424B4
Table of Contents

Filed Pursuant to Rule 424(b)(4)
Registration No. 333-220710

Prospectus

12,000,000 Shares

 

LOGO

Class A common stock

$13.00 per share

This is the initial public offering of the Class A common stock of Altair Engineering Inc.

The selling stockholders identified in this prospectus are offering 3,934,996 shares of our Class A common stock, and we are offering 8,065,004 shares of our Class A common stock in this offering. We will not receive any proceeds from the sales of shares of our Class A common stock by the selling stockholders. The initial public offering price is $13.00 per share.

We have two classes of common stock, Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to voting and conversion rights. Each share of Class A common stock is entitled to one vote per share. Each share of Class B common stock is entitled to ten votes per share and is convertible into one share of Class A common stock. The holders of our outstanding Class B common stock will hold approximately 95% of the voting power of our outstanding capital stock following this offering, with our directors, executive officers and current beneficial owners of 5% or more and their affiliates holding approximately 91% of the voting power.

Prior to this offering, there has been no public market for our common stock. Our Class A common stock will be listed on the Nasdaq Global Select Market under the symbol “ALTR.”

We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012, as amended, and may elect to comply with certain reduced United States public company reporting requirements for future filings.

Investing in our Class A common stock involves a high degree of risk. Please see the section entitled “Risk factors” starting on page 24 to read about risks you should consider carefully before buying shares of our Class A common stock.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

        Initial public
offering price
       Underwriting
discounts  and
commissions(1)
       Proceeds to
the Company,
before expenses
       Proceeds to
the selling
stockholders,
before expenses
 

Per share

     $ 13.00        $ 0.91        $ 12.09        $ 12.09  

Total

     $ 156,000,000        $ 10,920,000        $ 97,505,898        $ 47,574,102  

 

(1)   See the section entitled “Underwriting (conflicts of interest)” for a description of the underwriting discounts and commissions and offering expenses.

We have granted the underwriters a 30-day option to purchase up to an additional 1,800,000 shares of Class A common stock at the initial public offering price, less the underwriting discount, to cover over-allotments.

The underwriters expect to deliver the shares on or about November 3, 2017.

 

J.P. Morgan   RBC Capital Markets   Deutsche Bank Securities

 

William Blair    Canaccord Genuity

The date of this prospectus is October 31, 2017


Table of Contents

LOGO


Table of Contents

Table of contents

 

     Page  

Prospectus summary

     1  

Risk factors

     24  

Information regarding forward looking statements

     54  

Market, industry and other data

     55  

Use of proceeds

     56  

Dividend policy

     57  

Capitalization

     58  

Dilution

     60  

Selected historical consolidated financial and other data

     62  

Management’s discussion and analysis of financial condition and results of operations

     67  

Business

     107  

Management

     144  

Executive compensation

     152  

Certain relationships and related party transactions

     165  

Principal and selling stockholders

     168  

Description of capital stock

     171  

Shares eligible for future sale

     177  

Material United States federal income tax consequences to non-U.S. holders of our Class A common stock

     181  

Underwriting (conflicts of interest)

     186  

Legal matters

     193  

Experts

     193  

Where you can find more information

     193  

Index to consolidated financial statements

     F-1  

None of the Company, the selling stockholders or the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses prepared by or on behalf of us or to which we have referred you. The Company, the selling stockholders, and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus or in any applicable free writing prospectus is current only as of its date, regardless of its time of delivery or any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

 

i


Table of Contents

Investors outside the United States

None of the Company, the selling stockholders or the underwriters have done anything that would permit this offering or possession or distribution of this prospectus or any free writing prospectus we may provide to you in connection with this offering in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus and any such free writing prospectus outside of the United States.

Until November 25, 2017 (25 days after the commencement of this offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as an underwriter and with respect to their unsold allotments or subscriptions.

 

ii


Table of Contents

Prospectus summary

This summary provides a brief overview of information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our Class A common stock. You should carefully read this prospectus in its entirety including “Risk factors,” “Management’s discussion and analysis of financial condition and results of operations” and the financial statements and the notes to those financial statements included in this prospectus before investing in our Class A common stock. References to the “selling stockholders” refer to the selling stockholders named in this prospectus.

Our vision

Our vision is to transform product design and organizational decision making by applying simulation, optimization and high performance computing throughout product lifecycles.

Overview

Altair exists to unleash the limitless potential of the creative mind.

We are a leading provider of enterprise-class engineering software enabling innovation across the entire product lifecycle from concept design to in-service operation. Our simulation-driven approach to innovation is powered by our broad portfolio of high-fidelity and high-performance physics solvers. Our integrated suite of software optimizes design performance across multiple disciplines encompassing structures, motion, fluids, thermal management, electromagnetics, system modeling, and embedded systems, while also providing data analytics and true-to-life visualization and rendering.

The engineering software industry is challenged by increasingly sophisticated design requirements and enabled by the ever expanding availability of cost effective computing power. Rising expectations of end-market customers, new manufacturing methods such as three-dimensional, or 3D, printing, and new materials such as composites, combined with more powerful math-based computational technologies, are expanding the application of simulation across many industry verticals. The Internet of Things, or IoT, is also changing engineering by broadening the scope of Product Lifecycle Management, or PLM, affording the opportunity to leverage simulation and analytics toward the development of “digital twins” to optimize product performance and manufacturing throughput, predict failure, and schedule maintenance operations for in-service equipment.

CIMdata in its 2017 Simulation and Analysis Market Analysis Report, or the CIMdata Report, forecasts, “the PLM market to grow at a compound annual growth rate (CAGR) of 6.7% to $56.3 billion” in 2021. The CIMdata Report estimates the computer-aided engineering, or CAE, market which they refer to as Simulation and Analysis, as a subset of the PLM market to be approximately $5.3 billion and $5.7 billion in 2016 and 2017, respectively. The CIMdata Report expects the CAE market, “will be one of the more rapidly growing segments within the tools sector of PLM over the next five years, and forecasts that this market sector will exceed $7.8 billion in 2021, with an 8.1% CAGR.”

 

 

1


Table of Contents

Altair’s engineering and design platform offers a wide range of multi-disciplinary CAE solutions which we believe is one of the most innovative and comprehensive offerings available in the market. To ensure customer success and deepen our relationships with them, we engage with our customers to provide consulting, implementation services, training, and support, especially when applying optimization. Altair participates in five software categories related to CAE and high performance computing, or HPC:

 

 

Solvers & Optimization:    Solvers are mathematical software “engines” that use advanced computational algorithms to predict physical performance. Optimization leverages solvers to derive the most efficient solutions to meet desired complex multi-objective requirements.

 

 

Modeling & Visualization:    Tools that allow advanced physics attributes to be modeled and rendered on top of object geometry in high fidelity. These tools are becoming more design-centric and relevant earlier in the development process.

 

 

Industrial & Concept Design:    Tools that generate early concepts to address requirements for ergonomics, aesthetics, performance, and manufacturing feasibility. These tools are simulation-driven and, we believe, emerging as a market force eclipsing traditional computer-aided design, or CAD.

 

 

IoT:    Tools to develop new IoT enabled products, including device and data management, system level and full 3D digital twin simulation, and exploration, predictive analysis, optimization, and visualization of in-service performance.

 

 

HPC:    Software applications that streamline the workflow management of compute-intensive tasks including solvers, optimization, modeling, visualization, and analytics in fields such as PLM, weather modeling, bio-informatics and electronic design analysis. The HPC middleware software market was forecasted to exceed $1.6 billion by 2019 by the former high performance analyst team of International Data Corporation, or IDC, which is now owned by Hyperion Research Holdings, LLC, or Hyperion, and is not affiliated with IDC.

Our software enables customers to enhance product performance, compress development time, and reduce costs. Our thirty-year heritage is in solving some of the most challenging design problems faced by engineers and scientists. Altair is also a leading provider of high performance computing workflow tools which empower our customers to explore designs in ways not possible in traditional computing environments. We believe we are unique in the industry for the depth and breadth of our engineering application software offerings combined with our domain expertise and proprietary technology for harnessing HPC and cloud infrastructures.

Our primary users are highly educated and technical engineers, commonly referred to as simulation specialists. We predominantly reach customers with simulation specialists through Altair’s experienced, direct sales force, especially in industries requiring highly engineered products, such as automotive, aerospace, heavy machinery, rail and ship design. To enable concept engineering driven by simulation we make our physics solvers more accessible to designers, who may be less technical and not expert in simulation, by wrapping them in powerful, yet simple interfaces. We are increasing our use of indirect channels to more efficiently address a broader set of customers in consumer products, electronics, energy and other industries.

Altair pioneered a patented units-based subscription licensing model for software and other digital content. This units-based subscription licensing model allows flexible and shared access to all of our offerings, along with over 150 partner products. Our customers license a pool of units for their organizations giving individual users access to our entire portfolio of software applications as well as our growing portfolio of partner products. We believe our units-based subscription licensing model lowers barriers to adoption, creates broad engagement, encourages users to work within our ecosystem, and increases revenue. This, in turn, helps drive

 

 

2


Table of Contents

our recurring software license rate which has been on average approximately 88% over the past five years. Each year approximately 60% of new software revenue comes from expansion within existing customers.

Altair also provides client engineering services, or CES, to support our customers with long-term ongoing product design and development expertise. This has the benefit of embedding us within customers, deepening our understanding of their processes, and allowing us to more quickly perceive trends in the overall market. Our presence at our customers’ sites helps us to better tailor our software products’ research and development, or R&D, and sales initiatives.

We were founded in 1985 in Michigan and have a balanced global footprint, with 68 offices in 24 countries, and over 2,000 engineers, scientists and creative thinkers. For the six months ended June 30, 2017 we generated 34%, 33% and 33% of our total billings from customers in the Americas region, or the Americas, from the Asia-Pacific region, or APAC, and from the Europe, Middle East and Africa region, or EMEA, respectively. In 2016, we generated 38%, 32% and 30% of our total billings from customers in the Americas, APAC, and EMEA, respectively. Billings by geographical region can vary significantly by quarter. As of June 30, 2017, we had tens of thousands of users across approximately 5,000 customers worldwide. We define customers as a company, an educational or governmental institution, any separate or distinct worksite, a business unit, or a particular group that uses our products or services. Billings consists of our total revenue plus the change in our deferred revenue in a given period and is discussed under “Selected historical consolidated financial and other data—Key metrics” of this prospectus.

We believe a critical component of our success has been our company culture, based on our core values of innovation, envisioning the future, communicating honestly and broadly, seeking technology and business firsts, and embracing diversity. This culture is important because it helps attract and retain top people, encourages innovation and teamwork, and enhances our focus on achieving Altair’s corporate objectives.

Industry background

CAE software is essential to innovation across a wide range of highly engineered products in industry verticals ranging from automotive, aerospace, heavy machinery, rail and ship design to consumer electronics and sporting goods. Physical prototypes and testing have been largely supplanted by CAE for design validation over the last twenty-five years. This process continues unabated. Manual drawing and drafting were also replaced by 3D CAD during the same time period. More recently, CAE is emerging in a conceptualization process called simulation-driven design where new design tools are beginning to replace traditional 3D CAD.

CAE software allows engineers to simulate, predict, and optimize how physical products will perform in the real world under a range of operating conditions. CAE applications can accurately solve complex physical interactions through mathematical methods such as finite element analysis, simulate an extensive set of material types, and generate high-fidelity outputs that are realistic virtual representations of physical system behaviors. Modern CAE software can rapidly solve a wide range of complex physics, including structural, fluid, thermal, electromagnetic, system modeling, and embedded system design.

Beyond just simulating physical behavior, CAE can now solve multi-disciplinary optimization problems to numerically optimize parameters and achieve design objectives such as to minimize weight or cost. Utilizing such advanced simulation and optimization methods, engineers and designers can shorten development cycles, virtually test product performance, explore alternatives, and synthesize designs that enhance product functionality, performance and reliability while reducing complexity and costs.

 

 

3


Table of Contents

Principal drivers of growth in demand for simulation & analysis software include:

Improving sophistication and fidelity of CAE technologies

The engineering software industry is challenged by increasingly sophisticated design requirements and enabled by the ever-expanding availability of cost effective computing power. Simulation models continue to grow in size, complexity, and range of physics, driving demand for additional computational power and parallelization algorithms, more powerful modeling and visualization tools and more advanced multi-physics solvers. Advances in computing infrastructure have kept pace over time, drastically reducing the time it takes to perform complex simulations and solve large-scale problems such as automotive crash simulation, fluid-structure interaction of subsea oil pipelines and detailed composite simulation of full aircraft structures. As these models continue to grow larger and solve faster, the knowledge and power of these methods to impact design decisions expands across a department, an industry, or from one industry to another, fueling consumption of CAE software.

Fundamental transformations in product engineering

The nature of modern manufactured products is rapidly evolving toward intelligent, connected systems. Once composed solely of mechanical parts, products have become complex systems often combining mechanical hardware, electronics, sensors, controls, software, and communications in myriad ways to monitor and adjust behavior using embedded logic. Advanced driver-assistance systems, or ADAS, autonomous vehicles, or AVs, modern industrial robots and most new consumer products are examples of this new paradigm. This complex interplay across domains is forcing engineers to take a systems-level approach to design, and in turn to rely on advanced computer-aided systems simulation as a necessity in product design. Controls algorithm development, modeling of linked systems, and transfer of control logic into embedded systems can all be done using CAE software to achieve optimal performance and cost and ensure product integrity while minimizing physical prototype iterations.

Democratization of CAE

CAE software access was historically limited to a small pool of specialist engineers in large organizations with a high level of domain expertise and knowledge of complex mathematical modeling and underlying physics. Exploring different product design ideas at the same time through simulation software required reliable, secure, and dedicated high-speed computing infrastructure, which was typically expensive to own and operate. The dramatic increase in computing performance, and an equally dramatic reduction in computing cost over the last twenty years coupled with the growth of cloud computing is making CAE, and especially optimization, cost effective. Coupled with user-friendly software applications which make multi-run design studies less expensive, businesses have the opportunity to expand their CAE user community and overall application of simulation.

We believe record numbers of engineers and designers involved in product development now have access to CAE tools, and any one engineer involved in product development has access to more CAE tools than ever, thus driving increased adoption of CAE solutions across large organizations and by small and medium businesses.

An emerging paradigm of simulation-driven design

Simulation is now driving design innovation, rather than following design. The product development process of recent decades involved creation of a product concept followed by development of a detailed design using 3D CAD. The designs were then passed along to engineering teams to refine, test and optimize. CAE was often too

 

 

4


Table of Contents

late or too slow to effectively impact the rapid decisions required to correct flawed product designs. Design changes late in the product development process are costly, may delay product launches, and can adversely affect product quality and performance.

Democratization of CAE offers product designers easy access to a user-friendly subset of simulation tools to take into account product performance objectives and manufacturability early in the design process. Going forward, engineering specialists can focus more on detailed validations and complex simulations. This is driving a positive movement toward simulation-driven design processes and a corresponding growth in simulation software consumption.

Expanding scope of simulations to “digital twins”

The evolution of products into intelligent, connected devices—which are increasingly embedded in broader systems—is reshaping how products are engineered, manufactured, operated and serviced. Smart, connected products underpin the IoT and generate vast amounts of actionable data. As consumers and industries begin to realize tangible benefits from connected products, IoT adoption is accelerating. Gartner estimates that the installed base of IoT units will grow to reach more than 20 billion units by 2020.*

CAE software combined with advanced analytics and operating data from sensors make it possible for manufacturers to improve product performance through complete life-cycles. In-service measurements, combined with simulation models, or digital twins, provide information to predict and prescribe maintenance of components or systems. The IoT is changing engineering by broadening the scope of PLM to leverage simulation and analytics for better and more robust manufacturing and in-service operation.

Market opportunity

Rising expectations of end-market customers, new manufacturing methods such as 3D printing, the ability to design and process composites and new materials, combined with more powerful math-based computational technologies, are expanding the application of simulation across many industry verticals and throughout product life-cycles. CAE software offers companies opportunities to achieve better, lower cost products with fewer physical prototypes and tests, and reduces the time required to bring products to market.

The CIMdata Report forecasts, “the PLM market to grow at a compound annual growth rate (CAGR) of 6.7% to $56.3 billion” in 2021. The CIMdata Report estimates the CAE market which they refer to as Simulation and Analysis, as a subset of the PLM market to be approximately $5.3 billion and $5.7 billion in 2016 and 2017, respectively. The CIMdata Report expects the CAE market, “will be one of the more rapidly growing segments within the tools sector of PLM over the next five years, and forecasts that this market sector will exceed $7.8 billion in 2021, with an 8.1% CAGR.”

We believe our strategy of making CAE technologies more accessible through simplified user interfaces with easy access to a broad range of applications and new cloud offerings will help us expand to more designers, engineers and architects at larger companies as well as at small and medium enterprises, thus driving a growth rate that exceeds the overall simulation and analysis, or the S&A, market. In addition, our recent offerings including software for math-based systems modeling, embedded systems design, and visual analytics present an opportunity to expand our customer base.

Our addressable opportunity also includes software to facilitate and optimize the use of HPC infrastructure critical for running complex simulation models in industries ranging from manufacturing to weather prediction,

 

 

5


Table of Contents

bio-informatics and financial risk-management. According to the former high performance analyst team of IDC which is now owned by Hyperion, the market for high-end HPC servers is estimated to reach $7 billion by 2020. We believe we are positioned attractively to capture spending related to workload management systems for these high-end servers.

We believe Altair’s simulation and HPC expertise uniquely positions us to address a portion of spending in the massive and fast growing IoT and analytics market. IDC estimates that $36 billion was spent on IoT platforms in 2015, and estimates the market to grow at a CAGR of 15% through 2020. IDC believes $19.97 billion was spent on business intelligence and analytics software tools in 2016 and will grow at a CAGR of 12% through 2021. We have decades of experience helping our customers aggregate, analyze and visualize vast datasets created by large scale simulations, laboratory tests and in-field sensors. Through our analytics product suite and IoT platform, we are expanding our market reach to a broader set of customers, enabling them to collect and analyze data from an increasing number of connected products to support key business decisions.

Competitive strengths

We believe the following strengths will allow us to maintain and build our position in the growing market for engineering and simulation solutions:

Experienced management and culture of innovation

As a technology and product driven company, we believe Altair’s culture of innovation creates engagement and loyalty among our employees and customers.

Our founder and leadership team are deeply experienced with a strong track record of both business and product innovation. Our diversified and global workforce is highly experienced and energetic. Altair’s culture affords many opportunities for people to take on new roles and assignments, including significant mobility between locations around the world. Approximately 50% of our employees have been with Altair more than five years and approximately 50% of our managers have a tenure exceeding ten years. Many of our key executives have worked at the company for over 20 years. All of this translates into a significant competitive advantage through deeply rooted institutional knowledge about our market, our competitors’ strengths and weaknesses, and engineering technology.

Units-based subscription licensing model

Altair pioneered a patented units-based subscription licensing model for software and other digital content which has transformed the way our customers use software, delivering strong retention rates and revenue growth.

Under a traditional software industry licensing model, customers license rights to use a particular application or a suite of applications, which are typically priced on a per user or central processing unit, or CPU, basis for a specified period of time. The Altair units-based subscription licensing model is different from the traditional licensing model because it allows customers to license a pool of units for their organizations, providing individual users flexible access to our entire portfolio of software applications along with over 150 partner products. Under the Altair units-based subscription licensing model, customers acquire rights to use a “unit” for a specified period of time. Units are held in a pool and drawn when a user runs any of the applications available under our licensing model, either Altair applications or third-party partner applications. When the user closes the application, the units are returned to the pool and become available for use by all users. In 2016, customers

 

 

6


Table of Contents

accessed an average of 14.6 applications from our overall portfolio. Altair’s business model is particularly suited to CAE, as engineers and designers often require several different applications across multiple disciplines when developing products. This model lowers barriers to adoption, creates broad engagement, encourages users to work within our ecosystem and access applications they might otherwise have purchased from competitors, and increases revenue. This, in turn, helps drive our recurring software license rate which has been on average approximately 88% over the past five years. Each year approximately 60% of new revenue comes from expansion within existing customers.

 

 

 

LOGO

Broad simulation portfolio and open interfaces

Altair’s broad portfolio of solutions as well as our open philosophy toward interfacing with other solutions, including competitors, positions us as a strong and strategic partner for customers.

We have assembled one of the broadest portfolios of simulation and optimization applications in the industry, spanning multiple domains and technology disciplines. Our software offers multidisciplinary capabilities in simulation, optimization and predictive analytics. We address the entire product lifecycle including concept design, engineering, manufacturing processes, and in-service operations.

Altair has historically offered broad and complete interfaces to most major third party CAD and CAE software on the market. Customers using a variety of platforms within their enterprises and throughout their supply chain have the ability to use Altair’s software as a central method to share models across multiple formats and between different simulation disciplines.

Industry-leading simulation performance

Our simulation solutions including modeling, visualization and solvers are noted in the market for their ability to handle large and complex models.

Altair’s software applications are highly industrialized and state-of-the-art and take thorough advantage of new compute architectures as they become available including new processors, storage systems, Graphics Processing Units, or GPUs, and on-premise and public high-performance cloud computing. In addition, we are developing and experimenting with solutions for HPC workload management and remote visualization which will allow the delivery of our own as well as other software via a cloud model.

 

 

7


Table of Contents

Our software applications deliver high-performance and high scalability, including massive parallelization, which is increasingly important in the CAE market. This allows our customers to run complex high-fidelity simulations quickly and cost-effectively. As the market moves to drive design with numerical optimization and stochastic studies to improve quality, this requires models to be run multiple times, often with hundreds or thousands of changes to input variables. Compute performance and the ability to run larger models are critical to delivering timely and accurate results, and best-in-class designs.

Altair is a leader in integrating optimization technology across all our products including multi-disciplinary applications. We believe our ability to leverage HPC as the industry transitions to cloud computing also provides an important differentiator.

Deep technical engagement with customers

Our services including consulting, implementation services, training and support enhance our ability to drive grassroots demand for our applications.

Altair’s software related services team is comprised of approximately 700 highly technical people globally and is differentiated by its significant size and the breadth of their real world experience. We believe our approach differentiates us from our competitors, as we focus on establishing a strong working relationship with the user community allowing us to offer guidance and expertise throughout their product creation process.

Altair has a philosophy of significant engagement with strategic customers on key development projects in our software product roadmap to ensure we deliver solutions which are innovative and comprehensive in addressing customer requirements.

We believe our close technical engagement with users, along with senior engineering relationships developed by our sales personnel, helps our ability to sell future products and services.

Growth strategies

We believe the following represent opportunities for Altair’s growth in the engineering simulation market:

 

 

Grow market share for solvers;

 

 

Grow indirect business through our original equipment manufacturer, or OEM, and reseller networks;

 

 

Establish leadership position in the expanding cloud HPC market;

 

 

Expand client adoption for simulation-driven design offerings; and

 

 

Target the emerging IoT market with platform, analytics and digital twin solutions.

We intend to pursue growth by leveraging these opportunities with the following growth strategies:

Increase software usage within our existing customer base

Our existing base of tens of thousands of users across approximately 5,000 customers worldwide provides a significant opportunity to increase revenues. Historically we have derived 60% of our new software revenue from existing clients. The units-based subscription licensing model lowers barriers to usage, and provides customers the flexibility to initially deploy one or more of our products and later expand usage to more of our applications along with partner products. This land and expand strategy combined with our leadership position in modeling and visualization and our strong portfolio of solver products presents a clear path toward increased usage.

