2023-03-17 05:58:27 ET
Summary
- Altair Engineering focuses on the development of computer science and artificial intelligence for companies in different sectors and industries of the market.
- High competition, high complexity of product development, and changes in the regulations regarding the use of information and treatment of proprietary sensitive materials are meaningful risks.
- The company noted that 2022 was the most successful year in its long history. Management believes that the EBITDA margin will continue to grow in 2023.
Artificial intelligence software vendor Altair Engineering ( ALTR ) signed the best year in its history. Management believes that sales growth and EBITDA expansion in 2023 will likely continue. In my view, further development of software products and more growth in the global artificial intelligence market will likely bring FCF generation. I did identify some risks from changing regulations about the use of certain information and lower subscription growth, however, ALTR does not look expensive.
Business Model And The Reasons To Have A Look At Altair Today
Altair Engineering focuses on the development of computer science and artificial intelligence for companies in different sectors and industries of the market.
Altair develops software and online solutions in the area of ??simulation, high performance computing, data analysis, and artificial intelligence. Artificial intelligence is being used by the company in different products, some of which had been developed before for processing and analysis, as well as automation processes and machine learning. Altair currently has 13,000 customers globally, including some of the top manufacturers in these two industries. In 2022, regionally, 34% of sales were in Europe, the Middle East, and Africa, 32% in the United States, and 34% in Asia and Oceania.
Altair has divided its operations into two reportable segments: software and technical solutions for its customers. Regarding the software solutions segment, it diagnoses, develops, analyzes, designs and markets a wide variety of its digital products, while the technical solutions segment is exclusively oriented towards the relationship with customers, advice, and training for the smooth use of its platform.
The software solutions segment offers software products, which include physical simulations, conceptual design, high performance, cloud, data analytics, artificial intelligence, machine learning, and internet of things. This segment is the core of the company's business, and through these products, the company offers comprehensive experience in carrying out projects from development and simulation to analysis of the performance, optimization, automation, and digitization.
Altair has its own direct sales channels as well as other ways of distributing its products through contracts with independent vendors or agencies. In 2022, 86% of the company's revenue came from its direct sales channels. These sales teams are distributed and oriented to locate potential customers in their key markets, such as automotive, aerospace, and technology. Between the automotive and aerospace industries, they combined almost 40% of revenues by 2022.
I believe that the recent quarterly results, the expectations, and guidance for 2023 offer sufficient reasons to have a look at Altair.
The fourth quarter was very strong, capping one of the most successful years in our long history. Source: Quarterly Release
The results for 2022 included revenue from licenses of $363 million, maintenance and other services of $142 million, software related services of $30 million, and total software and related services of $537 million. With client engineering services of $28.883 million and the others worth $6 million, total revenue stands at $572.221 million. As shown in the chart below, total revenue increased in 2021 and 2022.
Source: Quarterly Release
The company noted that 2022 was the most successful year in its long history. Management believes that the EBITDA margin will continue to grow in 2023. The company expects sales growth close to 8.0-9.7% in 2023, adjusted EBITDA of $120-$130 million, and FCF of $108-$116 million.
We ended 2022 with record high annual revenue and exceeded our profit expectations. We've been successful in our disciplined approach to spending and expect to carry that approach into 2023, as we remain committed to exiting the year with 20% EBITDA margin, while continuing to add 200 to 300 basis points of margin per year into the future. Source: Quarterly Release
Balance Sheet
As of December 31, 2022, Altair reported cash and cash equivalents of $316 million accompanied by accounts receivable of $170 million, income tax receivable worth $11 million, and prepaid expenses and other current assets of $29 million. Total current assets stand at $526 million, close to two times the total amount of current liabilities.
Property and equipment stands at $37 million, with operating lease rights of use assets of $33 million and goodwill of $449 million. Besides, intangible assets were equal to $107 million with deferred tax assets of $9 million and total assets of $1.204 billion. The asset/liability ratio stands at close to 2x, so I believe that the financial situation is good.
Source: 10-k
Liabilities included accounts payable of $10 million along with accrued compensation and benefits of $42 million, a current portion of operating lease liabilities of $10 million, other accrued expenses of $56 million, and short term deferred revenue of $113 million.
The total amount of debt is not small, but net debt stands at close to zero. Convertible senior notes were around $305 million with an operating lease liability of $24 million, long term deferred revenue of $31 million, and total liabilities of $635 million.
