Monday, October 12, 2009

Digital River down huge as they lose their largest client (DRIV, SYMC)

Customer concentration can really, really hurt. Worse that just losing a client is when the client says "No thanks, we can do it ourselves." This morning, e-commerce solutions provider Digital River (DRIV) announced that they're losing their largest customer, Symantec (SYMC).

From the release:

“We are surprised and deeply disappointed that Symantec has chosen to move to an internally developed system, but we remain very confident in the future of our business,” said Joel Ronning, Digital River's CEO. “While Symantec is still our largest customer, the proportion of Symantec revenues relative to our other customers has declined significantly over the past few years as our non-Symantec business has grown at an increasing rate.

In 2008, sales of products for Symantec accounted for 24.3% of Digital River revenue and sales derived from proprietary Digital River services sold to Symantec consumers accounted for 9.4% of Digital River revenue. For Digital River’s quarter ended June 30, 2009, sales of Symantec products accounted for 22.5% of revenue and related services revenues accounted for 7.5% of revenue.

Of little solace for investors was the announcement later in the release that quarterly earnings for the period ended September 30th came in at the high end of estimates.

Symantec just lost 30% of its sales and probably a higher percent of its profits, as large "up-front" costs gradually came down with Symantec and it generated a higher-than-company-average profit margin. So maybe that 40-ish percent loss of profit is why the stock is off 40-ish percent today -->> currently trading down 38% to $25 from Friday's close of 40.42.

Also unnerving is that this announcement caught the company completely off guard. That's both indicative of DRIV management taking their eye off the ball, and also a pretty horrible move on the part of Symantec. Moving Digital River's services "in-house" is a huge blow to the company's selling points. While other companies may not have the resources to follow Symantec's lead, this could at least have some downward pressure on Digital River's pricing. With 2010 earnings per share at 2.00 and no doubt about to plummet, there could be a LOT more downside for Digital River shares.

Can't say they didn't warn you - from the RISK section of their 10-k filing:

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