Summary Business: Internet banking services Headquarters: Calabasas CEO: John Dorman Market Cap: $471 million Dividend Yield: N/A* Total Liabilities: $31.0 million P/E: No earnings Long-Term Debt: $3.9 million * Digital Insight does not pay dividends. If Deloitte & Touche’s Fast 50, most of the analysts covering the Internet banking sector and its own executives have it right, next year belongs to Digital Insight Corp. Naturally, you could expect the CFO of the Calabasas-based provider of Internet banking services to be optimistic (“We recently passed the 2-million end user mark,” said Kevin McDonnell, “and it can only grow.”), but with select kinds of Internet companies starting to show a profit and the niche market that Digital Insight is aiming at ripe for the taking, his optimism might make sense. Digital Insight offers outsourced Internet banking services to financial institutions for both retail and business customers. While the largest banks have done business on line for quite some time, there are still 22,000 banks, thrifts, savings and loans and credit unions with less than $10 billion in assets. Those are prime candidates for the outsourcing of Internet services. And it’s starting to make sense for larger banks who have tried to offer the services themselves. “They have started to realize it is more profitable to outsource these things,” said Jeffrey Baker, an analyst with WR Hambrecht & Co. “It’s just not a core competency for them.” Like any number of similar companies, Digital Insight has shown net losses in each of the last five years. However, revenues have grown from $1.6 million in 1996 to $54.4 million in 2000. And while net losses tripled from 1999 (when the company lost $19.5 million) to 2000 ($61.5 million), Digital Insight did acquire three companies last year, all of which are expected to help it record its first profitable quarter early in 2002. “Oh yes, they will be profitable by next year,” said Sutro & Company analyst Richard Eckert. “They have a relatively fixed cost structure, so, as they grow their revenue, more and more will go to the bottom line.” Net loss in the second quarter was $13.3 million on revenues of $22.7 million, compared to a net loss of $5.8 million on revenues of $11.1 million in the same quarter a year earlier. Digital Insight’s stock closed Aug. 17 at $17.16. While most Internet companies remain on life support, some are actually starting to make money, and analysts believe Digital Insight will soon be among them. “The competitive landscape has gotten better rather than worse,” Baker said, “and (Digital Insight) has a good product too, which always helps.” For instance, Priceline.com Inc. recently announced its first-ever profit. Others like Expedia Inc., Homestore.com Inc. and Ticketmaster are also close. One difference between Digital Insight and these companies and famous failures like eToys Inc. and Webvan Group Inc. is the former offer products or services that are information-intensive like online banking rather than something that has to be delivered to a home or office. “It’s more of a timing decision,” Eckert said. “It’s not whether people will adopt Internet banking, it’s more a question of when.” Obstacles still ahead for the sector as a whole involve Internet access to enough end-users. “You’ve got to get access to everyone’s house and it’s got to be reliable,” Eckert said. “Those are the big barriers, accessibility and reliability.” Digital Insight now has about 1,300 financial-institution clients with nearly 2 million customers. Besides a one-time setup fee that varies with client, Digital Insight collects $2 per end-user per month. At this point, a little over 80 percent of its revenue is derived from retail and business clients and the remainder from automated lending services. Digital Insight claims its existing clients have as many as 27 million customers who could become end-users. The only question is how quickly they will go on line to do their banking. “Eventually, there will widespread adoption,” Eckert said. “Will that move along fast enough to get all the revenue we expect as fast as we expect it? That’s the chicken and egg question. “It may be five years out instead of two years. That’s the only key issue.”
