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Edited Transcript of ALU.AX earnings conference call or presentation 17-Feb-20 6:00am GMT – Yahoo Finance


CHATSWOOD Feb 18, 2020 (Thomson StreetEvents) — Edited Transcript of Altium Ltd earnings conference call or presentation Monday, February 17, 2020 at 6:00:00am GMT

* Joseph G. Bedewi

* Ashwini Z. Chandra

* Stuart B. Turner

Ladies and gentlemen, thank you for standing by, and welcome to the half year results investor call. (Operator Instructions) Please be advised that today’s conference is being recorded.

I would now like to hand the conference over to your first speaker today, Kim Besharati. Thank you. Please go ahead.

Kim Besharati, Altium Limited – Company Secretary and VP of IR & Corporate Affairs [2]

Hello, everyone, and welcome to Altium’s Investor Call. It’s great to be back in Australia and to share with you details of Altium’s strong financial performance for the first half of fiscal 2020. I’m Kim Besharati, VP, Investor Relations. And joining me on the call today is our CEO, Aram Mirkazemi; our CFO, Joe Bedewi; and Senior VP, Finance, Martin Ive.

I’d like to remind participants that today’s call is being recorded.

Today, Altium released to the ASX the company’s half year financial results and investor presentation, which we will discuss with investors over the next few days. During this call, Aram and Joe will elaborate on Altium’s performance for the first half of fiscal 2020. We will also share details of our progress towards our 2025 goal of PCB market dominance and electronic industry transformation.

Please note, as a reminder, today’s call and the Q&A section at the end may include forward-looking statements regarding Altium products, its future operations or financial performance. Any such statements are based on current assumptions by Altium’s management and subject to risks and uncertainties that may cause actual events and results to differ materially.

Please note that all numbers are in U.S. dollars unless specified otherwise.

I will now pass over to Aram.

Thanks, Kim, and good afternoon, everyone. Thank you for joining us on this call.

Financial year 2020 is a momentous year for Altium. It’s the culmination of 3 years of rapid organic growth. It’s a transition year for Altium that will usher in a new horizon with great potentiality.

At the halfway mark, Altium is standing tall. I’m pleased to report that Altium has delivered a strong performance for the first half with a revenue growth of 19% and an EBITDA margin of 37%, excluding the positive impact of the new leasing standard. This strong performance is particularly pleasing given our outstanding first half performance in fiscal 2019.

From my perspective, Altium is well on its way to transition from the pursuit of market leadership to that of market dominance. Our strong growth in new Altium Designer seats of 19% and record growth of 16% in our subscription base of nearly 47,000 subscribers, put us well into our climb towards 100,000 subscribers. This gives me confidence that we will achieve our target of 50,000 subscribers this year.

One thing that I’m most pleased about in the first half is the release of Altium Designer 20. Altium Designer 20 is one of the most powerful releases that Altium has ever produced. Altium Designer 20 is the best in class in almost every aspect of PCB design software. This is quite an achievement and reflects many years of hard work by our software engineers to deliver PCB design tools, which I believe, is a game changer for the industry.

Equally as significant as the release of Altium Designer 20 is the rollout of our new cloud platform, Altium 365. This marks a pivotal movement in the company’s history. While early days, the initial feedback on Altium 365 is extremely positive. We are focused on driving adoption for Altium 365 and making hard yards to bring the first cohort of customers onto this platform. In a short period of 3 months and while it’s still in limited availability, over 90 companies have moved onto Altium 365 and are hosting their component libraries on this platform. In addition, we have made available an embeddable version of Altium 365 that can be hosted on any website. This provides a capability to view PCB designs with the stunning visualization and agile collaboration capability. This has been deployed on a few popular websites with great effect.

I believe that this has the potential to gain widespread adoption very quickly. We are planning to move to general availability in April for all of our current subscribers. This will enhance the benefit of our subscription and add a whole new dimension of value to our subscribers.

Another significant development is the success of our NEXUS product in the first half. NEXUS is beginning to show early signs of market momentum as we move beyond initial large reference account wins. NEXUS delivered an exceptional performance over the half, growing by 197% to reach revenue of over $7 million. Despite the positive signs and clear potential, we will not be able to sustain this rate of growth as we are still working to optimize the efficiency of the selling motion, which is significantly below our transactional selling.

