Altium Ltd

ASX:ALU

Earnings Call Analysis

Altium Targets Strong FY'24 Growth

Altium anticipates robust growth, guiding FY'24 revenue to reach $315-$325 million, marking a 20-23% increase. Design software is expected to achieve a 23-26% growth to $255 million, while their cloud platform, comprising Octopart and Smart Manufacturing, aims for 8-16% growth to $65-$70 million. The company's EBITDA margin forecast stands at an impressive 35-37%, with a long-term vision set on $500 million revenue, a 38-40% EBITDA margin, and 100,000 software subscription seats by FY'26.

Altium's FY'23 Financial Highlights and Future Guidance

Altium experienced another impressive year in FY'23 with their combined design software and cloud platform segments delivering group revenue of $263.3 million, a 19% increase over the previous year. The design software division was particularly strong, with revenue jumping 20% to $203 million, and cloud platform revenue also grew by 17% to $60.3 million. The company's recurring revenue continued to be robust, composing 77% of total revenue, a 2% increase from the previous year. The firm's investment in digitizing sales processes has begun to pay off, contributing to greater operational efficiency and leverage. For FY'24, Altium confidently projects that its design software will generate between $250 million and $255 million, fueled by a growing subscriber base and increased average subscription value.

Altium's Strategic Initiatives and Product Mix Evolution

Altium has advanced their strategic goals through higher level capabilities delivered to the mid-market. They've focused on transitioning customers from standard licensing to more profitable pro and enterprise-level subscriptions, which are expected to become the new standard in the industry. Notably, the Americas saw a near doubling in the uptake of pro and enterprise licenses. This strategic shift underpins expectations for a 10% to 15% subscriber growth in FY'24, bolstering both volume and average value per subscription. Altium also aims to further entrench into the enterprise market by leveraging their cloud-based design platform and expanding go-to-market initiatives.

Altium's Strong Financial Position and Dividend Increase

Sustaining financial stability, Altium ended the year with a flat cash balance of $201 million and no debts, even after substantial dividend distributions and a disputed payment to the ATO. The company's prudence allowed for a 15% increase in annual dividends to AUD 0.54. Furthermore, Altium's EBITDA grew by 20% to $96 million, and their net profit after tax increased almost equally. These formidable results demonstrate Altium's financial solidity and shareholder-friendly practices, providing a sound base for future investments and growth.

Investments Propelling Growth

Altium has been investing heavily in management talent and capabilities to reinforce its business model and capitalize on market opportunities. This includes appointments of new general managers and a chief commercial officer aimed at achieving a balance between subscriber volume and seat value. The firm’s focus on digitization and sales process improvement has contributed to both top and bottom-line growth. In addition, Altium has aspirations for direct monetization of Altium 365, expected to contribute around $50 million. These investments paint a promising picture of Altium's ambition and readiness to capture emerging opportunities.

Cloud Adoption and the Impact of Market Dynamics

The adoption of Altium's cloud platform Altium 365 shows a positive trajectory, with active users exceeding 36,700 and active accounts topping 12,500 as of August 2023. Market dynamics, however, presented both tailwinds and headwinds. Challenges in China and traffic normalization in its Octopart platform were among the identified headwinds. Still, Altium is taking steps to overcome these, including shifting towards a SaaS model in China and developing a stronger value proposition to sustain high average revenue per click, indicating a clear strategy to navigate market shifts.

Closing Remarks and Future Expectations

Altium has a clear focus on driving subscriber growth, particularly in the Americas and EMEA, aiming for a 10% to 15% increase in FY'24. The company is also aligning its product offerings to enterprise-level capabilities, which are expected to become the new standard. Altium's embracing of a cloud-first strategy is a major tailwind propelling the firm into the enterprise market, with large client wins like Renesas signaling strong product-market fit. The integration of Octopart with Altium 365 is another strategic move aimed at enhancing the value proposition and driving traffic volumes. As we move into FY'24, Altium remains committed to delivering value and maintaining the confidence of its shareholders.

Earnings Call Transcript 2023-Q4

[Operator]

Thank you for standing by and welcome to the Altium Limited Full 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 your first speaker today, Kim Besharati. Please go ahead.

[Kim Besharati]

Thank you. Good afternoon, 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 today is our CEO, Aram Mirkazemi; our Chairman, Sam Weiss; Interim CFO, Richard Leon; and President, Sergey Kostinsky.

Today, Altium released to the ASX the company's financial results for the full year ended June 30, 2023 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 business and financial performance to Altium for the full year fiscal '23 and our positive outlook for fiscal '24.

Aram will share insight as to how we are performing, while transforming both within Altium and the electronics industry. He will explain our performance on three fronts of transformation from mid-market to enterprise and beyond the PCB design software market to reach the broader electronics industry. Richard will provide a deep dive into some of the slides in our investor presentation that demonstrate our strong financial and business performance over the past 12 months.

