Earnings Transcript for ALU.AX - Q2 Fiscal Year 2022

Operator: Ladies and gentlemen, thank you for standing by, and welcome to Altium's Half Year Investor Call. [Operator Instructions] It is now my pleasure to introduce Chief of Staff, Kim Besharati.

Kim Besharati: Hello, everyone, and welcome to the Altium Investor Call. As mentioned, I'm Kim Besharati, Chief of Staff and Head of Investor Relations. Joining me on the call today from San Diego is our CEO, Aram Mirkazemi; and our President, Sergey Kostinsky; and from Sydney, our Interim CFO, Richard Leon. As separately announced to the market today, our CFO, Martin Ive has decided to leave Altium to pursue personal interests. And Richard will serve as our interim CFO while we progress our search for our next level CFO as we foreshadowed at our AGM back in November. Today, Altium released to the ASX the company's financial results for the half year ended 31 December 2021, and our investor presentation, which we will discuss with investors over the next few days. During this call, Aram and Richard will share details of Altium's strong first half performance and share color as to how we have regained momentum and are benefiting from a smoother-than-expected business model transition toward the cloud and SaaS. Aram and Richard will also speak about how we are making great progress towards our pursuit to dominate the PCB design software market and to use that dominance to transform the global electronics industry. Please note, as a reminder, today's call and the Q&A section at the end may include forward-looking statements regarding Altium products, its future operations or financial performance. Any such statements are based on the current assumptions by Altium management and subject to risks and uncertainties that may cause actual events and results to differ materially. Please note that all numbers are in U.S. dollars unless specified otherwise. Today's call is being recorded and will be made available on our website. I will now pass over to Aram.

