Digital River riding high as it hits 10th year: E-commerce outsourcer survived dot-com roller coaster

Aug 09, 2008 (Pioneer Press - McClatchy-Tribune News Service via COMTEX) -- DRIV | Quote | Chart | News | PowerRating -- Aug. 9--If you like big scary roller coasters, you'd have loved owning stock in Eden Prairie-based Digital River Inc. for the past 10 years.

The e-commerce company went public at under $10 a share in August 1998, proceeded up a sharp, clickety-clack incline to peak above $40 in January 2000, and then plunged with stomach-in-your-mouth velocity to $3 a share in January 2002 as the bottom fell out of the dot-com world.

Digital River shares have since ridden up and down amid some earnings misses and miscalculations, gradually clawing back to finish Friday at $43.79.

In that time, sales grew from $3.4 million in 1998 to $410 million expected this year. The company first swung to a profit in 2003 and has stayed in the black since.

Despite all that, few of the people who click through the estimated 3 billion transactions Digital River handles each year know its name.

That's because it's an outsourcer in e-commerce, running the store behind the scenes. It takes orders for thousands of companies, including software giants like Symantec and Microsoft, never showing its face.

The lack of public recognition doesn't bother founder and CEO Joel Ronning.

"We're well-recognized in the industry for our work in e-commerce, but we're certainly not a household name, and I think we're fine with that," he said recently.

The company gets a chance to make some noise Monday when it celebrates its 10th anniversary as a publicly traded company. Ronning and a contingent

of 10-year veterans are traveling to New York to ring the opening bell of the Nasdaq, on which the company is listed.

Digital River appears to be on one of its upswings at the moment, despite a tough economy -- or perhaps, because of it.

Companies that want to sell online are turning to Digital River and other outsourcers because they're finding running an online store is too complicated and expensive to handle themselves.

"The task of building out something (to handle e-commerce) internally is a pretty daunting task when most companies are just trying to keep their heads above water," said Michael Olson, an analyst at Piper Jaffray in Minneapolis.

CEO Ronning made a similar point on the company's second-quarter conference call.

"We've been through a couple recessions and it seems that clients are more skittish about making investments in their internal infrastructure," he said.

But the consumer -- "the ultimate customer" -- is still in the driver's seat, he added.

"If our ultimate customer is not buying, it's a problem for us, so we're paying a lot of attention to that," he said.

The sputtering economy may have lowered the company's second-quarter profit to $13.2 million from $14.5 million a year ago, but it handily beat Wall Street earnings expectations and revenue rose 26 percent from the previous year's quarter, to $98.4 million. Some of the expenses that cut into Digital River's profit went into things like more sales staff or a new back-end software system that will pay off down the road, the company said.

The company raised its outlook for the year to $410 million in revenue and earnings of $2 a share when it reported its second-quarter results.

Digital River's core business is selling software. Its largest customer, Symantec, contributed a third of the company's revenue last quarter.

But lately the company has waded into consumer electronics, counting Canon, accessories manufacturer Targus and flash-storage provider SanDisk as clients.

It's also starting to sell online games. Electronics Arts, which publishes the popular Madden NFL series, is a customer, as is Mattel, which lets Digital River handle sales of an online multiplayer Barbie game.

Revenue from consumer electronics and games is small so far, but Ronning said those categories represent an untapped market.

"Consumer electronics is three to four times the size of the software market," he said. "I mean, it's a huge, huge market." He expects to add two more large consumer electronics customers later this year.

Piper Jaffray's Olson said gaming in particular is a natural extension of Digital River's software business, but game publishers will need some time to get comfortable with selling their wares as digital downloads through outsourcers like Digital River.

Increased exposure to consumer electronics and games also may make the company more sensitive to the seasonal swings of consumer retailing at some point, Ronning acknowledged. It's the kind of sensitivity that is making retailers reach for their Dramamine this year.

But that's a ways off, he said. That's a different ride.

Leslie Brooks Suzukamo can be reached at 651-228-5475.

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