Altair Engineering - Q2 2024

Executive Summary

• Altair delivered Q2 2024 software revenue of $135.4M and total revenue of $148.8M, both above the high end of company guidance; adjusted EBITDA of $17.3M was above the midpoint, while GAAP diluted EPS was -$0.06 and non-GAAP diluted EPS was $0.16.
• Mix shift toward software (91% of revenue) and improved non-GAAP gross margin (80.9%, +90 bps YoY) supported profitability; engineering services and other revenue declined YoY, tempering total growth.
• Management tightened FY 2024 guidance in reported currency due to FX: total revenue midpoint to $653M (from $657M) and adjusted EBITDA midpoint to $140M (from $142M); software revenue midpoint held at $595M as constant-currency raise was offset by FX.
• Strategic/catalyst updates during the quarter: acquisition of Cambridge Semantics to power enterprise data fabrics and gen-AI grounding; Altair One availability on Google Cloud; ISO/IEC27001:2022 certification; addition to S&P MidCap 400—reinforcing data/AI leadership and enterprise credibility.

What Went Well and What Went Wrong

What Went Well

• Software and total revenue exceeded the high end of guidance; CEO highlighted “robustness of our software product lineup” and trajectory.
• Strong vertical momentum, particularly aerospace/defense; signed an 8‑figure, 3‑year contract with a multinational aerospace company—Altair’s largest deal ever.
• AI as a differentiator: HyperWorks 2024 release deepened embedded AI, physicsAI/romAI adoption grew materially, and RapidMiner was recognized by Gartner as a Leader in Data Science and ML platforms.

What Went Wrong

• Engineering services and other revenue declined YoY to $13.4M, which dampened total revenue growth versus software’s strength.
• Adjusted EBITDA margin compressed YoY to 11.7% from 12.1% on FX and mix dynamics; FY EBITDA guidance was lowered solely due to FX, per CFO.
• Sequentially, Q2 softened vs Q1 as several deals closed early in Q1 and due to typical seasonality; CFO flagged Q2/Q3 as Altair’s smaller quarters for billings/revenue.

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Altair Engineering Inc. Q2 2024 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Stephen Palmtag, Investor Relations. Please go ahead.

Stephen Palmtag (Head of Investor Relations)

Good afternoon. Welcome, and thank you for attending Altair's earnings conference call for the second quarter 2024, ended June 30th. I am Stephen Palmtag, Altair's Head of Investor Relations, and with me on the call are Jim Scapa, Founder, Chairman, and CEO, and Matt Brown, Chief Financial Officer. After market close today, we issued a press release with details regarding our second quarter 2024 performance and guidance for the third quarter and full year 2024, which can be accessed on our investor relations website at investor.altair.com. This call is being recorded, and a replay will be available on the IR section of our website following the conclusion of this call. During today's call, we will make statements related to our business that may be considered forward-looking under federal securities laws.

These statements reflect our views only as of today and should not be considered representative of our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from our expectations. These risks are summarized in the press release that we issued earlier today. For a further discussion of the material risks and other important factors that could affect our actual results, please refer to those contained in our quarterly and annual reports filed with the SEC, as well as other documents that we have filed or may file from time to time. During the course of today's call, we will refer to certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our press release.

Finally, at times in our prepared comments or responses to your questions, we may offer metrics that are incremental to our usual presentation to provide greater insight into the dynamics of our business or our quarterly results. Please be advised that we may or may not continue to provide this additional detail in the future. With that, I'll turn the call over to Jim for his prepared remarks. Jim?

Jim Scapa (Co-Founder, Chairman, and CEO)

Thank you, Stephen, and welcome to everyone on the call. During the second quarter of 2024, Altair maintained its strong trajectory. Total quarterly revenue was $148.8 million, with software revenue accounting for $135.4 million, both surpassing the high end of our guidance for the quarter. Adjusted EBITDA was $17.3 million, above the midpoint of our guided range. Altair's Q2 results underscore the robustness of our software product lineup, which continues to empower customers with industry-leading computational intelligence. Software revenue on a constant currency basis grew 10.6% year-over-year in the second quarter. Software revenue as a percentage of total revenue grew to 91% compared to 88.8% in the second quarter of 2023. Altair's success in the quarter spanned broadly across technologies and industry verticals, with notable strength in aerospace and defense.

