Altair Engineering Inc

NASDAQ:ALTR

Earnings Call Transcript 2022-Q3

[Operator]

Good day, and thank you for standing by. Welcome to Altair’s Third Quarter 2022 Earnings Conference Call. After the speaker’s presentation, there will be a question-and-answer session. To ask a question [Operator Instructions] Please be advised that today’s conference is being recorded.

I would now like to hand the conference over to your speaker today, Dave Simon, Senior Vice President, Investor Relations. Please go ahead.

[Dave Simon, SVP, IR]

Good afternoon. Welcome, and thank you for attending Altair’s earnings conference call for the third quarter of 2022 ended September 30, 2022. I’m Dave Simon, Altair’s SVP for Investor Relations. And with me on the call are James Scapa, Founder, Chairman and CEO; and Matt Brown, Chief Financial Officer. After market closed today, we issued a press release with details regarding our third quarter performance and guidance for the fourth quarter and full year 2022, which can be accessed on the Investor Relations section of our 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 perfection, 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, let me turn the call over to Jim for his prepared remarks. Jim?

[James Scapa, Founder, Chairman and CEO]

Thank you, Dave, and welcome to everyone on the call. Altair had a strong quarter for software sales showing exceptional momentum year-to-date despite significant macroeconomic uncertainty throughout the year. Total revenue on a constant currency basis for the first 9 months of 2022 grew by 10.4% over the same period in 2021. Software product revenue as a percentage of total revenue for the first 9 months of 2022, continued a strong positive trend of 87.8% compared to 84.7% during the same period in 2021. And our recurring software license rate remained high at 93% for 2022 year-to-date. Software product billings in the third quarter grew by more than 21% year-over-year on a constant currency basis, adding to the strong first half of the year. Through the first 9 months of 2022, software product billings grew by more than 22% on a constant currency basis and most impressively, at approximately this rate in the Americas, EMEA and APAC.

Altair continues to focus on growing our software business, driving our mix shift towards software and higher gross margins. Client engineering services has trended down significantly this year. However, we do see this trend beginning to abate entering the fourth quarter. The software-related services business has declined slightly in 2022. We also continue to expand our profitability. Adjusted EBITDA for the first 9 months of 2022 was $69.9 million or 17% of revenue versus $61.3 million or 15.7% of revenue in the same period for 2021, reflecting growth of 14% in a year in which exchange rates dramatically reduced our revenue numbers. The year-over-year constant currency headwind to adjusted EBITDA in the first 9 months of 2022 was more than $4 million.

In September, we completed the acquisition of Rapid Minor, a leader in advanced data analytics and machine learning software. RapidMiner’s low-code platform has been downloaded more than 1 million times and is used by hundreds of thousands of people of all skill levels to develop production scale data pipelines and ML models. This acquisition significantly strengthens Altair’s data analytics portfolio and gives Altair a best-in-class end-to-end cloud-native solution. RapidMiner pioneered the concept of visual explainable data science and was the first platform to introduce automatic data science, text analytics, automatic feature engineering, deep learning and more. It provides hundreds of powerful drag-and-drop building blocks to transform and augment data, greatly accelerating work for coders and noncoders alike. RapidMiner’s flexible delivery models provide users and enterprises with the scale they need from a user’s desktop to on-premise service to secure multi-tenant cloud. It’s best-in-class cloud offering leverages the same highly rated user experience of their desktop platform to existing users can easily migrate to the cloud, and new users of all levels, and learn the application quickly. Alter plans to quickly integrate several of our other analytics tools, including decision trees and scorecards from Knowledge Studio, ML Ops from SmartWorks and our SaaS language development and compiler environment, Altair SLC. Customers will soon be able to access existing Altair and RapidMiner’s products easily through Altair’s unique units licensing model.