 

 

8


Table of Contents

We believe Altair PBS Cloud, complemented by the newly acquired Runtime Design Automation, or Runtime, products, can revolutionize how customer organizations manage their on-premises HPC computing and off-premises cloud infrastructure. As companies transition more HPC workloads to the cloud, we believe Altair PBS Cloud along with Runtime will help them to easily provision, manage and optimize these resources to maximize return on investment.

Invest in our direct sales force

Our direct sales force is highly technical and experienced, and consistently delivers solid growth and customer loyalty. Our subscription business model sometimes results in smaller new and expansion deal sizes than traditional paid-up licensing approaches. However, our model drives recurring software licenses and consistent growth, creates broad engagement, encourages users to work within our ecosystem, and increases revenue. This drives our recurring software license rate which has been on average approximately 88% over the past five years, and is powerful when competing for new business.

We plan to hire additional field and inside sales professionals in most major markets in which we operate, and to support these teams with continued brand and product marketing. We believe adding sales capacity in our direct sales force will grow revenue.

Expand through indirect sales channels

We believe there is growth and margin expansion opportunity through our OEM and reseller networks, and we plan to continue adding more partners across all product suites in the future.

solidThinking indirect channels are intended to deliver important new top line growth into middle-market companies not requiring the full suite of enterprise solutions. We plan to focus significant attention on growing our base of Carriots OEMs, implementation partners, and resellers by targeting specific vertical IoT markets. These relationships are important in creating opportunities for digital twin simulation related to the design of, and in-service predictive analytics of, connected products.

Continue investment in R&D

We organically developed over 15 products which came to market commercially in the last 25 years. These include HyperMesh, HyperView, HyperGraph, OptiStruct, Compose, Activate, Click2Form, HyperStudy, Inspire, MotionView, MotionSolve, Altair PBS Access, Altair PBS Cloud, and Carriots Analytics. We believe this level of organic product creation sustained over such a long period of time is unique in the PLM market.

Analytics from our units-based subscription licensing model gives us insight into our customers’ workflows and usage patterns. This helps guide our product development and R&D efforts. We pay attention to how problems are being solved by currently available solutions and look for opportunities to create new products where we can make significant improvements in quality or performance and deliver future revenue streams for our company. We experiment with new methods and emerging technologies as they become available to learn and to find ways they can be relevant in advancing our products’ technologies in the markets we serve.

We view our continued investment in R&D as essential to developing new products and technologies, as well as new features for existing products, to support the needs of our users.

 

 

9


Table of Contents

Selectively pursue acquisitions and strategic investments

We plan to explore and pursue selective acquisitions and strategic investments to complement and strengthen our product offerings, expand the functionality of our solution, acquire technology or talent, or gain access to new customers and markets.

We acquired 19 companies or strategic technologies since 1996, including 11 in the last three years. These acquisitions brought strategic IP assets, and approximately 200 developers with expertise in disciplines ranging from electronics, material science, crash and safety to industrial design and rendering. Products which are commercially available as a result of these acquisitions include Click2Extrude, Altair PBS Professional, Radioss, Evolve, Acusolve, SimLab, Embed, Click2Cast, Multi-scale Designer, FEKO, FLUX, WinProp, Thea Render, Modeliis, Carriots, and ESAComp.

We believe our ability to integrate expert teams and new IP into our organization, and quickly bring acquired products to market with our business model, is unique in the PLM market.

Subsequent events

On September 28, 2017, we acquired Runtime for $9.7 million in cash, $ 0.3 million payable, $8.7 million in a deferred cash payment obligation, and 708,000 shares of our Class A voting common stock. Runtime complements Altair’s PBS Works suite of products for comprehensive, secure workload management for HPC and cloud environments and has solutions to manage highly complex workflows. We believe both Runtime and PBS Works deliver innovative and mission critical technology to optimize the use of HPC for compute-intensive applications. PBS Works targets product design, weather prediction, oil exploration and bio-informatics, and Runtime primarily serves customers in electronic design automation, or EDA.

 

 

10


Table of Contents

Recent operating results (preliminary and unaudited)

Set forth below are selected preliminary unaudited financial results for the three months ended September 30, 2017. Our consolidated financial statements for the three months ended September 30, 2017 will not be available until after this offering is completed. The following information reflects our preliminary estimates with respect to such results based on currently available information. We have provided ranges, rather than specific amounts, for the preliminary results described below primarily because our financial closing procedures for the three months ended September 30, 2017 are not yet complete and, as a result, our final results upon completion of our closing procedures may vary from the preliminary estimates. Income (loss) before income taxes is not yet complete pending the finalization of our September 30, 2017 valuation report. Global consolidated income tax expense (benefit) is not yet complete pending the tax implication of the stock-based compensation charge and the global consolidation of the Company’s tax balances. These estimates should not be viewed as a substitute for interim financial statements prepared in accordance with GAAP. Our independent registered public accounting firm has not conducted a review of, and does not express an opinion or any other form of assurance with respect to, these preliminary estimates.

 

      Three months ended
September 30, 2017
        
(in thousands)    Low     High     % Change  
     (unaudited)  

GAAP

      

Revenue:

      

Software

   $ 61,500     $ 62,500       10-12%  

Software related services

     8,300       8,600       (4)-(1)%  
  

 

 

 

Total Software

   $ 69,800     $ 71,100       8-10%  

Client Engineering Services

     11,200       11,500       (8)-(5)%  

Other

     1,600       1,600       12%  
  

 

 

 

Total revenue

   $ 82,600     $ 84,200       6-8%  

Income (loss) before income taxes, excluding stock-based compensation

   $ 2,900     $ 3,200    

Stock-based compensation expense

   $ (25,000   $ (29,000  
  

 

 

   

Income (loss) before income taxes

   $ (22,100   $ (25,800  

Cash and cash equivalents

   $ 16,300     $ 16,700    

Total debt

   $ 92,100     $ 92,300    

Net cash provided by operating activities (nine months ended)

   $ 17,000     $ 17,500    

 

 

 

 

For the three months ended September 30, 2017, we expect total revenue to be between $82.6 million and $84.2 million, representing an estimated increase of approximately 6% to 8% as compared to total revenue of $78.1 million for the three months ended September 30, 2016. The year-over-year increase in total revenue was primarily driven by a 10-12% increase in our software revenue. Our software revenue increase is estimated to be driven by an expansion in the number of units licensed by our existing customers under renewed software license agreements and, to a lesser extent, licensing of units to new customers pursuant to new software license agreements.

 

 

For the three months ended September 30, 2017, we expect income before income taxes, excluding stock-based compensation expense to be between $2.9 million and $3.2 million, as compared to income before income taxes, excluding stock-based compensation expense of $4.4 million for the three months ended September 30, 2016.

 

 

For the three months ended September 30, 2017, we expect stock-based compensation expense to be between $25 million and $29 million, as compared to stock-based compensation expense of $4.9 million for the

 

 

11


Table of Contents
 

three months ended September 30, 2016 primarily related to an increase to the Company’s liability-based stock option plan expense which is updated each period for changes in the fair value of the Company.

Non-GAAP financial measures

 

      Nine months ended
September 30, 2017
 
(in thousands)    Low      High  
            (unaudited)  

Non-GAAP

     

Free cash flows

   $ 10,700      $ 11,000  

Recurring software license rate

     90%        90%  

 

 

 

 

For the nine months ended September 30, 2017 we expect free cash flow to be between $10.7 million and $11.0 million, as compared to free cash flow of $16.6 million for the nine months ended September 30, 2016. Free cash flow for the nine months ended September 30, 2016 is calculated as $21.3 million of net cash provided by operating activities less capital expenditures of $4.7 million.

 

 

For the nine months ended September 30, 2017 our recurring software license rate is expected to be 90%.

Reconciliation of non-GAAP financial measures

The following tables provide reconciliations of net cash provided by operating activities to Free Cash Flow:

 

      Nine months ended
September 30, 2017
 
(in thousands)    Low      High  
            (unaudited)  

Net cash provided by operating activities

   $ 17,000      $ 17,500  

Capital expenditures

     (6,300      (6,500
  

 

 

 

Free Cash Flow

   $ 10,700      $ 11,000  

 

 

Free Cash Flow is a non-GAAP financial measure that we calculate as cash flow provided by operating activities less capital expenditures. We believe that Free Cash Flow is useful in analyzing our ability to service and repay debt and return value directly to stockholders. See the section entitled “Selected historical consolidated financial and other data – Reconciliation of non-GAAP financial measures” for information regarding the limitations of using Free Cash Flow as a financial measure.

The information above is based on preliminary unaudited information and management estimates for the three and nine months ended September 30, 2017, is not a comprehensive statement of our financial results, and is subject to completion of our financial closing procedures. This information should be read in conjunction with our consolidated financial statements and the related notes and “Management’s discussion and analysis of financial condition and results of operations” for prior periods included elsewhere in this prospectus. Our actual results for the three months ended September 30, 2017 will not be available until after this offering is completed, may differ materially from our preliminary estimates (including as a result of year-end closing and audit procedures and review adjustments) and are not necessarily indicative of the results to be expected for the remainder of 2017 or any future period. In addition, we are not able to provide a range of income taxes at this time. Accordingly, you should not place undue reliance upon these preliminary estimates. There can be no assurance that these estimates will be realized, and estimates are subject to risks and uncertainties, many of

 

 

12


Table of Contents

which are not within our control. See the section entitled “Risk factors” and “Information regarding forward-looking statements”. These preliminary estimates have been prepared by and are the responsibility of management. Our independent registered public accounting firm has not conducted a review of, and does not express an opinion or any other form of assurance with respect to, these preliminary estimates. These estimates should not be viewed as a substitute for interim financial statements prepared in accordance with GAAP.

Risks affecting us

Our business is subject to numerous risks and uncertainties, including those highlighted in the section entitled “Risk factors” immediately following this prospectus summary. These risks include, but are not limited to, the following:

 

 

We have experienced significant revenue growth and we may fail to sustain that growth rate or may not grow in the future;

 

 

If we cannot maintain our company culture of innovation, teamwork, and communication our business may be harmed;

 

 

If our existing customers or users do not increase their usage of our software, or we do not add new customers, the growth of our business may be harmed;

 

 

Our ability to acquire new customers is difficult to predict because our software sales cycle can be long;

 

 

Reduced spending on product design and development activities by our customers may negatively affect our revenues;

 

 

Our business largely depends on annual renewals of our software licenses;

 

 

We believe our future success will depend, in part, on the growth in demand for our software by customers other than simulation engineering specialists and in additional industry verticals;

 

 

We face significant competition, which may adversely affect our ability to add new customers, retain existing customers and grow our business;

 

 

Because we derive a substantial portion of our revenues from customers in the automotive industry, we are susceptible to factors affecting this industry;

 

 

Our quarterly results may fluctuate significantly and may not fully reflect the underlying performance of our business; and

 

 

The dual class structure of our common stock has the effect of concentrating voting control with certain stockholders who hold shares of our Class B common stock, including our founders, certain of our directors and executive officers and affiliates, who will hold in the aggregate approximately 95% of the voting power of our capital stock following the completion of this offering. This will limit or preclude your ability to influence corporate matters, including the election of directors, amendments of our organizational documents, and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction requiring stockholder approval. Upon the completion of this offering, our executive officers, directors and current beneficial owners of 5% or more of our Class A common stock, together with their respective affiliates, will beneficially own, in the aggregate, approximately 91% of our outstanding common stock, assuming no exercise of the underwriters’ option to purchase additional shares of our common stock in this offering.

 

 

13


Table of Contents

Corporate history and information

We were incorporated in Michigan in 1985. We became a Delaware corporation in October 2017. Our principal executive offices are located at 1820 E. Big Beaver Road, Troy, Michigan 48083. On April 3, 2017, we completed a recapitalization of our capital stock by filing a certificate of amendment to our articles of incorporation with the State of Michigan pursuant to which: (i) each share of our Class A voting common stock, or our old Class A shares, automatically converted into one share of new Class B voting common stock entitled to ten votes per share; and (ii) each share of our Class B non-voting common stock, or our old Class B shares, automatically converted into one share of new Class A voting common stock entitled to one vote per share, in each case, without any further action on the part of the holders thereof. We refer to this transaction as our “Recapitalization.” Our website address is www.altair.com. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider any information contained on, or that can be accessed through, our website as part of this prospectus or in deciding whether to purchase shares of our Class A common stock.

Unless the context otherwise requires, the terms “Altair,” “the Company,” “we,” “us” and “our” in this prospectus refers to Altair Engineering Inc. and its subsidiaries. The Altair design logo and the marks “OptiStruct,” “RADIOSS,” “AcuSolve,” “FEKO,” “Flux,” “WinProp,” “Multiscale Designer,” “HyperStudy,” “HyperMesh,” “HyperView,” “SimLab,” “HyperCrash,” “HyperGraph,” “Inspire,” “solidThinking Evolve,” “Thea Render,” “Click2Cast,” “Click2Extrude,” “Click2Form,” “Carriots,” “solidThinking Compose,” “solidThinking Activate,” “solidThinking Embed,” “Altair PBS Works,” “Altair PBS Professional,” “Altair PBS Cloud,” “MotionView,” “MotionSolve,” “Altair PBS Access” and our other registered or common law trade names, trademarks or service marks appearing in this prospectus are our property. This prospectus contains additional trade names, trademarks and service marks of other companies that are the property of their respective owners. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by these other companies.

Implications of being an emerging growth company

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, as amended, or the JOBS Act. An emerging growth company may take advantage of relief from certain reporting requirements and other burdens that are otherwise applicable generally to public companies. These provisions include:

 

 

reduced obligations with respect to financial data, including presenting only two years of audited financial statements and only two years of selected financial data;

 

 

an exemption from compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended, or SOX;

 

 

reduced disclosure about our executive compensation arrangements;

 

 

an exemption from the requirements to obtain a nonbinding advisory vote on executive compensation or stockholder approval of any golden parachute arrangements; and

 

 

extended transition period for complying with new and revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company, or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act.

 

 

14


Table of Contents

We may take advantage of these provisions for up to five years or such earlier time that we no longer qualify as an emerging growth company. We would cease to be an emerging growth company if we have more than $1.07 billion in annual revenues, have more than $700 million in market value of our capital stock held by non-affiliates or issue more than $1.0 billion of non-convertible debt over a three-year period. We may choose to take advantage of some but not all of these reduced reporting burdens.

 

 

15


Table of Contents

The offering

 

Class A common stock offered by us

8,065,004 shares

 

Class A common stock offered by the selling stockholders

3,934,996 shares

 

Overallotment option offered by us

1,800,000 shares

 

Class A common stock to be outstanding after this offering

21,387,512 shares (23,187,512 shares, if the underwriters exercise their option to purchase additional shares in full)

 

Class B common stock to be outstanding after this offering

39,003,428 shares

 

Total Class A and Class B common stock to be outstanding after this offering

60,390,940 shares (62,190,940 shares, if the underwriters exercise their option to purchase additional shares in full)

 

Use of proceeds

The net proceeds from our sale of 8,065,004 shares of Class A common stock in this offering based on the initial public offering price of $13.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses, will be approximately $93.4 million, or $115.1 million if the underwriters’ overallotment option is exercised in full.

 

  We intend to use the net proceeds of this offering to (i) repay our term loan and our revolving credit facility balance under our Credit Agreement, and (ii) pay the fees and expenses related to our new revolving credit facility, or New Credit Facility. We intend to use the remaining net proceeds to us for general corporate purposes, including real estate development, working capital, sales and marketing activities, general and administrative matters, capital expenditures, and acquisitions, or investments in, technologies or businesses.

 

  We will not receive any proceeds from the sale of shares of our Class A common stock by the selling stockholders.

 

  For a more complete description of our intended use of proceeds from this offering, see the section entitled “Use of proceeds.”

 

Symbol

“ALTR”

 

Voting Rights

Shares of our Class A common stock are entitled to one vote per share. Shares of our Class B common stock are entitled to ten votes

 

 

16


Table of Contents

per share. Holders of our Class A common stock and Class B common stock will generally vote together as a single class, unless otherwise required by law or by our Delaware certificate of incorporation. The holders of our outstanding Class B common stock will hold approximately 94% of the voting power of our outstanding capital stock following this offering and will have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of our directors and the approval of any change in control transaction. See the sections entitled “Principal and selling stockholders” and “Description of capital stock” for additional information.

 

Conflicts of Interest

Affiliates of J.P. Morgan Securities LLC and RBC Capital Markets, LLC, two of the three book running managers for this offering, will receive more than 5% of the net proceeds of this offering in connection with the repayment of outstanding loans under our Credit Agreement. Accordingly, this offering is being conducted in accordance with the applicable provisions of Rule 5121 of the Financial Industry Authority, Inc., or FINRA, Conduct Rules because certain of the underwriters will have a “conflict interest” pursuant to Rule 5121. In accordance with Rule 5121, Deutsche Bank Securities Inc., the third book running manager for this offering, is acting as the qualified independent underwriter in this offering. Any underwriter that has a conflict of interest pursuant to Rule 5121 will not confirm sales to accounts in which it exercises discretionary authority without the prior written consent of the customer. See the section entitled “Underwriting (conflicts of interest)—Conflicts of interest.”

The total number of shares of our common stock to be outstanding following this offering is based on 9,387,512 shares of our Class A common stock and 41,203,428 shares of our Class B common stock outstanding as of June 30, 2017 (which number of shares of Class B common stock includes (i) 2,495,752 shares converted into Class A common stock when the Company became a Delaware corporation in October 2017 and (ii) the automatic conversion of 2,200,000 shares of our Class B common stock held by certain selling stockholders into an equivalent number of shares of our Class A common stock upon their sale by these selling stockholders in our offering for which we will not receive any proceeds) and excludes:

 

 

708,000 shares of Class A common stock issued in connection with our acquisition of Runtime in September, 2017;

 

 

6,207,976 shares of our Class A common stock to be reserved for issuance under our 2017 Equity Incentive Plan, or our 2017 Plan;

 

 

2,627,920 shares of our Class A common stock reserved for issuance under our 2012 Incentive and Non-Qualified Stock Option Plan, or our 2012 Plan;

 

 

6,347,840 shares of our Class A common stock issuable upon exercise of stock options outstanding as of June 30, 2017, with an exercise price of $0.000025, under our 2001 Non-Qualified Stock Option Plan, or our 2001 NQSO Plan;

 

 

2,931,380 shares of our Class A common stock issuable upon exercise of stock options outstanding as of June 30, 2017, with a weighted average exercise price of $0.64, under our 2001 Incentive and Non-Qualified

 

 

17


Table of Contents
 

Stock Option Plan, or 2001 ISO and NQSO Plan (other than the 1,734,996 stock options to be exercised by our chief executive officer, Mr. James R. Scapa, in connection with this offering, which are included in the shares of Class A common stock offered by the selling stockholders, as set forth elsewhere in this prospectus); and

 

 

2,209,608 shares of our Class A common stock issuable upon exercise of stock options outstanding as of June 30, 2017, with a weighted average exercise price of $3.73, under our 2012 Plan.

Except as otherwise indicated, all information in this prospectus assumes:

 

 

no exercise or cancellations of outstanding stock options after June 30, 2017 (except by Mr. Scapa in connection with this offering, as disclosed elsewhere in this prospectus);

 

 

no exercise by the underwriters of their option to purchase up to an additional 1,800,000 shares of our Class A common stock; and

 

 

a four-for-one stock split of our common stock which became effective in October 2017.

 

 

18


Table of Contents

Summary historical consolidated financial and other data

The following tables summarize the consolidated financial data for our business. You should read this summary consolidated financial data in conjunction with the “Management’s discussion and analysis of financial condition and results of operations” and our consolidated financial statements and related notes included elsewhere in this prospectus. We derived the consolidated statements of operations data for the years ended December 31, 2015 and 2016 and the consolidated balance sheet data as of December 31, 2016, from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statement of operations and cash flow data for the six months ended June 30, 2016 and 2017, and the consolidated balance sheet data as of June 30, 2017, are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited consolidated financial statements on the same basis as the audited consolidated financial statements and have included all adjustments, consisting only of normal recurring adjustments that, in our opinion, are necessary to state fairly the financial information set forth in those statements. Our historical results are not necessarily indicative of the results that may be expected in the future, and the results of operations for the six months ended June 30, 2017 are not necessarily indicative of the results to be expected for the full fiscal year or any other period. The summary consolidated financial data in this section are not intended to replace our consolidated financial statements and the related notes, and are qualified in their entirety by the consolidated financial statements and related notes included elsewhere in this prospectus.

 

 

19


Table of Contents
      Years ended
December  31,
    Six months ended
June 30,
 
(in thousands, except share data)    2015     2016     2016     2017  

Consolidated statements of operations data:

        

Revenue:

        

Software

   $ 205,567     $ 223,818     $ 106,929     $ 113,697  

Software related services

     37,294       35,770       17,790       17,175  
  

 

 

 

Total software

     242,861       259,588       124,719       130,872  

Client engineering services

     45,075       47,702       24,289       24,594  

Other

     6,193       5,950       3,332       3,062  
  

 

 

 

Total revenue

     294,129       313,240       152,340       158,528  
  

 

 

 

Cost of revenue:

        

Software(1)

     27,406       31,962       15,021       17,633  

Software related services

     30,079       27,653       13,838       13,773  
  

 

 

 

Total software

     57,485       59,615       28,859       31,406  

Client engineering services

     36,081       38,106       19,207       19,969  

Other

     5,642       4,879       2,692       2,297  
  

 

 

 

Total cost of revenue

     99,208       102,600       50,758       53,672  
  

 

 

 

Gross profit

     194,921       210,640       101,582       104,856  

Operating expenses:

        

Research and development(1)

     62,777       71,325       34,012       41,608  

Sales and marketing(1)

     63,080       66,086       32,093       36,338  

General and administrative(1)

     54,069       57,202       27,882       37,290  

Amortization of intangible assets

     2,624       3,322       1,477       2,098  

Other operating income

     (2,576     (2,742     (1,129     (3,330
  

 

 

 

Total operating expense

     179,974       195,193       94,335       114,004  
  

 

 

 

Operating income (loss)

     14,947       15,447       7,247       (9,148

Interest expense

     2,416       2,265       1,247       1,159  

Other expense (income), net

     782       (520     (652     786  
  

 

 

 

Income (loss) before income taxes

     11,749       13,702       6,652       (11,093

Income tax expense (benefit)

     818       3,539       2,699       (1,659
  

 

 

 

Net income (loss)

   $ 10,931     $ 10,163     $ 3,953     $ (9,434
  

 

 

 

Net income (loss) per share attributable to common stockholders, basic(2)

   $ 0.23     $ 0.21     $ 0.08     $ (0.19

Net income (loss) per share attributable to common stockholders, diluted(2)

   $ 0.19     $ 0.18     $ 0.07     $ (0.19

Weighted average number of shares used in computing net income (loss) per share, basic(2)

     46,609       48,852       47,891       50,255  

Weighted average number of shares used in computing net income (loss) per share, diluted(2)

     58,709       57,856       57,236       50,255  

Pro forma net income (loss)(3)

     $ 12,341       $ (3,303

Pro forma net income (loss) per share attributable to common stockholders, basic(3)

     $ 0.25       $ (0.07

Pro forma net income (loss) per share attributable to common stockholders, diluted(3)

     $ 0.21       $ (0.07

Other financial information:

        

Net cash provided by operating activities

   $ 10,838     $ 21,385     $ 22,006     $ 26,117  

 

 

 

 

20


Table of Contents
(1)   Includes stock-based compensation expense as follows:

 

      Year ended
December  31,
     Six months ended
June 30,
 
(in thousands)    2015      2016      2016      2017  

Cost of revenue—software

   $ 44      $ 22      $ 14      $ 16  

Research and development

     149        1,370        41        3,784  

Sales and marketing

     109        775        35        2,115  

General and administrative

     295        2,965        85        8,122  
  

 

 

 

Total stock-based compensation expense

   $ 597      $ 5,132      $ 175      $ 14,037  

 

(2)   See Note 14 to our consolidated financial statements for an explanation of the method used to calculate basic and diluted net income (loss) per share attributable to common stockholders.

