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Digital River Reports Third Quarter 2014 Financial Results

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Digital River, Inc. (NASDAQ: DRIV), a leading global provider of Commerce-as-a-Service solutions, reported financial results for the third quarter of 2014.

Third Quarter Ended September 30, 2014
GAAP Results
Third quarter revenue totaled $88.8 million, an increase of 2 percent over revenue in the third quarter of 2013, and within management’s third quarter revenue guidance range.

Third quarter 2014 GAAP net income from continuing operations was $4.0 million or $0.13 per diluted share, exceeding management’s third quarter GAAP guidance of a net loss from continuing operations of $0.31 to a net loss of $0.26 per share. Third quarter 2014 GAAP net income from continuing operations benefited from the inclusion of $9.1 million in tax benefits. In 2013, third quarter GAAP net loss from continuing operations was $7.6 million or a net loss of $0.24 per share.

Non-GAAP Results
On a non-GAAP basis, results from continuing operations and earnings per share were break-even for the third quarter of 2014. These results exceeded management’s third quarter non-GAAP guidance of a net loss from continuing operations of $0.05 to a net loss of $0.02 per share. In 2013, third quarter non-GAAP net loss from continuing operations was $1.0 million or a net loss of $0.03 per share.

“I am pleased to report that we delivered a solid third quarter. The company has returned to revenue growth, representing another important transformation milestone. Our revenue growth was driven by the continued expansion of existing client relationships as well as new business in our core commerce and payments markets,” said David Dobson, Digital River’s CEO. “We also recently announced a definitive merger agreement to be acquired by Siris Capital. We believe that this transaction, in addition to providing significant value to our stockholders, will allow Digital River to continue to accelerate our transformation, sharpen our focus on long-term global opportunities and deliver more value to our clients more quickly.”

Definitive Merger Agreement
On October 23, 2014, Digital River announced that it entered into a definitive merger agreement to be acquired by an investor group led by Siris Capital Group, LLC (collectively,”Siris”) in a transaction valued at approximately $840 million. Under the terms of the agreement, Siris would acquire all of the outstanding common shares of Digital River for $26.00 per share in cash.

The agreement was approved by Digital River’s Board of Directors, which recommended that Digital River’s stockholders adopt the agreement with Siris. The transaction is subject to customary closing conditions and is expected to close in the first quarter of 2015. Following the date of execution of the merger agreement, Digital River may solicit alternative acquisition proposals from third parties during a 45-day “go-shop” period.

Fourth Quarter and Full Year 2014 Guidance
Management’s forward-looking financial expectations for the fourth quarter of 2014 are as follows:

  • Revenue, ranging from $101 to $104 million;
  • GAAP EPS, ranging from $0.11 to $0.16 per diluted share; and
  • Non-GAAP EPS, ranging from $0.31 to $0.35 per diluted share, using a 21 percent tax rate.

Management’s forward-looking financial expectations for the full year 2014 are as follows:

  • Revenue, updated to range from $375 to $378 million, within the previous guidance range;
  • GAAP EPS, updated to range from a net loss of $0.19 to a net loss of $0.14 per share, an increase from previous guidance; and
  • Non-GAAP EPS, ranging from $0.49 to $0.54 per diluted share, using a 21 percent tax rate, an increase from previous guidance.

A detailed table providing a reconciliation of the company’s GAAP and non-GAAP earnings guidance estimates can be found accompanying this press release. Supplemental information on Digital River’s earnings results is included in an earnings overview presentation, which is available on the Investor Relations page of Digital River’s corporate website at http://phx.corporate-ir.net/phoenix.zhtml?c=94762&p=irol-irhome.

In light of the pending acquisition by Siris, Digital River does not intend to hold a conference call to discuss third quarter earnings.

About Digital River, Inc.
Backed by 20 years of ecommerce experience, Digital River is recognized as a leading global provider of Commerce-as-a-Service solutions. Companies of all sizes rely on Digital River’s multi-tenant, SaaS commerce, payments and marketing services to manage and grow their online businesses. In 2013, Digital River processed more than $30 billion in online transactions, connecting B2B and B2C digital products and cloud service companies as well as branded manufacturers with buyers across multiple devices and channels, and nearly every country in the world.

