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DG Reports Third Quarter 2012 Results


DG Reports Third Quarter 2012 Results

Third Quarter Revenue Increases 11% to $93.8 Million

DALLAS, TX -- (Marketwire) -- 11/08/12 -- DG(R) (NASDAQ: DGIT), the world's leading ad management and distribution platform, today reported financial results for the third quarter of 2012. Consolidated revenue for the three months ended September 30, 2012 increased 11% to $93.8 million, compared to $84.6 million in the same period of 2011. DG's third quarter loss from continuing operations, which includes a goodwill impairment charge related to the online segment of $208.2 million, was $219.7 million, or $7.96 per diluted share, compared to a loss of $2.7 million, or $0.10 per diluted share, in the year earlier period. Third quarter Adjusted EBITDA was $27.6 million, compared to $30.7 million in the third quarter of 2011.

"In the short term, we saw improvement of the online business this quarter, continued increased shift towards HD in TV and greater opportunities to help our clients make the move to video across all screens," noted Neil Nguyen, President and CEO of Digital Generation. "It is clear from conversations with large advertisers that video convergence is a disruptive force that is now gaining acceptance and momentum with DG uniquely positioned to benefit. But it is also clear that we need to stay focused and execute with even more urgency to overcome current trends."

In July 2012, we announced that our Board of Directors was undergoing a strategic review of the feasibility and relative merits of various financial strategies for the Company, which may include partnerships, strategic business model alternatives, a sale or other transaction. In connection therewith, we engaged Goldman Sachs to assist us in exploring strategic alternatives. The Board established a Special Committee composed of independent directors who are exercising the full power of the Board regarding, and are controlling, the Company's strategic alternatives process. The strategic review process underway by the Special Committee is continuing and we do not intend to disclose developments in this process until such time as the Board of Directors approves or has a transaction or transactions to recommend to stockholders, or otherwise deems further disclosure appropriate.

Third quarter financial highlights inclu de:


 
--  DG generated consolidated revenue in the quarter of $93.8 million, an
    increase of 11% over the same period a year ago.
    
    
--  The television segment generated revenue of $60.1 million, a decrease
    of 1% from the year earlier period. HD advertising revenue increased
    15% to $36.5 million from the year earlier period.
    
    
--  The online segment generated revenue of $33.7 million, an increase of
    40% from the year earlier period, due to DG's acquisitions of
    MediaMind and EyeWonder during the 3rd quarter of 2011.
    
    
--  As of September 30, 2012, DG reported $68.6 million of cash and
    short-term investments and reported $455.0 million outstanding under
    its long-term credit facility.

Online Segment Goodwill Charge

During the third quarter, the Company conducted a goodwill impairment test of our online reporting unit. We estimated the fair value of the online reporting unit using a weighting of fair values derived from an income approach and market approach. Upon estimating the fair value of the online unit's goodwill, we determined it was less than its carrying value. As a result, DG's third quarter operating results include a $208.2 million non-cash charge before income taxes related to the write-down of our online reporting unit's goodwill.

Third Quarter 2012 Financial Results Webcast

The Company's third quarter conference call will be broadcast live on the Internet at 5:00 p.m. ET on November 8, 2012. The webcast is open to the general public and all interested parties may access the live webcast on the Internet at the Company's web site at www.dgit.com. Please allow 15 minutes to register and download or install any necessary software.

Acquisitions / Dispositions / Discontinued Operations

The Company has completed several acquisitions that have impacted the comparability of the operating results presented. The results of operations for each of the following entities have been included in the Company's results since the acquisition date.


 
--  MIJO Corporation ("MIJO") on April 1, 2011 (included in television
    segment)
    
    
--  MediaMind Technologies, Inc. ("MediaMind") on July 26, 2011 (included
    in online segment)
    
    
--  EyeWonder LLC, a Delaware LLC, and the equity interests of Chors GmbH,
    a German LLC (collectively, "EyeWonder") on September 1, 2011
    (included in online segment)
    
    
--  Peer 39, Inc. ("Peer 39") on April 30, 2012 (included in online
    segment)
    
    
--  NCMG, Inc. ("North Country") on July 31, 2012 (included in television
    segment)

We sold the net assets of our Springbox unit effective June 1, 2012 for estimated proceeds of $0.9 million, resulting in an after tax loss of $0.6 million. Results of our Springbox unit have been included in discontinued operations for both 2012 and 2011.

