DG Reports Fourth Quarter, Full Year 2012 Results

DG Reports Fourth Quarter, Full Year 2012 Results 
DALLAS, TX -- (Marketwire) -- 02/19/13 --  DG(R) (NASDAQ: DGIT) 


 
--  Fiscal 2012 Revenues Increase 19% to $386.6 Million Primarily Driven
    by Strategic Acquisitions in the Online Segment
--  DG Online Segment Surpasses Over One Trillion Impressions during 2012

  
DG(R) (NASDAQ: DGIT), the world's leading ad management and
distribution platform, today reported financial results for the
fourth quarter and full year 2012.  
Consolidated revenue for the three months ended December 31, 2012
decreased 4% to $103.6 million, compared to $108.3 million in the
same period of 2011. DG's fourth quarter loss from continuing
operations (including a goodwill impairment charge of $11.4 million)
was $20.8 million, or $0.75 per diluted share, compared to income
from continuing operations of $5.8 million, or $0.21 per diluted
share, in the year earlier period. Fourth quarter Adjusted EBITDA was
$38.1 million, compared to $43.1 million in the fourth quarter of
2011. 
For the twelve months ended December 31, 2012, consolidated revenue
was $386.6 million compared to $324.3 million in 2011, an increase of
19%. The 2012 loss from continuing operations (including a goodwill
impairment charge of $219.6 million) was $238.8 million, or $8.69 per
diluted share, compared to income from continuing operations of $26.5
million, or $0.95 per diluted share in 2011. Adjusted EBITDA for 2012
decreased 7% to $125.7 million compared to $134.6 million for 2011. 
"We believe that the steps we have taken over the past year position
DG to meet the increasing demand from advertisers to manage
video-centric campaigns across TV, online and mobile screens," said
Neil Nguyen, CEO and President of Digital Generation, Inc. "We saw
positive results in both our online video and data driven products.
We will continue to leverage DG's innovation and strength in
developing new products to address the evolving advertising
industry." 
In discussing the company's vision, Mr. Nguyen added, "Online video
continues to be at the core of DG's growth strategy, with online
video advertising expected to reach over $8 Billion by 2016. While
advertising may appear to fragment across screens and new technology
on the surface, we believe it will in fact integrate through the 
consistent use of data and technology we are developing. This will
enable advertisers to reach their customers through highly targeted
campaigns across screens and across available inventory. I believe
there is no company better positioned to drive this level of
convergence than DG." 
Fourth quarter financial highlights: 


 
--  TV segment revenues of $62.4 million included high-definition (HD)
    revenues of $37.4 million, with $3.5 million related to political
    campaign advertising.
    --  HD prices declined by approximately 25% from prior year levels
    --  HD penetration rates climbed to 31% in 2012 from 18% in 2011
    --  The fourth quarter decline in TV revenues was primarily
        attributable to a $6.8 million decline in revenues from studios as
        they continue to shift advertising revenues from smaller TV
        markets to national networks and online media.
        
        
--  Fourth quarter Adjusted EBITDA margins were 37% on a consolidated
    basis as compared to 40% in the fourth quarter of 2011.
    
    
--  Fourth quarter G&A expenses included $600,000 of litigation costs,
    the majority of which related to litigation that resulted in a
    favorable arbitration award of approximately $3.5 million that has not
    yet been recorded.
    
    
--  Fourth quarter operating expenses included a non-cash goodwill
    write-down of $11.4 million relating to the online business segment
    and also included costs of $3.0 million associated with Special
    Committee, proxy matters, merger and integration efforts.
    
    
--  At December 31, 2012 DG had $84.8 million of cash and short-term
    investments and $453.9 million outstanding under its long-term credit
    facility.

  
Fourth quarter business highlights:  


 
--  Yahoo! JAPAN began deploying MediaMind's ad serving technology on its
    GyaO! subsidiary, Japan's largest free video streaming site.
    
    
--  The APAC region maintained its double digit growth trends.
    
    
--  DG launched a solution to leverage the usage of tablets and smart
    phones while watching television by delivering automatic content
    recognition within TV ads.
    
    
--  The Company entered the mobile market through a partnership, adding a
    mobile rich media authoring solution to its platform.
    
    
--  In a commitment to greater campaign analysis and control by
    advertisers, DG launched its Verification Suite and introduced Versa
    Tag, a tag management solution. Versa Tag is being beta-tested by
    advertisers across numerous verticals, including financial,
    pharmaceutical, automotive, telecommunications and consumer products.

  
Full year 2012 financial highlights: 


 
--  Total revenue increased to $386.6 million.
    --  Online segment revenues now represent over-one third of total
        revenues.
    --  Data driven products and services revenues increased over 200%.
        
