Altium LLC (ALU) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Altium Limited Full Year Results Investor Call. [Operator Instructions] I would now like to hand the conference over to Ms. Kim Besharati, Chief of Staff. Please go ahead.

Hello, everyone, and welcome to the Altium investor call. I'm Kim Besharati, Chief of Staff and Head of Investor Relations. Joining me on the call in Sydney is our CEO, Aram Mirkazemi; President, Sergey Kostinsky; and CFO, Richard Leon. Today, Altium released to the ASX the company's financial results for the full year ended 30 June 2022 and our investor presentation, which we will discuss with investors over the next few days in Sydney. During this call, we will share details of Altium's strong financial performance for fiscal 2022 and our confidence for a very strong fiscal 2023. Aram will share color as to how we are making great progress towards our goal to dominate the PCB software industry and to transform the global electronics industry, where we aim to bring both the practice and the business of engineering onto our cloud platform, Altium 365. 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 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.

Thank you, Kim, and good evening, everyone. Today, I'm pleased to report that Altium delivered strong financial performance for the financial year '22. We exceeded the financial targets that we set for ourselves at the start of the year. This is both in terms of revenue growth and profitability. Revenue grew by 23%, and the margin increased to nearly 37%. I continue to be amazed by the robustness of our business. Altium consistently shines and shows the strength under diverse and trying conditions. This is from the pandemic to our restructuring and hard pivot to the cloud and now to the world teetering on the verge of a recession under inflationary pressure and unprecedented geopolitical instability. Altium's strong financial results reflect the power of the company's 2-part business strategy of Electronic Design Software and Engineering Cloud Platform. Our Electronic Design Software business is supporting our pursuit of market dominance, and our Engineering Cloud Platform business is powering our transformative agenda for the global electronics industry where we aim to bring both the practice and the business of engineering on Altium 365 from design to supply chain to manufacturing. Our Engineering Cloud Platform business delivered record revenue growth of 76% to $55.5 million. As the market leader in global parts search, Octopart delivered value to almost every single user and company, large or small, to ease the challenges of the global supply chain disruption and shortages. While this record financial performance may not be beaten in the foreseeable future, Octopart has cemented its dominant position and proven its unique strategic significance to the electronics industry. Standing next to Octopart and fast rising to a greater level of significance for the electronics industry is the industry's exciting new entrant, Altium 365, a collaboration cloud platform unrivaled in its popularity, not only in the electronics industry, but in the wider engineering world. The strong adoption of Altium 365 continues to exceed expectations. Since we last reported, we have increased the number of our monthly active users to almost 24,700, with quarterly CAGR of 31%. And the number of monthly active accounts over 9,300 with a quarterly CAGR of 24%. The greater rate of growth of active users reflects the increasing impact of the network effect of Altium 365, growing users from outside our traditional user base. Altium 365 is breaking through beyond what most within the industry thought was possible. Our Electronic Design Software Business is transitioning from the old world of stand-alone desktop software with perpetual licensing to the new world of connected cloud-enabled enterprise software with a term-based monetization model. Our Electronic Design Software Business delivered a solid performance in financial year '22, growing 12% for the year to almost $170 million. This is notwithstanding China, which contracted due to the extreme COVID lockdowns, and the Russian war, not to mention our ongoing business model transition. Our business model transition from perpetual to term-based licensing is progressing well with 33% of new seats sold being term-based licenses. This, combined with the uptake of higher-value seats that include Pro and Enterprise level capabilities, have driven the average annual subscription seat price up to 20 -- $2,170, which is a jump of over $400 in the next 2 years. This positive trend will accelerate our annual recurring revenue run rate, which is the underpinning of our drive towards our aspirational goal of $500 million. Altium's financial performance stands unrivaled within the industry. Altium's unique combination of high growth and high profitability sustained over many years makes