When Taking E-Commerce In-House, A Penny Saved Might Be 2.96 Pennies Earned
Written by Evan SchumanWhen Symantec this month announced that it was cutting its long-term deal with Digital River and taking its E-Commerce operations in-house, the vendor’s CFO gave an unusually detailed peek behind the spreadsheet curtains. In short—a bad term to use with a CFO—he pointed out that accounting rules see a dollar of E-Commerce revenue very differently depending on whether or not the workers making it happen are drawing a salary or benefits from you.
“Our E-Commerce business processed through Digital River accounted for $650 million, or 36 percent of our consumer revenue in fiscal 2009. As compensation for their work, we paid Digital River approximately $95 million. These fees were classified as contra revenue. Thus, as a result of taking this E-Commerce business in-house, you’ll see our consumer revenue increase, driven by the elimination of this contra revenue,” Symantec CFO James Beer said. “Conversely, the cost of running our own E-Commerce platform will be classified primarily in operating expenses with some amounts flowing through cost of goods sold. Therefore, operating expenses and cost of goods sold will both rise year-over-year.”
I know it sounds dry, but I truly encourage you to stay with this a little longer. The gymnastics these poor E-Commerce dollars have to go through is fascinating.
Continuing with CFO Beer, whom we are quoting verbatim—and in its entirety—from the transcript of an October 12 investor conference call: “During FY09, consumer margins were negatively impacted by approximately one percentage point due to operating expenses related to this project. As disclosed in our 10-K, our consumer operating margin was 53 percent in FY09, but would have been 54 percent if we had not been investing in our new E-Commerce capability. We expect revenue to increase by $5 million for the remainder of fiscal year 2010 and we expect revenue to increase in the range of $90 to $110 million in fiscal year 2011.”
Please note that this is not being attributed to a new product line or new feature. These are primarily ramifications of the new way these sales are going to be recorded, now that E-Commerce is shifting from one hand to the other.
“We believe that earnings per share will decrease by four cents in the back half of fiscal year 2010 as we gradually ramp customers through an orderly and phased transition, while beginning to depreciate the investment that we have made in building our E-Commerce platform. We believe the impact to earnings per share will be neutral for fiscal year 2011. However, we expect the impact to earnings per share to be accretive in the December 2010 quarter. Over time, we expect to increase earnings per share in two ways. First, we will capture the differential between what we have traditionally paid Digital River and the ongoing cost of operating our own E-Commerce platform. And second, as we scale our online business, we will grow the top line as a result of leveraging our new in-house E-Commerce capability.”
-Marc
October 22nd, 2009 at 9:33 am
No surprises here. The contra revenue has shifted to lift their revenue line and it’s taken them 18 months+ to build out the capability. This also shouldn’t surprise anyone from the outsourcing side. With big companies, too much success means that someone will want to bring it in-house. Symantec is doing what many other large tech companies have done. Outsource to learn how to do it, then once it’s successful bring it inside.
October 23rd, 2009 at 10:31 pm
Sorry, I guess my accounting degree is pretty old, but, is what I am hearing is that they were spending money for the service at the same time they were developing something, so they can now drop the outside thing? Like there will not be any support costs now that it is in-house?
Contra-Revenue? I used to call that Expense. Yikes.
November 4th, 2009 at 2:49 pm
Symantec outsourced to Digital River for 11 years. They didn’t exactly use Digital River as a test bed. The really sleazy thing is how Symantec sneaked around to set this up. They didn’t have to do that to a longtime partner. Absolutely uncalled for. Wasn’t like Digital River was going to retaliate. They have other customers watching to see how they handle their largest.
Symantec took e-commerce in house because more and more of its sales were subscription renewals, which are harder and harder to come by (given that ISPs are giving away antivirus). Symantec wanted more control. Part of the problem was they were reticent to give Digital River more power to influence sales/marketing. Symantec will have to spend more to generate new sales, regardless of who’s processing transactions.
November 4th, 2009 at 2:59 pm
As for the accounting question, Symantec netted Digital River’s fees out of the sales it took in solely to avoid depressing gross margin with e-commerce sales. The gross margin on software sales is as close to 100% as you can get. If Symantec had to account for gross sales through Digital River, then run the vendor’s 10-12% cut through cost of sales, then e-commerce growth would have had a visibly negative margin effect (bad for the Symantec stock price).
Digital River’s sales for Symantec had been losing share of total Symantec sales for many years. Due to revenue declines at 100% margin, the net accounting method proved to have a visibly negative margin effect.
February 22nd, 2010 at 11:27 am
Randle – why so bitter? do you work for Digital River or another outsourcer? seems like a legitmate, thoughtful move by Symantec. more commpanies should consider this approach … it is wise and prudent.