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Date : 18/07/2022

Altium Limited

ASX :

ALU

Market Cap : $3.82 Billion

Dividend Per Share : $0.42

Dividend Yield : 1.44 %

Buy

52 Week Range : $24.32 - $45.30

Share Price : $29.07

Momentum has returned to Altium's business. We recommend a 'Buy'.

Company Analysis

Altium (ASX: ALU) is a design software provider for printed circuit board manufacturers (PCB). PCBs are used in everything technology – from cars to mobiles to household appliances.

We recommended investors to Sell Altium at $37.08 about a year ago following an acquisition offer Altium had received from Autodesk. Back then, we believed that the offer on the table represented a fair value for Altium. However, Altium rejected the bid, and Autodesk did not make a revised offer – suggesting it was a fair offer that Altium had rejected.

Since then, the share price has come off, and Altium shares now find themselves trading at levels around $29 – representing about a 21% pull back. At current levels, Altium ASX shares are trading within their fair value. We believe they are once again worth considering as there is a significant upside potential as markets stabilise from the current macroeconomic turmoil.

altium limited asx on tradingview
Source: Tradingview.com

Pivot to a new Business Model

Altium pivoted to the cloud in September 2020 and introduced several organisational and business model changes to support the Group’s journey to market dominance and industry transformation. They reorganised Altium R&D into CAD software and Cloud teams and split their sales organisation into high-volume (Digital Sales) and high-touch (Professional Sales) units. The Office of CEO and the Office of President were formed, which included the appointment of a Chief of Staff, President and a new Chief Financial Officer and Chief Operating Officer. These appointments reflect the maturity of Altium’s leadership with key decision-making responsibilities shared by a broader group of individuals.

The separation of CAD software from Altium’s emerging Cloud business established two complementary engines of growth, CAD software for dominance and Altium 365 cloud platform for transformation and four flywheels: cloud adoption, ecosystem adoption, design tools adoption and design platform adoption. When all four flywheels are operating well, Altium is poised for very positive revenue growth.

Such a hard pivot in the business model does take time to transpire into the financials. Altium ASX shares endured a couple of periods of uncertain growth outlook. The situation in FY21 was exasperated by the effects the pandemic had on its clients as well. However, we think Altium is now at a stage where the benefits of the pivot will start to materialise.

The 4 Flywheels

Altium has moved beyond a single flywheel that powered its market leadership journey in PCB design tools from transactional sales and an annual software release to four flywheels for dominance and transformation.

Altium Designer

Altium Designer has strengthened its value proposition for engineers through deeper integration with Altium 365 and investment in an expanded range of capabilities. Users no longer have to wait for months between
releases to get access to new capabilities, but instead, get access to them as soon as they are ready. The Altium Designer development team also has benefited from the organisational changes and cloud-native approaches that have been embraced by R&D for Altium 365, including monthly release schedules, improved development tools and processes and more QA automation for faster release cycles.

The integration with Altium 365 is more advanced than before, with conflict prevention for concurrent collaboration, project history and a completely overhauled commenting system, all notable step changes in capabilities that have enhanced the user experience and value for customers.

Nexus

Nexus gained traction in a wide range and size of industries and companies. Unique in the electronics industry, Nexus provides out-of-the-box configuration for agile enterprise customers tailored to specific needs and requirements without expensive, non-scalable software customisation.

Utilising the common platform architecture approach that Altium takes with technology, the Nexus business process management and workflow capabilities have been deployed on the Altium 365 platform. Nexus customers can take full advantage of Altium’s cloud-based collaboration capabilities in combination with structured processes and workflows, enabling agility that is fundamental to our customer’s success in the enterprise space.

Altium 365

365 is a first for the electronics industry. It is a cloud platform that digitally connects electronic design to the supply chain, from parts sourcing to the manufacturing floor. It has been created for all users, from the mass mainstream engineering market to sophisticated enterprise accounts.

It will be a critical part of how Altium will evolve its subscription model from maintenance-based to capability-based and SaaS-like.

The benefits of Altium 365 include:

  • Reduction of churn,
  • Increased utilisation of PCB design tools,
  • Through Nexar, a seamless digital platform to connect design with component sourcing and board manufacturing,
  • Direct monetisation opportunities through premium services and apps.

Nexar

Nexar is a cloud-based integration platform to connect the growing community of Altium 365 PCB design users with the software, suppliers, and manufacturers needed to transform ideas into smart & connected products

Nexar is thus an ecosystem for the direct monetisation of Altium 365 and was set up to enable industry partners to benefit from Altium’s growing community of electronic engineers. Nexar is rapidly gaining momentum in the software engineering community and has signed up a wide range of partners, including Arduino, Frontline, Keysight and Samtec.

Platform Adoption is going strong, with over 7,000 companies having already adopted the Altium 365/Nexar cloud platform for electronics design.

Octopart – allows electronic designers to research parts availability and pricing while providing an opportunity for component manufacturers to influence early design decisions.

