Australia | Jul 15 2020
Soft activity and higher-for-longer levels of discounting are expected to beset Altium in the first quarter of FY21 but the longer-term growth trajectory remains sound.
-Long-term growth trajectory expected to offset short-term risks
-Sound balance sheet suggests cash is not a concern
-Company in better position now compared with GFC
By Eva Brocklehurst
While electronic software designer Altium ((ALU)) had a stronger end to FY20 than many had feared, several brokers are querying whether this is the end of the spate of downgrades. The company has recently acknowledged softer activity will affect its targets and, while "special pricing" ends in July, deferred payment incentives will still be offered throughout the first quarter of FY21.
Morgan Stanley points out this is the second time in almost as many weeks in which Altium has not referred to operating earnings (EBITDA) in its update and suspects that consensus EBITDA margin forecasts of around 37% may turn out to be optimistic.
Altium has flagged FY20 unaudited revenue of US$189m, consistent with its signalling at the June 22 update. Record subscriptions were reached in FY20, up 17%, which indicates to Morgan Stanley attractive pricing is supporting volumes and top-line growth.
There were over 3000 Altium Designer upgrades, a 47% increase. Promotions were a factor in stronger seat sales towards the end of the financial year, Citi points out, and this is positive for the medium to longer term.
Moreover, the strong licence sales and growth in subscriber numbers signal there is underlying demand for Altium Designer even in the current tough conditions. Still, the pandemic has prevented Altium from achieving its aspirations for US$200m in revenue.
More detail will be provided regarding the long-term impact of the pandemic on the company's strategy along with recurring revenue and pricing at the results on August 17. UBS believes this is a sign that more focus will be given to term and usage-based licences going forward, which could have short-term negative impacts but in the long term augur well for the quality of revenue.
More than US$90m on the balance sheet means cash is not a concern and UBS continues to believe the risk/return is balanced, while the long-term opportunity and growth trajectory will offset the short-term risks in FY21.