News Column

Digital River Reports Second Quarter 2014 Financial Results

July 30, 2014

  • Second quarter revenue of $87.4 million, exceeded guidance
  • Second quarter GAAP EPS net loss of $0.24 per share; and non-GAAP EPS net loss of $0.01 per share, both exceeded guidance

    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





    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

    Source: Digital River, Inc.


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