Digital River (DRIV) has historically been the company that handles software delivery, payments and related transactions between big companies like Microsoft and consumers.
The company lost some major customers which started their long decline from $60/share. Some years later the software world has moved on to app stores and is leaving Digital River behind with a shrinking but still nicely profitable business.
Net cash and short-term investments of nearly $400M come close to the current market capitalization of $489. That puts the valuation at 0.2x sales and 2.5x EBITDA. While profitable the numbers are going in the wrong direction. Earnings are projected to fall to just over 50 cents in 2014 from the $1.00 level last year.
Management has been flailing more than working to figure out a strategy - at least so far. After a few acquisitions it's clear that payment processing is at least one area they may go further into, particularly internationally. A new CEO, David Dobson, has recently been appointed. The board no doubt hopes that this caps what has been a long period of management turmoil.
Unfortunately the background of Mr. Dobson isn't very inspiring from a growth and value building standpoint. He most recently joins from staid mainframe software house CA (CA) where he spent a couple years. Prior to that he was at Pitney Bowes (PBI) which at least has lack of growth and a dying product in common with Digital River. Also like DRIV Pitney Bowes has not found a way to grow but they have seen the light and instituted an attractive dividend. Alas going a bit further into his history his job before that was with Corel Software (remember them?). The core of Mr. Dobson's background is his 19 year career with IBM. At a minimum we know he's a professional manager. Digital River needs more than "management" if they are going to grow.
But that might not be all bad news. There's an attractive alternative life for DRIV as a dividend-paying cash flow generator. They have lots of cash and can generate a considerable flow for at least a few years. A dividend will put a floor on the stock and allow the company to develop other businesses like payments where it makes sense and in their own time.
Consider this: With 35 million shares out and $400M of *net* cash the company could institute a quarterly dividend of 25c without making a major dent in their cash balances. At $1/year the yield would be just over 7% and probably ensure the stock moves up a little and stabilizes in the $15-18 range while the new CEO and the rest of the team work to build some meaningful businesses outside of selling software downloads.
There's plenty of precedent as well. Another very similar example is Iron Mountain (IRM) which stores paper and tapes for businesses. Their business came under major pressure as the world shifted to digital but the company still has a $2B business. They instituted a 6c/qtr dividend in 2010 and increased it to 25c in 2011. The shares lifted from a low-$20's trading range to a low-$30's range based on the yield.
In some ways the job of the new CEO and existing team is easy in the short term. Pay a dividend, put a floor on the stock and come up with a viable five year plan. Deciding what strategic moves to make and which acquisitions make the most positive impact will be the harder part.