TEXT-S&P rates Riverbed Technology riverbed 'BB', outlook stable
Overview -- We are assigning our 'BB' corporate credit rating to U.S. application and network performance management solutions provider Riverbed Technology Inc. . -- We are also assigning a 'BBB-' issue rating with a '1' recovery rating to the company's $500 million senior secured term loan B. -- The outlook is stable, reflecting the company's leadership position in its core WAN optimization market, and strong revenue and EBITDA growth. Rating Action On Nov. 30, 2012, Standard & Poor's Ratings Services assigned its 'BB' corporate credit rating to San Francisco-based Riverbed. The outlook is stable. At the same time, we assigned a 'BBB-' rating to the company's $500 million senior secured term loan B due 2019. The recovery rating is '1', indicating our expectation for very high (90% to 100%) recovery of principal in the event of payment default. We expect the company to use the proceeds from the bank loan to purchase Opnet Technologies Inc., which is a provider of solutions for application and network performance management. We believe $363 million of cash on hand and $152 million of issued common shares will provide additional funding. Rationale The rating reflects Riverbed's "fair" business risk profile and "significant" financial risk profile, incorporating relatively narrow target markets, a modest revenue base, and a limited track record at its current operating scale and profitability. Riverbed's growing addressable markets, leading market share in the wide area network (WAN) optimization market, and solid cash flow generation partly offset these factors. Standard & Poor's base-case rating assumptions include: -- Revenue growth in the mid double digits over the next two years, reflecting expected growth in the underlying markets; -- Adjusted EBITDA margins in the mid 20% area over the next year; and -- Pro forma leverage following the Opnet acquisition in the low-2x area, falling to about 2x by the end of fiscal 2013. Riverbed's WAN optimization solutions allow enterprises to increase the performance and value of their existing IT infrastructure and mission-critical applications. Riverbed has a leading position (approximately 50% market share) in this relatively niche market. In addition to WAN optimization, Riverbed has a small presence in the fast growing network performance management (NPM) market and application delivery controllers (ADC) market. The Opnet acquisition is aligned with Riverbed's strategic goal to further penetrate the NPM market and diversify into the adjacent application performance management (APM) business. While the acquisition enhances Riverbed's revenue diversity, the company's product mix remains concentrated, with WAN optimization products accounting for approximately 70% of estimated $1 billion pro forma revenues as of Dec. 31, 2012. Riverbed's EBITDA margin has expanded over the past few years to about 30% for the 12 months ended Sept. 30, 2012, reflecting growth-related economies of scale. However, we expect Riverbed's margins to decline to the mid- 20% area over the next year because of Opnet's relatively lower gross margins and higher operating expenses. In addition, given the significant size of the acquisition, potential integration issues could disrupt operating performance. Nevertheless, we believe that solid revenue growth and the cost reductions we expect will support Riverbed's long term margins. We view Riverbed as having a significant financial risk profile and our assessment of the company's management and governance is "fair." We expect pro forma debt to EBITDA (adjusted for operating leases) to be in the low-2x area as of Dec. 31, 2012 and expect it to fall to about 2x at the end of 2013. We expect pro forma funds from operations to debt to be about 29% in fiscal 2012. Although the company's financial metrics are moderate for the significant financial risk score, the rating incorporates the company's relatively short track record operating at its current size and scale, and potential near-term integration risks. Liquidity We consider Riverbed's liquidity profile as "adequate" under our criteria. Cash sources should cover uses by more than 1.2x over the next 12 to 24 months. We expect cash sources to include on-balance-sheet cash, as well as solid annual free cash flow generation. We expect uses to include capital expenditures of about $30 million, amortization of term debt of about $5 million per year, and modest share buybacks to manage dilution. Our assessment of Riverbed's liquidity profile incorporates the following expectations, assumptions, and factors: -- We expect sources of liquidity to exceed uses by 1.2x or more and also expect net sources to be positive, even if EBITDA drops 15% to 20%. -- We expect working capital to be a source of cash. -- Because of the company's adequate discretionary cash flow and cash position, we believe it could absorb low-probability, high-impact shocks. -- There are no near-term maturities. Outlook The outlook is stable, reflecting the company's leadership position in its core WAN optimization market, strong revenue and EBITDA growth trends, and leverage which is currently low for the rating. Near-term upgrade potential is constrained by the company's relatively short track record operating at its current size and scale, and potential near-term integration risks. We could lower the rating if the company pursues sizable debt financed acquisitions or share repurchases, or if margins deteriorate because of integration issues or increased competition, resulting in leverage staying at or above 4x. Related Criteria And Research -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Criteria Guidelines For Recovery Ratings On Global Industrials Issuers' Speculative-Grade Debt, Aug. 10, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List New Rating Riverbed Technology Inc. Corporate Credit Rating BB/Stable/-- Senior Secured US$500 mil fltg rate bank ln due 2019 BBB- Recovery Rating 1 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. 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