Digital River Reports Second Quarter 2013 Financial Results

Digital River, Inc. (NASDAQ: DRIV) today reported financial results for its second quarter of 2013.

Second Quarter Ended June 30, 2013 GAAP Results Second quarter revenue totaled $92.5 million, compared to $90.8 million during the same period in 2012. This result exceeded management’s second quarter revenue guidance of $89 to $92 million.

Second quarter GAAP net loss was $0.9 million or a net loss of $0.03 per share, which compared to GAAP net income of $0.2 million or $0.01 per diluted share in the second quarter of 2012. These results were improved by a realized gain from the sale of an investment and exceeded management’s second quarter GAAP guidance, which ranged from a net loss of $0.31 to a net loss of $0.27 per share.

Non-GAAP Results Second quarter non-GAAP net income was $1.4 million or $0.04 per diluted share, compared to $6.9 million, or $0.20 per diluted share in the second quarter of 2012. These results were in line with management’s second quarter non-GAAP earnings guidance, which ranged from $0.01 to $0.04 per diluted share.

“We reported solid financial results in the second quarter, exceeding revenue expectations and delivering earnings at the high end of our guidance range. Our payments revenue continues to be a major contributor to our top line growth,” said David Dobson, Digital River’s CEO. “In addition, we made good progress on our strategic transformation, advancing toward an open API-driven commerce-as-a-service, expanding our partner ecosystem and preparing for the launch of a state-of-the-art data center to better serve our global customers. Our transformation is on track, and increasing the value we deliver for our customers and shareholders remains our top priority.”

During the second quarter, the company repurchased approximately $20.1 million of common stock and $4.0 million of its two percent convertible notes. All transactions took place in the open market.

Third Quarter and Full Year 2013 GuidanceManagement’s forward-looking financial expectations for the third quarter of 2013 are as follows:

  • Revenue, ranging from $88 to $92 million;
  • GAAP net loss, ranging from a net loss of $0.38 to a net loss of $0.31 per share; and finally
  • Non-GAAP net loss, ranging from a net loss of $0.10 to a net loss of $0.05 per share, including a tax rate benefit of 21 percent.

Management’s forward-looking financial expectations for the full year 2013 are as follows:
  • Revenue growth of two percent to five percent;
  • GAAP net loss, ranging from a net loss of $0.67 to a net loss of $0.54 per share. This is an improvement compared to the company’s previous guidance, which ranged from a net loss of $0.90 to a net loss of $0.77 per share; and finally
  • Non-GAAP EPS, ranging from $0.55 to $0.65 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 second 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 15758804 and dialing +1 (408) 427-3861. A webcast replay of the call will be archived on Digital River’s corporate website.

Investor DayDigital River will host an investor day Thursday, Sept. 19, 2013, in New York City. Key members of Digital River’s management team will deliver presentations beginning at 1:00 p.m. EDT. A live webcast of the event can be accessed at Digital River’s website. A replay will be available after the event. Those interested in attending are asked to pre-register with Digital River. Space for the event is limited.

About Digital River, Inc.Digital River, Inc. 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.

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, when applicable, amortization of acquisition-related intangibles, stock-based compensation expense, intangible impairments, restructuring related costs, litigation settlement related costs, acquisition and integration costs, realized and unrealized investment gains or losses, and goodwill impairments, 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. In computing non-GAAP diluted earnings per share, if an increase in earnings per share will not result, 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 and 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 and payments markets; challenges associated with international expansion; 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, 2012. 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 fiscal 2013 reflect management’s expectations as of July 30, 2013. 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 online payments, progress with key partners and other factors. The guidance assumes, among other things, that there are no material 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 or future guidance 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.
Second Quarter Results
(In thousands, except share data)
Subject to reclassification
 