Last month, we unveiled exciting product enhancements with the release of Altair HyperWorks 2024, which includes substantial advancements in artificial intelligence. This further solidifies our platform status as a leading environment for AI-powered, simulation-driven innovation. Higorx 2024 includes improvements in AI-driven engineering, design of mechanical and electronic systems, and design and optimization driven by simulation. It's the only platform that offers a unified, modern user experience across any geometry, physics, and complexity at every stage of the product development lifecycle, from design to in-service. With AI-embedded workflows, photorealistic graphics, and a unified backend data system, Altair HyperWorks is the foundation upon which many of the world's most innovative digital engineering practices are being built. In June, we announced that Altair was named a leader in the Gartner Magic Quadrant for data science and machine learning platforms for our offering Altair RapidMiner.

Gartner's Magic Quadrant, especially for data-related technologies, is widely regarded as an influential tool in the IT industry and serves as a key reference point for many organizations when evaluating technology vendors. The evaluation is based on specific criteria that analyzes a company's overall completeness of vision and ability to execute. Being named as a leader in this ranking report validates what we have known for years. Altair has one of the market's most unique and comprehensive offerings for data analytics and machine learning. For us, this placement is a testament to our unmatched vision and business model, which has defined us since our inception as pioneers at the forefront of technological innovation and computational intelligence. I am proud of where Altair stands today and look forward to the strides we continue to make each day.

In July, we announced the acquisition of Metrics Design Automation, a Canadian company with a game-changing simulation-as-a-service business model for semiconductor electronic functional simulation and design verification. The Metrics Digital Simulator, DSim, when combined with Altair Silicon Debug Tools, will deliver a world-class advanced simulation environment with superior simulation and debug capabilities in the EDA and semiconductor space. The cloud-based business model has the potential to transform the semiconductor space by making high-caliber EDA design tools much more affordable and accessible for companies looking to aggressively scale out simulations to accelerate design cycles. Today, integrated circuit design verification has high licensing costs and may require hundreds and sometimes thousands of seats to run a single chip simulation. Additionally, these tools run on desktop machines and are not typically cloud-native or cloud-enabled.

The Altair and Metrics solution delivers the flexibility to run as a desktop app on your own servers or in the cloud and can run very large regressions with customers paying only for what they use. Customers will be able to run simulations concurrently and at scale, removing massive amounts of time and cost from the traditional design cycle. By combining our best-in-class software with Metrics' cloud-based simulation-as-a-service, we are excited to bring this groundbreaking technology to our EDA and semiconductor customers. We are unique in our ability to merge simulation with industry-leading workload and workflow optimization technology, serving as a true partner for companies embracing innovative tools and resource delivery models in this highly specialized and high-stakes industry. Customers now have a choice in design verification. DSim will be available through Altair One, Altair's cloud innovation gateway, where it will also be available for desktop download.

Altair's software portfolio continues to demonstrate leadership across industries. This quarter, we were thrilled to highlight the role our technology is playing throughout the development cycle for many teams in their quest for victory in the 37th America's Cup, beginning August 2022. Our work with America's Cup teams demonstrates the power of Altair's computational intelligence vision on a global stage like no other. These are world-class organizations always looking to find new ways to innovate and succeed, just as Altair is. Their use of Altair's solutions and expertise is helping design state-of-the-art AC75 yachts. Altair is the official computational science and artificial intelligence partner for the New York Yacht Club American Magic team, as well as an official supplier of Luna Rossa Prada Pirelli, and we are excited to watch the races and experience the outcome of these remarkable athletes and technologists.

In the second quarter, we partnered with Hewlett Packard to enrich the Altair Material Data Center with HP's proprietary material information, enhancing its utility for designers, engineers, and scientists. This aims to overcome traditional 3D printing challenges and improve component design for Multi Jet Fusion and Metal Jet printers. The collaboration bridges the often siloed functions of design and production of 3D printed parts. Now, engineers with access to the Altair Material Data Center will be able to use HP material data to design efficient components, conduct structural analysis using finite element analysis, and predict and fix manufacturing defects during design and simulation. The collaboration will also benefit users of Altair Inspire Print 3D, which accelerates the creation, optimization, and study of innovative, structurally efficient, additively manufactured parts by providing a fast and accurate toolset for the design and process simulation of parts made by metal binder jetting.

