CORPORATE FOCUS—Shares Bounce as Tech Firm Turns the Cash-Flow Corner

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Summary


Business:

Internet banking services


Headquarters:

Calabasas


CEO:

John Dorman


Market Cap:

$489.6 million Dividend Yield: N/A*


Total Liabilities:

$41.1 million P/E Ratio: N/A*


Long-Term Debt:

$4.8 million

* Digital Insight has no earnings and does not pay dividends.

Fueled by a market that remains largely untapped and an aggressive buying spree that has cut into the ranks of its competitors, shares of Digital Insight Corp. (Nasdaq: DGIN) keep climbing.

The Calabasas-based provider of Internet-based banking services projects a 72 percent increase in 2001 revenues. And despite the rapid run-up, Digital Insight has avoided the grow-at-all-costs methods of its Internet brethren, increasing its client base while decreasing its losses in the process.

“Basically, in the third quarter, we stopped burning cash,” said Kevin McDonnell, the chief financial officer. He attributed the improvement to revenue growth and reduced costs due to better integration of technologies from previously acquired companies.

Digital Insight reported a net loss of $9.9 million (32 cents per diluted share) for the third quarter ended Sept. 30, compared with a loss of $14.3 million (53 cents) in the like year-earlier quarter. Revenues were $24.5 million vs. $16.4 million in the third quarter of 2000.

After a $9.3 million amortization charge for the quarter, most of which is attributed to last year’s acquisitions of two smaller competitors, earnings before income taxes, depreciation and amortization were $1.9 million.

The market responded by bumping the stock to $16.81 a share on Oct. 25, the day third quarter earnings were announced. The stock was trading at $16.90 late last week, making it one of the few local Internet stocks that has gained ground since the beginning of the year.

In addition to selling hardware and software systems to an institution, Digital Insight operates the system as well, collecting service fees from the institutions.

With this model, Digital Insight targets small to mid-range financial institutions, like credit unions and community banks, that are less likely to develop the necessary service technology in-house. Their 1,150 clients range from start-up credit unions to established local institutions like IndyMac Bancorp Inc. and East West Bancorp.

“Close to 90 percent (of the larger institutions) either have a vendor or an in-house division, so it’s hard to sell into that market,” said David Easthope, an analyst for Friedman Billings Ramsey & Co. He estimated that about half of Digital Insight’s 20,000-institution target market has yet to provide on-line banking services, providing opportunities for companies in what is still a fragmented sector.

Competitors include Internet banking companies such as Atlanta-based S1 Corp., whose revenues are about three times Digital Insight’s, as well as McLean, Va.-based Online Resources Corp. But for the most part, analysts view the market as ripe for consolidation.

“You’ve got a lot of vendors in this space going after a fixed number of potential customers,” said Jeff John, an analyst for SunTrust Robinson Humphrey. “We’re really starting to see a separation between the good, the bad and the ugly.”

Digital Insight has done its part, completing its merger with nFront Inc. in February 2000 and acquiring smaller competitors 1View and ATA last year.

But while swallowing competitors has spurred growth, consolidation on the client side by mid-sized financial institutions could threaten the future customer base. McDonnell estimates that Digital Insight loses five to 10 clients per quarter. “The other side is that three or four will be acquired by another customer (of ours),” said McDonnell.

H & R; Block Financial Advisors equity analyst Tim Witt believes that consolidation and economic threats are more than offset by an increased number of people using Internet-based banking. While 9 percent of Digital Insight’s potential end users use online banking services, the rate is double for users of institutions that have been with Digital Insight for more than three years, according McDonnell.

Witt believes that the company’s aggressive growth projections $26 million in fourth quarter 2001, $140 million for fiscal year 2002 are realistic. “Ninety percent of that could be just from existing customers,” said Witt.

Meantime, McDonnell takes comfort in being part of a company that may outlast the bursting of the Internet bubble. “We’re above our IPO,” said McDonnell of the company’s $15 offer price. “There’s not too many people that can say that.”

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