We believe the addition of RapidMiner to the previously acquired technology from Datawatch and World programming, the breadth and depth of Altera’s data analytics portfolio, our market reach, our deeply technical and passionate team worldwide and the units business model positions us as a leader in supporting the data science and analytics requirements of clients across any market vertical. Specifically, in manufacturing, RapidMiner brings deep technology and experience, including industry-specific machine learning techniques and data source connections, including OSIsoft pie, Braincube and many more. When combined with Altair’s knowledge on technology and engineering and simulation, we believe Altair becomes the clear leader for data science and product engineering and manufacturing.

While we are excited with this acquisition and other important acquisitions we’ve made so far this year, we’re also continuing to push innovation organically. In Q3, we released simulation 2022.1 with many powerful new updates to enable efficient innovative products by applying advanced simulation, cloud-based computing and optimization for cleaner, more sustainable product life cycles. Simulation 2022.1 helps companies meet corporate social responsibility objectives, drive better design decisions and brings the power of open source technology to users around the world. In addition to many new capabilities, enhancements have been introduced to Altair Inspire for an improved design creation and optimization experience as well as updates to Altair SIMSOLID lightning Quick simulation-driven design. And a new HyperWorks workflow streamlines the process of building a reduced order model for early conceptual optimization.

Along with simulation 2022.1, we announced the release of OpenRadioss. With OpenRadioss, Altair aims to accelerate the global pace of innovation and address the ever-increasing multidisciplinary challenges faced by all industries. Staying true to Altair’s open architecture philosophy, OpenRadioss allows everyone to contribute, drive their own innovations, develop and share their models and experiment by getting inside the code. The release was met with significant community enthusiasm with 43,000 visitors to openradioss.org, 14,000 executable downloads and over 100 forks of the source on GitHub during the first 3 weeks after the release. For more than 30 years, Radioss has been a successful commercial software product utilized around the globe to help major automotive OEMs develop 5-star rated crash performance vehicles. Aerospace companies simulate hard landings and bird strikes and consumer electronics manufacturers analyze impact events like cell phone drops. Radioss is a leading technology for solving transient dynamic events with outstanding robustness, accuracy and scalability. Additionally, OpenRadioss can read and run models written with ls dyna syntax, enabling the community to contribute and harmonize model building. With this move, OpenRadioss is positioned to be the most accessible, powerful open source software for accurate simulation of complex multiphysics dynamic events. We believe this will enable a highly engaged community to make faster advances in technology and speed up research focused on solving today’s most complex challenges.

Bringing together many elements of our broad technologies, we announced Altair’s Digital Twin Solution, offering tool sets for preproduction, post production and in-service applications. These tool sets leverage the dynamic convergence of simulation and data science, and we look forward to seeing further customer successes in this arena.

Reaffirming the power of our technology, I’m excited to share that Altair has been ranked the #1 generative design software supplier based on a study conducted by ABI Research competitive ranking in this domain. This is a great recognition of our disruptive technology, innovation and leadership within the scope of generative design, noting that when we introduced OptiStruct many years ago, we were setting a path for the powerful intersection of engineering simulation and design.

It is especially gratifying for us and our simulation technology is chosen by companies clearly on the forefront of enabling a more sustainable world. And in Q3, we saw some notable customer successes. A European maker of solar trackers, one of the largest such companies in the market has chosen Altair’s Simulation Suite as it moves forward with new product development and services related to solar energy and distribution grids. We believe our many customers in wind, solar and other renewable fields will increase their positive impact at an accelerated pace over the next few years with our solutions. We often speak about ESG impact as related to the sustainability gains in our engineering and manufacturing customers made through the application of simulation and optimization.

I would like to highlight some activity in our banking, financial services and insurance sector, which represents a different type of positive social uplift. This past quarter, we closed 2 deals in India related to data analytics for lending to micro, small and medium enterprises. Providing efficient short-term working capital to such enterprises in developing nations is a key factor in nurturing healthy and sustainable livelihoods in disadvantaged areas. Leveraging the power of data analytics to increase access to equitable financing, the smart business and an intelligent approach to localized economic development.

