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Founded in 1994, Digital River (NASDAQ: DRIV) has built platform that allows for digital downloads of software (yes, it was a visionary idea back then). In fact, the company now handles about half the market. But there has always been a nagging concern with Digital River; that is, customer concentration. Unfortunately, today the nightmare scenario came true -- Digital River's largest customer, Symantec (NASDAQ: SYMC), will not renew its contract (which expires on June 30th).
To get a sense of things, I checked out the 10-Q for Digital River. Basically, Symantec accounted for roughly 23.8% of revenues for Q1 of 2009. What's more, the revenues from the proprietary network of Digital River came to 8.3% of revenues.
There was also this disclosure: "If our contract with Symantec is not renewed, renegotiated or otherwise terminated, or if revenues from Symantec and Symantec-related services decline for any other reason, our revenue and our ability to sustain profitability could be materially adversely impaired."
So what will Symatec do? It plans to transition to its own home-built system. With cheaper technologies, this will probably mean improved margins.
Of course, Wall Street is definitely concerned. In today's trading, the shares of Digital River are down 38% to $25.23.
Tom Taulli is the author of various books, including The Complete M&A Handbook
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