Customers within our automotive vertical continue to adopt our cutting-edge technology. In the quarter, a motorsports company with aspirations of joining the F1 grid signed a six-figure three-year deal to leverage our comprehensive suite of simulation and high-performance computing solutions. The organization believes our simulation-driven design philosophy and will use SimSolid and Inspire throughout the design process for rapid design exploration. The value, breadth, and flexibility of the Altair Units' software licensing model continues to be an important factor in securing new deals. In the banking, financial services, and insurance vertical, we welcomed one of the largest property and casualty insurance companies in the United States as a new customer. This organization will leverage Altair SLC, our powerful SAS language compiler, to construct advanced machine learning models, perform data preparation, and execute data transformations.

Their decision not only emphasizes the quality of our data analytics and AI platform, but also highlights the significant potential for growth in this sector. In addition, a Canadian bank leveraging our data analytics platform expanded its six-figure annual spend with Altair by over 200%. We also maintain strong performance within the aerospace and defense vertical. We signed an eight-figure three-year contract with a multinational aerospace company, our largest deal ever. The commitment was driven by Altair HyperMesh, part of the Altair HyperWorks design and simulation platform, which continues to provide superior capabilities for structural modeling and analysis. With HyperMesh, we continue to expand our presence in mission-critical workflows at some of the world's most important companies. In addition, a European aerospace defense and security company signed a seven-figure agreement representing a 49% year-over-year expansion compared to 2023.

This agreement grows our presence in simulation, high-performance computing, and data analytics, underscoring the convergence of these domains and Altair's unique ability to deliver comprehensive solutions. This year, Altair established a new vertical focused on healthcare and life sciences, where we already had significant business in the areas of HPC and simulation and won our first data analytics deal in Q1 2024. During the second quarter, we saw several new sales and our pipeline of data science activities significantly grow in this vertical, especially for our SAS Language solutions and our Graph database technology. Our indirect sales channel remains an important contributor to our overall revenue and a priority moving forward. A clear testament of this commitment is the addition of three new channel partners during the second quarter.

FactSpan, based in Seattle, will offer customers Altair's full suite of comprehensive data analytics and AI solutions found in the Altair RapidMiner platform. Devoteam and Semantic Partners will extend the reach of Altair's data analytics and AI solutions to customers across the EMEA region. Astec will bolster Altair's expansion into the North, West, and Central African regions, dynamic areas primed for swift adoption of technological solutions. The first half of 2024 was a strong start to the year. We are confident Altair is well-positioned for future growth, and we remain committed to delivering best-in-class technology to our customers. I will now turn the call over to Matt to provide more details on our financial performance and our guidance for the third quarter and full year 2024. Matt?

Matt Brown (CFO)

Thank you, Jim. Hello to everyone on the call, and thank you for joining us. Altair had a strong Q2, exceeding the high end of the guidance range for software revenue and total revenue, and Adjusted EBITDA was above the midpoint of our guidance range. Our first-half performance was driven by growth across multiple products and verticals, with especially strong performance in aerospace and defense, where demand for our products continues to be robust. Altair's solutions are fundamental to our customers' mission-critical workflows spanning design, simulation, and data analytics. As we look forward, we remain committed to innovation and product excellence, striving to exceed our customers' expectations. As a reminder, some of our revenues and expenses are transacted in currencies other than the US dollar, and therefore our reported results may be impacted by changes in foreign exchange rates. To aid in the review of our results, throughout my remarks, I will reference growth rates in both reported and Constant Currency.

For the second quarter, calculated total billings were $154.5 million, a year-over-year increase of 4.5% in reported currency and 7.1% in constant currency. Software revenue in Q2 was $135.4 million, a year-over-year increase of 8.1% in reported currency and 10.6% in constant currency compared to Q2 2023. The year-over-year increase in software revenue was driven by high retention rates and new and expansion business with notable strengths in aerospace and defense, where customers are increasingly leveraging the convergence of capabilities in our software. For instance, one aerospace customer is using ROM AI for multidisciplinary optimization of an avionic system, while another is using RapidMiner for predictive maintenance and root cause analysis. Our unique ability to deliver these comprehensive AI-powered engineering solutions gives us great confidence in the long-term trajectory of our software offerings. Additionally, our strengthened software continues to be broad-based, with gains across the Americas, EMEA, and APAC.

