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Profits Start to Flow at Digital River

E-commerce outsourcing company Digital River, once languishing along with many other B2B plays that nose-dived in the Internet downturn, is on a roll lately what with its stock price climbing into the double digits and a slew of new-customer signings.

The company is making money and in fact, Deutsche Bank Securities is maintaining a "buy" rating on the stock , which closed Monday at $12.86, up from a 52-week low of $4.25.

Deutsche Bank said its target price is $16 a share and "we believe that Digital River managed to grow the core operation by 23 percent in 2002 -- based on our current assumptions, we expect this business to increase 17 percent in 2003 -- while acquisition-related revenues are expected to grow by 29 percent year over year."

The sunny outlook comes as Digital River added to its surging outsourcing business in an agreement to provide hosting support to TrademarkBots, a specialty publisher of Web-based trademark search and monitoring applications. The company's e-commerce site helps customers police and audit trademarks on the Internet.

Under an agreement announced Wednesday, Digital River plans to support a multi-phased e-commerce initiative for the company, including a new e-commerce store (called eBusiness Trademark Reports) for certain vertical markets. The new service, expected to launch during the second quarter, will offer eBusiness trademark reports on Internet trademark usage within the banking industry. It will be offered to attorneys, stock analysts, investors, marketing and public relations professionals, and consumer affair professionals,

In addition to building and hosting the new TrademarkBots site, Digital River also plans to provide order management, fraud prevention and customer service.

Analysts expect Digital River, which reports its first-quarter earnings on April 23, to come in with a profit of 13 cents a share. Overall, analysts are expecting profits of 53 cents per share for the fiscal year.

And Deutsche Bank analysts Jeetil J. Patel and Neil G. McCluskey wrote in a report to Deutsche Bank clients that they "believe that the company is on track to report first-quarter results ahead of expectations" by about 5 percent, in part driven by new product releases from its customers as well as the strength of the tax season from customer H&R Block .

"We would not be surprised to see modest upward estimate revisions for the second quarter, based on the continued strength of e-commerce sales as well as revenues from MLB.com (driven by the start of the baseball season)," the analysts wrote. "Our 2003 earnings per share estimate of 55 cents may prove conservative by a couple of pennies, given the near-term strength in the business."

For the fourth quarter, Digital River reported net income of $3.3 million, or 11 cents a share, on a GAAP basis. That compared to a net loss of $3.5 million or 14 cents per share in the same period a year earlier. Revenues were $21.5 million, up 21 percent from revenue of $17.7 million in the fourth quarter of 2001.

The Software and Digital Commerce services segment accounted for 81 percent of 2002 revenues and the E-Business services segment 19 percent, according to Thomson Financial data.

At the time, CEO Joel Ronning said that "we're successfully managing the size of our organization, leveraging our platform, adding new clients with minimal expense, and seeing the results fall to the bottom line."

Digital River has also expanded its agreement with BioNet Systems LLC, the makers of Net Nanny. Digital will now host now host the company's European online business as well as the U.S. operation.

Other recent customer wins include Scopeware, Creative Bedding Technologies, DigiPortal Software and Sanctum.

The company also recently rolled out its next-generation customer service center, offering:

  • live chat -- facilitating real-time online discussions with customer service representatives.
  • intelligent auto response -- utilizing a rules-based engine to automatically e-mail relevant responses to common inquiries. enhanced frequently asked questions -- offering customers answers to common questions through a customizable interface.
  • e-refunds -- allowing customers to request their own refunds online.
    e-cancellations -- providing customers the ability to cancel their own online orders.
  • A proprietary knowledge base -- an information resource to help customer service representatives promptly answer user questions.
  • Digital River's business operations would seem to contrast sharply with that of companies such as B2B software maker Ariba Inc., , which said just last week that it has restated or adjusted all but one of its quarterly financial statements since becoming a public company in 1999. Ariba cited accounting errors, dubious partner deals and questionable payments for chartered airplanes, according to a Reuters report.

    Sunnyvale, Calif.-based Ariba, at one time a high-flyer on Wall Street (its market capitalization at one point three years ago was $22 billion) said the restatement included a boost in expenses that also widened its net loss for the as-yet-unreported fiscal second quarter ended March 31 by 2 cents a share. Ariba is expected to lose 18 to 20 cents a share.

    Minneapolis-based Digital River was founded in 1994 and now offers e-commerce services that include e-commerce strategy, site development and hosting, order and transaction management, system integration, product fulfillment and returns, e-marketing and customer service. Some of its larger clients are Symantec, Motorola, 3M, Major League Baseball Advanced Media, Novell, Autodesk and Staples.com.