Digital River Flows Gently

Aug 05, 2008 (Zacks Investment Research via COMTEX) -- DRIV | Quote | Chart | News | PowerRating -- Digital River, Inc. (DRIV) is a leading player in the digital delivery market, which is expected to grow at an annual rate of 25% for the next several years. The company reported revenues of $98.4 million in Q2:FY08, up 26% from a year ago but down 5.0% sequentially, and ahead of ours and the consensus estimate of $91 million. Approximately 44% of the total sales in Q2 2008 were generated outside United States. Hence, any unfavorable movement in foreign exchange rates can negatively affect the top-line. Despite uncertain macroeconomic conditions, management raised its guidance for 2008 and now expects revenues to come around $410 million, up from earlier projection of $401 million. EPS guidance was changed from $1.89 to $2.00, but when adjusted for the shift from the previously assumed 31% tax rate to the new 27% rate, 2008 guidance is unchanged, despite the $0.04 upside in Q2. The reduction in H2:08 EPS guidance is attributable to lower interest rates (about $0.01) and plans to pull forward some 2009 expenses related to the recent ERP implementation. For Q3:FY08, the company guided to revenue of $98.5 million, above consensus at $96.5 million, and EPS of $0.47 at the new 27% tax rate, or $0.44-$0.45 compared to consensus of $0.45 at 31% tax rate. Given flattish earnings guidance for Q3 with back-end loaded revenue growth expectations, we have maintained our Hold rating and target price at $39. The target price is derived by applying a target P/E multiple of 19.5x to our pro forma FY2008 estimate, which is higher than the current industry median. Read the full analyst report on DRIV

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