Total revenue in Q2, which includes engineering services and other revenue, was $148.8 million, a year-over-year increase of 5.4% in reported currency and 7.8% in constant currency compared to Q2 2023. Non-GAAP gross margin, which excludes stock-based compensation, was 80.9% in the second quarter compared to 80.0% in the prior year period, an increase of 90 basis points. The year-over-year increase in non-GAAP gross margin in Q2 was driven by the mixed shift towards software revenue, where gross margins are higher than our engineering services and other revenue margins. Software revenue was 91.0% of total revenue in Q2 compared to 88.8% in the prior year. We expect software revenue growth will continue to outpace that of engineering services and other revenue, and therefore continue to push our blended gross margins higher.

GAAP operating expenses were $128.2 million compared to $126.6 million in the prior year period, reflecting growth of just 1.2% due to the continued and sustained year-over-year reduction in stock-based compensation expense. Non-GAAP operating expenses, which excludes stock-based compensation and amortization of intangible assets, were $105.3 million compared to $96.9 million in the prior year period, reflecting the planned investments we're making in product development and sales capacity to capitalize on the large and exciting opportunities we're seeing ahead of us. Adjusted EBITDA in Q2 was $17.3 million, or 11.7% of total revenue, compared to $17.1 million, or 12.1% in the prior year. Moving to our balance sheet, we ended the quarter with $507.0 million in cash and cash equivalents, an increase of approximately $88.7 million from the prior year period and $39.5 million from year-end.

These increases in cash and cash equivalents were despite us paying $81.7 million for the settlement of our 2024 convertible notes in the second quarter. Free cash flow continues to be strong and was the primary driver of our cash and cash equivalents balance. Free cash flow was $97.0 million for the six months ended June 30th, compared to $83.0 million in the prior year period, an increase of 16.8%. We expect to continue to generate significant free cash flow going forward, and we will continue to allocate capital with focus and discipline to drive long-term shareholder value. Turning to guidance for Q3 and full year 2024, we've provided detailed tables in our earnings press release, including reconciliation to comparable GAAP amounts. To provide clarity on the effect's impact to our expectations, we've provided growth rates in both reported currency and Constant Currency in our guidance tables.

For Q3, we expect software revenue in the range of $130 million-$133 million, a year-over-year increase of 9.2%-11.7% in reported currency, and 11.1%-13.7% in constant currency. For full year 2024, we are raising our previous outlook in constant currency for software revenue and also adjusting for changes in foreign currency exchange rates over the past quarter. These amounts are offsetting, and therefore we expect full year software revenue in reported currency to be a range of $590 million-$600 million, a year-over-year increase of 7.3%-9.1% in reported currency, and 8.9%-10.8% in constant currency. We expect Q3 total revenue, which includes engineering services and other revenue, in the range of $145 million-$148 million, a year-over-year increase of 8.2%-10.4% in reported currency, and 10.0%-12.3% in constant currency.

For full year 2024, we are maintaining our previous outlook in constant currency for total revenue. This includes the increase in our full year software revenue outlook in constant currency and an offsetting reduction in engineering services and other revenue. However, due to changes in our foreign currency exchange rates over the past quarter, we are adjusting our full year outlook in reported currency to a range of $648 million-$658 million, a year-over-year increase of 5.8%-7.4% in reported currency, and 7.5%-9.1% in constant currency. For Q3, we expect Adjusted EBITDA in the range of $16 million-$19 million, or 11.0%-12.8% of total revenue, compared to $15.5 million or 11.5% of total revenue in Q3 2023.

For full year 2024, changes in foreign currency exchange rates have also impacted Adjusted EBITDA, and therefore we are adjusting our outlook to a range of $136 million-$144 million, or 21.0%-21.9% of total revenue, compared to $129.1 million or 21.1% of total revenue in 2023. Finally, for the full year 2024, we expect free cash flow in the range of $122 million-$130 million, which has also been impacted by changes in foreign exchange rates and therefore has been adjusted in line with the change in our full year Adjusted EBITDA guidance. As a reminder, our cash flow expectations are sensitive to billings and collections patterns, which fluctuate seasonally. We continue to be pleased with the high free cash flow as a percentage of Adjusted EBITDA at approximately 90%.

