INITIAL RATING: We are initiating coverage of Digital River in the e-Commerce Platforms Merchant of Record segment with an MGI 360 Rating of 51 and a Neutral outlook.
OPINION: Digital River is the largest player in its core market with a broad albeit somewhat dated service offering. The company overall revenues of $400Mil are growing modestly at under 5% p.a. (MGI estimates). The revenue for the Platform biz of $330Mil is flat to down as it has been steadily losing market share to more agile competitors. The firm provides an all-in-one commerce platform including order management on a rev-share approach. Revenues are highly concentrated with a few key customers, e.g. Microsoft (25%). The lack of modularity, an outdated architecture, perceptions of high prices are all challenges that the management team needs to address. The company has attempted a re-structuring but sales of assets have not generated resources needed for a true turn-around.
The best use case for DRIV is for mid to large customers looking for fulfillment of physical and digital product mix on a global scale.
Digital River pioneered the Merchant of Record (MoR) industry. In addition to several MoR platforms the firm operates Digital River World Payments and acquired several platforms to cover the entire market from small, self-service merchants to large enterprises. The firm has a unique capability to handle a mix of physical and digital goods. Company still faces acquisition integration challenges and battles market confusion and internal competition. In 2014, after the loss of Symantec account and risks to its Microsoft relationship the company was taken private by Siris Capital.
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