Fitch Assigns First-Time IDR of 'B' to Infoblox; Outlook Stable

Fitch Ratings has assigned the following first-time ratings to Infoblox Inc. (Infoblox):

--Long-Term Issuer Default Rating (IDR) at 'B';

--1st-Lien Senior Secured Revolving Credit Facility (RCF) at 'BB-/RR2';

--1st-Lien Senior Secured Term Loans at 'BB-/RR2';

--2nd-Lien Senior Secured Term Loans at 'CCC+/RR6'.

The Rating Outlook is Stable. Fitch's actions affect $800 million of total debt, including the undrawn $50 million RCF. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

--Meaningful Market Leadership: Fitch expects Infoblox's market leadership in DDI, which includes domain name services (DNS), dynamic host configuration protocol (DHCP) and internet protocol (IP) address management (IPAM), will continue and support solid operating performance through the intermediate-term. Infoblox has an estimated 50% share of the worldwide DDI software and appliance (excluding DNS security, which was 13% of fiscal 2016 revenue but expected to continue growing rapidly through the intermediate term). The company's leading share and large installed base results in meaningful cumulative intellectual property, including data to support analytics add-on services, customer and industry diversification, research and development (R&D) scale and significant recurring revenue from maintenance and support contracts.

--Maintenance Driven Recurring FCF: Fitch expects growing recurring free cash flow (FCF) from maintenance and support contracts, which have high attach and renewal rates. Maintenance contracts typically are one to three years in duration and drive substantial deferred revenue, supported by incentives for customers entering longer-term contracts. Maintenance and support revenue should grow by high single digits through the intermediate-term, due to high switching costs, product sales growth and increasing complexity. Importantly, Fitch believes there is minimal risk of repaying cash inflows from growing deferred revenue, given the nature and stickiness of maintenance and support services.

--High Intermediate-Term Leverage: Fitch expects Infoblox will remain highly levered over the intermediate term, given positive but modest FCF available for debt reduction. Fitch estimates funds from operations (FFO) adjusted leverage (FFO to debt adjusted for operating leases) is 9.5x, pro forma for the acquisition. Fitch expects small and organically funded tuck-in rather than large acquisitions, leaving the remainder of FCF available for debt reduction. The company has a 50% excess cash flow sweep in the senior secured credit facilities and Fitch expects more than $50 million of annual FCF beyond fiscal 2017, the vast majority of which onshore. As a result, Fitch expects FFO adjusted leverage approaching 7x exiting fiscal 2018 and mid-5x exiting fiscal 2019.

--Significant Product Cyclicality: Fitch expects three to five year product cycles will drive uneven revenue growth for the Product segment, which is comprised of the physical devices providing DDI services and will represent a lower but still significant portion of the overall sales mix. Product refreshes increase density or performance features and drive customer replacement and capacity additions. Fitch expects Product sales in fiscal 2017 will be down by mid-teens after robust growth in fiscal 2015 (+20%) and 2016 (mid-teens). Over the intermediate-term, Fitch expects low single digit growth for the Product segment, driven mainly by expanding relationships with existing customers and tempered by marginal shifts to subscription services. Given faster growing maintenance revenue, Fitch expects Product sales to decline to 40% of total revenue over the intermediate term from 50% in fiscal 2016.

--Secular Tailwinds Drive Growth: Fitch expects increasing complexity will drive growth through at least the intermediate-term. Greater complexity from network automation and development and operations (DevOps), security attacks, hybrid cloud and software defined networking (SDN), all within the context of more users and connected devices will drive explosive URL and IP address growth. DDI market, including that for external authoritative DNS as-a-service (DNSaaS), Service Provider DDI and Enterprise DDI, should grow by at least high single digits through the intermediate-term. Infoblox's mission critical services tie systems together, providing mission critical integration and automation. DNS vector security attacks are increasingly common, supporting demand for Infoblox DNS Security products attach aimed at preventing DNS tunnelling and data exfiltration.

