Earnings drop sinks Digital River shares

  • Article by: STEVE ALEXANDER
  • Star Tribune
  • August 2, 2012 - 9:33 AM

Shares of e-commerce firm Digital River Inc. dove 20 percent Wednesday, a day after the firm reported a 31 percent drop in second-quarter earnings.

The Minnetonka-based firm blamed a flat PC market (which hurt Digital River's online software sales) and a decision to accept lower profit margins in order to get more online sales contracts from Microsoft, which accounts for about 30 percent of Digital River's revenue.

"Business was running along pretty much as expected until the last few weeks of the second quarter, when we saw a more pronounced slowdown," CEO Joel Ronning told analysts in a conference call Tuesday. "We've not seen these trends change."

Digital River earned $200,000 in the second quarter, down from $291,000 a year earlier. But it missed on revenue, which at $90.8 million was 3 percent less than analysts had been expecting. The big stock decline also reflected Digital River's uneven financial performance over the past year, one analyst said.

"The PC industry is flat and consumer spending has been down. But it also comes down to execution, and that's been subpar," said Daniel Ives, an analyst at FBR Capital Markets in New York. "Digital River continues to be a show-me story."

The company said it lowered full-year earnings projections in the belief that the PC market won't get much better in the second half. That would be a major change, since the second half is usually boosted by back-to-school and holiday sales. The firm projected adjusted earnings for the year would range from 96 cents to $1.08 per share, compared with its previous guidance of $1.20 to $1.28 per share.

However, one of the biggest unknowns for Digital River is whether Microsoft's pending Windows 8 operating system will be successful, and thus boost software sales.

Test versions of Windows 8 have received mixed reviews. Its technology has been praised, but some question how many consumers will want an operating system that works best with touch screens that most PC owners don't yet have.

Windows 8 "is a big unknown," said Stefan Schulz, the chief financial officer, on the analyst conference call.

Analyst Ives agreed.

"Even moderate success of Windows 8 would translate into improved top-line growth for Digital River," Ives said. "The next six months are going to be key for the company because investors want to see if there will be a business pick-up from back-to-school, the holidays and Windows 8."

There was some good news for Digital River in the second quarter. Because the year-ago quarter benefited from one-time gains, Digital River actually beat analysts' expectations on adjusted earnings that factor out one-time events. Adjusted earnings were 20 cents a share vs. analyst expectations of 18 cents. The stock closed at $14.22 Wednesday, down $3.57.

Steve Alexander • 612-673-4553

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