-- Dutch Internet security services provider AVG Technologies N.V.
(AVG) significantly improved its capital structure in 2012.
-- In addition, meaningful growth in the number of users and fast-growing
revenues in the company's platform division are driving a continued
improvement in operating performance.
-- We are therefore raising our corporate credit rating on AVG to 'BB-'
-- The stable outlook reflects our view of adequate headroom at the
current rating due to the company's steady and growing revenue base and good
cash flow generation.
On Dec. 11, 2012, Standard & Poor's Ratings Services raised to 'BB-' from 'B+'
its long-term corporate credit and issue ratings on Dutch Internet security
services provider AVG Technologies N.V. (AVG). The outlook is stable.
The upgrade reflects AVG's strong deleveraging in 2012, through improvement of
its capital structure, meaningful debt reduction, and strong revenue growth.
We anticipate that the deleveraging trend will continue in 2013, albeit at a
slower pace, through additional EBITDA growth and solid cash flow generation.
Meaningful growth in the number of users and fast-growing revenues in the
company's platform division are driving the improvement in operating
performance. As a result, we have revised upward our assessment of AVG's
financial risk profile to "intermediate" from "significant."
AVG posted significant revenue growth in the first nine months of 2012, of
about 32% year-on-year, mainly on account of almost 73% revenue growth in
revenues from its platform division. We forecast double-digit revenue growth
for AVG in 2012, to about $355 million, up from $272 million in 2011.
We anticipate that AVG's gross debt, as adjusted by Standard & Poor's, will
fall to about $170 million on Dec. 31, 2012, from about $450 million at
year-end 2011, primarily due to the conversion of its preferred shares to
common equity and debt repayments and prepayments. We added preferred shares
and capitalized operating lease commitments to the company's gross reported
debt. Absent large-scale acquisitions, we anticipate an adjusted
debt-to-EBITDA ratio of about 1.4x-1.5x by the end of 2012, and a decline
toward 1.0x-1.2x by year-end 2013.
Our base-case credit scenario for 2013 assumes a decline in the pace of
revenue growth as a result of a slower organic growth in the company's user
base and lower revenues from acquisitions in 2012. We currently assume
mid-single-digit growth from subscription revenues.
Under our base-case credit scenario for 2013, we still see double-digit growth
in platform revenues due to the expansion of AVG's overall active user base,
the increasing use of its Internet search toolbar outside its Antivirus user
base, and a continued rise in the overall number of searches via AVG's partner
Google Inc. (AA/Stable/A-1+).
In our forecast, we anticipate that AVG's adjusted EBITDA margin will continue
to decline to 35% in 2012 and 33%-34% in 2013, from about 36% in 2011. This
mainly reflects our assumption of a further decline in the gross margin in the
platform segment due to an increasing proportion of partnerships with
third-party distributors and a continued increase in research and development
and marketing expenses. Nevertheless, we forecast double-digit EBITDA growth
in our base-case credit scenario for 2012 and mid-to-high-single-digit EBITDA
growth in 2013.
The rating remains constrained by our view of AVG's business risk profile as
"weak," mainly due to its relatively narrow product and customer focus, as
well as its small scale compared with major software players, and the
company's acquisitive nature.
We assess AVG's liquidity position as "strong" under our criteria. This view
is primarily supported by our forecast of continued solid free cash flow
generation. We anticipate that AVG's sources of liquidity will cover its uses
by significantly more than 1.5x in 2013.
In our base-case forecast, we estimate the following liquidity sources in 2013:
-- Cash balances of about $95 million on Dec. 31, 2012.
-- Cash flow from operations of $110 million-$120 million.
We estimate the following liquidity uses:
-- Annual debt amortization of $18.7 million.
-- Capital expenditure of about $16 million.
-- Further potentially material acquisitions. In the first nine months of
2012 and 2011, AVG reported cash outflows for acquisitions of $5 million and
about $50 million, respectively.
We anticipate that covenant headroom on leverage and interest coverage ratios
will remain significant, at more than 30% in 2012 and 2013.
We currently assume that AVG will not distribute any ordinary dividends in
2012, in line with management's declared dividend policy, and that it will use
discretionary cash flows for debt repayment and further acquisitions.
The issue rating on AVG's $235 million senior secured term loan is 'BB-', in
line with the long-term corporate credit rating on the company.
We use our structural subordination criteria in order to derive the issue
rating on AVG's term loan (see "Notching for Structural Subordination,"
published March 28, 2001, on RatingsDirect on the Global Credit Portal). Under
our criteria, debt securities cannot be rated above the long-term corporate
credit rating on the issuer.
The rating on the senior secured term loan reflects the company's moderate
proportion of priority liabilities (primarily consisting of modest trade
payables) compared with total assets. We assess total priority liabilities to
total assets to be less than our 15% threshold (above which we usually notch
the issue rating down), after applying a significant haircut to intangible
assets. In addition, the term loan benefits from a strong security package,
including a first-priority lien over the assets and shares of AVG's main
subsidiaries. We recognize the potential for lenders to access the company's
assets if the security package proves to be enforceable. However, we note that
the possibility and process of enforcement would be subject to the laws of the
particular jurisdictions in which AVG's subsidiaries operate.
The stable outlook reflects AVG's steady and growing revenue base and good
cash flow generation. We currently see material headroom at the current rating
for potential operating underperformance.
Rating downside remains possible if margins or subscription revenues decline
materially because of competitive pressures due to alternative attractive
security solutions, or if a major acquisition causes leverage to rise above 3x.
In light of our view of AVG's "weak" business risk profile and the company's
acquisitive growth strategy, which we believe pose some risks to the capital
structure, we foresee limited rating upside over the next 12-18 months.
However, over the longer term, if acquisitions provide a more diverse earnings
stream while AVG maintains the current financial profile, or if we see a
meaningful decline in customer concentration in the platform segment or AVG's
establishment of a materially longer-term contract with Google, we could
consider raising the rating.
Related Criteria And Research
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18,
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- Principles Of Credit Ratings, Feb. 16, 2011
-- Key Credit Factors: Business And Financial Risks In The Global High
Technology Industry, Sept. 18, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
Upgraded; CreditWatch/Outlook Action
AVG Technologies N.V.
Corporate Credit Rating BB-/Stable/-- B+/Positive/--
Senior Secured Debt BB- B+
AVG Holding Cooperatief U.A.
Senior Secured Debt BB- B+
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. Use the Ratings search box located in the left