Aram Mirkazemi: Thank you, Kim, and good morning, everyone. While it's too early to celebrate and there is still much work to do, our first half results are most promising. Our team is back to its winning form and regaining momentum. I'm pleased to report that Altium has achieved a strong first half performance of 28% revenue growth with a margin of 34%. We have achieved this while we have accelerated our business model transition with an increase of 43% in annual recurring revenue. We have regained momentum in our core PCB business which grew by 16%. Our Octopart business delivered a record performance for the first half with revenue growth of 105%. The strong adoption of our cloud platform, Altium 365 exceeds our expectations and is underpinning our smooth business model transition. Since we last reported, we have grown the number of our monthly active users by 54% to over 19,700 and the number of monthly active accounts by 29% to over 7,700. Today, more than 15% of Altium subscription customers have fully adopted the cloud and further 45% are in transition. The impact of Altium 365 cannot be underestimated. It is reducing churn and driving utilization for our subscription business, which will support our client to 100,000 subscribers for market dominance. And it's enhancing the value of our maintenance subscriptions for our customers by delivering the benefits of SaaS Live subscriptions, both for them and for Altium. Altium's first half result is quite significant. It demonstrates that business momentum is growing, and we are making the most of our growth opportunities. We are executing well with double-digit revenue growth in our mainstream digital sales, and we are regaining momentum in our enterprise sales with 16% growth in the first half. Altium Designer product revenue is up 15%, and Nexus and Concord Pro product revenue is up by 29.5% for the first half. We are leveraging our digital sales platform to drive volume and expand reach more effectively. We are achieving greater efficiency in opening and closing transactions to sell licenses. And our realized price per unit is at an all-time high with discounting at historic low levels. Our enterprise sales is beginning to build some momentum, and we are intent on scaling our capability and capacity in this segment of the market through Nexus. Examples of large deals closed during the half included Tesla, Altium's first $1 million-plus ARR customer; Sagemcom, a leading company of Internet, hardware and audio video products representing a major mentor graphics displacement; and NASA, a significant order to expand our relationship to include the Johnson as well as the Kennedy Space Center. With Nexus running on the cloud with Altium 365 and with the launch of what we call a digital showroom, demonstrating the power of completing the last mile of digital transformation, I believe that Nexus represents the iPhone of the PCB industry for modern enterprises. In the same way that an iPhone connects an individual to a variety of applications and services, Nexus will connect electronics within modern enterprises to other engineering disciplines with an ease and efficiency that is unprecedented in this industry. This requires strategic partnerships between Altium and key industry players to build and maintain digital bridges to connect electronics to these adjacent engineering worlds. Altium is actively working with large industry players to build digital bridges that will connect electronics to PLM, MCAD simulation and even silicon design. This way, Altium would compete more effectively against the closed walled garden approaches of our competitors to deliver best-of-grade engineering tools across the cloud platform to customers. The measure of success in strategic partnerships for Altium will be in the way that our enterprise sales revenue will grow and accelerate over the next few years. This requires maintaining strong and stable relationships with strategic partners, the alignment of product and go-to-market teams and scaling our enterprise sales workforce to capitalize on the opportunity and to convert potential to outcome. I'm pleased with our progress so far in advancing this work on these fronts. We are fully committed and building momentum. Turning now to Octopart. It delivered a record performance for the first half revenue growth of 105% to reach $22 million. This strong performance was against a period of relatively low growth from 2019 to 2021, caused by a cyclical glut in the electronic supply chain and the manufacturers' inventories. Conditions accentuated by the pandemic, such as scarcity, long lead times, price increases and supply chain instability are likely to stay around and continue at some level over the next few years. And I do not expect Octopart revenue to drop. However, its growth rate will most likely moderate. Octopart's API revenue grew strongly in the first half by 64%, and that is on the back of strong growth during the last period. We anticipate that this strong growth will continue. We have recently invested in developing the Octopart API through Nexar to offer additional value to our industry partners. We are leveraging our Nexar platform to bring actionable insights from the electronic design community to our supply chain partners. Imminent updates to both Octopart.com and the Nexar API will make available to customers over a decade of more than 300 billion data points of historical availability information as well as new stock predictor algorithms that will empower customers to be more informed than ever before when it comes to making key supply chain decisions. Beyond the current revenue momentum that I just outlined, the direct monetization of Altium 365 through a SaaS selling motion is yet to come. However, momentum is building up with great customer feedback about the value that they are receiving from our Altium 365 cloud platform, and I anticipate that at some point in the next financial year, we will launch premium services on Altium 365 and get our SaaS business on the scoreboard. I would now like to say a few words about our aspirational goal of reaching $500 million in revenue and 100,000 subscribers, which we originally communicated back in 2018 and set the target of 2025 for their achievement. With the impact of the global pandemic and our divestment of our tasking business, we communicated that we may be looking at financial year 2026 to achieve these goals. This is excluding the possibility of additional revenue through M&A. On the strengths of these first half results, seeing growing momentum in our cloud platform, our progress with our strategic partnerships, the strength of our Octopart business and the resurgence of our core PCB business, my confidence is growing in our ability to achieve these targets in 2026 or even sooner. I would provide a further update on our progress towards these targets in August. However, there is one thing that I want to mention regarding the nature of our progress towards our 100,000 subscribers target. Today, this number stands at 55,978 in its raw form, with a historical CAGR of around 10%. But what is important to appreciate is that not all seats are equal in their impact on our pursuit of dominance and transformation. Our Pro and other higher-value seats on subscription generates significantly more revenue per seat, and they have been growing at a faster rate. Additionally, our seats that have fully adopted the cloud have a much greater pulling power within the industry than an on-premise seat. Suffice to say that from a strategic point of view, both from dollar impacts and our influence