Altium Ltd

ASX:ALU

Earnings Call Transcript 2023-Q2

[Operator]

Thank you for standing by, and welcome to the Altium Limited Half Year Results Investor Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions]

I would now like to hand the conference over to Kim Besharati, Chief of Staff. Please go ahead.

[Kim Besharati, VP, IR & Chief of Staff]

Good afternoon, 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 in Sydney is, our CEO, Aram Mirkazemi; our President, Sergey Kostinsky; and our Interim CFO, Richard Leon.

Today, Altium released to the ASX the company's financial results for the half year ended December 31, 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 the strong financial performance for Altium for the half year fiscal '23 and our confidence in achieving our full year guidance.

Specifically, Aram will share color as to how we're making great progress toward our goal to dominate the PCB software industry and to transform the global electronics industry, where we intend to bring both the practice and the business of engineering onto our cloud platform, Altium 365. Richard will share details around our financial performance for the half.

Please note as a reminder for 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 are 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, CEO]

Thank you, Kim, and hello, everyone. Today, I'm going to share with you our progress for the first six months of the current financial year and provide insight into what has driven our performance, and what is going to underwrite the success of the second half and beyond. Of course, the first and foremost measure of performance for us is, revenue and earnings growth. I'm pleased to report that we have done well on both accounts.

Revenue grew by 17% on a reported basis and 22% in constant currency terms and our margin increased to over 36%. With this performance, Altium again demonstrated the robustness of its business and its financial strength. It was a balanced contribution from the two sides of our business, our Design Software business contributed 16% growth, and our Cloud Platform business, Octopart, delivered 22% growth.

Both businesses combined to move our volume and value levers to deliver sustainable growth. We worked apart (ph) compensating for its declining Offer Clicks from the COVID page with increased Average Revenue Per Click and with our Design Software increasing average Subscription Seat price to compensate for the full impact of Altium exit from Russia and the COVID breakdown in China.

The revenue growth in our Design Software business came from a combination of Altium taking advantage of its dominant position in the mid-market and driving volume with unprecedented efficiency, and at the same time, leveraging the unrivaled value from our Cloud Platform to encourage customers to move to higher level product capabilities. This unique combination will support the sustained growth of our Design Software business for years to come.

Our dominance in the mid-market has now reached a point that we do not have to do much selling to close sales. Our sales cycle in the mid-market has shortened from historic six to eight weeks to now averaging around three weeks. This translates to a reduction in the cost of sales and allows us to focus on our value proposition for the higher end product capabilities.

Our volume performance both on the number of subscriptions and new licenses while satisfactory could have been a whole lot better, if we had not divested our 1,000 subscription seats in Russia and the China market had not closed for us in November and December. Our effectiveness to sell a higher product level capabilities is moving forward in leaps and bounds with a two pronged attack from both the mid-market and enterprise engagement to drive adoption and revenue growth.

What's remarkable is our mid-market customers are moving on to Pro and enterprise level capabilities through a transactional selling motion, which drives our bottom line, our Enterprise and Octopart sales teams. On the other hand, are combining to leverage our Cloud Platform and our strong position in the supply chain, along with our strategic partners to drive larger strategic sales.

This new approach and the unique combination of our volume and value proposition has allowed us to steadily grow our Average Subscription Seat Value. The Average Subscription Seat Value has now reached $2,304 up from $2,170 at the start of this half. This increase has been driven by the effectiveness of our Cloud Platform that facilitates the adoption of higher product level capabilities by the mainstream customer that has had little help from price adjustments.

I should mention, however, that we made some pricing adjustments in the first half that have just started flowing through. These pricing adjustments, therefore, both perpetual and term based new licenses in addition to subscription seats. This has had a minimum impact on our revenue in the first half with a less than 5% impact on the increase of our Average Subscription Seat Value.

The price adjustments, however, had a short-term negative impact on the number of new licenses sold. Since we started transitioning from perpetual to term based licensing, we have steadily been increasing our perpetual license price to encourage the adoption of our term based licensing. In the first half, for the first time, our average realized price for each new perpetual license reached $7,000. This is quite high by our historical standards.

As a result, in the short term, this has kept the number of new licenses sold flat in Americas and EMEA. This, in addition to the impact of China and Russia, reflect our drop in the total number of new licenses sold in the first half.

For our Cloud Platform business, the value and volume levers have a different dynamic. Volume is driven primarily by external market forces, which had a huge spot during COVID as the extreme demand for electronic products and the decoupling of the U.S. and China economies put strain on the supply chain. On the other hand, the value lever, as indicated by the Average Revenue Per Click has got a long economic runway that indicates that Altium has hardly scratched the surface of potential revenue growth.