        
--  Operating expenses included non-cash goodwill write-downs of $219.6
    million relating to the online business unit and also included costs
    of $8.5 million associated with Special Committee, proxy matters,
    merger and integration efforts.
    
    
--  2012 Adjusted EBITDA margins were 33% on a consolidated basis as
    compared to 42% in 2011.
    
    
--  Cash flow from operations totaled $76.1 million in 2012.
    
    
--  Our provision for income taxes for 2012 is impacted by the goodwill
    impairment charge because the vast majority of the charge is not
    deductible for income tax purposes. Further, as a result of the
    goodwill impairment charge, we recorded a valuation allowance on all
    of our deferred tax assets.

  
Full year 2012 business highlights:  


 
--  The Company substantially completed the integration of its online
    businesses.
    
    
--  The Company consolidated its New York area offices into one location
    on Broadway.
    
    
--  The senior management team was strengthened to address the market
    opportunity with addition of new Chief Financial Officer, Chief
    Marketing Officer, General Counsel and Chief Technology Officer.
    
    
--  Full year political revenues totaled $8.5 million.

  
Online Segment Goodwill Charge 
During the third quarter, the Company completed an interim goodwill
impairment test of the online reporting unit. DG's third quarter
operating results included a $208.2 million non-cash charge before
income taxes related to the write-down of theonline reporting unit's
goodwill.In addition to the interim impairment test, the Company is
required to perform an annual impairment test as of December 31,
2012. As a result, the Company has recorded an additional non-cash
charge of $11.4 million for additional impairment of goodwill of its
online reporting unit. 
Classification of the Company's Debt 
On July 26, 2011, we entered into an amended and restated credit
agreement (the "Amended Credit Facility") that provides for $490
million of term loans (the "Term Loans") and $120 million of
revolving loans. The Term Loans were fully funded at closing and
mature in 2018. 
The Amended Credit Facility contains a variety of customary
restrictive financial covenants, such as limitations on borrowings
and investments. One of the financial covenants requires maintaining
a consolidated leverage ratio of not more than 3.5 to 1. On December
31, 2012, the consolidated leverage ratio was 3.38 to 1and the
Company was in compliance with the financial and nonfinancial
covenants of the Amended Credit Facility. However, on June 30, 2013,
the consolidated leverage ratio under the facility will be reduced to
3.0 to 1 and the Company believes it will likely exceed that limit.
Accordingly, the Company is seeking an amendment to the Amended
Credit Facility to change the consolidated leverage ratio which may
include an additional principal payment. The Company cannot assure
that it will be successful in amending this provision, and if the
Company does not obtain such a modification prior to the filing of
its Form 10-K in mid-March 2013, it will be required to report the
debt balance of $453.9 million as a current liability in its
financial statements. 
Acquisitions / 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 ("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. 
Annual Stockholders' Meeting 
As announced on November 30, 2012, the Company will host its annual
meeting of stockholders on February 21, 2013. 
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 (loss) 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 (loss), 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 segment 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 segment, 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 TV 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 of our other long-lived assets;
    
    
--  our ability to negotiate and complete an amendment to our credit
    facility on terms reasonably acceptable so that we remain in
    compliance with consolidated leverage ratio covenants in future
    quarters;
    
    
--  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.

  
(Financial Tables Follow) 


 
                          Digital Generation, Inc.                          
               Unaudited Consolidated Statements of Operations              
                  (In thousands, except per share amounts)                  
                                                                            
                                  Three Months Ended        Years Ended     
                                     December 31,          December 31,     
                                    2012       2011       2012       2011   
                                 ---------  ---------  ---------  --------- 
                                                                            