within the industry, we are a lot further along in our pursuit of the underlying objectives behind the 100,000 subscribers than the raw number of 55,978 may suggest. Having said that, we are still committed to making the 100,000 subscribers by the old measure. This requires us to have a breakthrough with nearly 40,000 active seats that are not on subscription and our success in China to bring our customers onto Altium China 365 and onto subscription. Whilst we have not made a concerted effort to go after them yet because our focus has been on the low-hanging fruits in the cloud adoption, I believe that there are signs that suggest that our cloud platform can break through that segment of our user base to bring them onto subscription. I'll keep you informed of our progress. We are not only picking up pace on our run towards PCB market dominance, but we are also leaning strongly into our transformative agenda for the global electronics industry. I'm pleased to report that Altimade, our smart manufacturing service in Altium 365 was launched recently at our AltiumLive user event to a great reception. Altimade is the electronic industry's first designed with manufacturing application available to the Altium user community. Altimade enables customers to request instant quotes and place orders to produce their PCB assembly without leaving the design environment. While this makes a significant step along our journey of industry transformation, it is pioneering work and it would be a while before its full commercial impact will be felt.. In the meanwhile, we will be winding down our incubation activities relating to smart hardware and manufacturing. You will have noticed a decline in our smart manufacturing revenue over the half. This is due to supply chain shortages and our transition to Altimade. Our vision for Altimade is to transform the way electronic hardware is manufactured and a key part of that is doing it without owning a factory. Altium has also recently entered a partnership with a well-established Chinese manufacturer to progress Altium 365 China, linking design to supply chain and to manufacturing. Supply chain insights are proving to be highly valued by the Chinese market. While it's early days, the pilot response undertaken in the second half of FY '21 has provided confidence to move to the next level between the 2 parties for work on the platform technology, bringing supply chain data in via Octopart and further identifying value opportunities for the local Chinese market. This work remains exploratory but highly promising. If we can drive adoption of Altium 365 China, we can increase our recurring revenue in China and, in time, transform our license compliance business. We still have a long way to go, but the early signs are promising. I would like now to speak to the role of M&A in our pursuit of dominance and transformation going forward. As most of you know, we were unsuccessful in our bid to acquire 2 large assets last fiscal year. While we were most disappointed at that time, conditions are now more favorable as the market has reset, and we are in a strong position. We are actively engaged and looking for assets that can support our strategy both in the area of dominance and transformation. While there is nothing imminent in terms of major assets, there are bolt-on assets that can fast track the development of digital bridges on the cloud that will not only help with accelerating our development but will be a way for us to bring in new talent. I would now like to turn to how Altium is responding to the challenge of acquiring talent during the global phenomenon known as the great resignation or what I call the great rejuvenation. To sustain our high growth and to take full advantage of our market opportunities, we must bring in a new class of talent as we transition beyond being a software and product company to a cloud platform and services company. We intend to aggressively scale our enterprise sales and to bring forward the organizational readiness for direct monetization of Altium 365. Our strategic pivot to the cloud in the last 12 months through our business model, organizational changes and our divestments of noncore assets such as TASKING, has put us in a relatively stronger growth position to take advantage of post-pandemic conditions and, importantly, attract top-level talent. To be successful, particularly in the U.S. market, we intend to use stock as a greater proportion than cash in total compensation. We will also be searching for key talent in markets where Altium has a strong brand or conditions are favorable. Australia and the U.K. are good examples of this. To be clear and as foreshadowed back in August, the impact of this investment has already been factored into our flight path at 34 to 36 percentage margin. While we are still in transition, we are maintaining a floor of 34% margin with the Rule of 50. However, I anticipate that our margin will grow towards 40% as we approach our target of $500 million, which represents a position of dominance and enduring competitive advantage in our industry. While many of you appreciate this, there may be a few who believe that pursuing higher margins could come at the cost of underinvesting to capitalize on opportunities. I would like to point out that the key feature of our strategy is the way it drives our margin. Our transformative agenda supports our drive for dominance and our pursuit of dominance supports our transformative agenda. This means our transformative cloud offering and our dominant software business have a complementary nature and can resonate to a great effect. If this unique combination unfolds in the way that we plan, we will be able to have our cake and eat it too in terms of high investment and delivering high margins. Having seen the way the momentum is coming back to our business, I'm confident our decision to pursue our strategy of transformation through dominance by pivoting to the cloud at the height of the pandemic was the right one and now is beginning to pay off. While many other companies chose to take cover and wait out the pandemic or maximize short-term gain, taking advantage of transient pandemic conditions, we use that opportunity to transform our business and lay the foundation for our next phase of growth. With our strong first half performance, we are upgrading our revenue guidance to the high end of the range. We believe that our margin is largely to be at the low end or thereabouts of the guided range as we pursue new cloud and enterprise sales roles in an increasingly competitive talent market, particularly in the U.S. Our fiscal 2022 guidance is between $213 million to $217 million, representing 18% to 20% revenue growth. Underlying EBITDA margin of 34% to 36% and an annual recurring revenue growth of 23% to 27%. Before I pass over to Richard, I would like to address the unfolding situation in Russia and the Ukraine and its potential impact on Altium. Clearly, the world is watching carefully with great concern as this situation develops. We have a strong interest in that region and our first and foremost concern is for our people. We have engineers and sales staff in Altium offices located in Moscow, Saint Petersburg and Kiev. Kiev is an engineering and development center for us. And Moscow and Saint Petersburg are both engineering and sales centers. We generate around $2 million to $3 million in revenue from Russia. At this point, we do not believe that we need to take any action but we are monitoring the situation closely. I will now hand over to Richard to provide further color on the first half financials.