Please note, as a reminder, today's call in the Q&A section at the end may include some forward-looking statements regarding Altium products, its future operations or financial performance. Any such statements are based on 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 US 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, Chief Executive Officer]

Thank you, Kim, and hello, everyone. Altium delivered strong results in financial year '23 with over 19% revenue growth and over 20% growth in EBITDA. Our performance across all business metrics in the Americas led the way to deliver a strong overall result.

Americas delivered stellar performance with 32.3% growth in revenue, 17% growth in new software licenses, 10% growth in total subscriptions and 22% growth in average subscription seat value. What's more, Americas has performed strongly in terms of new license volume that is consistent with its historical long-term growth.

America's historical performance can be seen on slide seven of the investor presentation. The Americas have delivered consistent growth in new license sales over the decade with license volumes growing at a 12% CAGR over this time period. I'm pleased to report that our design software annual recurring revenue grew by 32% to $147.2 million in financial year '23, and our average subscription seat value grew by 22% to reach $2,408.

EMEA also delivered a strong performance with design software revenue growing by 19.8%, 23.6% in euros, with 10.5% growth in subscriptions and 21% growth in average subscription seat value. During recent years, our historical seat volume growth in EMEA and the Americas have been paired with a substantial improvement in product mix with the strong adoption of pro and enterprise-level capabilities to accelerate our revenue growth.

I regard this transformation change in our mid-market as the first front of transformation that our cloud platform, Altium 365, is dramatically improving our potential for further value creation for our customers by changing the nature of our product portfolio from being a stand-alone desktop software to connected cloud-based and integrated with our design platform for the broader industry. On this front, I'm pleased to say that we are moving out of the transformation zone and beginning to enter the performance zone.

On a more critical front of transformation where our cloud platform is playing a key role, I'm pleased to report that we are gaining significant traction in the enterprise market. Altium 365 is proving to be a game changer for our prospects of succeeding with large enterprise customers in the high end of the market.

We recently closed a significant multimillion dollar multiyear sale to Renesas Electronics Corporation, a global semiconductor provider who have decided to standardize an Altium design software with the view to streamline their go-to-market and customer engagement leveraging Altium 365.

Further to the transformational impact of Altium 365 on our enterprise go-to-market in the high-end, we are entering the performance zone through the scaling of our enterprise sales organization. Altium's unique electronic data and life cycle management offerings combined with our cloud platform is increasingly being viewed as the platform of choice for the future of electronics by modern enterprises.

In financial year '23, our enterprise sales grew by 143% from $13.7 million to $33.3 million in revenue. That's more than doubling our enterprise revenue. We closed large multimillion dollar deals with customers such as Tesla, SpaceX, Texas Instruments, Bosch, Acuity and Xylem and many other significant deals with leading brands such as Mercedes, Meta, Amazon, Rivian, Lockheed, Volvo, TE Connectivity, Magna, iRobot, Hitachi, Infineon and Thales. These enterprise accounts and many more provide us with plenty of opportunity to grow our enterprise business in years to come.

Success in the enterprise market is critical for our pursuit of market dominance. We have been investing in building what we refer to as industry solutions on our cloud platform that are unique and specific to the electronics industry. Our first industry solution designed to win is targeting the semiconductor industry to improve their go-to-market effectiveness. This industry solution is based on Altium's unique assets of Altium Designer, Octopart and Altium 365.

This first industry solution is being developed in partnership with Renesas and is foundational for our other industry solutions that are yet to come. In that regard, we are working on intelligent by design industry solution through partnership with Renesas and Ansys, which aims to improve time to market for the automotive industry.

And compliant by design in partnership with Hexagon, a large Swedish high-tech manufacturing company, which aims to improve compliance and sustainability in electronics. These industry solutions centered on electronics will be the bedrock for building Altium's growing presence in the enterprise high-end of the market.

So far I have outlined how our cloud first strategy is transforming our business in the mid-market and our engagement with larger enterprises. The third front of transformation is related to Altium moving beyond the PCB design software market and offering our cloud platform to broader audiences in the electronics industry.

To go beyond our traditional PCB design software and into the broader electronics and engineering industry, we are actively working to bring business apps onto Altium 365. In addition, connecting Octopart to Altium 365 is bringing the two worlds of electronics design and the supply chain industry together and giving rise to a new class of users and customers beyond PCB designers for monetization opportunities.

Additionally, as we connect Octopart to Altium Designer to create a transformative outcome for the industry, we are investing in bolt-on capabilities through M&A that will enhance the value proposition and reach of Octopart.

I would like to provide an update on our strong and continuing Altium 365 adoption, which has a strong and growing viral effect. I am pleased to report that Altium 365 adoption grew by 54% to over 36,700 monthly active users and grew by 42% to over 12,500 monthly active accounts in August year-on-year.

What is most pleasing is the growing network effect of Altium 365, which brings in non-traditional users of Altium software onto this platform. This can be seen in slide 17 of the investor presentation with the ratio of active users to active accounts nearly doubling since we launched the platform.

