Digital River Reports Second Quarter Results

Digital River, Inc. (NASDAQ:DRIV), a leading provider of global e-commerce solutions, today reported its second quarter results. 2007 Revenue - Q2 and Six Months Ended June 30, 2007 Second quarter revenue totaled $78.2 million. This is an increase of 10 percent from revenue of $71.3 million in the second quarter of 2006. This result is consistent with the preliminary second quarter revenue guidance the Company provided on June 27, 2007. In the first half of 2007, the Company reported revenue of $169.9 million. This represents a 14 percent increase from revenue of $149.3 million in the similar period of the prior year. 2007 GAAP Results - Q2 and Six Months Ended June 30, 2007 Second quarter GAAP net income was $14.5 million, or $0.32 per diluted share. This compared to net income of $13.3 million, or $0.30 per diluted share, in the second quarter of 2006. These results represent a year-over-year increase of 9 percent in GAAP net income and 7 percent in GAAP diluted net income per share. This result is consistent with the preliminary second quarter GAAP diluted net income per share guidance the Company provided on June 27, 2007. In the first half of 2007, GAAP net income was $35.2 million, or $0.78 per diluted share. This compared to net income of $29.7 million, or $0.70 per diluted share, in the first half of 2006. 2007 Non-GAAP Results - Q2 and Six Months Ended June 30, 2007 Based on the Company’s non-GAAP measurements, second quarter non-GAAP net income was $18.1 million, or $0.39 per diluted share. This compared to net income on a similar basis of $18.7 million, or $0.41 per diluted share, in the second quarter of 2006. This result is consistent with the preliminary second quarter non-GAAP diluted net income per share guidance the Company provided on June 27, 2007. Based on the Company’s non-GAAP measurements, non-GAAP net income in the first half of 2007 was $43.1 million, or $0.93 per diluted share. This compared to net income on a similar basis of $39.4 million, or $0.91 per diluted share, in the first half 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 figure 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. "We continue to be confident in our core business, solid long-term fundamentals and the future growth potential of this company,” said Joel Ronning, Digital River’s CEO. "During the second half of the year, we plan to expand relationships with key clients, further enhance our e-commerce infrastructure to create added scalability for our business and continue to pursue international markets. Overall, we believe the company is well positioned to benefit from the strong trends in e-commerce outsourcing and the ongoing shift from physical to digital delivery of software.” Q3 2007 Guidance Forward-looking guidance for the third quarter ending September 30, 2007, is as follows: Revenue of $81.5 million; GAAP diluted net income per share of $0.34, including stock-based compensation expense of $3.7 million; and Non-GAAP diluted net income per share of $0.41. Full Year 2007 Guidance Forward-looking guidance for the full year ending December 31, 2007 is as follows: Revenue of $345 million; GAAP diluted net income per share of $1.59, including stock-based compensation expense of $14.2 million; and Non-GAAP diluted net income per share of $1.87. This guidance is consistent with the preliminary full year guidance that the Company provided on June 27, 2007. Share Repurchase Program Digital River also announced that the Company has repurchased approximately 1.37 million shares of the Company’s common stock at a weighted average price of $45.86 during the month of July 2007. The Company has approximately $137 million remaining under the $200 million share repurchase authorization the Company announced on June 27, 2007. Additional share repurchases will occur from time-to-time at the Company’s discretion, based on ongoing assessments of the capital needs of the business, the market price of its common stock and general market conditions. No time limit has been set for completion of the repurchase program. Digital River will hold a second 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/2007q2earnings/. Alternatively, a live broadcast of the call may be heard by using conference ID # 9684572 and dialing (888) 802-2278 inside the United States or Canada, or by calling (913) 312-1264 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 third quarter and full year 2007 reflect Digital River’s expectations as of July 26, 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. Second Quarter Results (Unaudited, in thousands) Subject to reclassification   Condensed Consolidated Balance Sheets As of June 30,   December 31, 2007 2006 Assets Current assets Cash and cash equivalents $ 409,115 $ 390,243 Short-term investments 271,657 235,699 Accounts receivable, net 45,408 52,392 Deferred income taxes 19,591 19,687 Prepaid expenses and other   7,042   6,025 Total current assets 752,813 704,046 Property and equipment, net 24,879 24,079 Goodwill 239,772 243,799 Intangible assets, net 17,604 21,106 Deferred income taxes 17,403 1,276 Other assets   12,106   11,957 Total assets $ 1,064,577 $ 1,006,263 Liabilities and stockholders' equity Current liabilities Accounts payable $ 126,991 $ 141,386 Accrued payroll 9,238 12,097 Deferred revenue 7,425 7,040 Accrued acquisition liabilities 1,047 5,654 Other accrued liabilities   43,946   39,982 Total current liabilities 188,647 206,159 Non-current liabilities Convertible senior notes 195,000 195,000 Other liabilities   9,504   1,345 Total non-current liabilities   