e-commerce outsource provider Digital River (NASDAQ:DRIV) will report second-quarter 2007 financial results on Thursday, July 26. My prediction: Calmer waters here on out.

What analysts say:

•  Buy, sell, or waffle? While the names may have changed (or maybe not), three-quarters of the 12 analysts covering Digital River recommend it as a buy just as they had last quarter, with the other three saying hold.

•  Revenues. Revenues are also expected to continue growing, rising more than 9% to $78.1 million.

•  Earnings. Profits, however, are expected to chart a new course and fall 7% to $0.38 per share.

What management says:
CEO Joel Ronning gave investors a bit of sobering news when the quarter closed at the end of last month: It would miss earnings projections by $0.06 to $0.07 for the quarter. Worse, it would miss full-year earnings by some $0.30 per share. Of course, it was analysts who had had a heady forecast for the e-commerce company, but the news sent Digital River's stock spinning like it was caught in a whirlpool, as it fell 15% in a day.

Why the earnings miss? Well, the company is heavily dependent on Symantec (NASDAQ:SYMC) for the bulk of its revenues. Delays with antivirus software introductions, along with issues with the Vista operating system from Microsoft (NASDAQ:MSFT), are no fault of its own. Yet that shows the dangers inherent in being too reliant upon a small group of customers -- when they sneeze you catch a cold.

However, it's also true that Digital River is far and away the predominant leader in the space, and it has been gobbling up smaller rivals at a hellacious pace over the past few years. So even with the anticipated stumbles, it comes as little surprise that the stock has already recovered half the ground it lost. There's no real competition on the horizon to sink this ship.

What management does:
Digital River assists companies in selling their software via download as opposed to an in-store purchase. Symantec has been a longtime customer, at one time contributing a third of the company's revenues. But as the download space has expanded, so has Digital River's predominance, although Symantec still accounts for about one-quarter of its revenues. The Microsoft deal could be large if IDC's market research turns out to be true -- that Vista will help propel double-digit PC sales for the next two years. That will help invigorate demand for software upgrades from other users, many of whom will choose the download version. With trial conversions of Office also available via the Digital River download deal, it may yet prove a fruitful relationship, although further down the river than originally anticipated.

Margin

03/06

06/06

09/06

12/06

03/07

Gross

88.5%

88.6%

88.3%

88.4%

88.6%

Operating

30%

28.9%

27.5%

26.5%

26.1%

Net

23.2%

22.6%

21.7%

19.8%

20.3%

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

One Fool says:
Digital River continues to have a full breeze in its sails with its leadership role in e-commerce solutions. The relationship with Symantec is still solid, and the Microsoft opportunity is big. It continuously signs up new customers both here and abroad -- as well as acquiring them -- and it's in the international arena where the company might make some of its biggest gains yet going forward.

For the second quarter, though, things will lag. The rewritten contract with Symantec has been moving slower than anticipated, and the release of the Vista operating system has been dead seas. With much of the bad news already factored in, any additional weakness exhibited by the stock as a result would signal a buying opportunity.

Related Foolishness:

Digital River has earned a three-star rating from Motley Fool CAPS, the 60,000-strong investor intelligence community. You can add your voice to the new stock-rating service by joining today. It's free!

Microsoft and Symantec are recommendations of Motley Fool Inside Value, where a 30-day guest pass lets you sail through all of the market-beating recommendations.

Fool contributor Rich Duprey owns shares of Digital River but does not own any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool's disclosure policy is smooth sailing.