When your biggest customer takes its business elsewhere,
you're in for a world of hurt.
Symantec (Nasdaq: SYMC) might not account for
all of
Digital River 's (Nasdaq: DRIV) eggs, but
breaking a quarter of your basket still leaves a pretty big
mess.
That's not good
Internet security provider Symantec decided it could
provide the same e-commerce services it currently outsources
to Digital River, and announced that it won't extend the
contract between the two companies, which expires next June.
Worse, Digital River also generated an additional 9% worth of
revenue last year from sales of proprietary services to
Symantec's consumers and dealer network; the security
specialist might want to take all of that with it as
well.
Walking on eggshells
The development highlights the risk associated with
tying up such a large portion of your business with just one
customer, supplier, or distributor. Time and again, we've
seen that when a business falters or (as occurred here) a
contract is retracted, your own operations are at risk.
Fortunately, Digital River has been working to minimize
that risk over time. In 2006, for example, 30% of its revenue
came from Symantec, while the dealer network accounted for
16% then. In the most recent quarter, those figures fell to
just 22% and 7.5%, respectively.
Still, Digital River hasn't moved fast enough. Even though
Microsoft (Nasdaq: MSFT),
Nuance Communications (Nasdaq: NUAN),
SanDisk (Nasdaq: SNDK), and even video game
maker
Electronic Arts (Nasdaq: ERTS) are all
customers, the company's efforts to provide digital downloads
of games and software have remained way too concentrated.
Stretched too thin
There can be risks in being too diverse, too.
Boeing (NYSE: BA) is an example of a company
with a
far-flung network of suppliers; its Dreamliner fiasco has
everyone reconsidering the merits of that plan. Because there
is no coordination among parts suppliers, a delay at one end
ripples through the supply chain, and we end up with a
plane years late to market.
The sell-off in Digital River's shares is expected, if not
over the top. Losing almost $600 million in its market cap
because of a potential loss of about $98 million in revenue
seems overdone. While there's rarely a one-to-one ratio in
such things, I sense opportunity here.
Chart your course
Digital River's non-Symantec-related sales grew at an
8% clip in the third quarter, well ahead of the 2% growth
experienced in the second quarter, indicating that strong
demand for its services persists. Losing Symantec will
undoubtedly hurt investors in the short run, but as a
shareholder myself, I expect Digital River to make it through
the rapids and enjoy calmer currents ahead.
Has losing Symantec dried up Digital River, or will it
keep rolling along? Tell us why below.
This article was originally published as
How to Lose 30% in One Dayon
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