Altium a highly attractive value proposition. This is demonstrated by a 5-year revenue CAGR of over 15% and EBITDA margin of mid- to high 30s, a strong balance sheet and a cash position of almost $200 million, an operating and free cash flow that underpins the strong profitability, growing recurring revenue and consistent EPS and dividend growth. Altium's vision of industry transformation is highly dependent on strong execution and product development. During financial year '22, we delivered additional enterprise capabilities in Altium 365 and continued building digital bridges to adjacent engineering domains to become the engineering platform to support workflows of modern enterprises in an easy-to-deploy and cost-effective way. We also achieved industry accreditation SOC2 Type 1 for Altium 365, recognized as the world-leading standard for cloud infrastructure, systems and controls. In addition, Octopart launched CAD Model Marketplace with the world's largest repository of CAD models for electronic components. We also released Altium Designer 22 with new capabilities that provide supply chain insights directly in the design experience, delivering advanced board design capabilities for fabrication, enhanced simulation tools and real life cycle management with Altium 365 to work from anywhere with anyone. Altium continues to attract strategic interest from large global players from design to engineering and manufacturing. This confirms Altium's unique position and rising significance in the engineering ecosystem for digital transformation. Altium's strategy of dominance and transformation for electronics design through its most popular electronic design software, Altium Designer, and its new and unrivaled engineering cloud platform for electronics design and manufacturing, Altium 365, takes Altium's historical competitive advantage in the mid-market to a whole new level. Altium has been advancing with an open mindset, an open platform on the cloud to connect all segments of the electronics industry. Our strategy of transformation through dominance and dominance through transformation is making Altium a formidable competitor within the electronics industry. We are betting our future on transformation through platform and cloud, and I believe dominance will naturally follow as a consequence. The engineering world is the last of major industries that is moving on to the cloud. As is the case on the cloud, the creator of network effect will be the eventual winner. And on the cloud, the winner takes all. There will be no prize for second place. There is no second search service to Google. There is no second place to Amazon. There is no second place to Salesforce. There is no second place to LinkedIn. This is due to the strong network effect of these services on the cloud, and we are single-mindedly focused on being the first to achieve that effect within our industry. Some of our competitors have not even made a start. Please rest assured that we do not allow our leads to make us too confident. We appreciate that we have a large lead, but until the winner is decided and the fat lady sings, the game is not over. We do not want to become MySpace or Blockbuster Video or, god forbid, the Kodak of this industry. As I have always maintained, financial strength is the underpinning of all successful pursuits. In my view, transformational pursuits are no exception to this rule. And as such, Altium will remain fully committed to delivering financial performance year-on-year as we complete and pursue dominance and transformation. I would now like to provide guidance for financial year '23 and share my confidence about the future in Altium's continued growth. As most of you know, the core driver of our business is related to the rise and the significance of electronics, which is at the heart of the new and smart and connected world. The emerging trends such as 5G communications, electrification of cars, autonomous driving, industrial IoT, AI and data science, mobile devices and the general demand for smart connected products are driving further demand for electronics in our software. Another emerging and impactful macro trend relates to the decoupling of China and U.S. economies. This is slowly giving rise to the formation of 2 independent and competing ecosystems for electronics. This is resulting in ongoing supply chain challenges and disruption that will potentially deepen over time. Among other things, this bodes well for our electronic parts search engine business, Octopart. My confidence in Altium's long-term growth prospect is quite high as the design of printed circuit boards and the sourcing of electronic parts are the 2 fundamental processes in the creation of electronics hardware, and Altium has a very strong market position both in the West and in China. Turning specifically to financial year '23, I believe that we will have a few tailwinds. These include Altium 365, which is increasing the attractiveness