campaign monitor - summary analysis - 10apr2016

Summary:

Campaign Monitor Finance Pty Ltd.

Primary Credit Analyst:

Paul R Draffin, Melbourne (61) 3-9631-2122; [email protected]

Secondary Contact:

Karan Rathod, Melbourne +613 9631 2011; [email protected]

Table Of Contents

Rationale

Outlook

Standard & Poor's Base-Case Scenario

Business Risk

Financial Risk

Liquidity

Ratings Score Snapshot

Recovery Analysis

Related Criteria And Research

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 10, 2016 1

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Summary:

Campaign Monitor Finance Pty Ltd.

Business Risk: WEAK

Vulnerable Excellent

Financial Risk: HIGHLY LEVERAGED

Highly leveraged Minimal

b- b- b-

Anchor Modifiers Group/Gov't

CORPORATE CREDIT RATING

B-/Stable/--

Rationale

Business Risk: Weak Financial Risk: Highly leveraged

• Concentrated product suite

• Strong competition

• Small earnings base

• Reduced profit margins

• Majority ownership by financial sponsor, Insight

Venture Partners

• Reduced profitability given heavy internal

reinvestment

• Debt to EBITDA in the mid-6x range in 2016

Outlook: Stable

The stable outlook reflects our expectation that Campaign Monitor Finance Pty Ltd.'s revenues will continue to

grow strongly in the next two years; however margins will decline as the group invests heavily in sales, marketing,

and other support functions across its business. This investment is likely to cause the company's EBITDA margins

to fall to the 30%-40% level and debt to EBITDA to be sustained above 5x.

Downside scenario

Downward pressure on the rating could occur if material erosion in the group's competitive position and revenues

undermined our view of the sustainability of the group's capital structure or substantially worsened the group's

liquidity position.

Upside scenario

We consider ratings upside to be unlikely in the near term, but could occur if Campaign Monitor materially

reduced leverage, such that its debt-to-EBITDA was sustained below 5.0x, while maintaining strong revenue

growth and EBITDA margins well above 30%.


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Standard & Poor's Base-Case Scenario

Our base-case forecasts indicate that Campaign Monitor will maintain heightened leverage over the next couple of

years, peaking at around 6.5x-7x in 2016, as the company's earnings reduce despite strong revenue growth. This will

be primarily due to substantial investment in its sales, marketing, and back-office operations.

Assumptions Key Metrics

• Revenue growth in the 10-20 percentage range in

fiscal 2016;

• Unadjusted EBITDA margins declining to below

40% in fiscal 2016;

• Minimal capital expenditure of A$1 million-A$2

million per annum; and

• Debt amortization under the cash sweep mechanism

of A$8 million-A$12 million per annum.

Year end June 30 2015A 2016E 2017E

FFO to debt (%) 12.4 8-10 10-12

Debt to EBITDA (x) 4.7 6.5-7.0 5.5-6

A—Actual. F—Forecast. FFO—Funds from operations.

Business Risk: Weak

Our business risk profile assessment on Campaign Monitor reflects our view of the group's narrow product mix, small

earnings base, relatively low barriers to entry, and strong competition. Tempering these factors are the group's diverse

customer base and growing global demand for e-mail marketing products and services. Although the company has

generated high profit margins, we expect the company to substantially increase internal costs, therefore reducing its

EBITDA margins to the mid-30% level (65% in 2015).

Campaign Monitor's business is focused primarily on its e-mail marketing software platform, which is subject to strong

and evolving competition. Although the company's customer base has grown rapidly over the past decade with low

customer churn, Campaign Monitor operates with limited scale and has a narrow business focus. In our view, the

group derives some competitive advantage from its low cost offer and its integration with advertising agencies that

on-sell its product. However, this advantage does not, in our view, provide a material barrier to competition over the

medium-to-long term. Accordingly, ongoing product enhancements and a broadening product range will be important

to maintaining the company's market position. The relaunch of its platform in early 2016 aimed at streamlining user

experience was supportive of maintaining its competitive relevance. The new platform which previously required

coding expertise has been revamped to allow nontechnical users to access the product, therefore broadening the

potential user base. The acquisition of marketing software company GetFeedback in late 2014 is reflective of the

group's strategy to invest in complementary products and services.

Financial Risk: Highly leveraged

Campaign Monitors financial risk profile reflects: 1) our expectation that its debt to EBITDA will exceed 5 times (x) in


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Summary: Campaign Monitor Finance Pty Ltd.

the next 2 years and 2) the group's financial sponsor ownership, with the group majority owned by private equity firm,

Insight Venture Partners.