Compared to Octopart, other aggregator and search platforms, such as those in real estate, car sales, travel and the like, receive a much greater reward for the value of the economic impact that they deliver within their industries. I believe that Octopart has a lot left in its value lever that will drive our Octopart revenue well beyond its current levels.

For us to get to the same level of reward for our aggregation and search capabilities within the electronics parts industry, we need to move Octopart from the second level in the industry value chain below distribution to the top of the industry value creation in electronics supply chain. This will allow us to fully realize the economic potential for Octopart.

Our strategy for this is to fully deploy and unleash Altium 365 to bring the design world into the front and center of the supply chain and as a consequence, position Octopart at the top of the industry value chain. Before elaborating further on this, let me first tell you about Altium 365 itself and how we have progressed in the first-six months of this financial year.

With Altium 365, we have continued to drive a strong adoption amongst PCB designers and as of this month, we have over 35,000 -- 33,500 monthly active users, up 36% and over 12,000 monthly active accounts, up 29% since August last year. This progress is very pleasing and are expected to continue.

We are now setting our sights to bring a new class of users on to our Altium 365 that come from a different segment of the industry. This class is the most critical class as these are professionals who are in the supply chain and are at the heart of procurement processes and hence, at the heart of realization of electronics hardware. Many of them are regular visitors to Octopart's website, a number in hundreds of thousands.

We are developing capabilities within Altium 365 that make it particularly appealing to procurement professionals. We believe we are not far from a point in time when we can pitch Altium 365 directly to the supply chain community through our Octopart website without any reliance on our popular Design Software brand and its value proposition.

This will mean that we will be able to create a true network effect on Altium 365 by having two distinct classes of users within the industry, operating on the same platform, which is critical for transformation. It will also ensure that our competitors can never catch up with us, has with all Cloud Platforms with network effect, the winner takes it all.

To bolster this effort, we intend to augment our existing position and strength with carefully selected M&A targets to make the Altium 365 value proposition even more attractive to supply chain professionals. To that end, we recently appointed a new head of M&A, who is part of our executive team in San Diego.

I would now like to say a few words about the progress that we are making with the direct monetization of Altium 365. Our approach to monetization divides the value proposition of Altium 365 into the two categories of the platform itself and the higher level business capabilities that run on that same platform. We intend to monetize the platform as a service with capacity based monetization and the higher level business capabilities with the SaaS business model monetization approach.

We are currently preparing to enter a pilot phase on both approaches to determine optimal pricing for value to both Altium and its customers. The platform monetization will be of particular significant in the higher end of the market as it is increasingly attracting industry partners. We are working with strategic partners to explore and explore it’s opportunities in the form of industry solutions for electronics. This includes large strategic partners in the semiconductor space in simulation and digital manufacturing.

I should also add that while this is exciting and full of potential to bring our Enterprise sales, strategic partnership and cloud monetization together into a synergistic endeavor, I do not want to give the impression that we are there yet, but I will be sure to keep you informed of our progress.

Another point that I would like to make is that the mid-market monetization of Altium 365 will be slightly staggered and is not dependent on our Enterprise and platform monetization. We will lead with the high end first to achieve optimal monetization and then to be followed by the mid-market.

What I've covered so far is an indication of some of the progress that we have made in the first half that I believe is significant and that I wanted to share with you. I would now like to turn to how we intend to deliver on the second half and beyond. As I mentioned in August, demand for electronics continues to grow, 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 demand for electronics in our software.

As for our business, the tailwinds and headwinds that I mentioned in August remained the same for the most part. The headwinds associated with Altium business model transition from perpetual licensing to term based licensing is subsiding as the pool of term based licensing is growing in size and with its recurring revenue countering the drop in our perpetual license revenue.

Another headwind is related to our digital sales and its effectiveness with respect to scale. While digital sales have had great success in creating efficiency and therefore paving the way for scalability, its effectiveness to come where opportunities that require deeper engagement remains work in progress. I expect that we will begin to make headway in the second half with our continued drive to bring effectiveness to our digital sales.

Our tailwinds on the other hand, are pretty strong and include Altium 365 increasing the attractiveness of Altium's Design Software even further, resulting in greater demand and greater competitive advantage. Our team's design platform with balanced data and process management capabilities continues to gain mainstream adoption, which is resulting in higher revenue per seat. Octopart will continue to leverage its dominant electronic parts/position and drive higher realized value.

