Ladies and gentlemen, thank you for standing by, and welcome to the Altair Engineering First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. I would now like to hand the conference to your speaker today, Howard Morof, CFO. Please go ahead, sir.

Good morning. Welcome. And thank you for attending Altair's earnings conference call for the first quarter of 2020. I'm Howard Morof, Chief Financial Officer of Altair. And with me on the call is Jim Scapa, our Founder, Chairman and CEO. After market close yesterday, we issued a press release with details regarding our first quarter performance and updated guidance for 2020, 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 yesterday. 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 for 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?

Thank you, Howard. And welcome to everyone on the call. I will first address our response to the COVID-19 crisis and what this means for Altair going forward. Then I will talk about our strong first quarter followed by some highlights from new product releases and customer engagements. I'm very proud of our global Altair team and how they have come together to support our customers and each other during the pandemic. It is truly an honor to lead such a profoundly dedicated and hard-working organization. Our productivity during this time has been stellar as evidenced by continued great product releases and excellent wins with current and new customers. Altair's IT infrastructure has proven remarkably robust as we shifted almost everyone to working from home and, most importantly, our systems have performed well as we have focused on keeping our customers working via solutions like hosted units and temporary licenses. At the same time, like everyone else, our people have been facing the realities of stay-at-home orders, homeschooling their children, concern over aging parents, the effects of isolation and worries about their own health and future. Most internal meetings and calls have transitioned to video calls and it has proven to be very powerful to connect with each other visually. Instead of complaints, my conversations with Altairians are full of creative solutions to our customers, funny stories about life under quarantine and pictures of some amazing food creations. We are a global family, and the last few weeks have made us even more keenly aware and appreciative of this. Altair's key strengths are our people and culture, the breadth and depth of our technology and our recognized ability to deliver innovative products and excellent support. COVID-19 has demonstrated we are extremely capable of providing outstanding customer engagement remotely. We are fortunate to have a very broad and diverse industry base, but as the macroeconomy is hit with extreme reductions in consumer spending, we believe some companies that consider new product development to be mission critical may be forced to reduce R&D spending. This is likely to affect our ability to grow revenue in the near term. Before talking about our new product releases, some impressive customer engagements and a recent acquisition, I will summarize the first quarter financials. We are pleased to report top line results for the high-end of our guidance range, with total revenue of $131.5 million for the first quarter, driven by a 5% year-over-year increase in software product revenue despite a significant decline in revenue quarter-over-quarter in China. On a constant currency basis, software product revenue growth was 6% for the first quarter. Adjusted EBITDA of $21.7 million was at the high end of our guidance range for the quarter. Software-related services for the quarter declined 29% versus Q1 of 2019 to $6.9 million, primarily driven by project deferrals. Client engineering services grew by about 15% to $13.9 million as a result of business momentum brought into 2020. Altair remains focused on growing software product revenue and continues to leverage services strategically to drive higher gross margin software product revenue growth and expand our relationship with key clients. Software product revenue was 82% of total revenue for the first quarter compared to 81% in the prior-year period. Our recurring software license rate was 93% for the first quarter of 2020 versus 92% for the same period in 2019. Our customer support, training and marketing teams have moved very quickly to a remote working environment. We saw a 26% jump in self-paced online training between February and March. With trade shows and technical expositions being canceled globally, we have been replacing them with webinars around focus topics. Many of these are attracting hundreds of attendees and we believe the momentum toward virtual engagement will be a positive trend to emerge from the current situation. We announced two major product releases in the past couple of weeks, and we plan to announce the most significant update release of our software in the history of Altair in the second quarter. On April 16, we announced a major release of Panopticon, our platform for user-driven monitoring of real-time