31, 20172018 and 2016,2017, we had gross deferred tax assets, or DTAs, of $73.6$92.6 million and $75.0$73.6 million, respectively, primarily related to net operating loss carryforwards, tax credits, share-based compensation, deferred revenue, and capitalized research and development expenses. We are also entitled to a United States federal tax deduction whennon-qualified stock options, or NSOs, are exercised. In connection with our IPO, a significant number of our NSOs were exercised, resulting in a tax deduction for United States income tax purposes. This deduction, in conjunction with other expected exercises of NSOs and deferred tax asset reversals, resulted in our needing to establish a valuation allowance for $47.0 million in 2017 for the United States DTAs. Our ability to utilize any net operating losses or tax credits may be limited under provisions of the Code if we undergo an ownership change after our IPO (generally defined as a greater than50-percentage point cumulative change (by value) in the equity ownership of certain stockholders over a rolling three-year period). We also inherited net operating losses, or NOLs, from the acquisition of Datawatch, which are subject to specific limitations on usage. We may also be unable to realize our tax credit carryforwards as they beginwhich began to expire in 2018.
49
Based on the evidence available, including a lack of taxable earnings in the United States, we recorded a valuation allowance against substantially all of our net deferred tax assets in the United States. If a change in judgment regarding this valuation allowance were to occur in the future, we will record a potentially material deferred tax benefit, which could result in a favorable impact on our effective tax rate in that period. The utilization of tax attributes to offset taxable income reduces the amount of deferred tax assets subject to a valuation allowance.
The enactment of the Tax Cuts and Jobs Act, (the “Tax Act”) inor the United StatesTax Act, was enacted on December 22, 2017, significantly revised2017. The Tax Act reduces the U.S. federal corporate income tax by, among other things, lowering corporate income tax ratesrate from 35% to 21% and imposing, requires companies to pay aone-time transition tax on deemed repatriated earnings of certain foreign subsidiaries. Pursuant tosubsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. Previously, we applied the guidance within SECin Staff Accounting Bulletin No. 118, (“SAB 118”), asIncome Tax Accounting Implications of the Tax Cut and Jobs Act when accounting for the enactment-date effects of the Tax Act. At December 31, 2018, we have completed our accounting for the tax effects of the Tax Act; we have not recorded any adjustments to the provisional amounts recorded at December 31, 2017 related to the remeasurement of our deferred balances. At December 31, 2017, we recognizedoriginally recorded a provisional amount for its one-time transition tax of $4.2 million, which was substantially offset by available foreign tax credits. During the year ended December 31, 2018, we revised our estimate of the provisional effectsamount of the enactmentone-time transition tax. Upon further analyses of the Tax Act for which measurement could be reasonably estimated. Although we continue to analyze certain aspects of the Tax Act and refinerefinement of its assessment,calculations, we increased our provisional amount of transition tax by approximately $0.6 million. This resulted in no change to income tax expense due to the ultimate impact of theforeign tax credits.
The Tax Act may differ from these estimatessubjects a U.S. shareholder to current tax on Global Intangible Low-Taxed Income, or GILTI, earned by certain foreign subsidiaries. The impact of GILTI resulted in no incremental tax expense for the year ended December 31, 2018 due to our continued analysis or further regulatory guidance that may be issued as a result of the Tax Act. Pursuant to SAB 118, adjustments to the provisional amounts recorded by the Company as of December 31, 2017, that are identified within a subsequent measurement period of up to one year from the enactment date, will be included as an adjustment to tax expense from continuing operations in the period the amounts are determined.
We remeasured certainfull valuation allowance on U.S. deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, we are still analyzing certain aspects of the Tax Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the remeasurement of net deferred tax assets and deferred tax liabilities was a net tax charge of $15.4 million, which was fully offset byassets. In addition, we have made an adjustmentaccounting policy election to the valuation allowance. Additionally, we recorded a deferred tax benefit of $1.3 million for the reduction of a deferred tax liability related to an indefinite lived intangible asset. The Tax Act did not change our judgment regarding the realizability of these net deferred tax assets.
Theone-time transition tax is based on our total post-1986 earnings and profits (“E&P”) that were previously deferred from U.S. incometreat taxes and for which no deferred taxes were recorded since we previously claimed the indefinite reinvestment assertion exception on these earnings. In December 2017, we recorded a provisional amount for ourone-time transition tax liability of $4.2 million, net of foreign tax credits. We have not yet completed our calculation of the total post-1986 E&P and associated foreign tax credits for these foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when we finalize the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation, and finalize the amounts held in cash or other specified assets. We anticipate that additional guidance and clarification regarding the implementation of the transition tax will be issued by federal and state taxing authorities and our estimate is, therefore, subject to future refinement. No additional income taxes (other than those related to the foreign earnings inclusion taxabledue under the transition tax) have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities,GILTI provision as these amounts provisionally continue to be indefinitely reinvested in foreign operations. We continue to apply ASC 740 based on the provisionsa current period expense.
50
Additional guidance is likely to be issued providing further clarification on the application of the Tax Act. Further, it is reasonable to expect that global taxing authorities will be reviewing current legislation for potential modifications in reaction to the implementation of the U.S. legislation. This additional guidance, along with the potential for additional global tax legislation changes, could have a material adverse impact on our net income and cash flow by impacting significant deductions or income inclusions.
The following table sets forth our results of operations and certain financial data for the years ended December 31, 2018, 2017 2016 and 2015:2016:
Year ended December 31, |
| Year ended December 31, |
| |||||||||||||||||||||
(in thousands) | 2017 | 2016 | 2015 |
| 2018 (1) |
|
| 2017 (1) |
|
| 2016 (1) |
| ||||||||||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Software | $ | 244,817 | $ | 223,818 | $ | 205,567 | ||||||||||||||||||
License |
| $ | 207,164 |
|
|
|
|
|
|
|
|
| ||||||||||||
Maintenance and other services |
|
| 97,197 |
|
|
|
|
|
|
|
|
| ||||||||||||
Total software |
|
| 304,361 |
|
| $ | 244,817 |
|
| $ | 223,818 |
| ||||||||||||
Software related services | 35,397 | 35,770 | 37,294 |
|
| 36,945 |
|
|
| 35,397 |
|
|
| 35,770 |
| |||||||||
|
|
| ||||||||||||||||||||||
Total software and related services |
|
| 341,306 |
|
|
| 280,214 |
|
|
| 259,588 |
| ||||||||||||
Client engineering services |
|
| 47,852 |
|
|
| 46,510 |
|
|
| 47,702 |
| ||||||||||||
Other |
|
| 7,221 |
|
|
| 6,609 |
|
|
| 5,950 |
| ||||||||||||
Total revenue |
|
| 396,379 |
|
|
| 333,333 |
|
|
| 313,240 |
| ||||||||||||
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
License |
|
| 16,119 |
|
|
|
|
|
|
|
|
| ||||||||||||
Maintenance and other services |
|
| 29,655 |
|
|
|
|
|
|
|
|
| ||||||||||||
Total software |
|
| 45,774 |
|
|
| 36,360 |
|
|
| 31,962 |
| ||||||||||||
Software related services |
|
| 26,415 |
|
|
| 26,888 |
|
|
| 27,653 |
| ||||||||||||
Total software | 280,214 | 259,588 | 242,861 |
|
| 72,189 |
|
|
| 63,248 |
|
|
| 59,615 |
| |||||||||
Client engineering services | 46,510 | 47,702 | 45,075 |
|
| 38,979 |
|
|
| 38,131 |
|
|
| 38,106 |
| |||||||||
Other | 6,609 | 5,950 | 6,193 |
|
| 4,805 |
|
|
| 5,212 |
|
|
| 4,879 |
| |||||||||
|
|
| ||||||||||||||||||||||
Total revenue | 333,333 | 313,240 | 294,129 | |||||||||||||||||||||
|
|
| ||||||||||||||||||||||
Cost of revenue: | ||||||||||||||||||||||||
Software | 36,360 | 31,962 | 27,406 | |||||||||||||||||||||
Software related services | 26,888 | 27,653 | 30,079 | |||||||||||||||||||||
|
|
| ||||||||||||||||||||||
Total software | 63,248 | 59,615 | 57,485 | |||||||||||||||||||||
Client engineering services | 38,131 | 38,106 | 36,081 | |||||||||||||||||||||
Other | 5,212 | 4,879 | 5,642 | |||||||||||||||||||||
|
|
| ||||||||||||||||||||||
Total cost of revenue | 106,591 | 102,600 | 99,208 |
|
| 115,973 |
|
|
| 106,591 |
|
|
| 102,600 |
| |||||||||
|
|
| ||||||||||||||||||||||
Gross profit | 226,742 | 210,640 | 194,921 |
|
| 280,406 |
|
|
| 226,742 |
|
|
| 210,640 |
| |||||||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Research and development | 93,234 | 71,325 | 62,777 |
|
| 97,592 |
|
|
| 93,234 |
|
|
| 71,325 |
| |||||||||
Sales and marketing | 79,958 | 66,086 | 63,080 |
|
| 80,277 |
|
|
| 79,958 |
|
|
| 66,086 |
| |||||||||
General and administrative | 87,979 | 57,202 | 54,069 |
|
| 79,751 |
|
|
| 87,979 |
|
|
| 57,202 |
| |||||||||
Amortization of intangible assets | 5,448 | 3,322 | 2,624 |
|
| 7,739 |
|
|
| 5,448 |
|
|
| 3,322 |
| |||||||||
Other operating income | (6,620 | ) | (2,742 | ) | (2,576 | ) |
|
| (9,597 | ) |
|
| (6,620 | ) |
|
| (2,742 | ) | ||||||
|
|
| ||||||||||||||||||||||
Total operating expenses | 259,999 | 195,193 | 179,974 |
|
| 255,762 |
|
|
| 259,999 |
|
|
| 195,193 |
| |||||||||
|
|
| ||||||||||||||||||||||
Operating (loss) income | (33,257 | ) | 15,447 | 14,947 | ||||||||||||||||||||
Operating income (loss) |
|
| 24,644 |
|
|
| (33,257 | ) |
|
| 15,447 |
| ||||||||||||
Interest expense | 2,160 | 2,265 | 2,416 |
|
| 200 |
|
|
| 2,160 |
|
|
| 2,265 |
| |||||||||
Other expense (income), net | 994 | (520 | ) | 782 | ||||||||||||||||||||
|
|
| ||||||||||||||||||||||
(Loss) income before income taxes | (36,411 | ) | 13,702 | 11,749 | ||||||||||||||||||||
Other (income) expense, net |
|
| (2,580 | ) |
|
| 994 |
|
|
| (520 | ) | ||||||||||||
Income (loss) before income taxes |
|
| 27,024 |
|
|
| (36,411 | ) |
|
| 13,702 |
| ||||||||||||
Income tax expense | 62,996 | 3,539 | 818 |
|
| 13,309 |
|
|
| 62,996 |
|
|
| 3,539 |
| |||||||||
|
|
| ||||||||||||||||||||||
Net (loss) income | $ | (99,407 | ) | $ | 10,163 | $ | 10,931 | |||||||||||||||||
|
|
| ||||||||||||||||||||||
Net income (loss) |
| $ | 13,715 |
|
| $ | (99,407 | ) |
| $ | 10,163 |
| ||||||||||||
Other financial information: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Billings(1) | $ | 359,166 | $ | 320,653 | $ | 297,358 | ||||||||||||||||||
Adjusted EBITDA(2) | $ | 22,517 | $ | 30,830 | $ | 22,949 | ||||||||||||||||||
Billings (2) |
| $ | 401,913 |
|
| $ | 357,212 |
|
| $ | 320,299 |
| ||||||||||||
Adjusted EBITDA (3) |
| $ | 50,180 |
|
| $ | 22,517 |
|
| $ | 30,830 |
| ||||||||||||
Net cash provided by operating activities | $ | 16,091 | $ | 21,385 | $ | 10,838 |
| $ | 36,230 |
|
| $ | 16,091 |
|
| $ | 21,385 |
| ||||||
Free Cash Flow(3) | $ | 8,569 | $ | 11,941 | $ | 5,605 | ||||||||||||||||||
Free Cash Flow (4) |
| $ | 29,571 |
|
| $ | 8,569 |
|
| $ | 11,941 |
|
(1) | The year ended December 31, 2018 has been reported under ASC 606, and the years ended December 31, 2017 and 2016, have been reported under ASC 605 and have not been adjusted under the modified retrospective approach. See Note 3 in the Notes to consolidated financial statements included elsewhere in this Annual Report on Form 10-K. |
(2) | Billings consists of our total revenue plus the change in our deferred |
51
financial measures and reconciliations of ournon-GAAP financial measures to the most directly comparable financial measure calculated and presented in accordance with GAAP, see Item 6, Selected Financial Data of this Annual Report on Form10-K. |
(4) | We define Free Cash Flow as net cash provided by operating activities less capital expenditures. For a reconciliation of Free Cash Flow |
The following table sets forth our revenue growth on a constant currency basis for the year ended December 31, 20172018 compared to the year ended December 31, 2016:2017:
Year ended December 31, | Change | Constant currency change(1) |
| Year ended December 31, |
|
| Change |
|
| Constant currency change (1) |
| |||||||||||||||||||||
(dollars in thousands) | 2017 | 2016 | % | % |
| 2018 (2) |
|
| 2017 (2) |
|
| % |
|
| % |
| ||||||||||||||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Software | $ | 244,817 | $ | 223,818 | 9% | 9% |
| $ | 304,361 |
|
| $ | 244,817 |
|
|
| 24 | % |
|
| 23 | % | ||||||||||
Software related services | 35,397 | 35,770 | (1% | ) | (1% | ) |
|
| 36,945 |
|
|
| 35,397 |
|
|
| 4 | % |
|
| 2 | % | ||||||||||
|
| |||||||||||||||||||||||||||||||
Total software | 280,214 | 259,588 | 8% | 8% | ||||||||||||||||||||||||||||
Total software and related services |
|
| 341,306 |
|
|
| 280,214 |
|
|
| 22 | % |
|
| 20 | % | ||||||||||||||||
Client engineering services | 46,510 | 47,702 | (3% | ) | (3% | ) |
|
| 47,852 |
|
|
| 46,510 |
|
|
| 3 | % |
|
| 3 | % | ||||||||||
Other | 6,609 | 5,950 | 11% | 11% |
|
| 7,221 |
|
|
| 6,609 |
|
|
| 9 | % |
|
| 9 | % | ||||||||||||
|
| |||||||||||||||||||||||||||||||
Total revenue | $ | 333,333 | $ | 313,240 | 6% | 6% |
| $ | 396,379 |
|
| $ | 333,333 |
|
|
| 19 | % |
|
| 18 | % | ||||||||||
|
|
_____________________________
(1) | The results for entities whose functional currency is a currency other than the United States dollar were converted to United States dollars at rates that were in effect for the corresponding period of the prior year. |
(2) | The year ended December 31, 2018 has been reported under ASC 606, and the year ended December 31, 2017, has been reported under ASC 605 and has not been adjusted under the modified retrospective approach. See Note 3 in the Notes to consolidated financial statements included elsewhere in this Annual Report on Form 10-K. |
Years ended December 31, 2018 and 2017
Revenue
Total revenue increased by $63.0 million, or 19%, for the year ended December 31, 2018, as compared to the year ended December 31, 2017. This increase was primarily attributable to an increase in subscription and software revenue, along with the impact of the adoption of ASC 606.
