Tuesday, February 28, 2006

Online Banking Fuels Growth for DGIN

As the online banking boom rages on, Digital Insight (DGIN) continues to ring the register.

Founded in 1996, the banking solutions outsourcer runs Internet services for close to 2000 banks and 6M end users.

Digital targets an attractive niche: smaller institutions that lack the proprietary wherewithal and resources to handle their client's online needs. Without the financial muscle to build out their own technological platform, smaller outfits have no choice but to sign up with Digital Insight.

Digital Insight clearly has of room to grow, but competition has been heating up. Analysts are already slashing their top line projections, and unforseen risks -- such as security breaches -- are creeping into play.

Still, as a service enabler, DGIN presents a compelling play on the escalating adoption of e-banking, which we reasonably suspect will continue to grow by leaps and bounds as Netizens realize that if they can give Amazon (AMZN) their credit card information over the computer, the same can be given to a financial institution (remember, we had e-commerce before we had e-banking). 39 million households will bank online this year, according to Jupiter Research. That number is expected to hit 57 million by 2009. In a word, Digitial Insight is well-positioned to seize this growth.

But trends in and of themselves do not guarantee success or long term sustainability.

Digtial Insight needs to hone in on its cross-promotional endeavors, as well as develop a competitive advantage that will keep rivals -- called core processors -- at arm's length. We forecast a modest drop in revenue growth as rivals storm the castle with lower priced platforms. With negligible debt and $115M in cash stored for a rainy day, Digital Insight's ability to scale and retaliate should not be discounted.

We are initiating coverage on the stock with a hold rating.

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