Digital River Reports Third Quarter 2012 Financial Results

MINNEAPOLIS--(BUSINESS WIRE)--Digital River, Inc. (NASDAQ: DRIV), the revenue growth experts in global cloud commerce, reports its third quarter financial results.

“We’re pleased with both the revenue and earnings results we delivered in the third quarter. It was a busy quarter for our teams as we prepared for some exciting product launches from key clients and we executed very well throughout this period”

Third Quarter Ended Sept. 30, 2012
GAAP Results
Third quarter revenue totaled $91.7 million, compared to $95.4 million during the same period in 2011. This result exceeded management’s third quarter revenue guidance of $88 to $91 million.

Third quarter GAAP net loss was $734 thousand or $0.02 per share, which compared to GAAP net income of $5.5 million, or $0.15 per diluted share in the third quarter of 2011. These results were at the top end of management’s third quarter GAAP earnings guidance, which ranged from a loss of $0.09 to a loss of $0.02 per share.

Non-GAAP Results
Third quarter non-GAAP net income was $6.6 million, or $0.20 per diluted share. This compared to non-GAAP net income of $8.9 million, or $0.23 per diluted share, in the third quarter of 2011. These results also exceeded management’s third quarter non-GAAP earnings guidance of $0.12 to $0.18 per diluted share.

“We’re pleased with both the revenue and earnings results we delivered in the third quarter. It was a busy quarter for our teams as we prepared for some exciting product launches from key clients and we executed very well throughout this period,” said Tom Madison, Digital River’s lead director and interim CEO. “We also announced our intent to acquire LML Payment Systems. This acquisition will further strengthen our online payments and transaction processing solutions, which are showing continued rapid growth. We have a lot of work ahead of us and face some challenges, but are confident we have the right strategy and team in place to execute to our plan and deliver attractive and sustainable shareholder value over time.”

Fourth Quarter and Full Year 2012 Guidance
Management’s forward-looking financial expectations for the fourth quarter are as follows:

• Revenue, ranging from $96 to $100 million;
• GAAP EPS, ranging from $0.08 to $0.15 per diluted share, using a 17 percent tax rate; and
• Non-GAAP EPS, ranging from $0.25 to $0.31 per diluted share, using a 21 percent tax rate.

Management’s revised forward-looking financial expectations for the full year 2012 are as follows:

• Revenue, ranging from $381 to $385 million;
• GAAP EPS, ranging from $0.20 to $0.27 per diluted share, using a 17 percent tax rate; and
• Non-GAAP EPS, ranging from $0.96 to $1.01 per diluted share, using a 21 percent tax rate.

A detailed table providing a reconciliation of the company’s GAAP and non-GAAP earnings guidance estimates can be found accompanying this press release.

Digital River will hold a conference call today at 4:45 p.m. EDT to discuss third quarter financial results. A live webcast of Digital River’s earnings conference call can be accessed on the Investor Relations section of its corporate website. Alternatively, a live broadcast of the call may be heard by using conference ID #37432540 and dialing [phone]. A webcast replay of the call will be archived on Digital River’s corporate website.

About Digital River, Inc.
Digital River, Inc., the revenue growth experts in global cloud commerce, builds and manages online businesses for software and game publishers, consumer electronics manufacturers, distributors, online retailers and affiliates. Its multi-channel commerce solution, which supports both direct and indirect sales, is designed to help companies of all sizes maximize online revenues as well as reduce the costs and risks of running a global commerce operation. The company’s comprehensive platform offers site development and hosting, order management, global payments, cloud-based billing, fraud management, export controls, tax management, physical and digital product fulfillment, multi-lingual customer service, advanced reporting and strategic marketing services.

Founded in 1994, Digital River is headquartered in Minneapolis with offices across the U.S., Asia, Europe and South America. For more details about Digital River, visit the corporate website, call [phone], or follow the company on Twitter.

Non-GAAP Net Income Calculation
Digital River’s non-GAAP net income (loss) is computed by adjusting GAAP pre-tax income as reported on the company’s statement of operations by adding back amortization of acquisition-related intangibles, stock-based compensation expense, intangible impairments, unrealized investment gain or loss, restructuring costs, litigation settlement and acquisition-related costs, net of a 21 percent tax rate. Non-GAAP diluted earnings per share is calculated using the “if-converted” method with respect to the issuance of the company’s 2004 and 2010 convertible notes, which includes shares reserved upon conversion of 199,828 and 7,022,027, respectively. In computing non-GAAP diluted earnings per share, adjust non-GAAP net income to add back debt interest and issuance cost amortization expenses, net of the tax benefit, and then divide this amount by fully diluted shares outstanding. This amount, representing the fully diluted earnings computation, is selected to represent non-GAAP diluted earnings per share for each period presented. To provide further clarity, a detailed reconciliation on the comparability of the GAAP and non-GAAP data has been provided in table form following the financial statements accompanying this release.