Software segment
Software
|
| Year ended December 31, |
|
| Change |
| ||||||||||
| 2018 |
|
| 2017 |
|
| $ |
|
| % |
| |||||
Software revenue |
| $ | 304,361 |
|
| $ | 244,817 |
|
| $ | 59,544 |
|
|
| 24 | % |
As a percent of software segment revenue |
|
| 89 | % |
|
| 87 | % |
|
|
|
|
|
|
|
|
As a percent of consolidated revenue |
|
| 77 | % |
|
| 73 | % |
|
|
|
|
|
|
|
|
Software revenue increased by $59.5 million, or 24%, for the year ended December 31, 2018, as compared to the year ended December 31, 2017. The increase in software revenue due to the adoption of ASC 606 was $11.3 million, primarily derived from revenue related to software licenses recognized at a point in time under ASC 606 that were historically recognized over time. Excluding the adoption of ASC 606, software revenue increased $48.2 million, or 20%. This increase was primarily the result of an expansion in the number of units licensed by our existing customers under renewed software license agreements, licensing of units to new customers pursuant to new software license agreements, and, to a lesser extent, revenue attributable to recent acquisitions.
52
| Year ended December 31, |
|
| Change |
| |||||||||||
(dollars in thousands) |
| 2018 |
|
| 2017 |
|
| $ |
|
| % |
| ||||
Software related services revenue |
| $ | 36,945 |
|
| $ | 35,397 |
|
| $ | 1,548 |
|
|
| 4 | % |
As a percent of software segment revenue |
|
| 11 | % |
|
| 13 | % |
|
|
|
|
|
|
|
|
As a percent of consolidated revenue |
|
| 9 | % |
|
| 11 | % |
|
|
|
|
|
|
|
|
Software related services revenue increased $1.5 million, or 4% for the year ended December 31, 2018, as compared to the year ended December 31, 2017. This increase was primarily the result of increased revenue from consulting services.
Client engineering services segment
| Year ended December 31, |
|
| Change |
| |||||||||||
(dollars in thousands) |
| 2018 |
|
| 2017 |
|
| $ |
|
| % |
| ||||
Client engineering services revenue |
| $ | 47,852 |
|
| $ | 46,510 |
|
| $ | 1,342 |
|
|
| 3 | % |
As a percent of consolidated revenue |
|
| 12 | % |
|
| 14 | % |
|
|
|
|
|
|
|
|
CES revenue increased by $1.3 million, or 3%, for the year ended December 31, 2018, as compared to the year ended December 31, 2017. The increase is primarily related to the growth in the number of placements at our customers.
Other
|
| Year ended December 31, |
|
| Change |
| ||||||||||
| 2018 |
|
| 2017 |
|
| $ |
|
| % |
| |||||
Other revenue |
| $ | 7,221 |
|
| $ | 6,609 |
|
| $ | 612 |
|
|
| 9 | % |
As a percent of consolidated revenue |
|
| 2 | % |
|
| 2 | % |
|
|
|
|
|
|
|
|
Other revenue increased $0.6 million, or 9% for the year ended December 31, 2018, as compared to the year ended December 31, 2017. This increase was primarily due to increased demand and volume sales of toggled LED lighting tubes.
Cost of revenue
Software segment
Software
| Year ended December 31, |
|
| Change |
| |||||||||||
(dollars in thousands) |
| 2018 |
|
| 2017 |
|
| $ |
|
| % |
| ||||
Cost of software revenue |
| $ | 45,774 |
|
| $ | 36,360 |
|
| $ | 9,414 |
|
|
| 26 | % |
As a percent of software revenue |
|
| 15 | % |
|
| 15 | % |
|
|
|
|
|
|
|
|
As a percent of consolidated revenue |
|
| 12 | % |
|
| 11 | % |
|
|
|
|
|
|
|
|
Cost of software revenue increased by $9.4 million, or 26%, for the year ended December 31, 2018, as compared to the year ended December 31, 2017. This increase was due to increased employee compensation and related costs of $2.8 million, increased third party royalty costs of $1.2 million for software programs and $5.7 million in costs associated with the operations of recent acquisitions completed after the end of the previous fiscal year.
53
| Year ended December 31, |
|
| Change |
| |||||||||||
(dollars in thousands) |
| 2018 |
|
| 2017 |
|
| $ |
|
| % |
| ||||
Cost of software related services revenue |
| $ | 26,415 |
|
| $ | 26,888 |
|
| $ | (473 | ) |
|
| (2 | %) |
As a percent of software related services revenue |
|
| 71 | % |
|
| 76 | % |
|
|
|
|
|
|
|
|
As a percent of consolidated revenue |
|
| 7 | % |
|
| 8 | % |
|
|
|
|
|
|
|
|
Cost of software related services revenue decreased by $0.5 million, or 2%, for the year ended December 31, 2018, as compared to the year ended December 31, 2017. The decrease in the current year period was due to a reduction in headcount driven by improved utilization of existing personnel.
Client engineering services segment
| Year ended December 31, |
|
| Change |
| |||||||||||
(dollars in thousands) |
| 2018 |
|
| 2017 |
|
| $ |
|
| % |
| ||||
Cost of client engineering services revenue |
| $ | 38,979 |
|
| $ | 38,131 |
|
| $ | 848 |
|
|
| 2 | % |
As a percent of client engineering services segment revenue |
|
| 81 | % |
|
| 82 | % |
|
|
|
|
|
|
|
|
As a percent of consolidated revenue |
|
| 10 | % |
|
| 11 | % |
|
|
|
|
|
|
|
|
Cost of CES revenue increased $0.8 million, or 2%, for the year ended December 31, 2018, as compared to the year ended December 31, 2017. This increase was due to higher compensation expenses associated with a larger number of placements hired to meet customer demand.
Other
|
| Year ended December 31, |
|
| Change |
| ||||||||||
(dollars in thousands) |
| 2018 |
|
| 2017 |
|
| $ |
|
| % |
| ||||
Cost of other revenue |
| $ | 4,805 |
|
| $ | 5,212 |
|
| $ | (407 | ) |
|
| (8 | %) |
As a percent of other revenue |
|
| 67 | % |
|
| 79 | % |
|
|
|
|
|
|
|
|
As a percent of consolidated revenue |
|
| 1 | % |
|
| 2 | % |
|
|
|
|
|
|
|
|
Cost of other revenue decreased by $0.4 million, or 8%, for the year ended December 31, 2018, as compared to the year ended December 31, 2017. This decrease is due to a $0.7 million decrease in third party royalties, partially offset by a $0.3 million increase in manufacturing costs for toggled, our LED lighting business, driven by the increase in the number of units sold during 2018.
Gross profit
|
| Year ended December 31, |
|
| Change |
| ||||||||||
| 2018 |
|
| 2017 |
|
| $ |
|
| % |
| |||||
Gross profit |
| $ | 280,406 |
|
| $ | 226,742 |
|
| $ | 53,664 |
|
|
| 24 | % |
As a percent of consolidated revenue |
|
| 71 | % |
|
| 68 | % |
|
|
|
|
|
|
|
|
Gross profit increased by $53.7 million, or 24%, for the year ended December 31, 2018, as compared to the year ended December 31, 2017. This increase in gross profit was primarily attributable to the growth of our software revenue of $59.5 million driven by the factors described above, including the increase in software revenue due to the adoption of ASC 606 of $11.3 million. Excluding the impact of the adoption of ASC 606, gross profit increased by 19% from the prior year.
Operating expenses
Operating expenses, as discussed below, support all products and services that we provide to our customers and, as a result, they are reported and discussed here in an aggregate total.
54
|
| Year ended December 31, |
|
| Change |
| ||||||||||
| 2018 |
|
| 2017 |
|
| $ |
|
| % |
| |||||
Research and development |
| $ | 97,592 |
|
| $ | 93,234 |
|
| $ | 4,358 |
|
|
| 5 | % |
As a percent of consolidated revenue |
|
| 25 | % |
|
| 28 | % |
|
|
|
|
|
|
|
|
Research and development expenses increased by $4.4 million, or 5%, for the year ended December 31, 2018, as compared to the year ended December 31, 2017. This increase was primarily attributable to higher employee compensation and related costs of $15.2 million, resulting from annual compensation adjustments and an increase in our headcount, a significant portion due to acquisitions and a $0.6 increase in third party software maintenance expense. This increase was largely offset by a decrease in stock-based compensation expense of $11.8 million.
Sales and marketing
|
| Year ended December 31, |
|
| Change |
| ||||||||||
(dollars in thousands) |
| 2018 |
|
| 2017 |
|
| $ |
|
| % |
| ||||
Sales and marketing |
| $ | 80,277 |
|
| $ | 79,958 |
|
| $ | 319 |
|
|
| — | % |
As a percent of consolidated revenue |
|
| 20 | % |
|
| 24 | % |
|
|
|
|
|
|
|
|
Sales and marketing expenses were essentially unchanged for the year ended December 31, 2018, as compared to the year ended December 31, 2017. While flat on an aggregate basis, an increase in employee compensation and related expenses of $6.8 million resulting from annual compensation adjustments and increased headcount, was offset by a decrease in stock-based compensation expense of $6.8 million.
