Digital River: Buying Opportunity

Digital River, Inc. (DRIV), which provides e-commerce solutions to software publishers and consumer technology companies, is on a roll. The complex licensing and subscription management operations of many software companies are outsourced to Digital River. We haven’t covered Digital River much, but it is a top holding for several internet-focused mutual funds. Quarterly revenues announced on July 30 of $98.4 million beat the market’s expectations of $91.0 million and were a 26% increase over the previous year. International e-commerce sales contributed 44% of total revenue. Revenues related to Symantec (SYMC) were 33% and the balance came from Direct Symantec’s contribution. Symantec itself doesn’t seem to be doing nearly as well.

EPS of $0.37 also beat the Street’s expectations of $0.34 but slipped 5% compared with the previous year.

Digital River gave revenue outlook of $98.5 million for the coming quarter, with EPS of $0.47. For the year, the company raised both revenue and EPS expectations to $410.0 million and $2.00 per share, respectively.

Previously, management was optimistic about the economic pressures, claiming that such pressures would lead to increased outsourcing and thus benefit Digital River. Last quarter’s results proved its optimism to be well founded, but with the earnings season coming up, and the world fully in the jaws of a brutal financial crisis, the optimism may not hold.

During the quarter, the company extended its marketForce program. It is a service that will manage clients’ e-mail marketing, search engine optimization, and marketing design programs. The company also introduced the Mass Dynamic Personalization feature, which lets it personalize an offer to a client. Digital River claims to have had tremendous success in generating additional revenues for its clients through these programs. These moves, however, are starting to take the company in a different direction - outsourced CRM. It is interesting to see how an outsourcer starts to get to know the customers of the parent company better, and is more effective in generating up-sell/cross-sell revenues.

During the quarter, the company continued to grow in software, consumer electronics, and games by expanding and strengthening key relationships. Through its relationship with Capcom, a leading publisher, developer, and distributor of interactive entertainment, the company will now manage digitally distributed content in addition to handling the online sales and physical delivery of Capcom’s products in North America. The company also tied up with Mattel (MAT) to launch services to manage commerce and subscriptions for BarbieGirl.com.

There are two major emerging industries: Gaming and SaaS - both of which have extensive licensing/subscription management challenges, and Digital River is well positioned to address both in an outsourced mode.

The stock rose 7% to $41.75 on the announcement of the results. It has slipped since, and is currently trading at $30.73. Given the market conditions, this isn’t so bad, and in fact, I would say, it is a buying opportunity. The company is excellent, so far executing flawlessly.

Disclosure: None