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EQS-News: SUSE S.A.
/ Key word(s): Quarterly / Interim Statement
SUSE’s Robust Revenue Supports High Profitability in Q3
Note: This table contains Alternative Performance Measures as defined in Appendix 4 of this document. The presentation is based on pro forma numbers including Rancher on a coterminous basis in 2021 as if acquired on November 1, 2020. NeuVector is included from November 1, 2021, in all APMs, and no prior year numbers are included, being immaterial to the group.
Constant Currency movement has been provided for ACV, Adjusted Revenue and Adjusted EBITDA. The definition of Constant Currency is included within Appendix 4.
Statutory data for the year-to-date is included in Appendix 1. Reconciliations to IFRS measures are shown in Appendix 2.
Luxembourg – September 22, 2022 – SUSE S.A. (the “Company” or “SUSE”), an independent leader in open source software specializing in Enterprise Linux operating systems, Enterprise Container Management and Edge software solutions, today announced its results for the third quarter of financial year 2022, which ended July 31, 2022.
“We have delivered strong revenue and profitability amid macro-economic and geopolitical uncertainty,” said Melissa Di Donato, CEO of SUSE. “We are working to address the challenges facing our business and have devised a robust plan to develop our Rancher business.”
“We have demonstrated the strength of our business model with our robust revenue and profitability,” said Andy Myers, CFO of SUSE. “I am pleased to confirm our revenue and EBITDA guidance for FY 2022, and while we are seeing short-term impacts on our ACV, I have continued confidence in our ability to capitalize on our market opportunity and in delivery of our medium-term guidance.”
Summary KPIs and Adjusted Profit and Loss Account for Q3 2022
Note: ARR and NRR are reported one quarter in arrears in USD millions at actual FX rates. Operating expenses exclude non-recurring items, as shown in the IFRS operating loss to Adjusted EBITDA reconciliation in Appendix 2. The presentation is based on pro forma numbers including Rancher on a coterminous basis in 2021 as if acquired on November 1, 2020. NeuVector is included from November 1, 2021, in all APMs, and no prior year numbers are included, being immaterial to the group.
Constant Currency movement has been provided for ACV, Adjusted Revenue, Cost of Sales, Adjusted Gross Profit, Opex and Adjusted EBITDA. The definition of Constant Currency is included within Appendix 4.
Adjusted Earnings Per Share is calculated on the basis of the weighted average number of ordinary shares in issue during the period. The number of ordinary shares in issue as at July 31, 2022, was 169,291,648.
In Q2 2022, SUSE updated its ARR methodology. Q2 and Q3 2022 ARR have been reported based on the updated methodology, and Q1 2022 and 2021 were restated based on the new methodology. NRR has also been updated to reflect the new methodology with limited impact on reported figures.
Financial and Business Review
The information in this section is based on the presentation of Alternative Performance Measures as defined in Appendix 4 and has not been audited. Historical data is also based on pro forma figures including Rancher prior to its acquisition by SUSE in November 2020. The Q1 numbers for 2021 include three months for Rancher on a pro forma basis. NeuVector is included in 2022 reporting only; prior year numbers have not been restated on a pro forma basis for NeuVector.
A reconciliation to the IFRS financials is included in Appendix 2. Results are shown using actual exchange rates.
SUSE delivered robust revenue and profitability in Q3. Early in the quarter we launched significant enhancements to SUSE Rancher, SUSE NeuVector and SUSE Linux Enterprise, highlighting SUSE’s commitment to cloud-native security. These enhancements were well received by our existing and prospective customers, and they demonstrate SUSE’s continued commitment to delivering innovative, open source subscription software to customers around the world.
Enterprise customers continue to sign multi-year contracts with up-front payment, and this is the basis for our confidence in our plans for long-term, sustainable growth with high profit margins and high cash conversion. In the quarter we signed important deals with new and existing customers, including a large-value SUSE Linux Enterprise renewal with upsell to a Fortune 500 company, capitalizing on our incumbency, and our first SUSE Liberty support sale in India to a prominent banking and payments institution, supplementing an existing SUSE Rancher subscription.
SUSE’s markets are expanding, driven by established global mega trends and supporting demand for our products. This underpins our growth, and we continue to see strong Rancher usage and downloads as a result.
However, the current macro-economic environment continues to particularly impact our Emerging business with slower purchase decision making for new contracts and some customer project delays. This effect is less marked in our Core business where a smaller proportion of our business is new, given the strong existing subscription base. In our Emerging business, while Rancher renewals remain strong, potential new Rancher customers are more willing to run unsupported with the free version for longer as their focus on costs has intensified. Coupled with higher churn in our work force earlier in the year, these factors have impacted Emerging growth.
