Don't Pull The Trigger On Digital River Yet

Sep. 8.11 | About: Digital River, (DRIV)

Digital River (NASDAQ:DRIV) is set for a $100 million stock repurchase program. Since the departure of a large client in 2009, the company has struggled with faltering revenue, which was standing at $363.2 million in FY10 on $403.8 million in FY09, with the total operating income down to $13 million, compared to $63.5 million in FY09. The cost of production seems to have gone up too, which adds to the declining operating income. But it is hard to understand why in a tech company the cost of production would go up.

It is potentially interesting to note that the diluted EPS has gone down over the last couple of years. It was $1.58 in 2007, the year the recession started, and stood at $0.45 in 2010, pretty bad if we consider the little upturn in the market after the recession.

The balance sheet shows increasing short-term and cash investments, which relieves us of the liquidity factor of the company. The total long-term debt went up to $353.8 million in 2010, compared to $8.81 million in 2009. Although the current ratio, which determines adequacy of the working capital, stands at 2.93x, much higher than 1.81x in FY09, the debt level surprises me. Its total debt to equity stands at 51.74x, compared to 30.54x of Rainmaker Systems (RMKR) and 37.39x of EasyLink Services International Corp. (NASDAQ:ESIC).

Too high a current ratio is not good, since it shows that the company is not being able to utilize the capital for maximum shareholder returns. Looking at the stats, the ROI stands at 1.78x, much lower than 8.63x of Akamai Technologies (NASDAQ:AKAM) and 8.21x of Symantec Corp. (NASDAQ:SYMC).

The company seems to be struggling. It is trying its best with initiating a multichannel online distribution program or acquiring the Payment Services Directive License from a Swedish Financial Supervisory Authority. But I see that most of the small- or mid-cap tech companies, especially in the online advertising and e-commerce industry, are pretty much struggling. If this goes on, I see a few mergers and acquisitions on the far horizon. That might give the stock value a boost in the long term.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.