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CYBERSOURCE CORP : Payment Transaction Firm Profits From G

26 août 200821:35

Investor's Business Daily
Payment Transaction Firm Profits From Growth Of Online Buying
Friday August 22, 6:07 pm ET
Kevin Harlin

Retailers are bracing for a slowing economy and tight-fisted shoppers. But U.S. consumers are still buying, particularly online.

Electronic payment processor CyberSource (NasdaqGS:CYBS - News) is supplementing that growth with new business in faster-growing markets, including India and China.

So while some retailers report choppy sales, CyberSource is gaining customers both in the U.S. and abroad. It's reporting double-digit sales and earnings growth, and predicting more of the same.

"Our business is really much more diverse than what's captured in those reports," said Bill McKiernan, chairman and chief executive.

Mountain View, Calif.-based CyberSource processes payments and provides security, tax calculation or other services for about 238,000 different merchants and nonprofits. It processed 449 million transactions in the second quarter, up 67% from a year ago, thanks to organic growth and a major acquisition.

Transaction Growth

E-commerce in the U.S., excluding travel, totaled $174.5 billion in 2007, up about 21% from the year before, according to Forrester Research. The market tracking firm expects nearly a 17% jump in 2008, to $204 billion.

So the rate of growth is slowing. But Forrester still expects online retailers to add more than $30 billion a year in sales in each of the next five years. By 2012, Forrester expects nontravel-related online sales to equal 11% of total spending, from 6% in 2007.

"The reality is, there's a channel shift, and consumers are in fact spending dollars online that had previously been spent in stores," Forrester analyst Sucharita Mulpuru wrote in a market report.

The notion that much of the online increase will come at the expense of brick-and-mortar sales doesn't concern CyberSource. Its business is primarily online transactions.

It also does much of its business with airlines, not captured by Forrester's numbers. It counts JetBlue Airways (NasdaqGS:JBLU - News), Air France, and British Airways among its customers.

Most e-commerce trackers also miss business-to-business sales and transactions for universities and other not-for-profits -- key pieces of CyberSource's operations.

CyberSource was founded in 1994 as online software seller Software.net. The payment process support business was spun off in 1997 as Internet Commerce Services Corp., which became CyberSource. It went public in 1999.

Business on the Internet is global. CyberSource processed transactions in 73 different currencies in the last quarter, up from 68 in the first quarter.

Of total gross revenue, 39% came from processing payments. That's primarily for merchants within the United States.

Outside the U.S., the company provides a host of security screening and other transaction support services. It doesn't yet underwrite merchants -- that is, process their transactions -- outside the U.S. But the company says it is in talks with a potential bank partner in Europe and is working on a pilot program now. Analysts expect an announcement soon.

"So the idea is we become much more of a one-stop shop in Europe, as we are in the U.S.," McKiernan said.

Longer-term, CyberSource is also looking for partners to help it expand in Asia.

In the second quarter, the company's revenue climbed 143% to $55.7 million.

Earnings per share more than doubled to 16 cents, excluding extraordinary items and stock-based compensation expenses.

After the quarter, the company increased its 2008 guidance. It now expects year-end revenue of between $220 million and $225 million, up $5 million from previous guidance. EPS for the year, excluding stock options, should come in between 62 and 64 cents, the company says.

Analysts surveyed by Thomson Reuters expect 64 cents this year and 76 cents the next.

Wedbush Morgan Securities analyst Gil Luria wrote in a client note that CyberSource should be able to continue growing revenue by 20% and EPS by 30%, "even in a tougher economic environment."

He thinks growth overseas will be a big part of that.

In the second quarter, for instance, European and India-based merchants accounted for 87.8 million transactions, a 90% jump from a year ago. That's about 20% of total volume. But those transactions account for only 7% of CyberSource's revenue.

New Customers

The company added 26,000 new customers in the quarter. But the net gain came to about 1,000 customers after some regular customer churn and a reseller that purged thousands of inactive merchants from its rolls.

McKiernan says the impact on revenue was negligible.

In the fourth quarter, the company closed on the $662 million purchase of Authorize.net, which caters to smaller mom-and-pop merchants. Also last year, CyberSource got out of an online auction payment business, which had been a drag on earnings.

Analysts say the key now for CyberSource is to execute cleanly and take advantage of the tail wind of shoppers moving online.

"It's a very leverageable business," said Gary Prestopino, a Barrington Research analyst who owns shares of the company. "It's very simple. The more transactions they put over the network, the more profitable they become."

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