Digital River to Survive Surprise Symantec Defection

When Symantec informed Digital River, a manager of online storefronts for more than 40,000 companies, that it would no longer be needing its services, Digital River’s shares took a precipitous plunge of as much as 41 percent yesterday.

It was the sharpest drop the company’s shares had taken in seven and a half years — the sort of seven-year itch no public company wishes to experience.

As is often the case, however, the market seems to have overreacted. Even though Symantec was Digital River’s largest customer, accounting for 30 percent of sales in the quarter ended June 30 compared with 33.7 percent in the same period a year earlier, the spurned company will endure, perhaps even prosper.

Digital River has plenty of other customers, and it seems to be cultivating a robust consumer-electronics niche. Symantec’s defection hurts Digital River, but it isn’t fatal. The Symantec-related share of Digital River’s overall revenue and earnings has been declining, and the company has been looking to lessen its reliance on the security-software vendor. It will have to scramble to expedite the necessary repositioning, but Digital River will find healthy and growing substitutes for Symantec’s business.

Many observers were shocked that the Symantec defection caught Digital River, not to mention practically all the market analysts that follow both companies, completely by surprise.

Said Digital River CEO Joel Ronning:

“Until last Friday, we had no notification Symantec was developing their own internal system . . . . (At a meeting Friday, Symantec) “informed us they recently completed a multiyear effort to develop an internal solution for these services.”

Symantec CFO James Beer said on a conference call that the eCommerce business through Digital River accounted for about 36% of Symantec’s consumer revenue for the fiscal year ended in April. He believed Symantec’s net consumer revenue will now increase because it won’t be paying fees to Digital River, though he noted operating expenses will rise because Symantec will incur the cost of running its own online-sales platform.

It seems an odd move. One would think that the outsourced approach would be less costly, all things considered, than an internal solution, which will require ongoing maintenance and support. There’s also the risk that the transition won’t go that smoothly. It could be an instance where Symantec is penny wise and pound foolish.

It’s possible other factors were behind the move, but it’s too early to offer an educated guess as to what those might be.

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