It's been a busy couple of weeks for the online banking software industry, what with earnings reports coming out of all the major players: Online Resources
At first glance, Digital Insight's Q3 earnings release gave me a serious case of the willies. Headlined: "Digital Insight Reports 16% Increase in Third Quarter Revenue," all I could think was: "Isn't that special. But what about the profits?"
As you probably guessed, there weren't any profits -- at least not under generally accepted accounting principles. In contrast to last year's respectable $0.19-per-share haul, this year's Q3 saw DI record a GAAP loss of $0.76. The not-so-bad news is that this loss didn't stem from any failure in the business -- rather, it consisted of stock options expensing and a massive $32 million charge (about $0.95 per share, before tax) to write off goodwill related to the lending business that DI acquired in 2000. Between them, these charges sufficed to transform what would have been a 22% profits increase into a massive GAAP loss. Or so DI said.
Money talks, pro forma walks
Mind you, I've got no reason to mistrust DI. In the past, this company's management team has always seemed on the up-and-up. But why take chances? If angels fear to tread somewhere, ain't no reason for Fools to go rushing in. And if there's one space I suspect would give any reasonable angel pause, it's the lawless world of pro forma accounting.
Fortunately, Fools have no need to parse the logic behind DI's assertion that it was actually pro forma profitable last quarter -- the firm let us see for ourselves that it was cash profitable. I'm speaking, of course, of the firm's cash flow statement, which shows that in Q3 2006, it generated $21.6 million in operating cash flow, bringing its year-to-date total up to $53.2 million. Subtract from that figure a mere $12.9 million in capital expenditures, and the business has generated $40.3 million in free cash flow so far, and is on track to generate nearly $54 million by year-end.
Operating on the assumption that DI hits that $54 million target come December, I put the firm's price-to-free cash flow ratio at less than 19, which is a bit lower than the 20% annual growth rate that analysts expect the firm to achieve going forward. In my book, that seems fairly reasonable.
For a complete rundown of last quarter's results for the online banking providers, read July's column: "Online Banking Bust."
Thirteen Motley Fool CAPS players pick DI to outperform the market. One says it will underperform. Where do you stand? Join more than 12,000 fellow investors in the Fool's new stock-rating service and let your voice be heard .