Does Altium Represent Value?

Australia | Sep 03 2021

This story features ALTIUM. For more info SHARE ANALYSIS: ALU

While Altium’s strategic importance was underlined by the recent Autodesk bid, earnings visibility has been questioned after FY21 results missed recent guidance.

-Altium released weaker than expected FY21 earnings
-While brokers reduce margin estimates, FY22 appears to have started well
-Potential to monetise the non-paying user base
-Discounted term-based licence offer to drag on ARPU
-Forecast margin estimates have been lowered

By Mark Woodruff

Having rejected a takeover offer by US technology giant Autodesk in June, valued at $5bn, Altium ((ALU)) produced FY21 results which saw its market capitalisation fall below $4bn.

Market confidence was dashed by a lack of near-term visibility after company guidance was missed, having been reiterated as recently as mid-June. Optics weren’t improved by an audit delay and a potential tax liability. However, some brokers note the underlying business is intact and see any share price weakness after the result as a buying opportunity.

The company is one of the largest providers globally of printed circuit board (PCB) design software and has an estimated market share of around 26%.

Altium develops software used for designing electronic products and has three key products including Altium Designer for the design of PCBs, which accounts for around 75% of group revenue. Then there is Nexus, a collaborative, cloud-enabled PCB design solution, while Octopart is an electronic parts search engine.

FY21 underlying earnings of $62m were weaker than expected as investment increased in Cloud and Product development, and FY22 earnings margin guidance was lowered to 34%-36% from 36%-39%.

There was also weaker top-line growth from the transition to term-based licenses. The shift from perpetual licences negatively impacted full year revenue by -3%.

Management targets for US$500m in revenues and 100,000 subscribers are unchanged though have been pushed-out to 2026 from 2025, as they may be impacted by covid.

More positively, subscriptions rose 7% year-on-year and China rebounded strongly with 47% growth in the second half bringing full year growth to 11%. Nexus returned to growth in the second half and Octopart’s revenue accelerated 63%, up from 19% in the first half.

Addressable market

While Altium has a long track record of profitability, Jarden sees limits to its long-term growth compared with peers.

The broker assesses the company's core PCB market size is $1.5bn and adoption is near full penetration. It’s thought strong share can be captured in the middle-market segment though the adoption of its high-end product, Nexus, will be challenged by strong competitors in Cadence and Mentor Graphics.

The broker reiterates its Underweight rating and awaits further evidence of take-up of Nexus and a return to an improvement in the margin expansion profile. 

Targets

To achieve the company’s 2026 aspirational revenue target of $500m and 100,000 subscribers, it needs to achieve record net subscriptions. Jarden believes acquisitions are required to achieve this, which may lead to a risk of overpaying to hit such targets.

Speaking of targets, the broker, not one of the seven stockbrokers monitored daily on the FNArena database, increases its 12 month target price to $27.00 from $23.00. This is partly driven by a lower forecast Australian dollar rate and a lower assumption for weighted average cost of capital.

While pushing back targets is never positive, management did highlight that it was the only PCB vendor to grow market share through covid. Essentially covid has “cost” the company a year in its ambition towards “industry transformation”. This is not considered detrimental by Shaw and Partners and the rejected Autodesk offer has built further confidence.

The broker, also not one of the seven, reiterates its Buy rating and reduces its price target to $37.90 from $38.50. 

Macquarie forecasts Altium’s revenues will reach the lower-end of the company’s previously provided aspiration range in FY26, and to reach the US$500m revenue target only by FY27.

The outlook

According to management, FY22 appears to have started well, with “July and August really strong, with business coming back to a normal state”.

The revenue guidance for FY22 was slightly higher than Bell Potter’s forecast while the earnings guidance was in-line implying a lower earnings margin than was expected. As a result, the analyst estimates there has been a negative impact from the shift to term-based licenses.

The broker modestly downgrades earnings and profit forecasts by around -3% in both FY22 and FY23, driven by reductions in margin estimates which have more than offset increases in forecast revenue. The broker, not one of the seven stockbrokers monitored daily on the FNArena database, maintains its Hold rating and reduces its price target to $32.50 from $35.00.

Shaw notes a second half recovery in the core PCB business and points out FY22 has started well, with Altium 365 adoption continuing and record growth for Octopart. 

It’s believed the company is benefiting from a cyclical recovery as evidenced by increased Designer seats sold in the second half and increasing Designer software license revenue. Management noted this was driven by the US and Europe, Middle East and Africa (EMEA), and much less discounting.

Octopart was a standout in the broker’s view, with growth buoyed by shortages in the semiconductor industry increasing search demand. Management expects this to continue in FY22.

The company withdrew its revenue and earnings guidance beyond FY22, when historically forecasts have been provided out to FY25. Macquarie dislikes this approach, decreases its rating to Underperform from Neutral and reduces its target price to $27.10 from $30.00. It’s felt market confidence will be reduced around the company’s lack of visibility on the longer-term outlook. 

While conceding revenues generated by term-based licenses should be stickier than perpetual licenses, the analyst points out the company accelerated the transition by offering -50% discounts (for up to three years) on the term-based licences during the period from late April to 18 June 2021.

As a result, the breakeven point where term-based licenses start generating more cumulative income versus perpetual has increased from an average four years up to 8-11 years. The broker estimates this will put a drag on average revenue per user (ARPU) over the coming three years. It's thought this will make it even more difficult to achieve the 2026 aspirational targets mentioned above.

Strategy 

Citi feels the underlying business is unbroken and recommends buying into any share price weakness after the FY21 result. The monetisation of the electronics supply chain via the Altium 365 and Nexar platform are a key source of upside over the medium to long-term, suggests Citi.

However, partnerships with industry stakeholders, which could potentially include direct competitors, are the key to the successful monetisation of the platform strategy, in the analyst’s view.

The broker upgrades its rating to Buy from Neutral and believes FY22 revenue guidance of 16% to 20% is solid when considering the headwind from the transition away from Perpetual licenses.

The analyst forecasts 19% growth in FY22, underpinned by strong growth in China, the semiconductor shortage boosting Octopart and price increases.

In addition, as management is potentially moving to a ‘named user’ model, there’s potential to monetise the non-paying user base, which Citi sees as five times the current subscription pool.

The broker lowers its target price to $35.40 from $37.60 on higher-than-expected costs in FY21 and investment in Enterprise sales staff as the company looks to increase penetration of the high-end PCB market.

Meanwhile, Credit Suisse lowers its rating to Neutral from Outperform and reduces its target price to $32.00 from $42.00, after reducing underlying earnings estimates. 

However, as the only high quality standalone PCB design software business, the company’s strategic importance has been further reinforced by the Autodesk bid, suggests the broker.

FNArena’s database has three broker ratings with one Buy, one Hold and one Sell rating and a consensus target price of $31.50, which signals 2.4% upside to the last share price.

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