Digital River Reports Third Quarter 2013 Financial Results

  • Third quarter revenue of $90.3 million, including contributions from divested businesses
  • Organic payments revenue increased 47 percent year-over-year
  • Completed divestitures of two supporting businesses
  • Provided updated 2013 revenue growth, excluding divested businesses, of 4 percent to 5 percent and non-GAAP EPS, ranging from $0.56 to $0.61

Business Wire

MINNEAPOLIS--(BUSINESS WIRE)--

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

Third Quarter Ended September 30, 2013
GAAP Results
Third quarter revenue totaled $90.3 million, including the contribution from the company’s recently divested businesses. This result was consistent with management’s third quarter revenue guidance of $88 to $92 million. Excluding the contribution from the divested businesses, third quarter revenue was $87.3 million, compared to $87.1 million during the same period last year.

Third quarter GAAP net loss, including the contribution from the company’s divested businesses, was $12.5 million or a net loss of $0.40 per share. Third quarter GAAP net loss, excluding the contribution from the divested businesses, was $7.6 million or a net loss of $0.24 per share. These results compared to a GAAP net loss of $0.7 million or a net loss of $0.02 per share in the third quarter of 2012, both including and excluding the contribution from the divested businesses.

Non-GAAP Results
Third quarter non-GAAP net loss, both including and excluding the contribution from the divested businesses, was $1 million or a loss of $0.03 per share. These results exceeded management’s third quarter non-GAAP guidance, which ranged from a net loss of $0.10 to a net loss of $0.05 per share. This compared to previously reported non-GAAP net income in the third quarter of 2012, including the contribution from the divested businesses, of $6.6 million and $0.20 per diluted share. Excluding the contribution from the divested businesses, non-GAAP net income was $6.1 million or $0.19 per diluted share in the third quarter of 2012.

“We reported solid financial results in the third quarter. We met revenue and exceeded earnings guidance, with payments continuing to be an important driver behind our top line growth,” said David Dobson, Digital River’s CEO. “We continue to take actions to accelerate our strategic transformation and deliver even more competitive products and services to our customers. We recently divested two of our non-core businesses. In addition, we appointed two new senior leaders to help drive our technology evolution and product innovation strategy, grow our core commerce, payments and marketing businesses, and increase our operational efficiency.”

Divestitures
During the third quarter, Digital River divested CustomCD, a provider of on-demand back-up media services, and Digital River Education Services, a reseller of software and hard goods for the U.S. education market. The businesses were previously included in the company’s Supporting Business line. The transactions closed on September 30, 2013, and October 1, 2013, respectively. The terms of the transactions are not material to the company’s financial position.

In accordance with applicable accounting standards, Digital River is presenting the CustomCD and Digital River Education Services businesses within discontinued operations in the consolidated statements of operations for all periods presented. The company’s historical consolidated financial statements and operating results have been updated to reflect this change.

Workforce Reduction
Subsequent to the third quarter, the company reduced global headcount by 7 percent in connection with the strategic transformation and rebalancing of skills and experience.

Share Repurchase
During the third quarter, the company repurchased approximately $12.7 million of common stock. All transactions took place in the open market.

Fourth Quarter and Full Year 2013 Guidance
Management’s forward-looking financial expectations for the fourth quarter of 2013, excluding the contribution of the divested businesses, are as follows:

  • Revenue ranging from $96.5 to $100.5 million;
  • GAAP EPS ranging from a net loss of $0.10 to a net loss of $0.03 per share; and finally
  • Non-GAAP EPS ranging from $0.17 to $0.22 per diluted share, using a 21 percent tax rate.

Management’s forward-looking financial expectations for the full year 2013, excluding the contribution of the divested businesses, are as follows:

  • Revenue ranging from $385 to $389 million, representing revenue growth of 4 percent to 5 percent compared to 2012;
  • GAAP EPS ranging from a net loss of $0.67 to a net loss of $0.60 per share; and finally
  • Non-GAAP EPS ranging from $0.56 to $0.61 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. A historical presentation of the company’s 2012 and 2013 continuing operating results as well as the new financial presentation reflecting the change in revenue categories from enterprise commerce and supporting revenues, to commerce and payments revenues can be accessed on the Investor Relations (www.digitalriver.com/investorrelations) section of its corporate website.

Digital River will host an open-access webcast presentation and conference call today at 4:45 p.m. EDT to discuss third quarter financial results. A live audio webcast can be accessed on the Investor Relations (www.digitalriver.com/investorrelations) section of its corporate website. Alternatively, to listen only to the live broadcast of the call, dial +1 (408) 427-3861 and use conference ID # 84237268. A webcast and audio replay of the presentation will be archived on Digital River’s corporate website.