 

(3)   The Pro forma amounts reflect the effects of the reversal of the stock-based compensation liability that will occur upon effectiveness (see Note 3 to our consolidated financial statements), but excludes the 708,000 shares of our Class A common stock issued on September 28, 2017 in connection with our acquisition of Runtime.

 

      As of June 30, 2017  
(in thousands)    Actual     Pro
forma(1)
     Pro forma as
adjusted(2)(3)
 

Consolidated balance sheet data:

       

Cash and cash equivalents

   $ 17,419     $ 17,419      $ 42,266  

Working capital

     (79,313     (79,313      (44,466

Total assets

     265,610       265,610        288,067  

Deferred revenue, current and non-current

     136,780       136,780        136,780  

Debt

     71,095       71,095        688  

Total stockholders’ (deficit) equity

     (41,434     (24,583      69,913  

 

 

 

(1)   The Pro forma column in the consolidated balance sheet data table above reflects the effects of the reversal of the stock-based compensation liability that will occur upon effectiveness of the registration statement of which this prospectus is a part, as if it had occurred on June 30, 2017 (See Note 3 to our consolidated financial statements), and the four-for-one stock split of our common stock effective when we became a Delaware corporation on October 5, 2017, but excludes the 708,000 shares of our Class A common stock issued on September 28, 2017 in connection with our acquisition of Runtime.

 

(2)   The Pro forma as Adjusted column gives effect to (i) the pro forma adjustments set forth above, (ii) the receipt by us of $93.4 million in net proceeds from the sale and issuance by us of 8,065,004 shares of our Class A common stock offered in this prospectus at an initial public offering price of $13.00 per share, after deducting the underwriting discounts and commissions from this offering and estimated offering expenses paid or payable by us (other than $0.9 million of such offering expenses paid by us on or before June 30, 2017) and, (iii) our use of a portion of our net proceeds from this offering to fully repay our term loan and revolving credit facility balance under our Credit Agreement, which had outstanding balances of $52.5 million and $18.0 million, respectively, as of June 30, 2017.

 

(3)   The pro forma as adjusted information presented in the consolidated balance sheet data is illustrative only.

Key metrics

We monitor the following key non-GAAP, (United States generally accepted accounting principles), financial and operating metrics to help us evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions. In addition to our results determined in accordance with GAAP, we believe the following non-GAAP financial and operating metrics are useful in evaluating our operating performance.

 

 

21


Table of Contents

Billings.    Billings consists of our total revenue plus the change in our deferred revenue in a given period. As we generally bill our customers at the time of sale, but typically recognize a majority of the related revenue ratably over time, management believes that Billings is a meaningful way to measure and monitor our ability to provide our business with the working capital generated by upfront payments from our customers. While we believe that billings provides valuable insight into the cash that will be generated from sales of our software and services, this metric may vary from period-to-period for a number of reasons including the impact of changes in foreign currency exchange rates and the potential impact of acquisitions. See the section entitled “Selected historical consolidated financial and other data—Reconciliation of non-GAAP financial measures” for information regarding the limitations of using Billings as a financial measure and for a reconciliation of Billings to revenue, the most directly comparable financial measure calculated in accordance with GAAP.

Our Billings were as follows:

 

      Year ended
December  31,
     Six months  ended
June 30,
 
(in thousands)    2015      2016      2016      2017  

Billings

   $ 297,358      $ 320,653      $ 165,449      $ 181,379  

 

 

Adjusted EBITDA.    We define Adjusted EBITDA as net income (loss) adjusted for income tax expense (benefit), interest expense, interest income and other, depreciation and amortization, stock-based compensation expense, restructuring charges, asset impairment charges and other special items as determined by management. We believe that Adjusted EBITDA is a meaningful measure of performance as it is commonly utilized by us and the investment community to analyze operating performance in our industry. See the section entitled “Selected historical consolidated financial and other data—Reconciliation of non-GAAP financial measures” for information regarding the limitations of using Adjusted EBITDA as a financial measure and for a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated in accordance with GAAP.

Our Adjusted EBITDA was as follows:

 

      Year ended
December  31,
     Six months  ended
June 30,
 
(in thousands)    2015      2016      2016      2017  

Adjusted EBITDA

   $ 22,949      $ 30,830      $ 12,933      $ 7,056  

 

 

Free Cash Flow.    Free Cash Flow is a non-GAAP financial measure that we calculate as cash flow provided by operating activities less capital expenditures. We believe that Free Cash Flow is useful in analyzing our ability to service and repay debt and return value directly to stockholders. See the section entitled “Selected historical consolidated financial and other data—Reconciliation of non-GAAP financial measures” for information regarding the limitations of using Free Cash Flow as a financial measure and for a reconciliation of Free Cash Flow to net cash provided by operating activities, the most directly comparable financial measure calculated in accordance with GAAP.

Our Free Cash Flow was as follows:

 

      Year ended
December  31,
     Six months  ended
June 30,
 
(in thousands)    2015      2016      2016      2017  

Free Cash Flow

   $ 5,605      $ 11,941      $ 18,307      $ 21,782  

 

 

 

 

22


Table of Contents

Recurring Software License Rate.    A key factor to our success is our recurring software license rate which we measure through billings, primarily derived from annual renewals of our existing subscription customer agreements. We calculate our recurring software license rate for a particular period by dividing (i) the sum of software term-based license billings, software license maintenance billings, and 20% of software perpetual license billings which we believe approximates maintenance as an element of the arrangement by (ii) the total software license billings including all term-based, maintenance, and perpetual license billings from all customers for that period. For the years ended December 31, 2015, 2016 and six months ended June 30, 2017, our recurring software license rate was 88%, 90% and 91%, respectively.

 

 

23


Table of Contents

Risk factors

Investing in our Class A common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all the other information in this prospectus, including “Management’s discussion and analysis of financial condition and results of operations” and our consolidated financial statements and the notes related thereto, before investing in our Class A common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that affect our business. If any of the following risks occur, our business, financial condition, operating results and prospects could be materially harmed. In that event, the trading price of our Class A common stock could decline, and you could lose part or all of your investment.

Risks relating to our business and industry

We have experienced significant revenue growth and we may fail to sustain that growth rate or may not grow in the future.

We were founded in 1985 and launched our first commercial software in 1990. Our growth has primarily been attributed to the increasing reliance of manufacturers on our simulation and optimization software to support development of their products and designs. Revenue from our software segment has historically constituted a significant portion of our total revenue. Our revenue growth could decline over time as a result of a number of factors, including increasing competition from smaller entities and well-established, larger organizations, limited ability to, or our decision not to, increase pricing, contraction of our overall market or our failure to capitalize on growth opportunities. Other factors include managing our global organization, revenues generated outside the United States that are subject to adverse currency fluctuations and uncertain international geopolitical landscapes. In connection with operating as a public company, we will also incur additional legal, accounting and other expenses that we did not incur as a private company. Accordingly, we may not achieve similar growth rates in future periods, and you should not rely on our historical revenue growth as an indication of our future revenue or revenue growth.

If we cannot maintain our company culture of innovation, teamwork, and communication our business may be harmed.

We believe that a critical component to our success has been our company culture, which is based on our core values of innovation, envisioning the future, communicating honestly and broadly, seeking technology and business firsts, and embracing diversity. We have invested substantial time and resources in building a company embodying this culture. As we develop the infrastructure of a public company and continue to grow, we may find it difficult to maintain these valuable aspects of our corporate culture. Any failure to preserve our culture could negatively impact our future success, including our ability to attract and retain personnel, encourage innovation and teamwork, and effectively focus on and pursue our corporate objectives.

If our existing customers or users do not increase their usage of our software, or we do not add new customers, the growth of our business may be harmed.

Our software includes a multitude of broad and deep design, simulation, optimization, and analysis applications and functionalities.

Our future success depends, in part, on our ability to increase the:

 

 

number of customers and users accessing our software;

 

24


Table of Contents
 

usage of our software to address expanding design, engineering, computing and analytical needs; and/or

 

 

number of our applications and functionalities accessed by users and customers through our licensing model.

In addition, through our Altair Partner Alliance, or APA, our customers have access to additional software offered by independent third parties, without the need to enter into additional license agreements.

If we fail to increase the number of customers or users and/or application usage among existing users of our software and the software of our APA partners, our ability to license additional software will be adversely affected, which would harm our operating results and financial condition.

Our ability to acquire new customers is difficult to predict because our software sales cycle can be long.

Our ability to increase revenue and maintain or increase profitability depends, in part, on widespread acceptance of our software by mid- to- large-size organizations worldwide. We face long, costly, and unpredictable sales cycles. As a result of the variability and length of the sales cycle, we have only a limited ability to forecast the timing of sales. A delay in or failure to complete sales could harm our business and financial results, and could cause our financial results to vary significantly from period to period. Our sales cycle varies widely, reflecting differences in potential customers’ decision making processes, procurement requirements and budget cycles, and is subject to significant risks over which we have little or no control, including:

 

 

longstanding use of competing products and hesitancy to change;

 

 

customers’ budgetary constraints and priorities;

 

 

timing of customers’ budget cycles;

 

 

need by some customers for lengthy evaluations;

 

 

hesitation to adopt new processes and technologies;

 

 

length and timing of customers’ approval processes; and

 

 

development of software by our competitors perceived to be equivalent or superior to our software.

To the extent any of the foregoing occur, our average sales cycle may increase and we may have difficulty acquiring new customers.

Reduced spending on product design and development activities by our customers may negatively affect our revenues.

Our revenues are largely dependent on our customers’ overall product design and development activities, particularly demand from mid- to- large-size organizations worldwide and their supplier base. The licensing of our software is discretionary. Our customers may reduce their research and development budgets, which could cause them to reduce, defer, or forego licensing of our software. To the extent licensing of our software is perceived by existing and potential customers to be extraneous to their needs, our revenue may be negatively affected by our customers’ delays or reductions in product development research and development spending. Customers may delay or cancel software licensing or seek to lower their costs. Deterioration in the demand for product design and development software for any reason would harm our business, operating results, and financial condition in the future.

 

25


Table of Contents

Our business largely depends on annual renewals of our software licenses.

We typically license our software to our customers on an annual basis. In order for us to maintain or improve our operating results, it is important that our customers renew and/or increase the amount of software licensed on an annual basis. Customer renewal rates may be affected by a number of factors, including:

 

 

our pricing or license term and those of our competitors;

 

 

our reputation for performance and reliability;

 

 

new product releases by us or our competitors;

 

 

customer satisfaction with our software or support;

 

 

consolidation within our customer base;

 

 

availability of comparable software from our competitors;

 

 

effects of global or industry specific economic conditions;

 

 

our customers’ ability to continue their operations and spending levels; and

 

 

other factors, a number of which are beyond our control.

If our customers fail to renew their licenses or renew on terms that are less beneficial to us, our renewal rates may decline or fluctuate, which may harm our business.

We believe our future success will depend, in part, on the growth in demand for our software by customers other than simulation engineering specialists and in additional industry verticals.

Historically, our customers have been simulation engineering specialists. To enable concept engineering, driven by simulation, we make our physics solvers more accessible to designers by wrapping them in powerful simple interfaces. We believe our future success will depend, in part, on growth in demand for our software by these designers, which could be negatively impacted by the lack of:

 

 

continued and/or growing reliance on software to optimize and accelerate the design process;

 

 

adoption of simulation technology by designers other than simulation engineering specialists;

 

 

continued proliferation of mobility, large data sets, cloud computing and IoT; our ability to predict demands of designers other than simulation engineering specialists and achieve market acceptance of our products within these additional areas and customer bases or in additional industry verticals; or

 

 

our ability to respond to changes in the competitive landscape, including whether our competitors establish more widely adopted products for designers other than simulation engineering specialists.

If some or all of this software does not achieve widespread adoption, our revenues and profits may be adversely affected.

We face significant competition, which may adversely affect our ability to add new customers, retain existing customers, and grow our business.

The market for CAE software is highly fragmented but has been undergoing significant consolidation. Our primary competitors include Dassault Systèmes, Siemens, Ansys and MSC Software. Dassault and Siemens are large public companies, with significant financial resources, which have historically focused on CAD and product data management. More recently, these two companies have been investing in simulation software through acquisitions. Ansys and MSC are focused on CAE. In addition to these competitors, we compete with many smaller companies offering CAE software applications.

 

26


Table of Contents

A significant number of companies have developed or are developing software and services that currently, or in the future may, compete with some or all of our software and services. We may also face competition from participants in adjacent markets, including two-dimensional, or 2D, and 3D, CAD, and broader PLM competitors, that may enter our markets by leveraging related technologies and partnering with or acquiring other companies.

The principal competitive factors in our industry include:

 

 

breadth, depth and integration of software;

 

 

domain expertise of sales and technical support personnel;

 

 

consistent global support;

 

 

performance and reliability; and

 

 

price.

Many of our current and potential competitors have longer-term and more extensive relationships with our existing and potential customers that provide them with an advantage in competing for business with those customers. They may be able to devote greater resources to the development and improvement of their offerings than we can. These competitors could incorporate additional functionality into their competing products from their wider product offerings or leverage their commercial relationships in a manner that uses product bundling or closed technology platforms to discourage enterprises from purchasing our applications.

Many existing and potential competitors enjoy competitive advantages over us, such as:

 

 

larger sales and marketing budgets and resources;

 

 

access to larger customer bases, which often provide incumbency advantages;

 

 

broader global distribution and presence;

 

 

greater resources to make acquisitions;

 

 

the ability to bundle competitive offerings with other software and services;

 

 

greater brand recognition;

 

 

lower labor and development costs;

 

 

greater levels of aggregate investment in research and development;

 

 

larger and more mature intellectual property portfolios; and

 

 

greater financial, technical, management and other resources.

These competitive pressures in our markets or our failure to compete effectively may result in fewer customers, price reductions, licensing of fewer units, increased sales and marketing expenses, reduced revenue and gross profits and loss of market share. Any failure to address these factors could harm our business.

Because we derive a substantial portion of our revenues from customers in the automotive industry, we are susceptible to factors affecting this industry.

The automotive industry accounted for approximately 50% of our total revenue for the year ended December 31, 2016. An adverse occurrence, including industry slowdown, recession, political instability, costly

 

27


Table of Contents

or constraining regulations, excessive inflation, prolonged disruptions in one or more of our customers’ production schedules or labor disturbances, that results in significant decline in the volume of sales in this industry, or in an overall downturn in the business and operations of our customers in this industry, could adversely affect our business.

The automotive industry is highly cyclical in nature and sensitive to changes in general economic conditions, consumer preferences and interest rates. Any weakness in demand in this industry, the insolvency of a manufacturer or suppliers, or constriction of credit markets may cause our automotive customers to reduce their amount of software licensed or services requested or request discounts or extended payment terms, any of which may cause fluctuations or a decrease in our revenues and timing of cash flows.

Our quarterly results may fluctuate significantly and may not fully reflect the underlying performance of our business.

Our quarterly results of operations and our key metrics, including billings, Adjusted EBITDA and Free Cash Flow may vary significantly in the future. Period-to-period comparisons of our operating results may not be meaningful. The results of any one quarter should not be relied upon as an indication of future performance. Our quarterly financial results and key metrics may fluctuate as a result of a variety of factors including:

 

 

our ability to retain and/or increase sales to existing customers at various times;

 

 

our ability to attract new customers;

 

 

the addition or loss of large customers, including through their acquisitions or industry consolidations;

 

 

the timing of recognition of revenues;

 

 

the amount and timing of billings;

 

 

the amount and timing of operating expenses and capital expenditures;

 

 

significant security breaches, technical difficulties or unforeseen interruptions to the functionality of our software;

 

 

the number of new employees added;

 

 

the amount and timing of billing for professional services engagements;

 

 

the timing and success of new products, features, enhancements or functionalities introduced by us or our competitors;

 

 

changes in our pricing policies or those of our competitors;

 

 

changes in the competitive dynamics of our industry, including consolidation among competitors;

 

 

the timing of expenses related to the development or acquisition of technology;

 

 

any future charges for impairment of goodwill from acquired companies;

 

 

extraordinary expenses such as litigation or other dispute-related settlement payments;

 

 

the impact of new accounting pronouncements; and

 

 

general economic conditions.

 

28


Table of Contents

Billings have historically been highest in the first and fourth quarters of any calendar year and may vary in future quarters. This seasonality or the occurrence of any of the factors above may cause our results of operations to vary and our financial statements may not fully reflect the underlying performance of our business.

In addition, we may choose to grow our business for the long-term rather than to optimize for profitability or cash flows for a particular shorter term period. If our quarterly results of operations fall below the expectations of investors or securities analysts the price of our Class A common stock could decline and we could face lawsuits, including securities class action suits.

Seasonal variations in the purchasing patterns of our customers may lead to fluctuations in the timing of our cash flows.

We have experienced and expect to continue to experience seasonal variations in the timing of customers’ purchases of our software and services. Many customers make purchase decisions based on their fiscal year budgets, which often coincide with the calendar year. These seasonal trends materially affect the timing of our cash flows, as license fees become due at the time the license term commences based upon agreed payment terms that customers may not adhere to. As a result, new and renewal licenses have been concentrated in the first and fourth quarter of the year, and our cash flows from operations have been highest late in the first quarter and early in the second quarter of the succeeding fiscal year.

In connection with the preparation of our consolidated financial statements in recent years, we and our independent registered public accounting firm identified material weaknesses in our internal control over financial reporting. If we are not able to remediate the material weaknesses and otherwise maintain an effective system of internal control over financial reporting, the reliability of our financial reporting, investor confidence in us and the value of our common stock could be adversely affected.

As a public company, we will be required to maintain internal control over financial reporting and to report any material weaknesses in such internal controls. Section 404 of SOX, or Section 404, requires that we evaluate and determine the effectiveness of our internal controls over financial reporting and, beginning with our second annual report following this offering, provide a management report on internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected and corrected on a timely basis.

In connection with the audits of fiscal years 2015 and 2016 financial statements, we and our independent registered public accounting firm identified two material weaknesses in our internal controls over financial reporting. The first material weakness pertained to controls over accounting for income taxes. Specifically, that: (i) certain misstatements were either not identified by management or were not identified timely by management; (ii) the preparation of the consolidation provision and various technical accounting analysis were not prepared or reviewed timely; and (iii) additional technical resources were necessary to enable timely and sufficient review controls over accounting for income taxes. We have taken steps to remediate this by hiring additional technical resources and increasing management review and oversight over the income tax process.

Also in connection with our audits of the fiscal year 2015 and 2016 consolidated financial statements, we and our independent registered public accounting firm identified a second material weakness related to the lack of timely preparation and review of our consolidated financial statements and related disclosures consistent with the requirements for a publicly traded company. Specifically that our internal controls over the financial statement close process were not designed to be precise enough to detect a material error in the financial statements in a timely manner. We have taken steps to remediate this material weakness, by hiring additional personnel and increasing management review and oversight over the financial statement close process.

 

29


Table of Contents

If our steps are insufficient to successfully remediate the material weaknesses and otherwise establish and maintain an effective system of internal control over financial reporting, the reliability of our financial reporting, investor confidence in us and the value of our common stock could be materially and adversely affected. The process of designing and implementing internal control over financial reporting required to comply with Section 404 will be time consuming, costly and complicated. Our independent registered public accounting firm was not engaged to audit the effectiveness of our internal control over financial reporting. We may discover other control deficiencies in the future, and we cannot assure you that we will not have a material weakness in future periods.

Effective internal control over financial reporting is necessary for us to provide reliable and timely financial reports and, together with adequate disclosure controls and procedures, are designed to reasonably detect and prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. For as long as we are an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404. We could be an “emerging growth company” for up to five years. An independent assessment of the effectiveness of our internal control over financial reporting could detect problems that our management’s assessment might not. Undetected material weaknesses in our internal control over financial reporting could lead to financial statement restatements and require us to incur the expense of remediation.

Fluctuations in foreign currency exchange rates could result in declines in our reported revenue and operating results.

As a result of our international activities, we have revenue, expenses, cash, accounts receivable and payment obligations denominated in foreign currencies including Euros, British Pounds Sterling, Indian Rupees, Japanese Yen, and Chinese Yuan. Foreign currency risk arises primarily from the net difference between non-United States dollar receipts from customers and non-United States dollar operating expenses. The value of foreign currencies against the United States dollar can fluctuate significantly, and those fluctuations may occur quickly. We cannot predict the impact of future foreign currency fluctuations.

Further strengthening of the United States dollar could cause our software to become relatively more expensive to some of our customers leading to decreased sales and a reduction in billings and revenue not denominated in United States dollars. A reduction in revenue or an increase in operating expenses due to fluctuations in foreign currency exchange rates could have an adverse effect on our financial condition and operating results. Such foreign currency exchange rate fluctuations may make it more difficult to detect underlying trends in our business and operating results.

We do not currently, and do not have plans to, engage in currency hedging activities to limit the risk of exchange rate fluctuations. In the future, we may use derivative instruments, such as foreign currency forward and option contracts, to hedge certain exposures to fluctuations in foreign currency exchange rates. The use of such hedging activities may not offset any or more than a portion of the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place, and the cost of those hedging techniques may have a significant negative impact on our operating results. The use of hedging instruments may introduce additional risks if we are unable to structure effective hedges with such instruments. If we are not able to successfully manage or hedge against the risks associated with currency fluctuations, our financial condition and operating results could be adversely affected.

 

30


Table of Contents

If we fail to attract new or retain existing third party independent software vendors to participate in the APA, we may not be able to grow the APA program.

The APA program allows our customers to use third party software that may be unrelated to our software, without the need to enter into additional license agreements. The APA program results in increased revenues through revenue sharing, and encourages users to stay within the Altair software ecosystem. If third party software providers are unwilling to join the APA on appropriate terms, including agreeing with our revenue share allocations, or if we are unable to retain our current APA participants, we may not be able to grow the APA program.

Licensing of our solidThinking software is dependent on performance of our distributors and resellers.

We have historically licensed our software primarily through our direct sales force. Our solidThinking offerings are primarily licensed through a recently expanded network of distributors and resellers. If these distributors and resellers become unstable, financially insolvent, or otherwise do not perform as we expect, our revenue growth derived from solidThinking could be negatively impacted.

If we fail to adapt to technology changes our software may become less marketable, less competitive, or obsolete.

Our success depends in part on our ability to:

 

 

anticipate customer needs;

 

 

foresee changes in technology, including to cloud-enabled hardware, software, networking, browser and database technologies;

 

 

differentiate our software;

 

 

maintain operability of our software with changing technology standards; and

 

 

develop or acquire additional or complementary technologies.

We may not be able to develop or market new or enhanced software in a timely manner, which could result in our software becoming less marketable, less competitive, or obsolete.

We believe our long-term value as a company will be greater if we focus on growth, which may negatively impact our profitability in the near term.

Part of our business strategy is to focus on our long-term growth. As a result, our profitability may be lower in the near term than it would be if our strategy was to maximize short-term profitability. Expanding our research and development efforts, sales and marketing efforts, infrastructure and other such investments may not ultimately grow our business or cause higher long-term profitability. If we are ultimately unable to achieve greater profitability at the level anticipated by analysts and our stockholders, our Class A common stock price may decline.

Our research and development may not generate revenue or yield expected benefits.