of Altium's PCB design software, resulting in greater demand and competitive advantage. Another tailwind relates to Altium's design platform with advanced data and process management capabilities gaining mainstream adoption, which is resulting in higher revenue per seat. Finally, it is hard not to see Octopart's rising significance in the industry, which is expanding its potential for revenue generation in the long term, but also in the next 12 months. There are, however, a few headwinds that we must contend with. These include Altium business model transition from perpetual licensing to term-based licensing, which has been in progress now for nearly 2 years. The good news is that the headwind is already decreasing and is expected to move to a tailwind in financial year '24 or '25. Another mild headwind relates to the recent restructuring and the digitization of Altium's transactional sales, which, while driving efficiency and stronger operating leverage, are yet to reach the same level of effectiveness. And finally, China's approach to zero COVID could continue to create some further headwinds for the first half. Having regard to the above, our guidance for financial year '23 for total revenue is between $255 million to $265 million, representing 15% to 20% growth. This target is comprised of $195 million to $200 million for our Design Software business, representing 15% to 18% growth, up from 12% growth in financial year '22; and $60 million to $65 million for our Engineering Cloud Platform business, representing 20% to 30% growth, down from 76% growth in financial year '22. Altium has always delivered strong operating leverage, and this will continue in financial year '23. Enhancers to our operating leverage during financial year '23 will include a higher realized price for Design Software due to mainstream adoption of enterprise and platform capabilities and moving away from promotional discounting. Additionally, digitization of our transactional sales processes is delivering greater efficiency in cost of transactional sales. And Octopart, becoming the dominant search engine for electronic parts with stronger pricing power, will continue to drive strong margins. In some part, offsetting these enhancers to our operating leverage are a few detractors. These include strong Altium 365 adoption translates to growing cloud infrastructure costs with as yet no revenue to offset. Inflationary costs on salaries and wages and increased professional fees for compliance and regulatory-related activities are additional detractors. The net effect of the above is that we are committed to deliver a stronger margin than previously guided for financial year '23. The range will be up by a full percentage point over earlier guidance to an underlying EBITDA margin of 35% to 37% for financial '23. While the world outlook remains uncertain with all that is going on, we remain committed to our aspirational targets in financial year '26 of $500 million in revenue and 100,000 seats on subscription with an underlying EBITDA margin of 38% to 40%. I would like to conclude by sharing my thoughts around our aspirational targets of $500 million and 100,000 seats on subscription. Much has changed in the world and within our business since we first devised these targets in FY '19. The targets were introduced with the intent to achieve dominance in both market share and in mind share as prerequisites for industry transformation. Today, our design platform and cloud are accelerating much faster than we imagined. The world is also undergoing change in an unprecedented way from the global pandemic to the latest Russian war and the decoupling of China and the U.S. economies. This is influencing the way that we think about our aspirational targets based on what we are seeing and experiencing. As Altium achieves a stronger uptake of higher-value subscription seats and with the growing mainstream adoption of our cloud and platform capabilities, we believe that we can achieve our $500 million target by relying on somewhere between 75,000 to 90,000 seats from high-quality subscribers. What's more, achieving 100,000 seats on subscription remains a distinct possibility. As the engineering world moves from desktop to cloud, the current active subscription will be required to connect a software seat to the cloud. It is worthwhile to mention that we ended FY '22 with a total of 99,500 active software licenses worldwide, of which only 50,600 -- 56,912 are on subscriptions. This number grew by 10.3% over the last financial year and represents the total number of potential subscription seats, which is behind our aspirational target of 100,000 seats on subscription by financial year '26. In conclusion, I'm very pleased with Altium's FY '22 performance, have a strong confidence in our FY '23 outlook and believe that we are well and truly in the game for our aspirational run chase to our FY '26 targets. I will now hand over to Richard.

