SAN FRANCISCO (CBS.MW) - One chief executive sees his company capitalizing on the
nitty-gritty of electronic commerce.
Joel Ronning's view of e-business is worth a look for executives and mom-and-pops who need
extra oomph, and pronto, from their sales of (pick one): anti-virus software, Major League
baseballs, athlete-tested sport watches or online business services.
Ronning's Digital River (DRIV: news, chart, profile) has been operating electronic commerce
for large and small companies since 1994. That was when the founder of a successful
direct-mail company left the world of postage stamps and paper handouts and threw his lot in
with Minnesota-based computer servers.
had its ups and downs in the demanding
world of digital commerce, will benefit
greatly from companies that have no choice
but to outsource their online transactions to a
low-cost outfit.
"We really haven't changed our strategy in all
these years," Ronning says. "We have
32,000 customers, and all of them share one
goal, improving their online commerce with
little interruption to their main businesses."
Digital River's technology, which usually
comes in the form of a Web site, is
responsible for about 6 percent of the
revenue of its largest customers. These
clients include security software developer
Symantec (SYMC: news, chart, profile),
Major League Baseball, Motorola, Siemens
and design software maker Autodesk
(ADSK: news, chart, profile).
In an iffy period for the American economy,
Ronning says his company can play a
most-valuable-player role for executives
under pressure to squeeze more sales from
their products and services without messing
with the muck of Web site development,
hosting, product fulfillment, marketing and
customer service.
Ronning's Digital River, with 500 employees,
a $240 million stock-market value and
roughly $75 million of expected sales this
year, hopes to thrive where others, like
BroadVision (BVSN: news, chart, profile),
Open Market (DVIN: news, chart, profile)
and Beyond.com, have faltered.
Ronning has bought 11 companies or digital
platforms in the past several years. He spent
$4.1 million of common stock to buy
Beyond.com's eStores business. Ronning
says 10 of his 11 purchases have become
profitable in short periods of time, and
analysts on Wall Street agree.
"Digital River's
software segment
is far more
profitable than the
company-wide
earnings-per-share
numbers suggest,"
Prudential
Securities' Mark J. Rowen just declared in a short note. Rowen sees Digital River benefiting
from strong software sales by companies such as Symantec, which owns the Norton AntiVirus
software that consumers and companies use to protect their computers.
Ronning, like most top executives this year, has had his share of challenges. His chief financial
officer resigned for personal reasons. The company missed a first-quarter sales projection by 8
percent, leading to a steep decline in Digital River's Nasdaq-traded shares. Legal disputes over
a contract dispute in Asia and patent infringement issues led to a $2.5 million reserve charge.
"We decided to take the charge just in case, but if we're infringing, then everyone in this
business is infringing," says Ronning, whose company has seven U.S. patents in encryption
technology.
Digital River's first-quarter revenue rose 40 percent from a year ago
to $18.1 million, yet the company lost $3.5 million or 13 cents a
share. Excluding $3.5 million in charges for merger and legal
expenses, the company earned $500,000, or 2 cents a share.
Ronning says the company will generate $75 million of sales this
year, up from $57 million, and earn as between 23 cents to 25 cents
a share.
Digital River's shares in June rebounded as software companies in general caught a wave of
buying from bargain-hunters. The shares Monday, at $9, are about double where they were
two months ago.
"This is an opportunity," Ronning said on his way through San Francisco, where he was meeting
with an investment bank. "We have a model that is going to be adopted by many companies."
That model includes customer service and Web-site design and integration, two areas of major
migraine for big and small companies.
Digital River's product managers have the responsibility of increasing their customers'
same-store sales. Digital River is rewarded with a piece of that larger digital pie. The company's
Major League Baseball contract helped increase online business there by a factor of four in
2001. Ronning says baseball revenue from the Major League's assorted Web sites should
double again this year.
Digital River claims customers experience a 20 percent gain in unique visitors to Web sites. The
Eden Prairie, Minn., company uses 54 locations to perform what is known as order fulfillment,
part of the messy business of getting online goods to buyers in a timely fashion.
"We don't own the inventory but we do want to own the
responsibility for making sure something gets shipped," Ronning
says. Some 150 of Digital River's 500 employees are in customer
service. The company gladly would like the big-name appeal of
running a major retail operation, such as Amazon.com (AMZN:
news, chart, profile) does for Toys 'R' Us (TOY: news, chart,
profile).
Ronning is grateful for small customers that form the backbone of the company's business. "We
have one client doing $200,000 a month selling beads - nice business," he says. Yet the CEO
recognizes the big leap in sales will come from big companies, many of them in the technology
area. About three-quarters of Digital River's clients are in the software business.
"There's no doubt the big money is in the enterprise business," Ronning says, counting Novell,
Fujitsu, Sega and Coors Brewing as customers.
"We see more companies becoming comfortable with the idea of outsource manufacturing,
especially in the electronic area. These are companies that want to get back to their core
competencies," says Ronning, who gross profit margins are running above 80 percent. "We do
it cheaply and quickly. Nokia doesn't want to run their e-commerce, period."
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