Richard Leon: Thank you, Aram. Good morning, good afternoon, everyone. Firstly, it feels great to be back at Altium and participating in an investor call. I look forward to meeting and reconnecting with many of you over the coming days during the Altium Investor Roadshow. I will begin by highlighting Altium's strong financial performance in the first half. And for someone that has recently come back into the office, I can best describe it as stellar. Altium grew revenue by 28% for the half to $102.2 million compared to the previous corresponding period. This resulted in double-digit revenue growth in all regions except China. Altium achieved a strong EBITDA margin for the half within the guided range for the full year of underlying EBITDA margin between 34% and 36%. There were no one-off adjustments to EBITDA during the first half with both reported and underlying margin of 34.1%. This is a significant increase on the underlying EBITDA margin of 30.6% at the same time last year. Operating cash flow also grew strongly by 78% to $33.3 million in the first half of fiscal 2022. This was primarily driven by an increase in cash receipts from customers and benefited from a decrease in net cashes paid -- net cash taxes paid. Profit before tax and profit after tax, both grew strongly for the half by 40% and 38%, respectively. Depreciation and amortization expenses were slightly lower period-over-period which, when combined with higher EBITDA, drove profit before tax higher. EPS also grew strongly by 37% to $0.1741 reflecting strong revenue growth, coupled with judicious management of operating expenses and investment in the business. Turning to Altium's first half operating performance. A key positive is at Altium's core PCB business, our Board and Systems business, grew revenue by 16% to $79 million. Realized pricing was at record levels and discounting was less than 10%, well down from the highs of 30% at the height of the pandemic some 12 months ago. Altium's digital sales grew well with the U.S. growing revenue by 14% to $26.5 million for the half and EMEA by 25% in EUR 23 million. The rest of the world grew revenue by 18% to $7.5 million, while China grew by 6%. China's performance reflects a measured approach to our license compliance business for the half and the impact of temporary regional COVID lockdowns in Central and Eastern China. For those that may be new to Altium, around 20% of Altium's license compliance business requires in-person visits to complete the process. This was temporarily curtailed in these regions through lockdowns as the Chinese government took extra precaution to contain COVID in Beijing as the country responded to Omicron. There is also heightened sensitivity to aggressive license compliance activities, resulting in a more measured approach by our local team. As is often the case with Altium, we are addressing this by adjusting our approach through smarter execution to accommodate the local conditions. Aram mentioned our enterprise sales is rebuilding momentum. And it's worth repeating, Nexus and Concord Pro revenue is up by 29.5% for the half, with large deals closure in the half, including Tesla, an expansion deal and our first $1 million annual recurring revenue customer; Sagemcom, NASA, Magna and a sale to Square, the new owner of Afterpay. For the second half, we will continue to build momentum and scale our enterprise sales to reach and engage with a growing pipeline of Nexus customers. Octopart delivered a record performance for the half too of 105% to $22 million in revenue. And we expect the strong tailwinds from the electronics parts global shortage to continue through 2022. During the half, Octopart experienced 70% growth in weekly active users to close to 195,000 compared with the first half of FY '21. Offer clicks were up 148% for the half to close to $15 million. We are leveraging the Nexar API, which is supply chain insights with our supply chain partners being the large distributors to increase the value proposition of Octopart. This will help us go beyond traffic volume and search to drive revenue even when the part shortage eventually tempers. As evidenced by the inroads that we are just beginning to make on the value front, the Octopart or Nexar API revenue grew by 64% in the first half of fiscal 2022 compared with 1 year earlier, and this was off the back of a strong growth last year. Another positive on the organizational side that Altium's business model transition and cloud adoption are progressing extremely well. The acceleration of a shift from perpetual to term-based licensing is positively impacting the quality of Altium revenue and increasing recurring revenue. Recurring revenue for the first half was 74%, well up from the 65% of the prior corresponding period. During the half, close to 30% of all new licenses sold were term-based licenses. The number of term-based licenses grew by 132% during the half, while perpetual licenses declined by 11%. That said, we are experiencing less-than-expected revenue headwind. And we estimate the headwind for the first half to be around $2.6 million. That is the take-up of time-based license versus perpetual licenses. Our business model transition with strong cloud adoption, strong time-based license takeup, growing Nexus revenue together with record Octopart revenue growth are all contributing to strong ARR annual recurring revenue growth of 43% for the half. I would characterize this as our PCB business growing strongly and to expectations and Octopart outperforming. As mentioned, Altium delivered an EBITDA margin of 34% for the half and is expected to achieve the low end of the guided range of underlying EBITDA of 34% to 36% for the full year FY '22. Operating expenses, the difference between our revenue and EBITDA increased by 27% to $67.4 million for the half. For context, just over half of this increase related to employee expenses as part of our deliberate Netflix business and organizational model transition. Other areas where operating expenses increased included web advertising and marketing, which contributed to the strong Octopart revenue, as well as cloud hosting fees to support the growing adoption of Altium 365. And for completeness, professional fees for tax compliance and audit fees were up; hardware material expenses increased, reflecting the shortage of PCB parts in the market; and finally, there was a $2.5 million credit from a contingent consideration write-back in the previous corresponding period. As we look ahead, Altium will continue to drive operating leverage in our foundational PCB business, focus our investment on scaling enterprise sales and cloud as we progress towards our dominance and industry transformation goals and work hard to deliver within our EBITDA guidance. This wraps up the formal part of this call, and I will now pass over for Q&A.

