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Digital River Set To Ride Current Of New E-commerce Strategies

Posted on Thursday, Sep 17th 2009

A recent survey of major US retailers found that nearly 70% of the surveyed population plans to maintain their e-commerce budgets despite the economic downturn. But a recent comScore report on e-tailing sales was hardly upbeat. US annual online retail spending of $30.2 billion fell 1% over the year after being flat in the earlier quarter and dropping 3% in the fourth quarter.
 
Digital River (NASDAQ:DRIV), the leading provider of e-commerce solutions, seems to have been caught in the undertow of recession after swimming through thus far. Q2 revenues of $96.6 million were down 2% over the year and 6% over the quarter. The market was expecting revenues of $96.5 million. Non-GAAP EPS of $0.42 beat the consensus estimate by a cent. International revenues were 39.4% of total sales compared with 44.1% a year ago.

But the picture is far from bleak: Digital River has been diversifying from software into complementary markets such as consumer electronics and games. The company recently expanded its e-commerce agreement with Western Digital to handle online orders, product fulfillment, and management of regulatory fees related to the recycling of electronics products in Europe. It also expanded its relationship with a large US-based PC manufacturer for which they will pre-load PC desktops with software, thus opening a new distribution channel for Digital River’s clients and leveraging their strategy of cross-selling to adjacent markets. In games too, they closed new businesses and renewed their agreements with Electronic Arts and Prima Games.

Additionally, Digital River has been investing in new technologies for opportunities in horizontal markets such as subscriptions and business-to-business software market and added clients such as Autodesk and Nuance to its portfolio. It expanded their B2B portfolio with a solution called Business Direct, which will help clients manage private online portals to sell directly to enterprise customers. 

As part of its aim to realize the potential of mobile commerce, Digital River also launched a new mobile-based offering that includes a smart storefront that tailors a shopper’s experience to PC and mobile browsers.

The company also strengthened existing relationships with Symantec and Microsoft by launching new stores both in the US and abroad. They are particularly hopeful about opportunities within Symantec’s SMB business.

Digital River is looking to control costs in the coming quarters. The company has already outsourced 120 customer service jobs. It is also planning additional organization changes to increase efficiency. Finally, Digital River plans to hire sales professionals to work with large global enterprises.

For Q3, the company projects revenues of $96.5 million to $98.5 million with an EPS of $0.38 to $0.41. Analysts are expecting revenues of $97.8 million with EPS of $0.45.

Digital River does seem to be taking the right steps to expand its reach even in the current depressed conditions. The move to expand from servicing B2C clients to B2B clients is a good one, and clients such as Autodesk can be excellent additions to Digital River’s revenue model options.

The stock is trading at $39.43 with a market capitalization of $1.52 billion. The stock price is much lower than the 52-week high of $44.43 achieved last year, but it is higher than the 200-day moving average of $34.91.

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