Thank you, Aram, and good evening, everyone. Altium has delivered an impressive financial performance for fiscal 2022 with all our key financial metrics exceeding guidance. Let's begin on Slide 10. But before I jump right in, for those that are already familiar with Altium, you will notice that the previous 4 business quadrants have now been streamlined into our 2-part business strategy being Design Software, once digital and enterprise software; and Cloud Platform, which was SaaS and [indiscernible] or Nexar. To make it easier to follow during this presentation, we have applied a yellow color spectrum to denote our Design Software business and a blue color spectrum for our Cloud Platform business. Now to FY '22. Altium delivered group revenue of $220.8 million, up 23% from the previous corresponding period. Both Design Software and Cloud Platform revenues grew. Our Design Software business performed strongly, growing revenue by 12% to $169.3 million, a wonderful effort by the team to turn this around from the 2% growth achieved in FY '21. And our Cloud Platform revenue was up 76% to $51.5 million. This, together with our sticky recurring revenue increasing to 75% of total revenue compared with 65% in the previous corresponding period, demonstrates the long-term attractiveness of our offerings to our customers. Slide 11 shows how each of our regions fared in FY '22 Design Software revenues. Our 5-year revenue CAGR shows each region continues to deliver double-digit revenue growth. When looked through a shorter-term lens comparing only to the previous year, Americas revenue was up 18% to $69.6 million; EMEA, up by 17% in local currency to EUR 48.7 million; the rest of the world group grew by 15% to $16.3 million; while China declined by 10% to $21.2 million. China's performance reflects the impact of several COVID lockdowns in China. Around 1/5 of the Altium China license compliance business requires in-person visits to complete the process, and this was curtailed through lockdowns as the Chinese government took extreme measures to contain COVID. There is also heightened sensitivity to aggressive license compliance activities resulting in our local team taking a more measured approach. As is the case with Altium, we are addressing this by adjusting our approach through smarter execution to accommodate the local conditions. On to Slide 12 and another slide [ pause ] to quickly describe another simplification we are introducing in relation to our Design Software products. We have moved away from product names such as [ SCE ], Concord Pro, NEXUS, CircuitStudio, to name a you, and modernized our product range to the Community and Standard; and the higher-value, higher-level, Pro and Enterprise. This, we believe, will help our customers and potential customers better consider our offerings suited to their platform capability requirements. As we transition to this new nomenclature, some slides may continue to apply the superseded names. The most pleasing aspect of Design Software revenue growth is the uptake by our mainstream customers adopting our Pro level platform capabilities with revenue up 82% to $22.2 million. Our Enterprise sales performed well with NEXUS revenue up by 60% for the year with large deals, that is over $1 million, closed with Veoneer, Meta Platform Technology and the Dräxlmaier Group. The pipeline of NEXUS customers is strong and bodes well for picking up a further gear for Enterprise level sales into fiscal 2023. The uptake of these high-level, higher-value offerings is a leading indicator of the value our customers appreciating our platform capabilities. Looking now to our annual recurring revenue, ARR, on Slide 13. Our Design Software ARR grew 15% during the year to $123.5 million. I would again draw to your attention our higher-level offerings of Pro and Enterprise platform capabilities that saw a noticeable uptake with ARR growing 42% and 48%, respectively, when compared to the previous corresponding period. These higher-level offerings now represent 1/4 of our total ARR. As Aram mentioned, this bodes well for our cloud strategy as more designers identify Altium as a critical solution provider. Let's take a moment to reflect on this phenomenon of the increasing uptake of our higher-value offerings and its relationship between ARR and subscription seats. The graph on the left-hand side of Slide 14 combines our ARR with our growing number of subscriber seats. To the right shows the positive impact of the increasing adoption of higher-value subscriptions applying a very simple calculation of our closing ARR as of the 30th of June '22, divided by our subscription pool. In this case, we take our ARR of $123.5 million divided by our subscriber pool of some 57,000 to arrive at an average subscription price of $2,170, as you can see on the graph. This represents an increase of 10% compared to the previous year and a 26% increase to the average subscription seat price back in FY '18. Allow me to take some time to describe the significance of this. As Aram mentioned earlier, we anticipate we can achieve our aspirational $500 million revenue target with only 75,000 to 90,000 seats on subscription by FY '26. We believe the encouraging trend we are seeing with the uptake of our higher-value subscription seats by our mainstream user base, we will continue to see a rising average subscription seat price. Based on our expectation that our average subscription seat price will increase and depending on the pace of the uptake for our higher-value platform capabilities, will allow us to reach our $500 million aspirational revenue target with only 75,000 to 90,000 subscriber seats in FY '26. Moving now to Slide 15, it illustrates the short-term effect of what we call price-volume normalization. Simply put, what we mean by this is the impact of our decision to discontinue promotional discounting offers, especially during the heart of COVID, that has resulted in a modest new license seat growth during FY '22. We expect this normalization to be short term and return to historic norms in FY '23. And by the way, this graph shows only 4 Altium Designer licenses and excludes SE and NEXUS licenses. As a result of this price-volume normalization that is low or no discounting, we achieved a 22% increase to our realized average price during FY '22. The expectation for sales volumes to return, together with improving realized average price for Design Software, gives us the confidence