"Vive la difference!"
So crooned investors in online banking software maker Digital Insight (NASDAQ:DGIN), in response to Wednesday's news that their company had parted ways with rivals like S1 (NASDAQ:SONE) and Corillian (NASDAQ:CORI) -- which lost money this quarter -- and Online Resources (NASDAQ:ORCC) -- which, although profitable, saw those profits plunge in comparison to last year's numbers.
In contrast its rivals, DI grew its first-quarter revenues 12% year over year, and increased its profits to $0.17 from last year's $0.16 per share. This, despite the fact that last year the firm didn't expense stock options, and this time it did.
Had DI been permitted to continue hiding the cost of its stock options program, as companies across the markets routinely did until only recently, then earnings would have come much closer to the $0.25 in pro forma profits that DI would much rather have you reading about today. Other contributors to the yawning gap between GAAP results and non-GAAP results included amortization of goodwill, "one-time" restructuring costs, and a higher tax rate than DI had originally anticipated.
This higher tax rate will have the further effect of lowering the firm's rolling net margin, because the firm netted only 10.7% of sales as profits this quarter, versus 11% one year ago. Regardless, Fools should focus on the operating margin, which better describes how the business is doing, and is less affected by such uncontrollables as the IRS. There we see that despite DI's gross margins compressing (as we've been told to expect in this industry), the firm has continued to grow in size, and this helped it to leverage its revenues to achieve an improved operating margin of 19.3% -- up 90 basis points from last year.
From a different point of view -- and the one I actually prefer, that of cash profits rather than accounting profits -- DI's quarter looks even more attractive. Free cash flow increased 31% against Q1 2005's $13.8 million, coming in at a healthy $18.1 million -- or nearly three times reported net income. Outstanding.
Enough about the trees. How's the forest looking?
Leaving aside DI for a moment, let's look at what its quarterly report has to say about the online banking software industry as a whole. CEO Jeff Stiefler observed that his company had landed four new financial institution clients during the quarter, and made a point of noting that each of these clients had previously run its online banking operations in-house. Stiefler commented that this "clearly demonstrat[es] that middle market financial institutions are increasingly gravitating toward outsourcing, in general, and Digital Insight, in particular."
I'm not sure if the decisions of four banks out of a field of several thousand can "clearly" indicate anything, but I do agree with Stiefler that it's suggestive. Let's keep an eye on this and see if it turns into a true trend.
For more Foolish musings on the online banking software providers, read:
- Fools Want to Know, With Digital Insight
- Foolish Forecast: Getting Some Digital Insight
- Rob Banks the Easy Way
- Bankers Are Bummed
Fool contributor Rich Smith owns shares of Corillian, but no shares of any other company named above.
