Digital River Meets Fourth Quarter and Full Year Earnings Expectations

Digital River, Inc. (NASDAQ: DRIV), a leading provider of global e-commerce solutions, reports its fourth quarter and full year 2007 financial results. Fourth Quarter and Full Year Ended Dec. 31, 2007 GAAP Results Fourth quarter revenue totaled $96.9 million, an increase of 17 percent from the same period in 2006 and was in line with management’s guidance. In the fourth quarter of 2006, revenue was $83.0 million. For full year 2007, revenue was $349.3 million, an increase of 14 percent from revenue of $307.6 million in 2006. Fourth quarter GAAP net income was $20.3 million, or $0.46 per diluted share and compared to GAAP net income of $16.4 million or $0.36 per diluted share in the fourth quarter of 2006. On a per share basis, net income increased 28 percent from 2006. For the full year, GAAP net income was $70.8 million, or $1.58 per diluted share, slightly ahead of management’s guidance. This compared to GAAP net income of $60.8 million, or $1.40 per diluted share during the same period in 2006. Non-GAAP Results Fourth quarter non-GAAP net income was $24.0 million or $0.53 per diluted share and compared to net income of $21.6 million, or $0.47 per diluted share in the fourth quarter of 2006. Non-GAAP net income for the full year was $85.8 million, or $1.87 per diluted share. This compared to non-GAAP net income of $79.7 million, or $1.79 per diluted share in 2006. Non-GAAP net income is computed by starting with GAAP pre-tax income as reported on the Company’s statement of operations, then adding back amortization of acquisition-related intangibles and stock-based compensation expense, to calculate non-GAAP pre-tax income. This amount 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 release. "For the fourth quarter and full year 2007, we reported financial results clearly in line with our expectations. Our core software business continues to deliver strong growth across a more diversified base of global clients,” said Joel Ronning, Digital River’s CEO. "In 2008, we intend to advance our e-commerce leadership position by making investments in our company. These investments will improve the efficiency of our business and accelerate growth in complementary markets where we see substantial opportunities.” In 2008, Digital River plans to re-invest in its business incremental profits of approximately $20 million, and an additional $10 million in capital. By making these investments, the company intends to advance its core software business; accelerate growth in consumer electronics and games; and enhance technologies in reporting, payments and subscriptions. "These investments, which are reflected in today’s initial 2008 outlook, will take place throughout the year and are expected to begin to provide leverage in the third and fourth quarters,” Ronning added. "With a solid financial position, strong core business and significant prospects in new vertical markets, this is an opportune time to make these investments.” 2008 Guidance Forward-looking guidance for the period ending Mar. 31, 2008, is as follows: First Quarter Revenue of $98.5 million; GAAP diluted net income per share of $0.40, including stock-based compensation expense of $3.4 million; and Non-GAAP diluted net income per share of $0.48. Forward-looking guidance for the period ending Dec. 31, 2008, is as follows: Full Year Revenue of $395 million; GAAP diluted net income per share of $1.58, including stock-based compensation expense of $14.0 million; and Non-GAAP diluted net income per share of $1.88. Digital River will hold a conference call today at 4:45 p.m. EST to discuss 2007 financial results, initial 2008 guidance, and its strategic investment plan. A live webcast of the conference call can be accessed from http://www.digitalriver.com/2007/q4earnings/. Alternatively, a live broadcast of the call may be heard by using conference ID #30605189 and dialing (888) 218-6314 inside the United States or Canada, or by calling (706) 634-9714 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; our ability to successfully manage our business while undertaking significant internal investments; 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 first quarter and full year 2008 reflect Digital River’s expectations as of January 31, 2008. 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. 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. Fourth Quarter Results (Unaudited, in thousands) Subject to reclassification   Condensed Consolidated Balance Sheets As of December 31,   December 31, 2007 2006 Assets Current assets Cash and cash equivalents $ 381,788 $ 390,243 Short-term investments 315,636 235,699 Accounts receivable, net 64,914 52,392 Deferred income taxes 7,899 19,687 Prepaid expenses and other   4,577   6,025 Total current assets 774,814 704,046 Property and equipment, net 31,102 24,079 Goodwill 261,885 243,799 Intangible assets, net 32,382 21,106 Deferred income taxes 15,606 1,276 Other assets   11,955   11,957 Total assets $ 1,127,744 $ 1,006,263 Liabilities and stockholders' equity Current liabilities Accounts payable $ 180,386 $ 141,386 Accrued payroll 12,704 12,097 Deferred revenue 10,384 7,040 Accrued acquisition liabilities 399 5,654 Other accrued liabilities   41,229   39,982 Total current liabilities 245,102 206,159 Non-current liabilities Convertible senior notes 195,000 195,000 Other liabilities   11,362   1,345 Total non-current liabilities   206,362   196,345 Total liabilities   451,464   402,504 Stockholders' equity Common stock 405 404 Additional paid-in capital 576,529 546,758 Retained earnings 68,413 44,989 Accumulated other comprehensive income   30,933   11,608 Stockholders' equity   676,280   603,759 Total liabilities and stockholders' equity $ 1,127,744 $ 1,006,263 Digital River, Inc. Fourth Quarter