As I mentioned on our last investor call in February, our approach to monetization divides the value proposition of Altium 365 into the two categories of the platform itself and the higher level of business capabilities that run on that same platform. We will continue to indirectly monetize the platform through the first two fronts of transformation that I have described and will not charge a joining fee for users to ensure that the viral effect of the platform will continue to grow.

We are continuing to widen the gap with our competitors and their attempts at cloud platforms and we want this gap to further widen to ensure our competitive advantage will further reinforce our unique strategy of market dominance and industry transformation.

As mentioned, we are actively working to bring higher-level business capabilities onto our cloud platform and beginning to explore ways to directly monetize these through a SaaS selling motion. This ties in with our third front of transformation. We have already integrated a number of critical business capabilities that will enhance security as well as supply chain intelligence applications and core capabilities related to electronics life cycle management.

We have made a number of significant new hires for our go-to-market team for direct monetization of these higher business capabilities overseen by our new GM of cloud, Ananth Avva, who has a wealth of experience in Silicon Valley SaaS companies. While I expect significant revenue contribution by financial year '26 from these efforts where we would have scaled our capacity, we are currently focusing on capability build, and as such, it will be a slow revenue climb in financial year '24.

Having focused on fronts of transformation in the Western world, I would now like to turn to China, where I see potentially a fourth front of transformation through the deployment of our cloud platform in China. As can be seen from our FY'23 results, Altium's traditional license compliance business in China post-pandemic is going through a slow recovery.

This has been partly due to Altium pulling out its management resources from China during COVID and now we are restoring focus and reversing the downward trend. As part of a new initiative, we are actively working to leverage our Altium 365 cloud platform in China to move China customers from perpetual license compliance initially to term-based licensing and ultimately to SaaS as customers begin to adopt our cloud platform in China.

To fully execute on this front of transformation, we are exploring the possibility of working collaboratively with our key industry partners in China. This effort is in its early days and I will keep the market updated with our progress.

I would now like to say a few words about Octopart and its performance in the second half of FY'23. As can be seen on slide 16 of the investor presentation, the traffic in the second half dropped by 5%, which is a much smaller amount than the first half, which was a drop in traffic of 20%.

However, what's notable, despite the 5% drop in traffic, the revenue grew in the second half compared to the first half. This is directly related to Octopart's growing value proposition as measured by the strong growth in average revenue per click. We further grew average revenue per click by 14% to $2.23 in the second half and anticipate continued growth based on the investment that we are making in Octopart.

Turning now to our outlook and market guidance for financial year '24. We have a number of tailwinds that will continue to support our strong performance in financial year '24. Our design software business in both the mid-market and at the enterprise level is performing well.

Our mid-market is benefiting from the digitization of our transactional sales platform for highly efficient and effective go-to-market while continuing to leverage our cloud platform to deliver enterprise-level capabilities to our mid-market customers. Our enterprise business scaling with Altium 365 being a draw card for our enterprise engagement and our industry solutions, while still early days, are looking highly promising.

With our expanded leadership team with new GMs in place and a performing digital sales and cloud platform, I expect the strong results achieved by the Americas in financial year '23 to continue in financial year '24. Further, I expect this performance to extend to EMEA and to other western and industrialized regions in time.

Our pursuit of market dominance is being carefully executed with an optimal balance between value and volume. We invested significantly in the last two years to build capabilities on the value side, resulting in a strong growth in average subscription seat value and demonstrating our pricing power.

We are now restoring capacity and management focus for a strong volume push which has been our historic strength and I expect to pick up a gear as we lean into financial year '24 and strive for 10% to 15% growth in our total subscription pool. This means we could be breaking into 70,000 subscribers by the financial year-end.

While our design software business is well and truly in the performance zone, our Octopart business will be in the transformation zone in financial year '24. We are investing in deepening the value proposition and expanding the reach of Octopart. While we anticipate some headwinds to remain in the first half of financial year '24 for Octopart, we are increasing our reach through localization efforts in non-English-speaking regions, improving the quality of data for power users of Octopart, integrating Octopart to Altium 365 and pursuing bolt-on acquisitions. We expect a solid performance from Octopart in financial year '24 while still in the transformation zone.

For financial year '24, we are guiding to a total revenue between $315 million to $325 million, which represents 20% to 23% revenue growth. Of this $250 million to $250 million (sic) [$255 million] for the design software business, which represents 23% to 26% growth and $65 million to $70 million for cloud platform, which is comprised of Octopart and Smart Manufacturing and represents 8% to 16% growth.

In addition, we are guiding to underlying EBITDA margin of 35% to 37%. At the top of this guidance, we will be achieving the rule of 60, but otherwise, in the high 50s, which is a rare and remarkable achievement by any company. Finally, I would like to reiterate that we are firmly committed to our long-term aspirational targets in financial year '26 of $500 million in revenue, 38% to 40% in underlying EBITDA margin and 100,000 of software seats on subscription.

