Pricing power

1H23 RESULT

Need To Know

• Result largely in-line with consensus, reaffirmed FY23 guidance
• Seat growth slowing, offset by higher pricing and average seat value
• Dividend uplift, 25cps (40% franked) up from 21cps

ALU delivered revenue of US$119.5m, up 17.0%, with EBITDA growth of 24.4%, and a margin growing to 36.2%, both relatively in-line with consensus, albeit -4% on an NPAT level. We don’t expect market forecasts to make any material changes to FY23f, although note there is scope to lift EBITDA margins. 

Underlying slowing in seat growth with users growing just 3.7% to ~58k and remain on track to exceed 60k by FY23. The growth was partially impacted by a non-renewal of Russian licenses and lockdowns in China, making underlying churn more difficult to see, which we will continue to monitor. This was offset by higher average pricing, rising 11.4% to $2,304, largely driven by a focus on higher product capability. This was evidenced by a 176% rise in Enterprise revenue (albeit off a small base) to $12.7m and an 83% rise in Professional to $17.0m, offset by a slight decline in the Standard software by 5%. 

Octopart clickbait? Offer clicks dropped by 20% from its peak in 2H22 to 13.8m, and -3.5% on 1H22, although this was largely offset by a significant jump in average revenue per click of 26% to $1.96, driving only a -3% fall in revenue to $27.0m. The supply chain disruption continues to abate, and we expect continued weakness in the segment. Sustainability of the higher pricing will be the key focus moving forward, with the $60-65m guidance for the cloud segment looking unachievable. 

FY23 guidance reaffirmed. $255-$265m group revenue guidance, implying 15-20% growth, with an underlying EBITDA margin of 35%-37% was reaffirmed by management, and the 1H result was right in the middle of the growth ranges. With recurring revenue growing to 79% of group revenue, visibility is becoming clearer. 

Investment View

Despite a reaffirming of guidance, the trajectory towards the FY26 targets still implies a significant ramp up in users and volumes which are becoming increasingly unachievable. Interestingly, ALU have appointed a ‘head of M&A’ indicating likely activity, providing potential catalysts. 

Trading at ~48x, we struggle to justify being more positive, with macro headwinds likely to continue impacting seat growth into the FY23 result. We retain our Sell recommendation.  

Figure 1: Solid growth in Americas offset by China lockdown and Russia exit

Figure 2: PER trading at 5-year average, despite lower growth and higher interest rates