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, read our Digital River blog, follow the company on Twitter or call +1 952-253-1234.

Non-GAAP Net Income Calculation
Digital River’s non-GAAP net income (loss) from continuing operations is computed by adjusting GAAP pre-tax income (loss) 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, investment gains or losses, goodwill impairments, and one-time impacts of debt repurchases, 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 Senior 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 from continuing operations 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; 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 and transformational 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; the nature, cost and outcome of pending and future litigation and other legal proceedings; the risk that the merger may not be consummated in a timely manner, if at all; the risk that the merger agreement may be terminated in circumstances that require Digital River to pay Siris a termination fee or other expenses; risks related to the diversion of management’s attention from Digital River’s ongoing business operations; risks regarding the failure of the relevant Siris affiliate to obtain the necessary financing to complete the merger; the effect of the announcement of the merger on Digital River’s business relationships (including, without limitation, customers and suppliers), operating results and business generally; risks related to satisfying the conditions to the merger, including the failure of Digital River’s stockholders to approve the merger, timing (including possible delays) and receipt of regulatory approvals from various governmental entities (including any conditions, limitations or restrictions placed on these approvals) and the risk that one or more governmental entities may deny approval; the ability to recognize the benefits of the merger and the nature, cost and outcome of pending and future litigation and other legal proceedings, including any such proceedings related to the proposed merger; 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, 2013. 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 reflect management’s expectations as of Oct. 29, 2014. 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.

Additional Information
This press release may be deemed to be solicitation material in respect of the proposed acquisition of Digital River. In connection with the proposed merger, Digital River intends to file relevant materials with the Securities and Exchange Commission (the “SEC”), including a preliminary proxy statement on Schedule 14A. Following the filing of the definitive proxy statement with the SEC, Digital River will mail the definitive proxy statement and a proxy card to each stockholder entitled to vote at the special meeting relating to the proposed merger. INVESTORS AND SECURITY HOLDERS OF THE COMPANY ARE URGED TO READ THESE MATERIALS (INCLUDING ANY AMENDMENTS OR SUPPLEMENTS THERETO) AND ANY OTHER RELEVANT DOCUMENTS IN CONNECTION WITH THE MERGER THAT DIGITAL RIVER WILL FILE WITH THE SEC WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT DIGITAL RIVER AND THE PROPOSED MERGER. The preliminary proxy statement, the definitive proxy statement and other relevant materials in connection with the proposed merger (when they become available), and any other documents filed by Digital River with the SEC, may be obtained free of charge at the SEC’s website at www.sec.gov. In addition, investors and security holders may obtain free copies of the documents filed with the SEC at Digital River’s website, www.digitalriver.com, or by contacting Investor Relations by directing a request to Digital River, Inc., Attention: Investor Relations, 10380 Bren Road West, Minnetonka, MN 55343, or by calling 952-225-3351.

Digital River and its directors and executive officers may be deemed to be participants in the solicitation of proxies from Digital River’s stockholders with respect to the proposed merger. Information about Digital River’s directors and executive officers and their ownership of Digital River’s common stock is set forth in the proxy statement for Digital River’s 2014 Annual Meeting of Shareholders, which was filed with the SEC on April 11, 2014. Information regarding the identity of the potential participants, and their direct or indirect interests in the merger, by security holdings or otherwise, will be set forth in the proxy statement and other materials to be filed with the SEC in connection with the proposed merger.

Digital River, Inc.
Third Quarter Results
(in thousands, except share data)
Subject to reclassification
Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
2014 2013

Assets

Current assets
Cash and cash equivalents $ 233,405 $ 483,868
Short-term investments 152,424 115,652
Accounts receivable, net of allowance of $3,062 and $3,206 64,667 70,865
Deferred tax assets 1,455 1,479
Prepaid expenses and other 24,916 27,878
Total current assets 476,867 699,742
Property and equipment, net 47,386 53,770
Goodwill 133,638 139,318
Intangible assets, net 21,565 29,217
Long-term investments 52,965 56,023
Deferred income taxes 1,078 1,037
Other assets 879 2,067
Total assets $ 734,378 $ 981,174

