Howard Morof - Chief Financial Officer James Scapa - Chairman & Chief Executive Officer

Richard Davis - Canaccord Genuity Sterling Auty - JPMorgan Bhavan Suri - William Blair & Company Nandan Amladi - Deutsche Bank Gal Munda - Berenberg Capital Markets LLC Matthew Sorenson - RBC Capital Markets

Good day, ladies and gentlemen, and thank you for your patience. You’ve joined the Altair Engineering Fourth Quarter and Full-Year 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference may be recorded. I would now like to turn the call over to your host, Mr. Howard Morof, Chief Financial Officer. Sir, you may begin.

Good afternoon. Welcome, and thank you for attending Altair’s earnings conference call for the fourth quarter and full-year 2017. I’m Howard Morof, Chief Financial Officer of Altair. And with me on the call today is Jim Scapa, our Founder, Chairman and CEO. After market closed today, we issued a press release with details regarding our fourth quarter performance, 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 our IR website following the conclusion of the 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 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 final perspectives, which is on file with the SEC. 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, let me turn the call over to Jim for his prepared remarks.

Thank you, Howard, and thank you, all, for joining our call today. Our fourth quarter capped an important year for Altair and positions us for continued success. We exceeded our revenue guidance with total revenue of $89.9 million, an increase of 8% from a year ago. We produced adjusted EBITDA of $8.4 million, which was in the upper-end of our guidance range. Our main growth driver software product revenue was $67.9 million, also above our guidance range and grew a 11% to represent 76% of total revenue, compared to 74% in the fourth quarter of 2016. Our business strengthened the quarter was also reflected in total billings, which grew 20% in the fourth quarter and 12% in all of 2017. Software product revenue plus the change in deferred revenue grew an even more impressive 27% in the fourth quarter versus the same period in 2016 and 17% for the year, providing us with strong momentum and visibility entering 2018. These results demonstrate our customers are investing to leverage simulation-driven design for success in their markets. Together with our subscription-based licensing model, which makes it easy for customers to deploy more of our products, we’re seeing healthy growth in customer usage. Our unique licensing model encourages customers to try our products and is a powerful way to expose them to the very broad array of best-in-class solutions we make available under this licensing system. Our own products as well as solutions from many partners in Altair’s ecosystem called the Altair Partner Alliance are included. During 2017, we added 12 new partner products to our platform through this program. Coupled with the strong support and training we offer globally, this low friction approach generally translates into expanded use of our products. We have significant customer wins in the fourth quarter of 2017, notable for increased revenue and positive momentum in simulation-driven design, model-based design and electromagnetics. In the aerospace industry, we are the leading player for structural optimization. We had several fourth quarter expansion wins, driven by the broad implementation of many of our software tools into standard design workflows. For example, at one major aerospace manufacturer, where we trained over 200 additional engineers in Altair products during 2017, we received a large software expansion order during the fourth quarter. This growth was primarily enabled by a significant increase in the use of our modeling and visualization tools and an order of magnitude increase in the usage of our electromagnetic technology for antenna design and placement. We continue to see meaningful opportunities for further expansion of this customer in the years ahead. Another example is a leading electronics manufacturer in Europe, more than doubled their software subscription. This was driven in large measure by an increase in model-based design and multiphysics simulation and optimization coupling structural analysis, computational fluid dynamics and manufacturing process simulation. Looking ahead to 2018, we will continue the growth strategy we outlined during our IPO, which includes focusing on innovation to deliver new capabilities and products developed organically and by acquisition, expanding our direct sales organization, growing and nurturing our network of indirect resellers to increase our penetration in the SMB market, and leveraging our unit space licensing model to promote new software product adoption and expanded software product usage within our existing customer base. We will continue to invest strongly to position ourselves from market opportunities we see as consistent with our vision. Areas of focus include technologies related to electronics and the Internet of Things, machine learning, solvers, manufacturing simulation and optimization. Based on the positive trends we see across our business and several specific opportunities to grow our market share, we intend to increase our investments in 2018 to drive faster revenue growth. We will add more resources to R&D to add features to existing products, expand our product portfolio in emerging areas and deploy incremental resources into recent acquisitions. We have a history of M&A, which supports our organic growth, and we will continue to use acquisitions as part of our R&D and growth strategy. For example, we recently acquired two exciting software technologies relevant for Electronic Design. The first includes a very high performance SPICE circuit simulator used in EDA, system modeling and electromagnetics, and to model sensors for the IoT. The second feature is computational fluid dynamics capabilities extending our thermal simulation solutions to solve electronic cooling from components to full printed circuit boards. While the near-term financial impact from these acquisitions is not material, the technology and talent we acquired create important new opportunities for us over the long-term. On the business development front, we saw success in 2017, including an almost 50% increase in the number of existing customers with software product license expansion versus 2016 by adding sales capacity and more aggressively promoting new products to existing customers. In 2018, we are accelerating hiring in our sales organization to expand our market coverage and capitalize on growing opportunities we see. We’re adding more direct account managers, as well as more channel sales managers and some marketing focus and resources to provide better support for our resellers. We’re confident these investments will positively impact our growth profile over time and further increase our mix of software revenue. From a profitability perspective, we expect our growing scale and continued mix shift towards software revenue will expand gross margins over time. We believe Altair’s scalable business model will be able to deliver meaningful operating leverage consistent with our long-term targets. In summary, we had a strong fourth quarter and 2017, and are optimistic about our outlook. Our growth in billings and in particular, software billings reflects the increasing value that customers are realizing through our technology. As we continue to enhance and expand our product portfolio and invest in broadening our market reach, we’re optimistic we can continue our track record of success as we further penetrate the multibillion dollar markets we address. Now I will turn the call over to Howard for details on our financial performance during the fourth quarter of 2017 and our outlook for 2018. Howard?