Octopart was our only business that underperformed during the half. As we informed the market at our Tech Day event in December, Octopart has been negatively impacted by reduced volume in the parts distribution industry. The trade war with China resulted in most companies in the supply chain stocking up on parts, fearing dramatic price increases. The excess inventory has resulted in lower click-through traffic for Octopart. Octopart’s revenue is highly sensitive to distribution businesses and sales of new components. A slowdown in the supply chain and, in particular, frontline distributors will flow through to Octopart through a reduction in their advertising budget, reducing Octopart’s ability to maintain high cost per click.

Octopart’s traffic also was temporarily impacted by changes to the Google search algorithm during the half. Altium has since rectified the problem by making a series of site changes and SEO improvement that has returned the organic traffic volume back up to levels comparable to prior period.

Early in the second half, Octopart is seeing positive momentum return to the market as inventories depleted and new component manufacturing lines are being spun off by several partners. This has resulted in new records for the month of January in traffic and clicks to distributors. Despite this positive improvement, we maintain a single-digit growth rate for Octopart for the remainder of the financial year.

Our partnership with Dassault Systemes is reaching a climactic point. I shared with many of you at Technology Day in December a video from Dassault Systemes speaking about the significance that they place on electronics and their partnership with Altium. In addition to Altium bringing electronics natively onto the Dassault Systemes’ 3DEXPERIENCE platform, Altium believes that it can be the most effective conduit for Dassault Systemes to introduce their 3DEXPERIENCE platform to the electronics industry. This will provide significant TAM expansion for both companies. We are intensely engaged in developing the right commercial model for this unique partnership to bring about a potentially disruptive outcome to this industry.

However, working as 1 while being 2 separate companies is a formidable challenge. Having reached the summit of Everest, we are well into the descent. But I want to remind everyone that most fatalities on Everest occur on the descent. In this case, the ascent was about technology and product integration, while the descent is about business and contract negotiation.

I would now like to spend a few minutes talking about the evolution of our “Line and Length” strategy, which we now refer to as the Rule of 50. Altium achieved a score of 56 on the Rule of 50 in the first half. This is based on 19% revenue growth and 37% EBITDA margin excluding the positive impact of the new leasing standards. The Rule of 50 allows us to aggressively invest in the strategic areas in the next few years. In the first half, we increased our investment to a total of $6.5 million in areas that relate to future growth. These include: one, Altium 365 and cloud adoption; two, brand advertising; three, Dassault Systemes 3DEXPERIENCE platform; four, Octopart parts data platform. We have added a new slide to our investor presentation that describes our investments under the Rule of 50.

There is one more thing that I would like to speak about, and that relates to our people. Something that is as significant as the pursuit of our brand vision is the commitment to create a unique employee experience at Altium. The transformative journey requires an extraordinary team and a team that is not only hard performing but is inspired, engaged and highly motivated.

To this end, we have established what we refer to as the institution of Centurions. Centurions are a group of employees from around the world who have earned the responsibility to bring about a unique employee experience at Altium. These employees are already leaders in their domains and have taken this responsibility over and above their core duties. We are still going through the early stages of this initiative, but I believe that in time, this will create a powerful force that is on par with other key assets in Altium.

Finally, I would like to say a few words about China. China continued its powerful performance in the first half, delivering 27% growth in revenue. China has been one of our best performers in recent times. There is no doubt that China will play an important role in our drive to our 2025 target of $500 million in revenue. However, the unfolding developments associated with coronavirus still bring risk and uncertainty in the shorter term and particularly the second half. Joe will speak further to the measures we are taking in China as a result of this. As I look ahead to the remainder of the second half with uncertainties surrounding the coronavirus in China and the slow start to Octopart during the first half, I believe that for the full year, we are likely to land at the lower end of our revenue margin guidance.

I will now hand over to Joe to share more color around Altium’s first half performance.