General and administrative
|
| Year ended December 31, |
|
| Change |
| ||||||||||
(dollars in thousands) |
| 2018 |
|
| 2017 |
|
| $ |
|
| % |
| ||||
General and administrative |
| $ | 79,751 |
|
| $ | 87,979 |
|
| $ | (8,228 | ) |
|
| (9 | %) |
As a percent of consolidated revenue |
|
| 20 | % |
|
| 26 | % |
|
|
|
|
|
|
|
|
General and administrative expenses decreased by $8.2 million, or 9%, for the year ended December 31, 2018, as compared to the year ended December 31, 2017. This decrease was primarily attributable to a $25.0 million decrease in stock-based compensation expense, partially offset by an $11.0 million increase in professional service fees, of which $8.4 million is directly attributable to the Datawatch transaction, including investment banking fees incurred, a $3.0 million increase in employee compensation and related costs, a $1.2 million increase in costs from being a public company, a $0.8 million increase in rent expense, and a $0.8 increase in third party software maintenance expense.
Amortization of intangible assets
|
| Year ended December 31, |
|
| Change |
| ||||||||||
| 2018 |
|
| 2017 |
|
| $ |
|
| % |
| |||||
Amortization of intangible assets |
| $ | 7,739 |
|
| $ | 5,448 |
|
| $ | 2,291 |
|
|
| 42 | % |
As a percent of consolidated revenue |
|
| 2 | % |
|
| 2 | % |
|
|
|
|
|
|
|
|
Amortization of intangible assets increased by $2.3 million, or 42%, for the year ended December 31, 2018, as compared to the year ended December 31, 2017. This was attributable to an increase in the amortization of developed technology in the current year period as a result of completed acquisitions in 2017 and 2018.
55
| Year ended December 31, |
|
| Change |
| |||||||||||
(dollars in thousands) |
| 2018 |
|
| 2017 |
|
| $ |
|
| % |
| ||||
Other operating income |
| $ | (9,597 | ) |
| $ | (6,620 | ) |
| $ | 2,977 |
|
|
| 45 | % |
As a percent of consolidated revenue |
|
| (2 | %) |
|
| (2 | %) |
|
|
|
|
|
|
|
|
Other operating income increased by $3.0 million, or 45%, for the year ended December 31, 2018, as compared to the year ended December 31, 2017. The increase is attributable to a gain on the sale of a building for $4.4 million and an increase in grant income of $1.6 million in the current year. These increases were partially offset by impairment charges for guaranteed royalty expense of $2.2 million related to our WEYV business, and impairment of trade names for $0.6 million as a result of rebranding certain products.
Interest expense
|
| Year ended December 31, |
|
| Change |
| ||||||||||
| 2018 |
|
| 2017 |
|
| $ |
|
| % |
| |||||
Interest expense |
| $ | 200 |
|
| $ | 2,160 |
|
| $ | (1,960 | ) |
|
| (91 | %) |
As a percent of consolidated revenue |
|
| — | % |
|
| 1 | % |
|
|
|
|
|
|
|
|
Interest expense decreased by $2.0 million for the year ended December 31, 2018, as compared to the year ended December 31, 2017. The decrease in interest costs was due to the repayment of all outstanding balance on our prior term loan and line of credit with IPO proceeds in the fourth quarter of 2017.
Other (income) expense, net
|
| Year ended December 31, |
|
| Change |
| ||||||||||
| 2018 |
|
| 2017 |
|
| $ |
|
| % |
| |||||
Other (income) expense, net |
| $ | (2,580 | ) |
| $ | 994 |
|
| $ | (3,574 | ) |
|
| (360 | %) |
As a percent of consolidated revenue |
|
| (1 | %) |
|
| — | % |
|
|
|
|
|
|
|
|
Other (income) expense, net increased by $3.6 million for the year ended December 31, 2018, as compared to the year ended December 31, 2017. This increase was due to fluctuations in the United States dollar relative to other functional currencies during the year ended December 31, 2018, as compared to the prior year, coupled with an increase in interest income of $1.7 million in 2018.
Income tax expense
|
| Year ended December 31, |
|
| Change |
| ||||||||||
(dollars in thousands) |
| 2018 |
|
| 2017 |
|
| $ |
|
| % |
| ||||
Income tax expense |
| $ | 13,309 |
|
| $ | 62,996 |
|
| $ | (49,687 | ) |
|
| (79 | %) |
Income tax expense decreased by $49.7 million for the year ended December 31, 2018, as compared to the year ended December 31, 2017. The decrease in the current year tax expense is primarily the result of the following non-recurring items recorded in 2017: (1) $47.0 million of tax expense related to the recording of a valuation allowance on the U.S. deferred tax assets, (2) $15.4 million of tax expense due to the remeasurement of net deferred tax assets and liabilities as part of the Tax Act, (3) $8.8 million of tax expense due to nondeductible stock-based compensation, (4) $4.2 million of tax expense due to the one-time transition tax, and (5) $1.0 million in foreign income taxes at rates other than the federal statutory rate. These decreases are partially offset by a $63.4 million increase in pre-tax income in the current year. See Note 14 in the Notes to consolidated financial statements in Item 15, Part IV of this Annual Report on Form 10-K.
56
Years ended December 31, 2017 and 2016
Revenue
Total revenue increased by $20.1 million, or 6%, for the year ended December 31, 2017, as compared to the year ended December 31, 2016. This increase was primarily attributable to an increase in subscription and software revenue.
Software segment
Software
Year ended December 31, | Change |
| Year ended December 31, |
|
| Change |
| |||||||||||||||||||||||||
(dollars in thousands) | 2017 | 2016 | $ | % |
| 2017 |
|
| 2016 |
|
| $ |
|
| % |
| ||||||||||||||||
Software revenue | $ | 244,817 | $ | 223,818 | $ | 20,999 | 9% |
| $ | 244,817 |
|
| $ | 223,818 |
|
| $ | 20,999 |
|
|
| 9 | % | |||||||||
As a percent of software segment revenue | 87% | 86% |
|
| 87 | % |
|
| 86 | % |
|
|
|
|
|
|
|
| ||||||||||||||
As a percent of consolidated revenue | 73% | 71% |
|
| 73 | % |
|
| 71 | % |
|
|
|
|
|
|
|
|
The 9% increase in our software revenue for the year ended December 31, 2017, as compared to the year ended December 31, 2016, was primarily the result of an expansion in the number of units licensed by our existing customers under renewed software license agreements and, to a lesser extent, licensing of units to new customers pursuant to new software license agreements. This increase in software revenue occurred across all regions with the largest increase derived from Europe.
Software related services
Year ended December 31, | Change |
| Year ended December 31, |
|
| Change |
| |||||||||||||||||||||||||
(dollars in thousands) | 2017 | 2016 | $ | % |
| 2017 |
|
| 2016 |
|
| $ |
|
| % |
| ||||||||||||||||
Software related services revenue | $ | 35,397 | $ | 35,770 | $ | (373 | ) | (1% | ) |
| $ | 35,397 |
|
| $ | 35,770 |
|
| $ | (373 | ) |
|
| (1 | %) | |||||||
As a percent of software segment revenue | 13% | 14% |
|
| 13 | % |
|
| 14 | % |
|
|
|
|
|
|
|
| ||||||||||||||
As a percent of consolidated revenue | 11% | 11% |
|
| 11 | % |
|
| 11 | % |
|
|
|
|
|
|
|
|
Software related services revenue decreased $0.4 million, or 1%, for the year ended December 31, 2017, as compared to the year ended December 31, 2016.
Client engineering services segment
Year ended December 31, | Change |
| Year ended December 31, |
|
| Change |
| |||||||||||||||||||||||||
(dollars in thousands) | 2017 | 2016 | $ | % |
| 2017 |
|
| 2016 |
|
| $ |
|
| % |
| ||||||||||||||||
Client engineering services revenue | $ | 46,510 | $ | 47,702 | $ | (1,192 | ) | (3% | ) |
| $ | 46,510 |
|
| $ | 47,702 |
|
| $ | (1,192 | ) |
|
| (3 | %) | |||||||
As a percent of consolidated revenue | 14% | 15% |
|
| 14 | % |
|
| 15 | % |
|
|
|
|
|
|
|
|
CES revenue decreased $1.2 million, or 3%, for the year ended December 31, 2017, as compared to the year ended December 31, 2016. CES business revenue decreased as we filled fewer open positions.
Other
Year ended December 31, | Change |
| Year ended December 31, |
|
| Change |
| |||||||||||||||||||||||||
(dollars in thousands) | 2017 | 2016 | $ | % |
| 2017 |
|
| 2016 |
|
| $ |
|
| % |
| ||||||||||||||||
Other revenue | $ | 6,609 | $ | 5,950 | $ | 659 | 11% |
| $ | 6,609 |
|
| $ | 5,950 |
|
| $ | 659 |
|
|
| 11 | % | |||||||||
As a percent of consolidated revenue | 2% | 2% |
|
| 2 | % |
|
| 2 | % |
|
|
|
|
|
|
|
|
The 11% increase in other revenue for the year ended December 31, 2017, as compared to the year ended December 31, 2016, was primarily due to increased sales and royalties from toggled, our LED lighting technology.business.
57
Software segment
Software
Year ended December 31, | Change |
| Year ended December 31, |
|
| Change |
| |||||||||||||||||||||||||
(dollars in thousands) | 2017 | 2016 | $ | % |
| 2017 |
|
| 2016 |
|
| $ |
|
| % |
| ||||||||||||||||
Cost of software revenue | $ | 36,360 | $ | 31,962 | $ | 4,398 | 14% |
| $ | 36,360 |
|
| $ | 31,962 |
|
| $ | 4,398 |
|
|
| 14 | % | |||||||||
As a percent of software revenue | 15% | 14% |
|
| 15 | % |
|
| 14 | % |
|
|
|
|
|
|
|
| ||||||||||||||
As a percent of consolidated revenue | 11% | 10% |
|
| 11 | % |
|
| 10 | % |
|
|
|
|
|
|
|
|
Cost of software revenue increased by $4.4 million, or 14%, for the year ended December 31, 2017, as compared to the year ended December 31, 2016. This increase was primarily attributable to higher employee costs of $2.3 million as a result of annual compensation adjustments and the addition of new personnel in connection with acquisitions, an increase in travel expense of $0.6 million, increased stock-based compensation expense of $0.3 million and increased third party royalty costs of $0.7 million for software programs.
Software related services
Year ended December 31, | Change |
| Year ended December 31, |
|
| Change |
| |||||||||||||||||||||||||
(dollars in thousands) | 2017 | 2016 | $ | % |
| 2017 |
|
| 2016 |
|
| $ |
|
| % |
| ||||||||||||||||
Cost of software related services revenue | $ | 26,888 | $ | 27,653 | $ | (765 | ) | (3% | ) |
| $ | 26,888 |
|
| $ | 27,653 |
|
| $ | (765 | ) |
|
| (3 | %) | |||||||
As a percent of software related services revenue | 76% | 77% |
|
| 76 | % |
|
| 77 | % |
|
|
|
|
|
|
|
| ||||||||||||||
As a percent of consolidated revenue | 8% | 9% |
|
| 8 | % |
|
| 9 | % |
|
|
|
|
|
|
|
|
Cost of software related services revenue decreased by $0.8 million, or 3%, for the year ended December 31, 2017, as compared to the year ended December 31, 2016, primarily related to a decrease in software related services revenue.
Client engineering services segment
Year ended December 31, | Change |
| Year ended December 31, |
|
| Change |
| |||||||||||||||||||||||||
(dollars in thousands) | 2017 | 2016 | $ | % |
| 2017 |
|
| 2016 |
|
| $ |
|
| % |
| ||||||||||||||||
Cost of client engineering services revenue | $ | 38,131 | $ | 38,106 | $ | 25 | — % |
| $ | 38,131 |
|
| $ | 38,106 |
|
| $ | 25 |
|
|
| — | % | |||||||||
As a percent of client engineering services segment revenue | 82% | 80% |
|
| 82 | % |
|
| 80 | % |
|
|
|
|
|
|
|
| ||||||||||||||
As a percent of consolidated revenue | 11% | 12% |
|
| 11 | % |
|
| 12 | % |
|
|
|
|
|
|
|
|
Cost of CES revenue was consistent for the year ended December 31, 2017, as compared to the year ended December 31, 2016. However, margins in our CES business were lower in 2017 due to increased salary costs relative to customer approved bill rates for certain positions.