What is important to note that our team's tailwinds and headwinds is that our tailwinds are coming from our competitive advantage and our aggressive pursuit of our strategy of dominance and transformation, and as such, I expect them to grow stronger in time. By contrast, our headwinds that I have described are temporary in nature, and we are already at the back end of their impact.

In addition, the decoupling of the U.S. and China economies and China's rapid recovery from its COVID breakdown and return to a normal business environment creates new opportunities for us in China. We expect our second half performance in China to be much improved compared to our first half. With conditions improving, we are putting particular focus on China in the second half to restart and to reinvent its engine as a key contributor to our aspirational financial targets for dominance and transformation.

In conclusion, I would like to say I'm pleased with our first half performance. I believe that we are building real momentum in our software business and bringing transformational impact through our Cloud Business. I'm confident about our second half and believe that we will achieve our full year revenue and margin guidance, and I have great optimism about our business in the next three years.

I will now hand over to Richard.

[Richard Leon, Interim CFO]

Thank you, Aram, and good afternoon, everyone. Thank you for joining us today. I will move through these financial slides relatively quickly. I'm sure people would like to participate in the Q&A at the end of the session. Altium has delivered another impressive financial performance for the first half of FY '23. Our key financial metrics of revenue and earnings growth gives us the conviction to commit to our full year guidance in a challenging business environment.

Let's start on Slide 11, where we continue with a more streamlined two part business strategy for Design Software, which is digital and Enterprise and Cloud Platform, which is SaaS monetization and seller pays revenue from Octopart and Nexar. As we did in the '22 full year, we continue with applying a warm yellow color spectrum to denote our Design Software business, in the cool blue color spectrum, our Cloud Platform business.

For the first half '23, Altium delivered group revenue of $119.5 million, up 17% from the previous corresponding period. Both Design Software and Cloud Platforms revenue grew. Our Design Software business performed strongly, growing revenue by 16% to $91.6 million, an incredible effort by the team who had to overcome significant currency headwinds we experienced this half.

For context, Design Software on a constant currency basis would have been $96.9 million or 22% increase on PCB (ph). Our Cloud Platform revenue was up 21% to $27.9 million, and our sticky recurring revenue increased from 74% to now near 80% of total revenue and was assisted by further migration to term based licenses.

Standard Design Software on Slide 12 shows how each of our regions fared. As foreshadowed, China performed below expectation as it continued to fill the lingering effects of drastic lockdowns. The Rest of the World was flat with sales growth in India somewhat compensated for our exit from Russia. As for our major regions, Americas revenue was up 25% to 39.1%. And EMEA, whilst the slide shows 21% in U.S. dollars, was up by 29% in local currency to EUR 33.1 million.

On to Slide 13, we speak to the simplified nomenclature of our Design Software products renamed to Standard and the higher value, higher level offerings of Professional and Enterprise. This page is quite telling that the quality of our Design Software revenue growth is enhanced by the take up of our mainstream customers. We have adopted our Pro level platform capabilities with revenue up 83% to $17 million.

Our Enterprise sales performed well with revenues up to $12.7 million for the half. Standard revenue dropped slightly, partly driven by the migration to Pro as well as the modest performance by China as previously shared.

Looking now to our annualized recurring revenue, ARR, on Slide 14. Our Design Software ARR grew 15.5% to $133.7 million when compared to the previous corresponding period. This slide closely mimics the previous half year revenue slide by product. ARR is the key metric for Altium that provides a focus of our sales efforts to achieve volume and value gains as well as the transition from perpetual to term based license.

And this segues nicely on to the next slide, on 15. For those that may be new to Altium, this slide shows the relationship between ARR and subscription fees. The graph on the left side combines our ARR with a number of subscribers seats. And from this, we derived our Average Subscription Seat Value. In other words, our annualized recurring revenue of $133.7 million divided by a subscription pool, some 58,000, to arrive at an Average Subscription Seat Value of $2,304. This represents an increase of 11% compared to the previous half year.

On Slide 16, speaks to new seats sold during the period, including all, Standard, Pro and Enterprise. As Aram mentioned, we have seen the impact of COVID lockdowns in China and the exit from Russia as well as a short-term impact of price adjustments to new seats.

To Design Software active license pool that continues to grow on Slide 17. Aside from noting that we have surpassed 100,000 active licenses, the highlight here is the increase of fully adopted Cloud license to 15.7 -- 15,700 as of February, up by 21.7% since August.

Rolling on to Slide 18 to our subscription pool and as we have traditionally shown the water force split between developed and developing countries. The change in product mix is positive as more mainstream users are gravitating to our own cloud platform offerings. Also good to see with an improved performance with several successful upgrade redrawing campaigns during the half and our renewal rates continue to be strong.