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Joseph G. Bedewi, Altium Limited – CFO [4]

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Good afternoon, everyone. Altium has delivered a strong first half performance across most financial metrics. We grew revenue by 19% for the first half — for the half year to $92.8 million. EBITDA grew to $36.8 million, up 22% for the half. Profit before tax grew by 23% to $31.8 million. EPS post-tax was virtually flat as Altium moved to the full effective tax rate of 27% during the half. This increased to 27% from the effective tax rate occurred earlier than anticipated as a result of Altium’s increasing profitability and complete utilization of prior year’s tax credits and full recognition of our deferred tax asset. Our effective tax rate represents the statutory reporting rate required by accounting rules. Pretax EPS continued to grow strongly and increased by 23% from the first half of fiscal 2019. Altium’s cash tax was 11.6% for the half. We expect to continue to benefit from deductions in the foreseeable future, but the cash rate will increase as profitability increases.

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We have a strong balance sheet with a cash balance of $80.7 million, up 39% year-on-year. Operating cash flow was $20.8 million, down 22% versus the first half of FY ’19. This decrease is driven by a drop in payables balances of $8.7 million, which is payment timing. Collections continue to be strong, but there are several long-term contracts in the NEXUS family. Lengthened collection periods contributed negatively to cash by approximately $3 million. Prepaid and deposits also increased approximately $2 million in the period. We continue to manage our cash with a high level of discipline and are confident cash flow will align closer to historical growth patterns as we finish out the year.

Altium’s core PCB business delivered strong growth based on a competitive advantage formed from our unique transactional sales model and next-generation products. The Boards and Systems division grew revenue by 12% for the first half of fiscal 2020 to $65.4 million. Altium Designer new seat sales grew by an impressive 19%, resulting in 4,205 new licenses sold during the half year.

The subscription pool or recurring revenue grew by 16% for the half year compared to the same period 1 year earlier to reach over 46,600 subscribers. The U.S. delivered a strong, solid performance on the half to achieve 11% revenue growth compared with the same period 1 year earlier. The U.S. is developing a model for the next-generation transactional sales teams to accelerate growth post-2020. This includes the introduction of Cyberpods or our man-out-of-the-loop to drive efficiency and reach with renewals and to introduce improved customer intelligence.

EMEA has delivered strong revenue growth over the half year of 12% in euros. Altium is now direct in most key European markets, with the Netherlands, the United Kingdom, Spain and Italy all performing stronger after our move to direct sales.

Our NEXUS product for the agile enterprise is building momentum and delivered $7 million in revenue, a 197% growth in the half. NEXUS is going beyond initial reference account and is beginning to scale. Examples of deals closed in the first half included Bosch, with over $1 million in revenue booked for the half, Texas Instruments, SpaceX, [Symbolab], [Astranis] and [Acuity]. However, as Aram mentioned, we are still working to optimize our sales efficiency in selling NEXUS and do not expect to be able to sustain this explosive growth rate beyond this financial year.

And turning to other parts of our business. I’m pleased to report that TASKING has performed strongly and grew revenue by 15% for the half. Our TASKING business is benefiting from being the #1 supplier of compiler software for Infineon, the large European semiconductor manufacturer, for its AURIX TriCore chipset for the automotive industry.

Octopart grew 2% in the first half due to the market inventory issue highlighted earlier. Octopart is on track for improvement in the second half.

China has been a standout performer during the half with 22% — 27% revenue growth compared to the same period 1 year earlier. Altium has been scaling up its operations in China and expanded its license compliance teams in Shanghai, Shenzhen and Beijing.

In responding to the coronavirus and the unfolding impact from it in China, Altium has been actively working with our management team on the ground in Shanghai to ensure that our teams can continue to work effectively under circumstances. We now have offices open, but we have enabled personnel to work from home as needed. We are thankful that we have no reported cases of the coronavirus in the Altium family. Our actions in China are driven by concern for the health and safety of our employees, their families and our relationships at large. The coronavirus in China is expected to have a significant impact on our performance in the second half.

The company’s reported expenses grew by 13% to $56 million for the half year. During the half, Altium invested in several transformative areas. First, at a product level, we are investing in cloud infrastructure for our new cloud platform Altium 365 to drive adoption. Second, we are building our brand presence as part of our mission to trigger an avalanche of users to Altium as we confidently move to our 100,000 subscriber target by 2025. Third, we are working to establish Octopart as the parts and data platform of choice for all things electronic parts. And fourth, we continue to invest in our relationship with Dassault Systemes.