Operator: [Operator Instructions] Our first question comes from the line of Garry Sherriff with RBC.

Garry Sherriff: A few questions. The first being the scaling of your enterprise sales function. You've told how you'll be aggressively scaling it. Could you maybe just give us a sense of additional costs we should assume into the second half and into FY '23 as you scale that function?

Aram Mirkazemi: Garry, this is a good question. I guess I'll start off by saying that the way we scale will be in accordance to, a, our ability to find the talent and also the development of our strategic partnership and the readiness of our partners in order to be able to create the required opportunity so we can convert them to sales outcome. The margin guidance given, it takes into account our investment in that area, which is one of the key areas over the next couple of years for Altium to invest and convert the potential to outcome.

Garry Sherriff: And when you talk about finding those strategic partners, again, maybe just remind us what's in it for them? And I just wanted to confirm, are they competitors in some of your existing ecosystem? Again, just trying to get a sense on those strategic partnerships that you're trying to target.

Aram Mirkazemi: So as I have mentioned in the past, there are a number of strategic partners who are very interested to develop an alliance with Altium in terms of product alignment and go-to-market alignment. So you can think of it as co-sale in terms of say in simulation or in PLM or in mechanical, they would have their own sales team. And then we have our sales team around ECAD and PCB. And then when we go to an enterprise, we go together. And our value proposition will be a combined value proposition against our competitors and their competitors. And we have common competitors. For example, Siemens is a common competitor for Altium. And PTC Cadence is a common competitor for Altium and ANSYS. In both these cases, we're asked to go in with them to support their bid against say, Siemens is a big competitor for PTC. And in the case of ANSYS, Cadence is. And we're absolutely more than delighted to go in. Of course, these sales cycles are different to our mainstream business. They don't close within 3 months. They take much longer, and we need to resource that. And of course, the things that we do together in terms of what I referred to as digital bridges on the cloud, it would be a differentiated aspect of our combined offering where, say, electronics gets connected to simulation on the cloud, same with PLM, same with mechanical care.

Garry Sherriff: Okay. Yes, that makes sense. The 365 adoption, I'd love to get some understanding of those customers. Could I get a sense of the proportion of the new customers to Altium, i.e., nonexisting Altium customers, but brand new customers or new logos to Altium for 365? And the follow-up for that is, what portion are supply chain members or your manufacturers?

Aram Mirkazemi: Majority of these customers are Altium Designer existing customers, which is the most important thing. Our ability to take traditional customers onto the cloud, this is the most significant part of our strategy. New logo customers, they're also adopting 365, some of them coming in because of 365. And as far as manufacturers and other type of activity is concerned, there are people on our Altium 365 platform that are not PCB designers, traditional PCB designers or schematic designers. They are brought in by our customers. And those are a significant part of our strategy to directly monetize 365 through, what I call, a SaaS selling motion. So a, mostly existing customers going on to the platform, that's the biggest positive. B, new logo customers adopting it at a very healthy rate and some come because of 365 . And people outside our traditional users are also coming onto 365 through a viral effect and invitation by our customers. That's how you see the number of users growing faster than the number of accounts.

Garry Sherriff: Understood. Last 2 questions, 1 on churn and 1 on your finance department. Starting with churn, discounting, you mentioned is now at historical low levels. What portion of your ARR is on discounted product? And are you budgeting for much churn into FY '23 as those discounts start to roll off?

Aram Mirkazemi: The discounting situation is actually was something that was early in the phase. And as we move forward already, we have pretty much cycled that through. So we're out of that phase. And as far as the portion of the TBL or the recurring revenue, it's not a huge significant part of our recurring revenue in a way that, say, a churn will dramatically impact our growth in ARR. As you noted, our headwind for TBL, term-based licensing, it's moderately low. And then in the same way, the corresponding aspect of that is the possible churn, and we also expect that to be low.

Garry Sherriff: Last question on the finance department. You've had a number of changes over the past 12 months or so. Is there an underlying issue here? And I guess the follow-up is, Richard, are you in running for that permanency overall?

Richard Leon: Garry, thanks for throwing that one at me. So the changes in the finance team is along the lines of what Aram was talking about, the great rejuvenation. We know that we are on a growth trajectory. And in order to pursue that, we need to scale up all our people, invest in training, spend more time with them. And that's what we're doing. We're doing this not only in finance, but across a lot of all the other functions. We also foreshadowed that as the company grows, it's very important that the senior management team congregate around headquarters. So we did say in the search for the CFO, we will be looking for someone who will eventually be residing out of the U.S.

Garry Sherriff: Okay. And so you, therefore, wouldn't be relocating to the U.S., just to clarify?

Richard Leon: Just to clarify, at this stage, I have no plans to relocate. That is a discussion between me and my other boss at home.

Operator: Our next question comes from the line of Siraj Ahmed with Citi.

Siraj Ahmed: Aram, just touching on China. Can you give us some more detail on what your -- how you're thinking about China performing in second half and just over the medium term, given this -- as you said, there's some issues with license compliance?

Aram Mirkazemi: The situation in China, if you recall, when COVID happened first time, it took the entire quarter, Q3of FY '20, out. In China, the way the restrictions and those things applied are quite different. And just prior to the Winter Olympics and Omicron, they were super sensitive and careful about how this was handled. And as a result, we kind of had a very poor month in December. But with the Beijing Olympics almost completed, we anticipate to pretty much return back to a more normal phase. So we see our second half to be different in its profile than our first half. That's barring that there'd be no outbreak, significant outbreak of COVID in China.

Siraj Ahmed: Got it. And just think -- Aram, just looking at FY '22 guidance. I mean clearly, strong performance in first half. It implies a bit of a slowdown in the second half as you cycle stronger growth. But your medium-term guidance does require sort of 20% revenue CAGR, right? Just trying to understand how we should think about that second half revenue growth trajectory going to more than 20% in '23 and beyond?