As we foreshadowed in August, we anticipated Offer Click volumes for Octopart on Slide 19 will decrease from the highs of the extreme spike from the supply chain strain that Aram mentioned earlier. For the first half, Octopart received 13.8 million clicks when compared to 17.3 million clicks for the previous six months ending June '22. In spite of this, we improved our Average Revenue Per Click to enable us to give -- to deliver half year revenue of $27 million.

I'd like to point out this page is an accounting view of at the transaction level. Aram earlier spoke to the more critical demand for the value for changing Octopart and how we see this will benefit us in the coming half with the potential in increasing the Average Revenue Per Click significantly.

Adoption of Altium 365 is covered in Slide 20. Monthly active accounts and monthly active users continue to grow, and as Aram mentioned, we are over 33,500 active users and over 12,000 active accounts in early February 2023. Now whilst this is not shown on the slide, the ratio is now 2.8. The significance of this is that new and different users such as mechanical engineers, procurement managers, et cetera are active on a platform, thereby expanding total users beyond our traditional user base. This is a major part of our dominance and transformation strategy.

On to our financials. Firstly, our operating expenses on Slide 21. Operating expenses, the difference between our revenue and EBITDA increased by 13% to $76.2 million compared to the previous period. As mentioned, our reported EBITDA was 36.2%, up from 34.1% one year earlier. Note, we amended the first half '22 bar to correct the allocation of expenses into the right categories to be consistent with other periods, including full year presentations.

With this done, R&D increases for this half were driven by higher cloud infrastructure costs associated with increases in Altium 365 adoption and will also incur costs related to our withdrawal in Russia. Sales saw a modest increase in costs when compared to the previous corresponding period, which we attribute to our improvement in digital sales efficiencies and also delivering -- enabling us to deliver reduced sales cycles.

Having said this, we acknowledge we have open positions to fill in both sales and R&D, what we call internally product and go-to-market and are working hard on the recruiting front. As for G&A, we added much needed corporate capabilities and will continue to pursue this drive to fill capability gaps in our pursuit of breakthrough and transformation. We also incurred additional costs related in our defense of the tax audit with the Australian Tax Office.

I would like to speak to our dispute against the Australian Tax Office. While details have been provided in our 4D under the Contingent Liabilities Note, we have conviction in our belief this is the correct treatment, and it is supported by our professional advisers and external legal counsel believe we will have a strong case.

We overview that Australian Tax Office has not considered all relevant facts and this has given expression in that the amended assessments we have received have an effective tax rate of 65% of our worldwide income. Altium will continue to challenge and take this matter to the Federal Court.

Slide 22, Altium continues to have a strong balance sheet with cash balance up 3% to $205 million and zero debt.

Moving quickly to the next slide on 23, where the cash generative nature of Altium business underpinned by growing recurring revenues allowed us to declare an interim dividend of AUD0.25 or 19% increase. Free cash flow stayed at the same level of $32.9 million compared with $32.8 million at the previous period, with higher cash receipts from customers, offset by tax and supplier payments. Cash conversion remained strong and stable, demonstrating the quality of our revenue and improving operating leverage.

And to my final slide, on 24 and in summary. Altium delivered another period of resilient top line growth with revenues of $119.5 million, up 17% despite currency headwinds and this was achieved through the following Altium qualities: increased uptake of our higher value, higher level Pro and Enterprise capabilities, realization of higher Subscription Seat Value, faster than expected business model transition from perpetual licenses to term based licenses, recurring revenue now representing 79% of total revenues, improving our annualized recurring revenue.

Active designers, software licenses surpassing 100,000 including Octopart Average Revenue Per Click and Altium's uncompromising commitment to real cash earnings culminated with underlying EBITDA margin improving to 36.2%. This positive momentum going into the second half provides us with condition to reaffirm our guidance for FY '23.

This wraps up the formal part of the call, and I will now pass to Q&A.

[Operator]

Thank you. [Operator Instructions] Your first question comes from Bob Chen with JPMorgan. Please go ahead.

[Bob Chen, JPMorgan]

Good afternoon, guys. Just a few questions for me. Just in terms of subscriber growth for the business. I think there were some comments there you're expecting sort of 60,000 subscribers by the year end. So it does imply some acceleration from here? And then when we look at your '26 targets, it implies even more acceleration over the next couple of years. What gives you confidence that you can sort of achieve that subs growth rate?

