E-commerce outsource provider Digital River (NASDAQ:DRIV) will report first-quarter 2007 financial results on Thursday, April 26. My prediction: smooth sailing.

What analysts say:

  • Buy, sell, or waffle? Three-quarters of the 12 analysts covering Digital River recommend it as a buy; the other three say sell.
  • Revenue. Revenue is expected to grow 13% to $88.5 million.
  • Earnings. Profits, meanwhile, are forecast to grow 6% to $0.53 per share.

What management says:
As more software publishers push their content online to download, there is opportunity for Digital River to see revenue and earnings grow by leaps and bounds. Although it has numerous partners that use its service, and while Symantec (NASDAQ:SYMC) is the largest in terms of revenue contribution, it's the potential that Digital River's relationship with Microsoft (NASDAQ:MSFT) offers that sets tongues wagging.

Fourth-quarter and full-year 2006 revenues were not what they could be simply because of the delays in PC shipments. Digital River CEO Joel Ronning said the 35% increase last year was still "especially strong, when you consider that it was also tempered by some external factors, which included the delays in PC sales due to the pending Vista launch." Now that the software is out there, there exists the opportunity to expand the Microsoft relationship beyond just the duo of Office and Vista. Ronning said "it's a massive, massive opportunity."

What management does:
While revenue has expanded along with opportunities, the costs associated with building out the business have grown as well. New employees, additional sales and marketing expenses, and generous compensation packages ate into margins throughout the year. Ronning was paid $3.7 million last year, including $1.25 million as a bonus and $2.2 million in stock options. Considering that shareholders as well were rewarded with a 140% increase in stock price in 2006, it's hard to argue with success. Of course, the SEC is now looking into Digital River's stock option awards program.

Margin

12/05

03/06

06/06

09/06

12/06

Gross

88.7%

88.5%

88.6%

88.3%

88.4%

Operating

30.3%

30%

28.9%

27.5%

26.5%

Net

25.6%

23.2%

22.6%

21.7%

19.8%
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:
Digital River continues to cement its leadership role in the provision of 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, and it is in the international arena where Digital River might make some of its biggest gains yet going forward.

For the first quarter, though, things will seem to be lagging. A rewritten contract with Symantec will provide lower transaction costs in exchange for more business, so things will get off to a slow start. The release of the Vista operating system will take some time to get moving, as the first two months of the year are considered dead time. And legal expenses from its internal stock-option review will suck about $1 million in additional costs out of the company. But with all the bad news out (assuming the SEC doesn't find any instances of fraud) and the good times just ahead, any 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 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 has a disclosure policy.