for our FY '23 target. The right-hand graph illustrates our business model transition from perpetual license to term-based licensing is progressing well. Term-based licenses now represents 1/3 of all new licenses sold and grew by 63% for the year. The combination of increased term-based license sales, together with a higher realized average price, has reduced the impact of headwinds associated with the transition from perpetual to term-based license. And for those that may be new to Altium, the business model transition headwind is essentially the short-term revenue price differential impact of replacing a higher-priced, but one-time perpetual license, with a more attractively priced recurring term-based license, with the expectation that the lifetime value of the term-based license will be more robust. To this extent, the better-than-expected take-up of term-based licenses has had a positive compounding effect building up our term-based license pool. This, coupled with a higher realized price for term-based license, allows us to anticipate these transitionary headwinds will convert into a tailwind sooner than expected and likely around FY '24, '25. During FY '22, our Design Software active licenses also grew, if we turn now to Slide 16. You will see, as Aram mentioned, we now have 99,500 active licenses, up more than 10%. This growing pool that includes all levels of our offerings, including the higher-value platform capabilities, is a nice feeder to deepening our subscription pool, which takes us to Slide 17. This speaks to one of our core assets being our highly-priced subscription pool. New seats, upgrades and rejoins are a central ingredient to deepen our subscriber pool. During the year, we added 12,600 subscribers from new seats plus upgrades and rejoins. While developing countries' renewal rates improved, the number of lapsed seats was more pronounced relative to the size of this pool. For some color, the lapsed subscribers within this group were impacted by the Russian war and the COVID lockdowns in China. Within the developed countries group, renewal rates also improved to nearly 89% and added just over 3,000 net new subscription seats. However, upgrades and rejoins decreased some 40% from last year. And as previously mentioned, we believe this is an outcome of our discontinuation of promotional discounting, where those that may have enjoyed a lower price in recent years are considering when to upgrade or rejoin and adjusting to our new pricing levels. FY '22 also delivered increasing momentum of our customers migrating from on-prem to on-cloud. Adoption of Altium 365 is a critical aspect of our Cloud Platform strategy. As you can see from the left-hand side graph, migration from on-prem to on-cloud grew some 74% during FY '22 to over 12,600 fully adopted seats. Reaching to the cloud now on Slide 18. Our Cloud Platform business, particularly Octopart, lifted by the global electronic parts shortages, delivered a record performance for the year with revenue up 76% to $51.5 million. During the year, Octopart doubled the number of Offer Clicks to over 31 million clicks. Adoption of Altium 365 is covered in Slide 19. We are thrilled to see the growing monthly active accounts and monthly active users. We observe the beginning of a network effect with the ratio of active users to active accounts growing from 1.67 to 2.55 in just a little over 2 years. The significance of this is the drawing in of new and different users such as mechanical engineers, procurement managers, et cetera, thereby expanding more broadly our traditional user base. This is a major part of our driving dominance and transformation strategy. On to our financials. Firstly, our operating expenses on Slide 20. Operating expenses, the difference between our revenue and EBITDA, increased by 17% to $141 million during the year. The main contributors to the increased operating expenses as compared to the prior year are: increased headcount costs, mainly in R&D to support the development of the cloud products, and inflation adjustments with total benefits expense going up by $10.6 million or 13%; there's been the $2.5 million on higher spend on Amazon Web Service hosting fees for Altium 365 infrastructure; another $2.5 million expense for web advertising to drive business; plus an increase in share-based payments expense, up by $2.5 million, because of higher percentage of achievement of the performance hurdles; and additional costs associated with compliance and regulatory activities. Our reported EBITDA was 36.2%, up [ 33.33% ] 1 year earlier. Underlying EBITDA, which excludes $1.3 million one-off costs related to the Altium support of its employees caught within the Russian war, delivered a margin of 36.7%, up 34.3% -- up from 34.3%. For Slide 21, the takeaway here is Altium continues to have a strong balance sheet with increasing cash balances up 4% to $199.3 million and 0 debt. On to the next slide, 22, where the cash-generative nature of Altium's business, underpinned by growing recurring revenues, allowed us to declare a final dividend of AUD 0.26, taking our full year dividend of AUD 0.47 or 17.5% increase year-on-year. Free cash flow grew to $71 million in FY '22, up from $59 million. And cash conversion remained strong and stable, demonstrating the quality of our revenue and improving leverage. To my final slide on 23. In summary, as I mentioned at the start, Altium exceeded all key financial metrics and delivered another year of resilient top line growth with revenues of $220.8 million, up 23% compared to the previous corresponding period. This was achieved through the following Altium qualities: increased uptake of our higher-value, higher-level Pro and Enterprise platform capabilities; realization of higher average price; faster-than-expected business model transition from perpetual licenses to term-based licenses; recurring revenue now representing 75% of total revenue, improving our annual recurring revenue; active Design Software licenses now just shy of 100,000; and record Octopart Offer Clicks in revenue. This, together with Altium's DNA for delivering real cash earnings, culminated with our underlying EBITDA margin improving to 36.7%, up by 2.4 percentage points. We believe these qualities are what generates Altium's business resilience to withstand whichever direction the economy in general will take. This wraps up the formal part of this call, and I will now pass over to Q&A.