data, now a native cloud offering, which we believe has broad value for business, finance, engineering and IoT applications. Panopticon users can examine their time series data down to the millisecond or below, as well as monitor any number of real-time streaming feeds in actionable ways. Time series databases and real-time information are of growing importance. With Panopticon 2020, we are delivering a single pane of glass view into the complete application life cycle in what we consider the most scalable, cloud-ready, streaming analytics platform on the market. On April 21, we released a new version of Inspire, our fully integrated generative design analysis and manufacturing simulation solution that accelerates the creation, optimization and study of innovative, structurally efficient parts and assemblies. It is full of great new features, including the complete integration of SimSolid, so interactive modifications to geometry can be made on the fly in one integrated solution. A significant share of our usage growth is being driven by many of our newest products and technologies, including SimSolid, ultra and nanoFluidX, EDEM, PollEx, Knowledge Works and Inspire. It is exciting to see the investments we have made in people and technologies contributing to our success, both now and into the future. We've shared many stories of increasing use of SimSolid. One of the highlights of the first quarter was an order from a major heavy equipment manufacturer, specifically targeted at SimSolid. This customer insisted on some tough benchmarks and SimSolid came through with great speed and accuracy. We believe this account has great opportunity for growth as the tool gets deployed broadly to their design engineers. Altair continues to invest for growth with organic investments in sales, marketing and technology, and we continue to actively investigate acquisition opportunities in engineering, data analytics and high-performance computing. Yesterday, we announced the acquisition of the WRAP software business from Swedish Company WRAP International AB. WRAP is a world-leading software technology for spectrum management and radio network planning and covers a wide range of applications with a focus on controlling radio spectrum assets for maximum utilization, including radio planning, interference and coverage calculations. WRAP complements Altair's existing Feko, newFASANT and WinProp software for wireless propagation modeling and network planning, and we are excited to have the team and technology as part of Altair. They bring an impressive user community, including major defense organizations, telecom authorities, broadcast operators and public safety organizations. Welcome to our newest Altairians. Turning to our outlook. Prior to COVID-19, we expected 2020 to reflect a more subdued macro growth environment. The global crisis has clearly had a downward effect on the economic outlook for the remainder of the year, and we have taken a conservative approach by revising our guidance accordingly. We now expect software product revenue for 2020 to be flat to slightly up versus 2019 and total revenue to be flat to down 4% versus 2019 due to a decline in services and foreign exchange headwinds. Despite the exceptionally challenging macroenvironment we are all experiencing globally, we continue to see a lot of momentum for our product offering among customers and users. We added 20% more new customers in Q1 of 2020 than we added in Q1 of 2019. Our software renewals are coming in as expected. However, we are experiencing elongated sales cycles and some weakness in new and expansion deals, especially in the automotive and aerospace markets, which comprise approximately 50% of our total revenue. Nevertheless, we continue to see many new and expansion opportunities and growing interest from customers to transition from competing products to ours as the economic benefits and solution breadth of our platform become more apparent. Having been in business for over 35 years, Altair and our senior team have been through multiple downward economic cycles. Our business has always performed well and tends to emerge with increased market strength due to the value we bring to customers. For example, since 2008 and 2009, our recurring revenue has grown considerably and our end market and customer exposure has become much more diversified. During the same period, our revenue mix has shifted significantly to over 80% software by 2019, and we expect this trend to continue for several years. Given our ability to work remotely and support our clients virtually, we remain well-positioned to successfully manage through the current environment. Additionally, the business continues to generate ample free cash flow, and our balance sheet remains strong. We continue to be very positive about Altair's product and sales delivery capabilities, and we are confident in our prospects for sustainable long-term growth. Now I will turn the call over to Howard to provide more details on our financial performance and our guidance for the second quarter and full year 2020. Howard?

