When you're growing internationally and adding major new clients at home, it's easy to get excited about future prospects. So it is for e-commerce service provider Digital River
For many years now, Symantec
The company sets up storefronts for companies that want to offer downloads of software over the Internet. When you want to download Symantec virus protection to your computer, you're actually using Digital River software and services to do so. With the Microsoft deal, Digital River established the software giant's interface for delivering the Vista operating system, as well as getting the upgrades from Windows XP to Vista out to customers. Considering these early months of the year are typically some of the slowest for OS upgrades, there should be greater returns coming in the future.
Online gaming will also be a future strong avenue for growth for the company, and although it hasn't yet signed a contract, game maker Electronic Arts
Yet Digital River has also been rewarding its executives quite handsomely for achieving these results. CEO Joel Ronning, for example, made $3.7 million in total compensation last year, only $250,000 of which was his salary. Some $2.2 million came in stock option awards. Digital River has been generous for a long time in doling out options, and the SEC is still investigating its options award programs. The company has allocated half a million dollars so far toward complying with the SEC probe, and its operating cash flow numbers have taken a hit as a result. So while revenue outstripped analyst forecasts for the quarter, earnings came in below expectations and full-year guidance is also below forecasts.
Stock-based compensation took $8.5 million out of operating cash, a $7 million increase over the year before. While the company's ability to generate free cash flow still remains prodigious -- $48 million this quarter compared to $36 million last year -- stock options continue to account for an overly large position.
As the leading e-commerce provider, Digital River's ability to maintain its top-dog status does not seem to be in question. It has a great capacity to bring major new customers on board, and hopes to announce several over the next few months. The Microsoft pact holds the potential to be a large, recurring revenue stream for the company, and online gaming should open up a new front. Yet as a shareholder of Digital River, I would also hope that it could at least temper its enthusiasm for doling out stock options to halt both the dilutive effects and operating impact such grants impose.
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Electronic Arts is a Stock Advisor recommendation.