Thanks, Jim. We had a strong fourth quarter with both software product revenue and total revenue above our guidance ranges. Software product revenue was $67.9 million, an increase of 11% from a year ago and total revenue was $89.9 million, representing growth of 9% from the fourth quarter of 2016. Adjusted EBITDA was $8.4 million for the quarter, which is within our guidance and compares to $10.6 million a year ago. Software product revenue grew to 76% of total revenue in Q4 2017 from 74% in the same quarter last year. Software segment revenue, which includes software products and software-related services grew to 86% of total revenue in Q4 of 2017, as compared to 85% last year. Revenue from client engineering services was $10.4 million. As expected, this was a decrease from $11.3 million a year ago. Other or innovation activities revenue increased 57% to $1.9 million with solid growth in sales of our toggled LED lighting solutions in the fourth quarter that was slightly ahead of our expectations. Billings trends can be viewed as a leading indicator for our business. As such, we believe billings is a valuable metric in evaluating our performance and are calculated by adding our revenue to change in deferred revenue, which is primarily related to software from the prior period. In the fourth quarter, deferred revenue increased 23% from a year ago and calculated billings were $99.2 million, an increase of 20% from a year ago, reflecting continued strong software momentum. This growth was primarily driven by renewals, growth at existing customers and new customer adoption, all of which were further supported by billings for our recent Runtime acquisition. Because deferred revenue can fluctuate on a quarter-to-quarter basis, we believe it’s also important to evaluate calculated billings on a longer-term basis. For the full-year of 2017, calculated billings were $359 million, an increase of 12% from a year ago, providing strong evidence of our continued software product momentum. I would like to turn to the rest of the P&L. I will be discussing income statement metrics some of which are on a non-GAAP basis. A reconciliation of GAAP to non-GAAP measures has been provided in the earnings release we issued earlier today. Non-GAAP gross margin in the fourth quarter was 70.4%, an increase of 2 percentage points from a year ago, largely due to a higher mix of software product revenue. Non-GAAP software gross margin was 79.1%, an increase from 77.6% a year ago. CES gross margin was 14.4%, compared to 17.3% a year ago, largely resulting from higher compensation costs relative to billing rates to our customers. Innovation gross margin was 21.5%, compared to 3.4% a year ago, primarily due to improved supply chain efficiencies and growth in sales of our toggled products. As we have said before, total gross margins are likely to vary on a quarter-to-quarter basis. For the quarter, operating expenses, excluding stock-based compensation and amortization of intangible assets were $56.3 million, compared to $47.6 million a year ago. The increase was primarily driven by ongoing investments in R&D headcount and related employment costs, including the impact of acquisitions, as well as accelerated investments in growing sales capacity to increase revenue growth. General and administrative expenses included increases in facilities and technology-related expenses and expenses associated with the impact of acquisition activities. Operating income, excluding stock-based compensation and amortization of intangible assets was $7 million, compared to $9 million a year ago. Adjusted EBITDA for the quarter was $8.4 million, as indicated earlier, compared to adjusted EBITDA of $10.6 million a year ago. Adjusted EBITDA margin in the fourth quarter was 9.4% compared to 12.8% a year ago. The anticipated decrease in adjusted EBITDA margin from a year ago was primarily due to planned investments targeted at increasing our revenue growth. With operating leverage that is inherent in our business model, we continue to target a long-term adjusted EBITDA margin of 20% or greater. This leverage comes from software revenue continuing to be a larger portion of total revenue and operating leverage as we scale our business, even as we invest to support long-term growth. Non-GAAP net income was $4.5 million, or $0.08 per diluted share, compared to $6.9 million, or $0.09 per diluted share a year ago. On a GAAP basis, fourth quarter net loss was $60.3 million, compared to net income of $5.9 million a year ago. The decline from a year ago is primarily due to income tax expense of $56.6 million and stock-based compensation expense of $8 million in the quarter related to the conversion from liability accounting to equity accounting for equity incentive plans, as well as lower operating income. The income tax expense increase of $55.1 million from a year ago to $56.6 million for the quarter, which primarily due to a $47 million increase in tax expense related to the establishment of a valuation allowance on the U.S. deferred tax assets, due in part to tax deductions from the exercise of non-qualified stock options in conjunction with our IPO. In addition, we had a $15.4 million increase due to the remeasurement of net deferred tax assets and liabilities as part of the recently enacted Tax Act. On a full-year basis, total revenue was $333.3 million, also above our guidance range. Software product revenue was $244.8 million for the year, an increase of 9% from a year ago. Software product revenue grew to 73.4% of total revenue, an increase of almost 2 percentage points from 71.5% a year ago, and our recurring software license rate that is the percentage of software revenue that is recurring continues to be strong at 89% in 2017 consistent with the prior year. Adjusted EBITDA for the year was $22.5 million in 2017 at the upper-end of our guidance range, compared to $30.8 million in 2016. Adjusted EBITDA margin for the year was 6.7%, compared to 9.8% in 2016, reflecting planned investments to support our longer-term growth objectives. Non-GAAP net income was $16.1 million, compared to $18.6 million in 2016. Non-GAAP