Investing.com -- Fitch Ratings has revised its outlook for Bumble (NASDAQ: BMBL ) Inc. and Buzz Finco LLC, collectively known as Bumble, from positive to negative. Despite this, the Long-Term Issuer Default Rating (IDR) has been affirmed at ’BB-.’ Buzz Finco LLC’s senior secured issue rating remains at ’BB+’ with a Recovery Rating of ’RR1’.

The revised outlook is due to significant execution risks associated with Bumble’s strategic product refresh. The refresh is expected to cause a decrease in revenue and contraction in margins in FY25. This coincides with a management transition that could disrupt the product refresh roadmap and delay a return to revenue growth.

Bumble’s IDR takes into account its strong liquidity and free cash flow (FCF) generation, supported by conservative leverage and high interest coverage. However, the company’s reliance on its core apps, along with intense sector competition, highlights the risks associated with its limited product diversification and potential vulnerability to market shifts.

Bumble’s planned product refresh is expected to result in low-single-digit revenue declines and margin contraction for FY25. The refresh is part of Bumble’s broader strategic objectives to improve the long-term health of the Bumble user ecosystem.

Furthermore, Bumble is undergoing a management transition period, including the appointment of founder Whitney Wolfe Herd as CEO. Fitch believes the management transition and product refresh may result in some platform disruption and higher-than-expected subscriber and market share losses. Fitch assumes high-single-digit revenue declines in FY25 and low single revenue growth for FY26 through FY28 to reflect these risks.

Fitch expects EBITDA margins to contract by approximately 300 basis points in FY25, reversing the gains made in FY24. This is due to increased investments in product development and AI features. As a result, Fitch-calculated leverage will increase by half a turn to 2.6x for FY25 before falling below 2.5x in FY28. Interest coverage will be maintained above 5.5x throughout the rating horizon.

Fitch has reduced its U.S. growth forecasts for 2025 and 2026 due to substantial import tariff increases by the new U.S. administration, which will likely weaken consumer confidence and spending. Fitch believes this may deepen Bumble’s revenue declines if consumers pull back on discretionary expenses. Further deterioration in macroeconomic conditions could delay Bumble’s revenue growth until mid-FY26 or later.

Bumble operates in a highly competitive industry, with Match Group (NASDAQ: MTCH ), owner of Tinder and Hinge, as its main competition. Fitch believes multiple competitors can coexist, as users often engage with and pay for several apps simultaneously. While Bumble’s emphasis on female empowerment and safety may offer a competitive advantage, Fitch questions the long-term sustainability against competitors with substantial financial resources and similar initiatives.

As of April 2024, Blackstone (NYSE: BX ) holds combined voting power of 62.9% in Bumble due to its ownership of class A shares and beneficial ownership of common units. Fitch regards the ownership structure as neutral in terms of impact. However, we acknowledge that the potential for exerting control exists, and there is increased likelihood of large debt-financed payouts to shareholders.

Fitch equalizes the IDRs for Bumble Inc. and Buzz Finco L.L.C. to reflect a stronger parent and high legal, strategic and operational incentives.

Bumble’s ’BB-’ IDR reflects its strong market position as a safe and female-friendly dating application, a relatively conservative leverage profile, and robust FCF generation. These strengths are offset by high execution risks associated with its product refresh initiatives, which are expected to result in short-term revenue declines and margin degradation.

Bumble is similar in scale to Quartz AcquireCo, LLC (BB-/Stable), a company specializing in enterprise experience management software, but Bumble has lower leverage and significantly stronger EBITDA and FCF margins. RingCentral (NYSE: RNG ), Inc. (BB/Positive), which provides cloud-based business communication solutions, has a larger scale and higher FCF margins than Bumble. However, Bumble has higher EBITDA margins and lower EBITDA leverage.

Bumble is also larger in scale compared to MeridianLink, Inc. (BB-/Stable), a software solutions provider for banks and other financial services companies. While MeridianLink has higher FCF and EBITDA margins, it exhibits lower coverage and higher leverage metrics.

Factors that could lead to a negative rating action or downgrade include steeper than expected revenue declines due to platform disruptions and/or slowing consumer spend on dating apps in the U.S., competitors taking material market share from Bumble, resulting in poor operating performance and depressed profitability, and sustained low single-digit FCF margins.

Fitch could resolve the Negative Outlook within its typical 12- to 24-month time frame if Bumble’s revenue and EBITDA margins are stabilized, particularly a return to positive revenue growth in FY26.

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