The full impact of these investments will not be felt during fiscal 2020 but rather in future years as we pursue industry transformation through market dominance. We also continue to invest to scale up our transactional and solution sales through enhanced reach and capacity. We established a direct selling presence in India, added to our NEXUS sales team and support structure and expanded Cyberpods in our new Dallas office, which has had a positive impact on our renewal rates.

Finally, we continually review our contingent consideration positions and assess the likelihood of making these payments. We evaluated our position regarding PCB:NG at the end of the first half and have taken a write-back to reflect the high likelihood that we will not pay the entire earn-out. The founders have initiated a lawsuit based on their inability to meet earn-out metrics. And as we have been unable to continue a productive relationship with them, we have dismissed the founders from the company. Separately, we have invested in the PCB:NG facility to establish production quality and capability that was not possible with the founders continuing in place under the circumstances previously existing. The company intends to vigorously defend the lawsuit and expect a positive outcome.

This wraps up the formal part of this call, and I’ll now pass it over to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Lucy Huang from Bank of America.

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Lucy Huang, BofA Merrill Lynch, Research Division – Analyst [2]

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Aram, Joe. I just have 3. So firstly, in relation to subscriptions in America and EMEA, are you able to give us some color as to how penetrated you think you are in those markets and how much run rate do you still have to grow, particularly in America, where you’re seeing pretty strong growth in this half? Just secondly, on — in terms of the cash flow, so you mentioned there was a slight negative movement in cash this half. Just wondering, is this going to reverse in the second half and normalize? Or do you think the reversal will happen in FY ’21? And then just thirdly, in relation to the Dassault partnership. Just wondering when — if you can provide some insight as to when you think we can expect maybe a positive outcome. Or do you think — given that the negotiations are still ongoing, that you may need to walk away?

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Joseph G. Bedewi, Altium Limited – CFO [3]

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Okay. I’ll let Aram talk to the Dassault partnership. He’s intimately involved with that. On the cash flow, the cash flow, this has been a function of timing and some of the duration with the longer lead contracts that we have. So NEXUS, for example, has longer duration timings. So I believe and we believe, as we go forward, we’re going to come back to normalized standards. I expect we’ll have a cash flow impact that’s higher than it was last year at the end of this year. We ended up with $80 million in the bank. We’re going to end up close to $100 million as our target for the fiscal year.

Related to subscriptions in America and in EMEA, we’ve had strong growth in America and EMEA. We’ve had renewal rates increasing. The Cyberpods are just kicking off now, and they’ve shown some renewal rate increases. I expect that to continue. Altium 365 has not come out yet. That is something — in a full-blown manner, that is something that will also increase our subscription because that’s the product that takes us from a maintenance-type subscription to a more productivity capability-driven subscription. So I don’t think we’ve reached any type of saturation at this point. We still have competitive displacement opportunities coming out. We still have growth within the mainstream segment related to IoT. And all of those will help with the subscription model as we go forward.

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Aram Mirkazemi, Altium Limited – CEO & Executive Director [4]

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Maybe I can say a few words about Dassault. We are intensely in discussion around the partnership in terms of go-to-market and customer engagement. That is something quite complex because there are different segments in the market and different arrangements, this is something that — to me, success is not defined by signing a contract. The success is defined by what happens after that. We don’t want to have a situation where we had — in our first round, where we had a contract signed with their SOLIDWORKS division. And we did not actually — despite all the positive things, they did not perform, and we could not get what we expected in terms of revenue from that partnership. So we are very conscious of that, and we are not going to just work to sign a contract. We’ve got to get the model right. And as far as positive outcome, I can’t really comment on the timing on that.

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Operator [5]

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Our next question comes from the line of Stuart Turner from Blue Ocean Equities.

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Stuart B. Turner, Blue Ocean Equities Pty Ltd, Research Division – Senior Equities Analyst [6]

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I was wanting to get a technical update on the integration of design and production, notwithstanding the corporate news on PCB:NG, and just your commitment to developing that from a technical exercise and how you see that progressing.