Forward-Looking Statements
This press release contains forward-looking statements, including statements regarding the company’s anticipated future growth, including future financial performance, as well as statements containing the words “anticipates,” “believes,” “plans,” “will,” “expects,” or “guidance” and similar words. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the company, or industry results, to differ materially from those expressed or implied by such forward-looking statements. Such factors include, among others: the company’s operating history and variability of operating results; competition in the commerce market; challenges associated with international expansion; our ability to successfully complete senior management succession plan; the variability of foreign exchange rates; any breach or compromise of the company’s security systems; our ability to successfully manage our business while undertaking significant internal investments; our ability to execute upon our payments strategy and expand our business in this sector; our ability to achieve favorable tax rates in our international operations; and other risk factors referenced in the company’s public filings with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the year ended Dec. 31, 2011. The financial information contained in this release should be read in conjunction with the consolidated financial statements and notes thereto included in Digital River’s most recent reports on Form 10-K and Form 10-Q, each as it may be amended from time-to-time.

The forward-looking statements for the remainder of fiscal 2012 reflect management’s expectations as of Nov. 1, 2012. Results may be materially affected by many factors, such as changes in global conditions in the financial services markets and consumer spending, fluctuations in foreign currency rates, the rate of growth of online commerce and the Internet, progress with key partners and other factors. The guidance assumes, among other things, that there are no changes to stock-based compensation expense and anticipated tax rates. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management's analysis only as of the date hereof. The company undertakes no obligation to update these forward-looking statements to reflect events or circumstances that may arise after the date hereof.

Digital River is a registered trademark of Digital River, Inc. All other trademarks and registered trademarks are trademarks of their respective owners.

Digital River, Inc.
Third Quarter Results
(In thousands, except share data)
Subject to reclassification
Consolidated Balance Sheets	(Unaudited)
	September 30,			December 31,
	2012			2011
Assets
Current assets
Cash and cash equivalents	$	465,455		$	497,193
Short-term investments		209,543			223,349
Accounts receivable, net of allowance of $4,932 and $4,613		75,254			64,811
Deferred tax assets		8,455			8,532
Prepaid expenses and other		38,358			35,719
Total current assets		797,065			829,604
Property and equipment, net		50,656			51,537
Goodwill		282,569			281,858
Intangible assets, net of accumulated amortization of $91,264 and $85,542		13,444			18,324
Long-term investments		81,064			99,047
Deferred income taxes		24,439			21,433
Other assets		6,143			8,973
Total assets	$	1,255,380		$	1,310,776
Liabilities and stockholders' equity
Current liabilities
Accounts payable	$	181,551		$	243,410
Accrued payroll		10,424			17,523
Deferred revenue		12,912			8,633
Other accrued liabilities		52,010			42,577
Total current liabilities		256,897			312,143
Non-current liabilities
Convertible senior notes		353,805			353,805
Other liabilities		15,883			12,556
Total non-current liabilities		369,688			366,361
Total liabilities		626,585			678,504
Stockholders' equity
Preferred stock, $.01 par value; 5,000,000 shares authorized; no shares issued or outstanding		-			-
Common stock, $.01 par value; 120,000,000 shares authorized; 48,848,429 and 47,248,765 shares issued		488			472
Treasury stock at cost; 13,317,730 and 11,741,310 shares		(364,845	)		(340,946	)
Additional paid-in capital		726,721			708,941
Retained earnings		275,972			271,769
Accumulated other comprehensive loss		(9,541	)		(7,964	)
Stockholders' equity		628,795			632,272
Total liabilities and stockholders' equity	$	1,255,380		$	1,310,776