[Aram Mirkazemi, CEO]

Thanks for that question, Bob. I guess right now, we've got this headwind that is happening because of the macroeconomic conditions around, for example, Russia and China, both if you look at our subs pool on the page -- on this Slide 18, there is drag that was caused by Russia and also because of China couldn't renew their subscriptions with Russia is a one-off thing. We essentially dropped over 1,000 seats, that it's going to be exited from Russia. So we're not going to worry about that, but that drag is going to stay with us.

In terms of our second half getting to 60,000, we're confident about that. We also believe that our Cloud Platform is the fundamental driver of our software subscription because without it, you wouldn't be able to connect our Cloud Platform. Our volume is a key factor. And as I said in my formal remarks, that is the area that we need to be able to scale with our new digital sales.

So I believe that we would be able to pick up their run rate beyond the second half and get into that zone to get us to the range of 75,000 to 90,000 for $500 million. And I believe 100,000 still is a distinct possibility. We just got to get out of this last two or three years where we've gone with the cloud. A lot of changes in our organization, a lot of changes outside but they're settling now, and we're getting into a nice rhythm. So if the run chase is on, and we're going to get there.

[Bob Chen, JPMorgan]

Okay. Great. And then maybe just on the Octopart business. Obviously, a pretty pleasing list in that cost per click, but how are you sort of thinking about that going into the second half? I mean that number you provide looks like an average number. Is there a sort of exit number that you can sort of provide on your CPC?

[Aram Mirkazemi, CEO]

There isn't an exit number that we can provide. But essentially, this is how we view that balance between volume and value with Octopart. Our Octopart business run generally by us bringing traffic and forwarding them to our partners. The way that the traffic gets monetized is highly sensitive in the way that we negotiate the contract. So you can see that the Offer Clicks, that is not a measure of volume of traffic, that's a measure of our monetization of that traffic.

And you will say that if that drops too suddenly, because of the contractual obligations of our partners, our value kicks up in the way it did. We tried to moderate those two and grow them consistently. The concept is very similar to our Design Software, the value and volume, of course, different, but there is a relationship between the two. And in the second half, we're going to bring the Offer Clicks up through -- try to do that through a better monetization -- more effective monetization under the conditions that they're in.

[Bob Chen, JPMorgan]

Okay. Great. And just a final 1 for me. Just in terms of designer price rises, how should we think about the cadence or regularity of price rises across the suite going forward?

[Aram Mirkazemi, CEO]

I think it's been our policy to steadily increase our perpetual license price over time rather than essentially not making it available like some other CAD companies done that. So we have the lease that it should be available, but we definitely encourage our customers to go with term-based licensing. We are not going to further increase our prices this year and the -- as I mentioned again in my formal section, the effect of pricing is to encourage people to go term-based licensing, but also -- we also responded to inflationary forces, environment. But that's looking to be something that we're going to do on a regular basis. And hopefully, the inflation will come down soon and we all be out of this situation.

[Bob Chen, JPMorgan]

Great. Thanks, guys.

[Operator]

Thank you. Your next question comes from Nick Basile with CLSA. Please go ahead.

[Nicholas Basile, CLSA]

Good afternoon, Aram and team. Just two questions from me. Just a first question. You talked a little bit about the impact of Russia losing 1,000 seats. Are you able to give us a bit more detail on the impact either in revenue or EBITDA terms? And secondly, you talked a little bit about there being a softer macro. How should we think about that impacting, I guess, those click volumes or perhaps the subscriber growth in the second half relative to the first half?

[Aram Mirkazemi, CEO]

With Russia, our revenue from Russia would have been around $3 million and plus. Now we pretty much have lost all that revenue and that had quite a strong portion that was subscription. And incrementally adding seats and that would grow the pool and it would grow that revenue. So we essentially lost that in the first half this year when we did not renew any of those licenses and exited Russia, so that's the content for that.

The volume drive of getting to 60,000 for the second half. We're pretty confident about that. It's mostly internal in terms of us optimizing our resources between the value drive and volume drive. We have been very open to the market from three years ago. We said that we want to change our transactional sales in such a way that we have reflected as a net after the loop. So we can do it efficiently so that they can drive volume efficiently.

Now we've done that, and you can see that we're matching previous year's volumes without having salespeople involved, which is great, and we've reduced the sales cycle from six to eight weeks down to three weeks. This is all great, but we've got to go beyond our traditional levels and increase the run rate, and I'm sure it will come. We're also putting a lot of our focus on the value sales that you see for Pro and our Enterprise level capabilities.

We're selling them, then that's all revenue and it's all going to the bottom line. So the system is working well. It's just the digitization of our transactional sales, not all parts of our transactional sales are digitizable equally. Certain parts, we've got to put more efforts.