net income per share was $0.26, based on $62.6 million diluted weighted average common shares outstanding, compared to $0.32 for 2016 based on $57.9 million diluted weighted average common shares outstanding. Currency fluctuations can impact our results of operations, given our global footprint and the geographic diversity of our revenue, especially for software products. Currency impacts, however, were not meaningful for both the fourth quarter and the full-year of 2017. Turning to our balance sheet. We ended the year with $39.2 million in cash and cash equivalents. This includes the benefit of $114.7 million in net proceeds from our initial public offering, offset by the retirement of $92.1 million in current and long-term debt. Total deferred revenue was $139.8 million at the end of the fourth quarter, an increase of 23% from a year ago, as I mentioned previously. We’re very pleased with this growth that reflects our strong business activity in the fourth quarter and our strong resulting growth in calculated billings though I will again point out that quarter-to-quarter changes in deferred revenue can vary due to timing factors. While changes in deferred revenue may not always be a meaningful indicator of the underlying momentum in our business from a short-term perspective, we do believe it is directionally relevant over the long-term. Looking at our cash flow statement. Cash flow from operations in the fourth quarter was an outflow of $1.4 million, compared to an inflow of $23,000 for Q4 2016. For the year, cash flow from operations was $16.1 million, compared to $21.4 million in 2016. Free cash flow, which consists of cash flow from operations, less capital expenditures, was an outflow of $4.5 million for fourth quarter, an improvement from an outflow of $4.7 million for the fourth quarter of 2016. For the year, free cash flow was $8.6 million, compared to $11.9 million in 2016. In the fourth quarter, our cash CapEx was elevated by cost to relocate one of our offices in the APAC region. Also note that our year-end cash flow statement separates MODELiiS acquisition costs out of CapEx, where it was previously included. Turning to our outlook for revenue in 2018, we expect our positive billings momentum to continue. We expect both software product revenue and total revenue to increase by low double digits. We’re particularly enthusiastic as this momentum positions us to deliver accelerating software product revenue growth, as well as strong total revenue growth this year. From a profitability perspective, we expect our growing scale and continued mix shift towards software revenue will expand gross margins and adjusted EBITDA over time. As Jim mentioned, we will increase our investments in R&D, as well as sales and marketing in 2018 to further extend our product portfolio and market coverage in order to capitalize on the significant growth opportunities we see in the market. We are confident, these investments will positively impact our business and position us to deliver meaningful operating leverage over the long-term consistent with our established targets. In addition, in 2018, we expect to incur one-time expenses related to our transition to becoming a large accelerated filer earlier than we originally anticipated. We may no longer qualify as an emerging growth company or EGC as defined by the Jobs Act, due to our share price appreciation since the IPO. If our public flow exceeds $700 million on June 30, 2018, as it does today, we will no longer qualify as an EGC. If we lose EGC status, we would be required to accelerate our plans for Sarbanes-Oxley Section 404 compliance and earlier adoption of accounting standards, including the new Revenue Recognition Standard known as ASC 606. As such, we now expect to incur several million dollars of additional G&A expense in 2018 to become compliant as a large accelerated filer. Even in a period, where we continue to invest heavily in R&D and sales capacity, we are able to drive meaningful increases in adjusted EBITDA and free cash flow. Finally, based on preliminary estimates from our initial evaluations, we expect an effective tax rate of approximately 20% to 22% in 2018. This estimate will be updated as our ongoing analysis progresses for the impact of the recent tax law changes. For the full-year 2018, we expect software product revenue to be between $269 million and $273 million, representing growth of 10% to 12% from 2017. We expect total revenue to be between $362 million and $366 million, representing growth of 9% to 10% from 2017. We anticipate GAAP net income to be between $10 million and $12 million. We are anticipating an adjusted EBITDA of between $32 million and $34 million, representing a notable improvement in adjusted EBITDA margin over 2017. We expect non-GAAP net income to be between $18 million and $20 million. We expect fully diluted weighted average share count to be approximately $73.3 million. We expect free cash flow to be between $18 million and $22 million for the year. For the first quarter of 2018, we expect software product revenue to be between $64.5 million and $65 million, representing growth of 19% to 20% from the first quarter of 2017. We expect total revenue to be between $86.5 million and $87.5 million, representing growth of 13% to 14% from the first quarter of 2017. We anticipate an adjusted EBITDA of between $3.8 million and $4.3 million. We anticipate GAAP net income to be between break-even and $0.5 million. We expect non-GAAP net income to be between $1.8 million and $2.3 million. We expect fully diluted weighted average share count to be approximately $72.8 million. In summary, we’re optimistic about our ability to drive faster, stronger revenue growth in 2018, based on our market momentum and ongoing investments and our continued growth. At the same time, we’re enthusiastic about our ability to drive increased operating leverage and improving profitability over the long-term. We also believe we have significant room to continue penetrating the larger and growing markets that we serve in 2018 and beyond. With that, operator, can we now open up the call to questions?