With our design software business entering the performance zone, with much renewed potential, we are seeing a clearer path to 100,000 seats on subscriptions. I will now hand over to Richard to share color around our financial performance in financial year '23 and to specifically share how we are making strong returns on our investments to drive sustainable long-term financial performance. Richard?

[Richard Leon, Interim Chief Financial Officer]

Thank you, Aram, and good evening, everyone. FY'23 was another outstanding year for Altium reasserting our ability to deliver impressive year-on-year financial performance. Beginning on slide 11, our two divisions of design software and cloud platforms together delivered group revenue of $263.3 million, up 19% from previous corresponding period both design software and cloud platforms' revenues grew.

Our design software business performed strongly, growing revenue by 20% to $203 million, an incredible effort by the team who had to overcome a significant currency headwind we experienced during the year. For context, design software on a constant currency basis would have been $209.6 million or near 24% increase. And our cloud platform revenue was up 17% to $60.3 million. The positive trend of sticky recurring revenue mix increasing to 77% of total revenue, up from 75% is supported by the continued migration to term-based licenses.

Before we consider the next few slides, we have some useful data that will demonstrate and support our growing strength. In order to have the next slides be gentle on the eyes and not too busy with numbers, we have a data summary at the back on slide 47 for those that really want to dive into the details.

Staying with design software on slide 12, we show how each of our regions faired. China performed below expectation as it continues to feel the lingering effects of severe lockdowns. Rest of the world was flat with sales growth in India compensating slightly for our exit from Russia. By far, the highlights were our major regions.

Americas revenue up 32% to $92 million; EMEA, up 24% in local currency to EUR68.6 million compared to last year. As shared earlier by Aram, when he spoke to the Americas track record of growth over the 10-year period, these two preeminent regions represent just over 80% of revenue in subscriber seats and nearly 90% of annual recurring revenue, which segues into slide 13.

If I may, I will take a moment to explain the change to this business metric and how we'll report on this going forward. We have adopted a more simplified approach in determining ARR by taking all open contracts, including our growing pool of multiyear term-based license contracts, net of any nonrecurring revenues such as perpetual license or training and annualizing this compared with our previous more complicated approach that contained multiple variables.

The genesis for this business metric was to monitor the growth in our average subscription seat value, ASSV, as growth in this metric will reflect our pricing power, migration from perpetual to term based and delivering higher level pro and enterprise capability to the mid-market. We have in the appendix at the back of this deck included a slide that applies our previous methodology for comparison.

To the slide itself, our design software ARR highlights are the Americas growing its ARR by 34% to $72.5 million and EMEA up over 33% to $58 million with growth of average subscription seat value at 22% and 21%, respectively. Much of this growth is attributed to the continued take-up of our higher-level offerings in professional and enterprise, driving up our ASSV. The key takeout here is momentum for the Americas and EMEA is returning and bodes well for our flight path and future revenue growth.

On to slide 14. This validates the return of momentum in Americas and EMEA with around 10% net growth of subscriber seats in each region during '23, a significant turnaround when considering the annual seats on subscription growth in the prior two years were around 6% for each of these regions. As for our emerging regions, with the exit from Russia now behind us and seeing early signs of business momentum returning in China, we anticipate subscribers seat growth for the group will hit early digit -- double digits from FY'24. Another call out here on this slide is product mix as the take-up of professional and enterprise-level platform capabilities continues.

Slide 15 looks at our new seats acquired during the year. Aside from the standout Americas returning to its pre-COVID growth trends, EMEA applied itself to focus on rejoins during FY'23 and achieved a strong subscription growth, though not for new licenses. Under the new leadership of our newly appointed General Manager of design software, together with further investments in restoring focus in this region, we are confident an optimal balance of value on the high end of the market as in higher ASSV and volume that is new seats at the lower end of the mid-market will result in improved license growth, higher average subscriber seats value and ARR for '24 and beyond.

Similar to the previous slide, the other noteworthy highlight is the growing momentum of new license leaning more towards professional and enterprise-level platform capabilities. Looking at these charts and the darker shades, especially Americas and EMEA, one could discern of those purchasing new license a near doubling of pro and enterprise take-up from the previous years.

This momentum has driven time-based subscription to 48%, up from 34% in the previous year and 22% in FY'21. A final comment before moving on to our cloud platform. The success and return of momentum of our design software business was underpinned by our investments in the digitization of transactional sales process. This is delivering greater efficiencies and operating leverage, which in turn allows us to invest in further growth in capacity and capability.

On to slide 16. Our Cloud Platform division, in particular, Octopart, as you can see on the right-hand side, click volumes declined from the height of supply chain challenges in 2022, though still well above pre '21 levels. The left-hand side demonstrates that our ability to grow revenue per click by some 32% since 2019, contributed to revenue growth of $60.3 million, up by 17%.