We are excited about our strong Q2 and first-half performance to start the year, and we are looking forward to maintaining that momentum in the second half. With that, we'd be happy to take your questions. Operator?

Operator (participant)

Thank you. As a reminder to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. In the interest of time, we ask that you please limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. Our first question comes from Matt Hedberg with RBC. Your line is now open.

Matt Swanson (Equity Research Analyst)

Yeah, thank you so much for taking my questions. This is Matt Swanson. I'm from Matt. It was great to hear about the success in the aerospace and defense. And Jim, I think you mentioned a big HyperMesh win, which has always been kind of seen as the best of breed products for the space. And then, Matt, I think in some of your examples, we talked about some of the newer products like RapidMiner. Could you guys just talk a little bit about the go-to-market and the ability to be able to sell both those things and kind of interconnectedness from your traditional products and some of these newer data-focused and just how the sales force is doing ramping on that?

Jim Scapa (Co-Founder, Chairman, and CEO)

Sure. First of all, thank you. Yeah, I mean, the go-to-market, first of all, in general, we've moved to this vertical market orientation for all the strategic accounts. So in the aerospace and defense vertical, we have a global team that is managed by one individual, and then the account teams are spread throughout the world. When you think about an account, one of the major aerospace accounts, most of them are using HyperMesh and it just continues to expand. Now we're expanding out to many of the other products. RapidMiner is a pretty natural next step because if they have a lot of test data or they're trying to process material data, for example, coming in for example, if they want to project what are values that maybe didn't come in through testing and they want to project those using some AI technology. I just saw that this morning, so it's fresh in my mind. It's just a great tool for doing that. We're seeing more and more applications throughout our traditional engineering customer base.

I would say that the account teams that are traditionally selling simulation applications are becoming more and more comfortable as they see more of these applications, understand them, and can really just talk about them. We bring experts in, of course, more and more. The other big application is a solution called Physics AI or ROM AI, reduced order modeling. So when we're doing digital twins, very often we're creating these reduced order models that are typically neural net type models to simulate a part of the system in the digital twin. Similarly, Physics AI lets you run a number of simulations and then run it through the neural nets of Physics AI, build an AI model, if you will. The next simulation just simply runs the AI model. So it's really starting to take off.

We have a lot of technology just embedded in our tools also that is all built on machine learning and AI. So it's sort of permeating throughout the products. And I think we have, frankly speaking, quite a big lead on our competition in applying this kind of technology. It does take time for everyone to come up to speed, the tech support guys, the sales guys, but we've been at this for five, six years now. And so we're just really running with it. We've been running these seminars, AI for engineering, and we have, in some cases, thousands of people signing up for them. So it's been very, very positively received. That's super helpful. And then my follow-up question was actually kind of on that getting up to speed standpoint and just the idea of kind of the push and pull of AI with your customers right now.

It was great to hear about those updates that came for the HyperWorks 2024 around AI. But I'm just curious, is AI something that your customers are looking to as a must-have when you enter into a new deal process, or are you really selling them? I think it's what's putting us. Yeah, I think so. And I think it's what's putting us really in the lead at this point. We see our position in many of these accounts where typically there's multiple vendors in each one of these accounts, ourselves and competitors. But we see our position sort of rising across the board, actually. And a lot of the reason for that is the AI technology that we're bringing, I think. So yes, I think it's very important.

Matt Swanson (Equity Research Analyst)

Thank you.

Jim Scapa (Co-Founder, Chairman, and CEO)

Sure.

Operator (participant)

Thank you. Our next question comes from Blair Abernethy with Rosenblatt Securities. Your line is now open.

Blair Abernethy (Managing Director and Senior Research Analyst)

Thanks for taking the questions, guys. Jim, just wanted to drill in a little bit more on your comments about the channel and adding some new capacity there. Are you looking at emphasizing the channel more now that you have more product? Just kind of what are your thoughts there? And I'm not sure what the current percentage revenue from the channel is for Altair. We are trying to emphasize the channel more. It's particularly important on the data side, to be honest with you, but it's also important on the simulation side in many of the regions that we probably historically have not gone to market indirectly as much. So some of the larger markets where we were selling a lot directly, we were underserving, I would say, the small, medium accounts. And we need to get to those through indirect channels, and that's what we're doing.