Yes, sir. [Operator Instructions] Our first question comes from the line of Richard Davis of Canaccord. Your question please.

Hey, thanks very much. Quick question. So the – there’s kind of a hard one, I guess. But when is it reasonable for us to kind of expect that you guys would start chipping away at share of, maybe you’re probably doing it, but from companies like Exxon or whatever of – that have been acquired even MSC and stuff like that. To what extent is the growth coming from replacements kind of versus Greenfield? That’s a question I sometimes get from investors. Thank you very much.

Thanks, Richard. This is Jim Scapa. So I think, the growth we’ve talked about this before, I think, the growth is coming really from a mix. The overall market is actually growing very well. But I think, Altair is generally growing a bit faster, and that bit faster is, in fact, coming from some conversion. So there’s a good deal of Greenfield growth happening actually with many companies are just investing more in simulation. This growth coming sort of Greenfield because of all the electronics, especially electromagnetic simulation is really hot for us. We’re seeing growth because of model-based design and simulation-driven design. And we’re doing some displacements of particularly some solver technology against competitors right now. So I don’t know, if I’m answering your question, but hopefully that does.

I just want the exact percentages 22.6, 13.7, but that’s a fair [Multiple Speakers]

Sorry.

Thanks anyway, I appreciate it.

Thanks, Richard.

Thank you. Our next question comes from the line of Sterling Auty of JPMorgan. Your line is open.

