Marcel Lux IV Sarl (SUSE Linux)

The stable outlook reflects our expectation that SUSE will maintain its market position, enabling it to tap into growth in the overall paid-Linux market. We think this will facilitate revenue growth of 10%-12% and adjusted EBITDA margins of 32%-34% in 2020-2021. We could lower our rating if lower-than-expected revenue growth or EBITDA margins, or an aggressive financial policy, lead SUSE's adjusted leverage to increase beyond 8.0x in fiscal 2020 or if--excluding one-time carve-out related costs and cash outflows--adjusted free operating cash flow (FOCF) to debt declined and stayed below 5%. Rating upside is constrained by SUSE's highly leveraged capital structure and financial sponsor ownership. However, we could raise the rating if SUSE reduced adjusted debt to EBITDA to sustainably below

...Good progress in carve out from Micro Focus reduces operational risks and should significantly improve cash flow generation. S&P Global Ratings understands that most of the carve-out processes have been completed following EQT's leveraged buyout of SUSE from Micro Focus in March 2019. Additionally, more than 90% of customer contracts have been transferred to SUSE, with the remainder expected to be migrated by the end of 2020. We see a very limited impact of the carve out on SUSE's operations, considering its high customer net retention rate of 108% in the first half of year ending Oct. 31, 2020 (fiscal 2020), compared with 105% in fiscal 2019. We think SUSE's nonrecurring costs related to the carve-out will largely phase out in 2021 from our estimate of $33 million in 2020 and $37.2 million in 2019, resulting in stronger net cash generation of more than $90 million in 2021, compared with our estimate of about $50 million in 2020. We anticipate a limited impact on SUSE from COVID-19, supported...

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