Other
Year ended December 31, | Change |
| Year ended December 31, |
|
| Change |
| |||||||||||||||||||||||||
(dollars in thousands) | 2017 | 2016 | $ | % |
| 2017 |
|
| 2016 |
|
| $ |
|
| % |
| ||||||||||||||||
Cost of other revenue | $ | 5,212 | $ | 4,879 | $ | 333 | 7% |
| $ | 5,212 |
|
| $ | 4,879 |
|
| $ | 333 |
|
|
| 7 | % | |||||||||
As a percent of other revenue | 79% | 82% |
|
| 79 | % |
|
| 82 | % |
|
|
|
|
|
|
|
| ||||||||||||||
As a percent of consolidated revenue | 2% | 2% |
|
| 2 | % |
|
| 2 | % |
|
|
|
|
|
|
|
|
Cost of other revenue increased by $0.3 million, or 7%, for the year ended December 31, 2017, as compared to the year ended December 31, 2016. This was due to an increase in third party royalty expense associated with launch of WEYV, partially offset by a decrease in manufacturing costs from negotiated reductions in pricing from suppliers for the LED lighting business.
Gross profit58
Year ended December 31, | Change | |||||||||||||||
(dollars in thousands) | 2017 | 2016 | $ | % | ||||||||||||
Gross profit | $ | 226,742 | $ | 210,640 | $ | 16,102 | 8% | |||||||||
As a percent of consolidated revenue | 68% | 67% |
| Year ended December 31, |
|
| Change |
| |||||||||||
(dollars in thousands) |
| 2017 |
|
| 2016 |
|
| $ |
|
| % |
| ||||
Gross profit |
| $ | 226,742 |
|
| $ | 210,640 |
|
| $ | 16,102 |
|
|
| 8 | % |
As a percent of consolidated revenue |
|
| 68 | % |
|
| 67 | % |
|
|
|
|
|
|
|
|
Gross profit increased by $16.1 million, or 8%, for the year ended December 31, 2017, as compared to the year ended December 31, 2016. This increase in gross profit was primarily attributable to the growth of our software revenue of $21.0 million driven by the expansion in the number of units purchased by our existing customers and, to a lesser extent, sales to new customers. The increase in revenue was partially offset by the increase in cost of revenue as described above.
Operating expenses
Operating expenses, as discussed below, support all products and services that we provide to our customers and, as a result, they are reported and discussed here in an aggregate total.
Research and development
Year ended December 31, | Change |
| Year ended December 31, |
|
| Change |
| |||||||||||||||||||||||||
(dollars in thousands) | 2017 | 2016 | $ | % |
| 2017 |
|
| 2016 |
|
| $ |
|
| % |
| ||||||||||||||||
Research and development | $ | 93,234 | $ | 71,325 | $ | 21,909 | 31% |
| $ | 93,234 |
|
| $ | 71,325 |
|
| $ | 21,909 |
|
|
| 31 | % | |||||||||
As a percent of consolidated revenue | 28% | 23% |
|
| 28 | % |
|
| 23 | % |
|
|
|
|
|
|
|
|
Research and development expenses increased by $21.9 million, or 31%, for the year ended December 31, 2017, as compared to the year ended December 31, 2016. This increase was attributable to higher employee costs of $9.9 million resulting from an increase in our headcount, primarily due to acquisitions and annual compensation adjustments. In addition, stock-based compensation expense increased by $11.2 million for the year ended December 31, 2017, as compared to the year ended December 31, 2016, due to the increased value of our shares of common stock. Excluding the impact of stock-based compensation, research and development expenses increased by 15%, from $70.0 million to $80.7 million for the years ended December 31, 2016 and 2017, respectively.
Sales and marketing
Year ended December 31, | Change |
| Year ended December 31, |
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| Change |
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(dollars in thousands) | 2017 | 2016 | $ | % |
| 2017 |
|
| 2016 |
|
| $ |
|
| % |
| ||||||||||||||||
Sales and marketing | $ | 79,958 | $ | 66,086 | $ | 13,872 | 21% |
| $ | 79,958 |
|
| $ | 66,086 |
|
| $ | 13,872 |
|
|
| 21 | % | |||||||||
As a percent of consolidated revenue | 24% | 21% |
|
| 24 | % |
|
| 21 | % |
|
|
|
|
|
|
|
|
Sales and marketing expenses increased by $13.9 million, or 21%, for the year ended December 31, 2017, as compared to the year ended December 31, 2016. Employee compensation costs increased $4.4 million, sales and marketing campaigns to support our direct sales force increased $1.0 million, and travel and trade show related expense increased $1.4 million during the year ended December 31, 2017, as compared to the prior year. In addition, stock-based compensation expense increased by $6.9 million for the year ended December 31, 2017, as compared to the year ended December 31, 2016, due to the increased value of our shares of common stock. Excluding the impact of stock-based compensation, sales and marketing expenses increased by 11%, from $65.3 million to $72.3 million for the years ended December 31, 2016 and 2017, respectively.
General and administrative
Year ended December 31, | Change |
| Year ended December 31, |
|
| Change |
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(dollars in thousands) | 2017 | 2016 | $ | % |
| 2017 |
|
| 2016 |
|
| $ |
|
| % |
| ||||||||||||||||
General and administrative | $ | 87,979 | $ | 57,202 | $ | 30,777 | 54% |
| $ | 87,979 |
|
| $ | 57,202 |
|
| $ | 30,777 |
|
|
| 54 | % | |||||||||
As a percent of consolidated revenue | 26% | 18% |
|
| 26 | % |
|
| 18 | % |
|
|
|
|
|
|
|
|
General and administrative expenses increased by $30.8 million, or 54%, for the year ended December 31, 2017, as compared to the year ended December 31, 2016. Employee compensation cost increased $2.7 million, software maintenance expense increased $1.3
59
million, rent expense increased $1.3 million from new leases and facilities acquired, and professional services increased $1.2 million primarily due to additional costs of being a public company during the year ended December 31, 2017, as compared to the prior year. In addition, stock-based compensation expense increased by $23.7 million for the year ended December 31, 2017, as compared to the year ended December 31, 2016, due to the increased value of our shares of common stock. Excluding the impact of stock-based compensation, general and administrative expenses increased by 13%, from $54.2 million to $61.3 million for the years ended December 31, 2016 and 2017, respectively.
Amortization of intangible assets
Year ended December 31, | Change |
| Year ended December 31, |
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| Change |
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(dollars in thousands) | 2017 | 2016 | $ | % |
| 2017 |
|
| 2016 |
|
| $ |
|
| % |
| ||||||||||||||||
Amortization of intangible assets | $ | 5,448 | $ | 3,322 | $ | 2,126 | 64% |
| $ | 5,448 |
|
| $ | 3,322 |
|
| $ | 2,126 |
|
|
| 64 | % | |||||||||
As a percent of consolidated revenue | 2% | 1% |
|
| 2 | % |
|
| 1 | % |
|
|
|
|
|
|
|
|
Amortization of intangible assets increased by $2.1 million, or 64%, for the year ended December 31, 2017, as compared to the year ended December 31, 2016. This increase was attributable to the amortization of intangible assets associated with acquisitions completed during the year ended December 31, 2017, and a full year of amortization related to acquisitions completed during the year ended December 31, 2016.
Other operating income
Year ended December 31, | Change |
| Year ended December 31, |
|
| Change |
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(dollars in thousands) | 2017 | 2016 | $ | % |
| 2017 |
|
| 2016 |
|
| $ |
|
| % |
| ||||||||||||||||
Other operating income | $ | (6,620 | ) | $ | (2,742 | ) | $ | 3,878 | 141% |
| $ | (6,620 | ) |
| $ | (2,742 | ) |
| $ | 3,878 |
|
|
| 141 | % | |||||||
As a percent of consolidated revenue | 2% | 1% |
|
| 2 | % |
|
| 1 | % |
|
|
|
|
|
|
|
|
Other operating income increased by $3.9 million, or 141%, for the year ended December 31, 2017, as compared to the year ended December 31, 2016. This increase was due to anon-recurring adjustment of $2.0 million for a change in estimated legal expenses during the year ended December 31, 2017, and an increase in government subsidies, primarily in France, in the form of grant income, including refundable R&D credits.
Interest expense
Year ended December 31, | Change |
| Year ended December 31, |
|
| Change |
| |||||||||||||||||||||||||
(dollars in thousands) | 2017 | 2016 | $ | % |
| 2017 |
|
| 2016 |
|
| $ |
|
| % |
| ||||||||||||||||
Interest expense | $ | 2,160 | $ | 2,265 | $ | (105 | ) | (5% | ) |
| $ | 2,160 |
|
| $ | 2,265 |
|
| $ | (105 | ) |
|
| (5 | %) | |||||||
As a percent of consolidated revenue | 1% | 1% |
|
| 1 | % |
|
| 1 | % |
|
|
|
|
|
|
|
|
Interest expense decreased by $0.1 million, or 5%, for the year ended December 31, 2017, as compared to the year ended December 31, 2016. The decrease in interest costs was due to paying off the term loan andline-of-credit with IPO proceeds in the fourth quarter of 2017.
Other (income) expense, (income), net
Year ended December 31, | Change |
| Year ended December 31, |
|
| Change | ||||||||||||||||||||||||
(dollars in thousands) | 2017 | 2016 | $ | % |
| 2017 |
|
| 2016 |
|
| $ |
|
| % | |||||||||||||||
Other expense (income), net | $ | 994 | $ | (520 | ) | $ | 1,514 | NM | ||||||||||||||||||||||
Other (income) expense, net |
| $ | 994 |
|
| $ | (520 | ) |
| $ | 1,514 |
|
| NM | ||||||||||||||||
As a percent of consolidated revenue | — % | — % |
|
| — | % |
|
| — | % |
|
|
|
|
|
|
Other (income) expense, (income), net increased by $1.5 million for the year ended December 31, 2017, as compared to the year ended December 31, 2016. This increase was due to fluctuations in the United States dollar relative to other functional currencies during the year ended December 31, 2017, as compared to the prior year.
60
Year ended December 31, | Change |
| Year ended December 31, |
|
| Change | ||||||||||||||||||||||||
(dollars in thousands) | 2017 | 2016 | $ | % |
| 2017 |
|
| 2016 |
|
| $ |
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| % | |||||||||||||||
Income tax expense | $ | 62,996 | $ | 3,539 | $ | 59,457 | NM |
| $ | 62,996 |
|
| $ | 3,539 |
|
| $ | 59,457 |
|
| NM |
Income tax expense increased by $59.5 million for the year ended December 31, 2017, as compared to the year ended December 31, 2016. This increase is primarily due to a $47.0 million increase in tax expense related to the recording of a valuation allowance on the U.S. deferred tax assets, a $15.4 million increase due to the remeasurement of net deferred tax assets and liabilities as part of the Tax Act, an $8.8 million increase due to nondeductible stock-based compensation, a $4.2 million increase due to theone-time transition tax and a $1.0 million increase in foreign income taxes at rates other than the federal statutory rate, partially offset by a $17.5 million decrease inpre-tax income mainly in the United States. See Note 1314 in the Notes to consolidated financial statements in Item 15, Part IV of this Annual Report on Form10-K.
Net (loss) income
Year ended December 31, | Change | |||||||||||||||
(dollars in thousands) | 2017 | 2016 | $ | % | ||||||||||||
Net (loss) income | $ | (99,407 | ) | $ | 10,163 | $ | (109,570 | ) | NM |
Net income decreased by $109.6 million resulting in a net loss of $99.4 million for the year ended December 31, 2017, as compared to net income of $10.2 million for the year ended December 31, 2016. This decrease in net income was primarily attributable to a valuation allowance on our deferred tax assets of $47.4 million, increased stock-based compensation expense of $42.1 million and increased cost of revenue which related to higher employee related costs and royalty share payments to our partners for the year ended December 31, 2017. Operating expenses increased primarily due to annual employee cost adjustments, employees who joined us in connection with acquisitions in 2017, and a full year of compensation expense for employees who joined in connection with acquisitions completed in 2016. These increased costs are partially offset by increased revenue in the Software segment.
Years ended December 31, 2016 and 2015
Revenue
Total revenue increased by $19.1 million, or 6%, for the year ended December 31, 2016, as compared to the year ended December 31, 2015. This increase was primarily attributable to an increase in software revenue of $18.3 million, or 9%, for the same period, partially offset by a decrease in software related services revenue of $1.5 million, or 4%. Our CES revenue also increased by $2.6 million, or 6% for the year ended December 31, 2016, as compared to the corresponding prior year.