[Operator Instructions] Your first question comes from Nick Basile from CLSA.

Just a couple of questions from me. On the core software business, just interested in thinking about the revenue growth that you've guided to next year, the 15% to 20%, versus the second half revenue growth. Just trying to understand the impact that you expect to see from price increases and then, I guess, perhaps a better China environment driving that number versus what you did in the second half. And then on Octopart, just interested, margins were a lot stronger than what we were expecting. Can you talk about how sustainable that will be given your slower revenue growth? And a final one on M&A. You've got a substantial cash balance now building. What kind of opportunities are out there for you? Or are you more looking at potentially some capital management?

Nick, thanks for those questions. I'll take the first one on the target for our software business next year. What we've been focusing is essentially on the higher-value seats, which is driven by the success of our platform and cloud offering. Essentially, the old world of stand-alone desktop subscriptions is now transitioning to connected, platform-based subscription and, in this way, is bringing higher-value revenue from each seat. That has been the driving force. If you look at our traditional fee for subscription for a seat, it's been around $1,600, $1,700 per year. And then in 2021, it picked up to $1,900 something. And in '22, yes, that we finished, it went up by another $200. That essentially moved across all our subscription pool, which means that our focus is going to subscription seats from higher-quality subscribers. So for next year, $195 million to $200 million guidance, if you look at our recurring to nonrecurring for our software business, which is if you had the chance to read the 3rd slide, it's $52 million is nonrecurring revenue for FY '22. We're guiding to $55 million to $65 million roughly for the nonrecurring. Of course, that depends on China coming back to some level of normalcy. And then that leaves the rest of it to come from our subscription pool, which is assuming higher average realized subscription seat. And of course, we're also expecting to grow our subscription pool. So that's how, if you do the math, that's how we'll get to the $195 million. $55 million to $65 million, if you take that out of the $195 million to $200 million, you end up with [ $130 million ], $140 million. And that essentially needs to be divided by the number of subscribers, that gives you average realized subscription seat price. And you'll see that, that number is well within reach. So that's the first part. As far as the margin is concerned, I guess it's just Octopart continued to do so well. If you recall or those who recall the first half when we were asked about Octopart, we were very conservative without expecting any significant growth. But it did grow quite significantly the second half revenue, and that essentially translates to margin. And as for China...