Altimade – provides cloud-based smart manufacturing that will improve productivity and manufacturability of electronics hardware and manage the supply chain of components and production risk.

nexar altium electronic design
Source: Altium

Operational Metrics look very Positive

The FY2025 target that Altium has set itself is 100,000 subscribers. This should generate $500 million in revenues, and Altium is well on its way to achieving this target.

The key metrics from the latest earnings report are as below:

  • Altium 365 active monthly users up 54% to 19,743.
  • Altium 365 active monthly accounts are up 29% to 7,734.
  • Subscription business growth at 7% year-on-year – reaching 55,978 subscribers.
  • Term-based licenses grew 132%, with 30% of all new licenses sold in the half were term-based.

Altium has finally seen momentum return to its business. The first half of FY22 was fantastic for the Company, and we witnessed revenue growth of 28%.

Company Updates

The vision for the pivot is for the Altium 365 web platform and its associated industry connector, Nexar, to digitise the entire PCB design, component sourcing and board manufacturing process from ‘end-to-end.’ It has the potential to transform PCB design and manufacturing so that it is consistent with the modern era of the IoT.

The Strategic Rationale

Altium will build strategic partnerships for the benefit of customers who are highly motivated to pursue digital transformation but have the low organisational capability to implement enterprise software for electronics.

The rise of smart connected devices has brought electronics into many organisations where previously they would outsource the design and manufacturing of electronics hardware.

The last mile of digital transformation is difficult for most companies with the low organisational capability to manage an enterprise-wide design and realisation platform

A cloud-based approach is ideal for facilitating and helping the implementation of digital transformation for this class of organisations

The implementation of an enterprise-wide platform for the design and realisation of electronics hardware is not economically viable for most companies where electronics is required but not central to their core activities

A SaaS-based business model makes digital transformation a viable proposition for large companies where electronics is required but secondary to their core competency.

Altium 365 Adoption

This is the world’s first digital platform for the design and realisation of electronics hardware and is gaining strong early adoption. As adoption of our cloud platform Altium 365 reduces churn in subscribers (with a 97% renewal rate on the cloud), the Group is on track to achieve its target of 95% recurring revenue, ex-China and developing countries by 2025.

Octopart, now tightly integrated into Altium 365, delivered a record performance for the half, growing revenue by 105% to US$22.2 million, as it benefits from tailwinds from the global electronic parts shortage. Momentum has returned to Altium’s core PCB business, which grew by 16% for the half. In addition, the adoption of Altium 365 has accelerated with over 19,700 monthly active users (up 29% since August) and over 7,700 monthly active accounts (up 54% since August).

A total of 15% of Altium seats on subscriptions have fully moved to the cloud, with a further 45% in transition. This adoption has created strong interest in our Nexar platform, our ecosystem for industry partners to access Altium 365.

Altium Announced a new interim-CFO

In recent news, Altium announced the appointment of its former CFO, Mr Richard Leon, as Interim CFO from the end of February following the intended departure of Mr Martin Ive from the Company at that time.

Mr Leon returned to Altium in October 2021 as SVP of External Affairs and Corporate Development. He is a highly experienced technology senior finance executive with over 25 years of experience leading the global finance functions of high-growth ASX companies, including Altium. Mr Leon served as Altium CFO from 2008 to 2015 and most recently served as the CFO of ASX listed company Infomedia Limited.

Given Mr Leon’s wealth of knowledge in the industry and his familiarity with Altium, he fits the bill to transition the Company into a positive growth mode at this crucial stage where Altium is amidst the pivot to a subscription model.

For the long-term, in addition to the permanent CFO role, Altium is looking to fill leadership positions for new cloud and enterprise sales teams.

The CEO role has been held by Aram Mirkazemi since 2014. Aram currently holds ~7% of the total stock outstanding.

Investment Thesis

Prior to Covid, Altium was the fastest growing EDA company in the world, with 8 consecutive years of double-digit growth and expanding margins.

Following a rough FY21, Altium achieved strong first-half performance for fiscal 2022 and is back to winning form after a pivot to the cloud with the business model and organisational changes in fiscal 2021.

altium limited group revenue fy17 to fy22

Highlights for the first half include:

  • Revenue grew by 28% to US$102 million.
  • Altium core PCB business grew by 16% to US$79 million.
  • Record revenue growth of 105% to US$22 million for Octopart, backed by tailwinds from the global electronic parts shortage.
  • Double-digit revenue growth from all regions, except China, which grew by 6% as it felt the temporary impact of regional COVID lockdowns.
  • Term-based licenses (TBL) growth was 132% and made up 30% of all new licenses sold.
  • Strong ARR growth of 43% for the half compared with the first half last year with recurring revenue now 74% of total revenue compared to 65% in the same period last year.
  • Strong adoption of Altium 365 with over 19,700 monthly active users (up 54% since August) and over 7,700 monthly active accounts (up 29% since August).
  • The reported and underlying EBITDA margin of 34.1% was up 11% over the first half of last year’s underlying margin of 30.6%.
  • Operating cash flow was up by 78% to US$33 million, and Profit After Tax up by 38% to US$23 million.
  • Earnings Per Share (EPS) up by 37% to 17.41 cents.

