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Friday, July 28, 2006

Color on quarter: Digital River (DRIV)

Couple of firms are out positive on Digital River (NASDAQ:DRIV) following results and guidance announced last night:

* Piper Jaffray notes Digital River had solid Q2 results highlighted by 39% revenue growth. DRIV continues to experience strong revenue growth driven by broadband adoption and increasing migration of software publisher online. The focus of the call, however, was on DRIV's comments that it has secured "significant incremental business." Firm believes one of these clients is Microsoft (DRIV indicated one partner could be a 10% partner in 2007). While DRIV will spend incremental dollars to ramp up these new major relationships in 2006, they have raised their 2007 revenue growth assumptions and expect solid operating leverage in 2007, and believe their estimates will likely prove conservative. Firm believes DRIV remains one of the most attractive stocks in their universe and believes that increased visibility into the new relationships and the diversification of DRIV's business model away from Symantec should provide for multiple expansion. Reiterates Outperform rating and $56 price target (14x 2007 EBITDA).

* Deutsche Bank says they maintain their Buy rating on shares of DRIV post in-line 2Q results. Firm thinks there could be significant client wins ahead as infrastructure and integration has already begun ahead of the launch . There is still plenty of existing business to be had with existing customers as well (Symantec). Shares are off 5% in aftermarket trading to $38, with concerns about 3Q guidance (lower tax rate), which they believe is unwarranted. Firm remains buyers as shares are currently trading at 20x 2007E EPS, vs. the e-commerce group trading at 23x 2007E EPS.

While guidance nudged up a bit again ($305mn vs. firm's $301mn estimate for 2006), they do think the major opportunity lies in new customer wins and international expansion at Digital River. On the 2006 EPS front, the company guided to $1.74, vs. our $1.73 estimate previously. As such, firm's investment thesis remains in tact, they continue to believe that the potential for e-commerce outsourcing deals (both new and existing), in addition to continued e-commerce/broadband penetration, favors Digital River over the next several years.

For the first time, the company talked about new significant business they have won or high expectation to win, both on its release and the conference call. While the firm believes in the short term (next two quarters) the company will likely incur higher operating expenses to build out the core infrastructure to support more business, these new clients should provide additional diversification (outside of AV) and further validates the value proposition at Digital River. Price tgt remains at $58.

Notablecalls: I think the 2pt sell-off we saw in DRIV in after mkt trading was just plain wrong. I expect this one to be squeezed higher today

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