business

As Wall Street searches for evidence of a turnaround in consumer spending, companies that might be harbingers of a recovery are drawing a lot of attention.

Digital River of Eden Prairie, which reports first-quarter earnings this week, is believed to be one of those harbingers, at least in the field of e-commerce. The 1,350-employee company is an outsourcer that acts as the online store for companies such as anti-virus firm Symantec. Customers seeking to buy software from Symantec's website are seamlessly transferred to a look-alike Digital River website.

But that distinction of being a harbinger cuts both ways: Analysts have downgraded or upgraded the stock depending on whether they believe consumer spending will diminish or make a comeback in the near term. Since January, analysts have bestowed two upgrades, two downgrades and two initiations of coverage.

But, based on its stock price, opinion appears to be shifting in favor of Digital River. Since late November, shares have risen about 90 percent from $18.10 a share to $34.42 Friday.

"What has really driven the stock was that it was ridiculously cheap and Digital River was going to be one of the business models that turns quicker when the economy comes back," said Robert Breza, an analyst at RBC Capital Markets in Minneapolis. He downgraded the stock in September but upgraded it again this month, from sector perform to outperform. "On Digital River's last analyst conference call, they said things have stabilized at the company. And that's all the market needs to hear right now."

Gene Munster, an analyst at Piper Jaffray in Minneapolis, said: "Digital River is a bellwether for e-commerce, and our expectation is that they will beat the Street for the quarter." Digital River declined to comment because of the upcoming earnings release.

But analyst Breza estimates the company will earn 50 cents a share on revenue of $98 million. Munster expects the company to earn 53 cents a share on revenue of a little more than $100 million.

An average of Wall Street estimates is 51 cents a share on revenue of $98.55 million.

Broadening revenue sources

To make itself more appealing to investors, Digital River has been trying to broaden its consumer appeal by expanding beyond its traditional business of selling software over the Internet. It has added several consumer electronics products, such as digital music players, cell phone accessories, printers and digital cameras to its online sales roster. Manufacturers include Eastman Kodak, SanDisk, Canon and Lexmark.

Consumer electronics sales represent a big opportunity for Digital River because of changes in real-world retail stores, Breza said. Retailers are offering their own private-label products, such as flat-panel TV displays. That encourages traditional flat-panel TV makers, such as LG, to seek other sales channels, such as online, he said.

"Selling software will continue to be the lion's share of Digital River's business, but consumer electronics will be a slow-growing part," Breza said. "It took them seven years to build the Symantec sales up to this size [33 percent of 2008 revenue]."

In March, the company announced a new initiative to help video game companies sell extra software to go with games customers already own.

The video game initiative represents a new type of online consumer sales that has been tried by Microsoft and others: selling game add-ons, such as additional game levels, via an Internet store.

Because many new video games are played on game consoles or PCs connected to the Internet, a consumer may be offered an opportunity to buy game add-ons while playing the game. So far, no game companies have signed up to use Digital River as their online store for what is sometimes called "in-game commerce."

The company's future contains some risk, too. Next year, Digital River must renegotiate its outsourcing deal with Symantec, whose large contribution to Digital River's revenue has always been considered one of the company's potential weaknesses.

"Digital River's business is doing well right now," Munster said. "But at some point they have to renegotiate with Symantec, and Digital River doesn't like to talk about it."

Steve Alexander • 612-673-4553