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Joseph G. Bedewi, Altium Limited – CFO [7]

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Absolutely progressing much more positively. That’s the reason that we brought Craig in, Craig Arcuri, who’s an expert in PCB design. We brought him in to help with that integration and get the facility into a shape that would look like a true production facility, and he’s done that. There were issues related to the ability to manage the facility and so forth from the founders’ side. We’ve worked through those. And I believe going forward, we are fully committed. And we have a facility now that we believe is more in line with the quality and the output that we wanted when we made the original acquisition. Did that help?

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Stuart B. Turner, Blue Ocean Equities Pty Ltd, Research Division – Senior Equities Analyst [8]

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That’s really good. Yes. And also, just a separate question, where can the renewal rates go? I mean they’re a big driver of the achievement of the 100,000 subscribers ambition by 2025, and they’ve come up a little bit. But do you think you can get them above 90%, now that the Dallas experience has proved to be quite encouraging?

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Joseph G. Bedewi, Altium Limited – CFO [9]

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Yes, we do. We definitely think we can get above 90%. We really do believe that once we start getting A365, Altium 365, out there, that the capability that you’d get from that product will be much stickier than it has been in the past. There’s very good early days related to that product. So — and then the Cyberpods have done a very good job on working the renewals, to get to a man-out-of-the-loop process. That’s really what we’re trying to do. The renewal rate increase is great, but we have to be able to do this in a much more effective way in able to get to 100,000 because we’re not going to add heads on top of heads to get to the 100,000. So the man-out-of-the-loop is pretty mission-critical.

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Stuart B. Turner, Blue Ocean Equities Pty Ltd, Research Division – Senior Equities Analyst [10]

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You mentioned Altium 365, how will that drive revenue? We’ve got a lot of interest from companies, and you embedded the PCB design feature into it. And like we saw the video from Arduino, which was just fantastic at the Tech Day. But how do you actually monetize that given that the fundamental of it is that it’s more of an open access product?

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Aram Mirkazemi, Altium Limited – CEO & Executive Director [11]

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Well, it’s — Stuart, this is Aram. This is not open access, it’s only available to subscribers. I believe that this has a whole new dimension of value to our subscribers, and we’re going to get a higher revenue efficiency from companies that go onto Altium 365. And also on the 365 – Pro, we actually have higher level capability for which you actually have to subscribe at higher rates. So we’re definitely going to get additional revenue. But as I have said in the past, the presence of Altium 365 is for transformation and dominance, it’s not really to just drive revenue by itself and in itself.

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Operator [12]

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Our next question comes from the line of Ash Chandra from Goldman Sachs.

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Ashwini Z. Chandra, Goldman Sachs Group Inc., Research Division – Equity Analyst [13]

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Just a couple of quick ones. Can I just clarify that the EBITDA of $36.8 million, that does include like the $2 million of the reversal of deferred consideration?

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Joseph G. Bedewi, Altium Limited – CFO [14]

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Yes, that’s fully all-in. The 39…

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Ashwini Z. Chandra, Goldman Sachs Group Inc., Research Division – Equity Analyst [15]

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It’s all-in.

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Joseph G. Bedewi, Altium Limited – CFO [16]

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Yes, the 39.7% is the all-in number related to the AASB leases changes for leases — for 16. And then we normalize the leases out, and that’s where you get the other — the number that you just mentioned. But it is all-in, it contains everything with the write-back in a whole bit.

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Ashwini Z. Chandra, Goldman Sachs Group Inc., Research Division – Equity Analyst [17]

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Okay. And then can I ask with respect to the NEXUS revenues which is causing a little bit of a mismatch in terms of book revenues versus collection of cash. Do you mind just expanding a little bit on exactly what that means? Because you’re booking the revenues upfront, but there’s a deferred or there’s an extended collection period. Do you mind just clarifying how exactly the next contract typically works?

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Joseph G. Bedewi, Altium Limited – CFO [18]

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Yes. They — there are 3-year — typically, 3- to 5-year life, and the payment terms would be over that life of the product. We booked a portion of that revenue upfront, so it’s not completely booked upfront. There is still also a ratable portion that goes forward on the time-based licenses. But the typical payment and invoicing would be on a 3-year period. So we get 1/3 upfront and goes forward, for example, depending on the contract, though.