And for example, to just give you a sense of that, if you have -- if your business has been operating for, say, years, with software from our competitors, and you want to switch to Altium, not because you didn't know about Altium and you found out about Altium, let's say, you've been looking to switch to Altium for some time, you need our support for the transition as opposed to the decision to buy.

Now our new digital sales is not as effective in providing support for customers such as the ones that I mentioned to transition across. They will work it out. It's just that they have to work it out themselves. We try to bring automation in certain capabilities that will facilitate that, but we're not going to put high-end salespeople to engage with them for just helping them across the street. They've already made a decision.

We don't need to actually put sales dollars for that. And that is more of a support question. So we're going to be able to get that as well. So the volume, I know that you guys are going to be focused on the volume, that the volume is born out of the strategy of going with digital sales, and we're doing fine with the volume, but we need to pick up the run rate and that shall come.

[Nicholas Basile, CLSA]

Okay. Great. And one other one, if I can squeeze one in quickly, just on the currency headwinds. You had -- you called it out, I think, for Europe, but can Richard perhaps provide any context to the Rest of World segment and the sort of overall impact of that across the business?

[Richard Leon, Interim CFO]

Sure, Nick. So roughly about a third of our revenue is invoiced in non-U.S. dollars, which is the main culprit that's contributed to the headwind where euro, that was about 22%, and British pound, which is about 5% and mixture of other currencies.

[Nicholas Basile, CLSA]

Okay. Great. Thanks very much.

[Richard Leon, Interim CFO]

You’re welcome.

[Operator]

Thank you. Your next question comes from Kane Hannan with Goldman Sachs. Please go ahead.

[Kane Hannan, Goldman Sachs]

Hey, guys. Just three for me, please, if I can ask them in turn, if that's all right. Maybe just starting the step up in 365 users and accounts in February, quite a big gap higher. Just talk about what sort of that step up in February. Is there any sort of noise in February that obviously isn't captured in the previous quarterly data points? And then in terms of the commentary around beta trials and the likes coming soon, I mean, is that really a revenue story in FY '24 or you don't think we should think about commercializing at the end to FY '24 numbers?

[Aram Mirkazemi, CEO]

The first question, it's with a very simple explanation. You find that at the end of each period, that is December or June. There is a decline in activities on Altium 365. So the way we calculate active monthly users -- active monthly accounts, they get impacted by the slowdown at the end of period. This is particularly marked in December, but you also like June, you will see that the summer holiday for Europeans come up and there's a slowdown in activities.

But what happens in the subsequent month, that is January, December and is more July and August. It's more August in the second half where Europeans come back and the business has this spike. So essentially, it goes flat. It has a big jump in February, and that's exactly what happened. The way we presented this chart in the past, it would have shown that quite easily. But now with the quarterly presentation, you see the charts are averaged out. But then we called that February, so you can see what the February activities are. That's for that.

As far as the monetization of Altium 365 is concerned, we are building a great base on Altium 365. There are thousands of companies and now there are thousands -- tens of thousands of now active users on it. It's very important for us to get it monetization right in a way that it's fair to our customers and fair to us. And that is directly related to the economic impact of Altium 365 on our customers. Whilst Altium 365 is great for users in terms of their productivities and their convenience, if you like, because they've got everything on the cloud and they can do a lot and they can collaborate, but its real impact is on the organization.

It's real economic impacts on the organization that, that user is in. So we want to make sure that we don't shortchange ourselves but trying to get the monetization of the user and in some ways, become penny-wise and pound fully. So we're going to start from the pound and the penny will take care of itself.

To that end, as I said again in my formal part is that we're going to stagger the user monetization until we achieve optimum monetization from an enterprise. With that I cannot give you a time span for that. But obviously, for the 2026 target, we need to bring the monetization of Altium 365 in to get to our $500 million. And so outset would have to be in time for us to be able to have a declining impact, if you like, on our revenue run chase.

[Kane Hannan, Goldman Sachs]

Got it. Thanks. And then maybe just on the churn side of things following the price rise that went in. Have you seen any impact on your churn in the subsequent months that we should be thinking about in that second half outlook? I mean, I think you were talking about 100 net adds in the month of January, you sort of backed that out. How do I think about the churn in the second half?

[Aram Mirkazemi, CEO]

There has been a little bit of a churn. If you look at Americas have developed pool, we are just above 90% in the past or close to it. We just dropped by 1 percentage point. I believe it's a combination of the macro-economic conditions, inflationary environment and everyone's in and our increased prices, I believe that will come back up. It's always the case in our industry from back a long time ago, whenever there is a price change of that kind, you have an immediate response, and then it goes back to where it was before.

