Digital River Reports Third Quarter 2012 Financial Results

  Digital River Reports Third Quarter 2012 Financial Results

Business Wire

MINNEAPOLIS -- November 01, 2012

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
Thirdquarter 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 fullydiluted 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         75,254            64,811
$4,932 and $4,613
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            13,444            18,324
amortization of $91,264 and $85,542
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                488               472
47,248,765 shares issued
Treasury stock at cost; 13,317,730 and           (364,845  )       (340,946  )
11,741,310 shares
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            2,974          3,663          9,671           11,682
services
Network and               13,414         12,017         39,103          37,106
infrastructure
Sales and marketing       37,954         40,535         120,798         117,733
Product research          15,677         16,781         47,096          50,507
and development
General and               14,309         9,741          38,831          31,364
administrative
Depreciation and          4,969          5,693          15,258          16,657
amortization
Amortization of
acquisition-related      1,709        2,184        5,301         6,511   
intangibles
Total costs and          91,006       90,614       276,058       271,560 
expenses
Income from              664          4,797        8,829         14,556  
operations
Interest income           773            1,565          2,908           4,793
Interest expense          (2,262 )       (2,264 )       (6,756  )       (6,764  )
Other income             (606   )      (511   )      127           27      
(expense), net
Income (loss)             (1,431 )       3,587          5,108           12,612
before income taxes
Income tax expense       (697   )      (1,931 )      905           (216    )
(benefit)
Net income (loss)       $ (734   )     $ 5,518       $ 4,203        $ 12,828  
                                                                      
Net income (loss)       $ (0.02  )     $ 0.15        $ 0.13         $ 0.34    
per share - basic
Net income (loss)       $ (0.02  )     $ 0.15        $ 0.13         $ 0.34    
per share - diluted
Shares used in per
share calculation -       32,685         37,294         33,347          37,416
basic
Shares used in per
share calculation -       32,685         37,799         33,579          38,177
diluted
                                                                      
                                                                      
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         $ (734   )     $ 5,518        $ 4,203         $ 12,828
(loss)
Add back debt
interest expense
and issuance cost        -            20           -             59      
amortization, net
of tax benefit
Adjusted net income
(loss) for GAAP EPS     $ (734   )     $ 5,538       $ 4,203        $ 12,887  
calculation
                                                                      
Net income (loss)       $ (0.02  )     $ 0.15        $ 0.13         $ 0.34    
per share - diluted
Shares used in per
share calculation -       32,685         37,799         33,579          38,177
diluted
                                                                                


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                 5,301           6,511
intangibles
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                (129    )       (1,517   )
compensation
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           (24,344 )      5,055    
activities
                                                                  
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             (14,394 )      (17,744  )
software
Net cash provided by (used in) investing           12,221        (63,246  )
activities
                                                                  
Financing Activities:
Debt issuance costs                                 -               (342     )
Exercise of stock options                           1,522           365
Sales of common stock under employee stock          1,300           1,251
purchase plan
Repurchase of common stock                          (20,242 )       (50,008  )
Repurchase of restricted stock to satisfy tax       (3,657  )       (5,905   )
withholding obligation
Excess tax benefits from stock-based               129           1,517    
compensation
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             497,193         565,086
period
                                                                 
Cash and cash equivalents, end of period          $ 465,455      $ 457,121  
                                                                 
Cash paid for interest on convertible senior      $ 3,560        $ 3,560    
notes
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        June 30,     September      December     December
                        31,                       30,            31,          31,
                        2011         2011         2011           2011         2011
                                                                              
GAAP pre-tax income     $ 8,885      $ 140        $ 3,587        $ 2,999      $  15,611
Add back
amortization of           2,122        2,205        2,184          11,529        18,040
acquisition-related
intangibles
Add back
stock-based               4,955        5,731        5,549          5,879         22,114
compensation
expense
Add back unrealized
investment               -           -           -            1,995        1,995
gain/loss
Subtotal                  15,962       8,076        11,320         22,402        57,760
Income tax expense       3,352       1,696       2,377        4,705        12,130
@ 21%
Non-GAAP net income      12,610      6,380       8,943        17,697       45,630
                                                                                 