The record growth for Octopart for the half was underpinned by increased search activity for integrated circuits caused by the ongoing shortage in the semiconductor industry, which is expected to continue through 2022. During the half, Octopart experienced a 70% growth in weekly active users to close to 195,000 compared with the first half of fiscal 2021. Offer clicks were up by 148% compared with the first half of fiscal 2021 to almost 15 million. Growth in the Octopart API, which is being rebranded as Nexar API, bodes well for future monetisation opportunities for our cloud platform.

Altium’s core PCB business grew by 16% for half to US$79.2 million. Double-digit revenue growth was achieved in all regions except China, which felt the temporary impact of regional COVID lockdowns. Altium’s Digital Sales and Enterprise Sales are both performing strongly, with revenue from NEXUS up 16% and revenue from Altium Designer up by 15% for the first half. Altium is leveraging its Digital Sales platform to drive volume and expand reach.

Pricing levels are at an all-time high, with discounting at their lowest levels in many years (less than 10%). The rate of change from perpetual license to term based increased during the half. This is positive for our future recurring revenue. Term-based licences grew by 132% to comprise almost 30% of all new licences sold.

Altium subscription business was solid for the half, with subscriptions up 3% since 30 June 2021 and up 7% over twelve months to reach over 55,978 subscriptions. NEXUS returned to strong growth of 16% for half to US$7.0 million. NEXUS on cloud and on-premise capabilities are the focus of strategic partnerships with other software engineering firms to expand Altium’s share of the higher end of the market.

Altium 365 is in a league of its own as the world’s only electronic design and realisation platform, something Altium’s competition so far has been unable to respond to in any meaningful way. Adoption continues to accelerate, with the beginning of February seeing us hit over 19,700 monthly active users and 7,700 monthly active accounts as companies continue to embrace the platform as part of their day-to-day business operations. Subscription renewal rates amongst adopted accounts are extremely high at 97%.

Outlook

Altium’s strategic pivot to the cloud during COVID through the business model, organisational changes and non-core asset divestment has placed it in a superior position to take advantage of post-pandemic conditions and attract top-level talent.

Altium will aggressively scale enterprise sales and bring forward direct monetisation of Altium 365. The margin impact of this is already included in Altium’s flight path at 34-36% margin, with expectations that it will climb to close to 40% by FY25/26.

Altium has regained momentum and is benefiting from a smoother than expected business model transition. Altium is well-positioned to capitalise on post-pandemic market opportunities. They are confident of achieving the flight path for dominance of US$500 million, 100,000 subscribers and 95% recurring revenue, ex-China.

Altium upgraded its full-year revenue guidance to be at the high end of the range, while margin is likely to be at the low end (or thereabouts) as the Company pursues new cloud and enterprise sales roles in an increasingly competitive talent market, particularly in the US:

  • Revenue between US$213 million to US$217 million (18-20% growth)
  • Underlying EBITDA margin of 34-36%
  • ARR growth of 23-27%

Balance Sheet

Altium’s balance sheet is extremely strong. Altium has minimal debt, with its total non-current liabilities coming in at under $15 million. The firm has $195 million in cash on its balance sheet as of 1H22 to support its operations and is thus in a very healthy position.

The recurring revenues and efficiency benefits from the subscription model will improve Altium’s earnings quality by increasing margins and recurring revenue – further de-risking Altium.

While Altium’s dividends are nothing exciting, they have been consistently growing year on year. For a company still pushing for growth and significant capital reinvestment going towards R&D and growth, even smaller dividend distributions are welcome.

Altium declared $0.21 as its interim dividend for 1H22. In the past 5 years, dividends have grown by a CAGR of 12% – which is a healthy growth rate. With Altium turning a corner with its revenue and the Company improving margins, we expect full-year FY22 dividends to continue in a similar growth trajectory. This puts our estimate for the FY22 final dividend in the $0.23 range.

altium shares dividend paid and cash equivalents

Altium ASX Recommendation

Altium’s renewed business model is a hard pivot. This migration is hard and long, and thus the firm experienced a rough FY21, which was also exasperated by the pandemic’s effects. Altium has now reached an inflection point where momentum has returned to its business. Subscriptions are soaring, churn rates are low, and recurring revenue is growing. Altium has a healthy balance sheet, and its outlook suggests good growth ahead. With business momentum strong, we expect Altium’s FY22 financials to be within their guidance range – positioning Altium well for the fast-approaching earnings season. ALU shares have also pulled back significantly, and as of 18-Jul-2022, we now upgrade Altium to a “Buy“.

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