Along the same lines, in Q3, we provided data analytics technology to a lender focused on family housing in rural areas, small towns and areas peripheral to cities where it has been previously difficult to efficiently deploy relatively small capital support for housing at scale. We are proud that our data analytics tools will help families and disadvantaged economies realize their lifelong dreams of home ownership. Also in the financial services market, a major European bank signed a renewal and expansion agreement with us, noting that a large percentage of its usage is for real-time data streaming and visualization of their trading dashboards. And a major U.S. bank has substantially increased its data analytics usage through units licensing model, resulting in a 73% year-on-year increase for Altair.

Application successes for data analytics also continue to build momentum in our manufacturing and engineering customer base. A major aerospace manufacturer is working with our AI tools to improve helicopter blade manufacturing, and in APAC, a leading electronics manufacturer is now using Altair’s data analytics and AI tools to improve its product performance with a digital twin strategy.

Turning to high-performance computing. That business continues to grow well, especially related to technology companies engaged in chip manufacturing where we have a very healthy pipeline. One major player awarded Altair a 7-figure contract representing over 150% year-on-year growth. We also inked a 7-figure deal representing significant growth in a European chip design company. One of our long-term goals is to continue increasing the percentage of our sales attributable to indirect sales channels. We made several recent announcements about new channel partners, including Flow Numeric in Switzerland, AmdoSoft in the U.K. and Germany, Symmetry in the Nordic region, Simutron in South Africa, VirtualCAE in Brazil, Inflection Consulting in France. As we support these high-quality organizations, we look forward to accelerated growth as we build our bright future together.

We remain positive about the remainder of 2022 despite continued global uncertainty and foreign currency exchange rate headwinds. Altair’s dedicated teams worldwide are truly a source of inspiration as we continue doing the right things for our customers and the world while we push forward with our outstanding technology developments and applications. Now I will turn the call over to Matt to provide more details on our financial performance and our guidance for the fourth quarter and full year 2022. Matt?

[Matt Brown, CFO]

Thank you, Jim, and hello to everyone on the call. Thank you for joining us. Altair had a strong third quarter, continuing the success we had in the first half of the year. Despite significant currency headwinds and an increasingly uncertain economic environment, demand for our products remained high, enabling us to deliver year-over-year revenue growth and a meaningful increase in cash flow, driving results above the midpoint of the range on every metric we guided to for the quarter. Calculated total billings for the quarter were $122.9 million, a year-over-year increase of 4.9% in reported currency and 13.3% in constant currency. The strength in billings and especially in software billings was supported by increased demand across all geographies and particular strength in our BFSI technology and aerospace verticals, all leading to software product and total revenue at the high end of our guidance range for the third quarter. Software product revenue was $103.8 million or an increase of 1.4% compared to Q3 2021 in reported currencies. Total revenue, which includes services and other revenue was $119.4 million or a decrease of 1.6% compared to Q3 2021 in reported currency. Our recurring software license rate, which is the percentage of software product billings that are recurring, continues to be strong at approximately 93% for the first 9 months of the year.

As a reminder, a significant portion of our revenues are billed in currencies other than the U.S. dollar and are, therefore, impacted by changes in FX rates. This was particularly true the past 9 months as we saw the dollar significantly strengthened against other major currencies. Relative to Q3 2021, our software product revenues and total revenues were unfavorably impacted by changes in FX rates of approximately $8.9 million and $9.6 million, respectively. Therefore, on a constant currency basis, in the third quarter 2022, we saw year-over-year software product revenue growth and total revenue growth of 10.1% and 6.3%, respectively. Non-GAAP gross margin, which excludes stock-based compensation and restructuring expense, was 78.6% in the third quarter compared to 75.2% in the prior year, an increase of 340 basis points, as our software revenue mix, which carries higher gross margins, increased as a percentage of total revenue. In addition, our non-GAAP gross margin specific to software product revenue continued to improve as our support costs trended down. Software revenue was 86.9% of total revenue in Q3 2022 compared to 84.3% in the prior year. Over the long term, we continue to expect a general mix shift towards software product revenue as growth there will outpace services and other revenue. Non-GAAP operating expenses, which excludes stock-based compensation, amortization of intangible assets and restructuring charges, were $91.7 million compared to $77.9 million in the year ago period.

