Digital River Reports Third Quarter Financial Results

Digital River, Inc. (NASDAQ:DRIV), a leading provider of global e-commerce solutions, reported its third quarter financial results. Third Quarter and Nine Months Ended Sept. 30, 2007 GAAP Results Third quarter revenue totaled $82.5 million. This is an increase of 10 percent from revenue of $75.3 million in the third quarter of 2006. For the nine months ended Sept. 30, 2007, the Company reported revenue of $252.4 million. This represents a 12 percent increase from revenue of $224.6 million in the similar period of the prior year. Third quarter GAAP net income was $15.3 million, or $0.35 per diluted share. This compared to net income of $14.8 million, or $0.33 per diluted share, in the third quarter of 2006. These results represent a year-over-year increase of 3 percent in GAAP net income and 6 percent in GAAP diluted net income per share. For the first nine months of 2007, GAAP net income was $50.5 million, or $1.12 per diluted share. This compared to net income of $44.5 million, or $1.04 per diluted share, in the similar period of 2006. Non-GAAP Results Based on the Company’s non-GAAP measurements, third quarter non-GAAP net income was $18.8 million, or $0.41 per diluted share. This compared to net income on a similar basis of $18.7 million, or $0.41 per diluted share, in the third quarter of 2006. Non-GAAP net income for the first nine months of 2007 was $61.9 million, or $1.34 per diluted share. This compared to net income on a similar basis of $58.2 million, or $1.32 per diluted share, during the first nine months of 2006. Non-GAAP net income is computed by starting with GAAP pre-tax income as reported on the Company’s statement of operations, adding back amortization of acquisition-related intangibles and stock-based compensation expense, to calculate non-GAAP pre-tax income. This amount is then taxed at 31 percent, the Company’s current estimated effective tax rate, to arrive at non-GAAP net income. This amount is then divided by fully-diluted GAAP shares outstanding, which includes the impact of the Company’s contingent convertible notes, to derive non-GAAP diluted net income per share. 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 announcement. "Overall we are pleased with our third quarter financial performance,” said Joel Ronning, Digital River’s CEO. "Our business continues to be fueled by growth in international markets, and our software and shareware businesses. In addition, we continue to sign key clients in the consumer electronics and game markets, where our expertise in managing global commerce and e-marketing services continues to drive wins with industry leaders.” 2007 Guidance Forward-looking guidance for the period ending Dec. 31, 2007, is as follows: Fourth Quarter Revenue of $96 million; GAAP diluted net income per share of $0.45, including stock-based compensation expense of approximately $3.4 million; and Non-GAAP diluted net income per share of $0.53. Full Year Revenue of $348 million; GAAP diluted net income per share of $1.57, including stock-based compensation expense of approximately $13.9 million; and Non-GAAP diluted net income per share of $1.87. Management will issue 2008 earnings guidance in conjunction with the Company’s fourth quarter earnings release in January 2008. Digital River will hold a third quarter conference call today at 4:45 p.m. Eastern Daylight Time. A live webcast of the conference call can be accessed from http://www.digitalriver.com/2007/q3earnings/. Alternatively, a live broadcast of the call may be heard by using conference ID # 9318373 and dialing (888) 603-6873 inside the United States or Canada, or by calling (973) 582-2706 from international locations. A webcast replay of the call will be archived on Digital River’s corporate Web site. About Digital River, Inc. Digital River, Inc., a leading provider of global e-commerce solutions, builds and manages online businesses for more than 40,000 software publishers, consumer technology manufacturers, distributors, online retailers and affiliates. Its multi-channel e-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 an e-commerce operation. The company’s comprehensive platform offers site development and hosting, order management, fraud prevention, export controls, tax management, physical and digital product fulfillment, multi-lingual customer service, advanced reporting and strategic marketing services. Founded in 1994, Digital River is headquartered in Minneapolis with offices in major U.S. cities as well as Cologne, Germany; London, England; Shannon, Ireland; Luxembourg, Luxembourg; Taipei, Taiwan; Tokyo, Japan; and Shanghai, China. For more details about Digital River, visit the corporate Web site at www.digitalriver.com