And staying with our cloud platform adoption of Altium 365 is covered in slide 17. Monthly active accounts and monthly active users continue to grow with over 36,700 active users and over 12,500 active accounts as at August 2023, resulting in a ratio of active users to active accounts just over 2.9%. These upward trends in cloud platform adoption, we feel will be critical to our enterprise penetration, as Aram shared earlier.

On to our financials. Firstly, our operating expenses on slide 18. Operating expenses, the difference between our revenue and EBITDA increased by 18.7% to $160 million compared to the previous period. Much of this investment is already generating a payback with our revenue growth of 19% this year.

However, its full impact will be felt in the next financial year. As mentioned, we hired several high-caliber leaders, including a general manager for each of our design software and cloud platform divisions, a Chief Commercial Officer as well as a Head of M&A. And we are committed to continue to invest in pursuit of the opportunities directly in front of us.

Notwithstanding these investments in laying the groundwork for future growth, our reported EBITDA continues to be among the highest in our industry and continues to be strong. On slide 19, our balance sheet closed for the year with cash flat at $201 million after payment of $27 million in the disputed ATO matter and also $45 million in dividends. Altium has zero debts.

Moving along to slide 20, where the cash-generative nature of Altium's business underpinned by growing recurring revenues allowed us to declare a final dividend of AUD0.29, bringing the FY'23 dividend to AUD0.54 or a 15% increase compared to the previous period. Our free cash flow metric was hindered by the disputed ATO payment that would have otherwise shown an improvement of 11.6% in free cash flow.

Quickly on to slide 21. To summarize for FY'23 financial metrics. In a year, we invested for future growth, Altium delivered another year of notable top line growth up 19.2% to $263 million, together with an industry-leading EBITDA margin of 36.5%. An enviable combination that well exceeds the industry norm of Rule of 40 or the Rule of 50 as it relates to Altium and puts us into the elite level of performance in the tech industry.

As for earnings, Altium produced EBITDA of $96 million, up 20% and net profit after tax of 66.3%, also up nearly 20%. Moving on to Section 3 of presentation in relation to our growth metrics and business drivers. Slide 23 lists the macro trends that we spoke to last year. This slide has not changed as all remain valid and exciting. We believe the growth achieved this year and future growth is driven by the realization of these trends and we are the beneficiaries of executing our strategy.

Slide 24, to add more color to Aram's outlook message, a significant tailwind for us is the convergence of our cloud-first strategy and gaining traction in the enterprise market. The example that Aram spoke to amongst other notable names was Renesas who we believe are archetypical of those businesses that realize their future success is in being connected to a cloud-based design platform with enterprise capabilities.

Another tailwind we will ride and an example of investments paying off is a digitization of our store wall transaction sales organization, bringing with that efficiency allowing us to invest and still deliver strong margin. No business is immune from headwinds. Ours relate to the traditional long-standing license compliance business in China.

Our strategy, as Aram alluded to, is to transition from perpetual into term-based model and ultimately, to SaaS. The other headwind, as I mentioned previously, lies with Octopart and the normalization of traffic volume post the pandemic. We will address this by building a stronger value proposition to drive up higher average revenue per click.

To slide 25, where I would like to spend a bit more time on the growth metrics for design software. As we shared with our financial results earlier, we are seeing momentum returning in growing our subscription pool with our cornerstone regions of Americas and EMEA each delivering circa 10% growth in subscriber seats.

As mentioned, the rest of the world issues associated with our exit from Russia is behind us and the early signs of China business returning to normal is promising. Aram mentioned, we are targeting subscription seat growth of between 10% to 15% for FY'24 of our current 61,100 subscriber seats.

This coupled with the growing average subscription seat value through the continued migration to term-based licenses and adoption of higher value offerings, plus maintaining nonrecurring revenue between $55 million to $60 million gives us the confidence to provide an outlook for design software of delivering between $250 million and $255 million in FY'24. This combination of volume seat growth together with growing average subscriber seat value will push our annual recurring revenue higher each year.

Slide 26 brings us back to Octopart business, and this slide illustrates while traffic volume has fallen, are still above pre-pandemic levels, our ability to offer stronger value proposition allows us to achieve improving average revenue per click. Which brings me to my final slide on 27 and our outlook on EBITDA.

Firstly, operating leverage. A higher price and margin for design software seats on subscription as evidenced by the mid-market adopting enterprise-level capabilities. This is also driving subscription growth and operating leverage. Digitization of transactional sales processes is delivering great efficiencies, allowing us to invest and maintain a strong margin while delivering top line growth.

As for investments, further investments in Altium 365 cloud capabilities, and as Aram mentioned already, having a positive impact on our mid-market business and a game changer for our enterprise business at the high end of the market. To service the enterprise opportunities, we will invest to scale enterprise sales capacity to deliver industry solutions for enterprise verticals, and we will further deepen the value proposition and reach of Octopart as well as expand the Altium leadership in the US all this and maintaining our strong EBITDA. This wraps up our formal part of the call and I will now pass on to Q&A.

