MINNEAPOLIS -- Oct. 20, 2004 -- Digital River, Inc. (Nasdaq:DRIV), a global leader in e-commerce outsourcing, today reported record revenue of $39.4 million for the quarter ended September 30, 2004. This represents a year-over-year increase of more than 47 percent from revenue of $26.7 million in the third quarter of last year, and a 13 percent sequential increase from the $34.9 million in revenue generated in the second quarter of 2004. This performance exceeded the Company's previous third quarter 2004 revenue guidance of $37 million.
GAAP Results: In the third quarter, net income was $8.1 million, or $0.23 per share on a diluted basis. This compared to net income of $4.7 million, or $0.14 per diluted share, for the same period last year, and $6.8 million, or $0.19 per diluted share in the second quarter of 2004. These results also exceeded guidance previously provided by the Company.
Pro Forma Results: Digital River's net income for the third quarter of 2004, prior to the amortization of acquisition-related expenses, was $10.6 million, or $0.29 per share, on a diluted basis. This compared to net income, on a similar basis, of $6.2 million, or $0.18 per diluted share, in the third quarter of 2003, and $9.0 million, or $0.25 per diluted share, in the prior quarter. These results also exceeded guidance previously provided by the Company.
"In the third quarter, Digital River achieved a record revenue and earnings performance," said Joel Ronning, Digital River's CEO. "We increased revenue more than 47 percent and GAAP net income more than 71 percent on a year-over-year basis. Our results speak directly to the ability of this organization to deliver on its vision and value proposition. We are 100 percent focused on helping our clients build and grow their online businesses. We accomplish this by providing them a complete set of integrated e-commerce services designed to unlock global markets and revenue streams. We believe this value-added business model not only serves to deepen our relationships with clients, but also creates a sustainable competitive advantage for our company."
For the nine months ended September 30, 2004, revenue totaled $106.2 million, a more than 43 percent increase from $74.1 million in the same period last year. Through September 30, 2004, GAAP net income totaled $22.5 million, or $0.63 per diluted share, as compared to a net income of $11.5 million, or $0.36 per diluted share, in the prior year. For the first nine months of 2004, net income, prior to the amortization of acquisition-related expenses, was $28.8 million, or $0.81 per share on a diluted basis. This compares to a net income, on a similar basis, of $15.4 million, or $0.48 per diluted share, for the first nine months of 2003.
In the third quarter of 2004, Digital River's gross margins averaged 85.1 percent. This represents a 60 basis point improvement over gross margins during the same period last year and a nearly 69 basis point decrease from the second quarter of 2004.
As of September 30, 2004, Digital River's cash and investments totaled $257.5 million, a $134 million increase from September 30, 2003, and a $52 million increase from June 30, 2004. The increase in cash and investments during the quarter can be attributed to cash generated from profitable operations, traditional balance sheet leverage, and an incremental $20 million of 1.25 percent contingent convertible senior notes. These notes were issued pursuant to the exercise of an over-allotment option in July 2004, following the initial $175 million issued in the second quarter of 2004. Net working capital totaled $178.6 million at September 30, 2004, a $100 million increase from September 30, 2003, and a $32.2 million increase from June 30, 2004.
Subsequent to Digital River's issuance of contingent convertible notes on June 1, 2004, the Emerging Issues Task Force (EITF), issue 04-08, proposed that the unissued shares underlying contingent convertible notes be treated as if such shares were issued and outstanding for the purposes of calculating GAAP earnings per share. On October 13, 2004, the Financial Accounting Standards Board (FASB) ratified this new accounting treatment for periods ending after December 15, 2004. Consequently, Digital River will reflect the dilutive effect of contingent convertible senior notes on earnings per share in the fourth quarter of 2004. If EITF 04-08 had gone into effect in the third quarter of 2004, Digital River's reported GAAP earnings per share would have been reduced by approximately one cent.
"It is important to note that our $195 million of contingent convertible senior notes may convert at $44.063 per share," said Carter Hicks, Digital River's CFO. "The ratification of EITF 04-08 will have no effect on Digital River's operating results, revenues, net income or cash position as reported in our fourth quarter 2004, and full year 2004 and 2005 guidance. Rather, it requires a revised method of calculating GAAP earnings per share. In order to provide clarity, we are providing guidance both before and after the effects of the new pronouncement."