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Ashwini Z. Chandra, Goldman Sachs Group Inc., Research Division – Equity Analyst [19]

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Right. Okay. So you might — you’re — well, there’s a disproportionate upfront revenue booking versus the cash that’s coming in?

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Joseph G. Bedewi, Altium Limited – CFO [20]

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Correct.

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Ashwini Z. Chandra, Goldman Sachs Group Inc., Research Division – Equity Analyst [21]

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With the door. Okay.

And then can I ask with respect to Dassault? I know questions have been asked on this with respect to where you are on partnership. But can I clarify, does Dassault and this partnership form part of your $500 million revenue target? Like, yes, are they implicit in the $500 million in revenues that you’re targeting by 2025?

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Aram Mirkazemi, Altium Limited – CEO & Executive Director [22]

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No, it does not form any part of that $500 million target, not implicitly nor explicitly.

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Ashwini Z. Chandra, Goldman Sachs Group Inc., Research Division – Equity Analyst [23]

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Okay. Brilliant. And then just one last question, please, again, if I could jump back to NEXUS. At the AGM, you’re indicating that this would have a significant impact on revenue contribution from fiscal ’21. But in this result, you’re also indicating that we’ve got to be — you haven’t like fully optimized your sales function to continue to grow that business at the rate at which you’ve got in the first half. Do you mind just articulating a little bit more about what actually is required to be able to facilitate a sustainable growth rate in this? Like what exactly is going on behind the scenes? And I’m just trying to think through how this slows a little bit in the second half but then contributes materially from fiscal ’21.

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Aram Mirkazemi, Altium Limited – CEO & Executive Director [24]

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We definitely expect a significant growth in 2021 from NEXUS. As I’ve always mentioned, that is really from 2021 that we expect the rise. But all we’re saying is that 200% growth of first half, that cannot be sustained. So all we’re saying, don’t expect an explosive growth rate, but certainly, a significant growth rate to be expected in 2021.

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Operator [25]

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And the next question comes from the line of Josh Kannourakis from UBS.

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Josh Charles Kannourakis, UBS Investment Bank, Research Division – Research Analyst [26]

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Aram and Joe. First question, just on your level of investment in the period, can we talk about within guidance just your expected level of investment into the second half of ’20?

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Aram Mirkazemi, Altium Limited – CEO & Executive Director [27]

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It would be increasing, similar to what you would have seen in one of the slides, but not dramatically. There would be an upward trend in our spending on Altium 365 and the other areas that we mentioned. But our Rule of 50 will stay in place, and we’re expecting to be hitting the Rule of 50 in the high 50s in the second half.

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Joseph G. Bedewi, Altium Limited – CFO [28]

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And the EBITDA and the guidance on revenue is consistent, so we’re not changing EBITDA guidance.

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Josh Charles Kannourakis, UBS Investment Bank, Research Division – Research Analyst [29]

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Yes. Got it. And then just — I know it’s too early into ’21, but can you just give us some signposts in terms of when you maybe flag the market with regard to the level of investment into ’21 and just how you’re positioned on the Rule of 50 into that year?

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Aram Mirkazemi, Altium Limited – CEO & Executive Director [30]

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We’re thinking of giving guidance at Tech Day in November for the 2021 or before that.

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Josh Charles Kannourakis, UBS Investment Bank, Research Division – Research Analyst [31]

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Okay. Got it. And just in terms of the manufacturing side of things and the piece of the puzzle, obviously, getting reference sites to prove up your ability to sort of influence the manufacturing relationships are important. How are you going in that journey? And is there any progress with regard to signing up or doing any pilot programs with PCB manufacturers?

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Aram Mirkazemi, Altium Limited – CEO & Executive Director [32]

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We are quite active in that area. It’s just that we got this zone, as I mentioned, at Tech Day, incubation zone. That’s a completely different zone to the zone that they call transformation zone. The areas that you’ve seen with Altium 365, with Octopart, with Dassault, with brand marketing, they’re in transformation zone. So we certainly expect future revenue growth to be created and affected by that but without those investments. [Then] manufacturing, there are many other areas that are in incubation zone, that we’ll be active on them, but we don’t actually think of them as still in the research and development phase. We will speak to that as we get to points where the outcome would have a material impact in our 2020 to 2025 journey.