The other thing very, very important for us is systems integrators on the data side, particularly when a customer wants to do a data modernization program, moving their SAS estate into Python in some cases or into a mix of Python and R and SAS. We're really well positioned for those deals, but they have to be done through systems integrators. And the other one that heavily relies on systems integrators is the graph technology. We have a lot of activity happening with that in pharma and in aero and defense. And in those opportunities, very often it's a system integrator that's heavily involved in the implementations. So yes, indirect is really important for us.

Matt Brown (CFO)

Okay, great. Thank you. And just one other, if I could, the called out the HP partnership with your material solutions. Is that strictly a product arrangement, or is there some go-to-market there as well? There's no go-to-market there, at least that I'm aware of. Maybe I'm missing something. Other than the fact that now their material data is available in our material database modeler, which is really important. We have about 400 different providers. HP is a new one that's added, but a very, very important one. That solution has been maturing, and I think it's going to really take off. We're going to move it into a units model approach coming up pretty soon here. And I think that's going to be very, very transformational. I think most of our existing customers are going to start using it. And when they do, I think it's going to really change the game. It's a gorgeous product. And it uses AI as part of it as well. So there's some new things coming that are rather cool.

Blair Abernethy (Managing Director and Senior Research Analyst)

That's great. Thanks very much.

Matt Brown (CFO)

Sure.

Jim Scapa (Co-Founder, Chairman, and CEO)

Thank you. Our next question comes from Charles Shi with Needham & Company. Your line is open.

Charles Shi (Managing Director and Senior Equity Research Analyst)

Hi, Jim, Matt. Thanks for taking my questions. I know we're in the, well, middle part of the year, still a little bit away from 2025. But Jim, Matt, any initial thoughts on next year at this point, given there seems to be some renewed concerns about the macroeconomic environment, particularly we're seeing news as Stellantis, for example, I'm sure it's probably one of your large customers in automotive, seems to be that there's some rumored layoffs there. Not so sure if this is an isolated case or not, but I want to get your thoughts in the middle part of 2024, any initial view on 2025, the macro environment, automotive, and what do you think about the Altair business? No, that's a good question.

Jim Scapa (Co-Founder, Chairman, and CEO)

In general, I feel like these companies have no choice but to continue to innovate aggressively. So my feeling is that these downturns aren't necessarily bad for my business because I think I bring a lot of value to the customers. And I think the customers are going to choose to work more and more with Altair as time goes on. But of course, when there is an overall malaise or whatever, I suppose it can have some effect. But generally, I'm not that concerned. I feel really, really optimistic coming into 2025. The product lineup that we're bringing at the end of this year into next year, it's just second to none across the board on the simulation side. All the modeling and visualization, all the work we've done on the modeling and visualization is essentially complete.

We are seeing ourselves very, very competitive against really everyone. Similarly, on the data side and the HPC stuff, we're launching a product called NavOps. We've got a huge number of customers lined up. It lets you get to the cloud, basically, works with any of the different cloud providers. Every customer is interested in being able to do that, managing cost and performance. So I just think we're in a great spot. Of course, macro can have some overarching effect, but it's my job to plow us through whatever, and I'm pretty confident about it.

Charles Shi (Managing Director and Senior Equity Research Analyst)

Got it. Thanks, Jim. Maybe a second question. Glad to see you at the Design Automation Conference. I feel like Altair has a bigger presence at that EDA industry trade show. Do you want to ask, maybe first off, can you kind of help us, give us a reminder, what are the Altair business, Altair exposure to the semiconductors at this point?

Matt Brown (CFO)

It's interesting to see Altair announce acquiring this company called Metrics Design Automation. But also want to check with you because that company, the founder, Joe Costello, is very famous for his different thinking around the business model, charged by the minute rather than charged by the seat. That has been his pitch to the EDA industry. But that does echo some of the new point-based business model you have been promoting for over the years. I wonder if we can get a comment from you on that as well. Thank you.

Jim Scapa (Co-Founder, Chairman, and CEO)

Yeah, we've been building out our portfolio in electronics, starting with printed circuit boards and now more and more in the semiconductor space. Obviously, we're not a major player there yet, but we're coming with a lot of, I think, interesting technology. The DSim product, we tested the hell out of it, and it's very, very competitively performing to the best in class logic simulators. And we have really nice digital debug technology, honestly best in class there. And we plan to integrate that stuff, make it available so people can run desktop on their servers or in the cloud with business models and technology that makes it very interesting.

