FY23 result overview vs consensus
Revenue $263.3m +19.2% vs $258m
EBITDA $96m +20.3% vs $94.8m
EPS 50.4cps +19.4% vs 50.0cps
DPS A$54.0cps +14.9%
Investment Implications
ALU’s results were solid, and marginally ahead of expectations. The result saw strong adoption in Pro and Enterprise licenses, up 76% to 14,437 and increasing in the mix from 14.4% to 23.6%. This drove a strong 22.5% uplift in Average Subscription Seat Value (ASSV) to $2,408. Management noted a few significant deals with large customers are helping improve this adoption and see the Pro license (above Standard, lower than Enterprise being the 3 tiers offered) as being the most common subscription moving forward.
The Cloud platform (Octopart) business also performed strongly, despite the slowdown in click volumes. 2H23 revenue of $29.2m was up 8% on 1H23, despite ~700k less clicks, as the value proposition to component manufacturers and distributors drove higher revenue per clicks from $1.96 to $2.23. ALU continues to integrate the business and is forecasting 8-16% revenue growth in FY24 to $65-70m.
Subscribers grew 7.5% to 61,159, which was predominantly from Americas and EMEA, partly offset by weakness in China and the exit of Russia. Americas revenue grew 32.3%, and EMEA grew 19.8% and represent over 80% of the design segment revenue. China continues to be impacted, however management noted that recent trends saw momentum returning. ALU is forecasting 10-15% subscriber growth through FY24, driven by increasing network effects from its 365 cloud platform, driving additional seats outside of traditional users, such as procurement managers and mechanical engineers.
The balance sheet is in solid shape, with net cash of $201m and no debt. ALU also noted it made a $26.7m payment to the ATO, however is disputing the charge and expects to receive it back. The dividend continues to grow with earnings, now 54cps, up 15%.
The FY24 revenue outlook came in ~6% ahead of consensus at the midpoint, of $315-325m. This is largely driven by a strong uplift in new subscribers and ASSV as the product mix moves towards more Pro and Enterprise licenses. FY24 EBITDA margin guidance of between 35-37% seems conservative given the 36.5% delivered in FY23, however management did note several key hires in senior management positions globally as it invests into its next phase of growth. The investment returns are likely to be longer dated, with revenue ramp up expected in the latter part of FY24, and into FY25/26.
The longer term ambition of US$500m in revenue by FY26 still seems ambitious, but the introduction of a dedicated M&A team means it will likely be achieved through inorganic opportunities. There are several adjacencies available for ALU and we see accretive M&A opportunities as potential upside risk.
Investment View
The outlook for the business is improving as supply chains normalise and the macro megatrends in AI and IoT begin to play out. ALU has materially underperformed key software peers on the ASX Xero (+63.6%) and Wisetech (+65.9%) which have both re-rated this calendar year, as ALU’s multiple has remained steady and returned just 4.8%. We believe the concerns of slower growth and higher churn rates have been largely put at ease at this result. ALU remains very profitable, focussing on the ‘rule of 50’, being revenue growth % and EBITDA margins % adding to above 50%. This is an incredibly strong metric, and one which looks to be sustainable.
At ~37x 12m forward PER, ALU is not ‘cheap’ however we expect it will be able to deliver 20%+ earnings growth over the short-medium term. We therefore upgrade our rating from Sell to Hold as the outlook becomes less negative.
Figure 1: ALU's PER is -1SD below its 5 year average
Risks
Subscriber growth remains key to ALU's growth, with there being risk of lower than expected new subscribers, as well as risk of higher churn rates of existing customers, impacting growth. The software landscape is largely competitive, and additional competitive pressures could impact growth potential. Intellectual property theft remains a key risk.
Recommendation
We upgrade our recommendation from Sell to Hold.