--Threat of Larger Entrants: Fitch believes larger players seeking growth in SDN and security could enter the DDI market via acquisition, potentially weakening Infoblox's operating profile. The DDI market is relatively small but with attractive demand characteristics, particularly for technology providers with more focused DNS product portfolios, focus on unique standards or industry or customer sets. Fitch believes bundling DNS services with a broad set of service offerings and leveraging over global sales footprint could meaningfully impact industry pricing and profitability.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

--Product revenue declines by mid- to high-teens following the impact of the recent product refresh cycle, followed by flat growth in fiscal 2018. Fitch assumes a next generation product refresh in fiscal 2019.

--Maintenance revenue continues growing in the high single digits, given high attach and renewal rates.

--Subscription DDI and DNS Security grow significantly from a small base to begin meaningfully contributing in fiscal 2019 (approaching 15% of total revenue).

--Deferred revenue balances grow in-line with maintenance and support revenue, supporting cash flow.

--Infoblox achieves cost synergies in the near term resulting in profit margin expansion but sales and marketing expense tick-up in fiscal 2019 to support revenue growth.

--Incremental cost savings from restructuring following the deal close are reinvested.

--Management will use FCF for debt reduction, given expectations that acquisitions will be tuck-in in nature and funded organically.

RATING SENSITIVITIES

Positive rating action could occur if Fitch expects:

--FCF approaching $100 million, driven by solid revenue and deferred revenue growth, supporting strong DNS Security attach and subscription adoption; and

--Total debt to EBITDA (excluding changes in deferred revenue) approaching 6x and FFO adjusted leverage approaching 5x from voluntary debt reduction and growing profitability.

A negative rating action could occur if Fitch expects:

--Meaningfully lower than expected revenue growth from more aggressively priced or competitive service offerings, potentially due to larger competitors entering DDI and leveraging larger sales footprints; or

--No meaningful improvement in FFO adjusted leverage from weak profitability growth resulting in FCF approaching break-even and constraining debt reduction.

LIQUIDITY

Pro forma the close of acquisition, Fitch believes Infoblox's liquidity is adequate and will consist of:

--$50 million of cash on hand, $11.2 million of which is located outside the U.S.; and

--An undrawn $50 million senior secured RCF expiring 2021.

Fitch's expectation for more than $50 million of annual FCF beyond fiscal 2017 also supports liquidity.

Pro forma for the transaction, total debt will be $750 and consist of:

--$500 million of senior secured 1st-lien term loans;

--$250 million of senior secured 2nd-lien term loans.

On Sept. 16, 2016, Infoblox announced it is being acquired by private equity firm, Vista Equity Partners (Vista), in an all-cash going private transaction valued at approximately $1.3 billion. Vista plans to fund the acquisition with $750 million of debt, $212 million of Infoblox's available cash at closing and $664 million of new equity from Vista. Infoblox's Board of Directors has approved the acquisition and Vista and Infoblox expect the deal will close in the second fiscal quarter ended January 2017, pending customary approvals. Infoblox is a leading provider of mission critical DDI services.

In connection with the acquisition, Infoblox will enter into $800 million of credit facilities comprised of $50 million 1st-lien senior secured RCF, which will be undrawn at closing, $500 million of 1st-lien senior secured Term Loans and $250 million of 2nd-lien senior secured Term Loans. The 1st-lien RCF and Term Loans will be secured by a 1st-priority lien on the collateral, which includes substantially all assets of Infoblox and its domestic subsidiaries, which hold the company's intellectual property. The 2nd-lien Term Loans will be secured by a 2nd-priority lien on the collateral. Fitch expects no financial covenants but customary negative covenants for the credit facilities, including limitations on indebtedness, liens, restricted payments and asset sales.

FULL LIST OF RATING ACTIONS

Infoblox Inc.

--Long-Term Issuer Default Rating (IDR) at 'B';

--1st-Lien Senior Secured Revolving Credit Facility (RCF) at 'BB-/RR2';

--1st-Lien Senior Secured Term Loans at 'BB-/RR2';

--2nd-Lien Senior Secured Term Loans at 'CCC+/RR6'.

The Rating Outlook is Stable.

Date of Relevant Rating Committee: Oct. 25, 2016

Summary of Financial Statement Adjustments - Fitch made no financial statement adjustments that depart materially from those contained in the published financial statements of Infoblox Inc.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)

https://www.fitchratings.com/site/re/885629

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 05 Apr 2016)

https://www.fitchratings.com/site/re/879564

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013809

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https://www.fitchratings.com/regulatory

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