The Dot-com Business is Clicking for CyberSource

| About: CyberSource Corp. (CYBS)

CyberSource (CYBS) is one those blossoming companies behind the scenes of e-commerce that most people never see. It provides a collection of services including transaction processing and risk management. This company broke into profitability in 2003 and its stock has more than quadrupled since then.

CyberSource is known for its fraud screening technology as well as its transaction processing. The company bundles these with tax calculation, export compliance, fulfillment management and professional services to deliver a comprehensive suite of value-added e-commerce solutions.

Even through the difficult economic conditions a few years ago and the demise of so many online companies, CyberSource's business held up relatively well. The company moved into sustained profitability in 2004 with sales of $36.7 million, net income of $4.5 million. In 2005, sales jumped to $50.5 million and net income $9.2 million or 18 cents per share. For 2006, the company racked up revenue of $70.2 million and EPS of 29 cents. That's an impressive ramp that is expected to continue for several years to come.

The transaction-based model of CyberSource is attractive because it aligns revenue growth with Internet usage and e-commerce activity. It doesn't rely on successful merchandising or building a consumer brand. The recurring revenue stream gives strong visibility to the financial picture, and because this kind of transaction-driven business scales well it can lead to very attractive profit margins. The outlook is for EPS of 37 cents this year and 52 cents in 2008.

CyberSource is adding thousands of new customers every quarter. Noteworthy additions last quarter included Shell Global Solutions, Sonoco Products, the Smithsonian Institute, and Next Day Blinds. The company also renewed or added to its existing relationships with Air Canada, Curves International, Eastman Kodak (EK), Home Depot (NYSE:HD), and Seagate (NASDAQ:STX). The company's total customer count is over 18,000. In the fourth quarter, transaction volume was up 32% to 255 million transactions.

CyberSource has not been entirely immune to the dot-com woes, though. The general distaste by investors for anything Internet-related sent its stock plunging from a high above $80 in 1999 to the low-single digits for the past several years. At $12.30 currently, CYBS has rebounded impressively from the $2.50 area in 2003 and it's up 70% since we wrote about it a little more than a year ago.

While CyberSource's stock price was clearly caught up in speculative fever a few years ago, business never fell off that dramatically. E-commerce is not limited to consumers shopping, eith er. The online transaction opportunity can span business-to-business (B2B) markets, business- and consumer-to-government markets (B2G and C2G), and evenconsumer-to-consumer exchanges (C2C). CyberSource also has a foothold in Asia where the company has partnered with local companies to address some huge market opportunities, including Japan's millions of wireless web users.

There is plenty of risk with a company like this. It is a volatile small-cap stock. There is intense competition in the e-commerce transaction space, though CyberSource is competing impressively as shown by the number and quality of its customers. Even so, revenue per transaction is likely to be squeezed as competition intensifies and online merchants require lower costs. But for those looking for the true dot-com business successes, CyberSource is a name worth knowing.

CYBS 1-yr chart

Disclosure: Author has no position in CYBS.