It's opposite to commodity like petrol and things like that, that initially, everybody pays at the petrol station, whatever the price is, but then after a few months, you decide to ride your bike and not use your cars often. And the professional world that we’re in (ph), is the opposite. It slows down some decisions for a little while, but then it comes back up to the level that it was before and everything would normalize after that.

[Kane Hannan, Goldman Sachs]

Perfect. And just one last quick one. I think the Nexar cost base is down about $1 million sort of in this half. Just remind us, I think about the Nexar cost base, whether they step up in the second half to drive that improved cost per click or things I should be thinking about.

[Richard Leon, Interim CFO]

So I think what we're seeing here is we're looking to invest in Nexar. Nexar contains Octopart. There are a couple of things that we're very keen to get going. I think I mentioned in my section that we are -- we have a number of open head counts that we want to sell. There are a lot of activities that we want to start investing in.

[Aram Mirkazemi, CEO]

Is that your question there?

[Kane Hannan, Goldman Sachs]

I think just the cost base for Nexar seem to go backwards $1 million in the half. So just trying to understand those comments around investing versus, I suppose, the numbers going backwards, but that's around.

[Richard Leon, Interim CFO]

No, in Nexar, there is a component of manufacturing. So whilst we generated a modest revenue rate, the cost of sales that we used to incur withstand more efficiencies out of that. So that's probably what you're seeing.

[Kane Hannan, Goldman Sachs]

Perfect. Got it.

[Richard Leon, Interim CFO]

Thank you.

[Operator]

Thank you. Your next question comes from Lucy Huang with UBS. Please go ahead.

[Lucy Huang, UBS]

Good afternoon, Aram and Richard. Thanks for taking questions. I've got three as well. So just firstly, following on Kane's question on the recent price increase. I'm just wondering if you can also give us some color as to whether the price increase has impacted, I guess, the number of new subscribers that are taking on Standard versus Pro subscription. So just wondering if we are seeing more customers hitting on further cheaper Standard versus Pro compared to the first half?

[Aram Mirkazemi, CEO]

Well, if I can tackle that. We don't really have hard evidence on how our adjustments to our price increases have impacted the adoption of Standard versus Pro versus Enterprise. So I can't really -- a definitive answer to that. But generally, you'll find that -- in some of the charts, you'll find that the Standard is not growing like Pro and Enterprise. That's mostly because the customers within those buckets that move up to Pro and Enterprise.

So the Standard in those charts is not an indicative of the Standard appeal has gone down and just many customers in those buckets. I mean there's still tens of thousands in the Standard bucket, but there are customers who are moving across. That might give an impression that the appeal for Pro and Enterprise are greater than the Standard, but I don't believe so. I believe the price would affect them uniformly.

[Lucy Huang, UBS]

Yes. Wonderful. And then just secondly, as you guys mentioned that sales cycles have been reducing due to digitization of transactional sales. So I guess, how do you see that sales that you passed any just out of that new percentage normalizing or where could it come down to? Because I think it's improved from 32% to 27% this half.

[Aram Mirkazemi, CEO]

We are investing in our Enterprise and value sales. So as I mentioned, we are dominant in the mid-market, and we've got an incredible brand in strength in terms of pricing power. But where we have to increase our effectiveness and strength is in the value sales and in the Enterprise. So we will be essentially taking the money out of the mid-market so to speak, and putting it into the higher end and behind our value drive. So I don't expect our cost of sales to actually go down or expenses related to sales.

The key thing we didn't want to grow -- disproportionately. If you look at 2018, '19, our sales expenses grew disproportionately relative to other parts of our business. And now I believe it will kind of stay stable and actually will come down. But certainly, we want to as aggressive as we can be in the Enterprise sales and therefore, I don't expect it to go down.

[Lucy Huang, UBS]

Understood. And then just one last one on Octopart. I guess, are you able to give us some more color on how you are growing CPC? Is there a risk that distributors kind of fall off the platform if CPC grow to too fast?

[Aram Mirkazemi, CEO]

No, the Offer Clicks and CPC, they are very much interrelated in these contracts. They are not independent variables because the contract size is negotiated in such a way that assumes certain amount of volume of traffic and assume a certain kind of quality of that traffic and the impact that it has on the customer. So none of our contracts on Octopart will have this fall out in scar, so to speak, nature about them.