[Operator]

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

[Bob Chen, JPMorgan]

Hey, afternoon, guys. Just a few questions for me. Obviously, over the couple of years, we've seen a pretty meaningful uplift in your average subscription seat price. I mean looking at your sort of guidance into '24 sort of implies another sort of further lift into the next year. Like how do you think about your customers' appetite to sort of take on the price increases that we've seen for the last couple of years?

[Aram Mirkazemi, Chief Executive Officer]

Bob, the first thing I'd say is that these are not price increases. There are higher level of capabilities we're delivering to the mid-market. From a standard to our pro level and from a standard to enterprise is, in fact, far greater value that is delivered to the customer, then the price differences suggest. So that drive behind our average subscription seat value is driven by the higher level of capabilities being delivered and therefore, we're charging higher. And also, the transition from perpetual licensing to term-based licensing, which we have had the headwind in the first two or three years, but they are turning into a tailwind as we accumulate a greater amount of term-based licensing. So this is going to continue you can see in those four slides that we have in the financial section. Those darker shades, there is still a long runway and on top of us adding volume and so we expect the volume and value continue and it has very little to do with price increases.

[Bob Chen, JPMorgan]

Okay. Got that. And then you're sort of talking about 10% to 15% increase in that subscription pool. I guess apart from the market in the Americas and Europe sort of improving like what are you doing on your end to get better adoption of your software?

[Aram Mirkazemi, Chief Executive Officer]

We obviously have invested in a whole layer of management in our design software. We have appointed a global GM for design software and we have appointed a Chief Commercial Officer, we recently appointed a regional GM for Europe. This layer of management is critical for us to be able to have this optimal balance between volume and value. The value side of our business in the mid-market is at the higher end of the mid-market, and it requires new capabilities, which we've been building the last two and three years, and we've demonstrated that through the average subscription seat value growing. And then the other side, which is volume it's really the lower end of the mid-market that requires capacity and focused management. Now we're going to be able to have the two sides focus on and executed on and I expect us to just same as pre-COVID. We will be driving this business in the mid-market. And you can see it in slide seven, with the Americas the trend over the last 10 years, you can see it there, and we're going to continue with that trend, both in America and pretty soon in EMEA as well.

[Bob Chen, JPMorgan]

Okay. Great. And just a final one on Octopart. I mean, obviously, the clicks have been down and visitation is down but your CPC continues to go up, and you've been talking about creating more value to your customers, and that's what's allowed you to push prices up. I guess if volumes are sort of coming down, does that make it more difficult to push or sort of drive further value or get further price increases in that business?

[Aram Mirkazemi, Chief Executive Officer]

Well, the value is related to what we're offering to our partners and volume, of course, is the amount of traffic we're receiving. I mean the value we're offering is constantly it's growing with developing partnership. We're adding additional data that is for the power users, we're also looking to invest in areas outside the English-speaking world for localization in a way that we can drive volume and value in markets that are not fully focused in the past. And we're also developing technologies in integration between Octopart and Altium 365. As I mentioned, we're also investing in bolt-on acquisitions, all these deepen the value proposition of Octopart which is a strategic aspect of our transformation and are expected to have a first half, which is probably going to be not so strong, but our second half in FY'24, I expect to see stronger performance from Octopart. And then in FY'25 and '26, we will see the real fruits of our efforts in those two years in Octopart.

[Bob Chen, JPMorgan]

Okay. Thanks, Aram.

[Aram Mirkazemi, Chief Executive Officer]

No worries.

[Operator]

Thank you. Your next question comes from Garry Sherriff with RBC. Please go ahead.

[Garry Sherriff, RBC Capital Markets]

Hi, Aram and Richard, two questions, one on 365 and the other one on enterprise. You had a nice uplift in the active users and accounts for 365. Can you maybe give us a sense when you plan on starting to charge users for the 365 product? I mean are we talking, I don't know, FY'25, FY'26? And if so, can you maybe give us a sense of the likely price range that you think users would see valuable?

[Aram Mirkazemi, Chief Executive Officer]

Garry, just on that point, as I mentioned in February and I also reaffirm that we see two sides or two layers to monetization of 365. One is the platform itself and one is the higher-level capabilities are on that platform. We're going to be monetizing on the higher-level capabilities, but we're going to not charge a joining fee for users to come on to this platform. This is really important for us because we're going to focus on going beyond PCB design software market. The customers or users that come onto our platform, we normally don't have access to them if they're not around PCB design. And we want to make sure that viral effect continues and hence, we're not going to be charging a joining fee. However, on the higher-level capabilities like around security, data intelligence, life cycle management, we are developing a SaaS team, is a strong team, and they have started the process of monetization. As I have said, in FY'24, I don't expect it to be a steep climb, but the pipeline that's being built is impressive and are expected to actually then rapidly grow in '25 and '26 which we will, of course, update the market on those.