Digital River, Inc.
Third Quarter Results
(Unaudited, in thousands, except per share amounts)
Subject to reclassification
Consolidated Statements of Operations
	Three months ended						Nine months ended
	September 30,						September 30,
	2012			2011			2012			2011
Revenue	$	91,670		$	95,411		$	284,887		$	286,116
Costs and expenses (exclusive of depreciation and amortization expense shown separately below):
Direct cost of services		2,974			3,663			9,671			11,682
Network and infrastructure		13,414			12,017			39,103			37,106
Sales and marketing		37,954			40,535			120,798			117,733
Product research and development		15,677			16,781			47,096			50,507
General and administrative		14,309			9,741			38,831			31,364
Depreciation and amortization		4,969			5,693			15,258			16,657
Amortization of acquisition-related intangibles		1,709			2,184			5,301			6,511
Total costs and expenses		91,006			90,614			276,058			271,560
Income from operations		664			4,797			8,829			14,556
Interest income		773			1,565			2,908			4,793
Interest expense		(2,262	)		(2,264	)		(6,756	)		(6,764	)
Other income (expense), net		(606	)		(511	)		127			27
Income (loss) before income taxes		(1,431	)		3,587			5,108			12,612
Income tax expense (benefit)		(697	)		(1,931	)		905			(216	)
Net income (loss)	$	(734	)	$	5,518		$	4,203		$	12,828
Net income (loss) per share - basic	$	(0.02	)	$	0.15		$	0.13		$	0.34
Net income (loss) per share - diluted	$	(0.02	)	$	0.15		$	0.13		$	0.34
Shares used in per share calculation - basic		32,685			37,294			33,347			37,416
Shares used in per share calculation - diluted		32,685			37,799			33,579			38,177
Calculation of GAAP Diluted Net Income (Loss) Per Share
	Three months ended						Nine months ended
	September 30,						September 30,
	2012			2011			2012			2011
GAAP net income (loss)	$	(734	)	$	5,518		$	4,203		$	12,828
Add back debt interest expense and issuance cost amortization, net of tax benefit		-			20			-			59
Adjusted net income (loss) for GAAP EPS calculation	$	(734	)	$	5,538		$	4,203		$	12,887
Net income (loss) per share - diluted	$	(0.02	)	$	0.15		$	0.13		$	0.34
Shares used in per share calculation - diluted		32,685			37,799			33,579			38,177

Digital River, Inc.
Third Quarter Results
(Unaudited, in thousands)
Subject to reclassification
Consolidated Statements of Cash Flows
	Nine months ended
	September 30,
	2012			2011
Operating Activities:
Net income	$	4,203		$	12,828
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Amortization of acquisition-related intangibles		5,301			6,511
Provision for doubtful accounts		1,349			916
Depreciation and amortization		15,258			16,657
Debt issuance cost amortization		1,481			1,492
Loss on sale of equipment		39			-
Stock-based compensation expense		18,255			16,235
Excess tax benefits from stock-based compensation		(129	)		(1,517	)
Deferred and other income taxes		(4,325	)		1,121
Change in operating assets and liabilities (net of acquisitions):
Accounts receivable		(11,539	)		(5,342	)
Prepaid and other assets		(7,362	)		651
Accounts payable		(62,586	)		(9,212	)
Deferred revenue		9,094			(1,198	)
Income tax payable		5,771			(5,525	)
Other accrued liabilities		846			(28,562	)
Net cash provided by (used in) operating activities		(24,344	)		5,055
Investing Activities:
Purchases of investments		(95,776	)		(207,790	)
Sales of investments		122,391			172,288
Cash paid for cost method investments		-			(10,000	)
Purchases of equipment and capitalized software		(14,394	)		(17,744	)
Net cash provided by (used in) investing activities		12,221			(63,246	)
Financing Activities:
Debt issuance costs		-			(342	)
Exercise of stock options		1,522			365
Sales of common stock under employee stock purchase plan		1,300			1,251
Repurchase of common stock		(20,242	)		(50,008	)
Repurchase of restricted stock to satisfy tax withholding obligation		(3,657	)		(5,905	)
Excess tax benefits from stock-based compensation		129			1,517
Net cash used in financing activities		(20,948	)		(53,122	)
Effect of exchange rate changes on cash		1,333			3,348
Net decrease in cash and cash equivalents		(31,738	)		(107,965	)
Cash and cash equivalents, beginning of period		497,193			565,086
Cash and cash equivalents, end of period	$	465,455		$	457,121
Cash paid for interest on convertible senior notes	$	3,560		$	3,560
Cash paid for income taxes	$	2,314		$	3,361