Consolidated Balance Sheets (Unaudited)
June 30, December 31,
2013 2012

Assets
Current assets
Cash and cash equivalents $ 422,847 $ 542,851
Short-term investments 147,351 162,794
Accounts receivable, net of allowance of $6,159 and $5,400 64,787 60,656
Deferred tax assets 416 457
Prepaid expenses and other   34,092     33,714  
Total current assets 669,493 800,472
Property and equipment, net 56,200 53,265
Goodwill 138,307 108,960
Intangible assets, net of accumulated amortization of $94,765 and $91,059 33,747 11,718
Long-term investments 52,575 71,735
Deferred income taxes 888 1,724
Other assets   2,942     4,342  
Total assets $ 954,152   $ 1,052,216  

Liabilities and stockholders' equity
Current liabilities
Accounts payable $ 134,553 $ 205,377
Accrued payroll 14,140 11,630
Deferred revenue 13,550 13,426
Other accrued liabilities   61,717     51,640  
Total current liabilities 223,960 282,073
Non-current liabilities
Convertible senior notes 304,555 309,909
Other liabilities   23,146     18,236  
Total non-current liabilities   327,701     328,145  
Total liabilities   551,661     610,218  
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; 50,023,146 and 48,941,402 shares issued 500 489
Treasury stock at cost; 15,771,730 and 13,581,889 shares (404,220 ) (368,721 )
Additional paid-in capital 751,898 737,499
Retained earnings 63,664 75,901
Accumulated other comprehensive loss   (9,351 )   (3,170 )
Stockholders' equity   402,491     441,998  
Total liabilities and stockholders' equity $ 954,152   $ 1,052,216  
 

Digital River, Inc.        
Second Quarter Results
(Unaudited, in thousands, except per share amounts)
Subject to reclassification
 
Consolidated Statements of Operations
 
Three months ended Six months ended
June 30, June 30,
2013 2012 2013 2012
Revenue $ 92,471 $ 90,774 $ 206,164 $ 193,217
Costs and expenses (exclusive of depreciation and amortization expense shown separately below):
Direct cost of services 17,585 16,125 40,525 34,547
Network and infrastructure 14,490 12,932 29,751 25,689
Sales and marketing 27,222 27,204 58,056 55,932
Product research and development 18,156 15,416 35,955 31,419
General and administrative 14,293 11,414 32,921 23,584
Goodwill impairment - - 21,249 -
Depreciation and amortization 5,088 4,950 10,118 10,289
Amortization of acquisition-related intangibles   2,283     1,743     4,211     3,592  
Total costs and expenses   99,117     89,784     232,786     185,052  
Income (loss) from operations   (6,646 )   990     (26,622 )   8,165  
Interest income 780 996 1,376 2,135
Interest expense (1,964 ) (2,254 ) (3,942 ) (4,494 )
Other income (expense), net   6,100     1,030     17,014     733  
Income (loss) before income taxes (1,730 ) 762 (12,174 ) 6,539
Income tax expense (benefit)   (858 )   562     63     1,602  
Net income (loss) $ (872 ) $ 200   $ (12,237 ) $ 4,937  
 
Net income (loss) per share - basic $ (0.03 ) $ 0.01   $ (0.37 ) $ 0.15  
Net income (loss) per share - diluted $ (0.03 ) $ 0.01   $ (0.37 ) $ 0.15  
Shares used in per share calculation - basic 32,478 33,453 32,816 33,629
Shares used in per share calculation - diluted 32,478 33,561 32,816 33,821
 
 
Calculation of GAAP Diluted Net Income (Loss) Per Share
 
Three months ended Six months ended
June 30, June 30,
2013 2012 2013 2012
GAAP net income (loss) $ (872 ) $ 200 $ (12,237 ) $ 4,937
Add back debt interest expense and issuance cost amortization, net of tax benefit   -     -     -     -  
Adjusted net income (loss) for GAAP EPS calculation $ (872 ) $ 200   $ (12,237 ) $ 4,937  
 
Net income (loss) per share - diluted $ (0.03 ) $ 0.01   $ (0.37 ) $ 0.15  
Shares used in per share calculation - diluted 32,478 33,561 32,816 33,821
 

Digital River, Inc.    
Second Quarter Results
(Unaudited, in thousands)
Subject to reclassification
 
