Shares in Value Logo
Product Review Img Vertical

Date : 25/08/2022

Altium Limited

ASX :

ALU

Market Cap : $4.71 Billion

Dividend Per Share : $0.47

Dividend Yield : 1.31 %

Buy

52 Week Range : $24.32 - $45.30

Share Price : $36.63

Altium's business is once again on the assendency. There is a strong growth runway ahead. We retain a 'Buy'.

Company Analysis

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

Altium is a market leader in this space, and they have successfully pivoted to a new subscription-based business model that has transformed the company and is bringing in recurring revenues and increasing retention of its customers.

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 had come off, and following a 21% pull back, we upgraded Altium from a Sell to a Buy in July at a share price of $29.07 as we saw momentum return to its business. We believed that ALU shares are once again worth considering as there is significant upside potential with the business model flourishing and as markets stabilise from the current macroeconomic turmoil.

The FY22 results have beaten market expectations, and the share price is up over 20% in the past two days. We see tailwinds for the business that should support the growth run that Altium is on.

 


Source: Tradingview.com

Altium operates two unique business units, which are complementary and synergistic

Following the successful pivot to the new business model, Altium now has 2 major product segments – Design Software (BSD) and Cloud Platform (Altium 365 + Nexar). These are two engines for growth that are dominating and transforming the industry. The business model gives rise to flywheels to increase the rate of growth: cloud adoption, ecosystem adoption, design tools adoption and design platform adoption.

The design software or BSD is Altium’s software business which provides PCB design solutions and indirectly enhances the value of Altium 365 through the subscriptions associated with PCB design tools. Whereas the cloud platform provides professionals and industry partners access to the vast ecosystem of electronic design and manufacturing users and customers. Nexar includes Octopart and manufacturing units Altimade and Upverter.

Nexar is essentially an ecosystem for the direct monetisation of Altium 365, which was set up to enable industry partners to benefit from Altium’s growing community of electronic engineers, and is rapidly gaining momentum.

Altium’s business model has moved beyond a single flywheel that powered its market leadership journey in PCB design tools from a base of transactional sales and annual software releases to four flywheels for dominance of PCB design and transformation of electronics manufacturing.

A deep dive into Altium’s business model can be viewed in our earlier stock coverage by clicking here.

Altium’s Strategy has positioned the firm to Dominate the Industry

Internet of Things [IOT] is making the fabric of the world around us smarter and more responsive, merging the digital and physical universes.

IoT comprises billions of devices, each connected to the internet and through it to other devices. Each device has a printed circuit board that powers its electronic functionality and each PCB not only needs to be designed using a tool such as Altium Designer, but it needs to be manufactured through a cumbersome process that involves the purchase of a custom-fabricated bareboard and individual components, shipping them to a board assembly company and the building there of the final PCB. Today this process is managed manually and with the extensive use of spreadsheets, site visits and emails.

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

Altium is pursuing a strategy of dominance and industry transformation to achieve its vision. Each element of the strategy supports the other. Dominance in the PCB design software business will increase uptake of the Cloud Platform.

Equally, as the user base grows for Altium365, customers will increase their usage and reliance on Altium Designer. Altium will bring the engineering business onto its cloud platform Altium 365 to connect design to the component supply chain and the board manufacturing industry. Four adoption programs are key to Altium’s strategy:

  • Adoption of Design Tools through a digital sales platform for Altium Designer
  • Adoption of the Design Platform through professional sales of Nexus
  • Adoption of Cloud collaboration through Altium 365
  • Adoption of the Cloud Ecosystem through Nexar

During the fiscal year 2023, Altium will continue to extend its digital sales platform and stores to mainstream customers, and utilise strategic partnerships to expand into the high-end market.

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
  • Additional direct monetisation opportunities through premium services and apps

Electronics are at the very heart of the software engineering ecosystem. They are the bridge connecting the multiple engineering disciplines, from electronic CAD to mechanical CAD to product lifecycle management to computer-aided engineering. The unique position of Altium in the engineering ecosystem as an independent and increasingly dominant electronics design tool provider imparts confidence to the Group that its strategy will achieve the goals set out for FY26.

Company Updates

This new business model is already delivering stunning performances. In our earlier report, we covered the strong operational metrics Altium showed in 1H22. For full year FY22, it has been no different. Metrics continue to trend upwards, and it has beaten consensus estimates.

Network Effects drives Altium 365 Adoption

The world’s first digital platform for designing and realising electronics hardware is actively used by thousands of electronics companies. The adoption of Altium 365 has accelerated with almost 24,700 monthly active users (up from 19,700 since February 2022) and over 9,300 monthly active accounts (up from 7,700 in February 2022. A total of 23% of Altium seats on subscriptions have moved to the cloud, with a further 30% in transition.