[Garry Sherriff, RBC Capital Markets]

Okay. Got you. Thank you. And with enterprise, I mean, you caught up with Cadence in the US recently, and they also have flagged really strong industry conditions in that enterprise segment. Do you envisage or are you seeing any competitive response from Cadence as yet as you build into that enterprise space?

[Aram Mirkazemi, Chief Executive Officer]

Well, Cadence is a very large company, they are very strong in silicon design and 90% plus business of Cadence comes from very small -- relatively to Altium, small number of customers that are focused on chip design. In the mid-market, we don't see any particular aggressive posture from Cadence, and they are very respected companies and they've got their user base in the mid-market. But we feel pretty confident in the mid-market. Of course, we would like to be more competitive against Cadence in the higher end and we have been doing a lot of work that can't be seen but I expect us to do better in the enterprise against Cadence in years to come. The momentum is building up. But in the mid-market, it's really hard to beat Altium and in the high-end Renesas and our focus on this unique industry solutions designed to remain compliant by design intelligent by design. These are the things that we're offering in their board-centric, PCB-centric, and I think we're going to make more competitive against Cadence in the higher end of the market.

[Garry Sherriff, RBC Capital Markets]

Okay. Thanks, Aram. Appreciate it. Thank you.

[Aram Mirkazemi, Chief Executive Officer]

No worries.

[Operator]

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

[Lucy Huang, UBS]

Good afternoon, Aram and Richard. I've got three questions as well. So firstly, just in relation to that guide of $55 million to $60 million of nonrecurring revenues coming through FY'24. Just wondering the rationale behind, I guess, still pushing or expecting revenues from the perpetual license model, given we are trying to transition to term?

[Richard Leon, Interim Chief Financial Officer]

Hi, Lucy. So FY'23, we did just over $56 million in perpetual. We're investing in emerging regions so we feel some of these regions, we will start off initially with perpetual. And our kind of client mix, there will always be a certain range of people that would want perpetual licenses. That's how we formulate the target range of $55 million to $60 million.

[Lucy Huang, UBS]

Okay. That makes sense. And then just secondly, on enterprise as well. Given you announced some new deals builds with Tesla, SpaceX, I'm just wondering who are you winning these deals from, any color on the competitive landscape there?

[Aram Mirkazemi, Chief Executive Officer]

With Tesla. Tesla is our market accounts, we were with Tesla when they were a start-up and that has just grown larger and larger. Now with many of these modern, digital, high-tech-based companies, they do silicon design, they do board design, they are involved with all the different aspects of high-tech. So Cadence will be also present in Tesla. But all the board level, the majority of work that happen around board design, Altium is their tool of choice. In some companies, we have displaced competitors. But generally, it would turn into a coexistence for a period because once the company switches to Altium, they can't just completely walk away from all the designs they've done in the prior year. So they're going to continue for a little while. And we hope that in time, they would entirely switch to Altium.

[Lucy Huang, UBS]

Yes. No, understood. And then just my last question on -- a follow-up to kind of Altium 365. Just wondering because you're expecting the ramp-up in FY'25 to '26, any color you can share on the amount of contribution you are expecting from 365 by FY'26.

[Aram Mirkazemi, Chief Executive Officer]

It's early days. We'll definitely provide an update February next year. But we have -- in February in our aspirational targets in pursuit of that, we had a simple high-level indication of what we expect to get from direct monetization of 365. And we're still expecting within that range, although our design software is performing better than expected at that time. So it's less than what we were expecting, but still around $50 million is expected to come from direct monetization of 365.

[Lucy Huang, UBS]

Wonderful. Thanks very much.

[Operator]

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

[Kane Hannan, Goldman Sachs]

Hey, guys. Maybe just the subscriber growth and obviously expecting that to improve to 10% to 15%, I think it's around 9% this year ex-Russia. Just be interested, is that pretty broad based across the businesses and geographies or is there anything worth calling out that sort of drives that acceleration? And then how much of it relates to the improved churn you guys did in the second half sort of continuing on next year?

[Richard Leon, Interim Chief Financial Officer]

Hi, Kane, as far as our renewal rates, our renewal rates have been maintained at a very high level in both the Americas and EMEA, the 10% increase overall. I think in the slide, we're showing as a group a 7.5%, but that includes these tailwinds as far as China and rest of the world, but we believe they're out, and that was a 2.5% drag overall. So this is where we feel confident that a 10% to 15% improvement in FY'25 is achievable. I think when we look at our first half, second half, the second half certainly was more performant as far as renewals and new license fee acquisitions.

[Kane Hannan, Goldman Sachs]

Yes. I think that's helpful. And then just thinking about your standard subscribers, obviously been decline since '21 as they're being upsold. I mean, do you have a line of sight to stabilizing those subscribe or do you see still think there's a multiyear decline ahead as you continue to upsell them?

