Positive Trajectory Continues For Altium

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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.

Altium 365

The broker assesses the traction in Altium 365, the new cloud platform, remains a highlight and partially mitigates the pressure on renewals as both small and large customers trim seats to save costs. Altium 365 provides subscribers with the incremental benefit of remote work and collaboration features and the pandemic could be a means to accelerate its adoption, UBS asserts.

Morgan Stanley expects lockdown measures in Beijing and increased coronavirus cases in parts of the US will have weighed on the second half while Citi is more inclined to believe the US and Europe will be the drivers of the recent downgrades to FY20 guidance. Morgan Stanley acknowledges the positive structural trends will benefit the company in the long run and notes market share gains are continuing.

Ord Minnett downgraded to Lighten from Hold in late June, and counted five downgrades to expectations since December 2019. The broker has a view that Altium is primarily a licence-driven software company and benefits from robust margins in good times but lacks visibility on revenue in difficult times.

That said, Ord Minnett currently expects a shallower trough and shorter recovery in the current cycle compared with the company's experience during the GFC. Back then the balance sheet was less sound.

Bell Potter, not one of the seven stockbrokers monitored daily on the FNArena database, agrees there is some short-term pain for long-term gain with Altium.  The broker has a Sell rating with a $30 target and believes Altium is a potential takeover target, being a top five operator in a growing global market while taking market share. There is also a partnership with Dassault and that company could be a potential suitor.

FNArena's database has two Buy, two Hold and one Sell (Ord Minnett). The consensus target is $35.80, suggesting 8.6% in upside to the last share price. Targets range from $29.50 (Ord Minnett) to $40.00 (Morgan Stanley).

See also Cash-Strapped SMEs Put Pressure On Altium on May 15, 2020.

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