(part 1) DRIV: FIRING ON ALL CYLINDERS WITH STRONG 1Q RESULTS...
Bankers Trust Research/BT Alex. Brown Research
Shaun Andrikopoulos,Jeetil J. Patel
April 23, 1999
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DIGITAL RIVER INC. [DRIV] "STRONG BUY"
Firing On All Cylinders With Strong 1Q Results--New Business
Initiatives
Underway--Raising Estimates--Reiterate "Strong Buy" Investment Rating
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Date: 04/22/1999 EPS 1998A 1999E 2000E
Price: 43.88 1Q (0.16) (0.27)A NE
52-Wk Range: 61 - 5 2Q (0.29) (0.30) NE
Ann Dividend: 0.0 3Q (0.26) (0.30) NE
Ann Div Yld: 0.00% 4Q (0.26) (0.29) NE
Mkt Cap (mm): 873 FY(Dec.) (0.97) (1.16) (0.67)
3-Yr Growth: 100% FY P/EPS NM NM NM
CY EPS (0.97) (1.16) (0.67)
Est. Changed Yes CY P/EPS NM NM NM
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52-week range is since 8/10/98 IPO priced at 8 1/2
HIGHLIGHTS:
--Digital River posted 1Q revenues of $11.7 mm, representing 12% upside to
our $10 mm forecast. Loss per share of $0.27 was ahead of our $0.29 loss
per share estimate.
--All key metrics grew sequentially: orders up 38% Q/Q to 245,000, end
users up 57% Q/Q to 566,000, and total customers increased 11% Q/Q to
2,848.
--Raising 1999 revenue forecast to $61.0 mm from $51.0 mm, while our 2000
forecast has been increased to $100.0 mm from $87.0 mm previously.
--Digital River should be able to extend its technology platform into
other digital content categories, such as music and shareware, in coming
quarters.
--We anticipate that the Company will announce several key customer wins,
potentially including a beer company and a PC company, within its new
transaction fee-based e-commerce service, CommerceBridge, shortly.
--Risks include: management of hypergrowth, acquisition integration risks,
and competitive threats from on-line software retailers.
--Reiterate $65 12-month price target and "strong buy" (1) investment
rating.
DETAILS:
12% REVENUE UPSIDE IN 1Q...AND ACHIEVING SCALE AHEAD OF EXPECTATIONS
Digital River reported impressive 1Q results as both revenues and earnings
exceeded our expectations. The Company posted revenues of $11.7 million
(up 24% Q/Q), which represented 12% upside to our forecast of $10.0
million. The operating loss per share of $0.27 also came in ahead of our
(as well as the Street consensus) loss per share estimate of $0.29. More
importantly, operating margins of -53% (-53% in 4Q) were well below our
estimate of -65%, demonstrating that the Company is achieving scale ahead
of expectations in its core ESD business. The Company also witnessed solid
sequential growth across all key business metrics in 1Q, as: (1) orders
grew by 38% Q/Q to 245,000, (2) end users increased 57% Q/Q to 566,000, and
(3) total (retailer and publisher) customers increased 11% Q/Q to 2,848.
We believe that Digital River continues to fire on all cylinders as it
executes upon its strategy to establish its Digital Trade Network (DTN) as
the best-of-breed, outsourced electronic software distribution (ESD)
solution on the Internet. We believe that the Company will enjoy increasing
economies of scale in its core ESD business as it leverages its scaleable,
fixed-cost technology platform, outstanding customer base and low cost of
customer acquisition. As a result, we anticipate that operating margins in
this (ESD) business will improve sequentially throughout the year (to -33%
in 4Q from -53% in 1Q), despite ongoing investments in several new business
initiatives.
EXTENDING THE FRANCHISE
We feel that Digital River will be able to successfully extend its core
technology platform with its Commerce Network Server (CNS) offering into
other digital content categories in coming quarters. The Company recently
acquired several companies, Maagnum Internet Group and Public Software
Library, focused on the shareware segment. We believe that the Company
will establish a DTN for the shareware segment, which should help not only
consolidate a large ($400 million per annum) and fragmented market, but
also seed its core ESD business with small, yet rapidly-growing publishers.
