96.5 F
San Fernando
Thursday, Mar 28, 2024

Digital Insight Preps a $100M Stock Offering

Digital Insight Preps a $100M Stock Offering By SHELLY GARCIA Senior Reporter Digital Insight Corp. is going on a buying spree. The Calabasas-based provider of customized Internet sites for small- and mid-sized banks and other financial institutions late last month registered its intent to issue a public stock offering to fund an aggressive acquisition strategy. Digital Insight plans to offer an additional 4 million shares of its common stock, raising more than $100 million at current prices, to buy up some of its competitors. “The timing couldn’t be any better,” said Jeffery B. Baker, senior research analyst with US Bancorp Piper Jaffray. “We’ve seen competitors to Digital Insight cut their support staff and sales staff down to the point of survival because they’re trying to cut their cash burn rates. It’s a good time for Digital Insight to consolidate the industry.” The move signals not just Digital Insight’s strength in a fragmented industry, but also an anticipated surge in demand among financial services companies for online services. Once a service provided only by the largest financial institutions, those with smaller assets are increasingly seeking ways to add Internet banking to the mix of services they offer. “These mid-tier and community banks, those are the ones that are scratching their heads saying, ‘How do I implement this stuff?'” said Virginia Philipp, senior analyst for e-banking at TowerGroup, a research and consulting firm in Needham, Mass. Officials at Digital Insight noted they are in a quiet period and were unable to comment for this story. But analysts who watch the financial services technology sector point out that acquiring weaker competitors in the current market is probably the cheapest, most efficient way to grow. “The attractive part of the story is that, in many cases, they can buy customers cheaper than if they acquire those customers on their own,” said Jeff John, an analyst with SunTrust Robinson Humphrey, an investment firm in Atlanta. “Not only can you add customers for a cheaper rate, you can do it a lot more quickly.” Digital Insight toiled in the red for seven years as it built out the infrastructure it needed to sell to banks, savings and loans and credit unions. Now in the black for the first time since its founding in 1995, Digital Insight boasts a customer base of about 1,200 financial institutions, 2.4 million end users and a 12-percent market share among those banks that offer online services. With about 22 percent of consumers now conducting some form of banking business online, e-banking has not grown at the rates once expected, Philipp said. But most believe that acceptance of online banking will grow in much the same way automated teller machines once did. In a report advising investors that he expects Digital Insight to outperform the market in the coming year, Morgan Stanley analyst Michael Sherrick wrote, “We note that with nearly 30 million potential end users, Digital Insight boasts an ample base of potential revenue-generating users.” Meanwhile, interest among bank customers is increasing, regardless of the speed at which end users adopt such services. Legislation passed several years ago allows banks to expand the range of products they offer, and many have added such services as stock brokerage and insurance. Those customers who use these online services tend to be more affluent, capable of generating more revenue for the bank, but there is fierce competition for those customers, not just among other banks, but among online brokerages and other e-commerce companies. By establishing an online presence, a bank can tap into individual customer profiles and target its marketing specifically to each user, making it easier to cross-sell products. And those banks that succeed in capturing customers for several different services and products are far more likely to retain them despite intense competition from other institutions. “It’s not so much about market share,” Philipp said. “If they only check balances (online), that’s not nearly as important as getting into the attractive customer you already have and selling them stocks and mortgages. Those consumers will think many times before they take their business elsewhere.” Large banking institutions have for some time now worked to attract these customers by building an in-house Internet infrastructure. But the far greater percentage of banks and credit unions, some 9,400, are smaller institutions that, in many cases, are struggling to provide an Internet presence with limited budgets and in-house resources. Digital Insight, analysts say, offers these institutions a cost-effective method of delivering online services because of its low licensing fee – $20,000 to $40,000 and affordable monthly charges based on usage. At the same time, the company’s past efforts to build its infrastructure now allow Digital Insight to add customers without a lot of additional cost. “They have a very fixed cost platform,” said John at SunTrust. “They’ve built these data centers out, now the game is to add customers to this platform, and the marginal cost of supporting each individual customer is (a lot less than) the revenue they’re bringing in.” Digital Insight last year acquired three companies, both to bolster its customer base and to add technologies it lacked. But those acquisitions were largely made with stock shares. By using cash for its future acquisitions, Digital Insight stands to drive a better bargain than it could with stock. Analysts also point out that by adding to the number of shares outstanding, Digital Insight increases its visibility on the street. “A lot of their stock is held by a couple of institutions, and this equity offering will improve the floats, which should make it more attractive for other institutions to come in and take positions,” said Baker. Already, Digital Insight has begun to garner more attention among investors. The company’s stock price has risen sharply in recent months to the mid-$20 range from $10 to $12 in October, following a strong fourth-quarter financial report in which the company reported a 10-percent growth in revenues to $27 million and a pro forma operating profit of $0.04 per share.

Featured Articles

Related Articles