Non-GAAP Financial Measure

In addition to providing financial measurements based on generally accepted accounting principles in the United States of America (GAAP), the Company has historically provided additional financial measures that are not prepared in accordance with GAAP (non-GAAP). Legislative and regulatory changes discourage the use of and emphasis on non-GAAP financial measures and require companies to explain why non-GAAP financial measures are relevant to management and investors. We believe that the inclusion of Adjusted EBITDA as a non-GAAP financial measure in this press release helps investors to gain a meaningful understanding of our past performance and future prospects, consistent with how management measures and forecasts our performance, especially when comparing such results to previous periods or forecasts. Our management uses Adjusted EBITDA as a non-GAAP financial measure, in addition to GAAP financial measures, as the basis for measuring our core operating performance and comparing such performance to that of prior periods and to the performance of our competitors.

We use Adjusted EBITDA to measure the operating performance of our segments. This measure also is used by management in its financial and operational decision-making. There are limitations associated with reliance on any non-GAAP financial measures because they are specific to our operations and financial performance, which makes comparisons with other companies' financial results more challenging. By providing both GAAP and non-GAAP financial measures, we believe that investors are able to compare our GAAP results to those of other companies while also gaining a better understanding of our operating performance as evaluated by management.

The Company considers Adjusted EBITDA to be an important indicator of the overall performance of the Company because it eliminates the effects of events that are non-cash, or are not expected to recur as they are not part of our ongoing operations.

The Company defines "Adjusted EBITDA" as income from operations, before depreciation and amortization, share-based compensation, acquisition and integration expenses, and restructuring / impairment charges and benefits. The Company considers Adjusted EBITDA to be an important indicator of the Company's operational strength and performance and a good measure of the Company's historical operating trends.

Adjusted EBITDA eliminates items that are either not part of our core operations, such as acquisition and integration expenses or do not require a cash outlay, such as share-based compensation and impairment charges. Adjusted EBITDA also excludes depreciation and amortization expense, which is based on the Company's estimate of the useful life of tangible and intangible assets. These estimates could vary from actual performance of the asset, are based on historical costs, and may not be indicative of current or future capital expenditures.

Adjusted EBITDA should be considered in addition to, not as a substitute for, the Company's operating income, as well as other measures of financial performance reported in accordance with GAAP.

Reconciliation of Non-GAAP Financial Measures

In accordance with the requirements of Regulation G issued by the Securities and Exchange Commission, the Company is presenting the most directly comparable GAAP financial measure and reconciling the non-GAAP financial measure to the comparable GAAP measure.

About DG

DG connects over 11,000 global advertisers and agencies with their targeted audiences through an expansive network of over 6,000 television broadcast stations and over 11,500 web publishers in 75 countries. The Company's television division utilizes best-in-class network and content management technologies, creative and production resources, digital asset management and syndication services that enable advertisers and agencies to work faster, smarter and more competitively. The Company's online division, MediaMind, allows marketers to benefit from optimized management of online advertising campaigns while maximizing data driven advertising. For more information, visit www.DGit.com.

Forward-Looking Statements

This release contains forward-looking statements relating to the Company. These forward-looking statements involve risks and uncertainties, which could cause actual results to differ materially from those projected. Such risks and uncertainties include, among other things;


 
--  our ability to further identify, develop and achieve commercial
    success for new products;
    
    
--  delays in product development;
    
    
--  the development of competing distribution and online services and
    products, and the pricing of competing services and products;
    
    
--  our ability to protect our proprietary technologies;
    
    
--  the shift of advertising spending by our customers to online and
    non-traditional media from television and radio;
    
    
--  the demand for High Definition (HD) ad delivery by our customers;
    
    
--  integrating MediaMind and other acquisitions with our operations,
    systems, personnel and technologies;
    
    
--  our ability to successfully transition customers from our previous
    online acquisitions to our MediaMind digital platform for ad
    delivery;
    
    
--  operating in a variety of foreign jurisdictions;
    
    
--  fluctuations in currency exchange rates;
    
    
--  adaption to new, changing, and competitive technologies;
    
    
--  potential additional impairment of our goodwill and potential
    impairment our other long-lived assets;

and other risks relating to DG's business which are set forth in the Company's filings with the Securities and Exchange Commission. DG assumes no obligation to publicly update or revise any forward-looking statements.


