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TWST: Would you start us off with a brief introduction to Digital
Insight, an overview of the company?
Mr. Dorman: Digital Insight is the market leader in providing
technology services that enable financial institutions '
specifically banks, credit unions and savings and loans ' to
serve their customers over the Internet. We provide our services
exclusively on an outsourced basis, meaning that we host the
technology for our clients; we are the network that connects our
client financial institutions to their customers over the
Internet. Everything their customers do over the Internet runs
through one of our secure data centers and networks, which are
connected in an online, real-time, secure fashion back to the
banks' core accounting systems and back-office systems for
conducting secure financial transactions. We have approximately
1,600 financial institution clients throughout the US. We serve
the medium and small size financial institutions commonly called
'regional and community financial institutions,' about 18,000
financial institutions in the US. The best way to define that
market segment is that it's all the financial institutions in the
US except for the top 50 banks, such as Bank of America or Wells
Fargo Bank. These very large institutions generally look to
license components of technology and integrate their own
solutions in-house rather than outsource them to a service
provider like Digital Insight. Our core products are Internet
home banking for consumers, including bill payment, bill
presentment and other types of bill payment services. We also
offer Internet business banking or cash management for our banks'
commercial customers. Further, we offer online lending with
instant decision capabilities so our clients can sell loans
directly to their consumer customers over the Internet and
generate an instant automated decision of that loan. TWST: Given the economic backdrop, what would you have
anticipated as the fallout from a slow, if not bad economic
environment together with a slowdown in IT spending? What would
you have anticipated as its impact, and what has been the real
impact?
Mr. Dorman: In general, what we anticipated and the real impact
have been consistent; we haven't been terribly surprised by the
environment. Because our business model features long-term
contracts and recurring-revenue streams, our business has been
remarkably insensitive to the sluggish economy and the downturn.
More than 92% of our revenues are recurring service fees, and
those service fees are on long-term contracts, typically four to
five years in term. The slowdown in spending really has not
markedly affected us; however, it does somewhat affect the new
sales environment. Generally speaking, new sales don't affect our
near-term revenue growth, because the bulk of our revenues for
any given year are driven by the contracts currently in place.
That gives us a lot of forward visibility and an ability to
adjust our outlook as we go forward. Consequently, we have come
through this environment very strong. We've sustained high
growth. Our latest quarter, which we reported July 25, had 41%
year-over-year revenue growth and over a 200% year-over-year
increase in cash operating earnings. So it's been a very strong
continued performance for us. As we reported with our first
quarter results, we had a minor impact to our lending business,
which accounts for approximately 12% of total revenue. The
lending division was the only area of our recurring business that
was notably impacted by the economy, and we did a slight
adjustment to forward guidance. We didn't get a surprise to
earnings, but we did a slight adjustment, about 3%, to forward
revenue guidance just for this year only, and we've left 2003
guidance unchanged. So relative to most companies, we have been
able to come through pretty much unscathed. The reason the
slowdown in IT spending hasn't affected us that much is that our
business model is designed deliberately so that for our clients
the decision to connect to Digital Insight is not a major capital
expenditure for them, unlike Internet software license
businesses. We are typically charging anywhere from $20,000 to
$100,000 for installation, The average implementation fee is
about $30,000-$40,000 ' less than the cost of purchasing a single
ATM machine ' yet for that cost they are getting the full
installation of the entire Internet channel to serve all of their
customers. Our revenues come more in the form of ongoing
recurring service fees that are sort of on a pay-as-you-go basis.
The more end users our clients have online, the more per-user
fees they pay us; further, the more activity the end users
conduct in the form of online payments, more transaction fees are
generated. This gives us growth from our existing customer base
without those customers having to make a significant capital-
expenditure purchase decision. That's insulated us, to a great
degree, from the slowdown in IT spending.
Tickers included in this excerpt: JOHN DORMAN - DIGITAL INSIGHT
For more information call (212) 952 7400. The
Wall Street Transcript does not endorse any of the comments made by interviewees, and does
not make stock recommendations.
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