Thanks, Jim. First, I would like to remind everyone that our seasonal billings patterns, coupled with the treatment of revenue under ASC 606, results in heightened seasonality in revenue and associated metrics with higher software product revenue recorded in our first and fourth quarters of any given year, and we expect this pattern to continue under present business conditions. We exceeded our revenue guidance for Q1, driven by strong software product revenue growth, and achieved adjusted EBITDA at the high end of our range. Our software-related services revenue declined relative to the prior year and were below our expectations. These services are more susceptible to reductions as some of our customers adjust their external project spend in response to deteriorating market conditions as a result of COVID-19. Our first quarter results were driven by continuing solid demand for our software products. Software product revenue reached $108.4 million, an increase of 5% from a year ago, while total revenue equaled $131.5 million, representing growth of 3% from last year, both exceeding our guidance. We were able to achieve growth in total revenue despite a decline of 29% in software-related services from last year and a $1.6 million negative currency impact in the quarter. The decline in software-related services was larger than we anticipated and reflects continued headwinds in our automotive customer base. Notably, our client engineering services reflect a growth of 15% compared to the prior year. However, due to reductions imposed by some of our CES customers after Q1 due to COVID-19, we do not expect that level of growth in the near term, as we will detail in guidance shortly. Adjusting for the adverse impact of currency fluctuations in Q1 2020, software product revenue grew by 6% and total revenue grew by 4% compared to Q1 2019. In the first quarter, software product revenue increased to over 82% of total revenue, up over 100 basis points from just under 81% last year, without any adjustment for currency-related data points, continuing the important long-term trend of increasing mix of software product revenue, a key driver of expanding our operating margins as we look forward. Note that, for the quarter, software product revenue as a percentage of our software segment hit 94% of segment revenue, up over 250 basis points compared to first quarter 2019 due to the combination of growth in software product revenue and decline in software-related services revenue. Our recurring software license rate – that is the percentage of software revenue that is recurring – continues to be strong and consistent with our past performance at about 93%, slightly better than the prior year. The key driver during this quarter is that we were able to increase the percentage of revenue to recurring revenue streams compared to the revenue profile for our data analytics business in Q1 2019. First quarter billings were $127.9 million, a decrease of 4% from a year ago. Billings were negatively impacted by the decline in software-related services as well as currency shift, which impacted current period billings negatively by $2.9 million. On a constant currency basis, billings decreased by 2% for the quarter. We tend to view billings over longer time periods due to the impact variations in timing of renewals, expansions and new customer arrangements can have quarter to quarter. I would like to turn to the balance of the P&L results. Gross margin in the first quarter was 74%, essentially flat relative to Q1 2019. If not for the decline in software-related service revenue that I mentioned earlier, gross margin would have increased year-over-year. Gross margin in the quarter was adversely impacted compared to the prior year by approximately $1.8 million directly attributable to the decline in software-related services revenue. For the quarter, non-GAAP operating expenses, which exclude stock-based compensation, amortization of intangibles and other operating income were $79.1 million. Non-GAAP operating expenses remained in a tight range across our quarters last year, with an uptick in Q4 2019 as expected, coupled with incremental costs related to the acquisitions of Polliwog and DEM. We have taken a number of actions to reduce our operating expenses to more closely align with our reduced outlook, which we will speak about shortly, while continuing to invest in those activities we believe are beneficial to realizing long-term growth. Our adjusted EBITDA for the quarter was near the top of our guidance range at $21.7 million and reflects a decrease of 10% from last year's first quarter, driven substantially by the decrease in gross margins from software-related services. Our adjusted EBITDA was also affected by a $300,000 negative impact from shifts in foreign currency during the quarter, along with an additional expense due to the adoption of the new CECL credit loss requirements approximating $200,000. Turning to our balance sheet. Consistent with the seasonality in our billings and collection activities, we ended the first quarter with $247 million in cash and cash equivalents and $150 million in undrawn capacity on our US revolver. Our liquidity position remains quite strong, and we feel well-prepared to navigate the uncertainties in the current business environment associated with COVID-19. Moving to our cash flows. Cash flow from operations in the first quarter was an inflow of $28 million compared to an inflow of $25.3 million in the first quarter of 2019. The increase in cash flow was primarily related to normal variations in working capital elements. Free cash flows improved from $20.7 million last year to $26.4 million this year. This improvement was based on improved cash flow from operations, along with a lower level of capital expenditures this