We are therefore evolving our Rancher business to capitalize on the significant opportunity presented by our market-leading product, with strong usage in rapidly growing markets. We are introducing, throughout Q4 FY22 and Q1 FY23, additional security certifications and capabilities for paying Rancher customers, to directly serve the evolving needs of enterprises. Furthermore, we have expanded our sales force and are now developing a specialized Rancher sales force. Finally, we are increasing Rancher’s capacity for product development and technical sales support to ensure we can deliver our new capabilities and maintain our market-leading position.
In Q3 2022 we expanded our organization, adding 69 people to our workforce despite a tough hiring environment. Wage inflation continues to be elevated but in line with our expectations accounted for within our guidance. Following elevated churn in our sales force earlier in the year, actions taken by SUSE and the softening hiring market have led to a more stable workforce with lower churn.
In early September we announced a new strategic collaboration with Amazon Web Services, Inc. (AWS) to support smoother migration of customers’ SAP landscapes to AWS. This multi-year agreement is an expansion of our work with AWS and includes integrated go-to-market activities across sales and marketing, shared channel enablement and training, and dedicated personnel worldwide.
The total number of shares issued remains at 169.3 million following the increase earlier in the year, which resulted from the first Restricted Stock Unit vesting in May 2022.
Market and Revenues
Total ACV for Q3 was $114.4 million, down 4% on the prior year, down 1% at constant currency given the impact of foreign currency headwinds, primarily a stronger U.S. dollar.
The decline in total ACV was driven by Core ACV of $93.2 million in Q3, down 8%, 5% at constant currency. This decline was largely as expected and reflects our usual sales cycle, available renewal pool in Q3 2022 and a large retrospective consumption contract in Q3 2021, together with a foreign currency headwind.
Emerging ACV for Q3 was $21.2 million, up 21%, 25% at constant currency, reflecting continued strong Rancher renewals partly offset by lower new business which has been particularly impacted by the current macro-economic environment and by higher churn in our work force earlier in the year.
The LTM ACV continues to grow, up 13%.
Weighted average contract lengths, on an LTM basis, remained stable versus the prior quarter at 20 months.
Adjusted Revenue of $171.2 million was up 13%, 15% at constant currency, comprising $142.9 million in Core and $28.3 million in Emerging.
ACV – By Route to Market
End User ACV, including the Cloud Service Provider (CSP) route-to-market, grew 4% in Q3, driven by continued strong growth in cloud sales across all CSPs.
Independent Hardware Vendors (IHV) and Embedded ACV declined 41% in Q3, driven primarily by a smaller renewal pool in our Embedded route-to-market. Sales to IHVs were also lower versus the prior year, driven by hardware shortages and a shift to selling through other routes, primarily through CSPs.
ACV – By Region
ACV growth in Asia, Pacific and Japan and in Latin America remained strong. ACV declined in North America in Q3, driven primarily by a smaller renewal pool, and in Greater China due to challenging market conditions in the region, with customers prioritizing local service providers.
Growth in sales through CSPs remained strong across all regions excluding Greater China, where sales through CSPs are a small part of our base.
Annual Recurring Revenue and Net Retention Rate
Annual Recurring Revenue (ARR) increased from $562.3 million in the prior year to $639.6 million in Q3 2022, representing 14% growth, driven by continued demand for our subscription-based products and services.
Net Retention Rate (NRR) remained strong at 108%, reflecting that customers continue to renew their subscriptions with SUSE and are willing to pay a higher price or purchase a more-expansive product selection.
Both metrics include NeuVector’s contribution since acquisition in October 2021.
ARR and NRR are reported three months in arrears as a significant portion of the revenues are invoiced retrospectively.
SUSE’s Adjusted Gross Profit margin was 92% in Q3, in line with the prior year.
Sales, Marketing and Operations costs increased by 15% to $45.0 million in Q3, driven by continued investments in sales people and marketing which focused on pipeline generation and qualification.
Research and Development costs increased by 7% to $27.1 million, driven by investments in engineering and product management, with significant funding directed to our container management (Emerging) products.
General and Administrative costs increased by 5% to $20.7 million, driven by headcount investments to meet the demands of a growing organization and being a listed entity, and an adverse realized foreign exchange movement.
Adjusted EBITDA grew 18% to $65.1 million in Q3, as SUSE’s revenue growth was further enhanced by strong cost control and a positive impact from foreign exchange movements, resulting in margin expansion of one percentage point versus the prior year.
Change in deferred revenue was negative $18.9 million, down from positive $9.8 million in the prior year, driven by higher revenue recognition and lower ACV in the quarter.
The decrease in Change in Deferred Revenue more than offset the increase in EBITDA, leading to Adjusted Cash EBITDA of $46.2 million, down 29%.