Software segment
Software
Year ended December 31, | Change | |||||||||||||||
(dollars in thousands) | 2016 | 2015 | $ | % | ||||||||||||
Software revenue | $ | 223,818 | $ | 205,567 | $ | 18,251 | 9% | |||||||||
As a percent of software segment revenue | 86% | 85% | ||||||||||||||
As a percent of consolidated revenue | 71% | 70% |
The 9% increase in our software revenue for the year ended December 31, 2016, as compared to the year ended December 31, 2015, was primarily the result of an expansion in the number of units licensed by our existing customers under renewed software license agreements and, to a lesser extent, licensing of units to new customers pursuant to new software license agreements. This increase in software revenue occurred across the Americas, EMEA and APAC.
Software related services
Year ended December 31, | Change | |||||||||||||||
(dollars in thousands) | 2016 | 2015 | $ | % | ||||||||||||
Software related services revenue | $ | 35,770 | $ | 37,294 | $ | (1,524 | ) | (4% | ) | |||||||
As a percent of software segment revenue | 14% | 15% | ||||||||||||||
As a percent of consolidated revenue | 11% | 13% |
The 4% decrease in our software related services revenue for the year ended December 31, 2016, as compared to the year ended December 31, 2015, was primarily the result of our continued focus on higher-value projects aligned with our software.
Client engineering services segment
Year ended December 31, | Change | |||||||||||||||
(dollars in thousands) | 2016 | 2015 | $ | % | ||||||||||||
Client engineering services revenue | $ | 47,702 | $ | 45,075 | $ | 2,627 | 6% | |||||||||
As a percent of consolidated revenue | 15% | 15% |
The 6% increase in our CES revenue for the year ended December 31, 2016, as compared to the year ended December 31, 2015, was primarily due to an increase in demand for our consulting services and corresponding higher billable headcount placements during the period. Our headcount in the CES business increased 4% in 2016, as compared to the prior year.
Other
Year ended December 31, | Change | |||||||||||||||
(dollars in thousands) | 2016 | 2015 | $ | % | ||||||||||||
Other revenue | $ | 5,950 | $ | 6,193 | $ | (243 | ) | (4% | ) | |||||||
As a percent of consolidated revenue | 2% | 2% |
Other revenue for the year ended December 31, 2015, included $2.0 million of revenue related to royalties from our licensing of intellectual property technology that did not reoccur in the year ended December 31, 2016. Excluding the impact of these royalties, our other revenue increased 42% for the year ended December 31, 2016, as compared to the prior year. This increase in our other revenue was primarily due to an increase in demand for LED lighting and increased royalties received from licensing our technology to third party manufacturers and resellers.
Cost of revenue
Software segment
Software
Year ended December 31, | Change | |||||||||||||||
(dollars in thousands) | 2016 | 2015 | $ | % | ||||||||||||
Cost of software revenue | $ | 31,962 | $ | 27,406 | $ | 4,556 | 17% | |||||||||
As a percent of software revenue | 14% | 13% | ||||||||||||||
As a percent of consolidated revenue | 10% | 9% |
Cost of software revenue increased by $4.6��million, or 17%, for the year ended December 31, 2016, as compared to the year ended December 31, 2015, primarily attributable to a $3.3 million increase in employee compensation costs, and increased third party royalty costs of $0.7 million for software programs we include in our APA program.
Software related services
Year ended December 31, | Change | |||||||||||||||
(dollars in thousands) | 2016 | 2015 | $ | % | ||||||||||||
Cost of software related services revenue | $ | 27,653 | $ | 30,079 | $ | (2,426 | ) | (8% | ) | |||||||
As a percent of software related services revenue | 77% | 81% | ||||||||||||||
As a percent of consolidated revenue | 9% | 10% |
Cost of software related services revenue decreased by $2.4 million, or 8%, for the year ended December 31, 2016, as compared to the year ended December 31, 2015, primarily related to a reorganization of personnel and the corresponding decrease in software related services revenue and our continued focus on higher-value projects aligned with our software.
Client engineering services segment
Year ended December 31, | Change | |||||||||||||||
(dollars in thousands) | 2016 | 2015 | $ | % | ||||||||||||
Cost of client engineering services revenue | $ | 38,106 | $ | 36,081 | $ | 2,025 | 6% | |||||||||
As a percent of client engineering services segment revenue | 80% | 80% | ||||||||||||||
As a percent of consolidated revenue | 12% | 12% |
Cost of CES revenue increased by $2.0 million, or 6%, for the year ended December 31, 2016, as compared to the year ended December 31, 2015. This increase was primarily due to compensation expenses associated with a larger number of placements to meet customer demand.
Other
Year ended December 31, | Change | |||||||||||||||
(dollars in thousands) | 2016 | 2015 | $ | % | ||||||||||||
Cost of other revenue | $ | 4,879 | $ | 5,642 | $ | (763 | ) | (14% | ) | |||||||
As a percent of other revenue | 82% | 91% | ||||||||||||||
As a percent of consolidated revenue | 2% | 2% |
Cost of other revenue decreased by $0.8 million, or 14%, for the year ended December 31, 2016, as compared to the year ended December 31, 2015. This decrease was primarily due to our introduction of new products that have a lower cost of manufacturing.
Gross profit
Year ended December 31, | Change | |||||||||||||||
(dollars in thousands) | 2016 | 2015 | $ | % | ||||||||||||
Gross profit | $ | 210,640 | $ | 194,921 | $ | 15,719 | 8% | |||||||||
As a percent of consolidated revenue | 67% | 66% |
Gross profit increased by $15.7 million, or 8%, for the year ended December 31, 2016, as compared to the year ended December 31, 2015. This increase in gross profit was primarily attributable to the growth of our software revenue of $18.3 million driven by the expansion in the number of units purchased by our existing customers and, to a lesser extent, sales to new customers. Gross profit margin increased to 67% in the year ended December 31, 2016, from 66% in the year ended December 31, 2015.
Operating expenses
Operating expenses, as discussed below, support all products and services that we provide to our customers and, as a result, they are reported and discussed here in an aggregate total.
Research and development
Year ended December 31, | Change | |||||||||||||||
(dollars in thousands) | 2016 | 2015 | $ | % | ||||||||||||
Research and development | $ | 71,325 | $ | 62,777 | $ | 8,548 | 14% | |||||||||
As a percent of consolidated revenue | 23% | 21% |
Research and development expenses increased by $8.5 million, or 14%, for the year ended December 31, 2016, as compared to the year ended December 31, 2015. This increase was attributable to an increase in employee costs of $6.2 million resulting from an increase in our headcount in 2016, primarily due to acquisitions and annual compensation adjustments. In addition, the share-based compensation expense component of our research and development expense increased during the year ended December 31, 2016, by $1.2 million as compared to the corresponding prior year primarily due to the increased value of our shares of common stock. Excluding the impact of stock-based compensation, research and development costs increased by 12% from $62.6 million to $70.0 million for the years ended December 31, 2015 and 2016, respectively.
Sales and marketing
Year ended December 31, | Change | |||||||||||||||
(dollars in thousands) | 2016 | 2015 | $ | % | ||||||||||||
Sales and marketing | $ | 66,086 | $ | 63,080 | $ | 3,006 | 5% | |||||||||
As a percent of consolidated revenue | 21% | 21% |
Sales and marketing expenses increased by $3.0 million, or 5%, for the year ended December 31, 2016, as compared to the year ended December 31, 2015. This increase was primarily attributable to a $2.4 million increase in employee compensation costs, including stock-based compensation and a $0.7 million increase in our sales and marketing campaigns to support our direct sales force.
General and administrative
Year ended December 31, | Change | |||||||||||||||
(dollars in thousands) | 2016 | 2015 | $ | % | ||||||||||||
General and administrative | $ | 57,202 | $ | 54,069 | $ | 3,133 | 6% | |||||||||
As a percent of consolidated revenue | 18% | 18% |
General and administrative expenses increased by $3.1 million, or 6%, for the year ended December 31, 2016, as compared to the year ended December 31, 2015. This increase was primarily attributable to a $2.7 million increase in share-based compensation expense. These expenses were partially offset by decreases in professional services expenses primarily related to a decline in legal costs for outstanding legal matters. Excluding the impact of stock-based compensation, general and administrative expenses increased by 1%, from $53.8 million to $54.2 million for the years ended December 31, 2015 and 2016, respectively.
Amortization of intangible assets
Year ended December 31, | Change | |||||||||||||||
(dollars in thousands) | 2016 | 2015 | $ | % | ||||||||||||
Amortization of intangible assets | $ | 3,322 | $ | 2,624 | $ | 698 | 27% | |||||||||
As a percent of consolidated revenue | 1% | 1% |
Amortization of intangible assets increased by $0.7 million, or 27%, for the year ended December 31, 2016, as compared to the year ended December 31, 2015. This increase was attributable to the amortization of intangible assets associated with acquisitions completed during the year ended December 31, 2016, and a full year of amortization related to acquisitions completed during the year ended December 31, 2015.
Other operating income
Year ended December 31, | Change | |||||||||||||||
(dollars in thousands) | 2016 | 2015 | $ | % | ||||||||||||
Other operating income | $ | (2,742) | $ | (2,576) | $ | 166 | 6% | |||||||||
As a percent of consolidated revenue | (1)% | (1)% |
Other operating income increased by $0.2 million, or 6%, for the year ended December 31, 2016, as compared to the year ended December 31, 2015. This increase was primarily attributable to an increase in government subsidies, primarily in France, in the form of grant income associated with certain of our research and development activities.
Interest expense
Year ended December 31, | Change | |||||||||||||||
(dollars in thousands) | 2016 | 2015 | $ | % | ||||||||||||
Interest expense | $ | 2,265 | $ | 2,416 | $ | (151 | ) | (6% | ) | |||||||
As a percent of consolidated revenue | 1% | 1% |
Interest expense decreased by $0.2 million, or 6%, for the year ended December 31, 2016, as compared to the year ended December 31, 2015. This decrease was due to a reduction in our interest expense related to our credit agreement as a result of a partial debt repayment and the use of lower cost short-term borrowing contracts related to our line of credit borrowings.
Other expense (income), net
Year ended December 31, | Change | |||||||||||||||
(dollars in thousands) | 2016 | 2015 | $ | % | ||||||||||||
Other expense (income), net | $ | (520 | ) | $ | 782 | $ | (1,302 | ) | NM | |||||||
As a percent of consolidated revenue | — % | — % |
Other expense (income), net decreased by $1.3 million for the year ended December 31, 2016, as compared to the year ended December 31, 2015. This decrease was due to fluctuations in the United States dollar relative to other functional currencies during the year ended December 31, 2016, compared to the prior year.
Income tax expense
Year ended December 31, | Change | |||||||||||||||
(dollars in thousands) | 2016 | 2015 | $ | % | ||||||||||||
Income tax expense | $ | 3,539 | $ | 818 | $ | 2,721 | 333% |
Income tax expense increased by $2.7 million for the year ended December 31, 2016, as compared to the year ended December 31, 2015. This increase was primarily due to a $1.8 million increase in tax expense related to nondeductible stock-based compensation, a $0.8 million increase in the expense related to an increase inpre-tax income related to foreign operations, partially offset by certain tax deductions and credits and foreign income taxes at rates other than the federal statutory rates. See Note 13 in the Notes to consolidated financial statements in Item 15, Part IV of this Annual Report on Form10-K.
Net income
Year ended December 31, | Change | |||||||||||||||
(dollars in thousands) | 2016 | 2015 | $ | % | ||||||||||||
Net income | $ | 10,163 | $ | 10,931 | $ | (768 | ) | (7% | ) |
Net income decreased by $0.8 million, or 7%, for the year ended December 31, 2016, as compared to the year ended December 31, 2015. This decrease in Net income was primarily attributable to increased stock-based compensation expense of $4.5 million and increased cost of revenue which related to higher employee related costs and royalty share payments to our partners for the year ended December 31, 2016. Operating expenses increased primarily due to annual employee cost adjustments and for those employees who joined us in connection with acquisitions in 2016, and a full year of compensation expense related to those employees who joined in connection with acquisitions completed in 2015. These increased costs are mostly offset by increased revenue in all segments with the largest increase in the Software segment.
Non-GAAP financial measures
In analyzing and planning for our business, we supplement our use of GAAP financial measures withnon-GAAP financial measures, including Billings as a liquidity measure, Adjusted EBITDA as a performance measure and Free Cash Flow as a liquidity measure.
