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Digital River Reports Second Quarter 2014 Financial Results

Companies mentioned in this article: Digital River, Inc.

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

Second Quarter Ended June 30, 2014
GAAP Results
Second quarter revenue totaled $87.4 million, exceeding management’s second quarter revenue guidance of $84 to $87 million. In 2013, second quarter revenue from continuing operations was $90.2 million.

Second quarter 2014 GAAP net loss from continuing operations was $7.3 million or a net loss of $0.24 per share, exceeding management’s second quarter GAAP guidance of a net loss from continuing operations of $0.33 to a net loss of $0.28 per share. In 2013, second quarter GAAP net loss from continuing operations was $0.2 million or a net loss of $0.01 per share.

Non-GAAP Results
Second quarter 2014 non-GAAP net loss from continuing operations was $0.3 million or a net loss of $0.01 per share, which exceeded management’s second quarter non-GAAP guidance of a net loss of $0.07 to a net loss of $0.03 per share. In 2013, second quarter non-GAAP diluted net income from continuing operations was $1.8 million or $0.06 per diluted share.

“I am pleased to report that we delivered a solid second quarter and our transformation efforts are generating meaningful results across our business,” said David Dobson, Digital River’s CEO. “Driven by our commitment to expand existing client relationships, gross transaction volumes across our core commerce and payments businesses continue to increase and signal healthy growth. Moreover, our commerce infrastructure investments, which are now largely complete, continue to contribute to added gains in our commerce loyalty index. We believe the steady rise in these key indicators over time are early confirmation that our business and clients are starting to yield the benefits of our transformation plan.”

Share Repurchase
During the second quarter, the company repurchased $14.2 million of its common stock. All transactions of common stock took place in the open market.

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

  • Revenue, ranging from $87 to $90 million;
  • GAAP EPS, ranging from a net loss of $0.31 to a net loss of $0.26 per share; and
  • Non-GAAP EPS, ranging from a net loss of $0.05 to a net loss of $0.02 per 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 $382 million;
  • GAAP EPS, updated to range from a net loss of $0.63 to a net loss of $0.51 per share; and
  • Non-GAAP EPS, ranging from $0.41 to $0.51 per diluted share, using a 21 percent tax rate, which is consistent with 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.

Digital River will host an open-access audio webcast and conference call today at 4:45 p.m. EDT to discuss second quarter 2014 financial results. The live audio webcast can be accessed on the Investor Relations (www.digitalriver.com/investorrelations) section of its corporate website. Alternatively, to listen to the live broadcast of the call, dial +1 (408) 427-3861 and use conference ID #71793026. A webcast and audio replay of the presentation will be archived on Digital River’s corporate website.

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, realized and unrealized 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 Convertible Senior 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; 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 July 30, 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.

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

Assets

Current assets
Cash and cash equivalents $ 225,226 $ 483,868
Short-term investments 166,863 115,652
Accounts receivable, net of allowance of $2,987 and $3,206 58,994 70,865
Deferred tax assets 1,552 1,479
Prepaid expenses and other   23,406     27,878  
Total current assets 476,041 699,742
Property and equipment, net 48,719 53,770
Goodwill 138,757 139,318
Intangible assets, net 24,631 29,217
Long-term investments 53,074 56,023
Deferred income taxes 1,174 1,037
Other assets   993     2,067  
Total assets $ 743,389   $ 981,174  

Liabilities and stockholders' equity

Current liabilities
Accounts payable $ 167,554 $ 187,635
Accrued payroll 15,203 20,058
Deferred revenue 5,052 6,904
Other current liabilities   41,084     55,899  
Total current liabilities 228,893 270,496
Non-current liabilities
Convertible senior notes 135,180 295,795
Other liabilities   21,810     21,452  
Total non-current liabilities   156,990     317,247  
Total liabilities   385,883     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; 50,797,206 and 50,074,977 shares issued 508 501
Treasury stock at cost; 18,817,940 and 16,910,883 shares (456,644 ) (424,416 )
Additional paid-in capital 771,207 761,560
Retained earnings 38,436 51,254
Accumulated other comprehensive income (loss)   3,999     4,532  
Stockholders' equity   357,506     393,431  
Total liabilities and stockholders' equity $ 743,389   $ 981,174  
 

