Investing.com — Ziff Davis, Inc., a vertically focused digital media and internet company, has had its corporate family rating (CFR) and probability of default rating (PDR) upgraded by Moody’s (NYSE:MCO) Ratings. The ratings have been improved to Ba3 from B1 for the CFR and to Ba3-PD from B1-PD for the PDR. Moody’s also confirmed the Ba3 senior unsecured rating of the company. The speculative grade liquidity rating (SGL) and the company’s outlook remain steady at SGL-1 and stable, respectively.
The upgrade in ratings is a reflection of Ziff Davis’s enhanced credit metrics and its ongoing commitment to a balanced financial policy. This has resulted in a low financial leverage of 2x and above 20% free cash flow-to-debt as of LTM 30 September 2024. Even though the company’s organic revenue continues to decrease, the decline rate has lessened. Ziff Davis has used its cash on hand and free cash flow to lower debt and finance acquisitions. The ratings upgrade also takes into account Moody’s expectation that Ziff Davis will prudently seek acquisitions while keeping financial leverage below 2.75x.
Ziff Davis’s Ba3 CFR is backed by robust financial metrics, including financial leverage of 2x, free cash flow-to-debt of 24% as of LTM 30 September 2024, a strong liquidity profile, and balanced financial policies. The company enjoys a diversified customer base and substantial subscription-linked revenues, accounting for 42% of total revenue.
The company’s significant revenue exposure to advertising, which makes up 55% of total revenue, is also considered in the rating. Ziff Davis has historically depended on acquisitions to expand its digital business. Advertising performance and website traffic are subject to the fast-changing technology trends, including generative AI and search engine algorithm revisions. Ziff Davis has shown a strong history of successfully integrating acquisitions and deriving synergies, but execution risk persists, especially as new digital businesses are bought and integrated. The company has not issued a common stock dividend since June 2019, and Moody’s does not expect Ziff Davis to resume paying dividends in the near future as it focuses on growing its business, likely through acquisitions.
The ratings of the instruments reflect the company’s probability of default, as indicated in the Ba3-PD Probability of Default Rating, an average expected family recovery rate of 50% at default, and the specific instruments’ ranking in the capital structure. The Ba3 rating on the $460 million outstanding of senior unsecured notes due October 2030 issued by Ziff Davis, Inc. indicates that the notes are unsecured and effectively subordinate to the $350 million revolving credit facility (unrated), but they benefit from guarantees from all significant operating subsidiaries. This makes the notes structurally senior to the $149 million convertible notes due November 2026 (unrated) and $263 million convertible notes due March 2028 (unrated). The revolving credit facility will expire at the earliest of 18 June 2027, or at any time when at least $175 million of the convertible notes due November 2026 is outstanding, the 91st day prior to the maturity date of the convertible notes due November 2026.
Ziff Davis’s SGL-1 speculative grade liquidity rating reflects its strong liquidity profile, supported by high cash balances and the expectation of continued strong free cash flow generation and high cash balances. As of 30 September 2024, the company retains full access to its $350 million revolver, which is expected to remain undrawn given its high cash balance of $386 million.
The stable outlook is based on Moody’s view that, over the next 12 months, Ziff Davis will grow revenue primarily through recent acquisitions, generate more than 15% free cash flow-to-debt, and maintain very good liquidity while keeping financial leverage below 2.75x.
Moody’s stated that the ratings could be upgraded if Ziff Davis increases scale while maintaining financial leverage near 1.75x, generating meaningful free cash flow, maintaining very good liquidity, and showing steady organic growth. Conversely, the ratings could be downgraded if financial leverage was sustained above 2.75x or if more aggressive shareholder return or acquisition policies were adopted.
Ziff Davis, Inc. generated $1.4 billion of revenue as of LTM 30 September 2024. It is a digital media and internet company whose portfolio includes leading brands in technology, entertainment, shopping, connectivity, health, cybersecurity, and marketing technology.
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