Digital River Inc. (NASDAQ: DRIV) announced Monday morning that it would extend the deadline for Microsoft Corp. (NASDAQ: MSFT) in its decision to extend the expiration date of the Microsoft Operations Digital Distribution Agreement. The extension will be from December 1, 2014, to December 19, 2014.
This is not the first time that this has happened, but the risk that Digital River faces is incredibly real for the amount of business that it does with Microsoft. 24/7 Wall St. went to Digital River’s 2013 Annual Report (10-K) filed with the U.S. Securities and Exchange Commission (SEC) from earlier in 2014. When we started searching Microsoft and contracts, there is a lot to the story.
Digital River said in its cautionary statement to its annual report:
We are subject to a number of risks, some of which may be similar to those of other companies of similar size in our industry, including rapid technological changes, competition, customer concentration, failure to successfully integrate acquisitions, adverse government regulations, failure to manage international activities, income we may not realize from our Microsoft relationship and loss of key individuals.
As far as what the company said regarding this situation with Microsoft having happened before:
On November 22, 2013, we received written notice from Microsoft Corporation (“Microsoft”) that Microsoft had exercised its right under the Third Omnibus Amendment to the Microsoft Operations Digital Distribution Agreement (the “Third Omnibus Amendment”) to extend the expiration date of the Microsoft Operations Digital Distribution Agreement to March 1, 2015. Pursuant to the Digital Distribution Agreement, we build, host and manage the Microsoft Store, an e-commerce store that supports the sale and fulfillment of Microsoft and third party software as well as consumer electronics products to customers throughout the world, and provide additional e-commerce services to Microsoft.
Digital River further detailed its relationship with Microsoft in the risk factors segment:
The termination of our e-commerce agreement with Microsoft may materially adversely affect our business, financial condition or results of operations and stock price. Sales of products for one client, Microsoft, accounted for approximately 32.5% of our revenue in 2013. In addition, a limited number of other software and physical goods clients contribute a large portion of our annual revenue. If any one of these key contracts is not renewed or otherwise terminates, or if revenues from these clients decline for any other reason (such as competitive developments), our revenue would decline and our ability to sustain profitability would be impaired. If our contract with Microsoft is renegotiated, not renewed, or is otherwise terminated, or if revenues from Microsoft decline for any other reason, our revenue and our ability to sustain profitability could be materially adversely impaired.
Shares of Digital River were down about 25% at $19.14 with three hours left in trading. The stock has a consensus analyst price target of $22.57 and a 52-week trading range of $13.61 to $25.88. Shares of Microsoft were down over 1% at $47.87. Microsoft has a market cap of roughly $394 billion compared to Digital River, which has a market cap of $569 million.