Mergers, flat subscriptions sock Digital Insight's stock.VOLATILITY for many public companies is just an earnings report away. That's the lesson learned from Digital Insight Corp., one of the largest providers of Internet banking and bill-pay services, whose shares plummeted 30 percent in late July, erasing $330 million of shareholder wealth in a two-day period. Digital Insight provides a unique view into what happens when a company's Internet business model, which, similar to Netflix, is based on recurring re·cur intr.v. re·curred, re·cur·ring, re·curs 1. To happen, come up, or show up again or repeatedly. 2. To return to one's attention or memory. 3. To return in thought or discourse. revenue from online subscribers, suddenly shows signs of a slowdown. Though Digital Insight posted an 18 percent jump in second-quarter revenue, it had flat earnings and investors rushed to the exits once a key metric for the firm's online traffic turned south. Erik Randerson, the Calabasas-based firm' s director of investor relations Investor relations The process by which the corporation communicates with its investors. , admits he was surprised the stock got whacked for reporting a substantial drop in the number of new subscribers for its highly-profitable bill-pay services. Digital Insight added 66,000 online bill-pay users in the second quarter, down from an average of 125,000 over the previous three quarters. Randerson said bill payment is not slowing and the figure was an aberration for the quarter, caused by increased merger activity among small banks. "By all accounts, this earnings season has been extremely volatile and the growth companies with higher multiples--like Digital Insight--that have disappointed have really been hammered ham·mered adj. 1. Shaped or worked with a metalworker's hammer and often showing the marks of these tools: a bowl of hammered brass. 2. Slang Drunk or intoxicated. Adj. ," Randerson said. At the same time, Digital Insight said that a rise in merger and acquisition activity among its small-bank customers led to the loss of 15 bank clients, a high attrition rate Noun 1. attrition rate - the rate of shrinkage in size or number rate of attrition rate - a magnitude or frequency relative to a time unit; "they traveled at a rate of 55 miles per hour"; "the rate of change was faster than expected" . The stock market's choppiness and a shift by institutional investors Institutional Investor A non-bank person or organization that trades securities in large enough share quantities or dollar amounts that they qualify for preferential treatment and lower commissions. to large cap stocks compounded the company's stock woes. Overblown o·ver·blown v. Past participle of overblow. adj. 1. a. Done to excess; overdone: overblown decorations. b. sell-off? Before the stock took a dive, Digital Insight had been trading at a multiple of 30 times its 2006 earnings estimates as measured by First Call, a unit of Thomson Financial Thomson Financial A major provider of information, analytical tools, and consulting services to the financial community. The firm, a division of Thomson Corporation, is best known to investors for its First Call segment, which publishes consensus earnings . The high multiple meant investors had expected the company to beat estimates and also raise its guidance for the year. When that didn't happen, shares fell 30 percent to $22.11 a share, from $31.65 a share a share on July 26. Not surprisingly, two analysts immediately upgraded the stock, characterizing the sell-off as overblown. Nik Fisken, a managing director at Stephens Inc., upgraded shares to "overweight" with a price target of $36 a share. John Kraft John Kraft (born May 6, 1941) is an American politician. He is currently a member of the Democratic Party and a was candidate for Insurance Commissioner of California in the 2006 democratic primary. His occupation on the ballot was listed as Insurance Healthcare Consultant. , a research analyst at D.A. Davidson & Co., upgraded the stock to a "buy" rating from "neutral," with a price target of $35 a share. "Their valuation was high and people questioned how long they could earn 45 percent gross margins being a reseller An organization that sells hardware and software to the general public. Resellers purchase products from software publishers and hardware manufacturers. ," Fisken said, noting that Digital Insight resells the services of two large bill-pay technology companies to 1,750 small and mid-sized banks and credit unions. Bank of America
Bank of America (NYSE: BAC TYO: 8648 ) is the largest commercial bank in the United States in terms of deposits, and the largest company of its kind in the world. is the 800-pound gorilla gorilla, an ape, Gorilla gorilla, native to the lowland and mountain forests of western and central equatorial Africa. It is the largest of the apes, the males reaching a height of 5 to 6 ft (150–190 cm) with a 9-ft (144–cm) arm spread. that radically changed the sector by offering free online banking. As a result, bill-pay features have grown in importance for banks trying to lure customers. In order to compete, small banks and credit unions that can't invest in technology have turned to outsourced services by Digital Insight. The company's business model is based on long-term subscription contracts and a recurring revenue stream. Digital's clients pay the software provider user or transaction fees of roughly $1 per month for basic online banking access and another $4 per user for bill-pay services--fees that fall directly to the company's bottom line. Online banking and bill-pay may seem like a way of life for many bank customers. Still, the statistics show that two-thirds of bank customers have not adopted online services--so the potential is high. Of its 1.6 million-customer base, Digital Insight has signed up only 4.4 percent for bill-pay services, compared with 20 percent for Bank of America, said Fisken of Stephens. Still, the total number of potential bill-pay subscribers is 36.8 million. Merger activity means that not only is Digital Insight facing a shrinking base of customers, but competition could erase its once-exclusive arrangement with technology providers. One important reseller, Fidelity Information Services See Information Systems. Inc., a unit of title escrow escrow Instrument, such as a deed, money, or property, that constitutes evidence of obligations between two or more parties and is held by a third party. It is delivered by the third party only upon fulfillment of some condition. giant Fidelity National Financial Inc., announced it is rethinking its strategy of selling its services to Digital Insight. In 2004, Fidelity National bought Aurum Technology Inc., turning Fidelity into one of Digital Insight's largest competitors. Digital Insight Corp. (Nasdaq: DGIN) Stock Prices [GRAPHIC OMITTED] Quarterly Net Income (thousands) [GRAPHIC OMITTED] YEAR (Dec. 31) 2005 2004 Revenue (millions) $214 $189 Total Expenses (millions) 173.7 160.7 Operating Income (millions) 40.3 28.2 Net Income (millions) 26.5 16.7 Earnings Per Share $0.76 $0.47 SUMMARY Business: Provider of outsourced online banking and bill-payment services Headquarters: Calabasas CEO: Jeffrey Stiefler Market Cap: $815.4 million Dividend Yield: N/A Total Liabilities: $57.7 million P/E Ratio: 30.94 Long-Term Debt: $1.1 million |
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