A key element of our strategy is to invest significantly in research and development to create new software and enhance our existing software to address additional applications and serve new markets. Research and development projects can be technically challenging and expensive, and there may be delays between the time we incur expenses and the time we are able to generate revenue, if any. Anticipated customer demand for any software we may develop could decrease after the development cycle has commenced, and we could be unable to avoid costs associated with the development of any such software. If we expend a significant amount of resources on research and development and our efforts do not lead to the timely introduction or improvement of software that is competitive in our current or future markets, it could harm our business.

 

31


Table of Contents

Our continued innovation may not generate revenue or yield expected benefits.

As a business focused on innovation, we expect to continue developing new software and products both internally and through acquisitions. These offerings may focus either on our existing markets or other markets in which we see opportunities. We may not receive revenue from these investments sufficient to either grow our business or cover the related development or acquisition costs.

If we lose our senior executives, we may be unable to achieve our business objectives.

We currently depend on the continued services and performance of James Scapa, our chief executive officer, and other senior executives. Many members of this executive team have served the Company for more than 15 years, with Mr. Scapa having served since our founding in 1985. Loss of Mr. Scapa’s services or those of other senior executives could delay or prevent the achievement of our business objectives.

If we are unable to attract and retain key personnel, we may be unable to achieve our business objectives.

Our business is dependent on our ability to attract and retain highly skilled software engineers, salespeople, and support teams. There is significant industry competition for these individuals. We have many employees whose equity awards in our company are fully vested and may increase their personal wealth after giving effect to our offering, which could affect their decision to remain with the Company. Failure to attract or retain key personnel could delay or prevent the achievement of our business objectives.

Defects or errors in our software could result in loss of revenue or harm to our reputation.

Our software is complex and, despite extensive testing and quality control, may contain undetected or perceived bugs, defects, errors, or failures. From time to time we have found defects or errors in our software and we may discover additional defects in the future. We may not find defects or errors in new or enhanced software before release and these defects or errors may not be discovered by us or our customers until after they have used the software. We have in the past issued, and may in the future need to issue, corrective releases or updates of our software to remedy bugs, defects and errors or failures. The occurrence of any real or perceived bugs, defects, errors, or failures could result in:

 

 

lost or delayed market acceptance of our software;

 

 

delays in payment to us by customers;

 

 

injury to our reputation;

 

 

diversion of our resources;

 

 

loss of competitive position;

 

 

claims by customers for losses sustained by them;

 

 

breach of contract claims or related liabilities;

 

 

increased customer support expenses or financial concessions; and

 

 

increased insurance costs.

Any of these problems could have a material adverse effect on our business, financial position, results of operations and cash flows.

 

32


Table of Contents

Acquisitions may dilute our stockholders, disrupt our core business, divert our resources, or require significant management attention.

Most of our software has been developed internally with acquisitions used to augment our capabilities. We may not effectively identify, evaluate, integrate, or use acquired technology or personnel from future acquisitions, or accurately forecast the financial impact of an acquisition, including accounting charges.

After the completion of an acquisition, it is possible that our valuation of such acquisition for purchase price allocation purposes may change compared to initial expectations and result in unanticipated write-offs or charges, impairment of our goodwill, or a material change to the fair value of the assets and liabilities associated with a particular acquisition.

We may pay cash, incur debt, or issue equity securities to fund an acquisition. The payment of cash will decrease available cash. The incurrence of debt would likely increase our fixed obligations and could subject us to restrictive covenants or obligations. The issuance of equity securities would likely be dilutive to our stockholders. We may also incur unanticipated liabilities as a result of acquiring companies. Future acquisition activity may disrupt our core business, divert our resources, or require significant management attention.

Failure to protect and enforce our proprietary technology and intellectual property rights could substantially harm our business.

The success of our business depends, in part, on our ability to protect and enforce our proprietary technology and intellectual property rights, including our trade secrets, patents, trademarks, copyrights, and other intellectual property. We attempt to protect our intellectual property under trade secret, patent, trademark, and copyright laws. Despite our efforts, we may not be able to protect our proprietary technology and intellectual property rights, if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property. It may be possible for unauthorized third parties to copy our technology and use information that we regard as proprietary to create products and services that compete with ours. Provisions in our licenses protect against unauthorized use, copying, transfer and disclosure of our technology, but such provisions may be difficult to enforce or are unenforceable under the laws of certain jurisdictions and countries. The laws of some countries do not protect proprietary rights to the same extent as the laws of the United States. Our international activities expose us to unauthorized copying and use of our technology and proprietary information.

We primarily rely on our unpatented proprietary technology and trade secrets. Despite our efforts to protect our proprietary technology and trade secrets, unauthorized parties may attempt to misappropriate, reverse engineer or otherwise obtain and use them. The contractual provisions that we enter into with employees, consultants, partners, vendors and customers may not be sufficient to prevent unauthorized use or disclosure of our proprietary technology or trade secrets and may not provide an adequate remedy in the event of unauthorized use or disclosure of our proprietary technology or trade secrets.

Policing unauthorized use of our technologies, software and intellectual property is difficult, expensive and time-consuming, particularly in countries where the laws may not be as protective of intellectual property rights as those in the United States and where mechanisms for enforcement of intellectual property rights may be weak. We may be unable to detect or determine the extent of any unauthorized use or infringement of our software, technologies or intellectual property rights.

From time to time, we may need to engage in litigation or other administrative proceedings to protect our intellectual property rights or to defend against allegations by third parties that we have infringed or misappropriated their intellectual property rights, including in connection with requests for indemnification by our customers who may face such claims. We have been approached and may be approached in the future by

 

33


Table of Contents

certain of our customers to indemnify them against third party intellectual property claims. Litigation and/or any requests for indemnification by our customers could result in substantial costs and diversion of resources and could negatively affect our business and revenue. If we are unable to protect and enforce our intellectual property rights, our business may be harmed.

Intellectual property disputes could result in significant costs and harm our business.

Intellectual property disputes may occur in the markets in which we compete. Many of our competitors are large companies with significant intellectual property portfolios, which they may use to assert claims of infringement, misappropriation or other violations of intellectual property rights against us, or our customers. Any allegation of infringement, misappropriation or other violation of intellectual property rights by a third party, even those without merit, could cause us to incur substantial costs defending against the claim, could distract our management from our business, and could cause uncertainty among our customers or prospective customers, all of which could have an adverse effect on our business or revenue. We are currently engaged in ongoing litigation with MSC, a competitor of ours, who brought suit against us in 2007 alleging misappropriation of trade secrets, breach of confidentiality and other employment-related claims. A jury returned a verdict against us in April 2014. After a successful challenge by us in November 2014, this verdict was partially vacated except for damages for $425,000 related to certain employment matters and the court ordered a new trial on damages for the trade secrets claims. No trial date is scheduled. On August 21, 2017, the court granted Altair’s motion to strike the testimony of MSC’s damage expert. On October 11, 2017, the court mooted the remaining pre-trial motions and allowed us to file a motion for summary judgment on the issue of whether MSC can prove damages. We cannot be certain of the outcome of this matter. We agreed to indemnify our employees named in the MSC litigation. See the section entitled “Business—Legal and regulatory—Legal proceedings—Litigation.”

Our agreements may include provisions that require us to indemnify others for losses suffered or incurred as a result of our infringement of a third party’s intellectual property rights infringement, including certain of our employees and customers.

An adverse outcome of a dispute or an indemnity claim may require us to:

 

 

pay substantial damages;

 

 

cease licensing our software or portions of it;

 

 

develop non-infringing technologies;

 

 

acquire or license non-infringing technologies; and

 

 

make substantial indemnification payments.

Any of the foregoing or other damages could harm our business, decrease our revenue, increase our expenses or negatively impact our cash flow.

Security breaches, computer malware, computer hacking attacks and other security incidents could harm our business, reputation, brand and operating results.

Security incidents have become more prevalent across industries and may occur on our systems. Security incidents may be caused by, or result in but are not limited to, security breaches, computer malware or malicious software, computer hacking, unauthorized access to confidential information, denial of service attacks, security system control failures in our own systems or from vendors we use, email phishing, software vulnerabilities, social engineering, sabotage and drive-by downloads. Such security incidents, whether intentional or otherwise, may result from actions of hackers, criminals, nation states, vendors, employees or customers.

 

34


Table of Contents

We may experience disruptions, data loss, outages and other performance problems on our systems due to service attacks, unauthorized access or other security related incidents. Any security breach or loss of system control caused by hacking, which involves efforts to gain unauthorized access to information or systems, or to cause intentional malfunctions or loss, modification or corruption of data, software, hardware or other computer equipment and the inadvertent transmission of computer malware could harm our business.

In addition, our software stores and transmits customers’ confidential business information in our facilities and on our equipment, networks and corporate systems. Security incidents could expose us to litigation, remediation costs, increased costs for security measures, loss of revenue, damage to our reputation and potential liability. Our customer data and corporate systems and security measures may be compromised due to the actions of outside parties, employee error, malfeasance, capacity constraints, a combination of these or otherwise and, as a result, an unauthorized party may obtain access to our data or our customers’ data. Outside parties may attempt to fraudulently induce our employees to disclose sensitive information in order to gain access to our customers’ data or our information. We must continuously examine and modify our security controls and business policies to address new threats, the use of new devices and technologies, and these efforts may be costly or distracting.

Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently or may be designed to remain dormant until a predetermined event and often are not recognized until launched against a target, we may be unable to anticipate these techniques or implement sufficient control measures to defend against these techniques. Though it is difficult to determine what harm may directly result from any specific incident or breach, any failure to maintain confidentiality, availability, integrity, performance and reliability of our systems and infrastructure may harm our reputation and our ability to retain existing customers and attract new customers. If an actual or perceived security incident occurs, the market perception of the effectiveness of our security controls could be harmed, our brand and reputation could be damaged, we could lose customers, and we could suffer financial exposure due to such events or in connection with remediation efforts, investigation costs, regulatory fines and changed security control, system architecture and system protection measures.

Adverse global conditions, including economic uncertainty, may negatively impact our financial results.

Global conditions, including the effects of the outcome of the United Kingdom’s referendum on membership in the European Union or any negative financial impacts affecting United States corporations operating on a global basis as a result of tax reform or changes to existing trade agreements or tax conventions, could adversely impact our business in a number of ways, including longer sales cycles, lower prices for our software license fees, reduced licensing renewals or foreign currency fluctuations.

During challenging economic times our customers may be unable or unwilling to make timely payments to us, which could cause us to incur increased bad debt expenses. Our customers may unilaterally extend the payment terms of our invoices, adversely affecting our short-term or long-term cash flows.

International operations expose us to risks inherent in international activities.

Operating in international markets requires significant resources and management attention and subjects us to regulatory, economic and political risks that are different from those in the United States. We face risks in doing business internationally that could adversely affect our business, including:

 

 

the need to localize and adapt our software for specific countries, including translation into foreign languages and associated expenses;

 

 

foreign exchange risk;

 

35


Table of Contents
 

import and export restrictions and changes in trade regulation, including uncertainty regarding renegotiation of international trade agreements and partnerships;

 

 

sales and customer service challenges associated with operating in different countries;

 

 

enhanced difficulties of integrating any foreign acquisitions;

 

 

difficulties in staffing and managing foreign operations and working with foreign partners;

 

 

different pricing environments, longer sales cycles, longer accounts receivable payment cycles, and collections issues;

 

 

compliance challenges related to the complexity of multiple, conflicting and changing governmental laws and regulations, including the Foreign Corrupt Practices Act of 1977, or the FCPA, employment, ownership, tax, privacy and data protection laws and regulations;

 

 

limitations on enforcement of intellectual property rights;

 

 

more restrictive or otherwise unfavorable government regulations;

 

 

increased financial accounting and reporting burdens and complexities;

 

 

restrictions on the transfer of funds;

 

 

withholding and other tax obligations on remittance and other payments made by our subsidiaries; and

 

 

unstable regional, economic and political conditions.

Our inability to manage any of these risks successfully, or to comply with these laws and regulations, could reduce our sales and harm our business.

We may lose customers if our software does not work seamlessly with our customers’ existing software.

Our customers may use our software, which in many instances has been designed to seamlessly interface with software from some of our competitors, together with their own software and software they license from third parties. If our software ceases to work seamlessly with our customers’ existing software applications, we may lose customers.

Our customers use our software and services to design and develop their products, which when built and used may expose us to claims.

Many of our customers use our software and services, together with software and services from other third parties and their own resources, to assist in the design and development of products intended to be used in a commercial setting. To the extent our customers design or develop a product that results in potential liability, including product liability, we may be included in resulting litigation. We may be subject to litigation defense costs or be subject to potential judgments or settlement costs for which we may not be fully covered by insurance, which would result in an increase of our expenses.

We also license our software on Altair branded computer hardware, which we acquire from an original equipment manufacturer, which we refer to as an OEM, exposing us to potential liability for the hardware, such as product liability. To the extent this liability is greater than the warranty and liability protection from our OEM, we may incur additional expenses, which may be significant.

 

36


Table of Contents

If we fail to educate and train our users regarding the use and benefits of our software, we may not generate additional revenue.

Our software is complex and highly technical. We continually educate and train our existing and potential users regarding the depth, breadth, and benefits of our software including through classroom and online training. If these users do not receive education and training regarding the use and benefits of our software, or the education and training is ineffective, they may not increase their usage of our software. We incur costs of training directly related to this activity prior to generating additional revenue, if any.

If we are unable to match engineers to open positions in our CES business or are otherwise unable to grow our CES business, our revenue could be adversely affected.

We operate our client engineering services business by hiring engineers for placement at a customer site for specific customer-directed assignments and pay them only for the duration of the placement. The success of this business is dependent upon our ability to recruit and retain highly skilled, qualified engineers to meet the requirements of our customers and to maintain ongoing relationships with these customers. Our CES business constituted approximately 15% of our total revenues for each of the years ended December 31, 2015 and 2016. Some of our customers operate their engineering personnel needs through managed service providers, or MSPs. A significant percentage of the engineers we place, either directly or through MSPs, are with U.S.-based customers and are citizens of countries other than the United States. In the event these engineers are unable to enter into the United States legally, we may be unable to match engineers with the appropriate skill sets matched to open customer positions. If we are unable to attract highly skilled, qualified engineers because of competitive factors or immigration laws, or otherwise fail to match engineers to open customer positions, our revenue may be adversely affected.

Our sales to United States government agencies and their suppliers may be subject to reporting and compliance requirements.

Our customers include agencies of the United States government and their suppliers of products and services. These customers may procure our software and services through United States government mandated procurement regulations. Because of United States government reporting and compliance requirements we may incur unexpected costs. United States government agencies and their suppliers may have statutory, contractual or other legal rights to terminate contracts for convenience or due to a default, and any such termination may adversely affect our future operating results.

Our sales to non-United States government agencies and their suppliers may be subject to reporting and compliance requirements.

Our customers include agencies of various non-United States governments and their suppliers of products and services. These customers procure our software and services through various governments’ mandated procurement regulations. Because of governmental reporting and compliance requirements we may incur unexpected costs. Government agencies and their suppliers may have statutory, contractual or other legal rights to terminate contracts for convenience or due to a default, and any such termination may adversely affect our future operating results.

We may require additional capital to support our business, which may not be available on acceptable terms.

We expect to continue to make investments in our business, which may require additional funds. We may raise these funds through either equity or debt financings. Issuances of equity or convertible debt securities may significantly dilute stockholders and any new equity securities could have rights, preferences and privileges superior to those holders of our Class A common stock. Future debt financings could contain restrictive

 

37


Table of Contents

covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital, manage our business and pursue business opportunities, including potential acquisitions.

We may not be able to obtain additional financing on terms favorable to us. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our growth, develop new software or add capabilities and enhancements to our existing software and respond to business challenges could be significantly impaired, and our business may be adversely affected.

Our loan agreements contain operating and financial covenants that may restrict our business and financing activities.

Our Credit Agreement is unconditionally guaranteed by us and all existing and subsequently acquired controlled domestic subsidiaries. It is also collateralized by a first priority, perfected security interest in, and mortgages on, substantially all of our tangible assets. The Credit Agreement contains operating financial restrictions and covenants, including liens, limitations on indebtedness, fundamental changes, limitations on guarantees, limitations on sales of assets and sales of receivables, dividends, distributions and other restricted payments, transactions with affiliates, prepayment of indebtedness and limitations on loans and investments in each case subject to certain exceptions. The Credit Agreement also requires us to maintain a minimum level of liquidity, which shall not be less than $20,000,000 at the end of each fiscal quarter. We entered into a new revolving credit facility in October 2017, or our New Credit Facility, which becomes effective on satisfaction of certain conditions including the closing of our offering on similar terms as described above and subject to similar operating financial restrictions and covenants. We expect to repay borrowings under our Credit Agreement and pay the fees and expenses related to entering into the new revolving credit facility with the proceeds of this offering. The restrictions and covenants in the Credit Agreement, as well as those contained in any future debt financing agreements that we may enter into, including our New Credit Facility, may restrict our ability to finance our operations and engage in, expand or otherwise pursue our business activities and strategies. Our ability to comply with these covenants and restrictions may be affected by events beyond our control, and breaches of these covenants and restrictions could result in a default under the loan agreement and any future financing agreements that we may enter into. See the section entitled “Management’s discussion and analysis of financial condition and results of operations—Liquidity and capital resources” for further information about our Credit Agreement and our new revolving credit facility and Note 7 to our consolidated financial statements included elsewhere in this prospectus for further information about our credit facility.

We operate internationally and must comply with employment and related laws in various countries, which may, in turn, result in unexpected expenses.

We are subject to a variety of domestic and foreign employment laws, including those related to safety, discrimination, whistle-blowing, employment of illegal aliens, classification of employees, wages, statutory benefits, and severance payments. Such laws are subject to change as a result of judicial decisions or otherwise, and there can be no assurance that we will not be found to have violated any such laws in the future. Such violations could lead to the assessment of significant fines against us by federal, state or foreign regulatory authorities or to the award of damages claims, including severance payments, against us in judicial or administrative proceedings by employees or former employees, any of which would reduce our net income or increase our net loss.

Changes in government trade, immigration or currency policies may harm our business.

We operate our business globally in multiple countries that have policies and regulations relating to trade, immigration and currency, which may change. Governments may change their trade policies by withdrawing

 

38


Table of Contents

from negotiations on new trade policies, renegotiating existing trade agreements, imposing tariffs or imposing other trade restrictions or barriers. Any such changes may result in:

 

 

changes in currency exchange rates;

 

 

changes in political or economic conditions;

 

 

import or export licensing requirements or other restrictions on technology imports and exports;

 

 

laws and business practices favoring local companies;

 

 

changes in diplomatic and trade relationships;

 

 

modification of existing or implementation of new tariffs;

 

 

imposition or increase of trade barriers; or

 

 

establishment of new trade or currency restrictions.

Any of these changes, changes in immigration policies, government intervention in currency valuation or other government policy changes may adversely impact our ability to sell software and services, which could, in turn, harm our revenues and our business. We are headquartered in the United States and may be particularly impacted by changes affecting the United States.

Our use of open source technology could impose limitations on our ability to commercialize our software.

We use open source software in some of our software and expect to continue to use open source software in the future. Although we monitor our use of open source software to avoid subjecting our software to conditions we do not intend, we may face allegations from others alleging ownership of, or seeking to enforce the terms of, an open source license, including by demanding release of the open source software, derivative works, or our proprietary source code that was developed using such software. These allegations could also result in litigation. The terms of many open source licenses have not been interpreted by United States courts. There is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our software. In such an event, we may be required to seek licenses from third parties to continue commercially offering our software, to make our proprietary code generally available in source code form, to re-engineer our software or to discontinue the sale of our software if re-engineering could not be accomplished on a timely basis, any of which could adversely affect our business and revenue.

The use of open source software subjects us to a number of other risks and challenges. Open source software is subject to further development or modification by anyone. Others may develop such software to be competitive with or no longer useful by us. It is also possible for competitors to develop their own solutions using open source software, potentially reducing the demand for our software. If we are unable to successfully address these challenges, our business and operating results may be adversely affected and our development costs may increase.

We currently open source certain of our software and may open source other software in the future, which could have an adverse effect on our revenues and expenses.

We offer a portion of our Altair PBS workload management software in an open source version to generate additional usage and broaden user-community development and enhancement of the software. We offer related software and services on a paid basis. We believe increased usage of open source software leads to increased purchases of these related paid offerings. We may offer additional software on an open source basis in the future. There is no assurance that the incremental revenues from related paid offerings will outweigh the lost revenues and incurred expenses attributable to the open sourced software.

 

39


Table of Contents

Our revenue mix may vary over time, which could harm our gross margin and operating results.

Our revenue mix may vary over time due to a number of factors, including the mix of term-based licenses and perpetual licenses. Due to the differing revenue recognition policies applicable to our term-based licenses, perpetual licenses and professional services, shifts in the mix between subscription and perpetual licenses from quarter to quarter, or increases or decreases in revenue derived from our professional engineering services, which have lower gross margins than our software services, could produce substantial variation in revenues recognized even if our billings remain consistent. Our gross margins and operating results could be harmed by changes in revenue mix and costs, together with other factors, including: entry into new markets or growth in lower margin markets; entry into markets with different pricing and cost structures; pricing discounts; and increased price competition. Any one of these factors or the cumulative effects of certain of these factors may result in significant fluctuations in our gross margin and operating results. This variability and unpredictability could result in our failure to meet internal expectations or those of securities analysts or investors for a particular period. If we fail to meet or exceed such expectations for these or any other reasons, the market price of our common stock could decline.

The estimates of market opportunity and forecasts of market growth included in this prospectus may prove to be inaccurate, and even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all.

Market opportunity estimates and growth forecasts included in this prospectus, including those we have generated ourselves, are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. Even if the market in which we compete meets the size estimates and growth forecasted in this prospectus, our business could fail to grow for a variety of reasons, which would adversely affect our results of operations. For more information regarding the estimates of market opportunity and the forecasts of market growth included in this prospectus, see the section entitled “Business—Market opportunity.”

We are subject to governmental export and import controls that could impair our ability to compete in international markets due to licensing requirements and subject us to liability if we are not in compliance with applicable laws.

Our software, services and hardware are subject to export control and import laws and regulations. As a company headquartered in the United States we are subject to regulations, including the International Traffic in Arms Regulations, or ITAR, and Export Administration Regulations, or EAR, United States Customs regulations and various economic and trade sanctions regulations administered by the United States Treasury Department’s Office of Foreign Assets Controls presenting further risk of unexpected reporting and compliance costs. Compliance with these regulations may also prevent and restrict us from deriving revenue from potential customers in certain geographic locations for certain of our technologies.

If we fail to comply with these laws and regulations, we and certain of our employees could be subject to substantial civil or criminal penalties, including the possible loss of export or import privileges, fines which may be imposed on us and responsible employees or managers and, in extreme cases, the incarceration of responsible employees or managers. Obtaining the necessary authorizations, including any required license, for a particular sale may be time-consuming, is not guaranteed and may result in the delay or loss of sales opportunities. In addition, changes in our software or changes in applicable export or import regulations may create delays in the introduction and sale of our software in international markets, prevent our customers with international operations from deploying our software or, in some cases, prevent the export or import of our software to certain countries, governments or persons altogether. Any change in export or import regulations, shift in the enforcement or scope of existing regulations, or change in the countries, governments, persons or technologies targeted by such regulations, could also result in decreased use of our software, or in our

 

40


Table of Contents

decreased ability to export or license our software to existing or potential customers with international operations. Any decreased use of our software or limitation on our ability to export or license our software will likely adversely affect our business.

