SUSE S A : Transcript Q1 2023

SUSE

Q1 FY23 Results

16th March, 2023 | 2:00 CET

Transcript

Speakers:

Melissa Di Donato

Andy Myers

Jonathan Atack

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Jonathan Atack	Thank you, Operator. Good morning and good afternoon to
	you all, and welcome to our presentation of SUSE's results
	for the first quarter of the 2023 financial year. I'm Jonathan
	Atack, Head of Investor Relations at SUSE. I will shortly
	hand over to our CEO, Melissa Di Donato, and our CFO,
	Andy Myers, who are going to take you through a few
	prepared remarks before we move to Q&A.
	Before I do that, can I remind you of the disclaimer on page
	two of the presentation, which contains important notices on
	the information provided in the following presentation.
	Melissa, over to you.
Melissa Di Donato	Thank you, Jonathan, and hello, everybody. Today, I am
	pleased to share the details of SUSE's first quarter
	performance in the 2023 financial year. We've made a
	strong start to the year, demonstrating the value of the
	mission criticality of the subscription software in what we call
	right now a macroeconomic environment that continues to
	be challenging.
	During Q1, we made important changes to our sales
	structure and launched Rancher Prime, which together will
	support our continued growth. Before I present our financial
	highlights, let me start with a reminder of the structural
	strengths that make our business model so resilient.
	The results we're reporting today again demonstrate our
	ability to deliver high revenue growth, high profit margins
	and high cash conversion. We operate in a rapidly growing
	market, driven by global mega-trends, delivering
	infrastructure software solutions for our customers. We have
	a strong business model built on subscription revenue and
	a diversified enterprise customer base. I am confident that
	this will continue to underpin sustainable growth well into the
	future. Let's now move on to our financial highlights.
	In Q1 FY23 SUSE delivered strong and solid revenue
	growth, strong margins and high cash conversion in the first
	quarter, enabling us to reiterate our full-year guidance.
	We're reporting a 9% growth in Adjusted Revenue, which
	was 10% at constant currency. Our Adjusted EBITDA
	margin was very strong, at 40%, during a period in which we
	continued to increase our R&D spend, retaining our
	commitment to product innovation and our commitment to
	first-class technical support.
	ACV was up 2% for the quarter, and up 5% at constant
	currency, largely reflecting the available renewable pool.
	More importantly, total ARR of $655 million was up 11%,
	demonstrating the continued strength of SUSE's
	subscription-based business, and underpinning our future
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revenue growth. Finally, we delivered strong unlevered free cash flow of $74 million, equivalent to a conversion rate of 110%.

Let's now spend some time on our key operational headlines for the quarter. We continue to develop our business to capitalise on the growth in our markets and maintain our competitive edge. In Q1, we delivered innovative new products and implemented our new sales structure, which we described with our Q4 results.

We made further progress in developing our Rancher business following the launch of Rancher Prime in December, driving higher sales in Q1, underpinned by increased adoption, with cross-selling and further improved customer support. Earlier in March, we launched Rancher Government Carbide, which delivers cutting-edge capabilities to support the US government's federal compliance requirements.

In Edge-related developments, we launched our Adaptive Telco Infrastructure Platform, a telco optimised solution that enables telco companies to accelerate and future-proof modernisation of their networks. This development was in close collaboration with the leading European operators, such as Deutsche Telekom, Orange, Telecom Italia, Telefonica and others.

As announced with our Q4 results, we simplified and we refocused our sales organisation at the start of Q1. This now comprises four sales teams, including a newly created specialised sales force dedicated to acquiring new Emerging customers, and a renewed focus on our largest existing customers through our Customers for Life team. The new organisation is building momentum, underpinning growth in the quarters and the years ahead and enabling efficiency gains across our company.

Finally, we are maintaining our disciplined approach to costs while continuing to invest in our future. In Q1, we continued to expand our R&D functions, with a focus on product innovation and first-class technical product support. SUSE's markets continued to expand, driven by global mega-trends, and our competitive position and continued investments ensure that we are well placed to capitalise on this growth.