Aram Mirkazemi: Well, the first half performance, obviously, was against a low bar that delivered 28%. Octopart's revenue grew by 105%. We are not having that in our calculus for the second half being just super cautious on that. But we see our core PCB business having this strong resurgence. In the second half, we're going to look at that carefully, and then we'll set appropriate expectations for FY '23. So it's really the core PCB business and enterprise sales that I look to see driving our growth into 20% and possibly mid- and high 20s given the fact that we essentially, in 2020 and '21, we didn't lose that growth. It just is delayed. And I expect that to come back in '23 to '25 period. And with all the things we've done in between, Altium is really a new look at Altium. The cloud is now -- is right at the heart of our core value proposition for PCB. Many customers actually refer to us as new Altium , and I believe that will give us that extra lift for us to get to the mid-20s and possibly to the high 20s.

Siraj Ahmed: Got it. And last one Aram, just confirming the guidance doesn't assume any contribution from Altimade. I believe it's currently on trial. And there's also a mention about targeted offerings for Altium 365 for the non-PCB designers. Can you just expand on that as well? It would be really helpful.

Aram Mirkazemi: Siraj, so that I make sure I understood. Are you asking about Altium 365 China and the contribution of non-PCB designers to our revenue?

Siraj Ahmed: Those are 2 questions. Just confirming that Altimade itself, you're not assuming any revenue -- much revenue contribution in your full year guidance? And secondly, regarding Altium 365, given you have these non-designer stakeholders like manufacturers and other stakeholders on the platform, there's a mention about targeted offerings again for them that you'll look to monetize in the future.

Aram Mirkazemi: So as we transition from the first stage of our, I guess, a whole process of connecting design space and manufacturing, from the incubation period to Altimade, our revenue going to transition from that to Altimade because of the supply chain shortages in that and the transition. The second half revenue from Altimade or smart manufacturing, if you like, is going to be more or less consistent with first half. And I don't have any expectations in the second half, to be honest. Even FY '23, right now, it's difficult to say how it's going to go. Even though they've been very excited about this moment, it's very significant. We've been talking about this for now, 2 or 3 years. And finally, we are going there, we can have this out there. We still got to get to the point where we can actually see the kind of experience that it delivers and the social reactions we're getting from the first group of customers. So it's difficult to speculate about the revenue potentiality of Altimade. Now as far as monetization of non-PCB design is concerned, as I mentioned, that's actually quite exciting. And you've seen one of the slides in the top right corner, call it, our SaaS business. The momentum is building up. The momentum is building up because we see thousands and thousands of businesses and users are actually on 365 and utilizing it as established part of their electronic design flow. And for us to monetize that directly and it's specifically in the area that you mentioned, it's exciting, but we don't want to rush into that. We've got to build an appropriate channel for that, and we're going to take our time in the second half. So as I mentioned, it will be in the next financial year that we'll be launching that effort. So consequently, the revenue impact of that would not be in the second half.

Operator: And our next question comes from the line of Paul Mason with E&P.

Paul Mason: Three from me. So the first one, I just wanted to get some clarification. Just in terms of the enterprise deals that you've announced, do they have a recurring element to them, like are they on term-based licenses? Or are they still sort of largely perpetual license arrangements in terms of how you're doing those deals?

Aram Mirkazemi: Paul, I must admit that the sound got distorted. So I didn't catch quite what you said. Do you mind repeating it, please? Yes.

Paul Mason: Yes, sorry. So just in terms of some of the enterprise deals that you called out, particularly for Tesla, where you've said it's your first $1 million ARR customers. So could you just give us a bit of detail here? Are they actually on term-based arrangements? Or are you selling still perpetual into these customers?

Aram Mirkazemi: No, they're on term-based arrangement, Paul. None of our enterprise customers ever been offered perpetual license and they're all on term-based arrangements. So when we say $1 million ARR, it's the run rate for Tesla.

Paul Mason: Okay. Great. So the second one was just on Octopart. I was just wondering if you could give some color, also there's a big spike in demand for search. But also you've gone and created like the Nexar APIs that are now available for your partners to use. Could you give us a bit of color on sort of the split between growth that's come from just Altium Designer users increasing their utilization versus growth from the APIs, meaning that there's more venues to search than there were previously?