Yes, thanks, guys. So relative to what we’re previously expecting, it looks like the new guidance for 2018 is calling for about $10 million of incremental investment in OpEx when we factor in the new tax rate, et cetera. Just want to confirm, is that the right order of magnitude to think about in terms of the increased investment. And maybe if you could give us some idea of how much of that is going to go into the R&D investment versus your sales and marketing?

Go ahead, wherever you want to, go ahead Howard and I can add.

Sterling, sure, this is Howard. Thank you. Yes, that’s approximately the order of magnitude that we’re talking about of incremental investment. And you can think of that as certainly going into a fair chunk into the R&D side and as well into the sales side in part, because we – we’re, I would say, aggressive in pursuit of hiring in order to drive growth on the sales side as well as we were finishing off, if you will, last year and into this year. So, Jim, if you want to.

I think, it’s actually more on the sales and marketing side, to be honest with you Sterling, than the R&D side at this point, but there’s some of both. We – we’re seeing a pretty good response, if you will, in the market. We’re finding – we’re able to hire some really good guys and we’ve been sort of stepping that up. We’ve been really aggressive so far this year and at the end of last year, and we’re seeing it working for us, if you will. So we’re probably accelerating that a bit. We’re also doing some restructuring around our indirect – how we go after indirect and we’ve added some resources there as well, put a little more focus on that and some more marketing around that as well. So I think, it – there’s some of both, but it’s probably a little more heavily on the business side than what we were expecting.

And then just maybe a little bit of a play off of Richard’s question. This increased investment, how much of it is coming from just looking at the underlying total marketing, while the market is just better? We do increase the investment to take advantage of it versus how much of it is, hey, the investments that you have made with the product portfolio, your particular solutions are gaining more traction than perhaps you may have originally thought and again, so to take advantage of it, it requires increased investment?

We’re seeing a lot of traction, and so we – we’re feeling actually really great about that. And so it’s a little bit of making hay while the sun is shining. And so we’re recognizing that that we should jump on it a bit and that’s what we’re doing.

Got it. Thank you.

Sure. Thank you.

Thank you. Our next question comes from the line of Bhavan Suri of William Blair. Your line is open.

Hey, guys, and congrats. The billings number was really, really solid, so nice job there. I guess, I just want to touch first, I know Richard touched on a little bit of it. But if you look at the Computational Fluid Dynamics market and you look at sort of competitive environment there, just a sense of sort of, have you seen any newcomers in that space either through sort of guys who commercialize other universities for others even just sort of starting to compete in that space, because it seems that’s basically hard. Just wondering what you see in terms of competition there and if it’s changed?

I’m not aware of any new exciting competition coming into that space, I’ll be honest with you. We – we’ve been working hard on our own safety solutions for the general purpose solution and we’ve made a lot of progress on that product. And we’re starting to see some very interesting wins, especially in the last, I don’t know, quarter or so more than we were seeing before. We also, as I think, we made a pretty interesting investment in a startup basically in Germany and we’re beginning to see some traction around that. But the revenues will probably not be that meaningful in 2018. But you might have seen that, we hired a very key guy that came out of Exxon and he’s joining our team on a model this side, because we see the solver really starting to mature and we’re getting a lot of strong interest from many, many customers. We’re going to start seeing a lot of pilots around that and good things happening. So I’m not seeing any new players. If maybe there’s something you’re saying that you want to tell me about. But as far as I’m aware, there’s nothing super exciting. And again, those two codes that we have that are out of that little company in Germany are both GPU-based codes. So they are blazingly fast. One is actually used for lubrication. So in gear boxes, for example, where most of the traditional codes just don’t have the performance to solve that problem. So we’re seeing a lot of traction for that. And the other code is an external aerodynamics code that, in fact, competes with Exxon and some others for fluid flow around around a car body, for example.

Yes. No, no the German investment is really cool. We just heard that Kanty [ph] primarily automotive was investing in a couple of things, but I can talk about that offline. And then just trying to sales productivity, you had a certain number of heads that you’re planning to add through last year and then this year and then now we’re sort of thinking about increased investment. So two quick ones for me. How is productivity tracking for your existing sort of headcount on the sales side? And then what do you think you exit the year at in terms of number of heads, both enterprise and mid-market sales?