Revenues                         $ 103,610  $ 108,301  $ 386,613  $ 324,257 
Cost of revenues                    33,829     31,956    135,377    104,697 
Sales and marketing                 17,017     15,705     60,803     31,549 
Research and development             4,902      6,927     21,915     17,818 
General and administrative           9,774     10,596     42,819     35,599 
                                 ---------  ---------  ---------  --------- 
Operating expenses, excluding                                               
 depreciation and amortization,                                             
 share-based compensation,                                                  
 acquisition and integration                                                
 expenses and goodwill                                                      
 impairment                         65,522     65,184    260,914    189,663 
                                 ---------  ---------  ---------  --------- 
Adjusted EBITDA                     38,088     43,117    125,699    134,594 
Depreciation and amortization       15,897     13,034     57,300     38,736 
Share-based compensation             3,654      4,838     17,470     12,430 
Acquisition and integration                                                 
 expenses                            2,957      1,343      8,513     15,119 
Goodwill impairment                 11,427          -    219,593          - 
                                 ---------  ---------  ---------  --------- 
Operating income (loss)              4,153     23,902   (177,177)    68,309 
  Interest expense                   7,563      8,206     31,329     14,915 
  Other, net                         2,100        475      2,800        637 
                                 ---------  ---------  ---------  --------- 
Interest expense and other, net      9,663      8,681     34,129     15,552 
                                 ---------  ---------  ---------  --------- 
Income (loss) before income                                                 
 taxes from continuing                                                      
 operations                         (5,510)    15,221   (211,306)    52,757 
Provision for income taxes          15,315      9,373     27,449     26,220 
                                 ---------  ---------  ---------  --------- 
Income (loss) from continuing                                               
 operations                        (20,825)     5,848   (238,755)    26,537 
Loss from discontinued                                                      
 operations                              -     (1,425)    (1,080)    (2,053)
                                 ---------  ---------  ---------  --------- 
Net income (loss)                $ (20,825) $   4,423  $(239,835) $  24,484 
                                 =========  =========  =========  ========= 
                                                                            
Basic earnings (loss) per share:                                            
  Continuing operations          $   (0.75) $    0.21  $   (8.69) $    0.96 
  Discontinued operations                -      (0.05)     (0.04)     (0.07)
                                 ---------  ---------  ---------  --------- 
    Total                        $   (0.75) $    0.16  $   (8.73) $    0.89 
                                 =========  =========  =========  ========= 
                                                                            
Diluted earnings (loss) per                                                 
 share:                                                                     
  Continuing operations          $   (0.75) $    0.21  $   (8.69) $    0.95 
  Discontinued operations                -      (0.05)     (0.04)     (0.07)
                                 ---------  ---------  ---------  --------- 
    Total                        $   (0.75) $    0.16  $   (8.73) $    0.88 
                                 =========  =========  =========  ========= 
                                                                            
Weighted average common shares                                              
 outstanding:                                                               
  Basic                             27,634     27,361     27,477     27,516 
  Diluted                           27,634     27,460     27,477     27,760 
                                                                            
                                                                            
                                                                            
                          Digital Generation, Inc.                          
                       Unaudited Segment Information                        
                               (In thousands)                               
           Three Months Ended December 31,  Three Months Ended December 31, 
                        2012                              2011              
          --------------------------------  ------------------------------- 
          Television  Online  Consolidated  Television  Online Consolidated 
          ---------- -------- ------------  ---------- ------- ------------ 
Revenues  $   62,427 $ 41,183 $    103,610  $   64,311 $43,990 $    108,301 
                                                                            
Segment                                                                     
 Adjusted                                                                   
 EBITDA                                                                     
before                                                                      
 corporate                                                                  
 overhead     33,518   11,151       44,669      37,473  10,674       48,147 
Less                                                                        
 corporate                                                                  
 overhead                           (6,581)                          (5,030)
                              ------------                     ------------ 
Adjusted                                                                    
 EBITDA                             38,088                           43,117 
Less:                                                          
             
 Acquisition
  and                                                                    
  integration                       (2,957)                          (1,343)
 Share-                                                                     
  based                                                                     
  compensation                      (3,654)                          (4,838)
 Depreciation
  and                                                                   
  amortization                     (15,897)                         (13,034)
 Goodwill                                                                   
  impairment                       (11,427)                             --- 
                              ------------                     ------------ 
Income                                                                      
 from                                                                       
 operations                   $      4,153                     $     23,902 
                              ============                     ============ 
                                                                            
                                                                            
                                                                            
            Year Ended December 31, 2012      Year Ended December 31, 2011  
          --------------------------------  ------------------------------- 
          Television  Online  Consolidated  Television  Online Consolidated 
          ---------- -------- ------------  ---------- ------- ------------ 
Revenues  $  245,961 $140,652 $    386,613  $  246,780 $77,477 $    324,257 
                                                                            
Segment                                                                     
 Adjusted                                                                   
 EBITDA                                                                     
before                                                                      
 corporate                                                                  
 overhead    129,645   22,642      152,287     138,299  15,043      153,342 
Less                                                                        
 corporate                                                                  
 overhead                          (26,588)                         (18,748)
                              ------------                     ------------ 
Adjusted                                                                    
 EBITDA                            125,699                          134,594 
Less:                                                                       
 Acquisition
  and                                                                    
  integration                       (8,513)                         (15,119)
 Share-                                                                     
  based                                                                     
  compensation                     (17,470)                         (12,430)
 Depreciation
  and                                                                   
  amortization                     (57,300)                         (38,736)
 Goodwill                                                                   
  impairment                      (219,593)                             --- 
                              ------------                     ------------ 
Income                                                                      
 (loss)                                                                     
 from                                                                       
 operations                   $   (177,177)                    $     68,309 
                              ============                     ============ 
                                                                            
