Digital River Announces Third Quarter 2009 Financial Results

Third Quarter Ended Sept. 30, 2009

GAAP Results Third quarter revenue totaled $99.4 million, compared to $96.3 million during the same period in 2008. These results exceeded management's third quarter revenue guidance of $96.5 - $98.5 million.

Third quarter GAAP net income was $11.0 million, or $0.29 per diluted share. This compared to GAAP net income of $15.6 million, or $0.39 per diluted share, in the third quarter of 2008. These results were consistent with management's third quarter earnings guidance of $0.26 - $0.29 per diluted share.

Non-GAAP Results Third quarter non-GAAP net income was $15.9 million, or $0.42 per diluted share. This compared to non-GAAP net income of $19.2 million, or $0.46 per diluted share, in the third quarter of 2008. These results exceeded management's third quarter earnings guidance of $0.38 - $0.41 per diluted share.

Non-GAAP net income is computed by starting with GAAP pre-tax income as reported on the company's statement of income, 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 27 percent to arrive at non-GAAP net income. This amount is then divided by fully-diluted GAAP shares outstanding, which includes shares underlying the company's convertible senior 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.

"Our third quarter revenue and earnings results exceeded our expectations," said Joel Ronning, Digital River's CEO. "Our performance was supported by accelerating top-line growth in software, consumer electronics and games -- markets where we continue to expand existing client relationships and close new business. While Symantec's decision to move its e-commerce platform in-house was disappointing, we believe these third quarter results continue to demonstrate the strength of our overall business and value proposition. We remain confident in the future prospects for our business and in our ability to take the actions necessary to continue to drive growth and profitability."

2009 Guidance Digital River continues to work on its business plans in response to Symantec's decision to not renew its e-commerce contract, which expires on June 30, 2010. While Digital River does not have complete visibility into Symantec's transition plans and is still assessing the impact to its business, Digital River's expectation for forward-looking guidance for the quarter ending Dec. 31, 2009, is as follows:

Fourth Quarter

-- Total revenue of $94 - $98 million; -- Revenue related to Symantec products is expected to be between $19 - $22 million;

-- Revenue, excluding Symantec, is expected to be approximately $75 - $76 million, representing year-over-year growth rates of 16 - 18 percent;

-- GAAP diluted net income per share of $0.18 - $0.22, assuming a 25 percent tax rate; and

-- Non-GAAP diluted net income per share of $0.30 - $0.34, assuming a 27 percent tax rate.

Full Year

-- Revenue of approximately $393 - $397 million.

-- GAAP diluted net income per share of $1.23 - $1.27, assuming a 25.5 percent tax rate; and

-- Non-GAAP diluted net income per share of $1.69 - $1.73, assuming a 27 percent tax rate.

Digital River will hold a conference call today at 4:45 p.m. EST to discuss third quarter financial results. A live webcast of Digital River's earnings conference call can be accessed at http://www.digitalriver.com/2009/investorrelations/. Alternatively, a live broadcast of the call may be heard by dialing (888) 218-6314 inside the United States or Canada, or by calling +1 (706) 634-9714 from international locations and using conference ID # 35972613. 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 software and game publishers, consumer electronics 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 management, 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 across the U.S., Asia, Europe and South America. For more details about Digital River, visit the corporate Web site at www.digitalriver.com or call +1 952-253-1234.

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 operating history and variability of operating results; competition in the e-commerce market; challenges associated with international expansion; the extent and timing by Symantec of the migration of business to its in-house solution; the variability of foreign exchange rates; our ability to successfully manage our business while undertaking significant internal investments; our ability to achieve favorable tax rates in our international operations; 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 and Form 10-K/A for the year ended Dec. 31, 2008. 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, Form 10-K/A and Form 10-Q, each as it may be amended from time-to-time.

