Why I think yesterday's $ALU update was significant
I've always understood $ALU as one of several leaders in the market for software to aid design of PCBs, focused on the mid-market. This market is very large covering moderate complexity designs for PCBs used in a wide range of consumer and industrial devices, which typically have moderate to large production volumes.
However, in yesterday's results release and in the presentation CEO Aram made reference to a multi-year, multi-million dollar "enterprise deal" with Renesas Electronics, a A$45bn market cap Japanese chip and IC manufactuer to be their standard design software platform, signalling a more explicit targeting of the high value enterprise market.
This is significant because the enterprise market is characterised by high-end design solutions, with greater scale and complexity and reliability requirements (think aerospace, large-scale medical imaging systems, self-driving.) This is a market where $ALU's much larger competitors, like Cadence Design Systems (Market Cap $US60bn; Sales $US4bn), are more at home. For $ALU to become the design standard of a large enterprise customer is significant.
It is arguably also necessary. As we appear to see Moore's Law flattening (pending the commercialisation of quantum technology), the design process is becoming more integrated, to optimise the design from the chip right through to the integrated assembly in its end application.
I'm not a microelectronics engineer and I've never used Altium Designer, but it would seem to me unlikely for $ALU to be able to win the Renesas deal without the ability to apply itslelf to these more complex design, simulation and verification challenges.
Aram reinforced this in saying "Of course, we would like to be more competitive against Cadence in the higher end and we have been doing a lot of work that can't be seen but I expect us to do better in the enterprise against Cadence in years to come."
More generally, it was impressive to hear on the call reference to a number of imipressive customer logos including Aram rattling off:
"We closed large multimillion dollar deals with customers such as Tesla, SpaceX, Texas Instruments, Bosch, Acuity and Xylem and many other significant deals with leading brands such as Mercedes, Meta, Amazon, Rivian, Lockheed, Volvo, TE Connectivity, Magna, iRobot, Hitachi, Infineon and Thales. These enterprise accounts and many more provide us with plenty of opportunity to grow our enterprise business in years to come."
Although the PCB design market is also having its slowdown, this is in the context of an industry that is forecast to achieve compound annual growth from 2023 to 2032 of 11-12%. The software market for PCB design is worth >US$4bn globally, and the broader market for design from the chip to more compex systems is materially larger.
I found it very encouraging that $ALU continues to be well positioned to ride this growth not only in its natural mid-market home, but increasingly in the enterprise space. This indicates that we will continue to see double digit growth in "seats" but importantly continuing strong growth in the value per seat.
The value per seat has risen strongly over recent years and in Q&A Aram made clear that this wasn't from price increases as such, but because designers are accessing increasing functionality, which drives revenue. Altium Designer is being made progressively more capable - again, supporting the story of now positioning for the enterprise market.
The next question for which Aram put markers in the sand yesterday, is the extent to which $ALU can get its customers to migrate more of their related workflows (beyond just the IC design) into the $ALU ecosystem,... think procurement and manufacturing. The building out of Octopart is key to that part of the strategy, and Aram gave us the markers to track that progress over the near term when he said:
"We're investing in bolt-on M&A for Octopart and 365, we will expect second half to be the beginning of the upswing and '25 and '26 when we will be hopefully seeing the same effect going from transformation to performance mode, which we've seen with our mid-market and recently with enterprise, and this is the third front I'm expecting for us for this transformational move of having Octopart and 365 connected to not only drive their value up significantly, but also we're going to be getting more volume of traffic."
The "upswing" he is referring to, is arresting the decline of Octopoart, which shot upo during the pandemic, when everyone had to redesign their IC's to get around chip shortages, and where Octopart was being used actively to source scare chips.
I will be interested to see how the analysts consider yesterday's results. But for me, the overall communication was strongly supportive of the thesis.
Disc: Held