[Aram Mirkazemi, Chief Executive Officer]

One of the things you can see in America that people go straight to pro, like they don't go to standard and to pro, you can see new licenses. When you look at Americas, it's got pro and enterprise, nearly half of new licenses, this is in many ways, saying to us that Pro is going to be the standard in the future. And with all this business apps and additional layers as we're adding, standard is going to be seen as on the powered in the future. So we really want to focus on the additional layers in pro and enterprise. Of course, standard will be kept, but that's not the metric that we would want to say grow, we want pro and enterprise. And as that pro is the new standard.

[Kane Hannan, Goldman Sachs]

Yes. And then just Octopart and then I know you made those comments before. But around the stronger second half, is that when you're seeing volumes I suppose, returning to growth in the second half? Or just interesting if you talk about your volume expectations?

[Aram Mirkazemi, Chief Executive Officer]

We're expecting the second half to have an uptick of volume, but the first half we expect it to be the bottoming of that traffic flow. As you could see in our slides, there was 20% from second half last year to first half this year, and there was only 5% drop in the second half. So we expect minimal effect in the first half, but all the works that we've done with the localization of Octopart, we are investing in certain partnerships that will allow us to deliver a greater data accuracy for power users of Octopart and we're working on the integration of 365 and Octopart. We're investing on bolt-on M&A for Octopart and 365, we will expect second half to be the beginning of the upswing and '25 and '26 when we will be hopefully seeing the same effect going from transformation to performance mode, which we've seen with our mid-market and recently with enterprise, and this is the third front I'm expecting for us for this transformational move of having Octopart and 365 connected to not only drive their value up significantly, but also we're going to be getting more volume of traffic.

[Kane Hannan, Goldman Sachs]

Okay. Thank you very much, guys.

[Operator]

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

[Nicholas Basile, CLSA]

Hello, Aram and team, just probably 2 questions from me. The first one on, I guess, the Pro and Enterprise segments. I think in the past, you were sort of cautious on the ability to capture more enterprise sales due to product gaps existing. So just interested if you can kind of give us an update in terms of where if any product gap still exists? And if there are any roadblocks to further adoption in terms of the feedback you get from customers? Obviously, you called out quite a few large enterprise customer wins. So what are they perhaps, I guess, seeing in the product relative to those that are still holdouts? And the second one on Octopart. Just interested if you could perhaps expand on the comments you made around the significance of further integration with Altium 365.

[Aram Mirkazemi, Chief Executive Officer]

Okay. The first question, there isn't really a product gap. It's -- our product is nothing competitive, but combined with our cloud platform has got such a unique value proposition for enterprises that makes us, to be honest, the platform of choice for future of electronics hardware design. Our go-to-market on the enterprise, that's the area that we've been investing the last few years, maybe five years ago, we started investing in this whole area. And we have now built capabilities within Altium that delivers enterprise-grade capability in terms of some deployment and implementation of our cloud platform. That's part of the go-to-market because when you got a platform and you've got product, you got to still be able to actually deliver that to an enterprise. We've got that capability and this year, we had nearly 200 deals that we have signed, and that's a lot of capacity compared to where we were two or three years ago. So that part is now on the scaling side. There is a layer above that, which is enterprise capabilities that pertain to the enhancement of enterprise-wide productivity. And that is something that our -- we're hoping that our SaaS go-to-market to deliver, which is going beyond the PCB designers, bringing other professionals into the equations and monetizing them, that is a significantly new front for us and very promising. And the third part, which is very exciting and Renesas was a very exciting opportunity that we closed is related to what we say, business transformation, where the partner will actually fundamentally change certain aspects of their business and in the case of semiconductor industries, their go to market. And that is new for us. We're excited. We've got our Chief Commercial Officer, Marc Boonen, who is at the forefront of that. We have Ted Pawela, another Executive. And that is, again, go-to-market, is a strategic partnership. So we're actually feeling pretty confident on these three fronts. The first front, as I said, is in performance zone, the second and third are very promising, still in transformation zone but I expect in the next two or three years, those things is going to be going from strength to strength. As for your question about Octopart, that area is very promising because you've got supply chain professionals at procurement and in one thing is related to matters that they all heard about last two or three years about supply chain and managing your supply and so forth in electronics was a big deal and having that done in the context of design early. Now there are a lot of things we're developing, there are capabilities that we refer to them as business capabilities, but there are extremely attractive. We're getting really good feedback on them. We're running pilot projects to make sure that areas we're addressing are prioritized in terms of investment making and we would be talking about that first front quite a bit in our next outing.

[Nicholas Basile, CLSA]

Okay. Thanks very much and cheers.

[Operator]

Thank you. That's all the time we have for our question-and-answer session. I'll now hand back to Mr. Mirkazemi for closing remarks.

[Aram Mirkazemi, Chief Executive Officer]

Thank you. 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 to deliver value to our shareholders. Thank you everybody.

[Operator]

That does conclude our conference for today. Thank you for participating. You may now disconnect.