year in the first quarter compared to the same period last year. Our updated guidance expectations for 2020 are rooted in our belief that we will continue to see reductions in software-related services for the balance of this year, along with similar challenges for client engineering services, although we do expect that both will start to see improvements as we approach Q4 of this year. While we expect stable software product revenues, we have pared back expectations of growth for this year based on the uncertain economic conditions that we are presently seeing. We believe that operating with a cautious and conservative posture is most prudent until we see tangible evidence that global economic conditions begin to improve, translating into growth and investments in R&D technology. Our priority is the health and safety of our employees and customers. We have adopted several measures in response to the COVID-19 outbreak, adhering to local and regional restrictions, including instructing employees to work from home, shifting certain of our customer events to online-only webcast, and restricting non-critical business travel by our employees. And we have adjusted our expenses to reflect the current demand environment by reducing certain employees' compensation levels, or similar adjustments as permitted, making adjustments to our other expenses to correlate with potential declines in billings and cash collections from customers, such as reducing the use of outside contractors, along with consulting and professional fees. Historically, a portion of field sales, professional services and other activities were conducted in person. As a result of travel restrictions, substantially all of our sales, professional services and other activities are being conducted remotely, also contributing to cost reductions. We had partially adjusted cost of revenue to mitigate the loss of software-related services revenue, primarily through the reduction in use of outside contractors. We will continue to strategically invest in certain R&D and technical support areas and selectively expand our sales capacity. Our experience and history having navigated through many challenging business cycles over more than 30 years has taught us that it is important on a long-term basis to retain much of the deeply technical and specialized engineering resources typically engaged, which has allowed us to continually develop and support a broad array of technologies and service our customers. Against this uncertain economic backdrop, we believe our long-term target of achieving 20% plus of adjusted EBITDA may be impacted in a manner that is presently difficult to predict. While we firmly expect that we can achieve this and an even greater level of profitability, we do think it is prudent to revisit our timeline for achieving this target. As the events related to COVID-19 evolve over the balance of this year, we look forward to providing an update regarding the timeline expectations for achieving our long-term target and beyond. For the 2020 year, we presently expect software product revenue of between $365 million and $380 million, representing essentially flat to growth of 4% year-over-year; total revenue of between $440 million and $460 million, representing a decrease of 4% to flat from 2019, driven primarily by a reduction in services revenue; adjusted EBITDA of between $30 million and $35 million, representing a decrease of $5 million to $10 million from 2019; free cash flow of between $5 million and $15 million. As mentioned before, our free cash flow expectations are sensitive to billings and collection patterns following the seasonality of our billings. As to Q2 2020, our expectations are software product revenue to be between $76 million and $80 million, representing a decrease of 5% to 10% from the second quarter of 2019; total revenue to be between $91 million and $96 million, representing a decrease of 10% to 15% from the same period last year, impacted by the reduction in software-related services and client engineering service revenue, apart from software product revenue; adjusted EBITDA of between $1 million and $4 million, representing a decrease from $5 million in Q2 2019. Further detailed guidance tables have been provided in the press release issued after close of market yesterday. Please note that these expectations assume stable foreign exchange rates. Our tax rate expectations for 2020 remain unchanged. We continue to expect that our tax rate applied to our pretax income will be about 30% this year. We believe that adopting a very cautious and conservative view is the most appropriate perspective at this juncture. COVID-19 driven events are evolving at a rapid pace and in an unpredictable manner. With decades of experience navigating through several very challenging business cycles emanating from different factors, there are a few key points to emphasize about our business. Our engineering technologies are critical to the R&D and product design activities of our customers regardless of industry. Our data analytics products respond to the important need to perform deep analysis and streams of information, so that our customers can make better decisions much more quickly, which is so important in today's environment. Our licensing model is incredibly well suited to continue to support our customers and allows us to leverage the key benefits we provide for the present and future needs of our customers. Our strong balance sheet gives us the flexibility to continue pursuing selective M&A activities, and we will continue to do so opportunistically. Most importantly, we have a highly experienced global team dedicated to continuing to support our customers regardless of the business environment. With that, operator, can we now open the call to questions