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,
2014 2013 2014 2013
Revenue $ 87,386 $ 90,163 $ 185,193 $ 201,184
Costs and expenses (exclusive of depreciation and amortization expense shown separately below):
Direct cost of services 16,819 17,061 34,971 39,067
Network and infrastructure 13,858 14,326 27,937 29,401
Sales and marketing 24,223 25,946 48,525 55,402
Product research and development 18,650 17,611 36,923 34,859
General and administrative 12,322 13,682 24,641 32,029
Goodwill impairment - - - 21,249
Depreciation and amortization 6,510 5,066 12,868 10,066
Amortization of acquisition-related intangibles   2,186     2,283     4,357     4,211  
Total costs and expenses   94,568     95,975     190,222     226,284  
Income (loss) from operations   (7,182 )   (5,812 )   (5,029 )   (25,100 )
Interest income 647 780 1,266 1,376
Interest expense (890 ) (1,964 ) (2,497 ) (3,942 )
Other income (expense), net 119 6,109 (204 ) 17,013
Loss on extinguishment of debt   -     -     (5,605 )   -  
Income (loss) from continuing operations before income taxes (7,306 ) (887 ) (12,069 ) (10,653 )
Income tax expense (benefit)   (31 )   (684 )   923     237  
Income (loss) from continuing operations (7,275 ) (203 ) (12,992 ) (10,890 )
Income (loss) from discontinued operations, net of tax   41     (669 )   174     (1,347 )
Net Income (loss) $ (7,234 ) $ (872 ) $ (12,818 ) $ (12,237 )
 
Income (loss) per share - basic
Income (loss) from continuing operations $ (0.24 ) $ (0.01 ) $ (0.43 ) $ (0.33 )
Income (loss) from discontinued operations   0.00     (0.02 )   0.01     (0.04 )
Net income (loss) per share - basic $ (0.24 ) $ (0.03 ) $ (0.42 ) $ (0.37 )
 
Income (loss) per share - diluted
Income (loss) from continuing operations $ (0.24 ) $ (0.01 ) $ (0.43 ) $ (0.33 )
Income (loss) from discontinued operations   0.00     (0.02 )   0.01     (0.04 )
Net income (loss) per share - diluted $ (0.24 ) $ (0.03 ) $ (0.42 ) $ (0.37 )
Shares used in per share calculation - basic 29,837 32,478 30,395 32,816
Shares used in per share calculation - diluted 29,837 32,478 30,395 32,816
 
 
 
Calculation of GAAP Diluted Net Income (Loss) Per Share
 
Three months ended Six months ended
June 30, June 30,
2014 2013 2014 2013
GAAP net income (loss) $ (7,234 ) $ (872 ) $ (12,818 ) $ (12,237 )
 
Add back debt interest expense and issuance cost amortization, net of tax benefit   -     -     -     -  
Adjusted net income (loss) for GAAP EPS calculation $ (7,234 ) $ (872 ) $ (12,818 ) $ (12,237 )
 
Net income (loss) per share - diluted $ (0.24 ) $ (0.03 ) $ (0.42 ) $ (0.37 )
Shares used in per share calculation - diluted 29,837 32,478 30,395 32,816
 

Digital River, Inc.    
Second Quarter Results
(Unaudited, in thousands)
Subject to reclassification
 
Consolidated Statements of Cash Flows
Six months ended
June 30,
2014 2013

Operating Activities:

Net income (loss) $ (12,818 ) $ (12,237 )
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Loss (gain) on disposal of discontinued operations (275 ) -
Amortization of acquisition-related intangibles 4,357 4,211
Provision for doubtful accounts (164 ) 928
Depreciation and amortization 12,868 10,118
Impairment of goodwill - 21,249
Debt issuance cost amortization 538 855
Amortization of investment premiums 743 1,524
Loss (gain) on disposal of equipment (358 ) 69
Gain on sale of investment - (17,526 )
Loss on extinguishment of debt 5,605 -
Stock-based compensation expense 8,654 11,954
Deferred and other income taxes (440 ) (1,765 )
Change in operating assets and liabilities (net of acquisitions):
Accounts receivable 12,031 (9,577 )
Prepaid and other assets 2,334 1,843
Accounts payable (18,944 ) (70,292 )
Deferred revenue (2,208 ) (1,460 )
Income tax payable 192 175
Other current liabilities   (9,444 )   (4,000 )
Net cash provided by (used in) operating activities   2,671     (63,931 )
 

Investing Activities:

Purchases of investments (164,363 ) (53,243 )
Sales of investments 117,057 66,847
Cash received (paid) for cost method investments (658 ) 39,636
Cash paid for acquisitions, net of cash received - (55,843 )
Proceeds from sale of equipment 532 -
Purchases of equipment and capitalized software   (8,152 )   (13,167 )
Net cash provided by (used in) investing activities   (55,584 )   (15,770 )
 

