Altium has once again delivered an outstanding half-year result which appears to have exceeded consensus forecasts. The stock has gained more than 20% on the result to trade around the $33 level. Given this stock traded at 8c in June 2011, it is now a ~400-bagger in less than 8 years. To be clear, we bought a little later, in 2015, so haven't experienced all of this rally!
Despite cycling a very strong pcp, the numbers have continued to demonstrate very strong growth, with revenue up 24%, for 57% EPS growth, and Cash flow strong, up 82% for the half.
The real highlight was the EBITDA margin, which despite significant investment back into the company, has hit 36%, exhibiting the company’s strong operating leverage. If the company can hit 100K users, CEO, Aram Mirkazemi, believes the company's EBITDA margin will be at least 40%, and could be ‘significantly higher’.
Key takeouts from the company commentary
Aram spent more time discussing China than normal, saying the company has ‘broken through a barrier in China’ – if this traction continues he believes China can get to the same user level as EMEA or the America’s and potentially higher. China has long been an issue for the business due to high levels of piracy. It appears they are having success pushing companies who have been illegally using the companies software over a paywall. He said they haven’t had any issues arising from the trade war.
The company delivered very strong sales numbers for the half. Historically 1H sales have made up around 42% of the full year and the company appears to be confident with overall sales to have a seasonality skew of 45 / 55% (1H vs 2H).
The renewal cycle was disappointing and the only blemish I can see in the result. The company has said they dropped the ball in this area but have put in place procedures to ensure this will be an anomaly.
Octopart has grown 80% in the half despite growing 56% last FY. It is becoming the leading package in the sector.
Altium 365 holds the greatest long-term promise to the company. All roads in the group end with the cloud-based solution designed to revolutionise the electronics industry globally. The feedback is very positive and the company has been receiving inbound calls from players right across the electronics industry. The package is due for full release later this calendar year.
Aram is looking past the $200m 2020 revenue target he set in 2012 which now is within easy reach and is looking forward to 2025. He has said they will use the exact same recipe to get to the subscriber target of 100K users by 2025. The new news announced with this presentation is that the company has set a 2025 revenue target of $500m he ‘has absolutely no doubt we will be able to reach this goal’
One area remains a challenge – attracting world-class talent on a much larger scale. For the next phase of growth, talent is the number one priority.
Widely admired but not widely held
Ever since we’ve owned Altium the one thing I’ve really noticed is how divisive the stock it is amongst institutional investors. This is a $3.5bn company yet less than 4% of the register are Australian active managers. Although it feels like many have admired its efforts from the sidelines few can bring themselves to pay the high earnings multiple the company has consistently traded on.
This goes back to the ongoing debate we’ve all been reading about – what price do you pay for growth. My view from here is that if Altium hit their 2025 newly installed revenue target you will make very strong returns from this point. On the way however it will continue to see the volatility that’s surrounded it for the last five years.
Look through the share price volatility and focus on the earnings trajectory is my advice; it's served us well to date.
However, without wanting to be accused of fence-sitting, when predicting what a result will do to a share price during earnings season, it's not about is it good / bad / indifferent – it’s all about where did the numbers come in vs the market's expectations.
When considering consensus forecasts this appears to be a reasonable beat on virtually every number. Although it is complicated by the company reporting in USD vs AUD consensus. Looking at two key lines, revenue and EBITDA, using a 72c rate and applying the 45% seasonality skew:
- Revenue was projected to come in around US$77m and they have delivered US$78m.
- EBITDA was projected at US$27m and came in at US$28.3m thanks to those better than expected margins.
The shorts are not game to take this stock on, the short position sits at a historical low of just 0.1% so we shouldn’t see any covering. The stock has been bid up aggressively into the result rising 35% from its low in December indicating elevated expectations. I expect to see reasonable broker upgrades which should lead to a positive share price reaction. This could see some sellers emerge however who are happy to trim into the recent strength.
Below is the best summary from the deck:
Comments
Stan Tan
How do you have the conviction to hold ALU when it is trading at such insane multiples? Based on a 35% EBITDA margin. At 200m sales, it is trading at 61x P/EBITDA. At 500m sales (assuming they hit their target by 2025), it is trading at 24x P/EBITDA. Even Google doesn't trade at such rich valuations. Google's P/EBITDA is only 17-18x.
Martin Ive
Stan Tan - note that those sales numbers are in US$
Hayden Aspinall
If my memory serves, the ten years preceding that 8c low, were not so good. Altium has been around since last century, and many of these early investors may have sold at a loss. So, timing and patience are virtues in investing! I like PainChek (PCK), another SAAS business model (different industry) as a potential rare-as-hens'-teeth ASX micro-cap to unicorn.
Stan Tan
@Martin Ive, even if you convert to USD, at 200m sales, P/EBITDA is still 43 and at 500m sales, P/EBITDA is 17 and not forgetting when they hit 500m in sales, that is 6 years out!
Duncan Owen
Stan, you talk about Google like it's an expensive tech stock. It's one of the cheaper FAANG stocks. If you want expensive look at uber growth US stocks like TTD, TWLO, AYX, NTNX etc. Then once you've bugged out on their p/s ratios, take a look at their growth rates and gross margins. There is plenty of money to be made in expensive stocks.
Ngaire
Excellent Ben. Thank you for the summary on this stock.
Robert Charles Claxton
I suggest that those who lack conviction in Altium should take the time to listen to Arram's last 3 updates. I have and holding Altium makes perfect sense - they have a plan, consistently stick to it, are self-critical and dare I say, have consistently met high performance hurdles. Seems a stand out to me. The drop in December proved a marvellous short term buying opportunity. Naysayers wrong again I'm afraid!