Cash-Strapped SMEs Put Pressure On Altium

Australia | May 15 2020

Increasing stress on small businesses has made customer acquisition and subscriber growth difficult for software designer Altium and achieving FY20 revenue targets now appears unlikely.

-Low probability for achieving FY20 revenue target of US$200m
-Momentum in China still accelerating
-A successful launch of Altium365 may mitigate downward risks


By Eva Brocklehurst

Software designer Altium ((ALU)) has punctured expectations it was withstanding the pandemic-related restrictions, as the North American and European businesses have revealed more stress than previously expected.

This stems from small business customers preserving their cash, which is affecting the conversion of sales in the seasonally stronger months of May and June. The company has noted heightened signs of small businesses "in distress". This has made doing business with new accounts more challenging.

Ord Minnett is one broker that does not assume Designer licence sales will bounce back in July and reduces forecasts for FY21 and FY20 to operating earnings (EBITDA) by -7% and -11% respectively.

While Altium has retained prior subscriber guidance of 50,000 it now describes a low probability to achieving its FY20 revenue target of US$200m. Online sales functions and discounted pricing have been pushed to the fore.

The company has launched extended payment terms and discounted pricing to attract volumes although, Goldman Sachs points out this is unlikely to be material enough to damage the balance sheet.  Moreover, UBS asserts a continuation of current momentum would indicate the company is on track to achieve its aspirational revenue target of US$500m in FY25, with 100,000 subscribers.

This view is underpinned by an accelerating presence in China and a more automated sales and subscription platform that drives lower churn. The Nexus business is still closing deals and the pipeline remains firm for the remainder of the fourth quarter.

Also, Tasking has performed well, Goldman Sachs notes, and should be supported by the re-opening of car manufacturing in Europe, while the Octopart website has experienced steady traffic.

The commercialisation of the relationship with Dassault is considered a material catalyst for the short term and, all up, Morgan Stanley believes any short-term decline in the stock is a buying opportunity, retaining an Overweight rating.

UBS highlights a risk that deeper levels of discounting will be required to stimulate demand, although the risk may be partially mitigated through a successful launch of Altium 365, the new cloud platform.

This provides the incremental benefit of remote work and collaboration, which is a the positive. UBS envisages a gradual reduction in discounting through to FY22 and downgrades to Neutral from Buy, given more balanced risk/return metrics.

Goldman Sachs believes the market has already anticipated the risks and would not expect material revisions to FY20 guidance at this stage. However, FY21 revenue forecasts could be under review, although the broker believes 18% growth is achievable albeit likely to be weighted to the second half. Goldman Sachs, not one of the seven stockbrokers monitored daily on the FNArena database, has a $34.55 target with a Neutral rating.

Bell Potter, also not one of the seven, makes several changes to its valuation to allow for a downgrade to earnings estimates and the withdrawal, effectively, of the aspirational revenue target for FY20, retaining a Hold rating with a $35.00 target. The database has two Buy and two Hold ratings. The consensus target is $36.43, suggesting 4.6% upside to the last share price.

See also, Long-Term Opportunity In Altium on March 18, 2020.

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