Billings.Billings consists of our total revenue plus the change in our deferred revenue, in a givenexcluding deferred revenue from acquisitions during the period. AsGiven that we generally bill our customers at the time of sale, but typically recognize a majorityportion of the related revenue ratably over time, management believes that Billings is a meaningful way to measure and monitor our ability to provide our business with the working capital generated by upfront payments from our customers. While we believe that billingsBillings provides valuable insight into the cash that will be generated from sales of our software and services, this metric may vary fromperiod-to-period for a number of reasons including the impact of changes in foreign currency exchange rates and the potential impact of acquisitions. See Part II, Item 6, Selected Financial Data for information regarding the limitations of using Billings as a financial measure and for a reconciliation of Billings to revenue, the most directly comparable financial measure calculated in accordance with GAAP.
Our Billings were as follows:
Year ended December 31, | 2016 to 2017 Change | 2015 to 2016 Change |
| Year ended December 31, |
|
| 2017 to 2018 Change |
|
| 2016 to 2017 Change |
| |||||||||||||||||||||||||||||
(in thousands, except percentages) | 2017 | 2016 | 2015 | % | % |
| 2018 |
|
| 2017 |
|
| 2016 |
|
| % |
|
| % |
| ||||||||||||||||||||
Billings | $ | 359,166 | $ | 320,653 | $ | 297,358 | 12% | 8% |
| $ | 401,913 |
|
| $ | 357,212 |
|
| $ | 320,299 |
|
|
| 13 | % |
|
| 12 | % |
Billings increased by $38.5$44.7 million, or 13%, for the year ended December 31, 2018, as compared to the year ended December 31, 2017. This increase in Billings was attributable to an 18% increase in Software segment billings.
Billings increased by $36.9 million, or 12%, for the year ended December 31, 2017, as compared to the year ended December 31, 2016. This increase in Billings was attributable to a 15% increase in Software segment billings equaling $39.0 million.billings.
Billings increased by $23.3 million, or 8%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015. This increase in Billings was primarily attributable to an 8% increase in Software segment billings equaling $20.9 million, with the remaining increase in the CES segment and our other businesses.
Adjusted EBITDA. We define Adjusted EBITDA as net income (loss) income adjusted for income tax expense (benefit), interest expense, interest income and other, depreciation and amortization, stock-based compensation expense, restructuring charges, asset impairment charges and other special items as determined by management. We believe that Adjusted EBITDA is a meaningful measure of performance as it is commonly utilized by us and the investment community to analyze operating performance in our industry. See Part II, Item 6, Selected Financial Data for information regarding the limitations of using Adjusted EBITDA as a financial measure and for a reconciliation of Adjusted EBITDA to net income (loss) income,, the most directly comparable financial measure calculated in accordance with GAAP.
Our Adjusted EBITDA was as follows:
Year ended December 31, | 2016 to 2017 Change | 2015 to 2016 Change |
| Year ended December 31, |
|
| 2017 to 2018 Change |
|
| 2016 to 2017 Change |
| |||||||||||||||||||||||||||||
(in thousands, except percentages) | 2017 | 2016 | 2015 | % | % |
| 2018 |
|
| 2017 |
|
| 2016 |
|
| % |
|
| % |
| ||||||||||||||||||||
Adjusted EBITDA | $ | 22,517 | $ | 30,830 | $ | 22,949 | (27)% | 34% |
| $ | 50,180 |
|
| $ | 22,517 |
|
| $ | 30,830 |
|
|
| 123 | % |
|
| (27 | %) |
Adjusted EBITDA increased by $27.7 million, or 123%, for the year ended December 31, 2018, as compared to the year ended December 31, 2017. Approximately $11.7 million is from the adoption of ASC 606. Excluding the effect of ASC 606, Adjusted
61
EBITDA increased $16.0 million. This increase in Adjusted EBITDA was primarily attributable to the increased revenue from our Software segment.
Adjusted EBITDA decreased by $8.3 million, or 27%, for the year ended December 31, 2017, as compared to the year ended December 31, 2016. This decrease in Adjusted EBITDA was primarily attributable to the Software segment. The increase in revenue was offset by the increase in operating expenses for the year ended December 31, 2017. The increase in operating expenses was primarily related to annual employee cost adjustments and increased headcount from acquisitions in 2016 and 2017.
Adjusted EBITDA increased by $7.9 million, or 34%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015. This increase in Adjusted EBITDA was primarily attributable to increases in all segments with the largest increase in the Software segment. The increase in revenue more than offset the increase in cost of revenue which related to higher employee related costs and royalty share payments to our partners for the year ended December 31, 2016. The increase in operating expenses was primarily related to annual employee cost adjustments and for those employees who joined us in connection with acquisitions in 2016 and a full year of compensation expense related to those employees who joined us in connection with acquisitions completed in 2015.
Free Cash Flow.Free Cash Flow is anon-GAAP financial measure that we calculate as cash flow provided by operating activities less capital expenditures. We believe that Free Cash Flow is useful in analyzing our ability to service and repay debt and return value directly to stockholders. See Part II, Item 6, Selected Financial Data for information regarding the limitations of using Free Cash Flow as a financial measure and for a reconciliation of Free Cash Flow to net cash provided by operating activities, the most directly comparable financial measure calculated in accordance with GAAP.
Our Free Cash Flow was as follows:
Year ended December 31, | 2016 to 2017 Change | 2015 to 2016 Change |
| Year ended December 31, |
|
| 2017 to 2018 Change |
|
| 2016 to 2017 Change |
| |||||||||||||||||||||||||||||
(in thousands, except percentages) | 2017 | 2016 | 2015 | % | % |
| 2018 |
|
| 2017 |
|
| 2016 |
|
| % |
|
| % |
| ||||||||||||||||||||
Net cash provided by operating activities | $ | 16,091 | $ | 21,385 | $ | 10,838 | (25% | ) | 97% |
| $ | 36,230 |
|
| $ | 16,091 |
|
| $ | 21,385 |
|
|
| 125 | % |
|
| (25 | %) | |||||||||||
Free Cash Flow | $ | 8,569 | $ | 11,941 | $ | 5,605 | (28% | ) | 113% |
| $ | 29,571 |
|
| $ | 8,569 |
|
| $ | 11,941 |
|
|
| 245 | % |
|
| (28 | %) |
Free Cash Flow increased by $21.0 million, or 245%, for the year ended December 31, 2018, as compared to year ended December 31, 2017. This increase in Free Cash Flow was attributable to an increase in net cash from operating activities of $20.1 million which primarily reflects an improvement in financial performance in 2018 and net changes to our working capital position.
Free Cash Flow decreased by $3.4 million, or 28%, for the year ended December 31, 2017, as compared to year ended December 31, 2016. This decrease in Free Cash Flow was attributable to a decrease in net cash from operating activities of $5.3 million, which primarily reflects a $6.0 million increase in accounts receivable, along with net changes to our working capital position.
Free Cash Flow increased by $6.3 million, or 113%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015. This increase in Free Cash Flow was primarily attributable to the increase in net cash from operating activities of $10.5 million, which was partially offset by an increase of $4.2 million in capital expenditures. Net cash from operating activities increased primarily due to higher net income, adjusted fornon-cash items and changes in working capital. The capital expenditures increase included a $4.0 million capital expenditure for the purchase of land adjacent to our corporate headquarters. Excluding this land purchase, our capital expenditures were consistent with the prior year and our Free Cash Flow would have increased by $10.3 million.
Recurring Software License Rate.A key factor to our success is our recurring software license rate which we measure through billings, primarily derived from annual renewals of our existing subscription customer agreements. We calculate our recurring software license rate for a particular period by dividing (i) the sum of software term-based license billings, software license maintenance billings, and 20% of software perpetual license billings, which we believe approximates maintenance as an element of the arrangement by (ii) the total software license billings including all term-based, maintenance, and perpetual license billings from all customers for that period. For the years ended December 31, 2018, 2017 2016 and 2015,2016, our recurring software license rate was 89%, 90%89% and 88%90%, respectively.
Liquidity and capital resources
Our principal sources of liquidity have been the net payments received from global customers using our software and services as well as our periodic draws on our credit facilities.facilities, when needed. We believe that funds generated from operations, with cash and cash equivalents and the amounts available to us to borrow under our credit facility will be sufficient to meet our anticipated cash needs for at least the next 12 months.
Revolving credit facility
On October 19,18, 2017, we entered into an amended and restated credit agreement with Altair Engineering Inc., as borrower, JPMorgan Chase Bank, N.A., as the lead arranger, sole book runner, the administrative agent, swingline lender and letter of credit issuer, and a syndicate of lenders (“2017 Credit Agreement”). The 2017 Credit Agreement became effective on satisfaction of certain conditions including the closing of the Company’s IPO and providesprovided for an initial aggregate commitment amount of $100.0 million, with a sublimit for the issuance of letters of credit of up to $5.0 million and a sublimit for swingline loans of up to $5.0 million. The 2017 Credit Agreement matures on October 18, 2022.
The 2017 Credit Agreement provides for an accordion feature that allows us to request thatexpand the aggregate commitments undersize of the 2017 Credit Agreement be increasedrevolving line of credit by up toan additional $50.0 million for a total of $150.0 million, subject to certain conditions, by obtaining additional commitments from the existing lenders or by causing a person acceptable to the administrative agent to become a lender (in each case subject to the terms and conditions set forth in the 2017 Credit Agreement).
On October 31, 2018, we increased the revolving commitment available under the 2017 Credit Agreement from $100.0 million to $150.0 million. There were no other material changes to the terms of the 2017 Credit Agreement.
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As of December 31, 2017,2018, we had no$31.0 million in outstanding borrowings under the 2017 Credit Agreement and there was $100.0$119.0 million available for future borrowing. The 2017 Credit Agreement is available for general corporate purposes, including working capital, capital expenditures, and permitted acquisitions.
The 2017 Credit Agreement is secured by collateral including (i) substantially all of the Company’sour properties and assets, and the properties and assets of the Company’sour domestic subsidiaries but excluding any patents, copyrights, patent applications or copyright applications or any trade secrets or software products and (ii) pledges of the equity interests in all present and future domestic subsidiaries (subject to certain exceptions as provided for under the 2017 Credit Agreement). The Company’sOur direct and indirect domestic subsidiaries are guarantors of all of the obligations under the 2017 Credit Agreement. In addition, the 2017 Credit Agreement contains financial covenants relating to maintaining a minimum interest coverage ratio of 3.0 to 1.0 and maximum leverage ratio of 3.0 to 1.0, as defined in the 2017 Credit Agreement. At December 31, 2017,2018, we were in compliance with all financial covenants. For additional information about the 2017 Credit Agreement, see Note 7 in the Notes to consolidated financial statements in Item 15, Part IV of this Annual Report on Form10-K.
Secured credit agreement
Prior to entering into the 2017 Credit Agreement, the Company’s credit agreement consisted of a $65.0 million term loan (“Term Loan A”) and a $60.0 million revolving commitment (“2016 Revolving Credit Facility”) including a $5.0 million swingline subfacility, and a letter of credit subfacility (collectively, the “Secured Credit Agreement”.)
At December 31, 2016, there was $57.5 million outstanding under Term Loan A at an interest rate of 2.6% based on the LIBO rate and the applicable margin. The Company was required to make quarterly principal payments on Term Loan A of $2.5 million in 2017, 2018 and March 2019. Any outstanding principal balance was to be paid in full on the maturity date of April 18, 2019.
At December 31, 2016, the Company had $27.4 million outstanding under the 2016 Revolving Credit Facility and there was $32.6 million available for future borrowing. The 2016 Revolving Credit Facility was available for general corporate purposes, including working capital, capital expenditures, and permitted acquisitions. All borrowings under the 2016 Revolving Credit Facility were due on the termination date in April 2019. The weighted-average interest rate on borrowings under the 2016 Revolving Credit Facility was 2.6% for the year ended December 31, 2016.
On November 3, 2017, in connection with the completion of our IPO, we repaid in full all outstanding debt under the Secured Credit Agreement. We paid a total of approximately $93.1 million, which included outstanding principal, interest, and other nominal costs. Upon the repayment of the Secured Credit Agreement, all unamortized debt issuance costs were recorded as interest expense.