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, 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) from continuing operations is computed by adjusting GAAP pre-tax income from continuing operations 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 from continuing operations 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 from continuing operations, 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 from continuing operations 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; our ability to execute on the 2013 holiday readiness program; 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 technical initiatives; 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 October 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.
Third Quarter Results
(In thousands, except share data)
Subject to reclassification
       
Consolidated Balance Sheets (Unaudited)
September 30, December 31,
2013 2012

Assets

Current assets
Cash and cash equivalents $ 458,062 $ 542,851
Short-term investments 122,698 162,794
Accounts receivable, net of allowance of $2,853 and $4,834 50,605 55,192
Deferred tax assets 119 457
Prepaid expenses and other 28,807 31,813
Assets of discontinued operations   6,584     9,353  
Total current assets 666,875 802,460
Property and equipment, net 52,703 53,098
Goodwill 140,389 108,960
Intangible assets, net of accumulated amortization of $85,655 and $78,757 32,255 11,718
Long-term investments 52,810 71,735
Deferred income taxes 1,390 -
Other assets   2,512     4,313  
Total assets $ 948,934   $ 1,052,284  

Liabilities and stockholders' equity

Current liabilities
Accounts payable $ 135,699 $ 201,826
Accrued payroll 15,316 11,294
Deferred revenue 10,008 13,119
Other current liabilities 70,994 50,149
Liabilities of discontinued operations   7,291     7,016  
Total current liabilities 239,308 283,404
Non-current liabilities
Convertible senior notes 295,750 309,909
Other liabilities   22,217     16,973  
Total non-current liabilities   317,967     326,882  
Total liabilities   557,275     610,286  
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; 49,928,175 and 48,941,402 shares issued 499 489
Treasury stock at cost; 16,495,649 and 13,581,889 shares (416,999 ) (368,721 )
Additional paid-in capital 756,239 737,499
Retained earnings 51,177 75,901
Accumulated other comprehensive loss   743     (3,170 )
Stockholders' equity   391,659     441,998  
Total liabilities and stockholders' equity $ 948,934   $ 1,052,284  
 
 
Digital River, Inc.
Third Quarter Results
(Unaudited, in thousands, except per share amounts)
Subject to reclassification
 
Consolidated Statements of Operations
               

Three months ended
September 30,

Nine months ended
September 30,

2013 2012 2013 2012
Revenue $ 87,260 $ 87,056 $ 288,444 $ 272,377
Costs and expenses (exclusive of depreciation and amortization expense shown separately below):
Direct cost of services 16,205 15,476 55,272 47,810
Network and infrastructure 14,648 13,184 44,049 38,322
Sales and marketing 25,013 22,756 80,415 74,593
Product research and development 18,108 15,201 52,967 45,632
General and administrative 12,011 13,726 44,040 37,025
Goodwill impairment - - 21,249 -
Depreciation and amortization 5,682 4,940 15,748 15,171
Amortization of acquisition-related intangibles   2,149     1,118     6,360     3,526  
Total costs and expenses   93,816     86,401     320,100     262,079  
Income (loss) from operations   (6,556 )   655     (31,656 )   10,298  
Interest income 553 773 1,929 2,908
Interest expense (1,941 ) (2,262 ) (5,884 ) (6,756 )
Other income (expense), net   (297 )   (601 )   16,717     124  
Income (loss) from continuing operations before income taxes (8,241 ) (1,435 ) (18,894 ) 6,574
Income tax expense (benefit)   (645 )   (700 )   (408 )   1,444  
Income (loss) from continuing operations (7,596 ) (735 ) (18,486 ) 5,130
Income (loss) from discontinued operations, net of tax   (4,891 )   1     (6,238 )   (927 )
Net Income (loss) $ (12,487 ) $ (734 ) $ (24,724 ) $ 4,203  
 
Income (loss) per share - basic
Income (loss) from continuing operations $ (0.24 ) $ (0.02 ) $ (0.57 ) $ 0.16
Income (loss) from discontinued operations   (0.16 )   0.00     (0.19 )   (0.03 )
Net income (loss) per share - basic $ (0.40 ) $ (0.02 ) $ (0.76 ) $ 0.13  
 
Income (loss) per share - diluted
Income (loss) from continuing operations $ (0.24 ) $ (0.02 ) $ (0.57 ) $ 0.16
Income (loss) from discontinued operations   (0.16 )   0.00     (0.19 )   (0.03 )
Net income (loss) per share - diluted $ (0.40 ) $ (0.02 ) $ (0.76 ) $ 0.13  
Shares used in per share calculation - basic 31,487 32,685 32,435 33,347
Shares used in per share calculation - diluted 31,487 32,685 32,435 33,579
 
