E-commerce outsourcing provider Digital River (NASDAQ:DRIV) will report Q4 2006 financial results on Thursday, Feb. 8. Let's see how strong the current will be.

What analysts say:

  • Buy, sell, or waffle? Of the 12 analysts covering Digital River, eight say buy, and four say hold.
  • Revenues. Sales are forecast to sail away at close to a 34% clip, to $82.33 million.
  • Earnings. Earnings are expected to jump 31%, to $0.46 per share.

What management says:
Digital River builds and personalizes websites for its customers. It hosts their websites and services their transactions, from order-taking and order fulfillment to fraud protection, security, customer service, and integration with back-end systems. Its largest customer to date has been Symantec (NASDAQ:SYMC), which provides about 30% of all of Digital River's trailing $286 million in revenue. The company recently renegotiated its contract with Symantec, which had some people worried because it gave the software provider a more "competitive" pricing structure, even though it would drive more incremental transactions to Digital River.

Those worrywarts might be reconsidering in light of Digital River's announcement that it will be working with Microsoft (NASDAQ:MSFT) to digitally deliver its new Vista operating system and the Office 2007 suite of products. In addition to managing the online transactions, payment processing, and downloads of the products, Digital River is also providing customer support and fraud prevention services.

What management does:
While management has done a fair job of maintaining its gross profits, the effects of expensing stock options have taken a whack at net margins. Management has been pretty generous in granting options to CEO Joel Ronning and other executives, and in the last quarter alone, the company's share count grew by nearly 9% from the year before. Those options chickens, though, may come home to roost if the shareholder lawsuits or SEC investigations prove some prior options were backdated.

Margin

09/05

12/05

03/06

06/06

09/06

Gross

88.8%

88.7%

88.5%

88.6%

88.3%

Operating

29.2%

30.3%

30.0%

28.9%

27.5%

Net

23.9%

24.7%

23.2%

22.6%

21.7%
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:
Even with a stock-option mess facing it, Digital River is poised to continue growing, so long as no fraud was involved in the backdating. If it is found to have engaged in shady practices, any fallout from having to restate its financials ought to be temporary, and shouldn't be a drag on the company going forward.

Digital River still has a firm relationship with Symantec, and though it will be getting less money per transaction, it ought to be getting more total transactions to further boost revenues from the deal. That will have little impact on this quarterly report, but it will be something Fools will want to watch in the future. Of course, the expansion of the Microsoft pact should drive additional revenues to the company, though there is some concern about Microsoft's timing of its OS release: These first two quarters of the calendar year are usually considered "dead," so any juicing of revenues won't begin to show up until the second half of the year.

With full-year growth in earnings expected to come in north of 40% this fiscal year, Digital River's trailing P/E ratio of 34 -- more than double its industry and sector -- may seem pricey in absolute terms. But it's still cheap when looked at relative to potential. Furthermore, a forward P/E of 20 stacked up against a long-term growth rate of 25% means Digital River may still have some clear sailing ahead.

Competitors:

  • Akamai (NASDAQ:AKAM)
  • Electronic Data Systems (NYSE:EDS)
  • Macrovision (NASDAQ:MVSN)
  • ValueClick (NASDAQ:VCLK)

Related Foolishness:

Digital River has earned a three-star rating from Motley Fool CAPS, the new 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, while Akamai is a Rule Breakers pick.

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 has a disclosure policy.