or call 952-253-1234. Forward-Looking Statements This press release contains forward-looking statements, including statements regarding the Company’s anticipated future growth, including future financial performance, as well as statements containing the words "anticipates,” "believes,” "plans,” "will,” or "expects” 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 limited operating history and variability of operating results; competition in the e-commerce market; challenges associated with international expansion; potential consequences surrounding findings of our internal investigation, investigation by a committee of our independent directors and informal SEC inquiry into our stock option granting practices; any potential civil litigation relating to our stock option granting practices; 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 December 31, 2006. 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 regarding fourth quarter 2007 reflect Digital River’s expectations as of October 25, 2007. Results may be materially affected by many factors, such as changes in global economic conditions and consumer spending, fluctuations in foreign currency rates, the rate of growth of online commerce and the Internet, progress with key partners and other factors. The guidance assumes, among other things, that there are no changes to stock-based compensation expense and anticipated tax rates, and that no additional intangible assets are recorded. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management's analysis only as of the date hereof. The Company undertakes no obligation to update these forward-looking statements to reflect events or circumstances that may arise after the date hereof. Digital River is a registered trademark of Digital River, Inc. All other trademarks and registered trademarks are trademarks of their respective owners. Digital River, Inc. Third Quarter Results (Unaudited, in thousands) Subject to reclassification   Condensed Consolidated Balance Sheets As of September 30,   December 31, 2007 2006 Assets Current assets Cash and cash equivalents $ 371,100 $ 390,243 Short-term investments 267,352 235,699 Accounts receivable, net 64,549 52,392 Deferred income taxes 15,399 19,687 Prepaid expenses and other   7,583   6,025 Total current assets 725,983 704,046 Property and equipment, net 25,497 24,079 Goodwill 273,361 243,799 Intangible assets, net 15,992 21,106 Deferred income taxes 17,403 1,276 Other assets   12,018   11,957 Total assets $ 1,070,254 $ 1,006,263 Liabilities and stockholders' equity Current liabilities Accounts payable $ 146,770 $ 141,386 Accrued payroll 13,992 12,097 Deferred revenue 8,980 7,040 Accrued acquisition liabilities 1,255 5,654 Other accrued liabilities   52,605   39,982 Total current liabilities 223,602 206,159 Non-current liabilities Convertible senior notes 195,000 195,000 Other liabilities   10,125   1,345 Total non-current liabilities   205,125   196,345 Total liabilities   428,727   402,504 Stockholders' equity Common stock 403 404 Additional paid-in capital 567,837 546,758 Retained earnings 48,108 44,989 Accumulated other comprehensive income   25,179   11,608 Stockholders' equity   641,527   603,759 Total liabilities and stockholders' equity $ 1,070,254 $ 1,006,263 Digital River, Inc. Third Quarter Results (Unaudited, in thousands, except per share amounts) Subject to reclassification       Condensed Consolidated Statements of Operations   Three months endedSeptember 30, Nine months endedSeptember 30, 2007 2006 2007 2006 Revenue $ 82,539 $ 75,337 $ 252,397 $ 224,628 Costs and expenses: Direct cost of services 3,009 1,912 7,998 5,689 Network and infrastructure 7,983 7,761 22,812 21,502 Sales and marketing 32,945 28,451 99,927 83,018 Product research and development 10,170 8,338 27,057 23,428 General and administrative 9,055 8,054 28,711 24,551 Depreciation and amortization 3,120 2,943 9,269 7,671 Amortization of acquisition-related intangibles   1,611   3,313   5,964   9,191 Total costs and expenses   67,893   60,772   201,738   175,050 Income from operations   14,646   14,565   50,659   49,578 Other income, net   7,528   5,804   22,528   15,131 Income before income tax expense 22,174 20,369 73,187 64,709 Income tax expense   6,875   5,581   22,689   20,255 Net income $ 15,299 $ 14,788 $ 50,498 $ 44,454   Net income per share - basic $ 0.38 $ 0.37 $ 1.25 $ 1.17 Net income per share - diluted $ 0.35 $ 0.33 $ 1.12 $ 1.04 Shares used in per share calculation - basic 40,078 39,619 40,555 38,126 Shares used in per share calculation - diluted 45,386 45,666 46,099 44,107       Calculation of GAAP Diluted Net Income Per Share   Three months ended September 30, Nine months ended September 30, 2007 2006 2007 2006 GAAP net income $ 15,299 $ 14,788 $ 50,498 $ 44,454 Add back debt interest expense and issuance cost amortization, net of tax benefit   434   435   1,304   1,305 Adjusted net income for GAAP EPS calculation $ 15,733 $ 15,223 $ 51,802 $ 45,759   Net income per share - diluted $ 0.35 $ 0.33 $ 1.12 $ 1.04 Shares used in per share calculation - diluted 45,386 45,666 46,099 44,107 Digital River, Inc. Third Quarter Results (Unaudited, in thousands) Subject to reclassification   Condensed Consolidated Statements of Cash Flows Nine months ended September 30, 2007 2006 Operating Activities: Net income $ 50,498 $ 44,454 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of acquisition-related intangibles 5,964 9,191 Change in accounts receivable allowance, net of acquisitions 628 426 Depreciation and amortization 9,269 7,671 Stock-based compensation expense 10,536 10,389 Excess tax benefits from stock-based compensation (11,297 ) (3,032 ) Deferred and other income taxes 17,337 17,676 Change in operating assets and liabilities (net of acquisitions): Accounts receivable (8,373 ) (2,351 ) Prepaid and other assets (1,652 ) (291 ) Accounts payable 810 (7,028 ) Deferred revenue 1,782 881 Income tax payable 3,314 1,022 Other accrued liabilities   5,912     5,679   Net cash provided by operating activities   84,728     84,687     Investing Activities: Purchases of investments (228,342 ) (135,911 ) Sales of investments 197,645 116,446 Cash paid for acquisitions, net of cash received (30,573 ) (37,998 ) Purchases of equipment and capitalized software   (9,752 )   (12,825 ) Net cash used in investing activities   (71,022 )   (70,288 )   Financing Activities: Proceeds from sales of common stock - 172,700 Exercise of stock options 11,244 10,579 Sales of common stock under employee stock purchase plan 1,244 933 Repurchase of common stock (62,968 ) - Repurchase of restricted stock to satisfy tax withholding obligation (382 ) - Excess tax benefits from stock-based compensation   11,297     3,032   Net cash (used in)/ provided by financing activities   (39,565 )   187,244   Effect of exchange rate changes on cash   6,716     2,263   Net (decrease)/ increase in cash and cash equivalents (19,143 ) 203,906 Cash and cash equivalents, beginning of period 390,243 131,770     Cash and cash equivalents, end of period $ 371,100   $ 335,676       Cash paid for interest on Convertible Senior Notes $ 2,438   $ 2,438   Digital River, Inc. GAAP to non-GAAP Reconciliations (Unaudited, in thousands, except per share amounts)   Calculation of non-GAAP Diluted Net Income Per Share   Three months ended Twelve months ended March 31, June 30, September 30,   December 31, December 31, 2006 2006 2006  2006 2006   GAAP pre-tax income $ 23,759 $ 20,581 $ 20,369 $ 24,773 $ 89,482 Add back: amortization of acquisition-related intangibles 2,840 3,038 3,313 2,943 12,134 Add back: stock-based compensation expense   3,413     3,519   3,456     3,516   13,904 Non-GAAP pre-tax income 30,012 27,138 27,138 31,232 115,520 Income tax expense @ 31%   9,304     8,413   8,413     9,682   35,812 Non-GAAP net income $ 20,708   $ 18,725 $ 18,725   $ 21,550 $ 79,708   Non-GAAP net income per share - diluted $ 0.50   $ 0.41 $ 0.41   $ 0.47 $ 1.79   Shares used in per share calculation - diluted 41,154 45,458 45,666 46,138 44,642   Three months ended Nine months ended March 31, June 30, September 30, September 30, 2007 2007 2007 2007 GAAP pre-tax income $ 30,008 $ 21,005 $ 22,174 $ 73,187 Add back: amortization of acquisition-related intangibles 2,746 1,607 1,611 5,964 Add back: stock-based compensation expense   3,476     3,649   3,411     10,536 Non-GAAP pre-tax income 36,230 26,261 27,196 89,687 Income tax expense @ 31%   11,231     8,141   8,431     27,803 Non-GAAP net income $ 24,999   $ 18,120 $ 18,765   $ 61,884   Non-GAAP net income per share - diluted $ 0.54   $ 0.39 $ 0.41   $ 1.34   Shares used in per share calculation - diluted 46,348 46,637 45,386 46,099   Breakdown of stock-based compensation expense Three months ended Nine months ended March 31, June 30, September 30, September 30, 2007 2007 2007 2007 Direct cost of services $ 195 $ 225 $ 223 $ 643 Network and infrastructure 72 61 58 191 Sales and marketing 1,268 1,350 1,230 3,848 Product research and development 552 466 391 1,409 General and administrative   1,389     1,547   1,509     4,445 Total $ 3,476   $ 3,649 $ 3,411   $ 10,536   Non-GAAP Guidance Reconciliation Q4 - 2007 FY - 2007 Guidance Guidance Expected GAAP net income per share - diluted $ 0.45 $ 1.57 Add back amortization of acquisition-related costs 0.05 0.18 Add back stock-based compensation expense 0.07 0.30 Tax variability (0.03 ) (0.15 ) Deduct impact of contingent convertible notes   (0.01 )   (0.03 ) Expected non-GAAP diluted net income per share $ 0.53   $ 1.87