SUSE S A : Transcript Q3 2022

SUSE S.A.

Third Quarter 2022 Results

22nd September 2022 | 02:00 PM CEST

Transcript

Speakers:

Melissa Di Donato, CEO

Andy Myers, CFO

Jonathan Atack, Head of Investor Relations

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Jonathan Atack	Good morning and welcome to our presentation of SUSE's
	results for the third quarter of the 2022 financial year. I'm
	Jonathan Atack, Head of Investor Relations at SUSE. I'll
	shortly hand you 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 open up the floor 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, everyone. I'm pleased to
	speak to you today and share details of SUSE's third quarter
	of our 2022 fiscal year. But before I present our financial
	highlights, let me start with a reminder of the many strengths
	that propel us and our business model going forward.
	The results and reporting today demonstrate our ability to
	deliver high revenue growth, high profit margins and high
	cash conversion. We're capitalising on the strength of our
	mission-critical infrastructure solutions and rapidly growing
	markets by developing relationships with existing
	customers, at the same time as attracting new ones.
	With our subscription model, diversified enterprise customer
	base and multiyear contract with up-front payment, we have
	a strong business model, which is driving long-term and
	sustained growth. This is particularly relevant at a time like
	we are today of macroeconomic uncertainty.
	SUSE has delivered robust revenue and profitability in Q3.
	We're reporting a 13% growth in adjusted revenue and 15%
	at constant currency. Looking at the first nine months of the
	year, this growth is even higher at 16%, or 17% at constant
	currency. Our adjusted EBITDA margin was strong at 38%.
	ACV was down 4% in Q3, or 1% at constant currency. This
	decline in total ACV was driven by an 8% decline in core,
	which was largely expected and reflected a number of key
	factors. First, a large retroactive and retrospective
	consumption contract in Q3 of prior year, our usual sales
	cycle, the available renewal pool in Q3 2022 and then lastly
	a foreign currency strong headwind.
	We delivered strong unleveraged free cash flow of 62
	million, equivalent to a conversion rate of 94%. Furthermore,
	I am reiterating our guidance for adjusted revenue and for
	our adjusted EBITDA margin this year. We are, however,
	seeing slower growth in our emerging ACV, exacerbated by
	the macroeconomic uncertainty in today's economy. I'll
	elaborate on the dynamics in this business shortly.
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This macro impact is less marked in our core business, where a smaller portion of that business is new, given the very strong existing subscription base, but nonetheless having a relatively small effect.

It's important to note that we are reiterating our medium- term guidance, reflecting the growth outlook in the market and SUSE's competitive position. Let's spend a few moments now on the key operational highlights and headlines.

In terms of product development in Q3, we announced several significant enhancements to SUSE Rancher, SUSE NeuVector and SUSE Linux, highlighting our commitment to cloud-native security. These enhancements were well received by our existing and prospective customers.

In early September, we announced a new strategic collaboration AWS, Amazon Web Services, to support its seamless migration of customers' SAP landscape to AWS. This is a multiyear agreement, expanding on our existing relationship with AWS, and involves integrated go-to-market activities all across sales and marketing, shared channel enablement, engagement and training and dedicated personnel worldwide.

In Q3 2022, we continued to grow as a company. We added 69 people to our workforce despite an extremely and highly competitive hiring market.

Following a bit of elevated churn in our sales force earlier this year, I'm pleased to say that the actions that we've taken have softened and have returned dividends on our hiring market and have led to a more stable workforce with lower churn. We also made focused investment in sales people specifically dedicated to container management, container management sales and product development.

ESG, as you well know, it's the heart of our business and sustainable growth. We continue to make progress towards achieving these targets. We have received our sustainability rating with EcoVadis, which is one of our commitments from earlier this year. We were awarded a silver medal for our ESG practices, placing SUSE amongst the top 25% of the rated companies.

Let me talk you through some of the key deals that we secured in Q3. In Q3, we continued to win important business through cross-selling use cases and across the business supporting our high net retention rate, and by consistently expanding our presence across industries and across geographies.

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This short list includes three descriptions of deals won in the quarter, reinforcing SUSE's strong value proposition around the world. First, a Fortune 500 US sports apparel giant chose our enterprise-grade, reliable and stable Linux product set. This large value renewal win demonstrated further expansion into a world-famous sports brand.

A global leader in sensors, logistics and manufacturing automation chose SUSE Rancher for its flexibility and for our responsiveness to customer needs. And then lastly a prominent Indian banking and payment institution chose SUSE Liberty specifically based on their positive experiences with SUSE Rancher. This represents the first large-scale SUSE Liberty win in India, supplementing an existing SUSE Rancher subscription.

Let me talk to you now about the current market dynamics and some important changes that we're going to be making. The mega-trends that are driving the growth in our market remain unchanged. Across the world, computing workloads continue to grow, and customers are increasingly deploying these workloads in the cloud and at the Edge, underpinning demand for Linux and container management products.

Open-source Linux, including SLES, is taking share from competing operating systems due to its stability, higher security, lower downtime, better performance and versality across cloud, on premises and hybrid environment.

The rising need for multi-cloud support and portability is driving container usage, which is predominantly a Linux technology. There's a huge potential for market growth, as only 5% of applications were containerised by 2020. And as a result, the container management market is expected to grow 44% per year between 22 and 25.

In Rancher, we have a market-leading container management platform, and we continue to see strong downloads and unique usage and users, reflecting the rapidly growing market that we reside in. We now have over 40,000 unique users, and this is an order of magnitude higher than the number of customers we've converted to subscriptions so far.

Let me tell you what we're going to do now to have faster growth to capture this market.

Whilst Rancher sales have grown significantly over the last two years, the business is currently performing, as you can see, below our expectations, and we are determined to take the necessary actions to fully benefit from the market growth and from our competitive position, even in tumultuous

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macroeconomic times.

We're developing our business to capitalise on the significant opportunity. We're addressing any issues in the economy that could be impacting our growth today.

First, as I mentioned last quarter in Q2, this current macro uncertainty continues to particularly impact our Rancher business, with slower purchase decision-making for new contracts and some customer project delays.

Second, potential new Rancher customers are more willing to extend the time they run unsupported with free versions of the software, as their focus on cost has intensified.

Third, despite the competitive hiring market, we've continued to grow our sales force, but following on the earlier churn in the year, this is now a less experienced sales force that we have as we enter Q3 and therefore have been less able to convert deals faster into actual sales per the past, but specifically in the current economic environment.

Then, number four, lastly we're enabling better sales support and accelerated product development.

In order to address these challenges, we're taking the following steps.

First, later this year, we're going to be introducing new security and compliance capabilities for Rancher to specifically serve the evolving needs of enterprise customer. This leverages the experience we've gained from our established SUSE Linux model and will serve as the platform for future value-creating innovation.

Second, and parallel with this evolution, to further differentiate from the free version, we are rebuilding and enhancing our go-to-market platform. What we're doing is we're expanding our team and we're now developing that specialised Rancher sales force to improve our ability to deliver a technical value proposition to customers even in this macroeconomic environment.

Lastly, we're also increasing Rancher's capability and Rancher's capacity specifically for product development and technical sales support to ensure we can deliver our new capabilities, maintain our current market-leading position and provide increased support to sales teams throughout the sales cycle.

This three-point plan will allow us to capitalise on significant pipeline generation and specifically the conversion of the pipeline of opportunity that we've been building over the last nine months in a rapid growing market.

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