Now let me talk you through some of the key deals we secured in the quarter. Q1 was another quarter in which SUSE signed important deals with new and existing customers. This short, small selection of deals highlights SUSE's continued leadership in the SAP market, supported by our vast experience and close partnership with SAP, and

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	the early momentum that we've already gained with
	Rancher Prime.
	First, a global leader in agriculture and construction
	machinery reiterated their trust in SUSE to support their
	SAP applications with a significant and large renewal.
	Second, a Swedish telco leader chose Rancher Prime,
	expanding from free to paid-for usage in a clear
	demonstration that our adoption-led strategy and approach
	is working. This deal was underpinned by our longstanding
	relationship and telco-specific offerings.
	Third, one of the largest banks in Latin America renewed a
	high-value SLES contract to support their ATMs and
	branches across the country with a custom-build operating
	system. Finally, a leading investment bank in the US chose
	Rancher Prime for its flexibility, scalability and ease of
	implementation, enabling significant automation and
	efficiency gains. With that, if I can, I'll hand it over to Andy,
	who will now take you through the details of our financial
	performance.
Andy Myers	Thanks, Melissa, and good morning, good afternoon to you
	all. Q1 was another quarter of robust delivery for SUSE, with
	solid revenue growth in line with expectations, and strong
	margins, allowing us to reiterate our guidance. We reported
	Adjusted Revenue growth for the quarter of 9%, and 10% at
	constant currency.
	Q1 ACV was up 2%, and up 5% at constant currency,
	reflecting the available renewal pool and some deal slippage
	in the quarter. Group ARR was up 11%, supported by
	growth in both Core and Emerging ARR. And our net
	retention rate of 105% demonstrated that our customers
	continue to renew and grow their subscriptions with us.
	Furthermore, we delivered a high Adjusted EBITDA margin
	of 40% for the quarter as our disciplined investments in the
	business were more than offset by foreign exchange
	movements and a significant foreign exchange gain.
	Excluding these foreign exchange effects, our margin
	increased year on year. Finally, cash conversion was very
	high, at 110% for the quarter, including a working capital
	inflow driven by customer collections from contracts signed
	late in Q4 and paid in Q1.
	I'll now talk you through our KPIs for Q1 in more detail,
	starting with revenue. Total revenue in the quarter was up
	9% to $169 million and up 10% at constant currency. This
	comprised Core revenues of $138 million and Emerging
	revenue of $32 million, up 6% and 28% at constant currency
	respectively.
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Our revenue growth has been impacted by the run-off of legacy products and suspension of sales to Russian customers over the past year. Excluding these headwinds, Core revenue was up 7% and Emerging revenue up 38%, both at constant currency.

Group ARR grew to $655 million, up 11% year on year, driven by a higher ARR from existing customers and by ARR from new customers. Finally, our net retention rate of 105% demonstrates continued growth from existing customers in a challenging macroeconomic environment, including slower cloud growth.

NRR was impacted by around two percentage points by the suspension of sales to Russian customers and the run-off of our legacy products, which we no longer develop or support, except in a few exceptional circumstances. Foreign exchange movements also reduced NRR by around two percentage points. Our weighted average contract duration on a last 12 months basis remained strong at 20 months, flat versus the prior quarter. Let's now turn to our ACV performance.

Group ACV was up 2%, or up 5% constant currency. As you know, this metric can be quite lumpy on a quarterly basis, reflecting the available renewal pool, and Q1's performance also reflected some deal slippage. Core ACV was down 1%, and up 1% on constant currency, and Emerging ACV was up 19%, and up 21% at constant currency.

Core ACV performance was driven by lower renewals, the suspension of sales to Russian customers and challenging market conditions in Greater China, offset by higher sales through cloud service providers. Whilst we continue to see strong growth through our cloud route to market, growth is slower than in prior quarters, reflecting the wider slowdown in the market, which we believe will accelerate again once the macro uncertainty reduces.

Emerging ACV growth was supported by higher renewals. ACV was also impacted by the run-off of SUSE legacy products and the suspension of sales to Russian customers. Excluding these effects, Core ACV was up 2%, and Emerging ACV was up 22% at constant currency.

Our ACV performance by geographies also follows the same trends we see in Core and Emerging ACV. Our performance by route to market included 3% growth in our End User and Cloud ACV, driven by growth in sales through cloud service providers, partially offset by lower renewals. ACV from Independent Hardware Vendors and Embedded customers was down 2%, similar to the prior quarter, driven

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