The smart machine revolution has arrived. Everything from toasters to the family car is now filled with processing power. And one Australian company is reaping the rewards. Altium (ASX: ALU) may not be a familiar name to most investors, but its software has helped design the electronics that power thousands of the products that we use every day.
Altium's main product is an advanced piece of software called 'Altium Designer' that helps engineers design printed circuit boards (PCB). You can think of it as software that helps design the parts that put the smart into all those smart devices. And demand for that software has been growing fast. Despite growing revenues at 14% per year for the last three years there are signs that Altium is just getting started.
A solid quarter
Altium announced its latest quarterly results last Friday. Revenue for the half year was up 17% from the year prior, and in constant currency terms rose by 21%. Much of that revenue boost came from the one-time gain of a 36% increase to Altium's perpetual license fee. Most customers have accepted the price increase as fair, providing a great demonstration of the pricing power that the company enjoys.
Altium shows no signs of slowing down either, with second quarter with revenues up 23% on a constant currency basis. And yet, despite the solid growth numbers, Altium's share price has been see-sawing, and is currently down around 9% since the news.
Some investors may have been spooked by the company's comments that it faces some currency headwinds for the remainder of the financial year. Altium sells its software all over the world, but reports its results in US dollars. So a stronger greenback compared to other major currencies lowers Altium's US dollar reported revenues.
But if that's the fear, then investors need to wise up. For every gain in the US dollar vs. the Aussie, the value of Altium's US dollar cash flows to us Australia-based investors increases, pushing up the company's intrinsic value. In other words, a rising US dollar is actually a big win for Altium's Australian investors.
Juicy economics
Like most successful software companies, Altium is capital light, with high margins and high returns on invested capital. Once all those zeroes and ones have been written, there is very little extra cost to add another customer to the platform and the additional revenue drips to the bottom line like hot butter. In the latest half year a 17% revenue increase flowed straight through to a 17% increase in operating cash flow.
Once a customer has made the decision to integrate Altium's software into their design process it's tough for them to jump ship to a competitor: staff need to be retrained, processes need to be redesigned, and the library of existing product designs need to be transferred. All of those switching costs make for sticky revenues and loyal customers.
Altium's financials are in great shape too. The company has no debt and over 18% of its market value in net cash. At current prices Altium pays a 4% dividend yield, and with profits steadily increasing we can expect that yield to keep on rising for years to come.
Foolish takeaway
Growing fast in a fast-growing industry, Altium is a business with a long runway ahead. A rock-solid balance sheet that is overflowing with cash, coupled with recurring revenues, and a solid dividend yield give investors plenty of downside protection. With the smart machine revolution in full swing, and a falling Aussie dollar as the cherry on top, its time investors switched on to Altium.
