When Taking E-Commerce In-House, A Penny Saved Might Be 2.96 Pennies Earned

When 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."

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