We incorporate encryption technology into portions of our software. Various countries regulate the import of certain encryption technology, including through import permitting and licensing requirements, and have enacted laws that could limit our ability to distribute our software or could limit our customers’ ability to implement our software in those countries. Encrypted software and the underlying technology may also be subject to export control restrictions. Governmental regulation of encryption technology and regulation of imports or exports of encryption products, or our failure to obtain required import or export approval for our software, when applicable, could harm our international sales and adversely affect our revenue. Compliance with applicable regulatory requirements regarding the export of our software, including with respect to new releases of our software, may create delays in the introduction of our software in international markets, prevent our customers with international operations from deploying our software throughout their globally-distributed systems or, in some cases, prevent the export of our software to some countries altogether.

United States export control laws and economic sanction programs prohibit the shipment of certain software and services to countries, governments and persons that are subject to United States economic embargoes and trade sanctions. Any violations of such economic embargoes and trade sanction regulations could have negative consequences, including government investigations, penalties and reputational harm.

Any change in export or import regulations, economic sanctions or related legislation, shift in the enforcement or scope of existing regulations, or change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our software by, or in our decreased ability to export or license our software to, existing or potential customers with international operations. Any decreased use of our software or limitation on our ability to export or license our software could adversely affect our business.

Our business is subject to a wide range of laws and regulations, and our failure to comply with those laws and regulations could harm our business.

Our business is subject to regulation by various federal, state, local and foreign governmental agencies, including agencies responsible for monitoring and enforcing employment and labor laws, workplace safety, environmental laws, privacy and data protection laws, anti-bribery laws, import and export controls, federal securities laws and tax laws and regulations. In certain foreign jurisdictions, these regulatory requirements may be more stringent than those in the United States. These laws and regulations are subject to change over time and thus we must continue to monitor and dedicate resources to ensure continued compliance. Non-compliance with applicable regulations or requirements could subject us to investigations, sanctions, mandatory product recalls, enforcement actions, disgorgement of profits, fines, damages, civil and criminal penalties or injunctions. If any governmental sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, operating results, and financial condition could be materially adversely affected. In addition, responding to any action will likely result in a significant diversion of management’s attention and resources and an increase in professional fees. Enforcement actions and sanctions could harm our business, operating results and financial condition.

If we or any of our employees violate the United States Foreign Corrupt Practices Act, the U.K. Bribery Act or similar anti-bribery laws we could be adversely affected.

The United States Foreign Corrupt Practices Act, or FCPA, the U.K. Bribery Act and similar anti-bribery laws generally prohibit companies and their intermediaries from authorizing, offering or providing, directly or indirectly, improper payments or benefits for the purpose of obtaining or retaining business to government officials, political parties and private-sector recipients. United States based companies are required to maintain

 

41


Table of Contents

records that accurately and fairly represent their transactions and have an adequate system of internal accounting controls. We operate in areas of the world that potentially experience corruption by government officials to some degree and, in certain circumstances, compliance with anti-bribery laws may conflict with local customs and practices. We cannot assure that our employees, resellers or distributors will not engage in prohibited conduct. If we are found to be in violation of the FCPA, the U.K. Bribery Act or other anti-bribery laws we could suffer criminal or civil penalties or other sanctions.

Business interruptions could adversely affect our business.

Our operations and our customers are vulnerable to interruptions by fire, flood, earthquake, power loss, telecommunications failure, terrorist attacks, wars and other events beyond our control. A catastrophic event that results in the destruction of any of our critical business or information technology systems could severely affect our ability to conduct normal business operations, including system interruptions, reputational harm, delays in our software development, breaches of data security and loss of critical data.

We rely on our network and third party infrastructure and applications, internal technology systems, and our websites for our development, marketing, operational support, hosted services and sales activities. If these systems were to fail or be negatively impacted as a result of a natural disaster or other event, our ability to deliver software and training to our customers could be impaired.

Our business interruption insurance may not be sufficient to compensate us fully for losses or damages that may occur as a result of these events, if at all.

Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.

GAAP are subject to interpretation by the Financial Accounting Standards Board, or FASB, the United States Securities and Exchange Commission, or the SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results for periods prior and subsequent to such change. We will need to comply with the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers. This standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most existing revenue recognition guidance under GAAP. The core principle of the guidance is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. We expect the timing of revenue recognition to be accelerated because we anticipate that license revenue will be recognized at a point in time, rather than over time, which is our current practice. Generally, the license revenue component of an arrangement represents a significant portion of the overall fair value of a software arrangement. While we continue to assess the potential impacts, under the new standards there is the potential for significant impacts on the consolidated financial statements.

The application of this new guidance may result in a change in the timing and pattern of revenue recognition including the retrospective recognition of revenue in historical periods that may negatively affect our future revenue trend, which, despite no change in associated cash flows, could have a material adverse effect on our net income (loss). The adoption of new standards may potentially require enhancements or changes in our systems and will require significant time and cost on behalf of our financial management.

As an “emerging growth company” the JOBS Act allows us an extended transition period for complying with new and revised accounting standards that have different effective dates for public and private companies until the earlier of the date (i) we are no longer an emerging growth company, or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. We have elected to use this extended

 

42


Table of Contents

transition period under the JOBS Act, including with respect to ASU 2014-09. As a result, we will not be required to apply ASU 2014-09 until January 1, 2019.

We cannot predict the impact of all of the future changes to accounting principles or our accounting policies on our consolidated financial statements going forward, which could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of the change. In addition, if we were to change our critical accounting estimates, including those related to the recognition of license revenue and other revenue sources, our operating results could be significantly affected.

If our goodwill or intangible assets become impaired, we may be required to record a significant charge to earnings, which could harm our business.

Under GAAP, we review our intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. As of June 30, 2017, and December 31, 2016 respectively, we have $43.7 million and $36.6 million of goodwill and $16.0 million and $11.2 million of other intangible assets—net. An adverse change in market conditions, particularly if such change has the effect of changing one of our critical assumptions or estimates, could result in a change to the estimation of fair value that could result in an impairment charge.

We have significant deferred tax assets in the United States, which we may not use in future taxable periods.

As of June 30, 2017, and December 31, 2016 we had net deferred tax assets, or DTAs, of $65.8 million and $61.5 million, respectively, primarily related to tax credits, share-based compensation, deferred revenue, and capitalized research and development expenses. We are entitled to a United States federal tax deduction when non-qualified stock options, or NSOs, are exercised. In connection with this offering, we expect a significant number of our NSOs will be exercised, creating substantial additional tax deductions for us. These deductions are expected to result in future net operating losses for United States tax purposes which are expected to result in our needing to establish a valuation allowance for the majority of our DTAs. Our ability to utilize any net operating losses or tax credits could be limited under provisions of the Internal Revenue Code of 1986, or the Code, if we undergo an ownership change in connection with or after this offering, provided, that for this purpose an ownership change is generally defined as a greater than 50-percentage-point cumulative change, by value, in the equity ownership of certain stockholders over a rolling three-year period. We do not expect to experience an ownership change in connection with our initial public offering. We may also be unable to realize our tax credit carryforwards as they begin to expire in 2018.

If our global tax methodology is challenged our tax expense may increase.

As a global business headquartered in the United States, we are required to pay tax in a number of different countries, exposing us to transfer pricing and other adjustments. Transfer pricing refers to the methodology of allocating revenue and expenses for tax purposes to particular countries. Taxing authorities may challenge our transfer pricing methodology, which if successful could increase our professional expenses and result in one-time tax charges, a higher worldwide effective tax rate, reduced cash flows, and lower overall profitability of our operations.

Our tax expense could be impacted depending on the applicability of withholding and other taxes including taxes on software licenses and related intercompany transactions under the tax laws of jurisdictions in which we have business operations. Our future income taxes may fluctuate if our earnings are either lower in countries that have low statutory tax rates or higher in countries that have high statutory tax rates. We are subject to review and audit by the United States and other taxing authorities. Any review or audit could increase our professional expenses and, if determined adversely, could result in unexpected costs.

 

43


Table of Contents

Sales and use, value-added and similar tax laws and rates vary by jurisdiction. Any of these jurisdictions may assert that such taxes are applicable, which could result in tax assessments, penalties and interest.

In addition to our software, we manufacture, distribute and sell products, which may expose us to product liability claims, product recalls, and warranty claims that could be expensive and harm our business.

We manufacture, distribute and sell products through two wholly owned subsidiaries, Altair Product Design, Inc., which we refer to as APD, and Ilumisys, Inc. doing business as toggled and which we refer to in this prospectus as toggled. Generally, APD supports our customers with engineering and design services, which may include the fabrication of equipment and prototypes that are sold to businesses but not sold to consumers. From time to time, certain customers may contract directly with us for services similar to those provided by APD. toggled designs, sources through contract manufacturers, and assembles in our own facilities LED lighting and related products for sale to consumers and businesses.

To the extent these products do not perform as expected, cause injury or death or are otherwise unsuitable for usage, we may be held liable for claims, including product liability and other claims. A product liability claim, any product recalls or an excessive warranty claim, whether arising from defects in design or manufacture or otherwise could negatively affect our APD or toggled sales or require a change in the design or manufacturing process of these products, any of which may harm our reputation and business.

Failure to protect and enforce toggled’s proprietary technology and intellectual property rights could substantially harm toggled’s lighting business.

Part of the success of toggled’s lighting business depends on our ability to protect and enforce toggled’s proprietary rights, including its patents, trademarks, copyrights, trade secrets and other intellectual property rights. As of December 31, 2016, toggled had 109 issued patents in the United States and more than 20 pending patent applications. We attempt to protect toggled’s intellectual property under patent, trademark, copyright, and trade secret laws. However, the steps we take to protect its intellectual property may be inadequate. We will not be able to protect toggled’s intellectual property if we are unable to enforce its rights or if we do not detect unauthorized use of its intellectual property. It may be possible for unauthorized third parties to copy toggled’s technology and use information that it regards as proprietary to create products that compete with toggled’s products. Some license provisions protecting against unauthorized use, copying, transfer and disclosure of toggled’s technology may be unenforceable under the laws of certain jurisdictions and foreign countries. Further, the laws of some countries do not protect proprietary rights to the same extent as the laws of the United States.

The process of obtaining patent protection is uncertain, expensive and time-consuming, and we may not be able to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. In addition, issuance of a patent does not guarantee that we have an absolute right to practice our patented technology, or that we have the right to exclude others from practicing our patented technology. As a result, we may not be able to obtain adequate patent protection or to enforce our issued patents effectively.

From time to time, toggled enforces its patents and other intellectual property rights including through initiating litigation. Any such litigation could result in substantial costs and diversion of resources and could negatively affect toggled’s business, operating results, financial condition and cash flows. If toggled is unable to protect toggled’s intellectual property rights, its business, operating results and financial condition will be harmed.

 

44


Table of Contents

Assertions by third parties of infringement or other violations by toggled of their intellectual property rights, or other lawsuits brought against toggled, could result in significant costs and substantially harm toggled’s business.

Patent and other intellectual property disputes are common in the markets in which toggled competes. Some of toggled’s competitors, own large numbers of patents, copyrights, trademarks and trade secrets, which they may use to assert claims of infringement, misappropriation or other violations of intellectual property rights against toggled or its customers. As the number of patents and competitors in this market increases, allegations of infringement, misappropriation and other violations of intellectual property rights may increase. Any allegation of infringement, misappropriation or other violation of intellectual property rights by a third party, even those without merit, could cause toggled to incur substantial costs and resources defending against the claim, which could have an adverse effect on toggled’s business.

Some of our businesses may collect personal information and are subject to privacy laws.

Companies that collect personal information are required to comply with the privacy laws adopted by United States and various state and foreign governments, including member states of the European Union. These privacy laws regulate the collection, use, storage, disclosure and security of data, such as names, email addresses and, in some jurisdictions, Internet Protocol addresses, that may be used to identify or locate an individual, including a customer or an employee.

Our Company includes the WEYV business, a consumer music and content service, which in the course of providing its service directly to consumers, collects and stores consumer information. Currently we expect to operate WEYV only within the United States and are only subject to the United States privacy laws. To the extent we expand our WEYV offering beyond the United States we will need to comply with the privacy laws of every country in which we operate. Some of our other products may collect personal data and would also be subject to these privacy laws.

These laws and regulations may require us to implement privacy and security policies, permit end-customers to access, correct and delete personal information stored or maintained by us, inform individuals of security breaches that affect their personal information, and, in some cases, obtain individuals’ consent to use personally identifiable information for certain purposes. Governments could require that any personally identifiable information collected in a country not be disseminated outside of that country. We also may find it necessary or desirable to join industry or other self-regulatory bodies or other information security, or data protection, related organizations that require compliance with their rules pertaining to information security and data protection. We may agree to be bound by additional contractual obligations relating to our collection, use and disclosure of personal, financial and other data. Our failure to comply with these privacy laws or any actual or suspected security incident may result in governmental actions, fines and non-monetary penalties, which may harm our business.

The privacy laws in the member states of the European Union are in a state of flux and may evolve or change in the near to mid-term. To the extent any European Union member state or other country in which we operate, modifies or changes its interpretation of an existing privacy law or enacts any new privacy law, we may incur unexpected costs.

Risks related to this offering and ownership of our Class A common stock

An active public trading market for our Class A common stock may not develop or be sustained.

Prior to this offering, there has been no public market or active private market for trading shares of our Class A common stock. We will list our Class A common stock on the Nasdaq Global Select Market, in connection

 

45


Table of Contents

with this offering, however, an active trading market may not develop following the completion of this offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the price of shares of Class A common stock. An inactive market may impair our ability to raise capital by selling shares and our ability to use our capital stock to acquire other companies or technologies. We cannot predict the prices at which our Class A common stock will trade. The initial public offering price of our Class A common stock may not bear any relationship to the market price at which our Class A common stock will trade after this offering.

The market price of our Class A common stock may be volatile, and you could lose all or part of your investment.

The market price of our Class A common stock following this offering will depend on a number of factors, many of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose all or part of your investment in our Class A common stock, since you might not be able to sell your shares at or above the price you paid in this offering. Factors that could cause fluctuations in the market price of our Class A common stock include the following:

 

 

price and volume fluctuations in the overall stock market from time to time, including as a result of trends in the economy as a whole;

 

 

volatility in the market prices and trading volumes of technology stocks;

 

 

changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular;

 

 

the expiration of market stand-off or contractual lock-up agreements and sales of shares of our Class A common stock by us or our stockholders;

 

 

the volume of shares of our Class A common stock available for public sale;

 

 

failure of financial analysts to maintain coverage of us, changes in financial estimates by any analysts who follow our company, or our failure to meet these estimates or the expectations of investors;

 

 

the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;

 

 

announcements by us or our competitors of new software or new or terminated significant contracts, commercial relationships or capital commitments;

 

 

public analyst or investor reaction to our press releases, other public announcements and filings with the SEC;

 

 

rumors and market speculation involving us or other companies in our industry;

 

 

actual or anticipated changes or fluctuations in our operating results;

 

 

actual or anticipated developments in our business, our customers’ businesses, or our competitors’ businesses or the competitive landscape generally;

 

 

litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors;

 

 

developments or disputes concerning our intellectual property or our solutions, or third party proprietary rights;

 

46


Table of Contents
 

announced or completed acquisitions of businesses or technologies by us or our competitors;

 

 

new laws or regulations or new interpretations of existing laws or regulations applicable to our business;

 

 

changes in accounting standards, policies, guidelines, interpretations or principles;

 

 

any major changes in our management or our board of directors;

 

 

general economic conditions and slow or negative growth of our markets; and

 

 

other events or factors, including those resulting from war, incidents of terrorism or responses to these events.

In addition, the stock market in general, and the market for technology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may affect the market price of our Class A common stock, regardless of our actual operating performance. In the past, following periods of volatility in the overall market and the market prices of a particular company’s securities, securities class action litigation has often been instituted against that company. We may become the target of this type of litigation in the future. Securities litigation, if instituted against us, could result in substantial costs and divert our management’s attention and resources from our business.

We cannot predict the impact our capital structure may have on our stock price.

In July 2017, S&P Dow Jones, a provider of widely followed stock indices, announced that companies with multiple share classes, such as ours, will not be eligible for inclusion in certain of their indices. As a result, our Class A common stock will likely not be eligible for these stock indices. Additionally, FTSE Russell, another provider of widely followed stock indices, recently stated that it plans to require new constituents of its indices to have at least five percent of their voting rights in the hands of public stockholders. Many investment funds are precluded from investing in companies that are not included in such indices, and these funds would be unable to purchase our Class A common stock. We cannot assure you that other stock indices will not take a similar approach to S&P Dow Jones or FTSE Russell in the future. Exclusion from indices could make our Class A common stock less attractive to investors and, as a result, the market price of our Class A common stock could be adversely affected.

Sales of substantial amounts of our Class A common stock may dilute your voting power and your ownership interest in us.

Sales of a substantial number of shares of our Class A common stock after this offering, particularly sales by our directors, executive officers and significant stockholders could adversely affect the market price of our Class A common stock and may make it more difficult to sell Class A common stock at a time and price that you deem appropriate. Based on the total number of outstanding shares of our common stock as of June 30, 2017, upon completion of this offering, we will have an aggregate of 21,387,512 shares of Class A common stock and 39,003,428 shares of Class B common stock outstanding, assuming no exercise of our outstanding stock options after June 30, 2017 and assuming the underwriters do not exercise their option to purchase additional shares.

All of the shares of Class A common stock sold in this offering will be freely tradable without restrictions or further registration under the Securities Act of 1933, as amended, or the Securities Act, except for any shares held by our affiliates as defined in Rule 144 under the Securities Act.

A substantial majority our outstanding shares of common stock are currently restricted from resale as a result of market standoff and “lock-up” agreements, as more fully described in “Shares Eligible for Future Sale.”

 

47


Table of Contents

These shares will become available to be sold 181 days after the date of this prospectus. Shares held by directors, executive officers and other affiliates will be subject to volume limitations under Rule 144 under the Securities Act and various vesting agreements. In addition, the underwriters may, in their sole discretion, release all or some portion of the shares subject to market standoff or lock-up agreements prior to the expiration of the lock-up period. See the section entitled “Shares eligible for future sale” for more information. Sales of a substantial number of such shares upon expiration of the market standoff and lock-up agreements, or the perception that such sales may occur, or early release of these agreements, could cause our market price to fall or make it more difficult for you to sell your Class A common stock at a time and price that you deem appropriate.

We intend to register the offer and sale of an aggregate of approximately 17,683,258 shares of Class A common stock that have been issued or reserved for future issuance under our equity compensation plans on a Form S-8 registration statement. Once we register the offer and sale of these shares, they can be freely sold in the public market upon issuance, subject to the market standoff or lock-up agreements or unless they are held by “affiliates,” as that term is defined in Rule 144 of the Securities Act. If the holders of these shares choose to sell a large number of shares, they could adversely affect the market price for our Class A common stock.

We may also issue shares of our Class A common stock or securities convertible into shares of our Class A common stock from time to time in connection with a financing, acquisition, investment or otherwise. Any such issuance could result in substantial dilution to our existing stockholders and cause the trading price of our Class A common stock to decline.

Our initial public offering price is substantially higher than the pro forma as adjusted net tangible book value per share of our outstanding Class A common stock, and new investors will experience immediate and substantial dilution.

Our initial public offering price is substantially higher than the pro forma as adjusted net tangible book value per share of our Class A common stock based on the expected total value of our total assets, less our goodwill and other intangible assets, less our total liabilities immediately following this offering. If you purchase shares of our Class A common stock in this offering, you will experience immediate and substantial dilution of $12.85 per share in the price you pay for our Class A common stock as compared to the pro forma as adjusted net tangible book value as of June 30, 2017, after giving effect to the issuance of shares of our Class A common stock in this offering at the initial public offering price of $13.00 per share. Furthermore, if the underwriters exercise their option to purchase additional shares, if outstanding options are exercised, if we issue awards to our employees under our equity incentive plans, or if we otherwise issue additional shares of our Class A common stock, you could experience further dilution. For a further description of the dilution that you will experience immediately after this offering, see the section entitled “Dilution.”

If financial or industry analysts do not publish research or reports about our business or if they issue inaccurate or unfavorable commentary or downgrade our Class A common stock, our stock price and trading volume could decline.

The trading market for our Class A common stock will be influenced by the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts or the content and opinions included in their reports. As a new public company, we may be slow to attract research coverage, and the analysts who publish information about our Class A common stock will have had relatively little experience with our company, which could affect their ability to accurately forecast our results and make it more likely that we fail to meet their estimates. In the event we obtain industry or financial analyst coverage, if any of the analysts who cover us issue an inaccurate or unfavorable opinion regarding our stock price, our stock price

 

48


Table of Contents

would likely decline. In addition, the stock prices of many companies in the technology industry have declined significantly after those companies have failed to meet, or often times exceeded, the financial guidance publicly announced by the companies or the expectations of analysts. If our financial results fail to meet, or significantly exceed, our announced guidance or the expectations of analysts or public investors, analysts could downgrade our Class A common stock or publish unfavorable research about us. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

The dual class structure of our common stock has the effect of concentrating voting control with certain stockholders who hold shares of our Class B common stock, including our founders, certain of our directors and executive officers and affiliates, who will hold in the aggregate approximately 95% of the voting power of our capital stock following the completion of this offering. This will limit or preclude your ability to influence corporate matters, including the election of directors, amendments of our organizational documents, and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction requiring stockholder approval.

Upon the completion of the Recapitalization, our Class B common stock was granted ten votes per share, and our Class A common stock, which is the common stock we are offering pursuant to this prospectus, has one vote per share. Following this offering, our Class B stockholders, including our founders, certain of our directors and executive officers, and affiliates, will hold, in the aggregate approximately 95% of the voting power of our capital stock. The ten-to-one voting ratio between our Class B and Class A common stock, results in the holders of our Class B common stock collectively controlling a majority of the combined voting power of our common stock and therefore being able to control all matters submitted to our stockholders for approval until 2029, or upon the occurrence of a triggering event at which time all shares of our Class B common stock will automatically convert into shares of our Class A common stock, or on an earlier date, as set forth in our Delaware certificate of incorporation.

This concentrated control will limit or preclude your ability to influence corporate matters for the foreseeable future, including the election of directors, amendments of our organizational documents, and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction requiring stockholder approval. In addition, this may prevent or discourage unsolicited acquisition proposals or offers for our capital stock that you may feel are in your best interest as one of our stockholders.

Future transfers by holders of our Class B common stock will generally result in those shares converting to Class A common stock, subject to the specific exceptions set forth in our Delaware certificate of incorporation, such as certain transfers effected for estate planning purposes and between or among our founders. The conversion of Class B common stock to Class A common stock will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock who retain their shares in the long-term. For a description of the dual class structure, see the section entitled “Description of capital stock—Anti-takeover effects of Delaware law and our certificate of incorporation and bylaws.”

Our management has broad discretion in the use of the net proceeds from this offering, and our use of the net proceeds may not enhance our operating results or the price of our Class A common stock.

We intend to use a portion of our net proceeds that we receive from this offering for the repayment of our existing term loan, which had an outstanding balance of $52.5 million as of June 30, 2017 and to pay off our revolving credit balance of $18.0 million as of June 30, 2017. We intend to use the remaining net proceeds we receive from this offering for general corporate purposes, including working capital, sales and marketing activities, application and application enhancement development, acquisition, investment in our technology and analytics, general and administrative matters and capital expenditures. We may use a portion of the net proceeds to acquire complementary businesses, products, services or technologies and to build and develop our

 

49


Table of Contents

new headquarters building. While we do not have agreements or commitments for any specific acquisitions at this time, other than as disclosed elsewhere in this prospectus, we continually evaluate potential acquisition candidates to enhance our product offerings. Accordingly, our management will have considerable discretion over the specific use of the net proceeds that we receive in this offering and might not be able to obtain a significant return, if any, on investment of these net proceeds. You will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Investors in this offering will need to rely upon the judgment of our management with respect to the use of proceeds. Until the net proceeds are used, they may be placed in investments that do not produce significant income, may be held in demand deposit accounts, or in investments intended to be highly liquid that may nevertheless lose value. If we do not use the net proceeds that we receive in this offering effectively, our business and prospects could be harmed, and the market price of our Class A common stock could decline.