Thank you. [Operator Instructions]. Our first question comes from Richard Valera with Needham. Your line is now open.

Thank you. Good morning. Jim, I was hoping you could talk about some of your history here with these types of downturns. Obviously, you referenced, I think, that you were involved in the 2008/20009 downturn. I'm just wondering how you're thinking about this one maybe relative to that one as it relates to the ability of your auto customers to not only survive, but sort of come out the other side and maybe bounce back to where they were. Just any perspective on how you're thinking about that would be great.

Sure. Thanks, Rich. First of all, I'm in California, by the way, I don't remember where you are, but it's pretty early in the morning. I think this time entering into all of this, the auto companies were quite a bit stronger than they were in the prior – in the 2008/2009 instance. And a little bit of that is evidenced by – you see the CES business, and we are projecting it to be down. Actually, what we've seen is very little reduction. There's really only one of the larger automotive companies has cut a very significant number of their people, furloughed them for a temporary period. We don't know how long, but they furloughed quite a few. And so, most of the others have kept all their engineering – even their contractors are working from home right now, which is not usual. So, I think they're quite a bit stronger, first of all. Also, they have a sense of the importance of continuing to do a lot of engineering. So, this event sort of overlaid with a little bit of a downturn overall in automotive that I had been speaking about. But by and large, I think – obviously, this is a very, very tough sort of localized event, but I think they're going to come out of it just fine and get back to business. Some of the smaller start-ups, those kind of guys, maybe some of those are going to shake out of this. But in general, I think most of these companies are going to come back and, certainly, the engineering side is going to be pretty vibrant. Hope that answered the question.

And just to follow-up on that, Jim, you had referenced that, I think, coming out of the last downturn, the 2008/2009 one, that you actually saw some quite strong growth years. Can you just comment on that? And if you think there might be sort of an analogous setup this time?

Okay. So, being conscious of not predicting the future. Yeah, we came out really strong. The couple of years that followed were really strong years for us. I'm feeling the same kind of energy and momentum quite frankly. We're seeing our usage climbing actually. We're seeing a lot of interest in our products. But I can't predict with certainty. But you're seeing that our software, even during this, is actually pretty solid actually. You look at our Q1 [Technical Difficulty] was down substantially. I'll say as much as 25% in Q1. And you see the services hit that we took. We still beat all of the numbers that we put up. We're expecting that software is going to be flat this year to up a little bit. And that's what we're saying. And then, we think we're going to come out of this pretty strongly.

Great. Appreciate the color, Jim. And glad to hear you're safe out there in California. Thanks.

Same for you. thank you.

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

Hey, Jim. Glad you're all safe and well. And echo that. And thanks for taking my questions. I appreciate it. I guess, Jim, I wanted to double quick and drill down a little bit on the usage in the current environment. So, renewals coming in as expected, slower newer, but also slower expansion sales. And so, when you think about usage or utilization or optimization around the HyperWorks units model, have you sort of seen companies, especially into that automotive aerospace space, try and optimize around the HyperWorks unit usage, meaning maybe I had x number units for x number of people and now I can spread them across more of those people. Have you seen that happen at all? Are you sort of seeing those trends play out? Or is that something that actually is not happening?

I haven't really explicitly seen that. No, quite frankly. We're pretty generous during these periods with our customers. We recognize that they're having a tough time. We have this concept of hosted HyperWorks units, by the way, which we invented about eight or nine years ago. And customers had not really had a lot of take-up of that. It's a very robust system that we use for education. We use it internally. And we use it for some percentage of our customers. But it's the perfect mechanism going in for this situation because it doesn't affect your VPNs and a lot of these customers were not geared up to have that kind of activity on their VPN servers. So, that's been really helpful. We've given a number of free licenses as well to get certain customers up and running and going. So, we're pretty friendly. We give a little better terms to some of the customers. We're pretty friendly with our customers, and we continue to support them. I'm not really seeing that they're stretching their licenses. Maybe a bit, and I'm not aware of it. But, in general, no. I think there's a lot of interest in leveraging our tools versus some competitive tools, quite frankly, during this period. And that's what gives me some hope for when we come out.

Yeah. No, that's great. That's helpful. And then, I want to touch a little bit on the free transition to cloud-based software automation. I'd love to talk about sort of customer traction here. And then, maybe for Howard, if you're seeing traction, you expect to see traction, obviously, coming out of this, people are going to do more cloud. What are the long-term implications for the model out of that? So, love to understand sort of what you're seeing in that cloud transition, especially given it's free. And then, if people do start moving sort of more workloads there, what is the impact to the model? Thank you.

