TEXT-S&P puts NexTag Inc on watch negative
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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