Robert Leitz on Digital River

Please enjoy Robert Leitz analysis of Digital River, a US based company offering global e-commerce solutions.

Prior to founding iolite Partners in 2011, Robert Leitz was a management consultant at KPMG Corporate Restructuring and investment analyst at Goldman Sachs’ European Special Situations Group. He later joined TPG Credit, a credit opportunities hedge fund launched in partnership with private equity firm Texas Pacific Group, as a founding member. Robert graduated from the University of St. Gallen (HSG), Switzerland, with a Masters of Science in Business Administration and Economics. He wrote his master’s thesis at Columbia University under the guidance of Prof. Eli Noam.

INVESTMENT THESIS

Digital River is a solid company in a competitive but growing industry and benefits from high scalability. It provides end-to-end global e-commerce solutions, such as online shops with integrated payment systems, and generates a substantial majority of its revenue on a client revenue-share basis. Despite a concentrated customer base and short-term contracts, the company is in a good position to benefit from the growth of online retail and some customer stickiness. Over the last five years, the company has averaged sales of $380 million and owner earnings (OCF less capex) of $80 million -a 20% margin on tangible assets of $50 million.

With a recent market cap of $540 million, the company trades at 80% cash to market cap, 130% cash and investments to market cap, 2.0x EV to owner earnings, and 6.5x market cap to owner earnings. The company recently announced a buyback program of $100 million, almost 20% of market cap. It is difficult to put a number on the shares’ fair value, as it is sensitive to the use of cash going forward. However, if the company maintains the current sustainable leverage level of 4.3x gross debt to owner earnings and keeps utilizing cash in a shareholder-friendly way (buybacks or value-adding acquisitions), the stock should return more than 15% annually over the next few years.

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