Source: 10-k
Forecasts From Other Financial Analysts Include Net Sales Growth, Operating Margin Expansion, And Lower Capital Expenditures
Market estimates were so good that I believe that investors may want to have a look at the company. Other financial analysts expect 2025 net sales of $730 million, an EBITDA close to $195 million, and operating margin around $185 million. 2025 operating margin would be close to 25% with pre tax profit of $15.5 million and 2025 net income larger than $15 million. 2025 FCF would stand at close to $175 million with 2025 FCF margin close to 25%. Finally, it is worth noting that most analysts are expecting lower capex/sales from 2023 to 2025. In the future, lower capital expenditures would lead to higher free cash flow.
Source: marketscreener.com
My Assumptions: Global Artificial Intelligence Market Growth, New Products, New Customers, And More Acquisitions
Under my financial model, I assumed that Altair would successfully develop and invest in technology and improve its products. As a result, I would expect new customers and strengthening of existing relationships, which may lead to revenue and free cash flow growth.
I assumed that Altair would enjoy further expansion of the global artificial intelligence market. According to market experts, the market is expected to grow at close to 37% from 2023 to 2030. Altair may experience sales growth at almost the same pace.
The global artificial intelligence market size was valued at USD 136.55 billion in 2022 and is projected to expand at a compound annual growth rate of 37.3% from 2023 to 2030. Artificial Intelligence Market Size & Share Analysis Report 2030
I also believe that Altair may try to grow inorganically. The company has already demonstrated through 48 previous acquisitions that management is constantly looking for new opportunities in this regard. Considering the current state of the balance, I believe that an acquisition or a merger using the stock could be a possibility. As a result, I would expect EBITDA margin expansion and a larger implied fair stock price.
My Financial Model
My estimates include lower net income loss from 2023 than in 2022 and positive net earnings in 2025 and 2026. Depreciation and amortization would increase to around $60 million in 2026 with stock based compensation of around $215 million and 2026 deferred income taxes of $5 million.
Source: My Estimates
Also, with changes in accounts payables of -$25 million, prepaid expenses close to $11.5 million, and changes in other long-term assets of $20 million, I included 2026 changes in accounts payable close to $17.5 million. Besides, with accrued compensation benefits of around -$6.5 million and 2026 changes in other accrued expenses of -$65 million, I included 2026 deferred revenue of around $115 million. Finally, my results included CFO close to $40 million and 2026 FCF of $30 million.
Source: My Estimates
By summing future free cash flows from 2023 to 2026 and using a discount of 6.55%, I obtained an implied enterprise value of $6.005 billion. If we sum close to $315 million in cash, and subtract $305 million in debt, the implied equity valuation would be $75 per share.
Source: My Estimates
Competitors And Risks
The market in which Altair participates is highly competitive and highly fragmented. We can find large companies such as Dassault Systèmes ( DASTY ), Siemens ( SIEGY ), Ansys ( ANSS ), MSC Software, SAS Institute, and Alteryx ( AYX ). Some of these are public companies that have greater resources and infrastructure than Altair. These are companies that offer competition in each of the products that the company develops. In addition, for each product, there are small developers or start-ups that can develop products and easily enter the market.
The risks at the operational level for Altair include risks from retention of key employees. Besides, renewal of the annual subscription by clients and successful reach of new clients in the future represent a clear risk. In my view, without the recurrent revenue that annual subscription brings, many investors will likely sell shares, which may lead to stock price declines.
The company's sales cycles are very unpredictable as they are long and depend on various factors such as the usage time of its customers and the evaluation stages. Besides, the company operates in different industries, with a significant revenue concentration in automotive and aerospace industries. Any changes in these industries could adversely affect the company's operations, and push the revenue growth down.
Finally, high competition, high complexity of product development, and changes in the regulations regarding the use of information and treatment of proprietary sensitive materials are also meaningful risks to take into account.
Conclusion
Altair noted that 2022 was the best year in the history of the company, and delivered beneficial guidance for 2023. I believe that further development of software products may bring new clients, and enhance revenue obtained from existing ones. I also assumed that inorganic growth and further expansion of the global artificial intelligence market will likely contribute to FCF generation in the future. Even considering risks from changing regulations or lack of new software subscriptions, I believe that the stock is undervalued.
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Altair Engineering: Risky Artificial Intelligence, But Not Expensive