Adjusted EBITDA in Q3 2022 was $6.8 million or 5.7% of total revenue compared to $14.8 million or 12.2% in the prior year quarter. Adjusted EBITDA was higher than expected in the quarter due to slightly higher-than-expected revenue, combined with our disciplined spending. For the 9 months ended Q3 2022, adjusted EBITDA grew 14% to $69.9 million or 17.0% of total revenue from $61.3 million or 15.7% of total revenue for the 9 months ended Q3 2021.

Turning to our balance sheet. We ended the third quarter with $311.9 million in cash and cash equivalents, a decrease of approximately $104.3 million from the prior quarter. The quarter-over-quarter decrease is primarily due to cash used in our acquisition of RapidMiner and other strategic investments, partially offset by free cash flow generated in the quarter. We generated free cash flow of $5.2 million in the third quarter, and when excluding the payment in the first quarter of the legal settlement assumed as part of the World Programming acquisition, we generated free cash flow of $85.7 million for the first 9 months ended 2022 compared to $48.8 million in the 9 months ended 2021, an increase of more than 75% year-over-year.

Turning to guidance for Q4 and full year 2022. We are continuing to see a significant FX impact relative to prior year and our previous guidance. In the past several months, the U.S. dollar has continued to strengthen meaningfully against other major currencies, which has a significant impact on our results in reported currency. However, on a constant currency basis, we are encouraged by the strength of our pipeline and resilience of our business model. With that backdrop, we are expecting software product revenue for Q4 in the range of $126 million to $131 million or a year-over-year increase of 3.0% to 7.1%. The year-over-year percentage increase is being negatively impacted by more than 10 percentage points due to changes in foreign currency exchange rates. For full year 2022 software product revenue, we are raising the guidance at the midpoint in constant currency. We are now expecting full year 2022 software product revenue to be in the range of $488 million to $493 million or a year-over-year increase of 7.5% to 8.7%. The year-over-year percentage increase is being negatively impacted by approximately 7 percentage points due to changes in foreign currency exchange rates. At the midpoint, when compared to the guidance we gave last quarter, this represents an increase of $4.2 million, offset by a decrease of $6.2 million due to changes in foreign currency exchange rates over the last 3 months. We continue to expect services and other revenue to be down in 2022 compared to 2021, consistent with our previous guidance. As a result, we expect total revenue for Q4 2022 in the range of $143 million to $148 million or a year-over-year increase of 1.6% to 5.1%. The year-over-year percentage increase is being negatively impacted by approximately 10 percentage points due to changes in foreign currency exchange rates.

For full year 2022 total revenue, we are also raising the guidance at the midpoint in constant currency. We are now expecting our full year 2022 total revenue to be in the range of $555 million to $560 million or year-over-year growth of 4.3% to 5.2%. The year-over-year percentage increase is being negatively impacted by approximately 6 percentage points due to changes in foreign currency exchange rates. At the midpoint, when compared to the guidance we gave last quarter, this represents an increase of $3.7 million offset by a decrease of $6.7 million due to changes in foreign currency exchange rates over the last 3 months.

From a cost perspective, we continue to be disciplined in our approach and are especially mindful of the economic uncertainty heading into next year. While we’re investing in areas that are driving the business forward, we’re reducing our spend as a percentage of revenue in administrative department, which is helping to drive increases in adjusted EBITDA. For Q4 2022, we expect adjusted EBITDA in the range of $22 million to $25 million or 15.4% to 16.9% of total revenue compared to $24.0 million or 17.0% of total revenue in the year ago period. And for full year 2022, we are also raising guidance for adjusted EBITDA at the midpoint in constant currency. We are now expecting adjusted EBITDA to be in the range of $92 million to $95 million or 16.6% to 17.0% of total revenue compared to $85.3 million or 16.0% of total revenue in 2021. At the midpoint, when compared to the guidance we gave last quarter, this represents an increase of $1 million, offset by a decrease of $1.5 million due to changes in foreign currency exchange rates over the last 3 months. Compared to prior year, our 2022 expected adjusted EBITDA is being negatively impacted by more than $7.5 million due to changes in foreign currency exchange rates.

