Hello Again, Elliot, Doc, and all:
As interest in DRIV has built up again, I've decided to pony up for a membership in this thread and enter some comments/questions from time to time in follow-up to our initial exchanges last July/Aug. Today I have a couple of comments on DRIV and then some questions on TSQD (which I'm going to put here, as I believe most of us are interested in that stock as well).
DRIV.
Basically, my DRIV shares are put away in the vault. On significant downdrafts, I will buy more. Probably a lot more. Period. This stock may not be around for very long, owing to take over frenzy, but it will do well as long as we have it.
Recently I had some concerns about margins . . . no longer. Mr. Ronning indicated on CNBC that margins were improving, and this became understandable when I finally got around to reading the latest 10-Q. It repeated earlier statements I had forgotten to the effect that margins on retailer sales are better, that is higher, than on developer website sales. About two-thirds of the present 2000 clients are developers, one-third retailers. Yet, only 6% of sales historically have come thru retailers. This is definitely in process of change, witness preponderance of deals with major retailers recently. Shift is major, retailer sales will rapidly increase, and margins should begin to increase themselves, probably this quarter.
Another concern, arrival of new competitors, lessens with time. Market entry by new competitors becomes more difficult as DRIV demonstrates capacity, good business practices, reliability. Such new entries would have to prove themselves and, in this market, what developer/retailer wants to take time, risk market share, for the sake of a couple of discount points? Obviously, an AMZN might decide to build a greenfield operation in esd. They may be pondering this right now. However, any fall off in DRIV occasioned by such event would be a buying opportunity in my view: the coming market for internet transmission of digitized information is broader than we imagine, too huge to spend energy worrying about new competition for the established leader at this point. (Frankly, I worry more that an AMZN will rightly conclude that the only smart way to get into esd is to acquire DRIV, and the party will be over, even if the buyout money is good.)
By the way, hurrah today for the new issue. Dilution of 10% no problem. Float ups to 6 million, very necessary increase in liquidity for larger investors. Shows planning, provides $35M in cash, says growth probably coming on faster than plan. Selling insiders put some dough in the bank, exhale, and go back to work to make more. Very positive.
Bottom Line: buying DRIV now, even after the last big week, will demonstrate serious market savvy when viewed 12-18 months down the road, if not sooner.
TSQD.
This was Mr. Ronning's liquidity source back when salaries were not on: a very clever gambit that he played like a violin. Now, I've lost the tune, can't figure where this is going. Stock is trailing DRIV at 8 to 1, or worse, whereas math says 5 to 1 should be ratio. Slippage likely due to doubts about structure, future of both option and overall DRIV/TSQD relationship. Recent TSQD 10-Q shows DRIV investment on balance sheet at $28 million with $10 million offsetting tax provision. Is this actually a tax cost payable at exercise?? If they bring the DRIV position to market on the balance sheet this quarter, the provision will have to be $30 million (!!) if DRIV at 25. Any tax accountants out there who could comment??
Mr. Ronning is not going to exercise if tax cost is current and at provision level. TSQD does not have the cash, and who would exercise such an option even if the money were there? There must be an alternative, but what? How about takeover of TSQD by DRIV for stock? Complicated: (1) Ronning controls both companies, would have to take care re self-dealing in establishing value. (2) Deal would find DRIV now in competition, thru DTP, with other retailers. Sell DTP and contract with it for packaging service necessary to DRIV ops? (3) Deal would be dilutive as new shares would be issued for takeover. Could shares subject to existing option be retired without tax consequences making dilution only a matter of difference between shares issued and 3.2 million retired? Doubt it: too beautiful as a solution.
Bottom Line: Not happy. Don't understand what the end-game is here. And reporting a burgeoning tax provision every quarter as DRIV succeeds makes exercise of option look less and less likely. Also insider option holders for whom 2.9 million TSQD shares were registered last August cannot be too happy as stock languishes. What is going on?? What should Mr. Ronning do with this tiger he has firmly by the tail to satisfy his shareholders, both inside and outside TSQD? My gut tells me he has this well-planned; my mind is disgusted that I cannot figure it out.
Best of Luck to All. Happy Thanksgiving in this marvelous country.
David
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