It's put-up-or-shut-up time at online banking facilitator Digital Insight (NASDAQ:DGIN). On Wednesday, when reporting its Q3 2006 earnings results, the company can prove that what it described as a fluke last quarter -- a slowdown in online billpay adoption -- truly was. Or wasn't.

What analysts say:

  • Buy, sell, or waffle? A baker's dozen of analysts follow DI. Six of them rate the stock a buy now that its price has relapsed, and seven more a hold.
  • Revenues. On average, the analysts expect a report of $61.4 million in revenue on Wednesday, 15% more than last year.
  • Earnings. Profits are expected to edge that out at $0.26 per share, for a 17% rise.

What management says:
Last quarter was a bit of a head-scratcher for Digital Insight investors. On the one hand, the company matched Wall Street estimates and turned in some terrific numbers. CEO Jeff Stiefler was able to point to "healthy growth in Internet banking and bill pay," and he hinted that investors could expect continued "predictable and profitable results." On the other hand, the company also continued to see hard-fought-for customers get fished out of its revenue stream as their banks were acquired by larger banks using software from DI rivals; and online billpay adoption slackened from its past torrid pace.

For its part, even though the numbers didn't look spectacular, DI didn't back away from its contention that billpay adoption is the single most important metric for evaluating the health of its business. Rather, it termed the quarter's numbers an "anomaly," and one it expected to be proven so in Wednesday's results.

What management does:
At last report, rolling gross and net margins had both stalled and dropped a bit, which may have contributed to the panicked selling of July. In contrast, the more important (because it's the one the company has the most control over) metric of operating margins continued to march steadily upwards.

Margins %

3/05

6/05

9/05

12/05

3/06

6/06

Gross

56.1

56.6

57.4

58.0

58.0

57.7

Op.

15.7

16.3

17.3

19.0

20.5

21.3

Net

9.4

10.1

11.1

12.4

12.3

11.8

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:
As of today, Digital Insight's stock has recovered nearly all of the losses it suffered when it fell 30% in value within a few hours of reporting its Q2 results. If Wednesday's results prove that the company was correct three months ago -- if we see strong billpay adoption numbers that don't simply return to past growth levels, but perhaps even make up for the adoption shortfall of yester-quarter -- I expect the stock to move higher still.

That said, investors should be aware that the stock's resurgence over the last three months has set up at least the potential for a repeat of the July disaster. With $40 million in trailing free cash flow, and growth projected to average 18% per year over the next five years, DI sells for roughly 24% more than I'd be willing to pay for it today. In tomorrow's news, therefore, I'll be looking not just for strong billpay adoption numbers, but even greater free cash flow than this self-described "cash machine" has produced in the past.

Competitors:

  • Corillian (NASDAQ:CORI)
  • S1 (NASDAQ:SONE)
  • Jack Henry (NASDAQ:JKHY)
  • Open Solutions (NASDAQ:OPEN)
  • Online Resources (NASDAQ:ORCC)
  • Fiserv (NASDAQ:FISV)

For a complete rundown of last quarter's results for the online banking providers -- all in one shot -- read July's column: Online Banking Bust.

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Fool contributor Rich Smith owns shares of Corillian. The Fool has a disclosure policy.