On Oct. 26, e-commerce outsourcing provider Digital River (NASDAQ:DRIV) released Q3 2006 earnings for the period ended Sept. 30, 2006.

  • Inspiring revenue growth was dulled by shrinking net margins and runaway share dilution. On a pro forma basis, discounting amortization of intangibles and stock-based compensation expenses, EPS topped $0.41, 32% over the year-ago total.
  • Digital River runs a lean balance sheet, with less debt than cash and a very favorable receivables-to-payables ratio. Lightweight operations like this one often tend to grow very quickly.
  • Excellent operations let the company nearly triple capital expenses and still grow free cash flow by more than 50%.

(Figures in thousands, except per-share data)

Income Statement Highlights

Avg. Est.

Q3 2006

Q3 2005

Change

Sales

$74,000

$75,337

$53,179

41.7%

Net Profit

--

$14,788

$12,358

19.7%

EPS

$0.38*

$0.32**

$0.29**

10.3%

Diluted Shares

45,666

41,972

8.8%
*On a pro forma basis.
**Calculated using GAAP net profit.

Get back to basics with a look at the income statement.

Margin Checkup

Q3 2006

Q3 2005

Change*

Gross Margin**

87.16%

88.66%

(1.50)

Operating Margin

19.33%

29.21%

(9.88)

Net Margin

19.63%

23.24%

(3.61)
*Expressed in percentage points.
**Includes network and infrastructure costs.

Margins are the earnings engine. See how they work.

Balance Sheet Highlights

Assets

Q3 2006

Q3 2005

Change

Cash + ST Invest.

$576,319.0

$355,285.0

62.2%

Accounts Rec.

$39,698.0

$25,540.0

55.4%


Liabilities

Q3 2006

Q3 2005

Change

Accounts Payable

$128,082.0

$91,983.0

39.2%

Long-Term Debt

$195,000.0

$195,000.0

0.0%


Learn the ways of the balance sheet.

Cash Flow Highlights

YTD 2006

YTD 2006

Change

Cash From Ops.

$40,710.0

$24,819.2

64.0%

Capital Expenditures

$3,663.0

$1,043.3

251.1%

Free Cash Flow

$37,047.0

$23,775.9

55.8%


Find out why Fools always follow the money.

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At the time of publication, Fool contributor Anders Bylund had positions in none of these companies. Fool rules are here.