I don’t know what the number of heads is going to actually be. It’s actually grown considerably on a percentage basis or an absolute basis even from where when you and I were starting to talk, I don’t know, eight months ago, nine months ago, maybe it’s even longer 10 months ago, and we’re not slowing down. So I – it can grow a lot this year and we think we can absorb that capacity, takes time for these guys to ramp. And so, you got to think about that in the model. But we’re seeing the productivity for the sales guys relatively staying the same a little up from what we were seeing before on an average basis, just more capacity really allows us to get to much more of the market.

Got it. Got it. That’s helpful. Thank you, guys. I appreciate it. And as I said, nice job on the billings number. Congrats.

Thank you.

Thank you. Our next question comes from the line of Nandan Amladi of Deutsche Bank. Your question please.

Hi, good afternoon. Thanks for taking my question. So, Jim, you made – mention of new third-party applications that you’re plugging into your platform. Can you discuss the trajectory of that since you’ve gone public, if there has been any difference? And then on the financial side, what is the gross margin profile of third-party apps versus your own?

So I don’t think it’s really stepped up since we’ve gone probably it hasn’t been that long. We have a great team around that actually. And there’s a lot of interest from third-party applications that want to join this Partner Alliance. And I just think, we have a very efficient process of vetting through that and basically bringing them on and making them successful. We really do try and make it up partnership. Many other companies, I don’t think really do as a good job. On the partnering side, they have an app store or whatever, but they don’t necessarily really drive success for those partners and we try to. I didn’t catch your second question. What was the second part of that question?

I was just trying to get a sense for the margin profile – the gross margins, because there’s obviously you have revenue share [Multiple Speakers].

Oh, on the third-party stuff?

Yes.

We really don’t talk about that. Yes, frankly speaking, we just don’t release that. Sorry.

All right. Thank you.

Thank you. Our next question comes from the line of Gal Munda of Berenberg Your line is open.

Hi, guys, thanks for taking my questions. I just have a few. First, Howard, can you just quickly check on the EGC cost impact, that’s not included in the – that’s excluded from the adjusted EBITDA just for the technical purposes yet for the year for the guidance?

The answer is yes. We have excluded EGC cost, the acceleration of those incremental outside costs that that we think we will incur this year.

And then just on the wider G&A comment, how are you seeing the level of G&A right now, because I understand the investment in R&D and sales and marketing, you guys ramping up significantly. There might have been a bit of expectation is following the market, I mean, G&A and maybe actually stepping down post IPO, how are you seeing the level? Is that the kind of the relevant run rate to where you kind of confident that? And how can we think about it and maybe one to two-year perspective?

So I think, the way that you can look at it, Gal, is that, it’s a pretty fair run rate from a G&A perspective. And that doesn’t mean that will void increases due to inflation and minor increases and some of the cost included in there, which obviously there’s some headcount there. But it’s pretty fully laid out across the various categories. So we’re not expecting any real significant material shift or change in the G&A cost profile.

Okay, perfect. In the absolute basis…

I think that if can add to that…

We have leverage as we go forward.

There’s a little bit of improvement actually in that G&A as a percent of the total. But the EGC costs are really something incremental…

Incremental, yes…

…because we’re sort of on a very accelerated schedule that we really couldn’t handle with our existing team. So it’s a big leap there to basically support that and we will and – because we recognize we have to dive in there. But in general, it is – it’s better on the G&A side.

Okay, perfect. And if I just touch a bit on the M&A – on the fire power for the M&A deals and kind of the willingness at this stage. And should we expect to see more of the similar ones? So a technology brought it end customers, or are we at a stage, where potentially we could also be thinking about, I think, customers for maybe a bit more transformative deals in the future?

So actually, the Runtime deal that we did in September shortly before the IPO really added a new market for us first of all in the high-performance computing space, the workload management and scheduling space and a lot of new and interesting customers in the EDA market, which was very new for us. For us, it’s a mix, right? We talked about that SPICE code and we talked about TES, which is thermal code for thermal simulation around printed circuit boards. Those are, if you will, more IP and acqui-hires. And we have a clear vision in terms of what we think we need to do with our products and electronics is really important for us right now. It’s not that we’re trying to go and compete with the EDA companies that is not our plan, this dissolved on a different track. But that SPICE simulator is really a high performance technology and made a lot of sense for us and brings a lot of expertise in. But we are looking at a lot of different opportunities right now and it’s a mix. It’s a complete mix, technology, as well as more accretive type – types of deals.