This adoption has created strong interest in the Nexar platform, the Altium ecosystem, for industry partners to access Altium 365.


Source: Altium

As Monthly Active Users reached a high of 24,687 at the end of July 2022 with a quarterly CAGR of 31%, Monthly Active Accounts reached a high of 9,301 at the end of July 2022 with a quarterly CAGR of 24%. The growth of the User to Account Ratio from 1.67 to 2.55 reflects the increasing impact of the “network effect” of Altium 365, drawing users from outside the traditional userbase (such as mechanical engineers, procurement managers, etc.).

Churn Rates continue to be Low despite the Pivot

  • 88.9% renewal rate for developed countries (FY21 84.4%)
  • 44.7% renewal rate for developing countries (FY21 40.8%)
  • 96.4% renewal rate for seats on cloud (FY21 98.8%)

While new seats grew in developed countries, upgrades and re-joins were down due discontinuation of promotional discounting. While this temporarily drags the metric lower, it separates the high-quality clients and makes Altium’s revenues steadier and more predictable.

To sum up, Altium has seen a material increase in the adoption of its software and low churn rates. These two all-important metrics show that Altium is a high-quality business whose strategy and business model pivot is working positively and positioning the company in a much stronger position.

Investment Thesis

These strong operational KPIs have flowed through into strong financial performance. Altium’s revenue growth had slowed during the pandemic as their clients had stopped production due to the closure of PCB manufacturing facilities. However, the reopening has been grand, and the semiconductor shortage means that demand is now more than ever to produce more chips, for which PCBs are the central element.

FY22 Performance Beat Market Expectations

Despite already leading the EDA market, Altium continues to be the fastest-growing EDA group in the world. Revenue has increased at a compound annual growth rate of 15.3% since the fiscal year 2014, with double-digit revenue increases in every year except the fiscal year 2021.

The FY22 financial performance beat market consensus and the ALU share price is surging as a result.

  • Strong revenue growth of 23% to US$220.8 million.
  • Strong underlying EBITDA margin of 36.7% (up from 34.3%).
  • Recurring revenue of 75% of total revenue, with 31% growth in ARR.
  • Double-digit revenue growth for Altium PCB business of 12% to US$169.3 million.
  • Record revenue growth of 85% for Octopart to US$50.0 million.
  • Acceleration of term-based licenses; up by 63% (33% of all new licenses).
  • Strong growth in Profit After Tax of 57% to US$55.5 million.
  • Earnings Per Share (EPS) grew by 57% to US$42.2 cents.
  • Final dividend of A$26 cents (A$47 cents for the full year, up 18%).


Source: Altium

The core PCB business grew by 12% for the year to US$169.3 million. Double-digit revenue growth was achieved in all reporting regions except China, which continued to suffer from the disruptive impact of COVID-19 lockdowns.

Digital Sales and Enterprise Sales performed solidly, with revenue from Nexus up 38% and revenue from Altium Designer up by 10% for the year. Altium is using its Digital Sales platform to drive volume and to expand reach. List price levels have been increased, and discounts are at their lowest levels in many years (less than 10%). The realised price for Altium Designer seats sold was 22% higher than in the prior year.

The rate of change from perpetual license to term-based increased during the year, which is positive for future recurring revenue. Term-based licenses grew by 52%, comprising a third of all new licenses sold. Altium’s subscription business was solid for the year, with subscriptions up 4.6% since 30 June 2021 to over 56,900.

Nexus (which includes Concord Pro) returned to strong growth of 38% for the year to US$20.3 million. Nexus on cloud and on-premises capabilities are the focus of strategic partnerships with other software engineering firms to expand Altium’s share of the higher end of the market.

Nexar, driven by Octopart, delivered a record performance for the year, growing revenue by 85% to US$50.0 million. The record growth for Octopart for the year was underpinned by increased search activity for integrated circuits caused by the ongoing shortage in the semiconductor industry.

During the year, one of the leading Nexar customers restructured its contract with Octopart. Subsequently, Octopart introduced a new offer table placement dynamic, fundamentally altering the go-to-market approach for the Altium search business and leading to higher realised costs per click (CPCs).

Growth in the Nexar API, which subsumed the Octopart API, is being supported by a new dedicated sales team that continues to evolve the business model. Today, API subscription prices are closely linked to the value created for a wide range of enterprise customers. While API revenue is not yet material, the growth rates hold promise to become an extremely sticky component of Altium search revenue.


Source: Altium

Altium achieved an underlying EBITDA margin of 36.7%, up from 34.3% in the prior year. Altium reported EBITDA was US$79.8 million, and reported EBITDA margin was 36.2%. After excluding the US$1.3m costs related to Altium’s support of its employees in Ukraine, the underlying EBITDA margin was 36.7%. This is a significant increase on the underlying EBITDA margin of 34.3% in the prior year.