204,504   196,345 Total liabilities   393,151   402,504 Stockholders' equity Common stock 415 404 Additional paid-in capital 574,820 546,758 Retained earnings 80,081 44,989 Accumulated other comprehensive income   16,110   11,608 Stockholders' equity   671,426   603,759 Total liabilities and stockholders' equity $ 1,064,577 $ 1,006,263 Digital River, Inc. Second Quarter Results (Unaudited, in thousands, except per share amounts) Subject to reclassification   Condensed Consolidated Statements of Operations   Three months endedJune 30, Six months endedJune 30,   2007 2006 2007 2006 Revenue $ 78,227 $ 71,277 $ 169,858 $ 149,291 Costs and expenses: Direct cost of services 2,426 1,914 4,989 3,777 Network and infrastructure 7,334 6,298 14,829 13,741 Sales and marketing 32,793 27,628 66,982 54,567 Product research and development 8,235 7,488 16,887 15,090 General and administrative 9,543 8,247 19,656 16,497 Depreciation and amortization 3,291 2,475 6,149 4,728 Amortization of acquisition-related intangibles   1,607   3,038   4,353   5,878 Total costs and expenses   65,229   57,088   133,845   114,278 Income from operations   12,998   14,189   36,013   35,013 Other income, net   8,007   6,392   15,000   9,327 Income before income tax expense 21,005 20,581 51,013 44,340 Income tax expense   6,512   7,292   15,814   14,674 Net income $ 14,493 $ 13,289 $ 35,199 $ 29,666   Net income per share - basic $ 0.35 $ 0.34 $ 0.86 $ 0.79 Net income per share - diluted $ 0.32 $ 0.30 $ 0.78 $ 0.70 Shares used in per share calculation - basic 41,169 39,452 40,823 37,386 Shares used in per share calculation - diluted 46,637 45,458 46,488 43,319       Calculation of GAAP Diluted Net Income Per Share   Three months endedJune 30,   Six months endedJune 30,   2007 2006 2007 2006 GAAP net income $ 14,493 $ 13,289 $ 35,199 $ 29,666 Add back debt interest expense and issuance cost amortization, net of tax benefit   435   435   870   870 Adjusted net income for GAAP EPS calculation $ 14,928 $ 13,724 $ 36,069 $ 30,536   Net income per share - diluted $ 0.32 $ 0.30 $ 0.78 $ 0.70 Shares used in per share calculation - diluted 46,637 45,458 46,488 43,319 Digital River, Inc. Second Quarter Results (Unaudited, in thousands) Subject to reclassification   Condensed Consolidated Statements of Cash Flows Six months ended June 30,   2007     2006   Operating Activities: Net income $ 35,199 $ 29,666 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of acquisition-related intangibles 4,353 5,878 Change in accounts receivable allowance, net of acquisitions 570 126 Depreciation and amortization 6,149 4,728 Stock-based compensation expense 7,125 6,932 Excess tax benefits from stock-based compensation (10,027 ) (2,705 ) Deferred and other income taxes 11,383 12,679 Change in operating assets and liabilities (net of acquisitions): Accounts receivable 6,515 (622 ) Prepaid and other assets (1,417 ) (2,538 ) Accounts payable (15,997 ) (14,263 ) Deferred revenue 298 553 Income tax payable 2,861 919 Other accrued liabilities   1,068     2,624   Net cash provided by operating activities   48,080     43,977     Investing Activities: Purchases of investments (173,092 ) (103,413 ) Sales of investments 137,395 86,913 Cash paid for acquisitions, net of cash received (8,540 ) (37,235 ) Purchases of equipment and capitalized software   (6,577 )   (9,162 ) Net cash used in investing activities   (50,814 )   (62,897 )   Financing Activities: Proceeds from sales of common stock - 172,700 Exercise of stock options 7,703 9,616 Sales of common stock under employee stock purchase plan 1,244 933 Repurchase of restricted stock to satisfy tax withholding obligation (377 ) - Excess tax benefits from stock-based compensation   10,027     2,705   Net cash provided by financing activities   18,597     185,954   Effect of exchange rate changes on cash   3,009     1,645   Net increase in cash and cash equivalents 18,872 168,679 Cash and cash equivalents, beginning of period 390,243 131,770     Cash and cash equivalents, end of period $ 409,115   $ 300,449       Cash paid for interest on Convertible Senior Notes $ 1,219   $ 1,219   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, Sept. 30, Dec. 31, Dec. 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 41,454 45,458 45,666 46,138 44,642   Three months ended Six months ended March 31, June 30, June 30, 2007   2007 2007 GAAP pre-tax income $ 30,008 $ 21,005 $ 51,013 Add back: amortization of acquisition-related intangibles 2,746 1,607 4,353 Add back: stock-based compensation expense   3,476     3,649   7,125 Non-GAAP pre-tax income 36,230 26,261 62,491 Income tax expense @ 31%   11,231     8,141   19,372 Non-GAAP net income $ 24,999   $ 18,120 $ 43,119   Non-GAAP net income per share - diluted $ 0.54   $ 0.39 $ 0.93   Shares used in per share calculation - diluted 46,348 46,637 46,488   Breakdown of stock-based compensation expense   Three months ended Six months ended March 31, June 30, June 30, 2007   2007 2007 Direct cost of services $ 195 $ 225 $ 420 Network and infrastructure 72 61 133 Sales and marketing 1,268 1,350 2,618 Product research and development 552 466 1,018 General and administrative   1,389     1,547   2,936 Total $ 3,476   $ 3,649 $ 7,125   Non-GAAP Guidance Reconciliation   Q3 - 2007 FY - 2007 Guidance Guidance Expected GAAP net income per share - diluted $ 0.34 $ 1.59 Add back amortization of acquisition-related costs 0.03 0.15 Add back stock-based compensation expense 0.08 0.31 Tax variability (0.03 ) (0.14 ) Deduct impact of contingent convertible notes   (0.01 )   (0.04 ) Expected non-GAAP diluted net income per share $ 0.41 $ 1.87