M&A.

Oh, M&A, sorry. With M&A, we are preparing to take advantage of the worsening market conditions. We're building internal capacity to become active on M&A on the cloud side of our business. So this is now playing well to our hand, and this is something that we're going to focus on over the next couple of years.

Your next question comes from Bob Chen from JPMorgan.

Just a few questions from me. Just given that push towards higher ARPU customers, can you talk a little bit about your overall pricing strategy and if there's any room to pass on some of the wage inflation that you're seeing as well?

Our pricing strategy, obviously, we are adjusting for the inflationary increases, but we are not aggressive on that. Perhaps more aggressive on the perpetual licenses than we are on term-based licenses. But the real increase in our average realized subscription seat price comes from the higher-value subscription seats, that Pro subscription, which means that customers that go on to the Pro level capability, it comes from Pro customers that go on term-based licensing and also from our Enterprise customers. Our traditional price seat or realized price per seat has been around $1,700. Those products, they are fetching well in advance of $3,000 a seat, and that's what's really driving the average realized seat price.

Okay. Great. And then just on the Octopart business, obviously, very strong for the second half. I mean in terms of the supply chain normalizing, like how are you thinking about maybe the normalization in that business into next year? And in fact, have you seen any of that over the last couple of months?

With regard to normalization, as I said in my prepared remarks, we actually see the decoupling of the 2 economies, so the U.S. and China, is quite significant in terms of creating 2 independent and competing ecosystems for electronics. So from that perspective, we don't see the world going back to how things were. The supply chain disruption, although was triggered by pandemic, changed in the way that consumers chose electronic products, it's really now deepening with that decoupling of the 2 economies. So from that perspective, we don't see a situation where we go back to the old days. But from the perspective of whether this growth that we enjoyed last year will continue, well, it's not going to continue the same rate as last year, but it still will grow in FY '23, and the July traffic is looking strong. So we expect the growth to continue, but not at the rate that it did in FY '22. And you can see that what we're guiding the market to is quite conservative, 20% to 30% growth on our cloud business.

Okay. Great. And just a final one. Given that slight shift in your 2026 guidance where you're still looking at 75,000 to 90,000 subscribers to get to that $500 million revenue target, I mean is any of that due to maybe the competition as well that's limiting your ability to get to that 100,000 mark? Or is it purely just a pricing strategy change?

Well, zero to do with competition. If you look at the time when we actually set this target of $500 million and 100,000 subscribers, it was before term-based licensing, it was before our cloud strategy. And if you take 100,000, let's just do the math of it, the 100,000 subscribers at $1,700, that's only $170 million towards that $500 million. If you look at the recurring to nonrecurring at the time, it was almost 50-50. So up to $350 million were to come from our PCB business, the half from recurring from subscription and half from perpetual in essentially direct traditional old business. But now with the business model transition and the adoption of our design platform capabilities, we're anticipating we're going to have 80:20 ratio between recurring and nonrecurring. So it means that our subscription pool is going to drive our revenue towards $500 million. At the rate that we're going, we don't need to have 100,000 to get to $350 million. Even at 55-65, which I expected to be more like $60 million to $70 million for nonrecurring or maybe even higher, you will end up with $250 million to $260 million from that $350 million. And then if you look at it $3,000 to $3,500 as average realized seat price, we only need 75,000 to 90,000 thousand to actually get there. This is much more powerful than we actually imagined we could drive in terms of revenue from our subscription pool, predominantly driven by our platform adoption by the mainstream. Our price increases and models, they're not really the reason why we're getting such increase in the average realized seat price. It's really the adoption of our platform capabilities. For those of you who've come from a few years back, it's really Vault and our data management software and services that because the cloud now is getting mainstream adoption, that means we're having just a lot of people on Pro level, which essentially in the old world would have been on being -- or going on to Vault. That's what's happening, and 75,000 to 90,000 should get us there.