And finally, we are also raising the guidance for full year 2022 free cash flow by $4 million at the midpoint to a range of $14 million to $18 million, which includes the $65.9 million payment for the existing litigation judgment against World Programming that we assumed as part of our acquisition and was paid in January. Excluding this payment, we’re expecting free cash flow for the year of approximately $82 million at the midpoint compared to $53.8 million in 2021, representing an increase of 52%. As a reminder, our cash flow expectations are sensitive to billings and collection patterns which fluctuate seasonally. In particular, our historical pattern has shown free cash inflow in the first half of the year, primarily from collections on billings from Q4 and Q1 and a smaller free cash outflow in the second half of the year. We’re expecting that pattern to continue this year. We’ve provided detailed guidance tables, including reconciliations to comparable GAAP amount and the impact of changes in foreign currency exchange rates in our earnings press release, which was issued after close of market today. With that, we’d be happy to take your questions. Operator?

[Operator]

[Operator Instructions] Please stand by while we compile the Q&A roster. Our first question comes from the line of Dylan Becker with William Blair.

[Dylan Becker, William Blair]

Nice job here. Maybe starting off with you, Jim. As you think about the outlook and kind of perception you’re hearing from the core customer base, it sounds like the demand environment still remains pretty healthy despite everything that’s going on. But Q4, Q1 typically fairly seasonal for you guys and important as well, too. So as those customers are aligning budget, love to get a sense of what you’re hearing, how they’re prioritizing budgetary allocation to simulation types of tools and how you can kind of help support the operational efficiency needs that they’re trying to address.

[James Scapa, Founder, Chairman and CEO]

Hi Dylan, first of all, I just want to let you know that it’s late and [indiscernible]. So you may hear my voice a little raspy here for the season. I’m speaking from a hotel room, traveling here, visiting my team here. So as you can imagine, I’m asking this question like all day long of my Chief Revenue Officer, of all my country managers or the people who run the indirect business because I’m reading the newspapers just like you guys are. It’s somewhat surprising to me, if I’m really honest, but the pipeline remains extremely strong we’re not seeing like any sense, any hint of deals being delayed or slowed down or taken back or any of that, it just somewhat surprisingly continues to be fairly robust. And I think the rationale is just that customers feel so much pressure to continue to put out competitive products and we actually help them to reduce cost and there’s this whole move towards applying data science and digital twin technology as well. And so that’s really kind of giving us almost a renaissance that we see. So it continues to be actually very, very strong for us.

[Dylan Becker, William Blair]

That’s encouraging and good to hear. You touched on the data analytics piece there and highlighted the RapidMiner acquisition in your prepared remarks. I wanted to maybe dig in to the value proposition there as well, too. How do you think about that kind of coalescing and fitting into the broader data analytics vision. It sounds like it really kind of helps round out the functionality of the suite, but maybe how you’re thinking about what customers are saying there and maybe how that can help incentivize the data analytics conversion towards the unit model as well?

[James Scapa, Founder, Chairman and CEO]

Yes, the unit model really works when you have a sufficient number of products that are available for the customer to use with their units, first of all. And so I think we finally sort of crossed that threshold where we have a really nice array of technology across a lot of different areas of interest for these customers. The RapidMiner acquisition brings some overlap with what we had before, but we think their technology is superior, frankly. They also had a very, very deep installed base in the manufacturing sector, which, of course, is very, very important for us. And just, a lot of you, your 20 years of experience with a lot of use cases in the manufacturing sector, that really helps us to sort of cement what we’re trying to do, and they’ve built all the major connectors that are relevant in manufacturing, but lots and lots of smaller connectors as well in the manufacturing space. So very, very strong in that direction.

