On its fifth year of profitability now and still growing at a 20% to 30% clip, Digital River has consistently delivered better-than-expected earnings and raised its guidance on the future. Moreover, it is aligned with some of the most powerful players in the business. Microsoft (MSFT) is a major customer and collaborative partner. In October, Digital River announced a 3-year deal to build, host and manage e-commerce stores for Microsoft. That propelled the stock from $44 when we wrote about it four months ago to $60.30 currently. The stock has doubled in the last year.
DRIV 1-yr chart
The soaring stock prices is backed by impressive business results. In 2005, Digital River posted sales of $220 million and pro-forma earnings of $1.27. For 2006, the outlook is for EPS of $1.78 and $307 million, followed by $2.15 and $380 million in 2007. This future guidance seems to go up every quarter, backed by a fast-growing roster of customers and substantive deals.
Digital River has made a habit of distinguishing itself from the hordes of Internet companies that promised the moon and produced rapid revenue growth but never came close to profitability. Digital River navigated the tough times of the tech-sector meltdown impressively to dominate the software download, which allows end users to buy software and immediately download it to their computer. In addition to Microsoft, one of Digital River's biggest customers for its software download service is Symantec (SYMC) which sells a lot of anti-virus and anti-spam software via direct download.
Along with electronic software delivery, Digital River offers hosting of web storefronts, transaction processing tools, fraud prevention and merchandising programs. The company also has an e-commerce service provider [ESP] business to serve as the link between a company's storefront/backend order fulfillment and the enterprise systems of vendors, retailers and distributors.
The merits of an electronic approach to software delivery are many, and while drawbacks do exist, it is in most cases a major improvement over the traditional method of making a trip to the computer store, buying a big shrink-wrapped box containing a CD-ROM and installing it on your PC. The electronic software download [ESD] format is hardly new, but the proliferation of broadband Internet access should greatly reduce download times as a barrier to usage.
A key ingredient that helped the Internet economy blossom in its early days was low barriers to entry. In other words, entrepreneurs who moved fast with a good idea could establish a prominent market position without much capital. In the area of e-commerce, though, businesses are now discovering they need to invest heavily in infrastructure, not to mention expertise, if they want to deliver a reliable customer experience. The appeal of outsourcing is fairly obvious, especially for traditional off-line retailers who are venturing into uncharted territory. The fact that even successful web-centric retailers outsource mission critical operations to Digital River is testimony to merits of outsourcing in this area.
Digital River's data center gives it the infrastructure to attract big clients and creates a barrier to entry from smaller competitors. The company has also capitalized on these difficult times by gobbling up smaller competition and expanding its markets from high-end to low-end customers. In addition to Microsoft and Symantec, Digital River clients include Motorola (MOT), 3M (MMM), H&R Block (HRB), Novell (NOVL), Autodesk (ADSK), ACT! and Staples.com (SPLS).
Digital River has established itself as the leader of the e-commerce outsourcing industry in the US, and it is rapidly expanding that position internationally now. Moreover, the business model is proving to be a winner. Digital River executed well through tough times and is now parked in front of a market that is really taking off. Based on Digital River's ability to deliver consistently strong growth and bring in major deals to sustain that trajectory into the future, the future looks very bright for this company. The stock valuation makes it vulnerable in a down market, but right now everything is clicking for DRIV.
Disclosure: Author has no position in Digital River.