Digital River gets the front page of Investors Business Daily
investors.com
Internet & Technology
Friday, November 23, 2001
Digital River Finds A Different Course
BY MURRAY COLEMAN
INVESTOR'S BUSINESS DAILY
Gearing up to sell and buy goods online takes a lot of
time and trouble.
Developers estimate that it can cost $2 million to $10
million to set up a business for e-commerce.
But Digital River Inc. (DRIV) is taking a different twist.
The company runs e-commerce operations for
corporate customers. And its results are attracting
investors. Since April, Digital River shares have jumped
from 3.50 to about 15.
Image: River Flowing
"They've been very smart about building slowly but
surely," said Jeetil Patel, an analyst with Deutsche Bank
Securities. "Now they're in a position to start crushing
competitors, or to buy them up."
Digital River is a cross between an application service
provider and an electronic software distributor, say
analysts. ASPs provide services using other developers'
software and gear. An ESD sets up and runs a
company's Web site using its own applications. But
those lines are blurring as both types of businesses
focus on gaining new customers through value-added
services.
That's Digital River's aim. It's created its own set of
e-commerce applications. But its programs do more
than just let buyers swap things with sellers. Its
services include analytics capabilities to track Web site
traffic automatically.
Digital River can set up a company with its e-commerce
system, as well as a targeted marketing campaign.
The company says that's what gives the Eden Prairie,
Minn.-based developer its edge.
"We've built a basic platform of services," said Joel
Ronning, Digital River's chief executive. "It's ours, so we
know what it can do and we can expand it in almost
any direction."
Clients are charged fees based on the services they
use. Since they use Digital River's system, customers
don't pay huge setup costs. "Our services cost five to
10 times less than setting up an e-commerce system
internally," Ronning said.
Getting a large Digital River client up and running in its
first year probably averages $150,000 to $300,000, he
says. A company generally would have to spend more
than $1 million to do the same thing from scratch.
"You've got to hand it to them," said Louis Columbus,
an analyst with market tracker AMR Research Inc.
"They've been able to succeed where everyone else
has failed."
Instead of trying to land a few big customers, Digital
River has spent the past five years targeting small and
midsize companies.
"To make it in this business you need volume," Ronning
said. "There's many more opportunities with smaller
customers."
As with ASPs, Digital River depends on economies of
scale. The company reached its revenue goal of $14
million in the third quarter. That's up 84% from the
year-ago quarter. It's also the target Ronning says the
company needed to hit to ensure growth.
Last quarter the company, which has been public since
1998, generated its first positive cash flow. It made
$590,000 before interest, taxes and amortization
charges. It reported a net loss of 2 cents a share.
Analysts expect Digital River to break into the black this
quarter, earning 3 cents a share.
"This company is a real breadwinner," said Chris Kwak,
an analyst at Bear, Stearns & Co. "They've kept costs
under control while building out their business and
making sure they have enough customers to support
expansion."
With 13,000 corporate clients, Digital River is confident
it's reached a level for consistent profit growth,
Ronning says.
In the third quarter, the company made two small
acquisitions. Analysts call both of them shrewd deals.
"They know in this economy there are a lot of good,
little niche service providers out there that can be
bought fairly cheap," said Columbus. "They're very
aggressive about using that as an economical way to
add value to their product line."
He says Digital River has a range of e-commerce
services few can match. One example is its ability to
create electronic marketing plans.
Digital River says its top clients have doubled online
sales via its direct-marketing e-mail campaigns.
"As we've moved forward, we've spent less time figuring
out how to ship an order and more time working on how
to get new business for our customers," Ronning said.
The result, says Gartner Dataquest Inc. analyst Joanne
Correia: "Their operation is at a point where it's big
enough to take on the bigger service providers." |