It's both a good thing and maybe not such a good thing because it is a sealing effectively that exists, which means that much as we like to go above it, it's not straightforward to go above it in the short term, but also it means there is a floor that don't fall off it like that. So it's most likely both blessing and cares at the same time. But we're working hard on this effective what we call effective monetization of Octopart's traffic in and I believe that generally we're going to be heading in the right direction in that area.

[Lucy Huang, UBS]

Wonderful. Thank you so much.

[Operator]

Thank you. Your next question comes from Josh Kannourakis with Barrenjoey. Please go ahead.

[Josh Kannourakis, Barrenjoey]

Hi, Aram. Can you hear me, okay?

[Aram Mirkazemi, CEO]

Yes. How are you, Josh?

[Josh Kannourakis, Barrenjoey]

Very well. Thank you. Very well. First question, just on the pricing impact, maybe a help from Richard could answer this one. You mentioned less than 5% impact in the first half, but it was back-end weighted. How should we think about some of the tailwinds into the second half in terms of ARPU and growth in subscription?

[Richard Leon, Interim CFO]

So Josh, I just give you my thoughts on that. The first half essentially did not pick up any lift from price adjustments because by the time that it went through and was rolled out like all the subscribers renewing in the first half, they got their quotes, well ahead of time. And two or three months ahead essentially, they got the old price. It’s really the second half, where subscribers will be paying us the new price, and we expect to see the impact in the second half.

But again, we don't expect this to be significant in terms of getting us our numbers, but definitely, it would help to counter the kind of things we've had like FX and certain other aspects of our business that are related to the macroeconomics. So we think the second half is going to have its impact. But no, that this is going to be driving our numbers second half. I just going to counter some of the things that I mentioned, and that's exactly what's meant to do.

[Josh Kannourakis, Barrenjoey]

Got it. No, that's great. And just in terms of the Enterprise result as well, that was obviously pretty strong. In terms of the model, you talked about trying to optimize that sales model and some of the challenges in that segment of the market. How far do you think you are in terms of getting that model where you want it to be? And is there further efficiency or optimization to come from that business?

[Aram Mirkazemi, CEO]

The key part, Josh, is that we have got now our mid-market combining its forces with our Enterprise sales to go after larger customers, which is essentially selling Pro-level subscription and Enterprise-level capabilities transactionally from the bottom end. And from the top end, we are now kind of going a lot harder on the strategic sales engagement, which would allow us to have both aspects.

We do the numbers on the high end in terms of engagement with customers through our mid-market resources, which we call it value drive. And that has been made possible by our mid-market not focusing on selling the volume and putting its resources on that. That is really changing our fortunes on the higher end. And I believe, both in terms of the value, but also volume in the high end, we're going to do well because of these two proposed attacks.

One from the mid-market, we're hitting it and one from the Enterprise, but the enterprises now is gearing up to be more enterprise-like rather than a solution selling. So we're definitely setting ourselves up to have a strong drive on the value in an enterprise sense.

[Josh Kannourakis, Barrenjoey]

No, that's great. Just very quick one final one. You mentioned selling to non-PCB design users. Can you talk about what sort of price point that would be at? Would that be at a similar price point to others or would there be a different sort of model or consumption model in terms of either the platform in terms of designer aspects for manufacturing or potentially the Octopart platform as well?

[Aram Mirkazemi, CEO]

So think of this, Josh, we Google the name to introduce Google maps, they just put a link on top of the search page and the rest is the history. I very much like us have some similar experience as that by putting, just imagine, Altium 365, a simple link is put above the Search Box in Octopart. If you go to Octopart, there is not a single mention of Altium on that website throughout. There will be a link there and the hundreds of thousands of professionals in this industry who frequent that, they're going to discover Altium 365.

Now in terms of monetization of that, we're going to monetize the organizations on which those users come from rather than the user themselves in the way of who our major target is. But we will be also targeting the user at the level of our PCB designers. They're just users, they're going to pay for their utilization of the platform, but is the organization that, that user is operating receives a much greater economic impact from Altium 365 than individual users within that organization will get. So we'll be monetizing on both fronts, whilst we'll be focusing on -- monetization from the organization. But soon after, we will have the user monetization also rolled in.

[Josh Kannourakis, Barrenjoey]

Great. Thanks, Aram. Look forward to catching up soon.

[Operator]

Thank you. That's all the time we have for our question-and-answer session. Please contact Kim Besharati for any questions that may not have been answered. I'll now hand back to Mr. Mirkazemi for closing remarks.

[Aram Mirkazemi, CEO]

All right. Well, thank you. Once again, I would like to say thank you for all your support. We appreciate your confidence in our team, and we will continue to do our very best to create and to deliver value to our shareholders. Thank you and goodbye.