Moreover, the Company's partnership yesterday with WWOZ-radio represents
its initial foray in establishing a DTN focused on the electronic music
download (EMD) market. We feel that the Company will leverage its existing
technology platform to scale its music DTN, albeit with marginal startup
costs.
Finally, the Company has signed up several key product vendors and
manufacturers for its new transaction-based e-commerce initiative,
officially called CommerceBridge. We anticipate Digital River to announce
these partners shortly, and give us increased visibility into the
opportunity facing the Company over the next several years. The underlying
strength of the core ESD business, coupled with the development of these
new business initiatives in future quarters, will likely provide upside
potential to our revenue projections in 1999 and 2000.
RAISING REVENUE PROJECTIONS AGAIN
Based on the continued strength of the 1Q revenue results and the recent
shareware acquisitions, we are raising our 2Q and 1999 revenue projections
to $14.3 million and $61.0 mm from $11.5 mm and $51.0 mm, respectively. We
are also raising our revenue forecast for the core ESD business to $13.0
million from $11.5 million in 2Q, and $56.0 million from $51.0 million in
1999. We anticipate the shareware acquisitions to contribute $4.8 million
in revenues in 1999. We also are raising our 2000 revenue forecast by 15%
to $100 million from our previous forecast of $87.0 million.
We are slightly increasing our operating expense assumptions to $36.0
million from $34.5 million to reflect the acquisitions. We note that our
revenue projections have been increased 20% while operating expenses have
been upwardly adjusted 4% in 1999. As a result, we now anticipate
operating margins to improve sequentially from a loss of 47% in 2Q to a
loss of 33% in 4Q, subsequently followed by a loss of 15% (versus 18%
previously) in 2000. We continue to project Digital River to achieve break-
even earnings in 2H 2001. We are adjusting our estimates as follows:
New Old New Old
EPS EPS Revenue Revenue
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1QA 1999 ($0.27) ($0.29) $11.7 $10.0
2QE 1999 ($0.30) ($0.30) $14.3 $11.5
3QE 1999 ($0.30) ($0.30) $16.2 $13.5
4QE 1999 ($0.29) ($0.28) $18.8 $16.0
FYE 1999 ($1.16) ($1.17) $61.0 $51.0
FYE 2000 ($0.67) ($0.70) $100.0 $87.0
Source: Company statistics, BT Alex. Brown research
PRIMARY VARIANCES -- ALL POSITIVE
Digital River posted 1Q revenues of $11.7 million, up 24% Q/Q. The 12%
revenue upside was driven by an increase in existing client sales (due
largely to the marketing and promotional capabilities offered to its
customers) as well as incremental sales generated from the quality and
quantity of new clients added in 1Q. We note that the addition of H&R
Block's TaxCut bode well for the Company given the seasonality associated
with the tax season.
Gross margins of 16.3% came in slightly below our forecast of 17.0%. Sales
and marketing expenses declined modestly to 31% from 32% in 4Q, while
general and administrative expenses continued to decline to 8% of revenues
from 11% in 4Q. As expected, product development expenses increased to 30%
of total revenues in 1Q, from 27% in 4Q, reflecting the heavy investments
in the Company's CommerceBridge business. Despite these substantial
investments, Digital River began to enjoy economies of scale earlier than
anticipated as the operating loss of 53% was well below our forecast of 65%
of total revenues.
Q1A 99 Q4A 98 Q/Q Growth
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Revenues $11.7 mm $9.4 mm 24%
Orders 245,000 178,000 38%
Avg. Order Size $46 $51 NA
End Users 566,000 361,000 57%
Customers 2,848 2,574 11%
Source: Company statistics, BT Alex. Brown research
CONTINUED STRENGTH ACROSS ALL KEY METRICS
The Company witnessed strong growth across all key metrics in 1Q as it
built its unique end-user database up to 566,000 customers, up 57% Q/Q and
well ahead of our forecast of more than 483,000 customers. During 1Q,
Digital River processed more than 245,000 orders (up 38% Q/Q), representing
20% upside to our forecast of 204,000 orders. The average order size
declined slightly in 1Q to $46, from $51 in 4Q, due to the lower ASPs
associated with H&R Block's TaxCut software. During the quarter,
electronic delivery sales accounted for 75% of total unit sales and 53% of
total dollars in 1Q, versus 70% of units and 57% of dollars, respectively
in 4Q. |
