According to the Citrix 2020 Technology Landscape Report (2015), the internet of things “represents the biggest expansion of Information Technology ever”. From sprinklers to toasters to jet engines, essentially anything with an on and off switch is set to be connected to the internet. Gartner (2015) estimate that the number of connected ‘things’ could rise from 6.4bn in 2016 to an astounding 20.8bn connected devices by 2020.
But how to take advantage of this? At the centre of each of these ‘connected’ devices will be a printed circuit board (PCB) uniquely designed for each device using electronic computer-aided design (CAD) software. Throughout the development process, constant collaboration is required between the electronic and the mechanical design teams to ensure that the PCB fits within the physical product design. At the best of times this can be a demanding process as data outputs from different software products attempts to be reconciled.
ASX listed Altium (ALU) offers one of the premiere electronic CAD software programs available on the market. On the other side of the development process is tech-giant Dassault Systemes (DSY:EPA) whose Solidworks mechanical CAD product is a global leader. Altium and Dassault have partnered to release an integrated ECAD-MCAD product that streamlines the development process – a move to take advantage of the ever-increasing demand for electronic components in everyday ‘things’. This partnership provides a chance for Altium to leverage Dassault’s 300+ distribution channels at minimal cost. With only 30,000 subscribers in comparison to Solidworks 2 million, the opportunity for Altium is clearly enormous. Even a very conservative 1% penetration of the Solidworks user base would provide a material impact to earnings.
Altium currently trades on a c.3.5% FY16 FCF yield which KIS believe is a fair price to pay given the substantial upside potential from the Dassault partnership. For the sake of exploration, using conservative 40% EBITDA margins and an average US$1,000 revenue per customer, just a 3% penetration would represent a US$24m increase to EBITDA – 88% of FY16e EBITDA. Whilst an attempt to forecast the level of user penetration is somewhat arbitrary at this point – even towards the lower end of the spectrum there is clear value.
Citrix Technology Office 2015, 2020 technology landscape, Citrix, California, viewed 08/06/16, <https://www.citrix.com/articles-and-insights/trends-and-innovation/may-2015/2020-technology-landscape.html>
Gartner 2015, Gartner says 6.4 billion connected “things” will be in use in 2016, up 30 percent from 2015, Gartner Inc. viewed 08/06/16, <http://www.gartner.com/newsroom/id/3165317>