Equities

Altium Limited (ALU) is engaged in the development and sale of computer software for the design of electronic products. The business provides electronic design software, or circuit board design.

Software is used to design printed circuit boards (PCBs), the green plastic boards that control everything from computers, calculators, phones and so on.

ALU is based in Australia with sales operations in the following regions: Americas; Europe, Middle East and Africa; Greater China; and Asia Pacific.

The business generates significant cash-flow, and expense all R&D (some tech companies capitalise). They are debt free and have strong management with an alignment of interests through significant shareholdings.

Divisionally

Nearly 60% of revenue is reoccurring. Importantly, 53% of revenue is from subscriptions with nearly 40,000 engineers subscribing to their platform which provides a continuous stream of content and new technology improvements.

ALTIUM DESIGNER is a web-based portal helping professional electronics designers connect with people and devices. ALU’s customers can browse and download content, add new device support to Altium Designer installation, and extend add-ons and feature updates.

TASKING is an embedded software development tool for use across industry-standard computer platforms. Tasking products include: CrossCompilers; Debuggers; Integrated Development Environment (IDE); and Real-Time Operating.

SUBSCRIPTION allows customer’s organisation to plug into the continuous stream of content, knowledge, improvements, and technologies available in Altium’s ecosystem.

1H19 Result

Altium delivered a result significantly ahead of expectations which has seen the share price appreciate ~20%. All divisions experienced double-digit growth.

• Revenue growth: 24%

• EBITDA margin: 36.3% (expanding with additional subscribers = economic moat)

• Net Profit growth: 58% (profit growth > revenue = scalable business)

• Subscribers growth: 9% (to 39,179)

• EPS growth: 57% Operating leverage was a highlight of the result, with revenue up $15m whilst operating expense increased only $5m.

Guidance

Altium does not provide specific guidance but instead provides “aspirational” targets. The business is confident of achieving its 2020 targets of US$200 million revenue and commits to an EBITDA margin of 35% or better.

The next target is in FY25, when Altium expect to have over 100,000 subscribers and revenue of $500m. The CEO, Aram Mirkazemi, has said he ‘has absolutely no doubt we will be able to reach this goal’. Summary of key points:

• The proliferation of electronics & smart connected devices

• 2020 targets of US$200 million revenue and commits to an EBITDA margin of 35% or better

• 2025 target of 100,000 Altium Designer subscribers & revenue of $500m

• Continue to pursue partnership and M&A opportunities

• Long-term vision of creating a product design platform is centered around electronics

Value and Growth

Consensus earnings per share (EPS) forecasts are anticipated to grow at around 30% p.a. compounding for the foreseeable future. The company has historically delivered on their ‘aspirational’ targets, both in terms of earnings and margins. The margin is of particular interest to us, given it demonstrates operating leverage, or an economic moat (pricing power). Management has indicated that if they can achieve their target of 100,000 subscribers by 2025, margins should expand to ~40%.

Numbers

Altium ticks all the boxes of an above average quality business, such as:

• Sustainable structural competitive advantage or “economic moat”

• Strong and constant free cash flow generation

• Honest and capable management

• High returns on capital

• Financial strength

Clearly the fundamentals of this business are appealing. The question investors ask is ‘at what price?’ On a P/E basis, the multiple is high although the drivers are there to achieve significant earnings growth in future.




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