When your biggest customer takes its business elsewhere, you're in for a world of hurt. Symantec (Nasdaq: SYMC) might not account for all of Digital River's (Nasdaq: DRIV) eggs, but breaking a quarter of your basket still leaves a pretty big mess.
That's not good
Internet security provider Symantec decided it could provide the same e-commerce services it currently outsources to Digital River, and announced that it won't extend the contract between the two companies, which expires next June. Worse, Digital River also generated an additional 9% worth of revenue last year from sales of proprietary services to Symantec's consumers and dealer network; the security specialist might want to take all of that with it as well.
Walking on eggshells
The development highlights the risk associated with tying up such a large portion of your business with just one customer, supplier, or distributor. Time and again, we've seen that when a business falters or (as occurred here) a contract is retracted, your own operations are at risk.
Fortunately, Digital River has been working to minimize that risk over time. In 2006, for example, 30% of its revenue came from Symantec, while the dealer network accounted for 16% then. In the most recent quarter, those figures fell to just 22% and 7.5%, respectively.
Still, Digital River hasn't moved fast enough. Even though Microsoft (Nasdaq: MSFT), Nuance Communications (Nasdaq: NUAN), SanDisk (Nasdaq: SNDK), and even video game maker Electronic Arts (Nasdaq: ERTS) are all customers, the company's efforts to provide digital downloads of games and software have remained way too concentrated.
Stretched too thin
There can be risks in being too diverse, too. Boeing (NYSE: BA) is an example of a company with a far-flung network of suppliers; its Dreamliner fiasco has everyone reconsidering the merits of that plan. Because there is no coordination among parts suppliers, a delay at one end ripples through the supply chain, and we end up with a plane years late to market.
The sell-off in Digital River's shares is expected, if not over the top. Losing almost $600 million in its market cap because of a potential loss of about $98 million in revenue seems overdone. While there's rarely a one-to-one ratio in such things, I sense opportunity here.
Chart your course
Digital River's non-Symantec-related sales grew at an 8% clip in the third quarter, well ahead of the 2% growth experienced in the second quarter, indicating that strong demand for its services persists. Losing Symantec will undoubtedly hurt investors in the short run, but as a shareholder myself, I expect Digital River to make it through the rapids and enjoy calmer currents ahead.
Has losing Symantec dried up Digital River, or will it keep rolling along? Tell us why below.
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