Consolidated Statements of Cash Flows
Six months ended
June 30,
2013 2012

Operating Activities:
Net income (loss) $ (12,237 ) $ 4,937
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Amortization of acquisition-related intangibles 4,211 3,592
Provision for doubtful accounts 928 900
Depreciation and amortization 10,118 10,289
Impairment of goodwill 21,249 -
Debt issuance cost amortization 855 987
Amortization of investment premiums 1,524 -
Loss on sale of equipment 69 -
Gain on sale of investment (17,526 ) -
Stock-based compensation expense 11,954 12,192
Excess tax benefits from stock-based compensation - (103 )
Deferred and other income taxes (1,765 ) 48
Change in operating assets and liabilities (net of acquisitions):
Accounts receivable (9,577 ) (8,434 )
Prepaid and other assets 1,843 (5,598 )
Accounts payable (70,292 ) (72,606 )
Deferred revenue (1,460 ) 4,917
Income tax payable 175 2,061
Other accrued liabilities   (4,000 )   (5,029 )
Net cash provided by (used in) operating activities   (63,931 )   (51,847 )
 

Investing Activities:
Purchases of investments (53,243 ) (80,602 )
Sales of investments 66,847 88,501
Cash received for cost method investments 39,636 -
Cash paid for acquisitions, net of cash received (55,843 ) -
Purchases of equipment and capitalized software   (13,167 )   (6,150 )
Net cash provided by (used in) investing activities   (15,770 )   1,749  
 

Financing Activities:
Repurchase of senior convertible notes (5,354 ) -
Exercise of stock options 1,273 1,509
Sales of common stock under employee stock purchase plan 1,183 1,300
Repurchase of common stock (31,238 ) (20,242 )
Repurchase of restricted stock to satisfy tax withholding obligation (4,261 ) (3,530 )
Excess tax benefits from stock-based compensation   -     103  
Net cash provided by (used in) financing activities   (38,397 )   (20,860 )
Effect of exchange rate changes on cash   (1,906 )   (4,693 )
Net increase (decrease) in cash and cash equivalents (120,004 ) (75,651 )
Cash and cash equivalents, beginning of period 542,851 497,193
   
Cash and cash equivalents, end of period $ 422,847   $ 421,542  
   
Cash paid for interest on convertible senior notes $ 3,068   $ 3,505  
Cash paid for income taxes $ 1,357   $ 1,867  
 

Digital River, Inc.          
GAAP to non-GAAP Reconciliations
(Unaudited, in thousands, except per share amounts)

UTILIZING 21% EFFECTIVE INCOME TAX RATE
 
 
Three months ended

Twelve monthsended
March 31, June 30, September 30, December 31, December 31,
2012 2012 2012 2012 2012
 
GAAP pre-tax income (loss) $ 5,777 $ 762 $ (1,431 ) $ (172,170 ) $ (167,062 )
Add back amortization of acquisition-related intangibles 1,849 1,743 1,709 1,766 7,067
Add back stock-based compensation expense 5,961 6,231 6,063 11,262 29,517
Add back restructuring related costs 395 49 73 1,508 2,025
Add back litigation settlement related costs - - 750 - 750
Add back acquisition and integration costs - - 622 175 797
Add back unrealized investment loss (gain) - - 627 (3,568 ) (2,941 )
Add back goodwill impairment   -     -     -     175,241     175,241  
Subtotal 13,982 8,785 8,413 14,214 45,394
Income tax expense @ 21%   2,936     1,845     1,767     2,985     9,533  
Non-GAAP net income   11,046     6,940     6,646     11,229     35,861  
 
Add back debt interest expense and issuance cost amortization, net of tax benefit   1,409     1,412     1,414     1,382     5,617  
Adjusted net income for non-GAAP EPS calculation $ 12,455   $ 8,352   $ 8,060   $ 12,611   $ 41,478  
 
Non-GAAP net income per share - diluted $ 0.30   $ 0.20   $ 0.20   $ 0.31   $ 1.02  
 