And the market, I think, for semiconductor design is exploding, starting from universities and small companies. And I do think that there's been a bit of a duopoly there with very expensive software that is sort of anathema to the creative power of the market to be able to go out and innovate. So I think we're going to bring some disruption there.

I don't mean that we're going to completely change the world in six months, but I think we are going to see a lot of traction around the stuff we're bringing. And you also have this move to 3D-IC, and Altair is very well positioned with some really nice technology in that direction as well. So I think it's going to be more and more important what we do. Obviously, we play big on the HPC side there as well. So bringing all that convergence, if you will, is going to be important. And I think some of the expertise and technology we bring on the AI side as well is going to bring some interesting innovation. I think that particular market, the EDA market, is ripe for some disruption, and we're going to try and bring some.

Operator (participant)

Thank you. And our next question comes from Steve Tusa with JPMorgan.

Steve Tusa (Senior Equity Research Analyst)

Your line is open. Hey, good evening. Hey there. Good evening. Just a question on the guidance and the margins. I would assume that part of the margin tweak down is due to foreign exchange. Can you just confirm that, or is there something else in the business that you're seeing on the cost side? Yeah, it is. Thank you for the question. If you look at the full year guide, and we have a table that's there that's helpful in getting you to bridge from sort of one quarter to the next, the full year guide from an EBITDA perspective in constant currency is unchanged. So you're correct that the only impact to EBITDA is due to FX. Okay, great.

And then, as far as the aerospace strength is concerned, it kind of is juxtaposed against, I know you're not direct competitors on certain fronts, but juxtaposed against Dassault, who called out aerospace and defense as being headwind. Is there anything to kind of directly read through there to market share? Are these just on very obviously, they're a large company with many different product lines, but is there anything to kind of read through from that to a direct project win or direct deal win for you guys?

Jim Scapa (Co-Founder, Chairman, and CEO)

I don't think there's anything direct Altair versus Dassault, if you will, but I do think some of the players are rising and some are slipping some. And I would say Altair is gaining, and others are perhaps slipping some. So without calling out names, I'm not sure what else I can say there. But it's part of why I don't concern myself with some of the macro because I think it can create new opportunities, and I think Altair is rising irrespective of where the tide is going.

Steve Tusa (Senior Equity Research Analyst)

Great. Thanks a lot. Congrats.

Jim Scapa (Co-Founder, Chairman, and CEO)

Thank you.

Operator (participant)

Thank you. And our next question comes from Mark Chappell with Loop Capital Markets. Your line is now open.

Mark Schappell (SVP and Senior Equity Research Analyst)

Hi. Thank you for taking my question. Nice job on the software revenue print. Jim, question for you on Metrics Design. I appreciate your color on that and your prepared remarks. You mentioned that you thought the technology was groundbreaking. I mean, would you consider their technology groundbreaking in the EDA space in the same way that maybe SimSolid is disruptive in mechanical simulation?

Jim Scapa (Co-Founder, Chairman, and CEO)

No. So I said it's groundbreaking the business model that they're applying here because with the cloud, you can scale up to thousands of simulations simultaneously. And so you can basically do in a very, very short amount of time what you could do in a much, much longer period of time because you perhaps don't have enough licenses or enough computing hardware to scale out as fast. So the business model and the approach, I think, is what's groundbreaking and can really accelerate designs. The general technology of the logic simulator, I think it's a really excellent logic simulator, which I admit before a lot of testing that we did, we were a little skeptical, but it's really quite strong. In fact, at the DAC conference, one of the gentlemen that does all this evaluations and whatever actually wrote similarly. He was quite surprised with its performance.

We were as well. We tested it with a team overseas. So no, I don't think the simulator itself is groundbreaking. I think it's a very competitive simulator. I think the business model is what's groundbreaking.

Mark Schappell (SVP and Senior Equity Research Analyst)

Great. Thanks. And then on Physics AI, that was a big topic during the user conference and investor day. What kind of an uptake rate are you seeing with your Physics AI tools?

Jim Scapa (Co-Founder, Chairman, and CEO)

I think a huge percentage of the customers are beginning to use it. So it's getting a lot of uptake.