Your next question comes from Roger Samuel from Jefferies.

I've got a few questions. First one, just on your longer-term revenue target of $500 million, I noticed that on the slide, you don't have any references to 10% to 20% from future M&A. Is that a reflection that you're more confident on your future targets?

Well, the short answer is yes. We are essentially expecting up to $350 million from our PCB business, up to $100 million from our Octopart and the remainder is coming from direct monetization of our cloud platform. This is something new we didn't have. And essentially, this is going to get us to $500 million without need to actually do acquisition.

Okay. That's great. And my second question is around the decoupling of China from the rest of the Western countries. I mean, is that going to be a benefit for your PCB design business as well in the sense that you'll find more PCB designers residing in China who are making their own design as opposed to more and more designers coming from Western countries, so that could actually be a tailwind for you going forward?

I'm not sure about the PCB design software side, but I'm certainly sure about the Cloud Platform and our Octopart search. Essentially, the decoupling, this means that the whole -- the way that the industry is set up is going to need to change growth on the West and in China. And in both cases, cloud platform and search are the key ingredients of being able to accomplish that in modern days. So -- and I guess we always see that our Cloud Platform and our strength in search is going to drive our Design Software business. And essentially, we call this as dominance through transformation.

Right. Okay. And you mentioned before that you're planning to directly monetize Altium 365. Have you got any guidance as to how much the Altium 365 will cost on a per month or per year basis?

No, I'm afraid we're not going to be able to give any information on the pricing or how we're going to exactly monetize. What's important to us is pick the optimal point. The optimal point, of course, is related to making sure that we maximize our competitive advantage that we have. We want to allow this -- the thing that Richard mentioned about user to account ratio, that's quite a significant ratio. It's the thing that determines the network effect being created by Altium 365. So we like to see that grow, but we're obviously going to pick time where we can bring revenue. We are going to need that for our $500 million, and we're going to pick optimal timing for that.

Your next question comes from Siraj Ahmed from Citi.

Aram, I have a few. Just first one in terms of guidance. Just keen to understand what you've assumed for any potential macro weakness in the guidance and what you're seeing today as well in terms of -- I know first quarter is not a big quarter for you, but are you -- what are you seeing in terms of new license sales and subscriptions?

We're doing well in the first 1.5 months. It's -- in terms of term-based licensing, it's continued to grow. There is continued strength across all fronts. So we're pretty confident that we're on target with our revenue. It would be great if our existing customers accepted the new world and begin to upgrade it from all the versions of our software. I'm sure that will come. That will definitely get us back on a much stronger trajectory. So we have guided to only 15% to 20% growth for next year, which is conservative as we go through this business model transition and the focus on higher-quality seats and subscribers.

Great. And that actually leads me to my second question. So in terms of the math that you provided for the $195 million to $205 million for Design Software, I think you mentioned 55 -- you're assuming nonrecurring of $55 million to $65 million, so let's call it $60 million. So that implies that $123.5 million in ARR grows to $140 million or so. I believe you've put a 10% price increase through, so that ARR should be, assuming no churn, that should be going up by 10%. So it sort of implies that net growth is only 4%. Is that because of this upgrade issue? Is that what you've assumed?

The thing -- Siraj, just one correction, the $123 million ARR is the ARR at the end of the period. The revenue number that you quoted at $140 million, that's the revenue which I take as average ARR. So we have to be higher than $140 million to actually hit that number. The price, 10% -- maybe, Sergey, you could speak to the price because the 10% price increase is not across everything. It's not like our $123 million ARR is going to grow to by 10% automatically. That math does not how it works.