 
Calculation of GAAP Diluted Net Income (Loss) Per Share
 

Three months ended
September 30,

Nine months ended
September 30,

2013 2012 2013 2012
GAAP net income (loss) $ (12,487 ) $ (734 ) $ (24,724 ) $ 4,203
Add back debt interest expense and issuance cost amortization, net of tax benefit   -     -     -     -  
Adjusted net income (loss) for GAAP EPS calculation $ (12,487 ) $ (734 ) $ (24,724 ) $ 4,203  
 
Net income (loss) per share - diluted $ (0.40 ) $ (0.02 ) $ (0.76 ) $ 0.13  
Shares used in per share calculation - diluted 31,487 32,685 32,435 33,579
 
 
Digital River, Inc.
Third Quarter Results
(Unaudited, in thousands)
Subject to reclassification
       
Consolidated Statements of Cash Flows
Nine months ended
September 30,
2013 2012

Operating Activities:

Net income (loss) $ (24,724 ) $ 4,203
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Loss on disposal of discontinued operations 2,110 -
Amortization of acquisition-related intangibles 6,360 5,301
Provision for doubtful accounts 1,400 1,349
Depreciation and amortization 15,831 15,258
Impairment of goodwill 21,249 -
Debt issuance cost amortization 1,278 1,481
Amortization of investment premiums 2,246 -
Loss on sale of equipment 121 39
Gain on sale of investment (17,526 ) -
Stock-based compensation expense 16,295 18,255
Excess tax benefits from stock-based compensation - (129 )
Deferred and other income taxes 1,715 (4,325 )
Change in operating assets and liabilities (net of acquisitions):
Accounts receivable (2,856 ) (11,539 )
Prepaid and other assets 5,940 (7,362 )
Accounts payable (65,721 ) (62,586 )
Deferred revenue (4,321 ) 9,094
Income tax payable (2,151 ) 5,771
Other accrued liabilities   (2,801 )   846  
Net cash provided by (used in) operating activities   (45,555 )   (24,344 )
 

Investing Activities:

Purchases of investments (53,243 ) (95,776 )
Sales of investments 90,891 122,391
Cash received for cost method investments 39,636 -
Cash paid for acquisitions, net of cash received (55,843 ) -
Cash received from divestitures 20 -
Purchases of equipment and capitalized software   (15,662 )   (14,394 )
Net cash provided by (used in) investing activities   5,799     12,221  
 

Financing Activities:

Repurchase of senior convertible notes (5,354 ) -
Exercise of stock options 1,273 1,522
Sales of common stock under employee stock purchase plan 1,183 1,300
Repurchase of common stock (43,950 ) (20,242 )
Repurchase of restricted stock to satisfy tax withholding obligation (4,328 ) (3,657 )
Excess tax benefits from stock-based compensation   -     129  
Net cash provided by (used in) financing activities   (51,176 )   (20,948 )
Effect of exchange rate changes on cash   6,143     1,333  
Net increase (decrease) in cash and cash equivalents (84,789 ) (31,738 )
Cash and cash equivalents, beginning of period 542,851 497,193
   
Cash and cash equivalents, end of period $ 458,062   $ 465,455  
   
Cash paid for interest on convertible senior notes $ 3,123   $ 3,560  
Cash paid for income taxes $ 3,373   $ 2,314  
 
 
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 months
ended

March 31, June 30, September 30, December 31, December 31,
2012 2012 2012 2012 2012
GAAP pre-tax income (loss) from continuing operations $ 6,476 $ 1,533 $ (1,435 ) $ (171,009 ) $ (164,435 )
Add back amortization of acquisition-related intangibles 1,257 1,151 1,118 1,174 4,700
Add back stock-based compensation expense 5,961 6,231 6,063 11,262 29,517
Add back restructuring related costs 331 - - 1,354 1,685
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 14,025 8,915 7,745 14,629 45,314
Income tax expense @ 21%   2,945     1,872     1,626     3,072     9,516  
Non-GAAP income from continuing operations   11,080     7,043     6,119     11,557     35,798  
 
Add back debt interest expense and issuance cost amortization, net of tax benefit   1,409     1,412     20     1,382     5,618  
Adjusted income from continuing operations for non-GAAP EPS calculation $ 12,489   $ 8,455   $ 6,139   $ 12,939   $ 41,416  
 
Non-GAAP income from continuing operations per share - diluted $ 0.30   $ 0.21   $ 0.19   $ 0.32   $ 1.02  
 
Shares used in per share calculation - diluted 41,032 40,783 33,150 40,163 40,719
 