 
                                                                            
                          Digital Generation, Inc.                          
              Unaudited Consolidated Statements of Operations               
                  (In thousands, except per share amounts)                  
                                                                            
                                  Three Months Ended     Nine Months Ended  
                                     September 30,         September 30,    
                                 --------------------  -------------------- 
                                    2012       2011       2012       2011   
                                 ---------  ---------  ---------  --------- 
                                                                            
Revenues                         $  93,818  $  84,594  $ 283,003  $ 215,956 
Cost of revenues                    34,212     28,292    101,548     72,741 
Sales and marketing                 15,651      9,619     43,786     15,844 
Research and development             5,168      5,546     17,013     10,891 
General and administrative          11,163     10,394     33,045     25,003 
                                 ---------  ---------  ---------  --------- 
Operating expenses, excluding                                               
 depreciation and amortization,                                             
 share-based compensation,                                                  
 acquisition and integration                                                
 expenses and goodwill                                                      
 impairment                         66,194     53,851    195,392    124,479 
                                 ---------  ---------  ---------  --------- 
Adjusted EBITDA                     27,624     30,743     87,611     91,477 
Depreciation and amortization       14,542     11,318     41,403     25,702 
Share-based compensation             4,439      4,382     13,816      7,592 
Acquisition and integration                                                 
 expenses                            1,379     10,571      5,556     13,776 
Goodwill impairment                208,166         --    208,166         -- 
                                 ---------  ---------  ---------  --------- 
Operating income (loss)           (200,902)     4,472   (181,330)    44,407 
  Interest expense                   7,835      6,477     23,766      6,709 
  Other, net                           346        284        700        162 
                                 ---------  ---------  ---------  --------- 
Interest expense and other, net      8,181      6,761     24,466      6,871 
                                 ---------  ---------  ---------  --------- 
Income (loss) before income                                                 
 taxes from continuing                                                      
 operations                       (209,083)    (2,289)  (205,796)    37,536 
Provisionfor income taxes           10,644        408     12,134     16,847 
                                 ---------  ---------  ---------  --------- 
Income (loss) from continuing                                               
 operations                       (219,727)    (2,697)  (217,930)    20,689 
Loss from discontinued                                                      
 operations                             --       (134)    (1,080)      (628)
Net income (loss)                $(219,727) $  (2,831) $(219,010) $  20,061 
                                 =========  =========  =========  ========= 
                                                                            
Basic earnings (loss) per share:                                            
  C
ontinuing operations          $   (7.96) $   (0.10) $   (7.95) $    0.75 
  Discontinued operations               --         --      (0.04)     (0.03)
                                 ---------  ---------  ---------  --------- 
    Total                        $   (7.96) $   (0.10) $   (7.99) $    0.72 
                                 =========  =========  =========  ========= 
                                                                            
Diluted earnings (loss) per                                                 
 share:                                                                     
  Continuing operations          $   (7.96) $   (0.10) $   (7.95) $    0.74 
  Discontinued operations               --         --      (0.04)     (0.02)
                                 ---------  ---------  ---------  --------- 
    Total                        $   (7.96) $   (0.10) $   (7.99) $    0.72 
                                 =========  =========  =========  ========= 
                                                                            
Weighted average common shares                                              
 outstanding:                                                               
  Basic                             27,600     27,491     27,423     27,568 
  Diluted                           27,600     27,491     27,423     27,861 
                                                                            
                                                                            
                          Digital Generation, Inc.                          
              Unaudited Consolidated Statements of Cash Flows               
                               (In thousands)                               
                                                                            