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 1,020 1,183
Repurchase of common stock (28,209 ) (31,238 )
Repurchase of restricted stock to satisfy tax withholding obligation   (4,039 )   (4,261 )
Net cash provided by (used in) financing activities   (204,526 )   (38,397 )
Effect of exchange rate changes on cash   (1,203 )   (1,906 )
Net increase (decrease) in cash and cash equivalents (258,642 ) (120,004 )
Cash and cash equivalents, beginning of period   483,868     542,851  
Cash and cash equivalents, end of period $ 225,226   $ 422,847  
 
Cash paid for interest on convertible senior notes $ 2,509   $ 3,068  
Cash paid for income taxes $ 2,584   $ 1,357  
 

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,
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
 
Six months
Three months ended ended
March 31, June 30, June 30,
2014 2014 2014
GAAP pre-tax income (loss) from continuing operations $ (4,763 ) $ (7,306 ) $ (12,069 )
Add back amortization of acquisition-related intangibles 2,171 2,186 4,357
Add back stock-based compensation expense 3,988 4,666 8,654
Add back restructuring related costs 221 116 337
Add back litigation settlement related costs 599 - 599
Add back loss on extinguishment of debt   5,605     -     5,605  
Subtotal 7,821 (338 ) 7,483
Income tax expense (benefit) @ 21%   1,642     (71 )   1,571  
Non-GAAP income (loss) from continuing operations   6,179     (267 )   5,912  
 
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 ) $ 5,912  
 
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 30,888

Digital River, Inc.              
Non-GAAP Reconciliations
(Unaudited, in thousands)
 
 
 
Breakdown of stock-based compensation expense
Six months
Three months ended ended
March 31, June 30, June 30,
2014 2014 2014
Direct cost of services $ 44 $ 40 $ 84
Network and infrastructure 382 365 747
Sales and marketing 1,002 1,575 2,577
Product research and development 912 809 1,721
General and administrative   1,648   1,877     3,525
Total $ 3,988 $ 4,666   $ 8,654
 
Breakdown of restructuring related costs
Six months
Three months ended ended
March 31, June 30, June 30,
2014 2014 2014
Direct cost of services $ - $ - $ -
Network and infrastructure 21 (14 ) 7
Sales and marketing 95 30 125
Product research and development 8 8 16
General and administrative   97   92     189
Total $ 221 $ 116   $ 337
 
Breakdown of litigation settlement related costs
Six months
Three months ended ended
March 31, June 30, June 30,
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)
 
 
Revenue Guidance Table
2013 Actual
Twelve months
Three months ended 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
Six months
Three months ended ended
March 31, June 30, June 30,
2014 2014 2014
Commerce $ 80.3 $ 71.2 $ 151.5
Payments   17.5     16.2     33.7
Total Revenue $ 97.8   $ 87.4   $ 185.2
 
 
2014 Guidance
Q3 2014 FY 2014
Low Guidance High Guidance Low Guidance High Guidance
Expected Revenue $ 87.0 $ 90.0 $ 375.0 $ 382.0
 
 
Non-GAAP Guidance Reconciliation
Q3 2014 FY 2014
Low Guidance

 

High Guidance Low Guidance High Guidance
Expected GAAP net income (loss) per share from continuing operations - diluted $ (0.31 ) $ (0.26 ) $ (0.63 ) $ (0.51 )
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 0.13 0.13 0.48 0.48
Add back restructuring related costs, net of tax - - 0.01 0.01
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
Tax variability   0.07     0.05     0.17     0.15  
Expected non-GAAP diluted net income (loss) per share $ (0.05 ) $ (0.02 ) $ 0.41   $ 0.51  
 
 
 
Projected Shares Used in Per Share Calculation
Q3 2014 FY 2014
Low Guidance High Guidance

 

Low Guidance High Guidance
 
Shares used in per share calculation - GAAP diluted 29,760 29,760 29,962 29,962
Shares used in per share calculation - non-GAAP diluted 29,760 29,760 30,509 30,509


Copyright © Business Wire 2014
Contact:

Digital River, Inc.
Investor Relations Contact:
Melissa Fisher, +1 952-225-3351
Vice President, Corporate Development,
Investor Relations and Treasury
investorrelations@digitalriver.com
or
Media Relations Contact:
Gerri Dyrek, +1 952-225-3719
Group Vice President, Corporate Communications
publicrelations@digitalriver.com