Wednesday, July 26, 2006

Color on quarter: Digital Insight (DGIN)

- Digital Insight (NASDAQ:DGIN) will be on the casualty list today as the company last night failed to beat & raise. Also, subs number was way below analyst ests.

* JP Morgan notes DGIN mgmt maintained their FY06 $243-245M and $1.05-1.07 proforma guidance, even with rev upside in 2Q. 3Q guidance of $61-61.5M and $0.26-0.27 is below the Street consensus of $62/$0.27 EPS, likely pressuring DGIN share price today.

DGIN added just 66K bill pay subs in the qtr, well below firm's 125K estimate, and couldn't explain the variance. DGIN monthly rev per customer of $2.33 was below estimates for $2.35 as bill pay shortfall could not offset ongoing online banking pricing pressure. Banking sub adds of 211K were above 190K est.

Although DGIN continues to execute well, uncontrollable factors such as bank customer MandA can reduce revenue growth via lost subscribers. Firm is more perplexed by the bill pay customer shortfall, which may be a one quarter anomaly, but with shares richly priced at 30X FY06 EPS, we likely see the stock decline today. Maintains Neutral.

* Merrill Lynch notes that following DGIN's 2Q06 results and conference call, they think investors will focus on what looks like a slowdown in online bill payment adoption. DGIN only added 66k new online bill payment uses in 2Q vs. an avg. of 125k over the prior three qtrs. Competitor Online Resources (ORCC) also experienced a slowdown while bill payment stats at large banks were generally solid in the qtr.

At this point, the firm doesn't have a great explanation for the slowdown at DGIN and ORCC. Perhaps it's an anomaly; maybe large banks are taking customers from small banks; maybe biller direct is gaining share vs. bank centric models. Nevertheless, they think the slowdown along with mixed financial results will keep DGIN shares range bound in the near-term, especially considering the stock's premium multiple.

* D.A. Davidson notes that sisappointingly, DGIN lost six Internet banking contracts, net, in the quarter, (15 were lost to merger activity). 211,000 new IB users adds was mediocre, while 66,000 new bill pay adds was poor. Clearly client losses account for most of the shortfall, however, seasonality appears to be playing a more substantial role.

Expects investors in the near term will focus on the negatives; lending, bill pay growth, and bank M&A. However, DGIN is sheltered from significant impact given its large client base, recurring revenue, and newer product partnership strategy. Firm would not be sellers into today's likely weakness.

Maintains NEUTRAL rating, but adjusting price target from $37 to $35, which represents 27x 2007 EPS estimate (or 25x excluding cash) and an EV/2007 EBITDA multiple of 13x.

Notablecalls: I would not be surprised to see DGIN stock down 10% today. With this rich valuation the co will have to do better than just half analyst est of sub adds. But don't get me wrong, I like the co. I just happen to think the stock is expensive.

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