Liabilities and stockholders’ equity

Current liabilities
Accounts payable $ 168,010 $ 187,635
Accrued payroll 15,468 20,058
Deferred revenue 4,522 6,904
Other current liabilities 42,169 55,899
Total current liabilities 230,169 270,496
Non-current liabilities
Senior convertible notes 135,180 295,795
Other liabilities 12,454 21,452
Total non-current liabilities 147,634 317,247
Total liabilities 377,803 587,743
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; 50,709,661 and 50,074,977 shares issued 507 501
Treasury stock at cost; 18,821,640 and 16,910,883 shares (456,696 ) (424,416 )
Additional paid-in capital 775,704 761,560
Retained earnings 42,590 51,254
Accumulated other comprehensive income (loss) (5,530 ) 4,532
Stockholders’ equity 356,575 393,431
Total liabilities and stockholders’ equity $ 734,378 $ 981,174
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,

2014 2013 2014 2013
Revenue $ 88,835 $ 87,260 $ 274,028 $ 288,444
Costs and expenses (exclusive of depreciation and amortization expense shown separately below):
Direct cost of services 18,304 16,205 53,275 55,272
Network and infrastructure 13,775 14,648 41,712 44,049
Sales and marketing 25,060 25,013 73,585 80,415
Product research and development 18,297 18,108 55,220 52,967
General and administrative 10,669 12,011 35,310 44,040
Goodwill impairment 21,249
Depreciation and amortization 6,601 5,682 19,469 15,748
Amortization of acquisition-related intangibles 2,038 2,149 6,395 6,360
Total costs and expenses 94,744 93,816 284,966 320,100
Income (loss) from operations (5,909 ) (6,556 ) (10,938 ) (31,656 )
Interest income 469 553 1,735 1,929
Interest expense (890 ) (1,941 ) (3,387 ) (5,884 )
Other income (expense), net 2,063 (297 ) 1,859 16,717
Loss on extinguishment of debt (5,605 )
Income (loss) from continuing operations before income taxes (4,267 ) (8,241 ) (16,336 ) (18,894 )
Income tax expense (benefit) (8,278 ) (645 ) (7,355 ) (408 )
Income (loss) from continuing operations 4,011 (7,596 ) (8,981 ) (18,486 )
Income (loss) from discontinued operations, net of tax 143 (4,891 ) 317 (6,238 )
Net Income (loss) $ 4,154 $ (12,487 ) $ (8,664 ) $ (24,724 )
Income (loss) per share – basic
Income (loss) from continuing operations $ 0.14 $ (0.24 ) $ (0.30 ) $ (0.57 )
Income (loss) from discontinued operations (0.16 ) 0.01 (0.19 )
Net income (loss) per share – basic $ 0.14 $ (0.40 ) $ (0.29 ) $ (0.76 )
Income (loss) per share – diluted
Income (loss) from continuing operations $ 0.13 $ (0.24 ) $ (0.30 ) $ (0.57 )
Income (loss) from discontinued operations 0.01 (0.16 ) 0.01 (0.19 )
Net income (loss) per share – diluted $ 0.14 $ (0.40 ) $ (0.29 ) $ (0.76 )
Shares used in per share calculation – basic 29,665 31,487 30,050 32,435
Shares used in per share calculation – diluted 30,126 31,487 30,050 32,435
Calculation of GAAP Diluted Net Income (Loss) Per Share

Three months ended
September 30,

Nine months ended
September 30,

2014 2013 2014 2013
GAAP net income (loss) $ 4,154 $ (12,487 ) $ (8,664 ) $ (24,724 )
Add back debt interest expense and issuance cost amortization, net of tax benefit
Adjusted net income (loss) for GAAP EPS calculation $ 4,154 $ (12,487 ) $ (8,664 ) $ (24,724 )
Net income (loss) per share – diluted $ 0.14 $ (0.40 ) $ (0.29 ) $ (0.76 )
Shares used in per share calculation – diluted 30,126 31,487 30,050 32,435
Digital River, Inc.
Third Quarter Results
(Unaudited, in thousands)
Subject to reclassification
Consolidated Statements of Cash Flows
Nine months ended
September 30,
2014 2013

Operating Activities:

Net income (loss) $ (8,664 ) $ (24,724 )
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Loss (gain) on disposal of discontinued operations (317 ) 2,110
Amortization of acquisition-related intangibles 6,395 6,360
Provision for doubtful accounts 599 1,400
Depreciation and amortization 19,469 15,831
Impairment of goodwill 21,249
Debt issuance cost amortization 730 1,278
Amortization of investment premiums 1,111 2,246
Loss (gain) on disposal of equipment (358 ) 121
Gain on sale of investment (2,209 ) (17,526 )
Loss on extinguishment of debt 5,605
Stock-based compensation expense 13,239 16,295
Deferred and other income taxes 120 1,715
Change in operating assets and liabilities (net of acquisitions):
Accounts receivable 3,600 (2,856 )
Prepaid and other assets 380 5,940
Accounts payable (12,816 ) (65,721 )
Deferred revenue (2,735 ) (4,321 )
Income tax payable (9,630 ) (2,151 )
Other current liabilities (6,320 ) (2,801 )
Net cash provided by (used in) operating activities 8,199 (45,555 )

Investing Activities:

Purchases of investments (185,180 ) (53,243 )
Sales of investments 151,834 90,891
Cash received (paid) for cost method investments 1,551 39,636
Cash paid for acquisitions, net of cash received (55,843 )
Proceeds from sale of equipment 532 20
Purchases of equipment and capitalized software (13,612 ) (15,662 )
Net cash provided by (used in) investing activities (44,875 ) 5,799

Financing Activities:

Repurchase of senior convertible notes (173,298 ) (5,354 )
Exercise of stock options 1,273
Sales of common stock under employee stock purchase plan 1,015 1,183
Repurchase of common stock (28,260 ) (43,950 )
Repurchase of restricted stock to satisfy tax withholding obligation (4,124 ) (4,328 )
Net cash provided by (used in) financing activities (204,667 ) (51,176 )
Effect of exchange rate changes on cash (9,120 ) 6,143
Net increase (decrease) in cash and cash equivalents (250,463 ) (84,789 )
Cash and cash equivalents, beginning of period 483,868 542,851
Cash and cash equivalents, end of period $ 233,405 $ 458,062
Cash paid for interest on convertible senior notes $ 2,509 $ 3,123
Cash paid for income taxes $ 3,663 $ 3,373
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,
2013 2013 2013 2013 2013
GAAP pre-tax income (loss) from continuing operations $ (9,766 ) $ (887 ) $ (8,241 ) $ (543 ) $ (19,437 )
Add back amortization of acquisition-related intangibles 1,928 2,283 2,149 2,183 8,543
Add back stock-based compensation expense 5,575 6,379 4,341 4,273 20,568
Add back restructuring related costs 2,808 424 395 2,164 5,791
Add back litigation settlement related costs 312 45 357
Add back acquisition and integration costs 4,532 269 94 806 5,701
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 ) 8,928 25,246
Income tax expense (benefit) @ 21% 3,204 487 (264 ) 1,875 5,302
Non-GAAP income (loss) from continuing operations 12,055 1,834 (998 ) 7,053 19,944
Add back debt interest expense and issuance cost amortization, net of tax benefit 1,233 1,214 79
Adjusted income (loss) from continuing operations for non-GAAP EPS calculation $ 13,288 $ 1,834 $ (998 ) $ 8,267 $ 20,023
Non-GAAP income (loss) from continuing operations per share – diluted $ 0.33 $ 0.06 $ (0.03 ) $ 0.22 $ 0.61
Shares used in per share calculation – diluted 39,767 32,739 31,487 37,709 32,744
Three months ended

Nine months
ended

March 31, June 30, September 30, September 30,
2014 2014 2014 2014
GAAP pre-tax income (loss) from continuing operations $ (4,763 ) $ (7,306 ) $ (4,267 ) $ (16,336 )
Add back amortization of acquisition-related intangibles 2,171 2,186 2,038 6,395
Add back stock-based compensation expense 3,988 4,666 4,585 13,239
Add back restructuring related costs 221 116 (183 ) 154
Add back litigation settlement related costs 599 599
Add back loss on extinguishment of debt 5,605 5,605
Add back realized investment loss (gain) (2,209 ) (2,209 )
Subtotal 7,821 (338 ) (36 ) 7,447
Income tax expense (benefit) @ 21% 1,642 (71 ) (7 ) 1,564
Non-GAAP income (loss) from continuing operations 6,179 (267 ) (29 ) 5,883
Add back debt interest expense and issuance cost amortization, net of tax benefit
Adjusted income (loss) from continuing operations for non-GAAP EPS calculation $ 6,179 $ (267 ) $ (29 ) $ 5,883
Non-GAAP income (loss) from continuing operations per share – diluted $ 0.20 $ (0.01 ) $ - $ 0.19
Shares used in per share calculation – diluted 31,418 29,837 29,665 30,542
Digital River, Inc.
Non-GAAP Reconciliations
(Unaudited, in thousands)
Breakdown of stock-based compensation expense
Three months ended