Aram Mirkazemi: All right. The first thing to note, Paul, is that the volume of traffic that has been coming through onto Octopart website, we have not -- it has reached saturation as far as monetization is concerned. So there is maybe almost up to half of that traffic is currently not being monetized, will be passed on those things to partners and so on. But we are -- because of the contractual terms and so on, we have monetized a portion of that. Therefore, if that traffic comes down, it's not going to impact our revenue proportionately. The second thing is that the API, it has been growing quite significantly in terms of partners and the way that the industry is coming to rely on the Nexar/Octopart. A couple of halves ago, I estimate the API revenue from just top of my head from Octopart, would have been maybe [150] or so. The last half was just around [800]. And then now it's, I think, $1.4 million is quite a significant growth in that, and that's completely not related to traffic. It's related to Nexar and the ecosystem effect. They're partners counting -- these are not users, these are industry partners, counting on our Nexar, Octopart platform for insight and data. And of course, we are looking for new ways to monetize on the data and design insights through our channel partners. So we're confident that we're going to be able to -- obviously, the first half Octopart it's against 3 halves that was between [9] and [11] and then first half, it shot up to [20] plus. This is partly also a cyclical nature of that industry. The new cycle started with a big bang, and I don't expect it to go back to 2019 and '20 or anything like that, it's just moderated a little bit.

Paul Mason: Okay. Great. And just the last one also on Octopart. Just in terms of the sort of the real-time trajectory, it sounded like your answer to Siraj's question before you don't effectively have something like $20 million baked in for the second half. But are you seeing a step down in real time? Or is that still sort of running basically as fast as it was in the first half?

Aram Mirkazemi: It's -- the constraint is the commercial arrangement that we have with partners. So the traffic is still as high, but in terms of being able to extract more for that traffic, that is not going to be happening to the extent that we would like it to happen. Therefore, the second half, it's going to be no further growth in the way that first half did. So -- but still, there will be a growth relative to second half last year, but it was just a more moderate version of it.

Operator: And our next question comes from the line of Josh Kannourakis with Barrenjoey.

Josh Kannourakis: Just first one with regard to the -- some of the relationships with the non-PCB players in the ecosystem. Could you give a little bit more color in terms of where you are at in your thinking in terms of formulating those relationships and whether you think there'll be formal relationships or less formal relationships on a go-forward basis?

Aram Mirkazemi: I think you mean users on the 365 as opposed to industry partners?

Josh Kannourakis: Sorry, industry partners, no the -- yes, the non-PCB industry partners, yes.

Aram Mirkazemi: Well, from that perspective, we're getting a lot of interest in terms of all partners, pretty much all parties who are interested in electronics. They find Altium 365 and Nexar is truly a new phenomenon. Because in the past, the only way you can connect to electronics would have been through some form of on-premise, within customer site, a connection of a sort. But cloud completely changed that in Altium 365 and Nexar. It's something that they discovered by -- through their own customers telling them that this is interesting, this is real as well as their staff. So they're coming to us. I, for example, mentioned silicon design. This is further away than places that we usually cross. But we have had interest shown in that area as well for -- doing some work for advanced packaging. So yes, there is -- it's coming from all directions. But of course, we have to be very judicious with the way that we apply our resources in a way that our resources are optimally used to drive momentum and build up our customer base and user base in Altium 365. But yes, that whole area is going really well.

Josh Kannourakis: Okay. Great. And just with regard to scaling up the enterprise segment, maybe could you give us a little bit more detail just in terms of how many more heads, for example, you think in terms of sales you need within the business? And when you're thinking about some of the extra investment, how much is extra headcount versus potential sort of cost inflationary pressures that you've sort of mentioned?

Aram Mirkazemi: In enterprise sales, Josh, is not really the quantity that counts, it's the quality. It's really a different game. It's kind of people who can actually represent Altium within this larger organizations and can partner and team up with our strategic partners in terms of going to a site. One of the things that we're planning to do is to have a U.S. enterprise head, and an EMEA enterprise head as opposed to a global head. And that would automatically distribute the load and will allow us to bulk up in a much more managed and natural way. So it wouldn't be in terms of large numbers. It's the quality of the individuals and Altium being able to attract that.

Josh Kannourakis: Yes. Got it. And just final question. With regard to your 2025 -- FY '25 revenue targets, can you give us a feel for how much direct monetization is in there today? And I think any comments around how you think the direct monetization piece will increment into that by that -- by FY '25?

Aram Mirkazemi: Well, if we could hit that number in FY '25 without reliance on any inorganic revenue, I will count direct monetization in the way I talked about, if that will allow us to get to $500 million by 2025. But generally, when we talk about $500 million, we do not talk about Altimade or direct monetization of the platform because this stage is very difficult to quantify the amount. So when we say 2026, essentially 23% of growth between now and 2026 will get us to $500 million or 29% get us to 2020 -- to $500 million by 2025. And in between courses in between, I will count direct monetization revenue if that helps us to get to 129% growth. Hitting $500 million in 2025 without any acquisition, without TASKING that will be the highest carat of gold and the best thing we could do for our strategy of transformation through dominance. So we're all totally focused on that, and we can see a chance because the way we're coming out of this COVID period, we really actually feel that we've got a chance. But I don't want to set false expectations. So I'll wait till August before I provide an update.

Operator: And our next question comes from the line of Elise Kennedy with Jarden Group.

