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8-K - DIGITAL RIVER, INC. 8K - DIGITAL RIVER INC /DEa50556024.htm

Exhibit 99.1

Digital River Reports Fourth Quarter and Full Year 2012 Financial Results

MINNEAPOLIS--(BUSINESS WIRE)--February 6, 2013--Digital River, Inc. (NASDAQ: DRIV), the revenue growth experts in global cloud commerce, today reported financial results for its fourth quarter and full year 2012.

Fourth Quarter and Full Year Ended Dec. 31, 2012, Financial Results
GAAP Results
In 2012 fourth quarter revenue was $101.3 million, exceeding management’s fourth quarter revenue guidance of $96 to $100 million. For the full year 2012, revenue was $386.2 million, also exceeding full year revenue guidance of $381 to $385 million. In 2011, the company reported fourth quarter revenue of $112 million and full year revenue of $398.1 million.

In 2012, the company reported a GAAP net loss of $200.1 million, or $6.11 per share, for the fourth quarter, and a GAAP net loss of $195.9 million, or $5.90 per share, for the full year. The net loss includes a non-cash goodwill impairment charge of $161.1 million net of tax and a non-cash valuation allowance against deferred tax assets of $43.5 million. The goodwill impairment and tax valuation allowance were both non-cash charges and are not expected to impact future company performance. In 2011, the company reported GAAP net income of $4.3 million, or $0.12 per diluted share, in the fourth quarter, and GAAP net income of $17.2 million, or $0.46 per diluted share, for the full year.

Non-GAAP Results
In 2012 on a non-GAAP basis, which excludes the non-cash goodwill impairment and tax valuation allowance, the company reported net income of $11.2 million, or $0.31 per diluted share, in the fourth quarter, and $35.9 million, or $1.02 per diluted share, for the full year. In 2011, the company reported non-GAAP net income of $17.7 million, or $0.45 per diluted share, in the fourth quarter, and non-GAAP net income of $45.6 million, or $1.15 per diluted share, for the full year.


“Our fourth quarter revenue and non-GAAP earnings performance was in line with our expectations,” said Tom Madison, Digital River’s chairman and interim CEO. “We continue to focus the organization on initiatives that drive revenue for clients. In addition during the quarter, we divested some non-core assets, reduced expenses in certain areas, as well as repurchased some of our outstanding convertible debt and common stock. In early January, we also completed our acquisition of LML Payment Systems. We plan to accelerate growth across our payments solution this year as we extend LML’s services to Europe and other geographies.”

Madison continued, “During 2013, we’ll be making some important investments to advance our technology toward an even more modular, cloud-based service, which is where we see the market moving. We believe these investments will solidify the foundation we need to return to increasing top-line growth in the future.”

During the quarter, the company repurchased approximately $44 million of its two percent, 2010 convertible notes in open market transactions. Additionally, the company repurchased approximately $2.4 million of common stock.

First Quarter 2013 Guidance
Management’s forward-looking financial expectations for the first quarter of 2013 are as follows:

  • Revenue, ranging from $101 to $104 million;
  • GAAP EPS, ranging from a loss of $0.14 to a loss of $0.09 per share, using a 17 percent tax rate; and
  • Non-GAAP EPS, ranging from $0.18 to $0.22 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. EST to discuss fourth quarter and full year 2012 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 #87094625 and dialing +1 (408) 427-3861. A webcast replay of the call will be archived on Digital River’s corporate website.

About Digital River, Inc.
Digital River, Inc., the revenue growth experts in global cloud commerce, 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.

Founded in 1994, 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 amortization of acquisition-related intangibles, stock-based compensation expense, intangible impairments, restructuring costs, litigation settlements, acquisition and integration costs, unrealized investment gain or loss, 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, which includes shares reserved upon conversion of 199,828 and 6,128,581, respectively. In computing non-GAAP diluted earnings per share, 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 market; challenges associated with international expansion; our ability to successfully complete senior management succession plans; 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, 2011. 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 Feb. 6, 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 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. 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.
Fourth Quarter Results
(In thousands, except share data)
Subject to reclassification
       
Consolidated Balance Sheets (Unaudited)
December 31, December 31,
2012 2011

Assets

Current assets
Cash and cash equivalents $ 542,851 $ 497,193
Short-term investments 162,794 223,349
Accounts receivable, net of allowance of $5,400 and $4,613 60,656 64,811
Deferred tax assets 457 8,532
Prepaid expenses and other   33,714     35,719  
Total current assets 800,472 829,604
Property and equipment, net 53,265 51,537
Goodwill 108,960 281,858
Intangible assets, net of accumulated amortization of $91,059 and $85,542 11,718 18,324
Long-term investments 71,735 99,047
Deferred income taxes 1,724 21,433
Other assets   4,342     8,973  
Total assets $ 1,052,216   $ 1,310,776  