We do not intend to pay dividends in the foreseeable future. As a result, your ability to achieve a return on your investment will depend on appreciation in the price of our Class A common stock.

We have never declared or paid any cash dividends on our Class A common stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any dividends on our Class A common stock in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors. Consequently, your only opportunity to achieve a return on your investment in our company will be if the market price of our Class A common stock appreciates and you sell your shares at a profit. There is no guarantee that the price of our Class A common stock that will prevail in the market after this offering will ever exceed the price that you pay. For additional information about our dividend policy, see the section entitled “Dividend policy” elsewhere in this prospectus.

Our management team has limited experience managing a public company.

Most members of our management team have limited experience managing a publicly-traded company, interacting with public company investors, and complying with laws pertaining to public companies. Our management team may not successfully or efficiently manage our transition to being a public company subject to significant regulatory oversight and reporting obligations under the federal securities laws and the continuous scrutiny of securities analysts and investors. These new obligations and constituents will require significant attention from our senior management and could divert their attention away from the day-to-day management of our business, which could adversely affect our business, financial condition, and operating results.

We will incur increased costs and devote additional management time as a result of operating as a public company.

As a public company, we will incur legal, accounting and other expenses that we did not incur as a private company. We will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and will be required to comply with the applicable requirements of the Sarbanes-Oxley Act of 2002, or SOX, and the Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank, as well as rules and regulations subsequently implemented by the SEC and the Nasdaq Global Select Market, including the establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. We expect that compliance with these requirements will increase our legal and financial compliance costs and will make some activities more time consuming and costly. In addition, we expect that our management and other personnel will need to divert attention from operational and other business matters to devote additional time to these public company requirements. In particular, we expect to incur additional expenses and devote additional management effort toward ensuring compliance with the requirements of Section 404 of SOX, which will increase when we are no longer an emerging growth company, as defined by the

 

50


Table of Contents

JOBS Act. We may need to hire additional accounting and financial staff with appropriate experience and technical accounting knowledge to support internal auditing. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs.

If we fail to maintain effective internal controls, we may not be able to report financial results accurately or on a timely basis, or to detect fraud, which could have a material adverse effect on our business or share price.

Effective internal controls are necessary for us to provide reasonable assurance with respect to our financial reports and to effectively prevent financial fraud. Pursuant to SOX, we will be required to periodically evaluate the effectiveness of the design and operation of our internal controls. Internal controls over financial reporting may not prevent or detect misstatements because of inherent limitations, including the possibility of human error or collusion, the circumvention or overriding of controls, or fraud. If we fail to maintain an effective system of internal controls, our business and operating results could be harmed, and we could fail to meet our reporting obligations, which could have a material adverse effect on our business and our share price.

As a public company, we will be required to maintain internal controls over financial reporting and to report any material weaknesses in such internal controls. Section 404 of SOX requires annual management assessments of the effectiveness of our internal controls over financial reporting beginning with our Annual Report for the year ending December 31, 2018. Both our independent auditors and we will be testing our internal controls pursuant to the requirements of Section 404 of SOX and could, as part of that documentation and testing, identify areas for further attention or improvement. We are in the process of designing, implementing, and testing the internal control over financial reporting required to comply with this obligation, which process is time consuming, costly, and complicated. We have identified material weaknesses in our internal controls over financial reporting for the fiscal years ended December 31, 2015 and 2016. If we identify material weaknesses in our internal control over financial reporting in the future or if we are unable to successfully remediate the identified material weaknesses or, if we are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Class A common stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC, or other regulatory authorities, which could require additional financial and management resources.

We are an emerging growth company and we cannot be certain if (i) the reduced disclosure requirements or (ii) extended transition periods for complying with new or revised accounting standards applicable to emerging growth companies will make our common stock less attractive to investors.

We qualify as an emerging growth company. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company, or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

For as long as we continue to be an emerging growth company, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies including, but

 

51


Table of Contents

not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

We will remain an emerging growth company until the earliest of (i) the end of the fiscal year in which the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of June 30, (ii) the end of the fiscal year in which we have total annual gross revenues of $1.07 billion or more during such fiscal year, (iii) the date on which we issue more than $1.0 billion in non-convertible debt in a three-year period or (iv) the end of the fiscal year that is five years from the date of this prospectus.

Certain provisions in our charter documents and Delaware law could prevent an acquisition of our company, limit attempts by our stockholders to replace or remove members of our board of directors or current management and may adversely affect the market price of our Class A common stock.

Our Delaware certificate of incorporation and bylaws contain provisions that could delay or prevent a change in control of our company that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions may also prevent or delay attempts by stockholders to replace or remove our current management or members of our board of directors. These provisions include:

 

 

providing for a dual class common stock structure for 15 years following the completion of this offering;

 

 

providing for a classified board of directors with staggered three-year terms, which could delay the ability of stockholders to change the membership of a majority of our board of directors;

 

 

authorizing our board of directors to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval;

 

 

the requirement that a special meeting of stockholders may be called only by the chairman of our board of directors, our chief executive officer, our president, or a majority vote of our board of directors, which could delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors;

 

 

requiring the affirmative vote of holders of at least 66 2/3% of the voting power of all of the then outstanding shares of the voting stock, voting together as a single class, to adopt, amend, or repeal provisions of (i) our certificate of incorporation relating to the issuance of preferred stock without stockholder approval, voting rights of our Class A common stock and our Class B common stock, and management of our business, and (ii) our bylaws relating to the ability of stockholders to call a special meeting and amending our bylaws in their entirety, which may inhibit the ability of an acquirer to effect such amendments to facilitate an unsolicited takeover attempt;

 

 

the ability of our board of directors, by majority vote, to amend our bylaws, which may allow our board of directors to take additional actions to prevent an unsolicited takeover and inhibit the ability of an acquirer to amend our bylaws to facilitate an unsolicited takeover attempt; and

 

 

requiring advance notice procedures with which stockholders must comply to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us.

 

52


Table of Contents

In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a certain period of time. See the section entitled “Description of capital stock—Anti-takeover effects of Delaware law and our certificate of incorporation and bylaws.”

These and other provisions in our certificate of incorporation, our bylaws and under Delaware law could discourage potential takeover attempts, reduce the price that investors might be willing to pay for shares of our Class A common stock in the future and result in the market price being lower than it would be without these provisions. See the sections entitled “Description of capital stock—Preferred stock” and “Description of capital stock—Anti-takeover effects of Delaware law and our certificate of incorporation and bylaws.”

 

53


Table of Contents

Information regarding forward looking statements

This prospectus includes forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial position, including our selected preliminary unaudited financial results for the three month period ended September 30, 2017, customer lifetime value, strategy and plans, market size and opportunity, competitive position, industry environment, potential growth opportunities and our expectations for future operations, are forward-looking-statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “design,” “intend,” “expect,” “could,” “plan,” “potential,” “predict,” “seek,” “should,” “would” or the negative version of these words and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, strategy, short- and long-term business operations and objectives, and financial needs. The forward-looking statements are contained principally in “Prospectus summary,” “Risk factors,” “Management’s discussion and analysis of financial condition and result of operations” and “Business.”

These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk factors.” Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, except as required by law, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus to conform these statements to actual results or to changes in our expectations.

You should read this prospectus and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.

 

54


Table of Contents

Market, industry and other data

We obtained the industry, market and competitive position data used throughout this prospectus from our own internal estimates and research, as well as from industry and general publications, in addition to research, surveys and studies conducted by third parties. Internal estimates are derived from publicly-available information released by industry analysts and third party sources, our internal research and our industry experience, and are based on assumptions made by us based on such data and our knowledge of our industry and market, which we believe to be reasonable. In addition, while we believe the industry, market and competitive position data included in this prospectus is reliable and is based on reasonable assumptions, such data involves risks and uncertainties and are subject to change based on various factors, including those discussed in the section entitled “Risk factors.” These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

Information based on estimates, forecasts, projections, market research, or similar methodologies is inherently subject to uncertainties, and actual events or circumstances may differ materially from events and circumstances that are assumed in this information. In some cases, we do not expressly refer to the sources from which data is derived.

Certain information in this prospectus is contained in independent industry publications. The source of these independent industry publications is provided below:

 

 

CIMdata, Inc., 2017 Simulation and Analysis Market Analysis Report, 2017.

 

 

Formerly International Data Corporation, now Hyperion Research Holdings, LLC, IDC HPC Update at ISC 16, 2016.

 

 

International Data Corporation, Market Forecast Report: Worldwide Business Analytics Software Forecast, 2017.

 

 

International Data Corporation, Market Forecast Report: Worldwide Internet of Things Forecast Update, 2016-2020, 2016.

 

 

*The Gartner Report described herein (the “Gartner Report”) represents research opinion or viewpoints published, as part of a syndicated subscription service, by Gartner, Inc. (“Gartner”), and are not representations of fact. Each Gartner Report speaks as of its original publication date (and not as of the date of this prospectus) and the opinions expressed in the Gartner Report are subject to change without notice. The Gartner Report consists of a Gartner, Inc., Press Release dated February 7, 2017: “Gartner Says 8.4 Billion Connected ‘Things’ Will Be in Use in 2017, Up 31 Percent from 2016.”

The independent publications described herein represent research opinions or viewpoints published and are not representations of fact. Each publication speaks as of its original publication date (and not as of the date of this prospectus) and are subject to change without notice.

 

55


Table of Contents

Use of proceeds

We estimate that the net proceeds from our sale of 8,065,004 shares of Class A common stock in this offering at an initial public offering price of $13.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses, will be approximately $93.4 million, or $115.1 million if the underwriters’ option to purchase additional shares is exercised in full. We will not receive any proceeds from the sale of Class A common stock by the selling stockholders.

We currently intend to use $70.5 million of the net proceeds of this offering to repay our term loan, which had an outstanding balance of $52.5 million as of June 30, 2017 and to pay off the revolving credit balance under our credit facility as set forth in the Credit Agreement. At June 30, 2017, we were required to make quarterly principal payments on Term Loan A of $2.5 million in 2017, 2018 and March 2019. Any outstanding principal balance is to be paid in full on the maturity date of April 18, 2019. At December 31, 2015 and 2016, and June 30, 2017, respectively, there was $67.1 million, $57.5 million, and $52.5 million outstanding under Term Loan A at an interest rate of 2.2%, 2.6% and 2.8%. We entered into a new revolving credit facility in October, 2017 and intend to use the above referenced net proceeds to pay the related fees and expenses. Please see the section entitled “Management’s discussion and analysis of financial condition and results of operations—Liquidity and capital resources—New revolving credit facility.”

As of June 30, 2017, the principal amount of the revolving loans outstanding was $18.0 million. See Note 7 to the financial statements included elsewhere in this prospectus.

We intend to use the remaining net proceeds to us from this offering primarily for general corporate purposes, including real estate development, working capital, sales and marketing activities, general and administrative matters and capital expenditures. We may also use a portion of the net proceeds for the acquisition of, or investment in, technologies, solutions or businesses that complement our business. We will have broad discretion over the uses of the net proceeds in this offering. Pending these uses, we may invest the net proceeds from this offering in short-term, investment-grade interest-bearing securities such as money market accounts, certificates of deposit, commercial paper and guaranteed obligations of the United States government.

By establishing a public market for our Class A common stock, this offering is also intended to facilitate our future access to public markets.

 

56


Table of Contents

Dividend policy

We have never declared or paid and do not anticipate declaring or paying, any cash dividends on our Class A common stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business. Any future determination to declare dividends will be made at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors may deem relevant.

 

57


Table of Contents

Capitalization

The following table shows our cash and cash equivalents and our capitalization as of June 30, 2017 on:

 

 

an actual basis;

 

 

a pro forma basis, giving effect to the reversal of the stock-based compensation liability (see Note 3 to the consolidated financial statements) which will occur upon effectiveness of the registration statement of which this prospectus is a part as if it had occurred on June 30, 2017, and the four-for-one stock split of our common stock effective when we became a Delaware corporation on October 5, 2017, but excluding the 708,000 shares of our Class A common stock issued on September 28, 2017 in connection with our acquisition of Runtime; and

 

 

a pro forma as adjusted basis, giving effect to (i) the pro forma adjustments set forth above, (ii) the receipt of $93.4 million in net proceeds from the sale and issuance by us of 8,065,004 shares of common stock offered by us in this prospectus at an initial public offering price of $13.00 per share, after deducting the underwriting discounts and commissions from this offering and estimated offering expenses paid or payable by us, (iii) our use of a portion of our net proceeds from this offering to fully repay our term loan and revolving credit balance under our credit facility, which had an outstanding balance of $52.5 million and $18.0 million, respectively, as of June 30, 2017, (iv) the exercise and sale of 1,734,996 stock options to be exercised by Mr. Scapa, our CEO, in connection with this offering, and (v) the automatic conversion of 2,200,000 shares of our Class B common stock held by certain selling stockholders into an equivalent number of shares of our Class A common stock in this offering for which the Company will not receive any proceeds.

You should read the following table in conjunction with “Management’s discussion and analysis of financial condition and results of operations,” “Description of capital stock” and our consolidated financial statements and the related notes appearing elsewhere in this prospectus.

 

     As of June 30, 2017  
(In thousands, except share and per share data)   Actual     Pro forma     Pro forma
as adjusted(1)
 

Cash and cash equivalents

  $ 17,419     $ 17,419     $ 42,266  
 

 

 

 

Credit Agreement:

     

Revolving credit facility(2)

  $ 18,018     $ 18,018     $  

Term Loan A(2)

    52,500       52,500        

Stockholders’ equity (deficit):

     

Preferred stock, $0.0001 par value per share: no shares authorized, issued and outstanding, actual; 45,000,000 shares authorized, no shares issued or outstanding, pro forma and pro forma as adjusted

                 

Class A common stock, $0.0001 par value per share: 76,000,000 shares authorized, 9,387,512 shares issued and outstanding, actual; 513,796,572 shares authorized, 9,387,512 shares issued and outstanding, pro forma; 513,796,572 shares authorized, 21,387,512 shares issued and outstanding, pro forma as adjusted

    1       1       2  

Class B common stock, $0.0001 par value per share: 44,000,000 shares authorized, 41,203,428 shares issued and outstanding, actual; 41,203,428 shares authorized, issued and outstanding, pro forma; 41,203,428 shares authorized, 39,003,428 shares issued and outstanding, pro forma as adjusted

    4       4       4  

Additional paid-in capital

    40,884       40,884       135,379  

Accumulated deficit

    (76,526     (59,675     (59,675

Accumulated other comprehensive loss

    (5,797     (5,797     (5,797
 

 

 

 

Total stockholders’ (deficit) equity

    (41,434     (24,583     69,913  
 

 

 

 

Total capitalization

  $ 29,084     $ 45,935   $ 69,913  

 

 

 

58


Table of Contents
(1)   The pro forma as adjusted information excludes share transactions that took place after June 30, 2017, including the issuance of 708,000 shares in connection with our acquisition of Runtime.

 

(2)   Our credit facility consists of a $60.0 million term loan, of which $52.5 million was outstanding as of June 30, 2017, a $60.0 million revolving commitment, of which $18.0 million was outstanding as of June 30, 2017, and a $4.0 million ancillary facility.

The total number of shares of our common stock to be outstanding following this offering is based on 9,387,512 shares of our Class A common stock and 41,203,428 shares of our Class B common stock outstanding as of June 30, 2017 (which number of shares of Class B common stock includes (i) 2,495,752 shares converted into Class A common stock when the Company became a Delaware corporation in October 2017, and (ii) the automatic conversion of 2,200,000 shares of our Class B common stock held by certain selling stockholders into an equivalent number of shares of our Class A common stock upon their sale by these selling stockholders in our offering for which we will not receive any proceeds) and excludes:

 

 

708,000 shares of Class A common stock issued in connection with our acquisition of Runtime in September, 2017

 

 

6,207,976 shares of our Class A common stock to be reserved for issuance under our 2017 Plan;

 

 

2,627,920 shares of our Class A common stock reserved for issuance under our 2012 Plan;

 

 

6,347,840 shares of our Class A common stock issuable upon exercise of stock options outstanding as of June 30, 2017, with an exercise price of $0.000025, under our 2001 NQSO Plan.

 

 

2,931,380 shares of our Class A common stock issuable upon exercise of stock options outstanding as of June 30, 2017, with a weighted average exercise price of $0.64, under our 2001 Incentive and Non-Qualified Stock Option Plan, or 2001 ISO and NQSO Plan (other than the 1,734,996 stock options to be exercised by Mr. Scapa in connection with this offering, which are included in the shares of Class A common stock offered by the selling stockholders, as set forth elsewhere in this prospectus); and

 

 

2,209,608 shares of our Class A common stock issuable upon exercise of stock options outstanding as of June 30, 2017, with a weighted average exercise price of $3.73, under our 2012 Plan.

See the section entitled “Executive compensation—Employee benefit and equity compensation plans” and Note 11 in the notes to consolidated financial statements included elsewhere in this prospectus for a description of our equity plans.

 

59


Table of Contents

Dilution

If you invest in our Class A common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our Class A common stock and the pro forma as adjusted net tangible book value per share of our Class A common stock immediately after this offering. The historical net tangible negative book value of our common stock as of June 30, 2017 was $(101.2) million, or $(2.00) per share. Our pro forma net tangible negative book value as of June 30, 2017 was $(84.3) million, or $(1.67) per share, taking into account the reversal of the stock-based compensation liability (see Note 3 to the consolidated financial statements) which will occur upon effectiveness, and the four-for-one stock split of our common stock effective when we became a Delaware corporation on October 5, 2017, but excluding the 708,000 shares of our Class A common stock issued on September 28, 2017 in connection with our acquisition of Runtime. Historical net tangible negative book value per share represents our total tangible assets less our total liabilities, divided by the number of shares of outstanding common stock.

After giving effect to the receipt of the net proceeds from our sale of shares of our Class A common stock in this offering at an initial public offering price of $13.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of June 30, 2017 would have been $9.1 million, or $0.15 per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $1.82 per share to existing stockholders and an immediate dilution of $12.85 per share to new investors purchasing Class A common stock in this offering.

The following table illustrates this dilution on a per share basis to new investors:

 

Initial public offering price per share,

           $ 13.00  

Pro forma net tangible negative book value per share as of June 30, 2017

   $ (1.67  

Increase in pro forma net tangible book value per share attributable to new investors

   $ 1.82    

Pro forma as adjusted net tangible book value per share after this offering

     $ 0.15  
    

 

 

 

Dilution per share to new investors in this offering

     $ 12.85  

 

 

If the underwriters exercise their over-allotment option in full, the pro forma net tangible book value per share of our common stock, as adjusted to give effect to this offering, would be $0.50 per share, and the dilution in pro forma net tangible book value per share to investors in this offering would be $12.50 per share of common stock.

The table below summarizes as of June 30, 2017, on a pro forma as adjusted basis described above, the number of shares of our common stock, the total consideration and the average price per share (i) paid to us by existing stockholders and (ii) to be paid by new investors purchasing our Class A common stock in this offering at an

 

60


Table of Contents

initial public offering price of $13.00 per share, before deducting underwriting discounts and commissions and estimated offering expenses:

 

      Shares purchased      Total consideration      Average price
per share
 
      Number      Percent      Amount      Percent     

Existing stockholders

     48,390,940        80%      $ 40,888,613        21%      $ 0.84  

New investors

     12,000,000        20%        156,000,000        79%      $ 13.00  
  

 

 

    

Totals

     60,390,940        100.0%      $ 196,888,613        100.0%     

 

 

The total number of shares of our common stock to be outstanding following this offering is based on 9,387,512 shares of our Class A common stock and 41,203,428 shares of our Class B common stock outstanding as of June 30, 2017 (which number of shares of Class B common stock includes (i) 2,495,752 shares converted to Class A common stock when we became a Delaware corporation in October 2017, and (ii) the automatic conversion of 2,200,000 shares of our Class B common stock held by certain selling stockholders into an equivalent number of shares of our Class A common stock upon their sale by these selling stockholders in our offering for which we will not receive any proceeds) and excludes:

 

 

708,000 shares of Class A common stock issued in connection with our acquisition of Runtime in September, 2017

 

 

6,207,976 shares of our Class A common stock to be reserved for issuance under our 2017 Plan;

 

 

2,627,920 shares of our Class A common stock reserved for issuance under our 2012 Plan;

 

 

6,347,840 shares of our Class A common stock issuable upon exercise of stock options outstanding as of June 30, 2017, with an exercise price of $0.000025, under our 2001 NQSO Plan;

 

 

2,931,380 shares of our Class A common stock issuable upon exercise of stock options outstanding as of June 30, 2017, with a weighted average exercise price of $0.64, under our 2001 Incentive and Non-Qualified Stock Option Plan, or 2001 ISO and NQSO Plan (other than the 1,734,996 stock options to be exercised by Mr. Scapa in connection with this offering, which are included in the shares of Class A common stock offered by the selling stockholders, as set forth elsewhere in this prospectus) and

 

 

2,209,608 shares of our Class A common stock issuable upon exercise of stock options outstanding as of June 30, 2017, with a weighted average exercise price of $3.73, under our 2012 Plan.

Sales by the selling stockholders in this offering will cause the number of shares held by existing stockholders to be reduced to 48,390,940 shares, or 80% of the total number of shares of our common stock outstanding after this offering, and will increase the number of shares held by new investors to 12,000,000 shares, or 20% of the total number of shares of our common stock outstanding after this offering. In addition, if the underwriters’ over-allotment option is exercised in full, the number of shares held by the existing stockholders after this offering would be reduced to 78% of the total number of shares of our common stock outstanding after this offering, and the number of shares held by new investors would increase to 13,800,000 shares, or 22% of the total number of shares of our common stock outstanding after this offering.

To the extent that any outstanding options are exercised, new options are issued under our stock-based compensation plans or we issue additional shares of our common stock in the future, there will be further dilution to investors participating in this offering. If all outstanding options under our 2012 Plan, our 2001 NQSO Plan and our 2001 ISO and NQSO Plan as of June 30, 2017 were exercised, then our existing stockholders, including the holders of these options, would own 83% and our new investors would own 17% of the total number of shares of our common stock outstanding upon the completion of this offering. In such event, the total consideration paid by our existing stockholders, including the holders of these options, would be approximately $40,888,613, or 21%, the total consideration paid by our new investors would be $156,000,000, or 79%, the average price per share paid by our existing stockholders would be $0.84 and the average price per share paid by our new investors would be $13.00.

 

61


Table of Contents

Selected historical consolidated financial and other data

The following selected consolidated financial data should be read in conjunction with the section entitled “Management’s discussion and analysis of financial condition and results of operations” and the consolidated financial statements and related notes included within this prospectus. The consolidated statement of operations data for the years ended December 31, 2015 and 2016, and the consolidated balance sheet data as of December 31, 2015 and 2016, are derived from our audited consolidated financial statements and related notes included elsewhere in this prospectus. The consolidated statement of operations data for the six months ended June 30, 2016 and 2017, and the consolidated balance sheet data as of June 30, 2017, are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited consolidated financial statements on the same basis as the audited consolidated financial statements and have included all adjustments, consisting only of normal recurring adjustments that, in our opinion, are necessary to state fairly the financial information set forth in those statements. Our historical results are not necessarily indicative of our future results and the results of operations for the six months ended June 30, 2017 are not necessarily indicative of the results to be expected for the full fiscal year or any other period. The selected consolidated financial data in this section are not intended to replace our consolidated financial statements and the related notes, and are qualified in their entirety by the consolidated financial statements and related notes included elsewhere in this prospectus.