The forward-looking statements regarding fourth quarter and full year 2009 reflect Digital River's expectations as of Nov. 3, 2009. 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 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.
Third Quarter Results
(Unaudited, in thousands)
Subject to reclassification
Condensed Consolidated Balance Sheets        As of
                                             September 30,         December 31,
                                             2009                  2008
Assets
Current assets
Cash and cash equivalents                    $    396,421          $    490,335
Short-term investments                            14,939                10,000
Accounts receivable, net                          51,574                53,216
Deferred income taxes                             7,654                 7,613
Prepaid expenses and other                        16,000                42,522
Total current assets                              486,588               603,686
Property and equipment, net                       54,420                41,733
Goodwill                                          278,682               273,788
Intangible assets, net                            27,697                32,222
Long-term investments                             94,335                93,213
Deferred income taxes                             23,063                24,824
Other assets                                      2,459                 786
Total assets                                 $    967,244          $    1,070,252
Liabilities and stockholders' equity
Current liabilities
Convertible senior notes                     $    -                $    186,195
Accounts payable                                  196,969               184,361
Accrued payroll                                   14,968                14,841
Deferred revenue                                  17,693                13,651
Accrued acquisition liabilities                   43                    3,278
Other accrued liabilities                         37,365                41,336
Total current liabilities                         267,038               443,662
Non-current liabilities
Convertible senior notes                          8,805                 8,805
Other liabilities                                 15,001                15,712
Total non-current liabilities                     23,806                24,517
Total liabilities                                 290,844               468,179
Stockholders' equity
Common stock                                      448                   432
Treasury stock                                    (216,738 )            (216,163  )
Additional paid-in capital                        641,811               623,778
Retained earnings                                 228,499               189,096
Accumulated other comprehensive income            22,380                4,930
Stockholders' equity                              676,400               602,073
Total liabilities and stockholders' equity   $    967,244          $    1,070,252

Digital River, Inc.
Third Quarter Results
(Unaudited, in thousands, except per share amounts)
Subject to reclassification
Condensed Consolidated Statement of Income
                                                   Three months ended          Nine months ended
                                                   September 30,               September 30,
                                                   2009        2008            2009             2008
Revenue                                            $   99,419  $   96,301      $   298,914      $   298,309
Costs and expenses (exclusive of depreciation
and amortization expense shown separately below):
Direct cost of services                                4,582       3,913           12,475           12,557
Network and infrastructure                             11,786      10,552          33,062           31,136
Sales and marketing                                    38,073      35,419          115,709          114,396
Product research and development                       14,134      12,993          39,605           38,737
General and administrative                             9,319       9,861           28,280           30,939
Depreciation and amortization                          5,162       4,047           13,635           11,838
Amortization of acquisition-related intangibles        1,800       2,001           5,719            6,347
Total costs and expenses                               84,856      78,786          248,485          245,950
Income from operations                                 14,563      17,515          50,429           52,359
Interest income                                        557         4,513           2,508            15,057
Other income (expense), net                            264         (1,387 )        (9      )        (3,789  )
Income before income tax expense                       15,384      20,641          52,928           63,627
Income tax expense                                     4,341       5,007           13,525           16,491
Net income                                         $   11,043  $   15,634      $   39,403       $   47,136
Net income per share - basic                       $   0.30    $   0.43        $   1.07         $   1.27
Net income per share - diluted                     $   0.29    $   0.39        $   1.05         $   1.15
Shares used in per share calculation - basic           37,151      36,495          36,899           37,186
Shares used in per share calculation - diluted         38,093      41,620          37,599           42,203
Calculation of GAAP Diluted Net Income Per Share
                                                   Three months ended          Nine months ended
                                                   September 30,               September 30,
                                                   2009        2008            2009             2008
GAAP net income                                    $   11,043  $   15,634      $   39,403       $   47,136
Add back debt interest expense and issuance cost
amortization, net of tax benefit                       21          435             63               1,304
Adjusted net income for GAAP EPS calculation       $   11,064  $   16,069      $   39,466       $   48,440
Net income per share - diluted                     $   0.29    $   0.39        $   1.05         $   1.15
Shares used in per share calculation - diluted         38,093      41,620          37,599           42,203