As of December 31, 20172018 and 2016,2017, respectively, we had an aggregate of cash and cash equivalents of $39.2$35.3 million and $16.9$39.2 million, which we held for working capital purposes and capital expenditures. At December 31, 2018 and 2017, and 2016, respectively, $20.1$3.1 million and $1.6$20.1 million of this aggregate amount was held in the United States and $17.5$28.9 million and $14.2$17.5 million was held in the APAC and EMEA regions with the remainder held in Canada, Mexico, and South America.
There are no significant restrictions on the ability of our subsidiaries to pay dividends or make other distributions to Altair. Based on our current liquidity needs and repatriation strategies, we expect that we can manage our global liquidity needs without material adverse cash tax implications. The recent2017 changes in U.S. tax law could materially affect our tax obligations. For further discussion, please see “Item 1A. Risk Factors – New legislations ortax-reform policies that would change U.S. or foreign taxation of international business activities, including uncertainties in the interpretation and application of the 2017 Tax Cuts and Jobs Act, could materially affect our tax obligations and effective tax rate.”
The following table summarizes our cash flows for the periods indicated:
Year ended December 31, |
| Year ended December 31, |
| |||||||||||||||||||||
(in thousands) | 2017 | 2016 | 2015 |
| 2018 |
|
| 2017 |
|
| 2016 |
| ||||||||||||
Net cash provided by operating activities | $ | 16,091 | $ | 21,385 | $ | 10,838 |
| $ | 36,230 |
|
| $ | 16,091 |
|
| $ | 21,385 |
| ||||||
Net cash used in investing activities | (24,851 | ) | (16,033 | ) | (8,030 | ) |
|
| (206,210 | ) |
|
| (24,851 | ) |
|
| (16,033 | ) | ||||||
Net cash provided by (used in) financing activities | 29,558 | (1,864 | ) | (4,697 | ) |
|
| 167,530 |
|
|
| 29,558 |
|
|
| (1,864 | ) | |||||||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | 1,641 | (362 | ) | (1,639 | ) |
|
| (1,443 | ) |
|
| 1,641 |
|
|
| (362 | ) | |||||||
|
|
| ||||||||||||||||||||||
Net increase (decrease) in cash, cash equivalents and restricted cash | $ | 22,439 | $ | 3,126 | $ | (3,528 | ) | |||||||||||||||||
|
|
| ||||||||||||||||||||||
Net (decrease) increase in cash, cash equivalents and restricted cash |
| $ | (3,893 | ) |
| $ | 22,439 |
|
| $ | 3,126 |
|
Net cash provided by operating activities
Net cash provided by operating activities for year ended December 31, 2018 was $36.2 million, which reflects an increase of $20.1 million compared to the year ended December 31, 2017. This increase was primarily a result of our improved financial performance and changes to our working capital position for the year ended December 31, 2018, as compared to the year ended December 31, 2017.
Net cash provided by operating activities for the year ended December 31, 2017 was $16.1 million which reflects a decrease of $5.3 million compared to the year ended December 31, 2016. This decrease primarily reflects a $6.0 million increase in accounts receivable, along with net changes to our working capital position for the year ended December 31, 2017, as compared to the year ended December 31, 2016.
Net cash provided by operatingused in investing activities
Net cash used in investing activities for the year ended December 31, 20162018 was $21.4$206.2 million, which reflects an increase in cash used of $10.5$181.4 million compared to the year ended December 31, 2015.2017. This increase was primarily reflects a $3.1 million improvementthe result of business acquisitions in deferred taxes along, with net changes to our working capital position, as compared to the prior year.
Net cash used in investing activitiesyear ended December 31, 2018.
Net cash used in investing activities for the year ended December 31, 2017 was $24.9 million which reflects an increase in cash used of $8.8 million compared to the year ended December 31, 2016. This increase was the result of an increase in cash payments for business acquisitions in the year ended December 31, 2017, as compared to the year ended December 31, 2016.
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Net cash used in investingprovided by (used in) financing activities
Net cash provided by financing activities for the year ended December 31, 20162018 was $16.0$167.5 million, which reflects an increase in cash usedprovided of $8.0$138.0 million compared to the year ended December 31, 2015. This reflects a $4.02017. We received aggregate proceeds of $135.6 million purchasefrom our follow-on public offering, net of real property adjacent to our corporate headquarters. The remaining $4.0underwriters’ discount and commissions and we had an increase in net borrowings of $30.8 million primarily relates to increased use of cash for acquisitions.
Net cash provided by (used in) financing activitiesthe year ended December 31, 2018.
Net cash provided by financing activities for the year ended December 31, 2017 was $29.6 million, which reflects an increase in cash provided of $31.4 million compared to the year ended December 31, 2016. We received aggregate proceeds of $119.3 million from our IPO, net of underwriters’ discounts and commissions. We paid offering costs for our IPO of $4.6 million and we had an increase in net debt payments of $87.3 million for the year ended December 31, 2017 compared to the year ended December 31, 2016 resulting from the use of IPO proceeds to pay off our prior term loan and line of credit.
Net cash used in financing activities for the year ended December 31, 2016 was $1.9 million which reflects a decrease in cash used of $2.8 million compared to the year ended December 31, 2015. This reflects a $4.8 million decrease in net debt payments compared to the prior year partially offset by a $1.3 million increase in redemptions of our common stock, and a $0.7 million return of capital in the year ended December 31, 2016.
Effect of exchange rate changes on cash, cash equivalents and restricted cash
There was an adverse effect of exchange rate changes on cash, cash equivalents and restricted cash of $1.4 million for the year ended December 31, 2018, compared to a favorable effect of exchange rate changes on cash, cash equivalents and restricted cash of $1.6 million for the year ended December 31, 2017, primarily due to currency fluctuations in the Euro.
The positive effect of exchange rate changes on cash, cash equivalents and restricted cash for the year ended December 31, 2017, increased $2.0 million from the year ended December 31, 2016, primarily due to currency fluctuations in the Euro.
The adverse effect of exchange rate changes on cash, cash equivalents and restricted cash for the year ended December 31, 2016 decreased by $1.3 million as compared to the prior year due to the decreased effect from fluctuations in foreign currency exchange rates.
Commitments and contractual obligations
Our principal commitments and contractual obligations at December 31, 20172018 consisted of obligations under operating leases for our office facilities and other debt obligations. As of December 31, 2017,2018, the futurenon-cancelable minimum lease payments under these obligations, and our futurenon-cancelable minimum payments under our other contractual obligations, were as follows:
Payments due by period |
|
|
|
|
| Payments due by period |
| |||||||||||||||||||||||||||||||||
(in thousands) | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years |
| Total |
|
| Less than 1 year |
|
| 1-3 years |
|
| 3-5 years |
|
| More than 5 years |
| ||||||||||||||||||||
Operating lease obligations | $ | 27,854 | $ | 8,946 | $ | 11,716 | $ | 4,825 | $ | 2,367 |
| $ | 33,179 |
|
| $ | 10,661 |
|
| $ | 13,979 |
|
| $ | 5,392 |
|
| $ | 3,147 |
| ||||||||||
Long-term debt obligations (excluding interest) | 203 | 126 | 77 | — | — |
|
| 31,025 |
|
|
| 75 |
|
|
| — |
|
|
| 30,950 |
|
|
| — |
| |||||||||||||||
Capital lease obligations | 207 | 106 | 96 | 5 | — |
|
| 813 |
|
|
| 256 |
|
|
| 382 |
|
|
| 175 |
|
|
| — |
| |||||||||||||||
Royalties | 628 | 448 | 180 | — | — |
|
| 1,884 |
|
|
| 1,470 |
|
|
| 414 |
|
|
| — |
|
|
| — |
| |||||||||||||||
Related parties | 119 | 119 | — | — | — | |||||||||||||||||||||||||||||||||||
Other long-term liabilities | 17,670 | 15,254 | 2,316 | 100 | — |
|
| 4,873 |
|
|
| 3,647 |
|
|
| 1,226 |
|
|
| - |
|
|
| — |
| |||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Total | $ | 46,681 | $ | 24,999 | $ | 14,385 | $ | 4,930 | $ | 2,367 |
| $ | 71,774 |
|
| $ | 16,109 |
|
| $ | 16,001 |
|
| $ | 36,517 |
|
| $ | 3,147 |
| ||||||||||
|
|
|
|
|
This table does not include contractual obligations associated with our pension and post-retirement benefit plans. As of December 31, 2017,2018, we had recognized a net benefit liability of $8.0$9.6 million. For additional information on pension and other post-retirement benefits, including expected benefit payments for the next 10 years, see Note 1516 in the Notes to consolidated financial statements included elsewhere in this Annual Report on Form10-K.
The table also does not include liabilities associated with uncertain tax positions due to the high degree of uncertainty regarding the future cash outflows associated with these amounts. For additional discussion of uncertain tax positions, see Note 1314 in the Notes to consolidated financial statements included elsewhere in this Annual Report on Form10-K.
Off-balance sheet arrangements
Through December 31, 2017,2018, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose offacilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical accounting policies and estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results
64
of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates. For further discussion on our significant accounting policies, see Note 2 in the Notes to consolidated financial statements in Item 15, Part IV of this Annual Report on Form10-K.
Revenue recognition
We generate revenue from our Software and CES segments and our other businesses. Revenue is recognized by identifying a contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations in the contract, and recognizing revenue when persuasive evidence of an agreement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable, and collection of the fee is probable or reasonably assured.(or as) we satisfy a performance obligation.
Software
Software revenue includes product revenue from software product licensing arrangements, related services consisting of software and software maintenance and support in the form of post-contract customer support (PCS or PCS.
Our softwaremaintenance) and professional services such as consulting and training services. Software products are sold to customers primarily through our patented units-based subscription licensing model throughunder a term-based software licensing model and to a lesser degree, perpetual software licensing. Thislicenses. We enter into contracts that include combinations of products, maintenance and services, which are accounted for as separate performance obligations with differing revenue recognition patterns.
Most term-based software license agreements include our patented units-based subscription licensing model which allows customers to license a pool of units for their organizations, providing individual users flexible access to our entire portfolio of engineering software applications as well as to our growing portfolio of partner products. These arrangements are referred to as “unit” arrangements. Units are a fixed means of measuring usage. The amount of software usage is limited by the number of the units licensed by the customer. Revenue from these arrangements is fixed (based on the units licensed) and is not based on actual customer usage of each software product.
Software productRevenue from term-based software licenses is classified as license arrangements may includesoftware revenue. Term-based licenses are sold only as a bundled arrangement that includes the rights to a term software license and PCS, which includes unspecified technical enhancements and professional services, such as consulting, implementation services, training, and support, which represent multiple-element arrangements. We have analyzedcustomer support. Maximizing the elements included in our multiple element arrangements and haveuse of observable inputs, we determined that we do not have vendor-specific objective evidence, or VSOE, of fair value to allocate revenue to our software products license, PCS, and professional services including consulting, implementation services, training and support. Revenue from the software products licenses, including perpetual licenses, PCS and professional services, if applicable, are considered to be one accounting unit and, once all services have commenced, are recognized ratably over the remaining perioda majority of the arrangement which consistsestimated standalone selling price of the longerterm-based license is attributable to the term license and a minority is attributable to the PCS. The license component is recognized as revenue upon the later of delivery of the contractual service termlicensed product or PCS term. If the professional services are essential to the functionalitybeginning of the software products, thenlicense period. The PCS is classified as maintenance revenue recognition does not commence until such services are completed.
Our term-based software license arrangements typically have a term of 12 months and include PCS, including the right to receive unspecified software upgrades, when and if available during the license term. We do not charge separately for PCS. Revenues for software licenses sold on a term-based model basis areis recognized ratably over the term of the contract, as we provide the PCS benefit over time.
In addition to term-based software licenses, we sell perpetual licenses. Typically, our perpetual licenses are sold with PCS, which includes unspecified technical enhancements and customer support. Revenue from the software component is classified as license arrangement, oncesoftware revenue and is recognized upon the later of delivery of the licensed product or the beginning of the license period. We allocate values in bundled perpetual and PCS arrangements based on the standalone selling prices of the perpetual license and PCS. Revenue from PCS is classified as maintenance revenue and is recognized ratably over the term of the contract, as we satisfy the PCS performance obligation over time.