 

      Years ended
December  31,
    Six months ended
June 30,
 
(in thousands, except share data)    2015     2016     2016     2017  

Consolidated Statements of Operations Data:

        

Revenue:

        

Software

   $ 205,567     $ 223,818     $ 106,929     $ 113,697  

Software related services

     37,294       35,770       17,790       17,175  
  

 

 

 

Total software

     242,861       259,588       124,719       130,872  

Client engineering services

     45,075       47,702       24,289       24,594  

Other

     6,193       5,950       3,332       3,062  
  

 

 

 

Total revenue

     294,129       313,240       152,340       158,528  
  

 

 

 

Cost of revenue:

        

Software(1)

     27,406       31,962       15,021       17,633  

Software related services

     30,079       27,653       13,838       13,773  
  

 

 

 

Total software

     57,485       59,615       28,859       31,406  

Client engineering services

     36,081       38,106       19,207       19,969  

Other

     5,642       4,879       2,692       2,297  
  

 

 

 

Total cost of revenue

     99,208       102,600       50,758       53,672  
  

 

 

 

Gross profit

     194,921       210,640       101,582       104,856  

Operating expenses:

        

Research and development(1)

     62,777       71,325       34,012       41,608  

Sales and marketing(1)

     63,080       66,086       32,093       36,338  

General and administrative(1)

     54,069       57,202       27,882       37,290  

Amortization of intangible assets

     2,624       3,322       1,477       2,098  

Other operating income

     (2,576     (2,742     (1,129     (3,330
  

 

 

 

Total operating expense

     179,974       195,193       94,335       114,004  

 

 

 

62


Table of Contents

Operating income (loss)

     14,947        15,447       7,247       (9,148

Interest expense

     2,416        2,265       1,247       1,159  

Other expense (income), net

     782        (520     (652     786  
  

 

 

 

Income (loss) before income taxes

     11,749        13,702       6,652       (11,093

Income tax expense (benefit)

     818        3,539       2,699       (1,659
  

 

 

 

Net income (loss)

   $ 10,931      $ 10,163       3,953     $ (9,434
  

 

 

 

Net income (loss) per share attributable to common stockholders, basic(2)

   $ 0.23      $ 0.21       0.08     $ (0.19

Net income (loss) per share attributable to common stockholders, diluted(2)

   $ 0.19      $ 0.18       0.07     $ (0.19

Weighted average number of shares used in computing net income (loss) per share attributable to common stockholders, basic(2)

     46,609        48,852       47,891       50,255  

Weighted average number of shares used in computing net income (loss) per share attributable to common stockholders, diluted(2)

     58,709        57,856       57,236       50,255  

Pro forma net income (loss)(3)

      $ 12,341       $ (3,303

Pro forma net income (loss) per share attributable to common stockholders, basic(3)

      $ 0.25       $ (0.07

Pro forma net income (loss) per share attributable to common stockholders, diluted(3)

      $ 0.21       $ (0.07

 

 

 

(1)   Includes stock-based compensation expense as follows:

 

      Year ended
December  31,
     Six months ended
June 30,
 
(in thousands)    2015      2016      2016      2017  

Cost of revenue—software

   $ 44      $ 22      $ 14      $ 16  

Research and development

     149        1,370        41        3,784  

Sales and marketing

     109        775        35        2,115  

General and administrative

     295        2,965        85        8,122  
  

 

 

 

Total stock-based compensation expense

   $ 597      $ 5,132      $ 175      $ 14,037  

 

(2)   See Note 14 in the notes to consolidated financial statements for an explanation of the method used to calculate basic and diluted net income (loss) per share attributable to common stockholders.

 

(3)   The Pro forma amounts reflect the effects of the reversal of the stock-based compensation liability that will occur upon effectiveness (see Note 3 in the notes to consolidated financial statements) but excludes the 708,000 shares of our Class A common stock issued on September 28, 2017 in connection with our acquisition of Runtime.

 

      As of December 31,     As of June 30,  
(in thousands)    2015     2016     2017  

Consolidated balance sheet data:

      

Cash and cash equivalents

   $ 13,756     $ 16,874     $ 17,419  

Working capital

     (55,097     (52,902     (79,313

Total assets

     221,850       250,776       265,610  

Deferred revenue, current and non-current

     106,516       113,929       136,780  

Debt

     83,177       85,241       71,095  

Total stockholders’ deficit

     (42,039     (34,653     (41,434

 

 

 

63


Table of Contents

Key metrics

We monitor the following key non-GAAP financial and operating metrics to help us evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions. In addition to our results determined in accordance with GAAP, we believe the following non-GAAP financial and operating metrics are useful in evaluating our operating performance.

Billings.    Billings consists of our total revenue plus the change in our deferred revenue in a given period. As we generally bill our customers at the time of sale, but typically recognize a majority of the related revenue ratably over time, management believes that Billings is a meaningful way to measure and monitor our ability to provide our business with the working capital generated by upfront payments from our customers. While we believe that billings provides valuable insight into the cash that will be generated from sales of our software and services, this metric may vary from period-to-period for a number of reasons including the impact of changes in foreign currency exchange rates and the potential impact of acquisitions.

See the section entitled “Selected historical consolidated financial and other data—Reconciliation of non-GAAP financial measures” for information regarding the limitations of using Billings as a financial measure and for a reconciliation of Billings to revenue, the most directly comparable financial measure calculated in accordance with GAAP.

Our Billings were as follows:

 

      Year ended
December  31,
     Six months  ended
June 30,
 
(in thousands)    2015      2016      2016      2017  

Billings

   $ 297,358      $ 320,653      $ 165,449      $ 181,379  

 

 

Adjusted EBITDA.    We define Adjusted EBITDA as net income (loss) adjusted for income tax expense (benefit), interest expense, interest income and other, depreciation and amortization, stock-based compensation expense, restructuring charges, asset impairment charges and other special items as determined by management. We believe that Adjusted EBITDA is a meaningful measure of performance as it is commonly utilized by us and the investment community to analyze operating performance in our industry. See the section entitled “Selected historical consolidated financial and other data—Reconciliation of non-GAAP financial measures” for information regarding the limitations of using Adjusted EBITDA as a financial measure and for a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated in accordance with GAAP.

Our Adjusted EBITDA was as follows:

 

      Year ended
December  31,
     Six months ended
June 30,
 
(in thousands)    2015      2016      2016      2017  

Adjusted EBITDA

   $ 22,949      $ 30,830      $ 12,933      $ 7,056  

 

 

Free Cash Flow.    Free Cash Flow is a non-GAAP financial measure that we calculate as cash flow provided by operating activities less capital expenditures. We believe that Free Cash Flow is useful in analyzing our ability to service and repay debt and return value directly to stockholders. See the section entitled “Selected historical consolidated financial and other data—Reconciliation of non-GAAP financial measures” for information regarding the limitations of using Free Cash Flow as a financial measure and for a reconciliation of Free Cash Flow to net cash provided by operating activities, the most directly comparable financial measure calculated in accordance with GAAP.

 

64


Table of Contents

Our Free Cash Flow was as follows:

 

      Year ended
December  31,
     Six months ended
June 30,
 
(in thousands)    2015      2016      2016      2017  

Free Cash Flow

   $ 5,605      $ 11,941      $ 18,307      $ 21,782  

 

 

Recurring Software License Rate.    A key factor to our success is our recurring software license rate which we measure through billings, primarily derived from annual renewals of our existing subscription customer agreements. We calculate our recurring software license rate for a particular period by dividing (i) the sum of software term-based license billings, software license maintenance billings, and 20% of software perpetual license billings which we believe approximates maintenance as an element of the arrangement by (ii) the total software license billings including all term-based, maintenance, and perpetual license billings from all customers for that period. For the years ended December 31, 2015, 2016 and six months ended June 30, 2017, our recurring software license rate was 88%, 90% and 91%, respectively.

These non-GAAP financial measures reflect an additional way of viewing aspects of our business that, when viewed with our GAAP results and the accompanying reconciliations to corresponding GAAP financial measures included in the tables below, may provide a more complete understanding of factors and trends affecting our business. These non-GAAP financial measures should not be relied upon to the exclusion of GAAP financial measures and are by definition an incomplete understanding of the Company and must be considered in conjunction with GAAP measures.

We believe that the non-GAAP measures disclosed herein are only useful as an additional tool to help management and investors make informed decisions about our financial and operating performance and liquidity. By definition, non-GAAP measures do not give a full understanding of the Company. To be truly valuable, they must be used in conjunction with the comparable GAAP measures. In addition, non-GAAP financial measures are not standardized. It may not be possible to compare these financial measures with other companies’ non-GAAP financial measures having the same or similar names. We strongly encourage investors to review our consolidated financial statements and the notes thereto in their entirety and not to rely on any single financial measure.

Reconciliation of non-GAAP financial measures

The following tables provide reconciliations of revenue to Billings, income (loss) before income taxes to Adjusted EBITDA and net cash provided by operating activities to Free Cash Flow:

Billings

 

      Year ended
December  31,
     Six months  ended
June 30,
 
(in thousands)    2015     2016      2016      2017  

Revenue

   $ 294,129     $ 313,240      $ 152,340      $ 158,528  

Ending deferred revenue

     106,516       113,929        119,625        136,780  

Beginning deferred revenue

     (103,287     (106,516)        (106,516)        (113,929)  
  

 

 

 

Billings

   $ 297,358     $ 320,653      $ 165,449      $ 181,379  

 

 

 

65


Table of Contents

Adjusted EBITDA

 

      Year Ended
December  31,
    Six months ended
June 30,
 
(in thousands)    2015     2016     2016      2017  

Net income (loss)

   $ 10,931     $ 10,163     $ 3,953      $ (9,434

Income tax expense (benefit)

     818       3,539       2,699        (1,659

Stock-based compensation

     597       5,132       175        14,037  

Interest expense

     2,416       2,265       1,247        1,159  

Interest income and other(1)

     (191     (249     12        (2,131

Depreciation and amortization

     8,378       9,980       4,847        5,084  
  

 

 

 

Adjusted EBITDA

   $ 22,949     $ 30,830     $ 12,933      $ 7,056  

 

 
(1)   Includes a non-recurring adjustment for a change in estimated legal expenses resulting in $2.0 million of income for the six months ended June 30, 2017.

Free Cash Flow

 

      Year ended
December 31,
     Six months ended
June 30,
 
(in thousands)    2015     2016      2016      2017  

Net cash provided by operating activities

   $ 10,838     $ 21,385      $ 22,006      $ 26,117  

Capital expenditures

     (5,233     (9,444) (1)       (3,699)        (4,335) (2) 
  

 

 

 

Free Cash Flow

   $ 5,605     $ 11,941      $ 18,307      $ 21,782 (3) 

 

 

 

(1)   Includes $4.0 million purchase of real property adjacent to our corporate headquarters.
(2)   Includes $2.0 million for the purchase of developed technology.
(3)   Cash flow impacted by delay of $2.3 million refundable research and development tax credit due to administrative reasons.

 

66


Table of Contents

Management’s discussion and analysis of financial condition and

results of operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the “Selected historical consolidated financial and other data” and our financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in “Risk factors” and “Information regarding forward looking statements” included elsewhere in this prospectus.

Vision

Our vision is to transform product design and organizational decision making by applying simulation, optimization and high performance computing throughout product lifecycles.

Overview

We are a leading provider of enterprise-class engineering software enabling innovation across the entire product lifecycle from concept design to in-service operation. Our simulation-driven approach to innovation is powered by our broad portfolio of high-fidelity and high performance physics solvers. Our integrated suite of software optimizes design performance across multiple disciplines encompassing structures, motion, fluids, thermal management, electromagnetics, system modeling and embedded systems, while also providing data analytics and true-to-life visualization and rendering.

Our engineering and design platform offers a wide range of multi-disciplinary computer aided engineering, or CAE, solutions which we believe is one of the most innovative and comprehensive offerings available in the market. To ensure customer success and deepen our relationships with them, we engage with our customers to provide consulting, implementation services, training, and support, especially when applying optimization. We participate in five software categories related to CAE and high performance computing, or HPC:

 

 

Solvers & Optimization;

 

 

Modeling & Visualization;

 

 

Industrial & Concept Design;

 

 

Internet of Things, or IoT; and

 

 

HPC.

Altair also provides client engineering services, or CES, to support our customers with long-term ongoing product design and development expertise. This has the benefit of embedding us within customers, deepening our understanding of their processes, and allowing us to more quickly perceive trends in the overall market. Our presence at our customers’ sites helps us to better tailor our software products’ research and development, or R&D, and sales initiatives.

Our business model

We pioneered a patented units-based licensing subscription model for software and other digital content. Our customers license a pool of units for their organizations, which allows individual users within the organization

 

67


Table of Contents

to have flexible and shared access to our entire portfolio of software applications, along with over 150 partner products. We believe our units-based subscription licensing model lowers barriers to adoption, creates broad engagement, encourages users to work within our ecosystem, and increases revenue. This, in turn, helps drive our recurring software license rate which has been on average approximately 88% over the past five years. Each year approximately 60% of new revenue comes from expansion within existing customers.

Our corporate history and culture

We were founded in 1985 in Michigan and have a balanced global footprint, with 68 offices in 24 countries, and over 2,000 engineers, scientists and creative thinkers. We believe a critical component of our success has been our company culture, based on our core values of innovation, envisioning the future, communicating honestly and broadly, seeking technology and business firsts, and embracing diversity. This culture is important because it helps attract and retain top people, encourages innovation and teamwork, and enhances our focus on achieving Altair’s corporate objectives.

Factors affecting our performance

We believe that our future success will depend on many factors, including those described below. While these areas present significant opportunity, they also present risks that we must manage to achieve successful results. If we are unable to address these challenges, our business, operating results and prospects could be harmed. See the section entitled “Risk factors” included elsewhere in this prospectus.

Seasonality and quarterly results

Our billings have historically been highest in the first and fourth quarters of any calendar year and may vary in future quarters. The timing of recording billings and the corresponding effect on our cash flows may vary due to the seasonality of the purchasing patterns of our customers. In addition, the timing of the recognition of revenue, the amount and timing of operating expenses including, employee compensation, sales and marketing activities, and capital expenditures, may vary from quarter-to-quarter which may cause our reported results to fluctuate significantly. In addition, we may choose to grow our business for the long-term rather than to optimize for profitability or cash flows for a particular shorter term period. This seasonality or the occurrence of any of the factors above may cause our results of operations to vary and our financial statements may not fully reflect the underlying performance of our business.

Foreign currency fluctuations

Because of our substantial international operations, we are exposed to foreign currency risks that arise from our normal business operations, including in connection with our transactions that are denominated in foreign currencies, including the Euro, British Pound Sterling, Indian Rupee, Japanese Yen, and Chinese Yuan. To present the changes in our underlying business without regard to the impact of currency fluctuations, we evaluate certain of our operating results both on an as reported basis, as well as on a constant currency basis.

Constant currency amounts exclude the effect of foreign currency fluctuations on our reported results. Our comparative financial results were impacted by fluctuations in the value of the United States dollar relative to other currencies during the six months ended June 30, 2017 as compared to the six months ended June 30, 2016. To present this information, the results for 2017 for entities whose functional currency is a currency other than the United States dollar were converted to United States dollars at rates that were in effect for 2016. These adjusted amounts are then compared to our current period reported amounts to provide operationally driven variances in our results.

 

68


Table of Contents

The effects of currency fluctuations on our Revenue and Adjusted EBITDA are reflected in the table below. Amounts in brackets indicate a net adverse impact from currency fluctuations.

 

      Six months
ended
 
(in thousands)    June 30, 2017  

Revenue

   $ (2,253

Adjusted EBITDA

   $ (916

 

 

Expanded use of our software applications

Our ability to grow our revenue is affected, in part, by the pace at which our customers continue to expand their use of our design, simulation, optimization and analysis applications and the degree to which prospective customers realize the benefit of using our software applications. To grow our presence within our customers and attract new customers, we devote substantial sales and marketing resources to drive increased adoption across our existing customers and encourage new customers to commence using our software. As a result of this “land and expand” business model, we expect to generate additional revenue from our current and future customer base. To the extent our sales and marketing efforts do not translate into customer retention or expansion, or if we do not allocate those expenses efficiently, our financial performance may be adversely affected. Therefore, our financial performance will depend in part on the degree to which our “land and expand” strategies are successful.

Investments for growth

We have made and plan to continue to make investments for long-term growth, including investments in our ongoing research and development activities seeking to create new software and to enhance our existing applications to address emerging technology trends and additional customer needs. Generally, the development of new or improved applications in our software can result in the expansion of our user base within an organization and a potential increase in revenue over time, although the expenditures associated with such developments may adversely affect our performance in the near term. We intend to continue to invest resources in sales and marketing, by further expanding our sales teams and increasing our marketing activities. Our ability to continue to grow revenue from our current and potential customer base is dependent, in part, upon the success of our current and future research and development and sales and marketing activities.

Business Segments

We have identified two reportable segments: Software and Client Engineering Services:

 

 

Software—our Software segment includes software and software related services. The software component of this segment includes our portfolio of software products including our solvers and optimization technology products, modeling and visualization tools, industrial and concept design tools, IoT platform and analytics tools, and high performance computing, or HPC, software applications, as well as support and the complementary software products we offer through our Altair Partner Alliance, or APA. The APA includes technologies ranging from computational fluid dynamics and fatigue to manufacturing process simulation and cost estimation. The software related services component of this segment includes consulting, implementation services, and training focused on product design and development expertise and analysis from the component level up to complete product engineering.

 

 

Client Engineering Services—our client engineering services, or CES, segment provides client engineering services to support our customers with long-term, ongoing product design and development expertise. We

 

69


Table of Contents
 

operate our CES business by hiring engineers for placement at a customer site for specific customer-directed assignments. We employ and pay the engineers only for the duration of the placement.

Our other businesses which do not meet the criteria to be separate reportable segments are combined and reported as “Other” which represents innovative services and products, including toggled, our LED lighting and IoT business. toggled is focused on developing and selling next-generation solid state lighting technology along with communication and control protocols based on our intellectual property for the direct replacement of fluorescent light tubes with LED lamps. Other businesses combined within Other include potential services and product concepts that are still in their development stages.

For additional information about our reportable segments and other businesses, see Note 19 in the notes to consolidated financial statements included elsewhere in this prospectus.

Components of results of operations

Revenue

We primarily derive revenue from our units-based subscription licensing model for software and other digital content, other software licensing, and software related services. Our CES business derives revenue from providing engineers to support our customers’ long-term, ongoing product design and development projects.

Software Segment

Software segment revenue consists of revenue from software licenses and software related services including consulting, implementation services, training, and support.

Software

Software revenue is principally comprised of subscription license agreements, typically with 12 month terms, which include maintenance and support. Software revenue is also comprised of perpetual license agreements, and associated maintenance and support agreements. We generally recognize software license revenue ratably over the period of the arrangement. Each year approximately 60% of our new revenue comes from expansion within existing customers.

Software related services

Software related services includes consulting, implementation services and training. Our software related services team is comprised of almost 700 highly technical people globally. We focus on establishing a strong working relationship with the user community allowing us to offer guidance and expertise throughout their product creation process.

We generally recognize revenue for software related services on a time and materials or, for fixed price arrangements, on a proportional performance basis.

Client engineering services segment

We provide CES to support our customers with long-term, ongoing product design and development expertise. We operate our CES business by hiring engineers for placement at a customer site for specific customer-directed assignments. We employ and pay the engineers only for the duration of the placement.

 

70


Table of Contents

Our CES business generates revenue from placing simulation specialists, industrial designers, design engineers, materials experts, development and test engineers, manufacturing engineers and information technology specialists on-site with our customers in businesses operating in the virtual simulation, product design and development, software development, and high-performance computing spaces. We recognize CES revenue based upon hours worked and contractually agreed-upon hourly rates.

The average CES assignment was 1.8 years during the period from 2011 through 2016, with a current average length of service for all CES employees of 2.4 years. As of December 31, 2016, 44% of CES employees were in their assignments for over two years. The terms of our CES arrangements generally provide that our customers pay us within 30 days of invoice. The amount and timing of CES revenue depends on our customers demand for engineering services and the number of available qualified employees to service our customers’ needs.

Other

Our Other revenue consists primarily of revenue related to our LED lighting business operated out of our wholly-owned subsidiary, toggled. toggled designs, sources through contract manufacturers, and assembles in our own facilities, LED lighting and related products for sale to consumers and businesses. We also generate revenue through royalties from licensing our technology to third party manufacturers and resellers.

Cost of revenue

Software segment

Cost of software revenue consists of expenses related to software licensing and customer support. Significant expenses include employee related costs for support team members, travel costs, and royalties for third-party software products available to customers through our products or as part of our APA.

Software

Cost of software revenue consists of the cost of personnel and related costs such as salaries, benefits, bonuses and stock-based compensation, travel expenses and certain data center and facility costs and substantially all royalty expenses.

Software related services

Cost of software related services revenue consists of the cost of personnel and related costs such as salaries, benefits, bonuses and stock-based compensation, travel expenses and certain data center and facility costs.

Cost of client engineering services

Cost of engineering services revenue consists primarily of employee compensation costs. We operate our CES business by hiring engineers for placement at a customer site for specific customer-directed assignments. We employ and pay the engineers only for the duration of the placement.

Cost of other

Cost of other revenue includes the cost of LED lighting products and freight related to products sold to retail and commercial sales channels.

 

71


Table of Contents

Operating expenses

Operating expenses, as defined and discussed below, support all of the products and services that we provide to our customers and, as a result, they are presented in an aggregate total.

Research and development

Research and development expenses consist primarily of expenses of our development team, including salaries, benefits, bonuses, stock-based compensation expense and allocated overhead costs. Our research and development efforts are focused on enhancing the functionality, breadth and scalability of our software, addressing new use cases, and developing additional innovative simulation technologies. Timely development of new products is essential to maintaining our competitive position, and we release new versions of our software on a regular basis. All software development costs are expensed as incurred as our current software development process is essentially completed concurrent with the establishment of technological feasibility.

Sales and marketing

Sales and marketing expenses consist primarily of the cost of personnel and related costs associated with our sales and marketing staff, including salaries, benefits, bonuses, commissions and stock-based compensation, and costs relating to our marketing and business development programs including trade shows and events. We intend to continue to invest resources in our sales and marketing initiatives in order to continue to drive growth and extend our market position.

General and administrative

General and administrative expenses consist of personnel costs and related expenses for executive, finance, legal, human resources, recruiting, and employee-related information technology and administrative personnel, including salaries, benefits, bonuses and stock-based compensation expense, professional fees for external legal, accounting, facilities, recruiting and other consulting services, allocated overhead costs, and legal settlements.

Amortization of intangible assets

Amortization of intangible assets consists primarily of amortization of intangibles associated with acquisitions. We expect to incur additional amortization expenses resulting from future strategic acquisitions.

Other operating income

Other operating income consists primarily of government subsidies, primarily in France, in the form of grant income associated with certain of our research and development activities.

Interest expense

Interest expense consists of interest expense on our outstanding indebtedness and accretion of interest expense on debt issuance costs. In connection with this offering, we intend to repay substantially all our outstanding indebtedness.

Other expense (income), net

Other expense (income), net is comprised primarily of foreign currency exchange gains and losses generated from the settlement and remeasurement of transactions denominated in currencies other than the functional currency of our operating units.