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Josh Charles Kannourakis, UBS Investment Bank, Research Division – Research Analyst [33]

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I understand. Just in terms of the competitive dynamics, can you just talk through any changes in period in terms of competitive dynamics across your core markets, both in terms of enterprise and also the sort of middle end in terms of any major updates from some of your competitors and any increase in marketing or sales activity?

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Joseph G. Bedewi, Altium Limited – CFO [34]

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We’re still owning the mainstream and actually moving up with the NEXUS model. So we haven’t seen any major competitive enhancements to their products. We’ve literally — with the introduction of AD20, we believe we’re at a par with the Expeditions and the OrCADs at this particular point. So it has not changed significantly.

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Josh Charles Kannourakis, UBS Investment Bank, Research Division – Research Analyst [35]

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Yes. Got it. And just one quick final one. Aram, you mentioned that 365 was not out in its entirety yet. I was just wondering whether you can just define in terms of what you mean by then and just some of the signposts that we can look at in terms of progress on 365 and the subscriber base actually engaging with that.

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Aram Mirkazemi, Altium Limited – CEO & Executive Director [36]

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You will see a slide in the front end of the deck that is about Altium 365. You’ll see there are 4 quadrants in there. The bottom 2 quadrants, which is Altium 365 – Pro and the Embeddable Viewer, they’ve been out, and you get some feedback on the reception of those 2. The top 2, which is the Basic and Standard, they are not released yet, and we’re intending to release them in April, which is on the (inaudible). Yes. And then (inaudible)

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Operator [37]

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And our next question comes from the line of Jules Cooper from Ord.

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Jules Cooper, Ord Minnett Limited, Research Division – Senior Research Analyst [38]

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Just — you mentioned just on China, I know it’s uncertain and it’s quickly moving sort of [phased] over there at the minute. But Joe, you mentioned you saw — you’re expecting a significant impact in the second half. And I was wondering if you could just give us some sense to how you see license sales tracking year-on-year or versus budget or just what you’re expecting in terms of seats sold in that market for the second half. Just a guide to the…

Sort of…

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Joseph G. Bedewi, Altium Limited – CFO [39]

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We really don’t have a number that we can put on it because it’s still very early. We’ve done everything to enable connections, and we’ve actually done some interesting things to keep connected to our customers. We set up training sessions that have gotten an amazing amount of interaction with them online. So it’s online training. And it’s been something that keeps our customer base active and focused. But I really can’t come up with a number at this point. We just feel that there is a significant impact, but it could — depending on how long it lasts, we could recover. There’s all kinds of different vectors that this could go.

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Jules Cooper, Ord Minnett Limited, Research Division – Senior Research Analyst [40]

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Sure. So just when we’re talking on the OpEx there, you mentioned an increase but not a dramatic one in the second half. How much flexibility do you have on that cost base in the second half if China doesn’t deliver the revenue and the license sales you expect?

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Joseph G. Bedewi, Altium Limited – CFO [41]

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We have quite a bit of flexibility, to be honest. It’s dependent. There’s headcount in there obviously, but we’ve got growth baked in, in line with our margin forecast. So if we come in at the higher end of the margin, we may spend more on some investments. If we come in at the higher end of the revenue, we may spend more. If we come in lower, we’re able to modulate that. So I mean we’re still within our guidance, and we’re going to continue to stay within our guidance. So I’m going to say that I have control and modulation within the guidance and our comfort level for hitting the EBITDA numbers that we have out there.

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Jules Cooper, Ord Minnett Limited, Research Division – Senior Research Analyst [42]

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Sure. And just lastly, on AD20, that release, are you able to sort of give us some sense for just how you’re seeing the reception in the market either through new sales? Any impacts on the subscription numbers at this point? Or is that something you expect to sort of play out more in the second half?

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Aram Mirkazemi, Altium Limited – CEO & Executive Director [43]

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We have not got anything in terms of saying this account just came in because of Altium Designer 20. Although we have had tremendous amount of positive commentary by users, in a way that all these years, that this last 3 decades, I’ve never seen our hard-core users being so positive about a release of a software. So it absolutely from that perspective is tremendous. But it takes a lot for this to filter through and get into wider organizations, that they’re building track with Altium on that [end], on a weekly basis.

