Earnings season doesn't offer a Fool a whole lot of time to listen to conference calls. With scores of companies reporting their results simultaneously, I'm hard-pressed even to read the prose versions of all these quarterly corporate report cards.
That's why I love weekends. I get two days of peace and quiet to listen in on a few of our favorite companies' calls as their management teams wax eloquent on months past and quarters yet to come. Last weekend, I had a chance to play back the call for banking software provider Digital Insight (NASDAQ:DGIN). In its second-quarter earnings report, released in prose form late last month, the company reported a 12% increase in revenues against the year-ago quarter, backed up by a 38% rise in profits per diluted share and a 41% jump in net earnings. Moreover, the company reported continuing improvement in gross margins, which increased both year over year and sequentially, hitting 58% in Q2.
Things are looking so good for Digital Insight that it decided to up its forecasts for fiscal 2005, and now predicts it will take in roughly $212.5 million in revenues, of which about $0.69 in profits should filter down to the per-share level.
So why did the shares drop 3% in response to that news? The conference call may hold the answer. During the call, management revealed several issues not addressed in the press release. For instance, it told us that end users of Digital Insight's services who have signed up for online bill pay generate four times more in revenue than end users who are banking online but still paying their bills by mail. It also reported that the quarter's 58% gross margins were essentially a function of a $500,000, high-margin licensing contract inked during the quarter, and that future gross margins should be a bit lower.
The call also addressed two points that may have accounted for the price drop. For one, the $5.5 million that the company spent on capital expenditures in Q2 was not a one-time deal; it will likely be repeated in Q3 before that number returns to the more normalized costs that we saw back in Q1. Also, the company's $6 million advance payment to CashEdge to acquire a bloc of account openings and account fundings for future Digital Insight end users won't result in revenues until 2006. Combined, those announcements promise to dampen the firm's cash flows next quarter, and that may have contributed to the mini sell-off.
But that, conversely, is good news for long-term investing Fools. Both of these short-term costs look likely to generate long-term benefits. If Mr. Market wants to use them as an excuse to give us better prices on Digital Insight's stock, let's just say "thank you" and take him up on the offer.
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Fool contributor Rich Smith does not own shares of Digital Insight, but he's giving it serious thought.