Then the last piece is that we were working on our own cloud platform. But frankly speaking, what they’ve built, we think, is just really world-class and frankly, better than what we were building. And so we just made the decision. This is just a really great team, great products, going to fit really well. We’re going to sunset a couple of our products and move some of our technology. That is really great. I mentioned it during the call, decision tree technology, for example, in RapidMiner product. But now we have this just absolutely best-in-class array from the data prep side all the way through data science, Panopticon gives us best-in-class visualization tools. And we’re just really well prepared for the whole digital twin revolution because our SmartWorks IoT platform is also very, very strong now. And we’re starting to just see a lot of traction. I mean, it’s just a great position for us.

[Operator]

Our next question comes from the line of Ahmad Khalil with Oppenheimer.

[Ahmad Khalil, Oppenheimer]

Congrats on the quarter. I guess just a more nuanced follow-up to Dylan’s question, Jim. Would you say there are differences among your different customer verticals in terms of how they’re viewing the macro environment?

[James Scapa, Founder, Chairman and CEO]

So, it’s a good question. To be honest, it seems to be pretty solid across the board. I’m not really getting getting the input and perhaps I’m not asking the right questions, so I’m going to probably need to dig further now that you’ve asked this. But frankly speaking, I’m just not seeing, for example, auto or aero, if you look at our numbers, our expansion numbers, our new account numbers and all the renewals, they’re all robust and the tech business, very, very strong. And then a lot of strength across simulation, our HPC business and the data analytics business. So it’s fairly across the board, frankly, right now. one can never know there’s all kinds of macro things out there, of course. But right now, the pipeline just feels very, very solid.

[Ahmad Khalil, Oppenheimer]

That’s great. And then one for Matt. I don’t know if this was disclosed, I didn’t see it in the press release, but is RapidMiner adding any revenue to this year?

[Matt Brown, CFO]

Yes. It’s adding very little this year, almost nothing in Q3, but we’re expecting a couple of million to come in, in Q4.

[Operator]

Our next question comes from the line of Blair Abernethy with Rosenblatt.

[Blair Abernethy, Rosenblatt]

Nice quarter. Can you hear me okay? Sorry, just was getting cut off there. Just another question on RapidMiner, if I could. Kind of, as you look down the road sort of 3 or 4 years down the road, Jim, is this potentially a platform where you can consolidate all of your various data analytics and offerings?

[James Scapa, Founder, Chairman and CEO]

The answer simply is yes. So yes, that’s exactly right, especially as the market and customers, especially enterprise customers, want to move to cloud, it just really gives us a fantastic platform for bringing everything in, and we were already developing. So I mean everything we’ve developed such as our whole ML apps capability that was in SmartWorks analytics, it’s just going to plug right into the rapid minor cloud solution. So in fact, that is exactly where we see things going and pretty quickly actually. And by the way, one other thing I was just going to mention, one other thing I didn’t mention earlier with Dylan’s question. RapidMiner’s a great brand. [Technical Difficulty] It’s just extremely well known. I’m here in Greece and was at the university the other day in one of the data science departments with a lot of students, and they had all heard a RapidMiner. So it’s just a really, really nice to have a brand that’s strong because I think it will help us.

[Blair Abernethy, Rosenblatt]

Okay. Excellent. Excellent. And what’s the sort, just in the next, let’s just say, the next year or the next few quarters, what’s sort of a go-to-market plan with the RapidMiner product today? And at what stage do you move it into the Altair’s units model?

[James Scapa, Founder, Chairman and CEO]

It’s going to move into the units model very, very quickly here. And we’re basically pushing units across the board now with all the customers for data analytics. We’re pretty much moving away from any named user business. Most of the renewals, we’re trying to move them over to the units model as well. In that way, they have access to all the applications. It’s just much easier for us to grow the business going forward. And we’re making a couple of other adjustments to make that easier and to accelerate that, which you’ll begin to see, basically, throughout 2023. And I think it’s going to dramatically increase the opportunities that we have for grabbing share.