Under our base case, increasing internal reinvestment is expected to erode the group's profitability and absolute

EBITDA, causing fully adjusted debt to EBITDA to increase to about 6.6x in June 2016. Leverage should decline

modestly thereafter, as free cash flow is used to reduce debt under the cash flow sweep, but is expected to remain in

excess of 5x for at least the next 2 years.

Liquidity: Adequate

We assess Campaign Monitor's liquidity as adequate. Over the next 12 months, we expect the group's sources of

liquidity to exceed its uses by more than 1.2x, and expect its sources to exceed uses even if EBITDA were to decline

15% from our base-case expectation. The group's narrow product and earnings focus, small earnings base, and

exposure to new competition constrain upside potential to our liquidity assessment. Furthermore, we consider that the

group's standing in the capital and bank markets is more consistent with an adequate liquidity profile.

Our liquidity assessment is based on the following key assumptions over the next 12 months:

Principal Liquidity Sources Principal Liquidity Uses

• Undrawn revolving credit facility of US$10 million;

and

• Forecast funds from operations (FFO) of A$12

million-A$17 million.

• Capital expenditure of A$1 million-A$2 million; and

• Minimum mandatory debt repayments of about

US$1.8 million.

Ratings Score Snapshot

Corporate Credit Rating

B-/Stable/--

Business risk: Weak

• Country risk: Very low

• Industry risk: Intermediate

• Competitive position: Weak

Financial risk: Highly leveraged

• Cash flow/Leverage: Highly leveraged

Anchor: b-

Modifiers

• Diversification/Portfolio effect: Neutral (no impact)


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• Capital structure: Neutral (no impact)

• Financial policy: FS-6 (no additional impact)

• Liquidity: Adequate (no impact)

• Management and governance: Fair (no impact)

• Comparable rating analysis: Neutral (no impact)

Recovery Analysis

The recovery rating of '4' and issue rating of 'B-' on the term loan facility reflect our expectations for an average

(30%-50%; upper half of range) level of recovery in the event of a default.

The debt facilities have first-priority ranking security over all property assets (both intangible and tangible, including all

capital stock of each of its subsidiaries), effectively comprising all of the borrower's present and future subsidiaries. The

facilities are "covenant lite", but benefit from a 'springing' gross debt-to-EBITDA covenant under the revolving credit

facility (RCF) that applies only if the RCF is at least 30% drawn. This covenant is currently set at a maximum of 5.25x,

but reduces progressively over the term of the facilities.

Our recovery assessment assumes that default will occur by 2018, and that the business will be sold as a going

concern. At the time of the hypothetical default, we expect the group's competitive position to weaken due to the entry

of a strong competing service that erodes the group's customer base and forces the group to materially reduce prices

and margins to retain customers.

Related Criteria And Research

Related Criteria

• Criteria - Corporates - General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers,

Dec. 16, 2014

• Criteria - Corporates - Recovery: Revised Revolver Usage Assumptions For Recovery Analysis In Corporate Ratings,

Nov. 20, 2014

• Criteria - Corporates - Industrials: Key Credit Factors For The Business And Consumer Services Industry, Nov. 19,

2013

• Criteria - Corporates - General: Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013

• General Criteria: Methodology: Industry Risk, Nov. 19, 2013

• General Criteria: Group Rating Methodology, Nov. 19, 2013

• Criteria - Corporates - General: Corporate Methodology, Nov. 19, 2013

• General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013

• General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers,

Nov. 13, 2012

• Criteria - Corporates - Recovery: Criteria Guidelines For Recovery Ratings On Global Industrials Issuers'

Speculative-Grade Debt, Aug. 10, 2009

• Criteria - Corporates - General: 2008 Corporate Criteria: Rating Each Issue, April 15, 2008

Standard & Poor's (Australia) Pty. Ltd. holds Australian financial services licence number 337565 under the Corporations Act 2001. Standard &


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Poor's credit ratings and related research are not intended for and must not be distributed to any person in Australia other than a wholesale

client (as defined in Chapter 7 of the Corporations Act).

Business And Financial Risk Matrix

Business Risk Profile

Financial Risk Profile

Minimal Modest Intermediate Significant AggressiveHighly

leveraged

Excellent aaa/aa+ aa a+/a a- bbb bbb-/bb+

Strong aa/aa- a+/a a-/bbb+ bbb bb+ bb

Satisfactory a/a- bbb+ bbb/bbb- bbb-/bb+ bb b+

Fair bbb/bbb- bbb- bb+ bb bb- b

Weak bb+ bb+ bb bb- b+ b/b-

Vulnerable bb- bb- bb-/b+ b+ b b-


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campaign monitor - summary analysis - 10apr2016

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