 

72


Table of Contents

Income tax expense (benefit)

Income tax expense (benefit) is comprised primarily of income taxes related to United States, foreign, and state jurisdictions in which we conduct business. We record interest and penalties related to income tax matters as income tax expense. We expect the amount of income tax expense (benefit), if any, to vary each reporting period depending upon fluctuations in our income. We have substantial United States tax credit carryforwards which, if not utilized, will begin to expire in 2018. The ability to utilize these tax credit carryforwards is highly dependent upon our ability to generate taxable income in the United States in the future.

Our future effective annual tax rate may be materially impacted by the amount of benefits and charges from tax amounts associated with our foreign earnings that are taxed at rates different from the federal statutory rate, changes in valuation allowances, level of profit before tax, accounting for uncertain tax positions, stock-based compensation, business combinations, closure of statute of limitations, or settlements of tax audits, and changes in tax laws including possible United States tax law changes that, if enacted, could significantly impact how United States multinational companies are taxed on foreign subsidiary earnings. A significant amount of our earnings is generated in the EMEA and APAC regions. Our future effective tax rates may be adversely affected to the extent earnings are lower than anticipated in countries where we have lower statutory tax rates or we repatriate certain foreign earnings on which United States taxes have not previously been provided.

As of December 31, 2016 and June 30, 2017, we had net deferred tax assets, or DTAs, of $61.5 million and $65.8 million, respectively, primarily related to tax credits, share-based compensation, deferred revenue, and capitalized research and development expenses. We are also entitled to a United States federal tax deduction when non-qualified stock options, or NSOs, are exercised. In connection with this offering, we expect a significant number of our NSOs will be exercised, creating substantial additional tax deductions for us. These deductions are expected to result in future net operating losses for United States tax purposes which are expected to result in our needing to establish a valuation allowance for the majority of our DTAs. Our ability to utilize any net operating losses or tax credits could be limited under provisions of the Code if we undergo an ownership change in connection with or after this offering (generally defined as a greater than 50-percentage point cumulative change (by value) in the equity ownership of certain stockholders over a rolling three-year period). It is also possible that we will be unable to realize our tax credit carryforwards as they begin to expire in 2018.

 

73


Table of Contents

Results of operations

The following table sets forth our results of operations and the period-over-period percentage change in certain financial data for the years ended December 31, 2015 and 2016 and the six months ended June 30, 2016 and 2017:

 

     Year ended
December 31,
    Change     Six months ended
June 30,
    Change  
(dollars in thousands)   2015     2016     %     2016     2017     %  

Revenue:

           

Software

  $ 205,567     $ 223,818       9%     $ 106,929     $ 113,697       6%  

Software related services

    37,294       35,770       (4%     17,790       17,175       (3%
 

 

 

     

 

 

   

Total software

    242,861       259,588       7%       124,719       130,872       5%  

Client engineering services

    45,075       47,702       6%       24,289       24,594       1%  

Other

    6,193       5,950       (4%     3,332       3,062       (8%
 

 

 

     

 

 

   

Total revenue

    294,129       313,240       6%       152,340       158,528       4%  
 

 

 

     

 

 

   

Cost of revenue:

           

Software

    27,406       31,962       17%       15,021       17,633       17%  

Software related services

    30,079       27,653       (8%     13,838       13,773       —%  
 

 

 

     

 

 

   

Total software

    57,485       59,615       4%       28,859       31,406       9%  

Client engineering services

    36,081       38,106       6%       19,207       19,969       4%  

Other

    5,642       4,879       (14%     2,692       2,297       (15%
 

 

 

     

 

 

   

Total cost of revenue

    99,208       102,600       3%       50,758       53,672       6%  
 

 

 

     

 

 

   

Gross profit

    194,921       210,640       8%       101,582       104,856       3%  

Operating expenses:

           

Research and development

    62,777       71,325       14%       34,012       41,608       22%  

Sales and marketing

    63,080       66,086       5%       32,093       36,338       13%  

General and administrative

    54,069       57,202       6%       27,882       37,290       34%  

Amortization of intangible assets

    2,624       3,322       27%       1,477       2,098       42%  

Other operating income

    (2,576     (2,742     6%       (1,129     (3,330     195%  
 

 

 

     

 

 

   

Total operating expenses

    179,974       195,193       8%       94,335       114,004       21%  
 

 

 

     

 

 

   

Operating income (loss)

    14,947       15,447       3%       7,247       (9,148     NM  

Interest expense

    2,416       2,265       (6%     1,247       1,159       (7%

Other expense (income), net

    782       (520     NM       (652     786       NM  
 

 

 

     

 

 

   

Income (loss) before income taxes

    11,749       13,702       17%       6,652       (11,093     NM  

Income tax expense (benefit)

    818       3,539       333%       2,699       (1,659     NM  
 

 

 

     

 

 

   

Net income (loss)

  $ 10,931     $ 10,163       (7%   $ 3,953     $ (9,434     NM  
 

 

 

     

 

 

   

Other financial information:

           

Billings(1)

  $ 297,358     $ 320,653       8%     $ 165,449     $ 181,379       10%  

Adjusted EBITDA(2)

  $ 22,949     $ 30,830       34%     $ 12,933     $ 7,056       (45%

Net cash provided by operating activities

  $ 10,838     $ 21,385       97%     $ 22,006     $ 26,117       19%  

Free Cash Flow(3)

  $ 5,605     $ 11,941       113%     $ 18,307     $ 21,782       19%  

 

 

NM=Not meaningful.

 

(1)   Billings consists of our total revenue plus the change in our deferred revenue. For more information about Billings and our other non-GAAP financial measures and reconciliations of our non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP, see the section entitled “Selected historical consolidated financial and other data—Reconciliation of non-GAAP financial measures.”

 

(2)  

We define Adjusted EBITDA as net income (loss) adjusted for income tax expense (benefit), interest expense, interest income and other, depreciation and amortization, stock-based compensation expense, restructuring charges, asset impairment charges and other special items as

 

74


Table of Contents
 

determined by management. For more information about Adjusted EBITDA and our other non-GAAP financial measures and reconciliations of our non-GAAP financial measures to the most directly comparable financial measure calculated and presented in accordance with GAAP, see the section entitled “Selected historical consolidated financial and other data—Reconciliation of non-GAAP financial measures.”

 

(3)   We define Free Cash Flow as net cash provided by operating activities less capital expenditures. See the section entitled “Selected historical consolidated financial and other data—Reconciliation of non-GAAP financial measures” for a reconciliation of Free Cash Flow.

The following table sets forth our revenue growth on a constant currency basis for the year ended December 31, 2016 compared to the year ended December 31, 2015, and the six months ended June 30, 2017 compared to the six months ended June 30, 2016:

 

     Year ended
December 31,
    Change     Constant
currency
change(1)
    Six months ended
June 30,
    Change     Constant
currency
change(1)
 
(dollars in thousands)   2015     2016     %     %     2016     2017     %     %  

Revenue:

               

Software

  $ 205,567     $ 223,818       9%       9%     $ 106,929     $ 113,697       6%       8%  

Software related services

    37,294       35,770       (4%     (3%     17,790       17,175       (3%     (1%
 

 

 

   

 

 

       

 

 

   

 

 

     

Total software

    242,861       259,588       7%       7%       124,719       130,872       5%       7%  

Client engineering services

    45,075       47,702       6%       6%       24,289       24,594       1%       1%  

Other

    6,193       5,950       (4%     (4%     3,332       3,062       (8%     (8%
 

 

 

   

 

 

       

 

 

   

 

 

     

Total revenue

  $ 294,129     $ 313,240       6%       7%     $ 152,340     $ 158,528       4%       6%  

 

 

 

(1)   The results for entities whose functional currency is a currency other than the United States dollar were converted to United States dollars at rates that were in effect for the corresponding period of the prior year.

Six months ended June 30, 2016 and 2017

Revenue

Total revenue increased by $6.2 million, or 4%, for the six months ended June 30, 2017 as compared to the six months ended June 30, 2016. The increase was primarily attributable to an increase in subscription and software revenue.

Software segment

Software

 

      Six months ended
June 30,
     Period-to-period
change
 
(in thousands)    2016      2017                  $                  %  

Software revenue

   $ 106,929      $ 113,697      $ 6,768        6%  

As a percent of software segment revenue

     86%        87%        

As a percent of consolidated revenue

     70%        72%        

 

 

The 6% increase in our software revenue for the six months ended June 30, 2017, as compared to the six months ended June 30, 2016, was primarily the result of an expansion in the number of units licensed by our existing customers under renewed software license agreements and, to a lesser extent, licensing of units to new customers pursuant to new software license agreements.

 

75


Table of Contents

Software related services

 

      Six months  ended
June 30,
     Period-to-period
change
 
(in thousands)            2016              2017                  $                 %  

Software related services revenue

   $ 17,790      $ 17,175      $ (615     (3%

As a percent of software segment revenue

     14%        13%       

As a percent of consolidated revenue

     12%        11%       

 

 

The 3% decrease in our software related services revenue for the six months ended June 30, 2017 as compared to the six months ended June 30, 2016, was primarily the result of our continued focus on higher-value projects aligned with our software products, and the completion of projects that had been in process.

Client engineering services segment

 

      Six months ended
June 30,
     Period-to-period
change
 
(in thousands)            2016              2017                  $                  %  

Client engineering services revenue

   $ 24,289      $ 24,594      $ 305        1%  

As a percent of consolidated revenue

     16%        16%        

 

 

CES revenue increased $0.3 million, or 1%, for the six months ended June 30, 2017, as compared to the six months ended June 30, 2016.

Other

 

      Six months  ended
June 30,
     Period-to-period
change
 
(in thousands)            2016              2017                  $                 %  

Other revenue

   $ 3,332      $ 3,062      $ (270     (8%

As a percent of consolidated revenue

     2%        2%       

 

 

Other revenue decreased $0.3 million, or 8%, for the six months ended June 30, 2017 as compared to the six months ended June 30, 2016, primarily due to decreased sales prices with our largest distributor of lighting products.

Cost of revenue

Software segment

Software

 

      Six months  ended
June 30,
     Period-to-period
change
 
(in thousands)            2016              2017                  $                  %  

Cost of software revenue

   $ 15,021      $ 17,633      $ 2,612        17%  

As a percent of software revenue

     14%        16%        

As a percent of consolidated revenue

     10%        11%        

 

 

Cost of software revenue increased by $2.6 million, or 17%, for the six months ended June 30, 2017, as compared to the six months ended June 30, 2016. This increase was primarily attributable to higher employee costs of $1.1 million as a result of annual compensation adjustments and the addition of new personnel in connection with 2016 acquisitions, and increased third party royalty costs of $0.6 million for software programs.

 

76


Table of Contents

Software related services

 

      Six months  ended
June 30,
     Period-to-period
change
 
(in thousands)            2016              2017                  $                 %  

Cost of software related services revenue

   $ 13,838      $ 13,773      $ (65     —%  

As a percent of software related services revenue

     78%        80%       

As a percent of consolidated revenue

     9%        9%       

 

 

Cost of software related services revenue was consistent for the six months ended June 30, 2017 as compared to the six months ended June 30, 2016.

Client engineering services segment

 

      Six months ended
June 30,
     Period-to-period
change
 
(in thousands)            2016              2017                  $                  %  

Cost of client engineering services revenue

   $ 19,207      $ 19,969      $ 762        4%  

As a percent of client engineering services segment revenue

     79%        81%        

As a percent of consolidated revenue

     13%        13%        

 

 

Cost of CES revenue increased by $0.8 million, or 4%, for the six months ended June 30, 2017, as compared to the six months ended June 30, 2016. This increase is primarily due to compensation expenses associated with placements to meet customer demand and compensation increases to the CES staff in advance of when those costs can be passed through to our CES clients.

Other

 

      Six months ended
June 30,
     Period-to-period
change
 
(in thousands)            2016              2017      $     %  

Cost of other revenue

   $ 2,692      $ 2,297      $ (395     (15%

As a percent of other revenue

     81%        75%       

As a percent of consolidated revenue

     2%        1%       

 

 

Cost of other revenue decreased by $0.4 million, or 15%, for the six months ended June 30, 2017, as compared to the six months ended June 30, 2016. This decrease is primarily due to our introduction of new products that have a lower average cost than the older products.

Gross profit

 

      Six months ended
June 30,
     Period-to-period
change
 
(in thousands)    2016      2017      $      %  

Gross profit

   $ 101,582      $ 104,856      $ 3,274        3%  

As a percent of consolidated revenue

     67%        66%        

 

 

Gross profit increased by $3.3 million, or 3%, for the six months ended June 30, 2017, as compared to the six months ended June 30, 2016. This increase in gross profit was primarily attributable to the growth of our software revenue of $6.8 million driven by the expansion in the number of units purchased by our existing customers and, to a lesser extent, sales to new customers. The increase in revenue was partially offset by the increase in cost of revenues as described above.

 

77


Table of Contents

Operating expenses

Operating expenses, as discussed below, support all the products and services that we provide to our customers and, as a result, they are reported and discussed here in an aggregate total.

Research and development

 

      Six months ended
June 30,
     Period-to-period
change
 
(in thousands)    2016      2017      $      %  

Research and development

   $ 34,012      $ 41,608      $ 7,596        22%  

As a percent of consolidated revenue

     22%        26%        

 

 

Research and development expenses increased by $7.6 million, or 22%, for the six months ended June 30, 2017, as compared to the six months ended June 30, 2016. This increase is attributable to higher employee costs of $3.7 million resulting from an increase in our headcount, primarily due to acquisitions and annual compensation adjustments. In addition, the stock-based compensation expense component of our research and development expense increased during the six months ended June 30, 2017 by $3.7 million as compared to the six months ended June 30, 2016 primarily due to the increased value of our shares of common stock.

Sales and marketing

 

      Six months ended
June 30,
     Period-to-period
change
 
(in thousands)    2016      2017      $      %  

Sales and marketing

   $ 32,093      $ 36,338      $ 4,245        13%  

As a percent of consolidated revenue

     21%        23%        

 

 

Sales and marketing expenses increased by $4.2 million, or 13%, for the six months ended June 30, 2017, as compared to the six months ended June 30, 2016. This increase is primarily attributable to a $3.2 million increase in employee compensation costs, including stock-based compensation expense of $2.1 million, and a $0.7 million increase in sales and marketing campaigns to support our direct sales force.

General and administrative

 

      Six months ended
June 30,
     Period-to-period
change
 
(in thousands)    2016      2017      $      %  

General and administrative

   $ 27,882      $ 37,290      $ 9,408        34%  

As a percent of consolidated revenue

     18%        24%        

 

 

General and administrative expenses increased by $9.4 million, or 34%, for the six months ended June 30, 2017 as compared to the six months ended June 30, 2016. This increase is primarily attributable to an $8.9 million increase in employee compensation cost, including stock-based compensation expense of $8.0 million. Excluding the impact of stock-based compensation, general and administrative expenses increased by 5%, primarily from annual compensation adjustments, from $27.8 million to $29.2 million for the six months ended June 30, 2017 and 2016, respectively.

 

78


Table of Contents

Amortization of intangible assets

 

      Six months ended
June 30,
     Period-to-period
change
 
(in thousands)    2016      2017      $      %  

Amortization of intangible assets

   $ 1,477      $ 2,098      $ 621        42%  

As a percent of consolidated revenue

     1%        1%        

 

 

Amortization of intangible assets increased by $0.6 million for the six months ended June 30, 2017 as compared to the six months ended June 30, 2016. This increase was attributable to the amortization of intangible assets associated with acquisitions completed during the year ended December 31, 2016.

Other operating income

 

      Six months  ended
June 30,
     Period-to-period
change
 
(in thousands)            2016              2017                  $                  %  

Other operating income

   $ (1,129    $ (3,330    $ 2,201        195%  

As a percent of consolidated revenue

     1%        2%        

 

 

Other operating income increased $2.2 million, or 195%, for the six months ended June 30, 2017 as compared to the six months ended June 30, 2016. This increase was due to an increase in grant income as a result of an acquisition in the second quarter of 2016 and a non-recurring adjustment for a change in estimated legal expenses resulting in $2.0 million for the six months ended June 30, 2017.

Interest expense

 

      Six months  ended
June 30,
     Period-to-period
change
 
(in thousands)            2016              2017      $     %  

Interest expense

   $ 1,247      $ 1,159      $ (88     (7%

As a percent of consolidated revenue

     1%        1%       

 

 

Interest expense decreased by $0.1 million, or 7%, for the six months ended June 30, 2017, as compared to the six months ended June 30, 2016. This decrease was due to a reduction in our interest expense related to our Credit Agreement as a result of a reduction in outstanding debt, partially offset by slightly higher rates based upon Libor interest rate based borrowings.

Other (income) expense, net

 

      Six months ended
June 30,
     Period-to-period
change
 
(in thousands)            2016             2017                  $                  %  

Other (income) expense, net

   $ (652   $ 786      $ 1,438        NM  

As a percent of consolidated revenue

     —%       —%        

 

 

Other (income) expense, net increased by $1.4 million for the six months ended June 30, 2017, as compared to the six months ended June 30, 2016. This increase was due to fluctuations in the United States dollar relative to other functional currencies during the six months ended June 30, 2017, compared to the six months ended June 30, 2016.

 

79


Table of Contents

Income tax expense (benefit)

 

      Six months ended
June 30,
    Period-to-period
change
 
(in thousands)            2016              2017                 $                 %  

Income tax expense (benefit)

   $ 2,699      $ (1,659   $ (4,358     NM  

 

 

The effective tax rate was 15% and 41% for the six months ended June 30, 2017 and 2016, respectively. The tax rate is affected by the Company being a United States resident taxpayer, the tax rates in the United States and other jurisdictions in which the Company operates, the relative amount of income earned by jurisdiction and the relative amount of losses or income for which no benefit or expense is recognized. The effective tax rate was impacted by the geographic income mix in 2017 as compared to 2016, primarily related to the United States pre-tax income of $7.2 million in 2016 compared to a $14.9 million pre-tax loss in 2017, and nondeductible stock-based compensation in the amount of $0.1 million in 2016 compared to $9.3 million in 2017.

Net income (loss)

 

      Six months ended
June 30,
    Period-to-period
change
 
(in thousands)            2016              2017                 $                 %  

Net income (loss)

   $ 3,953      $ (9,434   $ (13,387     NM  

 

 

Net income decreased by $13.4 million resulting in a net loss of $9.4 million for the six months ended June 30, 2017, as compared to net income of $4.0 million for the six months ended June 30, 2016. This decrease in net income was primarily attributable to increased stock-based compensation expense of $13.9 million and increased cost of revenue which related to higher employee related costs and royalty share payments to our partners for the six months ended June 30, 2017. Operating expenses increased primarily due to annual employee cost adjustments and increased headcount as a result of acquisitions in 2016. These increased costs are partially offset by increased revenue in the Software segment.

Years ended December 31, 2015 and 2016

Revenue

Total revenue increased by $19.1 million, or 6%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015. This increase was primarily attributable to an increase in software revenue of $18.3 million, or 9%, for the same period, partially offset by a decrease in software related services revenue of $1.5 million, or 4%. Our CES revenue also increased by $2.6 million, or 6% for the year ended December 31, 2016 as compared to the corresponding prior year.

Software segment

Software

 

      Year  ended
December 31,
     Period-to-period
change
 
(dollars in thousands)    2015      2016      $      %  

Software revenue

   $ 205,567      $ 223,818      $ 18,251        9%  

As a percent of software segment revenue

     85%        86%        

As a percent of consolidated revenue

     70%        71%        

 

 

 

80


Table of Contents

The 9% increase in our software revenue for the year ended December 31, 2016 as compared to the year ended December 31, 2015, was primarily the result of an expansion in the number of units licensed by our existing customers under renewed software license agreements and, to a lesser extent, licensing of units to new customers pursuant to new software license agreements. This increase in software revenue occurred across the Americas, EMEA and APAC.

Software related services

 

      Year  ended
December 31,
     Period-to-period
change
 
(dollars in thousands)    2015      2016      $     %  

Software related services revenue

   $ 37,294      $ 35,770      $ (1,524     (4%

As a percent of software segment revenue

     15%        14%       

As a percent of consolidated revenue

     13%        11%       

 

 

The 4% decrease in our software related services revenue for the year ended December 31, 2016 as compared to the year ended December 31, 2015, was primarily the result of our continued focus on higher-value projects aligned with our software.

Client engineering services

 

      Year  ended
December 31,
     Period-to-period
change
 
(dollars in thousands)    2015      2016      $      %  

Client engineering services revenue

   $ 45,075      $ 47,702      $ 2,627        6%  

As a percent of consolidated revenue

     15%        15%        

 

 

The 6% increase in our CES revenue for the year ended December 31, 2016 as compared to the year ended December 31, 2015, was primarily due to an increase in demand for our consulting services and corresponding higher billable headcount placements during the period. Our headcount in the CES business increased 4% in 2016 as compared to the prior year.

Other

 

      Year  ended
December 31,
     Period-to-period
change
 
(dollars in thousands)    2015      2016      $     %  

Other revenue

   $ 6,193      $ 5,950      $ (243     (4%

As a percent of consolidated revenue

     2%        2%       

 

 

Other revenue for the year ended December 31, 2015 included $2.0 million of revenue related to royalties from our licensing of intellectual property technology that did not reoccur in the year ended December 31, 2016. Excluding the impact of these royalties, our Other revenue increased 42% for the year ended December 31, 2016 as compared to the prior year. This increase in our Other revenue was primarily due to an increase in demand for LED lighting and increased royalties received from licensing our technology to third party manufacturers and resellers.

 

81


Table of Contents

Cost of revenue

Software segment

Software

 

      Year  ended
December 31,
     Period-to  -period
change
 
(dollars in thousands)    2015      2016      $      %  

Cost of software revenue

   $ 27,406      $ 31,962      $ 4,556        17%  

As a percent of software revenue

     13%        14%        

As a percent of consolidated revenue

     9%        10%        

 

 

Cost of software revenue increased by $4.6 million, or 17%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015, primarily attributable to a $3.3 million increase in employee compensation costs, and increased third party royalty costs for software programs we include in our APA program of $0.7 million.

Software related services

 

      Year  ended
December 31,
     Period-to-period
change
 
(dollars in thousands)    2015      2016      $     %  

Cost of software related services revenue

   $ 30,079      $ 27,653      $ (2,426     (8%

As a percent of software related services revenue

     81%        77%       

As a percent of consolidated revenue

     10%        9%       

 

 

Cost of software related services revenue decreased by $2.4 million, or 8%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015, primarily related to a reorganization of personnel and the corresponding decrease in software related services revenue and our continued focus on higher-value projects aligned with our software.

Client engineering services segment

 

      Year  ended
December 31,
     Period-to-period
change
 
(dollars in thousands)    2015      2016      $      %  

Cost of client engineering services revenue

   $ 36,081      $ 38,106      $ 2,025        6%  

As a percent of client engineering services segment revenue

     80%        80%        

As a percent of consolidated revenue

     12%        12%        

 

 

Cost of CES revenue increased by $2.0 million, or 6%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015. This increase is primarily due to compensation expenses associated with a larger number of placements to meet customer demand.

 

82


Table of Contents

Other

 

      Year  ended
December 31,
     Period-to-period
change
 
(dollars in thousands)    2015      2016      $     %  

Cost of other revenue

   $ 5,642      $ 4,879      $ (763     (14%

As a percent of other revenue

     91%        82%       

As a percent of consolidated revenue

     2%        2%       

 

 

Cost of Other revenue decreased by $0.8 million, or 14%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015. This decrease is primarily due to our introduction of new products th