Digital River Reports Third Quarter 2012 Financial Results

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

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 +1 (408) 427-3861. 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 +1 952-253-1234, 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  
 

Contacts

Digital River, Inc.
Investor Relations Contact:
Ed Merritt, 952-225-3362
Vice President, Investor Relations, Treasury
investorrelations@digitalriver.com
or
Media Relations Contact:
Gerri Dyrek, 952-225-3719
Group Vice President, Corporate Communications
gdyrek@digitalriver.com

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Contacts

Digital River, Inc.
Investor Relations Contact:
Ed Merritt, 952-225-3362
Vice President, Investor Relations, Treasury
investorrelations@digitalriver.com
or
Media Relations Contact:
Gerri Dyrek, 952-225-3719
Group Vice President, Corporate Communications
gdyrek@digitalriver.com