So, we do think that things are going to move more and more to cloud, and we're doing a lot of things in that direction, obviously. We'll have some other things we're announcing over the course of the next month or so even in this direction. Nothing to do with COVID-19. Just continuing on pace with what we work on. For the most part, the way we're restructured right now, the hosted units that I'm talking about is really just the licensing and how they access their licenses is just from our own servers actually as opposed to servers on their networks. And that's how they avoid the VPN game there. I think that you're going to start to see a growth of the use of cloud offerings. Pano is now a native cloud offering. We're moving the Knowledge Works platform to a native cloud offering. We are working on other applications, as you might imagine. And many of our applications can run from the cloud using some technologies that we've developed over the years. I don't think it's going to dramatically alter. I know this is a question for Howard, so I can let him answer part of it, but I don't think it's going to dramatically alter the way that…

I'll take both answers.

I'm sorry.

I said I'll take both your answer and Howard's answer. Both answers.

Yeah, that's fine. So, I don't think it's going to dramatically alter the way that our model really works. I think you may see some more take up of shorter term – we'll offer some shorter-term licenses that are more expensive, so a customer who wants to do something for a month or three months might be able to do that. But, in general, it's not going to be that great of a bargain, I think, unless that really is their need. And so, you'll see we have some patents around the cloud with our units model for how you can use the units for hardware, for example. And we're going to start experimenting with all that. We're pretty experimental as a company when it comes to models, as you see. And that's been pretty effective for us. I don't know, Howard, do you want to address that, how the cloud affects our accounting.

Yeah, sure. Well, from a basic perspective, no, as Jim indicated, we don't really expect a significant shift. But frankly, the evolution of the model is really geared to allow those who want to do more simulation to continue to be able to do it in a manner that continues to leverage the technology. So, we don't really see it as, if you will, a negative in any particular way, but more of a continued growth and positive as there's more and more need to use in simulation. Now, clearly, if we provide a three-month scenario versus our typical annual recurring, and if it's more in a traditional, I would say, SaaS way, we're back to revenue that looks like a monthly revenue stream rather than under 606, a little bit more of an upfront. But on the margin, maybe there's a little bit of a shift, but by and large, we don't think there's a wholesale shift here in modeling and economics and performance.

Just to add to that, I don't think the shift is going to be – it's not going to be like a step function where everybody moves to that. I think it's going to be much more slow-paced to be perfectly honest. That's just the nature of our market. And I think it's going to move there, but it's going to take a lot longer than people may expect. Thank you very much.

Thank you.

Thank you. Our next question comes from Matt Hedberg with RBC Capital Markets. Your line is now open.

Okay, great. Thanks, guys, for taking my question. I'm glad to hear you guys are all doing well. Jim, 20% growth in new customers was impressive. I'm curious, if you could talk about sort of what drove that, was that pre-COVID? And I guess I'm wondering how new business trends continued thus far or through April now?

We're barren down, right? So, we added a lot of sales guys. We've added a lot of capacity into the organization. And we're doing things a little more mechanized than we were in the past. We've been talking about that over the last year. And so, I think that's driving a lot of new customer activity for us. You have to realize, though, that new customer activity, it's a little longer process, right? So, you add new customers, the relative revenue in that initial deal is not as large as some of our bigger stuff. But it speaks to the future, as I think you understand. And so, we're a lot more focused on that than we used to be. We were much more focused on the high-end, exclusively at the market. We remain focused there, but we are pushing down market where we simply had not really even tried to compete in the past, and so that's why we're having that impact.

That's great. And then maybe Howard, when we think of your 2020 guidance – thanks for all the color. It's helpful when we think about modeling. Just maybe digging into it a little bit more. I think you said that you expect a recovery in Q4. Does this assume also that the worst headwinds are expected in Q2 and then sort of slowly getting better through Q4. I'm sort of curious, if you think about it like a U or a V-shaped type recovery, I know there's a lot of acronyms out there, but just sort of a little bit more on sort of the expectations of where Q2 sits in terms of the expected headwinds.

Well, certainly, obviously, we're taking a cautious view for sure, especially where we're at in Q2 and where customer base is and all the things that everybody is certainly witnessing firsthand. We do expect to see some gradual improvements we get through the year as we approach Q4. Don't read into that overly optimistic or anything along those lines. I think we've guided conservatively and, frankly, appropriately with the level of uncertainties and unknowns. We certainly do expect activity to pick up as we get into that time period. Obviously, if we see differences coming between now and then, we'll certainly be speaking to those differences, whether positive or negative for that matter.