Forward-looking guidance for the fourth quarter ending December 31, 2004, is as follows:
-- Revenue is expected to be $42.5 million;
-- GAAP diluted earnings per share is expected to be $0.29, before the effects of EITF 04-08, and $0.27, after the effects of EITF 04-08; and
-- Diluted pro forma earnings per share, before the amortization of acquisition-related costs and the effects of EITF 04-08, is expected to be $0.35.
Forward-looking guidance for the full-year ending December 31, 2004, is as follows:
-- Revenue is expected to be $148.7 million, up from the Company's previous guidance of $145 million;
-- GAAP diluted earnings per share, before the effects of EITF 04-08, is expected to be $0.92. This is up from the Company's previous guidance of $0.90. GAAP diluted earnings per share, after the effects of EITF 04-08, is expected to be $0.90; and
-- Diluted pro forma earnings per share, before the amortization of acquisition-related costs and the effects of EITF 04-08, is expected to be $1.15. This is up from the Company's previous guidance of $1.13.
Digital River's full year 2005 guidance will be affected by the new EITF 04-08 pronouncement discussed above. In 2005, Digital River also expects that it will record non-cash tax expense.
"Digital River entered 2004 with $93 million of net operating loss carry forwards, which will serve to reduce our future taxable income," explained Hicks. "However, under GAAP, only $46 million of these net operating losses can offset book income. The benefit of the remaining net operating losses must flow through additional paid in capital. This means that, while Digital River does not expect to pay cash income taxes other than alternative minimum taxes in 2005, we must record a non-cash tax expense under GAAP at an estimated rate of 40 percent once these $46 million of net operating losses are offset by taxable net income."
In order to allow for a reasonable comparison to prior period results, Digital River's 2005 guidance will be presented before and after the effects of the 2005 non-cash tax expense and the EITF 04-08 accounting pronouncement to be implemented in the fourth quarter of 2004.
Forward-looking guidance for the full-year ending December 31, 2005, is as follows:
-- Revenue is expected to be $188 million;
-- GAAP diluted earnings per share is expected to be $1.38, on a basis consistent with 2004. This compares to 2004 GAAP earnings per share of $0.92. GAAP diluted earnings per share, after non-cash taxes and the effects of EITF 04-08, is expected to be $0.90. The impact of non-cash taxes is expected to be $0.45; and the effects of EITF 04-08 is expected to be $0.03; and
-- Diluted pro forma earnings per share, prior to the amortization of acquisition-related costs, non-cash income tax and EITF 04-08, is expected to be $1.58. This result can be compared to the diluted pro forma earnings per share of $1.15 noted above in Digital River's 2004 guidance.
The estimated effective tax rates and tax expense assumed in Digital River's 2005 full year guidance may vary based on actual operating results and tax elections available to the Company. In addition, Digital River's 2005 GAAP guidance does not include the effects of the adoption of the amendment to FAS 123, regarding stock based compensation, which is pending finalization of implementation guidelines by the FASB.
A detailed reconciliation of the pro forma measurement data above and certain key calculations designed to show comparability of earnings expectations between 2004 and 2005 has been provided as a table following the condensed financial statements accompanying this announcement. Further information regarding the Company's use of non-GAAP financial data has been included in the Company's Form 8-K filed with the Securities and Exchange Commission on October 20, 2004.
Digital River will hold a third quarter conference call today at 4:45 p.m. Eastern Daylight Time. To access the call, please dial 877-422-0170 inside the United States or Canada, or 706-679-5647 from international locations. In addition, the call can be heard via webcast at http://phx.corporate-ir.net/phoenix.zhtml?c=94762&p=irol-irhome. Please install any necessary audio software.
About Digital River, Inc.
Digital River, Inc., a global leader in e-commerce outsourcing, builds and manages online businesses for more than 40,000 software publishers, manufacturers, distributors and online retailers. 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, site merchandising, advanced reporting and analytics, product fulfillment, e-marketing and multi-lingual customer service.