 
Three months ended

Nine months
ended

March 31, June 30, September 30, September 30,
2013 2013 2013 2013
GAAP pre-tax income (loss) from continuing operations $ (9,766 ) $ (887 ) $ (8,241 ) $ (18,894 )
Add back amortization of acquisition-related intangibles 1,928 2,283 2,149 6,360
Add back stock-based compensation expense 5,575 6,379 4,341 16,295
Add back restructuring related costs 2,808 424 395 3,627
Add back litigation settlement related costs - 312 - 312
Add back acquisition and integration costs 4,532 269 94 4,895
Add back realized investment loss (gain) (11,067 ) (6,459 ) - (17,526 )
Add back goodwill impairment   21,249     -     -     21,249  
Subtotal 15,259 2,321 (1,262 ) 16,318
Income tax expense (benefit) @ 21%   3,204     487     (264 )   3,427  
Non-GAAP income (loss) from continuing operations   12,055     1,834     (998 )   12,891  
 
Add back debt interest expense and issuance cost amortization, net of tax benefit   1,233     -     -     59  
Adjusted income (loss) from continuing operations for non-GAAP EPS calculation $ 13,288   $ 1,834   $ (998 ) $ 12,950  
 
Non-GAAP income (loss) from continuing operations per share - diluted $ 0.33   $ 0.06   $ (0.03 ) $ 0.39  
 
Shares used in per share calculation - diluted 39,767 32,739 31,487 32,949
 
 
Breakdown of stock-based compensation expense
Three months ended

Nine months
ended

March 31, June 30, September 30, September 30,
2013 2013 2013 2013
Direct cost of services $ 42 $ 47 $ 35

$

124
Network and infrastructure 415 327 341 1,083
Sales and marketing 1,832 1,799 1,718 5,349
Product research and development 925 846 782 2,553
General and administrative   2,361     3,360     1,465     7,186  
Total $ 5,575   $ 6,379   $ 4,341   $ 16,295  
 
 
Digital River, Inc.
Non-GAAP Guidance
(Unaudited, in millions except per share amounts)
                   
Revenue Guidance Table
2012 Actual
Three months ended

Twelve months
ended

March 31, June 30, September 30, December 31, December 31,
2012 2012 2012 2012 2012
Commerce $ 92.9 $ 81.6 $ 81.0 $ 90.1 $ 345.6
Payments   5.3     5.5     6.1     8.0     24.9
Total Revenue $ 98.2   $ 87.1   $ 87.1   $ 98.1   $ 370.5
 
 
2013 Actual
Three months ended

Nine months
ended

March 31, June 30, September 30, September 30,
2013 2013 2013 2013
Commerce $ 96.7 $ 74.3 $ 72.5 $ 243.5
Payments   14.3     15.8     14.8     44.9
Total Revenue $ 111.0   $ 90.1   $ 87.3   $ 288.4
 
 
2013 Guidance
Q4 2013 FY 2013
Low Guidance High Guidance Low Guidance High Guidance
Commerce $ 80.6 $ 83.8 $ 324.0 $ 327.3
Payments   15.9     16.7     61.0     61.7  
Total Expected Revenue $ 96.5   $ 100.5   $ 385.0   $ 389.0  
 
 
Non-GAAP Guidance Reconciliation
Q4 2013 FY 2013
Low Guidance High Guidance Low Guidance High Guidance
Expected GAAP net income (loss) per share from continuing operations - diluted $ (0.10 ) $ (0.03 ) $ (0.67 ) $ (0.60 )
Add back amortization of acquisition-related intangibles, net of tax 0.06 0.06 0.21 0.21
Add back stock-based compensation expense, net of tax 0.12 0.12 0.52 0.52
Add back restructuring related costs, net of tax 0.05 0.05 0.14 0.14
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 0.14 0.14
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 ) (0.01 )
Tax variability   0.02     0.01     0.13     0.11  
Expected non-GAAP diluted net income (loss) per share $ 0.17   $ 0.22   $ 0.56   $ 0.61  
 
 
Projected Shares Used in Per Share Calculation
Q4 2013 FY 2013
Low Guidance High Guidance Low Guidance High Guidance
 
Shares used in per share calculation - GAAP diluted 30,871 30,871 32,083 32,083
Shares used in per share calculation - non-GAAP diluted 31,772 37,792 32,803 32,803
 

Contact:
Digital River, Inc.
Investor Relations Contact:
Melissa Fisher, 952-225-3351
Vice President, Corporate Development, Investor Relations and Treasury
investorrelations@digitalriver.com
or
Media Relations Contact:
Gerri Dyrek, 952-225-3719
Group Vice President, Corporate Communications
publicrelations@digitalriver.com

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