Just to chime in on that, Matt, and I think Howard said it very well. We've been really conservative about what we see for the rest of the year. There's not a lot of wishful kind of stuff in the way we're operating here. Q2, certainly, we think is going to be the toughest, but we've also seen what's happened in China and Korea, which kind of came in the early part of the wave, if you will, and how they've been getting back to work. And they're getting back to work, but it's not a full – fully back, right? It's coming back relatively slowly. So, we factored that into the way we're thinking about things.

That's great context. Thanks both of you.

Thank you. [Operator Instructions]. Our next question comes from Jackson Ader with J.P. Morgan. Your line is now open.

Great. Thanks for taking my questions this morning, guys. The first one. Jim, could we just spend a little bit of time on the data analytics side of things. A lot of changes in 2019, expecting a little bit of a bounce back here in 2020. So, just curious how the deal momentum has fared in that business maybe relative to simulation during all this disruption.

Sure. Yeah, I think things are pretty settled down in that team. And people have been ramping up and know what they're doing and they understand the Altair way of doing things. People are wrapping their heads around the units model much more than before, and they're very active. So, I think it's been very solid, really consistent with the rest of the business actually. Of course, it's not what we hope. None of it is what we perfectly hoped. But everything is actually pretty solid for us. I've been listening to some of the other calls from other players in the market. And I think probably my sense is that we're probably a lot calmer than maybe others are at this point. And part of that, I think, is just we operate in a very conservative way, all the way through, right? We have such high recurring revenues, most of that's coming in for us. We're not trying to play any games, any financial games. We're not doing multiyear deals. Typically, we've converted most of the data of multiyear deals to subscription, and we've continued that pretty aggressively in Q1 and coming into Q2 as well. So, data specifically is pretty solid for us. We're feeling very optimistic about the future there actually.

That's great. Okay, thank you. Just a quick follow-up on CES. Are these the type of assignments that are first to be cut, but first to come back? Or are these the type of assignments that are first to cut and maybe last to come back?

So, historically, I would say that they're first cut and last back. But what I'm seeing is that – and I've had some very senior level conversations with some executives at some of the customers. And they're actually afraid of losing people. There's sort of this dearth of high-caliber engineering people and they're really worried about losing their people. It's a competitive world out there. And so, I think this is why all of them except for one, and I honestly think that that particular client has probably made some missteps because we've placed some of those people that they furloughed at some other customers already. I just think that was a misstep. So, in general, normally, I would say it's first out, last in. But in this case, it seems like they just don't want to be losing quality people.

Okay. Thanks for that color.

Yep.

Thank you. Our next question comes from Brian Essex with Goldman Sachs. Your line is now open.

Hi. Good morning. And thank you for taking the question. And glad to hear everyone is well. Jim, just a quick question for you on the simulation side. Maybe could you talk a little bit more about the conversations that you're having with your customers? I know you mentioned furloughs and temporary reductions and elongated sales cycles. But are you also having more creative conversations with those customers in terms of just recognizing that we're all kind of – we've all kind of shifted to a work from home environment in R&D. That's probably not the status quo for them. And in order for an R&D to kind of continue from a work from home environment, is there an opportunity considering that there are no longer – there's no longer the ability to be physically present and do physical testing. Is that kind of materializing in the conversations at all?

Yeah. It's the new normal, right? I'm sitting in my home office and you're probably all doing the same, and all of our customers are doing the same. And when I talk to an executive from a customer, and I'm making a lot of those calls, they're the same, right? And in general, it's been surprising for me actually. Our productivity level may actually be higher. And I don't know if others have been talking about that much. And I don't know if that can persist because there's other challenges for people working from home with kids and whatever and all that, but people have been extremely engaged. And I've seen the same from the customers as well. So, I think they're going to try and get back, and labs can't work. And as much as we like simulation, in order to do their work, they have to make parts and the labs are necessary to their work. So, I think people are going to figure out how to get ramped back little by little here and go. But I certainly think there'll be more working from home in the future and certainly for us. And I don't think it's a bad thing. You have to be flexible around your people's personal lives as well. I don't know if I answered your question there. Sorry, if I didn't.