                                                       Nine Months Ended    
                                                         September 30,      
                                                   ------------------------ 
                                                       2012         2011    
                                                   -----------  ----------- 
Cash flows from operating activities:                                       
  Net income (loss)                                $  (219,010) $    20,061 
  Adjustments to reconcile net income (loss) to                             
   net cash provided by operating activities:                               
    Goodwill impairment                                208,166           -- 
    Depreciation of property and equipment              19,117       12,635 
    Amortization of intangibles                         22,286       13,611 
    Deferred income taxes                                7,167       (6,873)
    Provision for accounts receivable losses             2,510        1,833 
    Share-based compensation                            13,816        7,592 
    Loss on sale of Springbox unit                       1,000           -- 
    Other                                                  672          553 
    Changes in operating assets and liabilities:                            
      Accounts receivable                                8,204       12,008 
      Other assets                                       3,504         (247)
      Accounts payable and other liabilities           (14,592)      (8,133)
      Deferred revenue                                    (852)         497 
                                                   -----------  ----------- 
Net cash provided by operating activities               51,988       53,537 
                                                   -----------  ----------- 
                                                                            
Cash flows from investing activities:                                       
  Purchases of property and equipment                  (17,166)      (6,910)
  Capitalized costs of developing software              (9,491)      (5,491)
  Acquisitions, net of cash acquired                   (10,089)    (499,945)
  Long-term investment                                  (1,017)          -- 
  Proceeds from sale of short-term investments          10,390           -- 
  Other                                                   (141)      (1,257)
                                                   -----------  ----------- 
Net cash used in investing activities                  (27,514)    (513,603)
                                                   -----------  ----------- 
                                                                            
Cash flows from financing activities:                                       
  Proceeds from issuance of common stock, net of                            
   costs                                                   174          383 
  Purchases of treasury stock                               --      (16,571)
  Payment of tax withholding obligation in                                  
   exchange for shares tendered                             --       (1,129)
  Proceeds from issuance of long-term debt                  --      485,100 
  Payment of debt issuance costs                            --      (12,019)
  Repayments of capital leases                            (398)        (298)
  Repayments of long-term debt                         (28,675)      (1,225)
                                                   -----------  ----------- 
Net cash provided by (used in) financing                                    
 activities                                            (28,899)     454,241 
                                                   -----------  ----------- 
                                                                            
Effect of exchange rate changes on cash and cash                            
 equivalents                                               451         (502)
                                                   -----------  ----------- 
Net decrease in cash and cash equivalents               (3,974)      (6,327)
Cash and cash equivalents at beginning of year          72,575       73,409 
                                                   -----------  ----------- 
                                                                            
Cash and cash equivalents at end of period         $    68,601  $    67,082 
                                                   ===========  =========== 
                                                                            
Supplemental disclosures of cash flow information:                          
  Cash paid for interest                           $    20,916  $     5,445 
  Cash (received) paid for income taxes            $    (1,184) $    25,327 
  Non-cash component of purchase price to acquire                           
   a business                                      $     5,645  $        -- 
  Landlord lease incentives                        $     5,599  $        -- 
                                                                            
                                                                            
                          Digital Generation, Inc.                          
                    Condensed Consolidated Balance Sheets                   
                               (In thousands)                               
                                                                            
                                                 September 30,  December 31,
                                                      2012          2011    
                                                 ------------- -------------
                                                    Unaudited               
Cash and short-term investments                  $      68,601 $      82,965
Accounts receivable, net                                90,767       100,719
Property and equipment, net                             68,541        54,159
Goodw
ill                                               380,950       580,229
Deferred income taxes                                       --         4,796
Intangibles, net                                       187,554       201,405
Other                                                   32,378        33,204
Assets of discontinued operations                           --           766
                                                 ------------- -------------
  Total assets                                   $     828,791 $   1,058,243
                                                 ============= =============
                                                                            
Accounts payable and accrued liabilities         $      36,291 $      48,234
Deferred revenue                                         1,900         2,474
Deferred income taxes                                   12,236         9,477
Debt                                                   454,983       483,033
Other                                                   15,244         7,239
                                                 ------------- -------------
  Total liabilities                                    520,654       550,457
Total stockholders' equity                             308,137       507,786
                                                 ------------- -------------
  Total liabilities and stockholders' equity     $     828,791 $   1,058,243
                                                 ============= =============

For more information contact: Omar Choucair Chief Financial Officer DG 972/581-2000

JoAnn Horne Market Street Partners 415/445-3233

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