TEXT-S&P puts NexTag Inc on watch negative

Fri Oct 26, 2012 11:18am EDT

Overview
     -- San Mateo, Calif.-based comparison shopping Web site operator NexTag 
has performed below our expectations as Google's algorithm changes and
the launch of Google Product Search have resulted in revenue declines and higher
expenses.
     -- We are placing all ratings on the company, including the 'BB-' 
corporate credit rating on CreditWatch with negative implications.
     -- The CreditWatch listing reflects the possibility that NexTag's core 
business and profitability could come under further pressure as Google Product 
Search transitions to the new Google Shopping. We could lower the rating 
following our review after the company reports its third-quarter results, 
depending on revenue and EBITDA trends.
 
Rating Action
On Oct. 26, 2012, Standard & Poor's Ratings Services placed all ratings on 
NexTag Inc., including the 'BB-' corporate credit rating, on CreditWatch with 
negative implications.

Rationale
The CreditWatch placement is based on our expectation that operating results 
will be soft over at least the intermediate term as the company takes steps to 
maintain its traffic quality and address its cost structure. Moves by Google, 
especially its rollout of Google Product Search and its subsequent transition 
to Google Shopping, have hurt NexTag's EBITDA and EBITDA margin as the company 
attempts to maintain high Internet traffic to its sites. Additionally, 
algorithm changes by Google lowered the volume of organic traffic, which is 
more profitable than paid traffic. We expect that NexTag will increase its 
search engine marking spending and attempt to improve its direct navigation 
traffic (people visiting its sites without going through a search engine like 
Google) to its sites. Ongoing cost reductions could offset some of the 
top-line pressure.

In the second quarter, NexTag's revenue declined 2%, below our expectations, 
as strong international results only partially offset the negative effect of 
Google's algorithm changes. Increases in sales and marketing expenses led to a 
low-double-digit percentage EBITDA decline. The second quarter typically is a 
seasonally weak quarter. Therefore, any EBITDA increase or decrease on a 
percentage basis can appear larger than in other quarters. For the 12 months 
ended June 30, 2012, adjusted interest coverage and debt leverage ratios were 
3.5x and 2.1x, respectively. Under our base-case scenario for 2012, we expect 
current trends and results to continue to decline. It is possible that 2013 
could be an even more difficult year as merchants may decide to move some of 
their advertising budget previously allocated to NexTag to Google Shopping.

CreditWatch
We expect to meet with management to discuss its business outlook after the 
company releases its third-quarter business and financial results, and the 
strategies that it is contemplating to reduce its exposure to Google. We will 
likely resolve the CreditWatch listing upon completion of our review of the 
company's business.

Related Criteria And Research
     -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 
2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Use Of CreditWatch And Outlooks, Sept. 14, 2009
     -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
     -- Standard & Poor's Revises Its Approach To Rating Speculative-Grade 
Credits, May 13, 2008
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
     -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
     -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
 
Ratings List
CreditWatch Action
                                        To                 From
NexTag Inc.
 Corporate Credit Rating                BB-/Watch Neg/--   BB-/Negative/--

Senior Secured                          BB-/Watch Neg      BB-
   Recovery Rating                      4                  4


Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings referenced 
herein can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
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