Nine months
ended

March 31, June 30, September 30, September 30,
2014 2014 2014 2014
Direct cost of services $ 44 $ 40 $ 38 $ 122
Network and infrastructure 382 365 380 1,127
Sales and marketing 1,002 1,575 1,452 4,029
Product research and development 912 809 849 2,570
General and administrative 1,648 1,877 1,866 5,391
Total $ 3,988 $ 4,666 $ 4,585 $ 13,239
Breakdown of restructuring related costs
Three months ended

Nine months
ended

March 31, June 30, September 30, September 30,
2014 2014 2014 2014
Direct cost of services $ $ $ $
Network and infrastructure 21 (14 ) 7
Sales and marketing 95 30 (183 ) (58 )
Product research and development 8 8 16
General and administrative 97 92 189
Total $ 221 $ 116 $ (183 ) $ 154
Breakdown of litigation settlement related costs
Three months ended

Nine months
ended

March 31, June 30, September 30, September 30,
2014 2014 2014 2014
Direct cost of services $ $ $ $
Network and infrastructure
Sales and marketing
Product research and development
General and administrative 599 599
Total $ 599 $ - $ - $ 599
Digital River, Inc.
Non-GAAP Guidance
(Unaudited, in millions except per share amounts)
Actual Revenue Table
2013 Actual
Three months ended

Twelve months
ended

March 31, June 30, September 30, December 31, December 31,
2013 2013 2013 2013 2013
Commerce $ 96.4 $ 73.8 $ 72.1 $ 84.3 $ 326.6
Payments 14.6 16.4 15.2 16.9 63.1
Total Revenue $ 111.0 $ 90.2 $ 87.3 $ 101.2 $ 389.7
2014 Actual
Three months ended

Nine months
ended

March 31, June 30, September 30, September 30,
2014 2014 2014 2014
Commerce $ 80.3 $ 71.2 $ 71.8 $ 223.3
Payments 17.5 16.2 17.0 50.7
Total Revenue $ 97.8 $ 87.4 $ 88.8 $ 274.0
Revenue Guidance Table
2014 Guidance
Q4 2014 FY 2014
Low Guidance High Guidance Low Guidance High Guidance
Expected Revenue $ 101.0 $ 104.0 $ 375.0 $ 378.0
Non-GAAP Guidance Reconciliation
Q4 2014 FY 2014
Low Guidance High Guidance Low Guidance High Guidance
Expected GAAP net income (loss) per share from continuing operations – diluted $ 0.11 $ 0.16 $ (0.19 ) $ (0.14 )
Add back amortization of acquisition-related intangibles, net of tax 0.06 0.06 0.22 0.22

Add back stock-based compensation expense, net of tax 0.15 0.15 0.49 0.49
Add back loss on extinguishment of debt, net of tax 0.14 0.14
Add back litigation settlement related costs, net of tax 0.02 0.02
Add back acquisition and integration costs, net of tax
Add back realized investment gain, net of tax (0.06 ) (0.06 )
Add back goodwill impairment, net of tax
Tax variability (0.01 ) (0.02 ) (0.13 ) (0.13 )
Expected non-GAAP diluted net income (loss) per share $ 0.31 $ 0.35 $ 0.49 $ 0.54
Projected Shares Used in Per Share Calculation
Q4 2014 FY 2014
Low Guidance High Guidance Low Guidance High Guidance
Shares used in per share calculation – GAAP diluted 30,295 30,295 30,041 30,041
Shares used in per share calculation – non-GAAP diluted 30,295 33,047 30,553 30,553

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