Add back debt
interest expense
and issuance cost        1,420       20          1,413        1,413        5,659
amortization, net
of tax benefit
Adjusted net income
for non-GAAP EPS        $ 14,030     $ 6,400      $ 10,356      $ 19,110     $  51,289
calculation
                                                                              
Non-GAAP net income     $ 0.31       $ 0.17       $ 0.23        $ 0.45       $  1.15
per share - diluted
                                                                              
Shares used in per
share calculation -       45,276       38,181       44,821         42,207        44,532
diluted
                                                                              
                                                                              Nine
                                                                              months
                        Three months ended                                    ended
                        March        June 30,     September                   September
                        31,                       30,                         30,
                        2012         2012         2012                        2012
GAAP pre-tax income     $ 5,777      $ 762        $ (1,431 )                  $  5,108
(loss)
Add back
amortization of           1,849        1,743        1,709                        5,301
acquisition-related
intangibles
Add back
stock-based               5,961        6,231        6,063                        18,255
compensation
expense
Add back
restructuring             395          49           73                           517
related costs
Add back litigation
settlement related        -            -            750                          750
costs
Add back
acquisition related       -            -            622                          622
costs
Add back unrealized      -           -           627                        627
investment loss
Subtotal                  13,982       8,785        8,413                        31,180
Income tax expense       2,936       1,845       1,767                      6,548
@ 21%
Non-GAAP net income      11,046      6,940       6,646                      24,632
                                                                                 
Add back debt
interest expense
and issuance cost        1,409       1,412       1,414                      4,235
amortization, net
of tax benefit
Adjusted net income
for non-GAAP EPS        $ 12,455     $ 8,352      $ 8,060                    $  28,867
calculation
                                                                              
Non-GAAP net income     $ 0.30       $ 0.20       $ 0.20                     $  0.71
per share - diluted
                                                                              
Shares used in per
share calculation -       41,032       40,783       40,172                       40,801
diluted
                                                                              
                                                                              
Breakdown of
stock-based
compensation
expense
                                                                              Nine
                                                                              months
                        Three months ended                                    ended
                        March        June 30,     September                   September
                        31,                       30,                         30,
                        2012         2012         2012                        2012
Direct cost of          $ 60         $ 58         $ 26                        $  144
services
Network and               364          368          408                          1,140
infrastructure
Sales and marketing       2,168        2,129        1,949                        6,246
Product research          735          953          999                          2,687
and development
General and              2,634       2,723       2,681                      8,038
administrative
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     December      December
                                                    30,           31,           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                   September
                                                    30,                         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           High          Low           High
                        Guidance      Guidance      Guidance      Guidance
Commerce                $ 77.6        $ 81.2        $ 302.8       $ 306.3
Support Business         18.4        18.8        78.1        78.6  
Total Expected          $ 96.0       $ 100.0      $ 380.9      $ 384.9 
Revenue
                                                                                
                                                                                
Non-GAAP Guidance
Reconciliation
                        Q4 2012                     Full Year 2012
                        Low           High          Low           High
                        Guidance      Guidance      Guidance      Guidance
Expected GAAP net
income per share -      $ 0.08        $ 0.15        $ 0.20        $ 0.27
diluted
Add back
amortization of           0.04          0.04          0.16          0.16
acquisition-related
costs, net of tax
Add back
stock-based               0.15          0.15          0.58          0.58
compensation
expense, net of tax
Add back
restructuring             -             -             0.01          0.01
related costs, net
of tax
Add back litigation
settlement related        -             -             0.02          0.02
costs, net of tax
Add back
acquisition related       -             -             0.02          0.02
costs, net of tax
Add back unrealized
investment loss,          -             -             0.02          0.02
net of tax
Convertible debt
dilution impact,          (0.02 )       (0.02 )       (0.04 )       (0.05 )
net of tax
Tax Variability          -           (0.01 )      (0.01 )      (0.02 )
Expected non-GAAP
diluted net income      $ 0.25       $ 0.31       $ 0.96       $ 1.01  
per share
                                                                                

Contact:

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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