Liabilities and stockholders' equity

Current liabilities
Accounts payable $ 205,377 $ 243,410
Accrued payroll 11,630 17,523
Deferred revenue 13,426 8,633
Other accrued liabilities   51,640     42,577  
Total current liabilities 282,073 312,143
Non-current liabilities
Convertible senior notes 309,909 353,805
Other liabilities   18,236     12,556  
Total non-current liabilities   328,145     366,361  
Total liabilities   610,218     678,504  
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; 48,941,402 and 47,248,765 shares issued 489 472
Treasury stock at cost; 13,581,889 and 11,741,310 shares (368,721 ) (340,946 )
Additional paid-in capital 737,500 708,941
Retained earnings 75,900 271,769
Accumulated other comprehensive loss   (3,170 )   (7,964 )
Stockholders' equity   441,998     632,272  
Total liabilities and stockholders' equity $ 1,052,216   $ 1,310,776  
 

 
Digital River, Inc.
Fourth Quarter Results
(Unaudited, in thousands, except per share amounts)
Subject to reclassification
               
Consolidated Statements of Operations
 
Three months ended Twelve months ended
December 31, December 31,
2012 2011 2012 2011
Revenue $ 101,335 $ 112,024 $ 386,222 $ 398,140
Costs and expenses (exclusive of depreciation and amortization expense shown separately below):
Direct cost of services 2,990 3,809 12,661 15,491
Network and infrastructure 14,459 12,327 53,562 49,433
Sales and marketing 41,403 44,831 162,201 162,564
Product research and development 16,414 16,355 63,510 66,862
General and administrative 19,552 11,729 58,383 43,093
Goodwill impairment 175,241 - 175,241 -
Depreciation and amortization 5,049 5,550 20,307 22,207
Amortization of acquisition-related intangibles   1,766     11,529     7,067     18,040  
Total costs and expenses   276,874     106,130     552,932     377,690  
Income (loss) from operations   (175,539 )   5,894     (166,710 )   20,450  
Interest income 912 1,307 3,820 6,100
Interest expense (2,212 ) (2,254 ) (8,968 ) (9,018 )
Other income (expense), net   4,669     (1,948 )   4,796     (1,921 )
Income (loss) before income taxes (172,170 ) 2,999 (167,062 ) 15,611
Income tax expense (benefit)   27,901     (1,340 )   28,806     (1,556 )
Net income (loss) $ (200,071 ) $ 4,339   $ (195,868 ) $ 17,167  
 
Net income (loss) per share - basic $ (6.11 ) $ 0.12   $ (5.90 ) $ 0.47  
Net income (loss) per share - diluted $ (6.11 ) $ 0.12   $ (5.90 ) $ 0.46  
Shares used in per share calculation - basic 32,752 34,757 33,224 36,778
Shares used in per share calculation - diluted 32,752 35,185 33,224 37,510
 
 
Calculation of GAAP Diluted Net Income (Loss) Per Share
 
Three months ended Twelve months ended
December 31, December 31,
2012 2011 2012 2011
GAAP net income (loss) $ (200,071 ) $ 4,339 $ (195,868 ) $ 17,167
Add back debt interest expense and issuance cost amortization, net of tax benefit   -     19     -     78  
Adjusted net income (loss) for GAAP EPS calculation $ (200,071 ) $ 4,358   $ (195,868 ) $ 17,245  
 
Net income (loss) per share - diluted $ (6.11 ) $ 0.12   $ (5.90 ) $ 0.46  
Shares used in per share calculation - diluted 32,752 35,185 33,224 37,510
 

 
Digital River, Inc.
Fourth Quarter Results
(Unaudited, in thousands)
Subject to reclassification
       
Consolidated Statements of Cash Flows
Twelve months ended
December 31,
2012 2011

Operating Activities:

Net income (loss) $ (195,868 ) $ 17,167
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Amortization of acquisition-related intangibles 6,832 8,689
Provision for doubtful accounts 2,031 1,317
Depreciation and amortization 20,307 22,207
Impairment of goodwill 175,241 -
Impairment of intangibles 235 9,351
Debt issuance cost amortization 1,953 1,986
Loss on sale of equipment 85 -
Gain on investment (3,178 ) -
Gain on business divestiture (246 ) -
Stock-based compensation expense 29,517 22,114
Excess tax benefits from stock-based compensation (505 ) (1,985 )
Deferred and other income taxes 23,349 (2,649 )
Impairment of equity investment - 2,198
Change in operating assets and liabilities (net of acquisitions):
Accounts receivable 2,715 (15,292 )
Prepaid and other assets (8,392 ) 2,635
Accounts payable (40,333 ) 57,162
Deferred revenue 8,265 (1,782 )
Income tax payable 10,948 (4,061 )
Other accrued liabilities   5,884     (24,289 )
Net cash provided by (used in) operating activities   38,840     94,768  
 

Investing Activities:

Purchases of investments (98,658 ) (254,536 )
Sales of investments 185,750 213,302
Cash received (paid) for cost method investments 2,700 (9,490 )
Cash received from divestitures 500 -
Purchases of equipment and capitalized software   (22,035 )   (23,860 )
Net cash provided by (used in) investing activities   68,257     (74,584 )
 

Financing Activities:

Debt issuance costs - (342 )
Repurchase of senior convertible notes (43,896 ) -
Exercise of stock options 1,567 364
Sales of common stock under employee stock purchase plan 2,552 2,466
Repurchase of common stock (22,667 ) (79,758 )
Repurchase of restricted stock to satisfy tax withholding obligation (5,108 ) (5,992 )
Excess tax benefits from stock-based compensation   505     1,985  
Net cash provided by (used in) financing activities   (67,047 )   (81,277 )
Effect of exchange rate changes on cash   5,608     (6,800 )
Net increase (decrease) in cash and cash equivalents 45,658 (67,893 )
Cash and cash equivalents, beginning of period   497,193     565,086  
Cash and cash equivalents, end of period $ 542,851   $ 497,193  
   
Cash paid for interest on convertible senior notes $ 7,123   $ 7,010  
Cash paid for income taxes $ 3,272   $ 5,085  
 

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

UTILIZING 21% EFFECTIVE INCOME TAX RATE

                   
Twelve months
Three months ended ended
March 31, June 30, September 30, December 31, December 31,
2011 2011 2011 2011 2011
 
GAAP pre-tax income $ 8,885 $ 140 $ 3,587 $ 2,999 $ 15,611
Add back amortization of acquisition-related intangibles 2,122 2,205 2,184 11,529 18,040
Add back stock-based compensation expense 4,955 5,731 5,549 5,879 22,114
Add back unrealized investment gain/loss   -   -   -     1,995     1,995  
Subtotal 15,962 8,076 11,320 22,402 57,760
Income tax expense @ 21%   3,352   1,696   2,377     4,705     12,130  
Non-GAAP net income   12,610   6,380   8,943     17,697     45,630  
 
Add back debt interest expense and issuance cost amortization, net of tax benefit   1,420   20   1,413     1,413     5,659  
Adjusted net income for non-GAAP EPS calculation $ 14,030 $ 6,400 $ 10,356   $ 19,110   $ 51,289  
 
Non-GAAP net income per share - diluted $ 0.31 $ 0.17 $ 0.23   $ 0.45   $ 1.15  
 
Shares used in per share calculation - diluted 45,276 38,181 44,821 42,207 44,532
 
 
Twelve months
Three months ended ended
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
 
 
Breakdown of stock-based compensation expense
Twelve months
Three months ended ended
March 31, June 30, September 30, December 31, December 31,
2012 2012 2012 2012 2012
Direct cost of services $ 60 $ 58 $ 26 $ 41 $ 185
Network and infrastructure 364 368 408 436 1,576
Sales and marketing 2,168 2,129 1,949 2,037 8,283
Product research and development 735 953 999 998 3,685
General and administrative   2,634   2,723   2,681     7,750     15,788  
Total $ 5,961 $ 6,231 $ 6,063   $ 11,262   $ 29,517  
 

 
Digital River, Inc.
Non-GAAP Guidance
(Unaudited, in millions except per share amounts)
                 
Revenue Guidance Table
2011 Actual
Twelve months
Three months ended ended
March 31, June 30, September 30, December 31, December 31,
2011 2011 2011 2011 2011
Commerce $ 74.6 $ 70.1 $ 72.5 $ 89.6 $ 306.8
Support Business   23.6     22.4     22.9   22.4   91.3
Total Revenue $ 98.2   $ 92.5   $ 95.4 $ 112.0 $ 398.1
 
 
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 Guidance
Q1 2013
Low Guidance High Guidance
Commerce $ 84.2 $ 86.9
Support Business   16.8     17.1  
Total Expected Revenue $ 101.0   $ 104.0  
 
 
Non-GAAP Guidance Reconciliation
Q1 2013
Low Guidance High Guidance
Expected GAAP net income (loss) per share - diluted $ (0.14 ) $ (0.09 )
Add back amortization of acquisition-related intangibles, net of tax 0.06 0.06
Add back stock-based compensation expense, net of tax 0.16 0.16
Add back restructuring related costs, net of tax 0.07 0.07
Add back litigation settlement related costs, net of tax - -
Add back acquisition and integration costs, net of tax 0.02 0.02
Add back unrealized investment loss, net of tax - -
Convertible debt dilution impact, net of tax (0.01 ) (0.01 )
Tax Variability   0.02     0.01  
Expected non-GAAP diluted net income (loss) per share $ 0.18   $ 0.22  

CONTACT:
Digital River, Inc.
Investor Relations Contact:
Ed Merritt, 952-225-3362
Vice President, Investor Relations, Treasury
investorrelations@digitalriver.com
or
Media Relations Contact:
Gerri Dyrek, 952-225-3719
Group Vice President, Corporate Communications
gdyrek@digitalriver.com