Sophia L.P.

The stable outlook reflects Ellucian's leading position in the higher education ERP software market, its stable and recurring revenue base, and our expectation that the company will generate free cash flow of $70 million or better in fiscal 2019. We could raise the rating over the next 6 to 12 months if the company continues to generate revenue and EBITDA growth, maintains EBITDA margins in the low- to mid-30% area, sustains leverage below 8x, free cash flow to debt approaches 5%, and we view a near-term leveraging action (either through a dividend or an acquisition) to be unlikely. Although unlikely, we could lower the rating if the company cannot maintain operating profitability, resulting in flat to negative free cash flow,

...Sophia L.P.'s (Ellucian) financial metrics have been improving in 2019. Ellucian has had a strong 2019, with high-single-digit revenue growth and improving margins with EBITDA margins reaching 35%. The company is generating good free cash flow and has used its cash position to pay down just under $50 million of debt during 2019. Adjusted EBITDA for the last 12 months has grown to greater than $280 million, with leverage coming down to the 7x area. While leverage has improved and is better than our upside trigger of 8x, free cash flow to debt is still around 3%. Nonetheless, if the company can sustain this performance in 2020 and continue to grow revenues in line with the software industry, we would consider a positive rating action....

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