Revenue from training, consulting and other services is recognized as the services are performed. For contracts in which the service consists of a single performance obligation, such as providing a training class to a customer, we recognize revenue upon completion of the performance obligation. For service contracts that are longer in duration and often include multiple performance obligations (for example, both training and consulting), we measure the progress toward completion of the obligations and recognizes revenue accordingly. In measuring progress towards the completion of performance obligations, we typically utilize output-based estimates for services with contractual billing arrangements that are not based on time and materials, and estimate output based on the total tasks completed as compared to the total tasks required for each work contract. Input-based estimates are utilized for services that involve general consultations with contractual billing arrangements based on time and materials, utilizing direct labor as the input measure.
We also execute arrangements through indirect channel partners in which the channel partners are authorized to market and distribute our software products to end users of our products and services in specified territories. In sales facilitated by channel partners, the channel partner generally bears the risk of collection from the end-user customer. We recognize revenue from transactions with channel partners when the channel partner submits a purchase commitment, collectability from the channel partner is probable, and the performance obligation was met, at a point in time or over time as appropriate, provided that all other revenue recognition criteria have been met.are satisfied. Revenue from channel partner transactions is the amount remitted to us by the channel partners. This amount includes a fee for PCS that is compensation for providing technical enhancements and the second level of technical support to the end user, which is recognized over the period that PCS is to be provided. We do not offer right of return, product rotation or price protection to any of its channel partners.
Some of our contracts with customers contain multiple performance obligations. Judgment is required in determining whether each performance obligation is distinct. We alsoallocate the transaction price for each contract to each performance obligation based on the
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relative standalone selling price, or SSP, for each performance obligation within each contract. The SSP is the price that we would sell perpetual licensesa promised service separately to certainone of our customers. Judgment is required to determine the SSP for each distinct performance obligation. We estimate SSP using information such as past transactions, internally approved pricing guidelines related to the performance obligations and other information reasonably available to us.
Non-income related taxes collected from customers and remitted to governmental authorities are recorded on the consolidated balance sheet as accounts receivable, net and other accrued expenses and current liabilities. These amounts are reported on a net basis in the consolidated statements of operations and do not have VSOE of fair value for the PCS, which is sold along with the perpetual licenses. As a result, revenue from these perpetual arrangements is recognized ratably over the initial PCS term.
Software related servicesimpact reported revenues or expenses.
Software related services revenue is derived
Consulting services from our consulting, implementation services and training for product design and development projects.
Software servicesprojects are considered distinct performance obligations and are provided to customers on a time and materialstime-and-materials, or T&M, or fixed-price basis. We recognize softwareAltair recognizes services revenue for time and materialsfrom our T&M contracts based upon hours workedusing input-based estimates, utilizing direct labor and contractually agreed-upon hourly rates. Revenue fromrates as the input measure. For fixed-price engagementscontracts, software services revenue is recognized over time using a method that measures the proportionalextent of progress towards completion of a performance obligation, generally using a cost-input method where revenue is recognized based on the ratioproportion of coststotal cost incurred to theestimated total estimated project costs. Project costs are based on standard rates, which vary by the consultant’s professional level, plus all direct expenses incurred to complete the engagement thatat completion. If output or input measures are not reimbursed by the client. Project costs are typically expensed as incurred. The use of the proportional performance method is dependent upon management’s ability to reliably estimate the costs to complete a project. We use historical experience as a basis for future estimates to complete current projects. Additionally, we believe that costs are the best available measure of performance. If the costs to complete a project are not estimable or the completion is uncertain, thecannot be reasonably estimated, revenue is recognized upon completion of the services.
Client engineering services
CES revenue is derived from our hiring of engineers and data scientists for placement at a customer site for specific customer-directed assignments. These engineersprofessional services are hiredconsidered distinct performance obligations and paid only for the duration of the placement.are provided to customers on a T&M basis. We recognize client engineering services revenue based upon hours worked and contractually agreed-upon hourly rates.
Other
Other revenue is derivedincludes product revenue from the sale of LED products for the replacement of fluorescent tubes. Revenue from the sale of LED products for the replacement of fluorescent tubes is recognized when all revenue recognition criteria stated above are met, which is generally when the products are transferreddelivered to resellers or to end customers. We recognize revenues from royalties for licensing our technology when received.Sales returns, which reduce revenue and cost of revenue, are estimated using historical experience.
Goodwill and indefinite-lived intangible assets
In accordance with ASC Topic 360, we assess the carrying value of goodwill each year, based on weighting estimates of future cash flows from the reporting units or estimates of the market value of the reporting units, based on comparable companies. We also perform impairment analyses whenever events or circumstances indicate that goodwill or certain intangibles may be impaired. These estimates of future discounted cash flows are based upon historical results, adjusted to reflect our best estimate of future market and operating conditions. Historically, actual results have occasionally differed from our estimated future cash flow estimates. In the future, actual results may differ materially from these estimates. In addition, the comparable companies used to establish market value for our reporting units is based on management’s judgment.
The timing and size of any future impairment charges involves the application of our estimates and judgment and could result in the impairment of all, or substantially all, of our goodwill or intangible assets.
Stock-based compensation
Stock-based compensation expense, consisting of stock options expected to be settled by issuing shares of our common stock, are recorded as equity awards. The fair value of these awards on the date of grant is measured using the Black-Scholes option pricing model. The fair value of restricted stock units, or RSUs, is measured using the fair value of our common stock on the date of the grant.
Our use of the Black-Scholes option pricing model requires the input of many assumptions, some highly subjective, assumptions, including the fair value of our underlying common stock, expected term of the option, expected volatility of the price of our common stock, risk-free interest rates, and expected dividend yield. The assumptions used in our option pricing model represent management’s best estimates. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future.
These assumptions and estimates are as follows:
66
Expected term. The expected term of employee stock options represents the weighted-average period that the stock options are expected to remain outstanding. To determine the expected term, we generally apply the simplified approach in which the expected term of an award is presumed to be the mid-point between the vesting date and the expiration date of the award as we do not have sufficient historical exercise data to provide a reasonable basis for an estimate of expected term. Risk-freeinterest rate. We base the risk-free interest rate on the yields of United States Treasury securities with maturities approximately equal to the term of employee stock option awards. Expected volatility. As we do not have a long trading history for our common stock as a new public company, the expected volatility for our common stock was estimated by taking the average historic price volatility for industry peers based on daily price observations over a period equivalent to the expected term of the stock option awards. Industry peers consist of several public companies in our industry which are either similar in size, stage of life cycle or financial leverage. Our forfeiture rate is based on actual forfeitures. We will continue to use judgment in evaluating the assumptions related to our stock-based compensation on a prospective basis, Employee stock-based awards, consisting of stock options with repurchase features that allow them to be settled in cash at a purchase price that is less than the current fair value, are considered liability-based awards. These awards are initially recorded at fair value and remeasured to fair value at the end of each reporting period until settled. Our 2001 ISO and NQSO Plan was terminated in 2011. Options granted under the 2001 ISO and NQSO Plan were accounted for as liability awards as the terms of the awards could require or allow repurchase of the shares at amounts different than fair value. We made the accounting policy election to use the intrinsic value method of accounting to determine stock-based compensation liabilities for these awards. During the quarter ended June 30, 2017, in accordance with ASC 718 as we no longer met the definition of a nonpublic entity, we changed our accounting policy to measure the fair value of our liability awards using the Black-Scholes option pricing model. The impact of the change in accounting policy was not material to the financial statements. The 2001 ISO and NQSO Plan also included stock-based compensation liability for our Class A redeemable common shares outstanding resulting from our call feature with a purchase price that may be set at less than the fair market value at the redemption date. We utilized the fair value of the outstanding Class A redeemable common shares to determine the stock-based compensation liabilities for these redeemable common shares. As a result of our IPO in the fourth quarter 2017, the call feature terminated which resulted in the liability associated with our Class A redeemable common shares and the liability associated with stock options outstanding under the 2001 ISO and NQSO Plan to be reclassified to equity as of December 31, 2017, in accordance with ASC 718. Accounting for income taxes We utilize the asset and liability method of accounting for income taxes in accordance with ASC 67 The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of taxable temporary differences. We consider, among other available information, scheduled reversals of deferred tax liabilities, projected future taxable income, limitations on the availability of tax credit carryforwards, and other evidence assessing the potential realization of deferred tax assets. Adjustments to the valuation allowance are included in the tax provision in our consolidated statements of operations in the period they become known or can be estimated. Significant management judgment is required in determining any valuation allowance recorded against deferred tax assets and liabilities. The valuation allowance is based on our estimates of taxable income for jurisdictions in which we operate and the period over which our deferred tax assets may be recoverable. Historically, we have had substantial United States tax credit carryforwards which We apply amore-likely-than-not recognition threshold to our accounting for tax uncertainties. We review all of our tax positions and make determinations as to whether our tax positions are more likely than not to be sustained upon examination by the relevant taxing authorities. Only those benefits, or exposures, that have a greater than fifty percent likelihood of being sustained upon examination by taxing authorities are recognized. Interest and penalties related to uncertain tax positions are recorded in income tax expense (benefit) in the consolidated statements of operations.
Recently issued accounting pronouncements For information regarding recent accounting guidance and the impact of this guidance on our consolidated financial statements, see Note 2 of the Notes to consolidated financial statements in Item 15, Part IV of this Annual Report on Form10-K, which is incorporated by reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk We are exposed to certain global market risks, including foreign currency exchange risk and interest rate risk associated with our debt.
Foreign Currency Risk As a result of our substantial international operations, we are exposed to foreign currency risks that arise from our normal business operations, including in connection with our transactions that are denominated in foreign currencies. In addition, we translate sales and financial results denominated in foreign currencies into United States dollars for purposes of our consolidated financial statements. As a result, appreciation of the United States dollar against these foreign currencies generally will have a negative impact on our reported revenue and operating income while depreciation of the United States dollar against these foreign currencies will generally have a positive effect on reported revenue and operating income. To date, we have not entered into any foreign currency hedging contracts, since exchange rate fluctuations have not had a material impact on our operating results and cash flows. Based on our current international Interest Rate Risk As of December 31, 2018, and 2017, we had cash, cash equivalents and restricted cash of $35.7 million and $39.6 million, respectively, consisting primarily of bank deposits and money market funds. As of December 31, 2018, we had $31.0 million outstanding under our 2017 Credit Agreement. Such interest-bearing instruments carry a degree of interest rate risk; however, historical fluctuations of interest expense have not been significant. As of December 31, 2017, we had no amounts outstanding under our 2017 Credit Agreement. Interest rate risk relates to the gain/increase or loss/decrease we could incur on our debt balances and interest expense associated with changes in interest rates. It is our policy not to enter into derivative instruments for speculative purposes, and therefore, we hold no derivative instruments for trading purposes. Item 8. Financial Statements and Supplementary Data. The financial statements required by this Item 8 are included in our consolidated financial statements and set forth in the pages indicated in Part IV, Item 15(a) of this Annual Report on Form 10-K and are incorporated herein by reference. The supplementary financial information required by this Item 8 is included in Note 20 of the Notes to consolidated financial statements and set forth in the pages indicated in Part IV, Item 15(a) of this Annual Report on Form 10-K and is incorporated herein by reference. 68 Item 9. Changes in and Disagreements with None. Item 9A. Controls and (a) Evaluation of Disclosure Controls and
The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as (b) Management’s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) and 15d(f). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with United States generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Our management, including our Chief Executive Officer and Chief Financial Officer, Management has identified a material weakness over the income tax process as of December 31, 2018. We determined that management’s review controls over income taxes are not operating effectively to detect a material misstatement in the financial The effectiveness of our internal control over financial reporting at December 31, 2018 has been audited by Ernst & Young LLP, an independent registered public accounting Remediation Efforts with Respect to Material Weakness We have (c) Changes in Internal Control Over Financial 69 There was no change in our internal control over financial reporting (as defined in Rules13a-15(f) and15d-15(f)) under the Exchange Act) that occurred during the fourth quarter ended December 31,
None.
Item 10. Directors, Executive Officers and Corporate Governance. The information called for by this item will be set forth in our Proxy Statement for the Item 11. Executive Compensation. The information called for by this item will be set forth in our Proxy Statement and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information required by this item will be set forth in our Proxy Statement and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions, and Director Independence. The information required by this item will be set forth in our Proxy Statement and is incorporated herein by reference. Item 14. Principal Accountant Fees and Services. The information required by this item will be set forth in our Proxy Statement and is incorporated herein by reference. 71
Item 15. Exhibits, Financial Statement Schedules.
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