Sophia L.P. (dba Ellucian)

With Ellucian significantly increasing its FOCF in 2017-2019 through continued revenue growth and lower capitalized software development (product investments), we believe future revolver needs might decrease over time, as has occurred during the aforementioned time frame. However, with the increased interest burden and sales disruption occurring in 2020, we forecast future seasonal needs to be about $60 million in 2021. The stable outlook reflects Ellucian's leading position in the higher education enterprise resource planning (ERP) software market, its large contractually recurring revenue base, and our expectation that the company will generate free cash flow of about $90 million in fiscal 2021. Although unlikely, we could lower the rating if the company cannot maintain operating profitability, resulting in flat to negative

...Higher educational institutions Sophia L.P. (dba Ellucian) serves are likely to face budget uncertainties in 2021 as administrators evaluate how and when campus life can return to normal. Pandemic-related headwinds have limited Ellucian's new customer acquisitions and delayed planned implementations in 2020. These trends are likely to continue to varying degrees in 2021. Ellucian's high-90% gross-retention rates and 82% contractually recurring revenue (which includes managed services) provide some stability to revenue, but S&P Global Ratings expects revenue to decline about 3% in 2020. We attribute the declines to lower professional services revenue from delayed implementations and the cancellation of its annual user conference. To offset the lower revenue, management has implemented numerous cost-saving initiatives in addition to lower travel and expense costs. We believe these initiatives will improve 2020 EBITDA levels slightly versus 2019 and limit the negative effect on free operating...

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