Company Spotlight - CyberSource (CYBS-NASDAQ)

  The Click Stream Keeps Flowing

February 5, 2008 - CyberSource (Nasdaq:CYBS) is one those behind-the-scenes Internet companies that most of us have used yet few have ever heard of. It provides a collection of services including e-commerce transaction processing and risk management.

Even through the difficult economic conditions a few years ago and the demise of so many online companies, CyberSource's business held up relatively well. The company moved into sustained profitability in 2004 with sales of $36.7 million, net income of $4.5 million. In 2007, the company racked up revenue of $117 million and EPS of 39 cents. That's an impressive ramp that is expected to continue for several years to come.

The transaction-based model of CyberSource is attractive because it aligns revenue growth with Internet usage and e-commerce activity. It doesn't rely on successful merchandising or building a consumer brand. The recurring revenue stream gives strong visibility to the financial picture, and because this kind of transaction-driven business scales well it can lead to very attractive profit margins. The outlook is for EPS of 62 cents this year and 75 cents in 2009.

Last year, CyberSource acquired Authorize.Net Holdings for $662 million in cash and stock. Cybersource added over 7000 customers last quarter including Borders, Air France, and La-Z-Boy. The company's total customer count is over 228,000. In 2007, transaction volume was up 45% to 1.2 billion billable transactions.

CyberSource has not been entirely immune to the dot-com woes, though. The general distaste by investors for anything Internet-related sent its stock plunging from a high above $80 in 1999 to the low-single digits for several years. At $16.63 currently, CYBS has rebounded impressively from the $2.50 area in 2003 and it's more than doubled since we wrote about it two years ago.

While CyberSource's stock price was clearly caught up in speculative fever a few years ago, business never fell off that dramatically. E-commerce is not limited to consumers shopping, either. The online transaction opportunity can span business-to-business (B2B) markets, business- and consumer-to-government markets (B2G and C2G), and even consumer-to-consumer exchanges (C2C). CyberSource also has a foothold in Asia where the company has partnered with local companies to address some huge market opportunities, including Japan's millions of wireless web users.

There is plenty of risk with a company like this. It is a volatile small-cap stock. There is intense competition in the e-commerce transaction space, though CyberSource is competing impressively as shown by the number and quality of its customers. Even so, revenue per transaction is likely to be squeezed as competition intensifies and online merchants require lower costs. But for those looking for the true dot-com business successes, CyberSource is a name worth knowing.

- James Hale