Applied Systems Inc.

The stable outlook on Applied reflects our expectation that the company will maintain its good market position in the insurance broker management systems industry. Additionally, we forecast the company will continue generating predictable cash flow, leading to modest improvements in credit measures over the next 12 months. We could lower the rating if the P&C industry experiences a significant downturn, coupled with increased pricing pressure from competitors, leading to negative free cash flow and overall weakening liquidity and an inability to meet its debt service obligations. We could consider an upgrade if the company can organically increase revenue in line with past historical rates of about 10% and continue to recognize slight EBITDA margin expansion from a favorable revenue mix

...Leading market position will contribute to continued strong performance in 2019 and 2020. Applied Systems Inc.'s revenue has grown at around 10% since 2016 (17% in 2015), and S&P Global Ratings expects revenue growth to be around the same level in 2019. Uncertain economic conditions may cause headwinds for the property and casualty (P&C) industry in 2020, with lower premiums being underwritten contributing to a slowdown in broker headcount growth. We view Applied's solution as mission-critical to brokers' operations, and expect ongoing revenue growth in 2020, albeit slightly lower than recent years, at around the mid- to high-single-digit percentage area. Dividends, share repurchases, and options vesting have been a drain on cash. The nearly $750 million of debt-funded dividends paid out since October 2016 has materially raised Applied's interest expense since being acquired by its current sponsor (Hellman & Friedman), almost doubling since fiscal year 2015 to around $120 million annually....

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