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|  | APRIL 6, 2005
S&P's Tech Company Report Card, Pt. 3 [Page 6 of 6] Software Service Providers Red Hat (RHAT ) B/Stable Rapid subscriber growth continues to fuel 2004 growth rates of over 50%. EBITDA margin has been maintained at 20%. Still, debt to EBITDA is over 15x on a run-rate basis. Cash in excess of debt provides ratings support. Expectations are for measured acquisitions and share repurchases. Reynolds & Reynolds (REY ) BBB/Negative In the first quarter, revenues for the software solutions segment declined 3% year over year, the documents segment declined 5%, and the financial services segment declined 18% (to $7 million) for a consolidated 4% decline. However, cash flow generation supports the current ratings. We expect Reynolds & Reynolds gradually to restore operating performance to historic levels as the company's sales force becomes more productive, and order rates improve as the company successfully shifts to its new product suite. The company's 2005 guidance is for flat revenues, mid-teens operating margins, and return on equity of 18% to 19%. Additionally, the company announced the appointment of a new CEO. Science Applications International A-/Negative Ratings were affirmed and removed from CreditWatch with a negative outlook following the sale of its Telcordia Technologies subsidiary or about $1.3 billion in cash. While SAIC's cash position will improve following the Telcordia sale to about $3 billion (compared with about $1.5 billion of debt), SAIC's business diversity has been diminished with the loss of Telcordia's higher margin and predictable cash flow generation. Telcordia -- with revenues of about $875 million and $184 million of EBITDA -- represented about 25% of SAIC's profits. Securus Technologies B+/Positive The ratings on Securus reflect its narrow focus within a competitive niche marketplace, aggressive financial profile, and the potential challenges with the integration of Evercom. These risks are partially offset by a largely recurring revenue base and the expectation for relatively stable operating margins, which should allow for continued modest free operating cash flow generation. As Securus integrates its two operating subsidiaries, synergies from the leveraging of Evercom's billing and bad debt management systems, combined with operating efficiencies gained through scale, should lead to EBITDA growth and an improved financial profile. Since the rating was initially assigned, the company has not yet been required to file financial statements. SI International B+/Positive The recent acquisitions of Shenandoah Electronics and Bridge Technology broaden SI's customer base into intelligence agencies and strengthens the company's relationship with the Homeland Security Dept., in addition to adding scale. However, SI still holds a relatively modest share of the highly competitive and consolidating government IT services market. Pro forma operating lease-adjusted debt to EBITDA is expected to be about 3.6x following these transactions, which is solid for the rating. A low fixed cost structure, limited working capital needs, and minimal capital expenditures should allow the company to generate modest levels of free operating cash flow, which should support the company's acquisitive growth strategy. SunGard Data Systems (SDS ) BBB+/Watch Negative SunGard announced that its board of directors has authorized its management and advisors to engage in discussions for a sale of the entire company. In October, Standard & Poor's placed SunGard on CreditWatch, with negative implications, following the announced plan for its disaster-recovery technology unit to become an independent, publicly held corporation through a tax-free spin-off to shareholders. We will continue to monitor the events as they unfold, and the impact that they may have on SunGard's credit quality. Syniverse Technologies (SVR ) B+/Stable In February, 2005, proceeds from a new bank facility, along with approximately $370 million of proceeds from Syniverse's initial public offering, were used to redeem $252 million of preferred stock (which had been treated as equity), repay all borrowings under a previous credit facility, and tender for a portion of the company's senior subordinated notes. Although these transactions improved Syniverse's financial profile, both in terms of leverage as well as financial flexibility, the company's rating and outlook remained unchanged, constrained by the company's business risk profile. Syniverse is expected to continue to generate moderate levels of free operating cash flow, which should support acquisitions or other investments necessary to facilitate establishment of an international footprint. Telcordia Technologies B+/Stable Telcordia has experienced double-digit revenue declines over the past three years. However, we expect stabilization and modest growth over the next few years as telecom service providers begin to reinvest in infrastructure, offsetting likely continued modest declines in profitable maintenance revenues. Titan (TTN ) BB-/Stable Titan's ratings were recently affirmed and removed from CreditWatch, following the conclusion of investigations by the Justice Dept. and the SEC surrounding the company's alleged violation of the Foreign Corrupt Practices Act. Despite distractions associated with these investigations, in addition to the failed merger with Lockheed Martin and continuing allegations surrounding Titan's involvement in the abuse of prisoners in Iraq, operations have performed well. Operating lease adjusted debt to EBITDA, adjusted for nonrecurring charges, improved to the low 4x area as of December, 2004, from 4.5x one year earlier. Titan's contract win rate has also remains strong. A strong backlog, at about $6.2 billion ($935 million funded), also preserves revenue visibility. TNS (TNS ) BB-/Stable Revenues in the POS division continued to decline during the December quarter, mainly because of a decrease in transaction volumes as First Data continues to move transactions away from Transaction Network Services (TNS). This loss was offset by rapid growth in TNS' international point-of-sale business, which posted more than 60% revenue growth during 2004 compared to 2003. TNS also raised about $21 million in cash through follow-on equity offerings in the December, 2004 quarter, which was used to pay down debt. While this transaction improved TNS' already strong financial profile, ratings remain constrained by the company's narrow business profile. UGS B+/Stable UGS increased revenues to over $1 billion in 2004 (+14%), while EBITDA rose 16% over the previous year to $258 million. Ratings are currently constrained by UGS' high leverage of about 5x. Unisys (UIS ) BB+/Stable Revenues in the fourth quarter of 2004 declined about 7% year over year, while full year free cash flow was in the $30 million area, from expected levels of more than $50 million. For the full year, revenues decreased by 2%, reflecting a 10% decline in technology sales offset by an increase of 1% in services revenue. The company reported an operating loss in 2004 reflecting a $126 million impairment charge, $87 million of cost restructuring actions, and $94 million of pension expense. The company received a waiver of one of its financial covenants, and has full availability under its $500 million revolving credit facility. Unisys' good business position and services backlog should limit downside risk. Despite a solid financial profile for its rating, upside ratings is constrained by Unisys' inconsistent operating performance. VERITAS Software (VRTS ) BB+/Watch PositiveThe CreditWatch placement follows the announced merger agreement of Veritas with unrated Symantec (SYMC ) in an all-stock transaction valued at about $13.5 billion. The combined company will have about $5 billion in revenues, additional business diversity, and strong financial flexibility with modest debt outstanding and large cash balances. Our preliminary assessment is that the combined company has an investment-grade credit profile.
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