The Starting Line: Digital River goes shopping

On Monday, Digital River announced two acquisitions--Orbit Commerce and RegSoft.com--that are expected to help the company expand into the small to midsized business market.

The purchases will give Digital River another batch of customers, including Gateway and VeriSign, to add to its current roster topping 8,000. Digital River provides transaction systems for software sellers and online retailers, among others.

The company, which largely caters to software companies, also saw a surge in traffic in the last two weeks because of the Nimda virus. The virus not only swamped Digital River's servers, but also created a jump in demand from customers such as Symantec.

Digital River said it added capacity after the Nimda troubles strained its infrastructure and call centers. The company is also looking to grow its earnings and revenue. Digital River, scheduled to report its third-quarter financials Oct. 24, is expected to post a loss of 5 cents a share on sales of $13.6 million, according to First Call.

CEO Joel A. Ronning talks about what's going on.

Q: What do the two acquisitions this week do for you and how do they fit?
A: We put out a notification that we were going on an acquisition strategy a month and a half ago. Digital River has acquired about six companies to date, and these two would bring us to eight.

We found these acquisitions an accretive way to grow the business. These were two smaller versions of Digital River--two companies that were competing in the same spaces, but ran out of runway and were not being funded anymore. RegSoft was a successful and profitable operation that we liked. Orbit was focused on the manufacturing and retail division.

These were two smaller competitors of ours. In today's market conditions, there are tremendous opportunities to build a company organically or also by acquiring companies. It's an unbelievable time to be acquiring companies.

Who found who? Did you approach them or did they approach you?
We found them. We started this process last year and have profiled literally hundreds of companies. We started off with a list of 500 and narrowed it down to 50 we found interesting. Now we have 20 we are very interested in.

How many acquisitions will you make by the end of the year?
I don't know. Even though we have this strategy, we're still pretty cautious about who we want to buy. We want to make sure we're not tying some kind of anchor on the boat. A lot of it depends on what price we have to pay and what the ROI (return on investment) is going to be. It's all very dependent on the nature of the negotiations.

What have you been seeing in your business since the Sept. 11 attacks?
We have seen processes be more thoughtful. We've also seen companies that wanted to install an enterprise application decide to outsource so they could save money. The events on Sept. 11 are similar--although much more shocking to the system--to what we've seen happening over the last year and a half. There's just a general conservation--a tightening of the belt. We are getting access to opportunities today that we would not have seen a year and a half or two years ago. They would have gone to BroadVision, or a Blue Martini. Our clients just don't have the appetite for those enterprise installations anymore.

So you're just seeing more outsourcing in general?
Yes. When we look at other successful outsourcing companies (ADP, which does payroll processing), we see them do well during times of fiscal conservatism.

If you broke out your revenue by categories, what are the big categories?
Software, clearly. We've dominated that market. That's about 75 percent of our business. Manufacturing and retail distribution is the other 25 percent.

You hear a lot of software companies saying they depend on late-in-the-quarter sales and that they'll miss estimates. Has that affected you?
It doesn't seem to have affected us. Our clients--even though we know some of them are having a tough quarter--are seeing their digital business continuing to break records. What's happening is the growth of the digital business is outweighing the negative impact of the markets right now. We're seeing better traction and more velocity. More people are buying digitally today.

Let's fast-forward a few years. At what point is shrink-wrapped software going to go away?
I don't think it's going to happen for a long time. There are products that are either of a certain size, (a certain) level of complexity or (that) need so many manuals that you need a box. There's also a price issue; when someone buys a $5,000 product, they want a box. There will always be some percentage of sales in box format. Five years from now it will be a significantly smaller number than today.

How did the Nimda virus affect your business?
We, like all the major players in e-commerce, were getting millions and millions of hits from it. It put a tremendous strain on the entire industry for a week-and-a-half period. It was a tough week. At the same time, some of our major clients sell antivirus software, so they had a tremendous amount of business.

Are you affected by seasonality? Do you expect a holiday sales pop?
We will. The software business tends to be loaded toward Q4 and Q1. Seasonality isn't a huge issue for us, but it's there. We get paid as a percentage of sales and monthly hosting fees.