[Blair Abernethy, Rosenblatt]

Okay. Great. Just shifting gears a little. In your prepared remarks, you called out a few larger deals in the data analytics side of things and elsewhere. And I’m just wondering, given the cloudy macro environment, are you seeing a change here at all? Like are you seeing more large deals happening because you’ve got more product to offer? Or any sort of change in terms of the size of things you guys are booking?

[James Scapa, Founder, Chairman and CEO]

I mean it’s a natural transition that we as a company have been making from selling, if you will, individual tools to solutions to really selling the whole portfolio into accounts. And more and more, we’re selling a little higher level, more top down into accounts. We still do a lot of bottom up, but it’s bottom-up, top-down, and we are selling the entire portfolio. And we think that data science and data analytics offering combined with everything else that we do as a business is very, very attractive now to customers. And our simulation products are really, really advancing. It sort of goes unnoticed, but we’ve been rearchitecting everything and modernizing everything. So there’s just a real strength across the product portfolio.

[Operator]

Our next question comes from the line of Matthew Murakami with RBC Capital Markets.

[Matthew Murakami, RBC Capital Markets]

This is a Matt Murakami on for Matt Hedberg. We just wanted to ask, when looking out at some major themes that you’re seeing from your customers and in the market, what areas of the market do you feel an emphasis to invest in either organically or inorganically?

[James Scapa, Founder, Chairman and CEO]

So we’re seeing a lot of opportunity in technology in aerospace and in banking. Those 3 sectors are growing really, really well, and we just see a lot of headroom in all 3 of those. Automotive still has headroom because we’re just beginning to penetrate. We just had a win on the data analytics side in Europe. The RapidMiner technology is very, very interesting and attractive to a lot of customers in automotive as well as all the manufacturing customers. But if you’re asking me where we’re really seeing the most headroom, it’s those first three. But if I look at new accounts, we’re seeing a lot of new architectural engineering accounts, there’s a lot of business really across the board.

[Matthew Murakami, RBC Capital Markets]

Perfect. And I’m just going to follow up on that. With M&A being a part of your guys’ strategy the past few years, as we approach this more uncertain macro, does this kind of create some pause in the M&A strategy? Or do you think this is an opportunity or from a value perspective, creating some more opportunity in M&A?

[James Scapa, Founder, Chairman and CEO]

I think it may create some more opportunity as time goes on. In general, I’m feeling like there’s no really huge moves that we’re going to make in 2023. I think we have some things to digest now. We needed to do some of these moves to fill out the solution set, particularly in data analytics. And I think we’ve done a lot of good work there. There’s still obviously a pipeline of things that we’re looking at. But it’s smaller, quite frankly. And now we need to digest and, frankly, just put our heads down and grow the business.

[Operator]

Our next question comes from the line of Gal Munda with Wolfe Research.

[Gal Munda, Wolfe Research]

So the first one, maybe Matt, for you. Just thinking about the digestion period that Jim mentioned and the fact that RapidMiner will contribute a little bit to the top line, but also brings in the cost base. How are you thinking or how are you feeling about the next year in terms of the cost base when you look into, especially in light of the ‘23 targets to introduced, either I guess?

[Matt Brown, CFO]

Yes, thanks for the question. So when we’re looking at RapidMiner, it is such a great piece of technology that we were able to acquire and bring in. And it obviously contributes some top line, not a lot. But one of the things that we’re doing is looking at cost synergies in terms of other open positions that are already existing within the business. And there’s quite a bit of very technical talent that exists at RapidMiner that we now get the benefit of. But I do think that there’s some opportunity for some cost synergies to fold in now and bring the teams together and maybe positions that we would have hired for before, we can now fill with just a really, really talented team. And so, sort of the short answer is, RapidMiner alone, I don’t see significantly impacting our 2023 target materially one way or the other, actually. I think we can bring it into our portfolio and make it work from a cost structure such that it’s not a drag on our EBITDA target.

