CyberSource swims not only against the current but often under it. The company lacks the name recognition of an eBay Inc. (Nasdaq: EBAY) or Amazon.com, Inc. (Nasdaq: AMZN), and for good reason: It doesn't rely on front-end merchandising or brand building to expand its business. Cybersource works behind the scenes, providing transaction processing (94% of 2006 revenue) and fraud screening technology that it bundles with tax calculation, export compliance, fulfillment management and professional services. It's an attractive model that aligns revenue growth with Internet usage and e-commerce activity.
And by the looks of recent financial numbers, all is well at CyberSource. The company recorded third-quarter revenue of $26.5 million, a 53% increase compared to $17.4 million in the same quarter in 2006, which produced net income of $347,000, a 21% increase compared to third-quarter 2006's $286,000. Cash flow from operations, meanwhile, surged ahead to $5.2 million, a 53% increase compared to $3.4 million in 2006. While the small cap's 52-week range has been between $9.37 and $17.60, shares of CyberSource closed at $15.10 on Tuesday.
Investing, though, isn't about what you've done for me lately―a sentiment reflected in historical prices―it's about what you will do for me in the future, and CyberSource promises to do a lot. A few weeks ago, it completed its acquisition of Authorize.Net, a payment gateway service provider that allows merchants to accept credit cards and electronic check payments through their website, for cash and best stock valued at $662 million. Thanks to the merger, CyberSource is now one of the industry's largest providers of payment management solutions, with over 220,000 merchants―half of which comprise the Fortune 500.
Just as important, Authorize.Net is expected to be accretive to both revenue and earnings from the get-go. In a Nov. 8 statement, CyberSource management increased fourth-quarter estimates, stating it expects total revenue of between $44 million to $44.3 million and adjusted earnings of $8.2 million to $8.7 million, or $0.13 to $14 a share. Previous guidance called for revenue of $31.5 million and EPS of $0.12 a share.
Increased online spending should continue to fortify CyberSource's financials. Though growth is no longer doubling annually, it's still respectable. Jupiter Research projects that domestic online retail participation will increase by 16% in 2007, but plateau over the next few years to 10% to 15% of total retail sales. And as legitimate transaction numbers grow, so do illegitimate transaction numbers. Cybersource estimates criminals will divert approximately $3.6 billion from U.S. eCommerce in 2007 (a 20% increase over 2006) and that approximately 1.3% of accepted orders ultimately will turn out to be fraudulent, up from 1.1%. Increased fraud activity is an obvious conduit to increased fraud-prevention revenue.
Foreign markets are expected to provide another growth source. Internet penetration is roughly 68% in the United States, 52% in Australia and 36% in Europe. In less developed countries it's far less―3% in Africa, 10% in the Middle East and Asia and 14% in Latin America and the Caribbean.
Most of these underdeveloped regions are unlikely to approach U.S. penetration rates―namely because of legal, economic and political barriers―but they still provide ample opportunity. CyberSource's European operations contributed 55.1 million transactions in the third quarter of 2007, an increase of 62% over the same period last year, and approximately 19% of total transaction volume. The company is making headway into fast-growing South Asia, having recently announced that Jet Airways of India will implement an automated online risk management solution.
Look for CyberSource to continue to devote more time and energy to overseas markets. According to dhairman and CEO Bill McKiernan, CyberSource's strategy is "to expand globally by helping merchants adapt to local payment and risk requirements around the world, and vertically by deepening our solutions for specific high growth industries."
Recent price appreciation suggests investors, including the folks who follow CyberSource for a living, like what they hear. In a Nov. 9 research note, JMP Securities analyst David Scharf reiterated his "market outperform" rating and raised his target price to $20 from $16. On the same day, Johnathan Maietta at Needham & Co reiterated his "buy" rating and raised his price target to $20 from $15.
Similar sentiments were expressed last month, before completion of the Authorize.Net acquisition and new management guidance. In October, Gil Luria at Wedbush Morgan reiterated his "buy" rating and raised his target price to $18 from $16. In an accompanying research note, Luria mentioned that "continued transaction growth at Authorize.net and CyberSource points toward robust growth prospects for the merged company. The pro forma EPS estimate of the combined company has been raised from $0.48 to $0.49."
CyberSource (CYBS) is a small fish ($533 market cap), but it has proven in recent months that it has the ability to swim as well, if not better, than the big fish in roiling waters.
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