Digital River, Inc.
Third Quarter Results
(Unaudited, in thousands)
Subject to reclassification
Condensed Consolidated Statements of Cash Flows
                                                                      Nine months ended September 30,
                                                                      2009              2008
Operating Activities:
Net income                                                            $     39,403      $     47,136
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of acquisition-related intangibles                             5,719             6,347
Change in accounts receivable allowance, net of acquisitions                216               632
Depreciation and amortization                                               13,635            11,838
Stock-based compensation expense                                            13,256            10,161
Excess tax benefits from stock-based compensation                           (615     )        (1,685   )
Deferred and other income taxes                                             2,466             6,927
Change in operating assets and liabilities (net of acquisitions):
Accounts receivable                                                         2,141             10,204
Prepaid and other assets                                                    20,601            (7,819   )
Accounts payable                                                            10,219            1,310
Deferred revenue                                                            3,833             1,789
Income tax payable                                                          1,900             (10,289  )
Other accrued liabilities                                                   (6,568   )        39
Net cash provided by operating activities                                   106,206           76,590
Investing Activities:
Purchases of investments                                                    (17,279  )        (460,549 )
Sales of investments                                                        17,600            516,108
Cash paid for acquisitions, net of cash received                            (4,445   )        (22,221  )
Purchases of equipment and capitalized software                             (26,143  )        (15,169  )
Net cash (used in)/provided by investing activities                         (30,267  )        18,169
Financing Activities:
Cash paid for convertible senior notes                                      (186,660 )        -
Exercise of stock options                                                   9,133             6,841
Sales of common stock under employee stock purchase plan                    1,336             1,446
Repurchase of common stock                                                  -                 (137,858 )
Repurchase of restricted stock to satisfy tax withholding obligation        (575     )        (387     )
Excess tax benefits from stock-based compensation                           615               1,685
Net cash used in financing activities                                       (176,151 )        (128,273 )
Effect of exchange rate changes on cash                                     6,298             (3,025   )
Net decrease in cash and cash equivalents                                   (93,914  )        (36,539  )
Cash and cash equivalents, beginning of period                              490,335           381,788
Cash and cash equivalents, end of period                              $     396,421     $     345,249
Cash paid for interest on convertible senior notes                    $     1,274       $     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
                                                                                                                       Twelve months
                                                           Three months ended                                          ended
                                                           March 31,       June 30,      September 30,  December 31,   December 31,
                                                           2008            2008          2008           2008           2008
GAAP pre-tax income                                        $   26,114      $  16,872     $      20,641  $    22,644    $    86,271
Add back: amortization of acquisition-related intangibles      2,176          2,170             2,001        2,044          8,391
Add back: stock-based compensation expense                     3,031          3,507             3,623        2,387          12,548
Non-GAAP pre-tax income                                        31,321         22,549            26,265       27,075         107,210
Income tax expense @ 27%                                       8,457          6,088             7,092        7,310          28,947
Non-GAAP net income                                        $   22,864      $  16,461     $      19,173  $    19,765    $    78,263
Non-GAAP net income per share - diluted                    $   0.53        $  0.40       $      0.46    $    0.48      $    1.86
Shares used in per share calculation - diluted                 43,506         41,647            41,620       41,395         42,106
                                                                                                                       Nine months
                                                           Three months ended                                          ended
                                                           March 31,       June 30,      September 30,                 September 30,
                                                           2009            2009          2009                          2009
GAAP pre-tax income                                        $   22,759      $  14,785     $      15,384                 $    52,928
Add back: amortization of acquisition-related intangibles      2,003          1,916             1,800                       5,719
Add back: stock-based compensation expense                     3,711          4,887             4,658                       13,256
Non-GAAP pre-tax income                                        28,473         21,588            21,842                      71,903
Income tax expense @ 27%                                       7,688          5,828             5,897                       19,413
Non-GAAP net income                                        $   20,785      $  15,760     $      15,945                 $    52,490
Non-GAAP net income per share - diluted                    $   0.56        $  0.42       $      0.42                   $    1.40
Shares used in per share calculation - diluted                 37,227         37,781            38,093                      37,599
Breakdown of stock-based compensation expense
                                                                                                                       Nine months
                                                           Three months ended                                          ended
                                                           March 31,       June 30,      September 30,                 September 30,
                                                           2009            2009          2009                          2009
Direct cost of services                                    $   169         $  172        $      160                    $    501
Network and infrastructure                                     113            207               215                         535
Sales and marketing                                            1,517          1,643             1,704                       4,864
Product research and development                               456            622               670                         1,748
General and administrative                                     1,456          2,243             1,909                       5,608
Total                                                      $   3,711       $  4,887      $      4,658                  $    13,256
Non-GAAP Guidance Reconciliation
                                                           Q4 - 2009 Guidance
                                                           Low             High
Expected GAAP net income per share - diluted               $   0.18        $  0.22
Add back amortization of acquisition-related costs             0.05           0.05
Add back stock-based compensation expense                      0.12           0.12
Tax variability                                                (0.05  )       (0.05  )
Expected non-GAAP diluted net income per share             $   0.30        $  0.34

SOURCE: Digital River, Inc.

Digital River, Inc. 
Investor Relations Contact: 
Ed Merritt, 952-540-3362 
Vice President, Investor Relations 
investorrelations@digitalriver.com 
or 
Media Relations Contact: 
Gerri Dyrek, 952-253-1234, ext. 38396 
Senior Director, Public Relations 
gdyrek@digitalriver.com