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Operator [44]

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Your next question comes from the line of Andrew Levy from Macquarie.

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Andrew Levy, Macquarie Research – Analyst [45]

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A couple of mine were asked, but if I just could on the Dassault negotiations, I’m just wondering if there’s — they’ve obviously been ongoing for a while, and you’ve been working with them for a long time. So is there a point in time or a time line that we can think about in which — to which point if we haven’t reached a conclusion, that — it looks like it’s going to be very difficult to get to one between the 2 companies? And Aram, I don’t know if you’re able to go into sort of what the main points of contention are in more specifics than what you have. And maybe just a third part of the Dassault discussion is what level of cost is going into that investment or that platform with the 3DEXPERIENCE at the moment.

And just the second part on NEXUS, just wanted to follow up, Joe. I took your answer to the earlier question is saying there’s sort of an installation revenue that you get paid evenly over the term-based contracts. I’m just wondering, in the current half, how much of that NEXUS revenue would be one-off in-store revenue booked to accounts versus, I guess, the underlying or more recurring term base?

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Joseph G. Bedewi, Altium Limited – CFO [46]

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Yes. So I’ll just answer the quick question. We believe that the long-term contracts contributed about $3 million in delta in this first half. So it will be played out over time and recovered. That’s not all NEXUS, there’s also a little TASKING in there, too.

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Aram Mirkazemi, Altium Limited – CEO & Executive Director [47]

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As for Dassault, we’re a long ways away from walking away. There’s no such a thing as any party walking away. It’s a matter of being able to actually develop a commercial model that will work in practical terms. We have been — as I mentioned before, had workshops. I have — just a few days before coming here, I was in Nashville, Tennessee, discussing and developing models. And it’s just one of those things. We just want to make sure that once we signed contracts, we can — both parties can perform to expectations. And Altium is going to be very, I guess, insistent that this is going to be the right model, and we don’t want it to be just taking front of electronics for Dassault and not to have a material revenue that is consistent with our expectations from this deal. So for us, revenue matters.

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Andrew Levy, Macquarie Research – Analyst [48]

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Understood. And are you able to talk to the level of cost of investment that you’re putting in?

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Aram Mirkazemi, Altium Limited – CEO & Executive Director [49]

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We have got in our slides, you’ll see the dollar value. But the significance of those dollars are much higher than the actual absolute dollar value. It’s about $0.5 billion. It’s really dollars coming from unique people in Altium and those expertise — our expertise is we don’t actually make available to anything that comes from a partner. So yes, we are investing in terms of the real substance in this.

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Joseph G. Bedewi, Altium Limited – CFO [50]

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Yes, I’m going to touch base one more time with that, the contract timing on cash. The fact is several of these NEXUS contracts hit in December, so early and late in December. So the timing of the cash payment is also part of that issue when I say the $3 million.

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Andrew Levy, Macquarie Research – Analyst [51]

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All right. Can I ask one more while I’ve got you? Just as we move to Altium 365, as that scales up, obviously, part of that you provide an infrastructure piece to your customers. Should we think about — is that a material sort of CapEx commitment going forward? Or is that all scalable and can convert to OpEx using some of the cloud providers?

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Joseph G. Bedewi, Altium Limited – CFO [52]

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It’s all scalable in OpEx at this particular point. And we’re not going to do necessarily do a CapEx investment. It’s not on the cards at this point.

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Operator [53]

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(Operator Instructions) And there are no further questions at this time. I would now like to hand the conference back to Aram for any closing remarks.

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Aram Mirkazemi, Altium Limited – CEO & Executive Director [54]

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Thank you. In conclusion, we will continue to increase our capacity and reach for dominance and to drive adoption for our new cloud platform, Altium 365. Altium’s commitment to the Rule of 50 along with our 2025 targets and annual guidance provides a strong framework, from within which Altium will be driving future performance. As I have mentioned, with the uncertainty associated with the coronavirus in China and this slower first half for Octopart, I believe that Altium is likely to land at the lower end of our full year revenue and margin guidance. Thank you.

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Operator [55]

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Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.



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