Overview
— U.S. collaboration software provider IntraLinks has reported
meaningfully lower profitability and flat revenue during the first half of
2012.
— We are lowering our corporate credit rating on the company to ‘B+’
from ‘BB-‘ and removing the rating from CreditWatch Negative.
— At the same time, we are lowering our issue-level rating on the
company’s first-lien credit facility to ‘BB’ from ‘BB+’. The recovery rating
remains unchanged at ‘1’.
— The stable outlook reflects the company’s significant level of
recurring revenues, good channel partner relationships, and conservative
financial policy.
Rating Action
On Aug. 17, 2012, Standard & Poor’s Ratings Services lowered its corporate
credit rating on New York City-based IntraLinks Holdings Inc. to ‘B+’ from
‘BB-‘. At the same time, we removed the ratings from CreditWatch with negative
implications, where it was placed on May 16, 2012. The outlook is stable.
We also lowered our issue-level rating on the company’s first-lien credit
facility to ‘BB’ from ‘BB+’. The recovery rating of ‘1’ remains unchanged,
indicating our expectation of very high (90%-100%) recovery of principal in
the event of payment default.
Rationale
The downgrade reflects lack of revenue growth and materially weaker
profitability and free cash flow in the first half of 2012, as well as a
reduction in our visibility of future operating performance.
The rating on IntraLinks reflects the company’s “weak” business risk profile,
marked by slowing revenue growth and decreased profitability, and its
“aggressive” financial risk profile, incorporating a modest EBITDA base and
minimal free operating cash flow (FOCF). Meaningful recurring revenues,
relationships with key partners, and a track record of debt repayment partly
offset these factors.
IntraLinks provides collaboration software that allows its customers to share
confidential information with external parties in a secure environment. The
company has expanded from the more volatile M&A; and syndicated loan markets
into the enterprise market, which includes financial services, life sciences,
legal, and government customers. The Enterprise segment represents the
company’s most significant growth opportunity (making up 44% of revenues in
2011, up from 13% in 2005). However, total revenues declined by 1% in the
first half of 2012 from the year-ago period on slowing growth in the
Enterprise segment, smaller deal sizes in the M&A; segment reflecting increased
referrals from middle-market financial institutions, and customer losses in
its Debt Capital Markets (DCM) segment due to strong offerings from
competitors. In addition, recent senior management and strategy changes add
near-term execution and revenue growth uncertainty.
IntraLinks’ EBITDA margin was about 16% in the first half of 2012, down from
over 30% historically, as the company increased investments in sales,
marketing, and customer service. We expect revenues to be roughly flat with
EBITDA margins in the mid-teen area over the next year as the company
fine-tunes its Enterprise sales process and pricing strategy, and stabilizes
revenues in the DCM segment through new product features and sales
partnerships.
The company’s financial risk profile is aggressive, with leverage we expect to
be in excess of 3x at the end of 2012. Although leverage is moderate for the
aggressive financial risk category, the rating reflects our expectation of
minimal FOCF in the near term. IntraLinks’ conservative financial policy,
incorporating repayment of more than $80 million of debt since the IPO in
2010, provides some rating support. However, given our weak cash flow
expectations, incremental debt capacity is very limited.
Liquidity
IntraLinks has “adequate” liquidity, with sources of cash likely to exceed
uses for the next 12 months. Cash sources include cash and investments of $70
million as of June 30, 2012, and $13 million of availability under its
revolving credit facility. We expect uses to include annual capital spending
of about $25 million and debt amortization of less than $1 million.
Our assessment of IntraLinks’ liquidity includes the following expectations,
assumptions, and factors:
— We expect sources of liquidity to exceed uses by at least 20% over the
next 12 to 24 months.
— Net sources would be positive, even with a 15% decline in EBITDA from
latest-12-month June 2012 levels.
— IntraLinks’ only financial covenant is a springing senior secured
leverage ratio of 6.5x, which is only in effect if the revolver is drawn. We
expect the company to maintain a covenant cushion of at least 15% in the event
the revolver is drawn.
— In addition, the current rating and outlook incorporate our
expectation that the ongoing SEC investigation will not materially affect
IntraLinks’ financial profile.
Recovery analysis
For the complete recovery analysis, see the recovery report on IntraLinks, to
be published separately on RatingsDirect.
Outlook
The stable outlook incorporates the company’s significant base of recurring
revenue, good channel partner relationships, and conservative financial
policy. An upgrade is unlikely in the near term given current profitability
and cash flow levels. However, sustainable revenue growth, with restoration of
EBITDA and FOCF to near fiscal 2011 levels could lead to higher ratings in the
near-to-intermediate term.
Conversely, we could lower the rating if lack of execution or increased
competition lead to further EBITDA declines with negative FOCF on a sustained
basis.
Related Criteria And Research
— Industry Economic Outlook: Despite Economic Headwinds, Global
Technology Shows Balanced Ratings Trend, July 9, 2012
— Issuer Ranking: Global Technology Ratings, Strongest To Weakest, June
29, 2012
— Performance For U.S. Semiconductor Equipment Makers Has Been Volatile,
But Ratings Remain Stable, June 11, 2012
— Top 10 Investor Questions: How Will The Global Technology Industry
Fare Amid An Economy In Flux?, April 26, 2012
— Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
— Key Credit Factors: Methodology And Assumptions On Risks In The Global
High Technology Industry, Oct. 15, 2009
— Criteria Methodology: Business Risk/Financial Risk Matrix Expanded,
May 27, 2009
— 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Ratings List
Downgraded; Off Watch; Recovery Rating Unchanged
To From
IntraLinks Holdings Inc.
Corporate Credit Rating B+/Stable/– BB-/Watch Neg/–
IntraLinks Holdings Inc.
Senior Secured BB BB+/Watch Neg
Recovery Rating 1 1
