Foolish Forecast: Getting Some Digital Insight

Want to know what's happening at online banking facilitator Digital Insight (Nasdaq: DGIN)? We'll get the full skinny tomorrow, when the company reports Q1 2006 results after close of trading. In the meantime, let's take a look at a few facts that will help put the numbers in context.

What analysts say:

• Buy, sell, or waffle? Twelve analysts follow DI. Of these, three rate the stock a buy, and nine more a hold.
• Revenues. Analysts expect DI to report 11% revenue growth tomorrow, to $57.4 million.
• Earnings. Profits are expected to rocket 32% to $0.25 per share.

What management says:
DI's management is a bit more conservative in its outlook than the above numbers suggest, predicting only $57.1 million in sales and $0.24 to $0.25 in profits in its last earnings report. But you can't really blame the analysts for going DI one better. After all, the company has beaten Wall Street's estimates in each of the last five quarters.

DI also made clear something that you can almost never figure out from the analyst estimates posted on Yahoo! -- the predicted profits number that everyone will be focusing on tomorrow is actually a non-GAAP, or pro forma, number. Under generally accepted accounting principles, DI is only looking for $0.15 to $0.19 per share in profits for Q1 2006. The difference between the GAAP and pro forma numbers boils down to the cost of amortizing goodwill, taking charges for non-cash restructuring costs, and expensing stock options.

What management does:
DI's business continues to grow in size, giving it additional economies of scale and expanding its margins. Over the last 18 months, rolling gross and operating margins have both risen. The rolling net margin from September 2004 was still benefiting from the aftereffects of a large tax credit taken in Q4 2003. If you ignore it and focus on the last five quarters' worth of net results, you'll see that net profitability is also improving quite nicely.

Margins %	9/04	12/04	3/05	6/05	9/05	12/05
Gross	55	55.4	56.1	56.6	57.4	58
Op.	14.9	14.9	15.6	16.3	17.3	19
Net	26.6	8.9	9.4	10.1	11.1	12.4

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

One Fool says:
If price were no object, DG would be one of my favorite companies in the public markets. However, with just under $40 million in trailing free cash flow and a market price of $1.3 billion, the company appears valued at a premium-priced 33 times trailing free cash flow.

To justify paying that price, I'd want DI to continue growing profits at the better-than-30% annual rate it has managed over the last five years. But with analysts projecting closer to 20% compound growth over the next five, I don't see myself as a buyer just yet.

Competitors:

• S1 (Nasdaq: SONE)
• Jack Henry (Nasdaq: JKHY)
• Open Solutions (Nasdaq: OPEN)
• Online Resources (Nasdaq: ORCC)
• Fiserv (Nasdaq: FISV)
• Fundtech (Nasdaq: FNDT)

Fool contributor Rich Smith does not own shares of any company named above.