Okay, helpful. Thanks. If I can just wrap up on the indirect channel, you said you’re kind of thinking about, you’re doing some moves restructuring it. Can you give us just a bit more examples of what you’re doing with the channel and how you see the channel evolving in the future? Is that relative to the way it’s performing at the moment?

So we actually think we have a very, very strong set of partners for the most part. We are focusing on the partners that we think are, if you will, the – have the most potential for us and putting a bit more resources into making them successful and getting a bit more mind share from them. And that can be a bit on the expensive side and you’re seeing that reflected. But we think in the long run, once we get those guys past a certain point, we think they’re going to deliver a lot more for us, and that’s what we want to see. I’m not sure what I should add up. In terms of the restructuring, we – it’s more internal than anything else how we’re operating externally hasn’t changed at all. But internally, we’ve done some things that that make how we handle the direct and the indirect business better aligned enough within our own internal organization. So that everyone is sort of in the same boat and rowing in the same direction. We didn’t have as good an alignment, I think, before. These are fairly small subtle changes that you would notice though on the outside.

Okay, perfect. Thank you.

Thank you.

Thank you. Our next question comes from the line of Matt Hedberg of RBC Capital Markets. Your question please.

Thanks. This is actually Matt Sorenson on for Matt. Jim, you talked a little bit about investing more in the IoT market. I know, it’s early days for Carriots. But can you talk a little about maybe your customers reaction to the product? Then maybe more generally kind of what percentage of your customers maybe have a roadmap are starting to plan for the IoT market?

So thanks for the question, Matt. So I think, many, many of our customers are thinking about what to do in the direction of IoT in connected products, thinking about the business models around that? And do they shift a bit of their business to a more services-oriented model? How do they go forward with that? There are some different customer opportunities actually different than existing customers that we’re seeing as well that that are interesting opportunities for us also that we’re learning a great deal from. So we’re having a lot of very high-level meetings actually with customers, where those discussions are happening. But I think, it’s – it is still relatively early days for what happens there. And so I think, these investments are the right things to do. There’s a few things that I really can’t talk about quite frankly right now. I’m in the middle of them, I’d love to. But maybe in – on the next earnings call, we’ll be able to say a little bit more. But I think, it’s progressing, but it’s a longer play.

All right. We’ll look forward to the update. And then, Howard, I know CES went down a little bit this year kind of as we expected. Is there a way to think about that side of the business in relation to the guidance and kind of moving forward?

Sure. The – their business we actually expect to see a little bit of growth there. As we indicated before, we thought this year would be a little bit of a challenging year for CES in terms of being able to find enough candidates to place at our customers to meet their demands. We had people – our placements hired by our customers. So that’s actually not a bad thing. That’s a good thing and especially if you can find replacements to add in. So that really becomes the challenge. It’s as much a talent in recruiting challenges it is anything. But we certainly expect their business to be positive at solid 11% EBITDA business, it generates great cash flow. So our view continues in that regard.

All right. Thanks for the time, guys.

Thank you. Our next question comes from the line of Sterling Auty of JPMorgan. Your line open.

Hey, guys, just one quick follow-up housekeeping one for you Howard. So you talked about the emerging growth company status and 606 in Sarbanes-Oxley. When – so specifically the 606. If you crush that threshold, are you doing the work now to be in preparation to go live with 606 in the September quarter, if needed, or I’m just kind of want to understand the timeline of adoption depending on that trigger?

We’re still discussing that, Sterling, it’s a great question. We still believe the adoption is a year-end adoption, not a midyear adoption on 606.

Okay, good. Thank you.

Thank you. At this time, I’d like to turn the call back over to Founder, Chairman and CEO, Mr. Jim Scapa, for any closing remarks. Sir?

Okay. Thank you very much. So in closing, Altair delivered very strong fourth quarter results that capped a great year for the company. We’re seeing increasing opportunities to extend our leadership position in CAE and adjacent markets, and we’re investing to drive faster growth in the future. We believe we’re well-positioned to deliver strong growth and increasing profitability in the years ahead, which should generate significant value for shareholders. Look forward to speaking with all of you, again. Thank you.

And ladies and gentlemen, that does concludes your program. Thank you for your participation, and have a wonderful day.