Yeah, I think so. I'm trying to get a handle on, if it is an opportunity where your customers are trying to remain productive without access to physical facilities, how near-term versus long-term of an opportunity might that be for you on the simulation side?

I try not to be as wishful-thinking as others do around these kind of things that this new normal is going to mean it's all new simulation and no more of anything else. The trend to more and more algorithmic work is a trend that's going to continue. Is it going to accelerate because of this? Maybe. I certainly didn't build that into a forecast, right? Yeah. So, sorry. I don't buy into those kind of things.

Okay. And maybe real quick for Howard. If we look at your full-year guidance, I totally get the conservatism and understand, on the services side, the direction and the drivers for the guidance there. If we were to look at software product revenue guidance and the bottom end of that guide, what kind of assumptions have you made to drive revenue towards the bottom of that range? What has to happen in order for that kind of scenario to play out?

Well, as you know, our recurring software license rate is 90% or so. We pivot around that. So, most of our software is on an annual recurring basis and such. So, there's still a percentage, which – approximately 10% on a perpetual type basis. So, we're again making assumptions around that we've seen renewals continue to be coming in as we would expect. On the lower end of the spectrum, there's continued to be significant challenges out there from an operations growth perspective, as we've talked about. So, essentially flat. Keep in mind also that, relative to when we guided our initial guidance compared to where we are basically today, foreign exchange has also moved a bit and we're a third US, a third APAC and a third EMEA. So, FX itself took about $6 million out of software product revenue just between changes in currency rates as well. So, we'd have another 1.5 points to maybe 2 points of growth, but if we had FX rates that existed earlier this year. So, we baked that into the numbers as well. I have no magic crystal ball relative to FX rates in terms of what they will be and what will happen later in the year, but that's also a contributing factor.

Got it. That's very helpful. Thank you.

Thank you. And our last question will be from Andrew DeGasperi with Berenberg. Your line is now open.

Good morning. I just wanted to quickly ask in terms of the renewals that you've seen so far in Q1. Have you seen any incremental penetration of your tool set within that cohort of customers?

So, have we seen any incremental penetration within the customers where there's recurring revenues? I'm sorry. I didn't follow the question.

No. More like, have your customers added more – are using more tools or more products from Altair, the ones that have renewed? Yeah.

Got it. Yeah. We're business as usual, right? So, we're trying to drive usage, and we're introducing the new products that are there. We've got some very, very interesting new technologies. PollEx is starting to get a lot of interest. We just went out with some marketing around it. We have this huge list of companies that are interested in exploring it. Same on the EDEM side. We've had a lot of interest there. Yeah. And there's a lot of interest in SimSolid. Just that continues to really grow. We just had a webinar with Whirlpool presenting actually on SimSolid, and we had over 1,000 people participate. And we had another one with another customer. I think it might have been Renault, and that was over 1,000 people as well. These are just two small webinars. The attendance and interest in all these new applications is really, really significant.

That's pretty impressive. I just wanted to quickly maybe switch to Howard. In terms of the aerospace and defense exposure you have, would you say it skews more on to the defense side? And could you maybe give us some idea of how that customer base is doing at this time?

Well, aerospace for us is a little less than maybe 10% of our business on the software side. And as you know, those development projects have very long time horizons. At the same time, obviously, they're under immense pressure, as you might suspect right now for obvious reasons. So, we've, again, been a pretty conservative view on that, but we don't expect to see significant shifts in that business based upon where we are right now.

I was just going to add. We had a lot of momentum in aero coming into this year. Obviously, everything is adjusted accordingly. But we're still feeling very, very good about that space. And defense in general, I think, is doing fine as well from what I see.

Great. And lastly, in terms of the large versus small/medium business customers that you serve, have you seen any significant change in terms of one or the other? I'm assuming that the small/medium side is probably going to be more pressured.

Yeah. That's exactly right. So, when we think about the change to the business cycles or slowdown in opportunities for expansion, whatever, it's much more impact to the small/medium customers, for sure.

Great. Very helpful. Thank you.

I'm not showing any further questions at this time. I would now like to turn the call back over to Jim Scapa for closing remarks.

Thank you. I just want to express appreciation to everyone for their support and the interest in Altair. And wish everyone to stay safe. So, thank you very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.