SUSE S.A.

Overview Key strengths Key risks Third-largest paid server operating system provider in the world after Microsoft and Red Hat. Niche focus on the paid-Linux server operating system, accounting for more than 80% of group revenue. Strong customer relationships with high net retention rate of about 108%, supported by mission-critical nature of products and upselling. Lack of own intellectual property given the open-source business model. Sound adjusted free operating cash flow (FOCF) of above $130 million supported by limited capital spending (capex), working capital needs, and cash taxes. Competition from larger and more resourceful paid-Linux service provider Red Hat, and the option for customers to use free Linux distribution. We anticipate SUSE?s revenue growth will decelerate to 10%-12% in fiscal 2023

...We anticipate SUSE's revenue growth will decelerate to 10%-12% in fiscal 2023 (ending Oct. 31) and fiscal 2024, compared with about 16% in fiscal 2022. We expect the growth deceleration will mainly stem from a weak macroeconomic environment, leading to slower customer decision making on new purchases and prolonged use of the unsupported free version of the software, as we have seen from the company's results as of the third quarter of fiscal 2022. That said, we note the forecast growth is still much faster than that of most of the software peers we rate, thanks to the company's subscription-based business model, continued expansion of Linux versus Windows, and growing adoption of containers....

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