Digital River Beats Estimates, Profits Fall

Feb. 1.10 | About: Digital River, (DRIV)

Digital River, Inc. (NASDAQ:DRIV) reported revenues of $104.9 million in the fourth quarter of 2009, up 26% from a year ago exceeding management’s guidance of $94 million – $98 million. The growth in revenues was driven by series of one time promotions of Microsoft Windows 7 in the fourth quarter. This resulted in Microsoft Corporation (NASDAQ:MSFT) generating approximately 11.8% of total revenues in 2009.

Net income came in at $15.3 million or 40 cents per share beating the Zacks Consensus Estimate of 33 cents. This compared to a net income of $19.8 million or 48 cents in the fourth quarter of 2008.

Management expects to further expand its relationship with Microsoft and is looking forward to a successful Office 2010 launch, scheduled for the first half of 2010.

Reveneus from top customer Symantec came in at $23.5 million, above management expectations. During the fourth quarter, Symantec generated 22.4% of total revenues.

Symantec had earlier stated that it would not renew its existing e-commerce agreement with Digital River beyond June 30, 2010, on the expiry of its existing contract. Symantec stated that it would move all of the online traffic currently outsourced to Digital River to an internally developed Symantec e-commerce system before the current contract expires.

For the full year, total revenue was $401.8 million with non-Symantec revenues (core revenues) growing 10.6% to approximately $289 million. For 2009, net income was $67.8 million, or $1.80 per diluted share compared to a net income of $78.3 million or $1.86 per diluted share in 2008.

Going forward, Digital River will continue to emphasize on core vertical markets including software, consumer electronics, and games on a global basis. Management plans to accelerate its emphasis on new vertical markets for certain product offerings to maintain growth profile well beyond 2010. The company increased the size of its sales force adding new seasoned sales professionals in key markets in 2009.

Management expects revenues between $96 million and $99 million in 2010. Core revenues are projected between $80 million and $81 million. The first quarter core year-over-year revenue growth rate represents a decline from the fourth quarter due to a series of one-time Microsoft Windows 7 promotions in the fourth quarter and increased volume from consumer electronics and games.

Revenues from Symantec are estimated around $15 million – $18 million in the first quarter and around $5 million – $10 million in the second quarter. The current contract ends on June 30, 2010.

Operating expenses are expected to be higher in the first half of 2010, than historical levels as a percentage of revenue, as Digital River is still running most online marketing programs and is contractually obligated to operate all sites regardless of traffic levels. Earnings per share are forecasted between 18 cents and 23 cents.

Management continues to work on its business plans in response to Symantec’s decision to not renew its e-commerce contract. However, it remains to be seen how the company carves its growth path excluding Symantec, which has been contributing more than 30% to the top-line (directly or indirectly).

Digital River is also diversifying its software business into complementary markets, which include consumer electronics and games. Digital River plans to invest in new technologies to unlock opportunities in horizontal markets such as subscriptions and business-to-business software markets.

Headquartered in Minneapolis, MN, Digital River provides e-commerce solutions for software publishers and retailers worldwide. The company delivers software and other digital goods online to over 40,000 customers.