Digital River, Inc.
GAAP to non-GAAP Reconciliations
(Unaudited, in thousands, except per share amounts)
UTILIZING 21% EFFECTIVE INCOME TAX RATE
										Twelve months
	Three months ended									ended
	March 31,		June 30,		September 30,			December 31,		December 31,
	2011		2011		2011			2011		2011
GAAP pre-tax income	$	8,885	$	140	$	3,587		$	2,999	$	15,611
Add back amortization of acquisition-related intangibles		2,122		2,205		2,184			11,529		18,040
Add back stock-based compensation expense		4,955		5,731		5,549			5,879		22,114
Add back unrealized investment gain/loss		-		-		-			1,995		1,995
Subtotal		15,962		8,076		11,320			22,402		57,760
Income tax expense @ 21%		3,352		1,696		2,377			4,705		12,130
Non-GAAP net income		12,610		6,380		8,943			17,697		45,630
Add back debt interest expense and issuance cost amortization, net of tax benefit		1,420		20		1,413			1,413		5,659
Adjusted net income for non-GAAP EPS calculation	$	14,030	$	6,400	$	10,356		$	19,110	$	51,289
Non-GAAP net income per share - diluted	$	0.31	$	0.17	$	0.23		$	0.45	$	1.15
Shares used in per share calculation - diluted		45,276		38,181		44,821			42,207		44,532
										Nine months
	Three months ended									ended
	March 31,		June 30,		September 30,					September 30,
	2012		2012		2012					2012
GAAP pre-tax income (loss)	$	5,777	$	762	$	(1,431	)			$	5,108
Add back amortization of acquisition-related intangibles		1,849		1,743		1,709					5,301
Add back stock-based compensation expense		5,961		6,231		6,063					18,255
Add back restructuring related costs		395		49		73					517
Add back litigation settlement related costs		-		-		750					750
Add back acquisition related costs		-		-		622					622
Add back unrealized investment loss		-		-		627					627
Subtotal		13,982		8,785		8,413					31,180
Income tax expense @ 21%		2,936		1,845		1,767					6,548
Non-GAAP net income		11,046		6,940		6,646					24,632
Add back debt interest expense and issuance cost amortization, net of tax benefit		1,409		1,412		1,414					4,235
Adjusted net income for non-GAAP EPS calculation	$	12,455	$	8,352	$	8,060				$	28,867
Non-GAAP net income per share - diluted	$	0.30	$	0.20	$	0.20				$	0.71
Shares used in per share calculation - diluted		41,032		40,783		40,172					40,801
Breakdown of stock-based compensation expense
										Nine months
	Three months ended									ended
	March 31,		June 30,		September 30,					September 30,
	2012		2012		2012					2012
Direct cost of services	$	60	$	58	$	26				$	144
Network and infrastructure		364		368		408					1,140
Sales and marketing		2,168		2,129		1,949					6,246
Product research and development		735		953		999					2,687
General and administrative		2,634		2,723		2,681					8,038
Total	$	5,961	$	6,231	$	6,063				$	18,255

Digital River, Inc.
Non-GAAP Guidance
(Unaudited, in millions except per share amounts)
Revenue Guidance Table
	2011 Actual
													Twelve months
	Three months ended												ended
	March 31,			June 30,			September 30,			December 31,			December 31,
	2011			2011			2011			2011			2011
Commerce	$	74.6		$	70.1		$	72.5		$	89.6		$	306.8
Support Business		23.6			22.4			22.9			22.4			91.3
Total Revenue	$	98.2		$	92.5		$	95.4		$	112.0		$	398.1
	2012 Actual
													Nine months
	Three months ended												ended
	March 31,			June 30,			September 30,						September 30,
	2012			2012			2012						2012
Commerce	$	82.1		$	71.3		$	71.7					$	225.1
Support Business		20.3			19.5			20.0						59.8
Total Revenue	$	102.4		$	90.8		$	91.7					$	284.9
	2012 Guidance
	Q4 2012						Full Year 2012
	Low Guidance			High Guidance			Low Guidance			High Guidance
Commerce	$	77.6		$	81.2		$	302.8		$	306.3
Support Business		18.4			18.8			78.1			78.6
Total Expected Revenue	$	96.0		$	100.0		$	380.9		$	384.9
Non-GAAP Guidance Reconciliation
	Q4 2012						Full Year 2012
	Low Guidance			High Guidance			Low Guidance			High Guidance
Expected GAAP net income per share - diluted	$	0.08		$	0.15		$	0.20		$	0.27
Add back amortization of acquisition-related costs, net of tax		0.04			0.04			0.16			0.16
Add back stock-based compensation expense, net of tax		0.15			0.15			0.58			0.58
Add back restructuring related costs, net of tax		-			-			0.01			0.01
Add back litigation settlement related costs, net of tax		-			-			0.02			0.02
Add back acquisition related costs, net of tax		-			-			0.02			0.02
Add back unrealized investment loss, net of tax		-			-			0.02			0.02
Convertible debt dilution impact, net of tax		(0.02	)		(0.02	)		(0.04	)		(0.05	)
Tax Variability		-			(0.01	)		(0.01	)		(0.02	)
Expected non-GAAP diluted net income per share	$	0.25		$	0.31		$	0.96		$	1.01