Mark Schappell (SVP and Senior Equity Research Analyst)

Great. Thank you.

Jim Scapa (Co-Founder, Chairman, and CEO)

Sure.

Operator (participant)

Thank you. And our final question comes from Dylan Becker with William Blair. Your line is now open.

Dylan Becker (Senior Equity Research Analyst)

Hey, gentlemen. Nice job here. Jim, maybe touching on kind of the HyperWorks 24 rollout, any kind of additional color you can give us around maybe added functionality for customers, how they're thinking about adoption of this, what that can mean for incremental usage or units, kind of the right way of thinking about what that means for the business?

Jim Scapa (Co-Founder, Chairman, and CEO)

I think it's sort of a broad-based release with a lot of really great new stuff in it. The HyperMesh product, which is our flagship product, has gone through this complete transformation. It's a new user experience. It's all Python, all of that. And there's a lot of underlying stuff that you can't see that we are taking out, if you will, because we had two processes running simultaneously. So the performance is dramatically improving.

It improved dramatically with the 4.0 release and the 4.1 release, which is right now, and the 4.2 release in a few months. Each one of these is giving us a lot of new performance. That is extremely important. A lot of robustness as well. So brand new user experience, much higher performance. Some of the products have the new graphics engine in it, which is gorgeous. So it's full-time, real-time rendering. It's really beautiful stuff. The Inspire product continues to really just be groundbreaking for simulation-driven design. I think over the next six months to 12 months, I think we're going to see a lot more take-up of Inspire. That addresses the design community. I'm very excited about that as well, especially some of the new technology for implicit design is, I think, very, very interesting as well. There's a lot.

I mean, it's hard to pinpoint lots of new things in SimSolid. The electronics, the electromagnetics in SimSolid continues to evolve here. And we're continuing to benchmark runs against our traditional electromagnetic solver, Feko, and getting very, very good results. So we're excited about where things are going.

Dylan Becker (Senior Equity Research Analyst)

Okay. That sounds great. Yeah. Appreciate the depth there. Maybe too, for Jim, maybe Matt as well too, on that kind of push to new verticals. Obviously, we've kind of restructured and verticalized the sales force, but it sounds like there's some key wins in some of those segments as well. I guess, how should we think about kind of the evolution of those pockets of strength within some of these new markets and how to kind of fully capitalize on the potential in each of those as well?

Jim Scapa (Co-Founder, Chairman, and CEO)

I can answer that. I don't know if Matt has a different answer here, but I think some of them have matured faster, are really hitting their stride, aerospace and defense for sure. Some of them are continuing to mature, and we're continuing to tune them. Some of the people that we might have selected, whatever, we're making little changes here and there and kind of learning from the ones that are doing well. We're also adding more folks with domain expertise, for example, in the life science space. We've had to add a couple of people that really deeply know that space, particularly on the data science side. But some of the acquisitions that we've made, for example, the Graph Database acquisition had a lot of life science expertise in it. And so that's really shored up that new healthcare life science vertical, which really looks like it's taken off for us. So in general, I mean, I think it's coming along. It's only 1.5 years into this new organization. And I think an organizational transformation like this probably takes three to four years to really completely hit its stride.

Matt Brown (CFO)

Yeah. I mean, the only thing I would add there, Dylan, is just that I think the momentum we're seeing is really, really strong. And Jim called out in his prepared remarks, "In Q2, we signed our largest deal ever." And that has a lot to do with us moving to verticals. So a lot of these verticals are starting to hit their stride. We were pleased with our Q2 software revenue performance, getting a 10.6% in constant currency. And we're excited about our guide for Q3 at the midpoint at 12.4% in constant currency. Just we're pleased with how momentum is building here and feel very good about it.

Dylan Becker (Senior Equity Research Analyst)

Okay. Great. Sounds good. Thanks, guys.

Operator (participant)

Thank you. This concludes our question-and-answer session. I will now turn it back to Jim Scapa for closing remarks.

Jim Scapa (Co-Founder, Chairman, and CEO)

Okay. Well, thank you very much. I want to just express appreciation to the team because everyone worked really hard on the Altair team. Appreciate everyone's interest in our company and look forward to continued success here. Thank you.

Operator (participant)

This concludes today's conference call. Thank you for participating. You may now disconnect.