Is the Altium Limited (ASX: ALU) share price a buy? The Altium share price has risen by 6% this week. It reported its FY20 result earlier this week.
There was a lot of interesting information in the Altium FY20 report:
FY20 result
Altium managed to grow its revenue by 10% to US$189.1 million with record growth of 17% of the subscription base to 51,000 subscribers.
Reported expenses only grew by 8% to US$113 million. This combination of higher revenue and slower expense growth meant that its earnings before interest, tax, depreciation and amortisation (EBITDA) managed to grow by 13% to US$75.6 million.
The reported EBITDA margin improved to 40%, up from 38.9% in FY19. However, the underlying EBITDA margin dropped from 36.6% to 35.8%.
Altium's profit before income tax rose by 12% to US$64.6 million, though net profit after tax (NPAT) fell 42% to US$30.9 million. Taxation had a large effect because of a one-off change, though Altium's effective tax rate will be lower in FY21 in the US. Excluding that, normalised earnings per share (EPS) rose 5% to 42.45 cents. Over time the Altium share price is going to follow the direction of its EPS.
Operating cash flow fell 18% to US$56.5 million as Altium suffered due to COVID-19 impacts. Altium provided extended payment terms to its clients which helped them afford the switch to Altium's services.
Many of Altium's segments saw very limited revenue growth. However, there were two very positive standouts. NEXUS revenue jumped 133% to US$15.5 million and manufacturing revenue rose 328% to US$2.55 million.
The full year dividend was increased by 15% to AU$0.39. A solid increase considering all of the disruption this year.
What to make of the report
Altium wasn't able to achieve its long-held aspirational goal of US$200 million and it also warned that it could take another six or twelve months to reach its US$500 million goal which it had aimed to hit by 2025. But it's still looking to reach 100,000 subscribers by 2025. This growth will be a key part for driving the Altium share price higher.
Altium 365 is a bright spot for the ASX share. The online cloud offering is very useful under the current circumstances. The accelerated roll out of Altium 365 is evolving Altium's revenue away from perpetual licensing and maintenance subscriptions. It's moving towards term-based licensing and software as a service (SaaS) subscriptions.
The company is still on a path of achieving market dominance during this decade. Altium has a great chance of returning back to solid growth in the second half of FY21 once its payment terms and prices revert back to normal.
It's not surprising that the Altium share price is lower than it was in February 2020 because plenty of its clients are still suffering in the current economic environment.
But over the longer-term I think Altium's EBITDA margin and other metrics can continue to rise. It's still hoping to meet the 'rule of 50' target.
I think its balance sheet can continue to strengthen – its cash balance rose 16% to US$93 million. That capital can be used to fund bolt-on acquisitions and fund the growing dividend to shareholders.
Clients tend to be sticky once they change to Altium's software, so it makes sense to attract customers onto the system during this difficult period at a lower fee and then gain years of full-price revenue from that client.
Foolish takeaway
Recurring revenue is 60% of total revenue and it could go even higher. I think Altium is a great business with fairly defensive revenue. I think it's one worth holding for many years. However, at the current Altium share price of $35.60 it's valued at 54x FY22's estimated earnings. I'd rather buy Altium shares closer to $30 than $35. Perhaps the US election will throw up volatility and offer another buying opportunity?