Shares used in per share calculation - diluted 41,032 40,783 40,172 40,163 40,719
 
Three months ended

Six monthsended
March 31, June 30, June 30,
2013 2013 2013
GAAP pre-tax income (loss) $ (10,444 ) $ (1,730 ) $ (12,174 )
Add back amortization of acquisition-related intangibles 1,928 2,283 4,211
Add back stock-based compensation expense 5,575 6,379 11,954
Add back restructuring related costs 3,094 706 3,800
Add back litigation settlement related costs - 312 312
Add back acquisition and integration costs 4,532 269 4,801
Add back realized investment loss (gain) (11,067 ) (6,459 ) (17,526 )
Add back goodwill impairment   21,249     -     21,249  
Subtotal 14,867 1,760 16,627
Income tax expense @ 21%   3,122     370     3,492  
Non-GAAP net income   11,745     1,390     13,135  
 
Add back debt interest expense and issuance cost amortization, net of tax benefit   1,233     -     39  
Adjusted net income for non-GAAP EPS calculation $ 12,978   $ 1,390   $ 13,174  
 
Non-GAAP net income per share - diluted $ 0.33   $ 0.04   $ 0.40  
 
Shares used in per share calculation - diluted 39,767 32,739 33,347
 
 
Breakdown of stock-based compensation expense
Three months ended

Six monthsended
March 31, June 30, June 30,
2013 2013 2013
Direct cost of services $ 42 $ 47 $ 89
Network and infrastructure 415 327 742
Sales and marketing 1,832 1,799 3,631
Product research and development 925 846 1,771
General and administrative   2,361     3,360     5,721  
Total $ 5,575   $ 6,379   $ 11,954  
 

Digital River, Inc.          
Non-GAAP Guidance
(Unaudited, in millions except per share amounts)
 
 
Revenue Guidance Table
2012 Actual
Twelve months
Three months ended ended
March 31, June 30, September 30, December 31, December 31,
2012 2012 2012 2012 2012
Commerce $ 82.1 $ 71.3 $ 71.7 $ 82.5 $ 307.6
Support Business   20.3     19.5     20.0     18.8     78.6
Total Revenue $ 102.4   $ 90.8   $ 91.7   $ 101.3   $ 386.2
 
 
2013 Actual
Six months
Three months ended ended
March 31, June 30, June 30,
2013 2013 2013
Commerce $ 97.4 $ 77.7 $ 175.1
Support Business   16.3     14.8     31.1
Total Revenue $ 113.7   $ 92.5   $ 206.2
 
 
2013 Guidance
Q3 2013 FY 2013
Low Guidance High Guidance Low Guidance High Guidance
Commerce $ 73.1 $ 75.3 $ 333.6 $ 338.9
Support Business   14.9     16.7     60.4     65.1  
Total Expected Revenue $ 88.0   $ 92.0   $ 394.0   $ 404.0  
 
 
Non-GAAP Guidance Reconciliation
Q3 2013 FY 2013
Low Guidance High Guidance Low Guidance High Guidance
Expected GAAP net income (loss) per share - diluted $ (0.38 ) $ (0.31 ) $ (0.67 ) $ (0.54 )
Add back amortization of acquisition-related intangibles, net of tax 0.05 0.05 0.21 0.21
Add back stock-based compensation expense, net of tax 0.12 0.12 0.53 0.53
Add back restructuring related costs, net of tax - - 0.09 0.09
Add back litigation settlement related costs, net of tax - - 0.01 0.01
Add back acquisition and integration costs, net of tax 0.02 0.02 0.16 0.16
Add back realized investment gain, net of tax - - (0.43 ) (0.43 )
Add back goodwill impairment, net of tax - - 0.52 0.52
Add back convertible debt dilution impact, net of tax - - (0.01 ) (0.01 )
Tax variability   0.09     0.07     0.14     0.11  
Expected non-GAAP diluted net income (loss) per share $ (0.10 ) $ (0.05 ) $ 0.55   $ 0.65  

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