Elise Kennedy: I've got 3 quick questions. Firstly, on the core business, it looks like it was a bit softer than what we all expected. I'm just wondering, are you thinking that you're looking forward going to have a stronger or weaker position? Just keen to understand what you're seeing around the industry growth. Are your customers more or less cautious? My second question is just also around the -- you've mentioned you're acquisitive. If you're able to give any more color around the type of investment that -- color that we can get that's not commercially sensitive would be super useful. And then the last question I have is just around Nexar that higher-end product. I'm wondering what you're seeing in that competitive landscape and just how the product is actually resonating if you need to drive some of those strategic relationships, such as the one with the sale that you historically had looked at? Or is that product ready and strong enough with even additional investment in the sales team to be able to compete with some of those strong competitors there?

Aram Mirkazemi: All right. My first comment is that our core business has actually done well, at least the way we look at it. If you take churn out, Europe's done 25% growth. That's pretty remarkable. America's done 14%. Our enterprise sales done 16%. This is actually quite impressive. Our Nexus and Concord Pro products done 30%. So from that perspective, we're actually very encouraged by our core business in the way it performed in the first half. Then as for the -- your last question, which is Nexus and its competitiveness in the market against our competitors. The biggest thing about Altium and its entry into the high end of the market. It's the fact that Altium is agile. We're on the cloud. Whereas our competitors, they got legacy systems that come back from quite a number of years ago. And those solutions, they're developed at a time when electronics wasn't at the heart of everything. So from that perspective, we actually believe that we've got great advantage over them going forward. In terms of their incumbent, they entrenched. And that's where a strategic partnership with other adjacencies are critical for us to get into those accounts. They require us to essentially bring that aspect in a greater portion to our game. Our products are confident. It's cloud-based, and I don't see any problem in the product since -- as far as competition is concerned. And as far as M&A is concerned, like every one of those adjacencies, if you say PLM or MCAD or simulation, it's not just 1 bridge. There are set of multiple bridges for different aspects, like PLM has got requirements management. It's got component and library synchronization. It's got process management. It's got release of design data. There are many bridges that need to be built and maintained. Some of these things are less central. And for any area where an acquisition, a bolt-on acquisition, for example, can have with specific work that we're doing with -- or we plan to do with building these bridges, we'll be very much interested in those. That applies to PLM, applies to simulation, applies to MCAD or could even apply to silicon design.

Operator: Your next question comes from the line of Lucy Huang with Bank of America.

Lucy Huang: I've got 3 questions as well. So firstly, just in relation to the core Altium Designer subscription business. I just wonder if you can give us some color into the momentum coming into the second half? And how are the net additions tracking in January and February? And then secondly, in terms of Octopart, just a follow-up question. So you mentioned that we weren't able to monetize the traffic as efficiently. So just wondering whether there's scope in the next 6 to 12 months to rewrite some of these contracts with some of your partners so that you can maximize the monetization potential there? And then just thirdly, how many roles are you now looking for in the business? And I guess, what are talent looking for? Like are they -- what do you see as Altium's edge to attract key talent, given this is a broader kind of labor shortage issue globally?

Aram Mirkazemi: I guess the first question about our subscriptions and the way business has been operating in the first month half. The second half, the start has been great. It has been much stronger than first half. So from that perspective, I see momentum just continuing and getting stronger. As far as subscription part is concerned, a lot of it is in the -- is back-ended. So it's difficult to judge that by the first month and 1.5 months. But generally, our second half is a stronger part of our subscription business. And as far as efficiency of monetization with contracts, we're working on that. That's something that we're actually not only working on that. We're also seeing opportunities in us to take our monetization scheme to a more sophisticated way. There is not wholesale per contract. It's got much more dynamicism in it in terms of different areas, different parts, categories and so on, so we can monetize differently. So I actually see this as a great opportunity for Altium to move up in the way it monetizes traffic. And as far as your last question, Lucy, is concerned about roles and the type of talent we need. I guess we were a software and product company. And now we are a software product company plus cloud platform and services companies. So naturally, as we are more successful in this cloud platform and services, we will be evolving our roles in a way that it will now be appropriate for the combination of these 2 platforms in the company. We feel pretty confident in terms of our ability to attract because we can -- we have a very exciting growth trajectory, which is the #1, #2, #3 as to why talent wants to join you. And also we differentiated, our culture is actually quite attractive. We have areas where we're targeting and I feel confident that we'll be able to achieve our goals. I can't give you a number for roles, but I believe that we're -- I'm confident about it. We have never gone out and competed in the talent in the past. We have always had the fortunate situations where people want to come and join us. But now we are putting together concerted efforts to go out there and make our pitch, and I believe we're going to do well.

Operator: I'm showing no further questions. So with that, I'll turn the call back over to Aram Mirkazemi for any closing remarks.

Aram Mirkazemi: All right. Once again, thank you for all your support. We appreciate your confidence in Altium, and we will continue to do our very best to create and deliver value to our shareholders. Thank you.

Operator: This concludes today's conference. Thank you for participating, and you may now disconnect.