                                                                            
                                                                            
                          Digital Generation, Inc.                          
               Unaudited Consolidated Statements of Cash Flows              
                               (In thousands)                               
                                                            Years Ended     
                                                           December 31,     
                                                       -------------------- 
                                                          2012       2011   
                                                       ---------  --------- 
Cash flows from operating activities:                                       
  Net income (loss)                                    $(239,835) $  24,484 
  Adjustments to reconcile net income (loss) to net                         
   cash provided by operating activities:                                   
  Goodwill impairment                                    219,593          - 
  Depreciation of property and equipment                  27,609     18,580 
  Amortization of intangibles                             29,691     20,699 
  Deferred income taxes                                   26,037      7,758 
  Provision for accounts receivable losses                 3,202      1,471 
  Impairment of Springbox unit                                 -      1,800 
  Impairment of long-term investments                      2,394          - 
  Share-based compensation                                17,470     12,430 
  Loss on sale of Springbox unit                           1,000          - 
  Other                                                      501       (619)
  Changes in operating assets and liabilities:                              
    Accounts receivable                                      344      1,759 
    Other assets                                          (3,108)    (4,905)
    Accounts payable and other liabilities                (7,900)    (6,950)
    Deferred revenue                                        (852)       506 
                                                       ---------  --------- 
Net cash provided by operating activities                 76,146     77,013 
                                                       ---------  --------- 
                                                                            
Cash flows from investing activities:                                       
  Purchases of property and equipment                    (19,903)   (11,802)
  Capitalized costs of developing software               (12,745)    (7,321)
  Purchases of short-term investments                          -     (9,148)
  Proceeds from sale of short-term investments            10,350      2,860 
  Long-term investment                                    (1,517)         - 
  Other                                                   (2,211)        33 
  Acquisitions, net of cash acquired                     (10,089)  (499,945)
                                                       ---------  --------- 
Net cash used in investing activities                    (36,115)  (525,323)
                                                       ---------  --------- 
                                                                            
Cash flows from financing activities:                                       
  Proceeds from issuance of common stock, net of costs       427        392 
  Purchases of treasury stock                                  -    (21,547)
  Payment of tax withholding obligation in exchange                         
   for shares tendered                                       (93)    (1,129)
  Proceeds from issuance of long-term debt                     -    485,100 
  Payment of debt issuance costs                               -    (12,019)
  Repayments of long-
term debt                           (29,900)    (2,450)
  Repayments of capital leases                              (497)      (431)
                                                       ---------  --------- 
Net cash provided by (used in) financing activities      (30,063)   447,916 
                                                       ---------  --------- 
                                                                            
Effect of exchange rate changes on cash and cash                            
 equivalents                                               1,977       (440)
                                                       ---------  --------- 
Net increase (decrease) in cash and cash equivalents      11,945       (834)
Cash and cash equivalents at beginning of year            72,575     73,409 
                                                       ---------  --------- 
                                                                            
Cash and cash equivalents at end of year               $  84,520  $  72,575 
                                                       =========  ========= 
                                                                            
Supplemental disclosures of cash flow information:                          
  Cash paid for interest                               $  28,169  $  12,721 
  Cash (received) paid for income taxes                $  (1,749) $  26,231 
  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)                               
                                                       December    December 
                                                         31,         31,    
                                                         2012        2011   
                                                     ----------- -----------
                                                      Unaudited             
Cash and short-term investments                      $    84,834 $    82,965
Accounts receivable, net                                  97,583     100,719
Property and equipment, net                               66,169      54,159
Goodwill                                                 369,137     580,229
Deferred income taxes                                          -       4,796
Intangibles, net                                         180,156     201,405
Other                                                     34,515      33,204
Assets of discontinued operations                              -         766
                                                     ----------- -----------
  Total assets                                       $   832,394 $ 1,058,243
                                                     =========== ===========
                                                                            
Accounts payable and accrued liabilities             $    42,270 $    48,234
Deferred revenue                                           1,627       2,474
Deferred income taxes                                     27,063       9,477
Debt                                                     453,918     483,033
Other                                                     16,322       7,239
                                                     ----------- -----------
  Total liabilities                                      541,200     550,457
Total stockholders' equity                               291,194     507,786
                                                     ----------- -----------
  Total liabilities and stockholders' equity         $   832,394 $ 1,058,243
                                                     =========== ===========

  
For more information contact: 
JoAnn Horne
Market Street Partners
415/445-3233 
 
 
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