Adjusted Unlevered Free Cash Flow was up 58% to $61.5 million in the quarter. This reflects a working capital inflow and lower IFRS 15 cash adjustment in the quarter, which in turn reflects lower commissions paid. These drivers were partially offset by lower Adjusted Cash EBITDA, higher cash tax driven by timing of tax filings and anticipated higher payments in multiple regions, and an increase in gross capex due to investment in a data center move.
Cash conversion was 94% for the quarter.
Net Debt at the end of the third quarter was $604.1 million, a reduction of $50 million versus the prior quarter, driven by our strong cash flow.
As a result, our leverage ratio, calculated as the Net Debt divided by the last 12 months Adjusted Cash EBITDA, was 2.3x, flat versus the prior quarter and well within our commitment to keep leverage below 3.5x.
Environmental, Social and Governance (ESG) is at the heart of our business and sustainable growth, and we continue to make progress toward our targets.
After the quarter end, we received our sustainability rating with EcoVadis, one of our commitments for the year. We secured a silver medal for our ESG practices, placing us among the top 25% of the rated companies.
Given the long-term nature of our ESG focus, we will provide a full ESG update in our half year and annual statements from now on.
SUSE reaffirms full year 2022 guidance for Adjusted Revenue and Adjusted EBITDA margin, prior to FX impacts.
The current macro-economic environment continues to particularly impact our Emerging business with slower purchase decision making for new contracts and some customer project delays. This effect is less marked in our Core business where a smaller proportion of our business is new, given the strong existing subscription base. In our Emerging business, while Rancher renewals remain strong, potential new Rancher customers are more willing to run unsupported with the free version for longer as their focus on costs has intensified. Coupled with higher churn in our work force earlier in the year, these factors have impacted Emerging growth.
We now expect Core ACV growth around 10% and Emerging ACV growth around 20% in 2022, both prior to FX impacts.
We also expect Adjusted Unlevered Free Cash Flow conversion over 80% in 2022, prior to FX impacts, primarily reflecting the lower ACV.
FX rate movements, particularly the stronger U.S. dollar, are reducing reported ACV, Adjusted Unlevered Free Cash Flow, and, to a lesser degree, Adjusted Revenue. Our reported Adjusted EBITDA margin is supported by a small positive FX impact.
Medium-term guidance is unchanged, reflecting the growth outlook in the markets and SUSE’s competitive position. We expect to build steadily toward these performance levels over the coming years, subject to market and macro-economic developments.
SUSE is a global leader in innovative, reliable and secure enterprise-grade open source solutions, relied upon by more than 60% of the Fortune 500 to power their mission-critical workloads. We specialize in Business-critical Linux, Enterprise Container Management and Edge solutions, and collaborate with partners and communities to empower our customers to innovate everywhere – from the data center, to the cloud, to the edge and beyond. SUSE puts the “open” back in open source, giving customers the agility to tackle innovation challenges today and the freedom to evolve their strategy and solutions tomorrow. The company is headquartered in Luxembourg and employs more than 2,000 people globally. SUSE is listed in the regulated market (Prime Standard) of the Frankfurt Stock Exchange.
For more information, visit www.suse.com.
Melissa Di Donato (CEO) and Andy Myers (CFO) will host an analyst and investor conference call at 2:00 PM CET / 1:00 PM BST on September 22, 2022, to discuss the results.
If you would like to dial in and ask questions during the conference and have not pre-registered, please call +49 162 2059754 or email firstname.lastname@example.org for dial-in details.
The audio webcast can be followed in listen-only mode using this link: https://www.webcast-eqs.com/suse20220922
A replay will be available on the Investor Relations website. The accompanying presentation also can be downloaded from the Investor Relations website.
Certain statements in this communication may constitute forward-looking statements. These statements are based on assumptions that are believed to be reasonable at the time they are made, and are subject to significant risks and uncertainties, including, but not limited to, those risks and uncertainties described in SUSE's disclosures. You should not rely on these forward-looking statements as predictions of future events, and we undertake no obligation to update or revise these statements. Our actual results may differ materially and adversely from any forward-looking statements discussed in these statements due to several factors, including without limitation, risks from macroeconomic developments, external fraud, lack of innovation capabilities, inadequate data security and changes in competition levels.
The Company undertakes no obligation, and does not expect to publicly update, or publicly revise, any forward-looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to it or to persons acting on its behalf are expressly qualified in their entirety by the cautionary statements referred to above and contained elsewhere in this communication.
APPENDIX 1 Statutory Financials
IFRS Income Statement
Interim Condensed Consolidated Statement of Comprehensive Income (unaudited)
For the nine months ended 31 July 2022
(1)For the nine months ended 31 July 2022 and 31 July 2021, potential ordinary shares are anti-dilutive, as their inclusion in the diluted loss per share calculation would reduce the loss per share, and hence have been excluded.
Interim Condensed Consolidated Statement of Comprehensive Income (unaudited)
For the nine months ended 31 July 2022
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