Results (Unaudited, in thousands, except per share amounts) Subject to reclassification       Condensed Consolidated Statements of Operations   Three months endedDecember 31, Twelve months endedDecember 31, 2007 2006 2007 2006 Revenue $ 96,878 $ 83,004 $ 349,275 $ 307,632 Costs and expenses: Direct cost of services 2,245 2,020 10,243 7,709 Network and infrastructure 9,497 7,748 32,309 29,250 Sales and marketing 34,474 30,444 134,401 113,462 Product research and development 12,122 8,913 39,179 32,341 General and administrative 10,226 9,607 38,937 34,158 Depreciation and amortization 3,437 3,312 12,706 10,983 Amortization of acquisition-related intangibles   1,622     2,943     7,586     12,134   Total costs and expenses   73,623     64,987     275,361     240,037   Income from operations   23,255     18,017     73,914     67,595   Interest income 8,191 7,191 32,167 22,836 Other expense, net   (1,558 )   (435 )   (3,006 )   (949 ) Income before income tax expense 29,888 24,773 103,075 89,482 Income tax expense   9,572     8,417     32,261     28,672   Net income $ 20,316   $ 16,356   $ 70,814   $ 60,810     Net income per share - basic $ 0.51   $ 0.41   $ 1.75   $ 1.58   Net income per share - diluted $ 0.46   $ 0.36   $ 1.58   $ 1.40   Shares used in per share calculation - basic 40,164 40,024 40,444 38,593 Shares used in per share calculation - diluted 45,401 46,138 45,914 44,642       Calculation of GAAP Diluted Net Income Per Share   Three months endedDecember 31, Twelve months endedDecember 31, 2007 2006 2007 2006 GAAP net income $ 20,316 $ 16,356 $ 70,814 $ 60,810 Add back debt interest expense and issuance cost amortization, net of tax benefit   435     434     1,739     1,739   Adjusted net income for GAAP EPS calculation $ 20,751   $ 16,790   $ 72,553   $ 62,549     Net income per share - diluted $ 0.46   $ 0.36   $ 1.58   $ 1.40   Shares used in per share calculation - diluted 45,401 46,138 45,914 44,642 Digital River, Inc. Fourth Quarter Results (Unaudited, in thousands) Subject to reclassification   Condensed Consolidated Statements of Cash Flows   Twelve months ended December 31, 2007 2006 Operating Activities: Net income $ 70,814 $ 60,810 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of acquisition-related intangibles 7,586 12,134 Change in accounts receivable allowance, net of acquisitions (174 ) 1,215 Depreciation and amortization 12,706 10,983 Stock-based compensation expense 13,742 13,904 Excess tax benefits from stock-based compensation (12,030 ) (8,980 ) Deferred and other income taxes 27,522 19,583 Change in operating assets and liabilities (net of acquisitions): Accounts receivable (6,863 ) (14,678 ) Prepaid and other assets 1,325 (1,293 ) Accounts payable 32,181 3,701 Deferred revenue 3,046 811 Income tax payable (7,076 ) 8,126 Other accrued liabilities   3,609     11,190   Net cash provided by operating activities   146,388     117,506     Investing Activities: Purchases of investments (436,806 ) (193,609 ) Sales of investments 358,470 179,296 Cash paid for acquisitions, net of cash received (31,625 ) (37,800 ) Purchases of equipment and capitalized software   (18,722 )   (15,907 ) Net cash used in investing activities   (128,683 )   (68,020 )   Financing Activities: Proceeds from sales of common stock - 172,780 Exercise of stock options 13,510 21,118 Sales of common stock under employee stock purchase plan 2,483 2,109 Repurchase of common stock (62,968 ) - Repurchase of restricted stock to satisfy tax withholding obligation (528 ) (426 ) Excess tax benefits from stock-based compensation   12,030     8,980   Net cash (used in)/ provided by financing activities   (35,473 )   204,561   Effect of exchange rate changes on cash   9,313     4,426   Net (decrease)/ increase in cash and cash equivalents (8,455 ) 258,473 Cash and cash equivalents, beginning of period 390,243 131,770     Cash and cash equivalents, end of period $ 381,788   $ 390,243       Cash paid for interest on Convertible Senior Notes $ 2,438   $ 2,438   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, September 30, December 31, December 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 41,154 45,458 45,666 46,138 44,642   Three months ended Twelve months ended March 31, June 30, September 30, December 31, December 31, 2007   2007   2007   2007 2007 GAAP pre-tax income $ 30,008 $ 21,005 $ 22,174 $ 29,888 $ 103,075 Add back: amortization of acquisition-related intangibles 2,746 1,607 1,611 1,622 7,586 Add back: stock-based compensation expense   3,476       3,649     3,411       3,206   13,742 Non-GAAP pre-tax income 36,230 26,261 27,196 34,716 124,403 Income tax expense @ 31%   11,231       8,141     8,431       10,762   38,565 Non-GAAP net income $ 24,999     $ 18,120   $ 18,765     $ 23,954 $ 85,838   Non-GAAP net income per share - diluted $ 0.54     $ 0.39   $ 0.41     $ 0.53 $ 1.87   Shares used in per share calculation - diluted 46,348 46,637 45,386 45,401 45,914   Breakdown of stock-based compensation expense Three months ended Twelve months ended March 31, June 30, September 30, December 31, December 31, 2007   2007   2007   2007 2007 Direct cost of services $ 195 $ 225 $ 223 $ 164 $ 807 Network and infrastructure 72 61 58 79 270 Sales and marketing 1,268 1,350 1,230 1,180 5,028 Product research and development 552 466 391 327 1,736 General and administrative   1,389       1,547     1,509       1,456   5,901 Total $ 3,476     $ 3,649   $ 3,411     $ 3,206 $ 13,742   Non-GAAP Guidance Reconciliation Q1 - 2008 FY - 2008 Guidance Guidance Expected GAAP net income per share - diluted $ 0.40 $ 1.58 Add back amortization of acquisition-related costs 0.05 0.18 Add back stock-based compensation expense 0.07 0.30 Tax variability (0.03 ) (0.15 ) Deduct impact of contingent convertible notes   (0.01 )   (0.03 ) Expected non-GAAP diluted net income per share $ 0.48   $ 1.88