Profit before tax and profit after tax increased by 42.4% and 57.3%, respectively. Operating expenses grew by 17.8% on an underlying basis to US$139.7 million. The main contributors to the increased operating expenses compared to the prior year were an increase in headcount to support R&D, inflation adjustments, and other administrative expenses.

Operating cash flow was up 17.4% to US$72.5 million compared to the prior year. This was due to increased cash receipts from customers and decreased net cash taxes paid. EPS from continuing operations increased by 57.0% to 42.23 cents reflecting strong revenue growth coupled with prudent management of operating expenses.

No Debt on Balance Sheet

Altium’s balance sheet deserves mention. Despite the pivot in the business model and navigating a period of uncertainty, Altium has zero debt. Additionally, the company holds $200 million in cash.

Altium’s cashflows are also of high quality. They have maintained a free cash flow conversion ratio of 32.2%, which is on the high side. Free cash flow for FY22 was 71m and increased significantly on FY21 resulting in an increase in cash for the period.

This strong balance sheet and high cash flow generation capacity have resulted in increased dividends for Altium shareholders even though the company continues to invest in R&D and growth.


Source: Altium

Following a flat dividend growth in FY21, Altium is now back to dividend growth with a 17.5% increase over last year.

Outlook

In addition to delivering results above consensus, another reason for the 19% surge in Altium shares was the bullish guidance that the company has issued. For FY23, Altium expects:

  • Total Revenue between US$255 million to US$265 million (15%-20% growth)
  • US$195 million to US$200 million for Electronic Design Software Business (15%-18% growth)
  • US$60 million to US$65 million for Engineering Cloud Platform Business (20%-30% growth)
  • Underlying EBITDA margin of 35%-37%.

Altium’s outlook for the long term has also been bolstered. Altium’s management reaffirmed FY26 targets: revenue of US$500m and underlying earnings margins of 38-40%. Given the outcome of Altium’s pivot and its customers’ uptake, these numbers can go higher if Altium manages to hit its operational KPI of having 100,000 subscribers by 2026.

Given the growth ahead, we believe Altium shares are trading at desirable levels. ALU shares are currently trading at a 50x P/E for FY23, and this multiple drops to just 32x P/E for FY25. This valuation range prices Altium on the cheaper side.

On a fiscal basis, the last time ALU shares were trading at a P/E less than 50x was back in FY17 – a few years before the pandemic and long before the ascendency in tech shares began.

Two Massive Tailwinds for Altium

Driving this guidance is a very strong industry tailwind for Altium. Electronics play a key role in driving competitive edge and speed in manufacturing modern products. This is resulting in many companies bringing electronics in-house. Altium’s software and cloud platform enable the proliferation of electronics by designing printed circuit boards, and the sourcing of electronic parts are the two fundamental processes in creating electronics hardware.

The geopolitical situation between China and the USA is also boosting the prospects for Altium. It is giving rise to the formation of two independent and competing ecosystems for electronics. As the USA and the West set up semiconductors and other electronics manufacturing in their respective countries and reduce their reliance on China, this will increase the demand for Altium’s software.

Altium’s positioning means it can take advantage of these two tailwinds. Altium 365 is increasing the attractiveness of Altium’s PCB design software resulting in greater demand and competitive advantage. The Altium design platform with data and process management capabilities is gaining mainstream adoption resulting in higher revenue per seat. Octopart’s rising significance in the industry is expanding its potential for revenue generation.

Three Reasons why Altium is a fantastic Growth Stock

  • Altium’s Business Model Shift – this is a transformative strategy that the company has completed. Subscriptions are soaring, churn rates are low, and recurring revenue is growing.
  • The Two Tailwinds driving Growth – Altium’s product is #1 in the industry. Despite the market leadership, they continue to be the fastest growing, meaning no competitor can catch up. This positions Altium to reap the benefits from the two massive tailwinds driving electronics manufacturing.
  • Strong Profitability & cash flow Generation + Zero Debt – This is a highly desirable mix of financial metrics for long-term investors for mainstream reasons, that is, shareholder value creation.

Recommendation

Altium has delivered market-beating FY22 results. The company’s hard pivot of its business model has transformed it and given it significant momentum, much to the market’s surprise. All of Altium’s operational and financial metrics are trending upwards, and the company continues to scale with the highest growth rates in the industry. The outlook is positive, with industry tailwinds boosting prospects. Altium has even issued bullish guidance for FY22. Strong cash flow generation and zero debt is supporting Altium’s growth activities. The current valuation multiples prices ALU shares on the cheaper side relative to expected earnings. We reiterate our ‘Buy‘ recommendation.

Scroll to Top

Login

By submitting this form, I agree to the TERMS AND CONDITIONS and PRIVATE POLICY