Digital River to Outsource

Digital River, Inc. (DRIV - Analyst Report), a leading provider of global e-commerce solutions, announced yesterday that it will outsource a majority of its global customer service operations along with realigning certain other resources. Digital River is an example of an emerging trend known as “Software as a Service”.

The company plans to outsource its global customer service operations to Tennessee-based Sitel, a leading global business process outsourcing provider. Management stated most customer email and phone inquiries will be managed by Sitel’s customer service centers from September onwards. Sitel has more than 150 facilities worldwide. Digital River delivers software and other digital goods online to over 40,000 customers.

The company plans to eliminate 120 positions globally primarily related to the outsourcing of customer service operations. This organizational change is expected to drive efficiencies for the company beginning in the fourth quarter of 2009.

On the other hand, Digital River is becoming more market focused. It plans to add new positions, primarily to its sales and product development organizations.

Digital River is expected to report results for the second quarter on July 29, 2009 and management will throw more light on the short- and long-term financial impacts of these two actions during its earnings conference call.

Management had earlier stated that revenues should come between $95 million and $97 million in the second quarter of 2009. GAAP EPS was projected between $0.27 and $0.30 while non-GAAP EPS was forecasted between $0.39 and $0.42. Management now expects revenue and EPS to come at the high end of this guidance.

The stock has almost doubled after touching a low of $18 in the crash of November 2008. Although outsourcing will improve margins due to reduced costs, we expect margins to remain under pressure due to the initial ramp up of new customers. We maintain a HOLD on the stock ahead of the second quarter results.

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