[Gal Munda, Wolfe Research]

That’s really clear. And then, Jim, maybe just focusing on SimSolid, you mentioned continued progress. In the past, you’ve also talked about the new types of physics that you’re trying to introduce. And can you talk a little bit more about that? And maybe a good question, the overarching kind of question that I have is, at what stage do you think, or maybe it has happened already, when your sales force goes out and kind of offers the suite of products at what stage can SimSolid becomes kind of a normal part of the inclusion of the contract discussion? So it becomes more of a mainstream product rather than a novelty something to show something to wow customers with.

[James Scapa, Founder, Chairman and CEO]

Well, it’s not a novelty at this point, and it is the fastest-growing product from a usage standpoint in the portfolio by far and continues to really run. Most of the success we’re having is in the design community, coupled with the Inspire product or on a stand-alone basis. And we’re just beginning to start to really poke into the traditional analyst community as well. we do 3 releases of SimSolid a year, and every one of all is just chockful of capabilities, and it’s just an extremely impressive tool. So at this point, it’s sort of mainstream, but it’s also a great discussion starter. It’s similar to the SaaS language compile capability. The pipeline is very robust for those discussions as well. And then they bring us to look at the entire portfolio, use the units model. And so both of those products are really nice for generating activity to fill the funnel. I hope I answered your question.

[Operator]

Our next question comes from the line of Mark Schappel with Loop Capital.

[Mark Schappel, Loop Capital]

Just building on the earlier question around SimSolid. Jim, in your prepared remarks, you noted new innovations in your simulation portfolio, particularly around radios and simulation 2022. Did you release any new significant or meaningful product innovations around SimSolid this quarter? If I recall correctly, multiphysics capabilities were something that we’re being looked at for that product.

[James Scapa, Founder, Chairman and CEO]

So there’s nothing in that arena. We have had some breakthroughs in the lab, if you will, around electronics, for example. But it’s going to take, probably, a year or so before we release something that the market is going to see. At the same time, though, we’re constantly releasing new capabilities, particularly in the nonlinear space and contact and all of that. So SimSolid continues to really go fast, and we’re adding developers to it. We’re adding electronics developers now to it and just really focused on doing some really interesting things going forward.

[Mark Schappel, Loop Capital]

Great. And then, Matt, in your prepared remarks, you noted that you’re looking to reduce some spend in some administrative areas. I was wondering if you could provide a little bit more color around that.

[Matt Brown, CFO]

Yes. And that’s really much more to just talk about where we plan to invest and where we plan to cut back as a percentage of revenue. And so as we look ahead to the future, we’re just very mindful about the need to continue to invest in product development. That’s important for us. And in sales capacity, that’s also important for us. But areas like G&A, as a percentage of revenue, we expect that to just continue to come down. So absolute dollar spend, of course, will increase -- continue to increase a bit, but at least in terms of a percentage of revenue, we’re expecting that to come down faster than we would say in development or in our sales capacity. So yes. And when I think about those departments, I’m thinking about the typical back office functions that you would expect, so finance, legal, HR, things of that nature where really we can just start to make use of our scale.

[Operator]

Our next question comes from the line of Andrew DeGasperi with Berenberg.

[Andrew DeGasperi, Berenberg]

This is Stephanie on for Andrew Diggisberry. So are you concerned about any indirect impact from U.S. export control rules that were imposed a few weeks ago for check transfer to China?

[James Scapa, Founder, Chairman and CEO]

Thanks, Stephanie. I mean, we’re paying attention, and we obviously have to follow the rules. For Altair, relative to some of the other, let’s say, more EDA oriented companies, China is a relatively smaller percentage of our business. And a lot of our business is in the commercial enterprise like automotive and such, heavy equipment, those sorts of things. So there has been impact for us, no doubt, as the number of customers that we can or cannot sell to continues to decline. There’s certainly some impact, but we see business out of China will continue to grow even with those restrictions.

[Operator]

That concludes today’s question-and-answer session. I’d like to turn the call back to Jim Scapa for closing remarks.

[James Scapa, Founder, Chairman and CEO]

I just want to say thank you for everyone’s attention and interest in Altair and thanks to my team for all the work preparing everything and having another great quarter.

[Operator]

This concludes today’s conference call. You may now disconnect.