Digital River, Inc.
) reported an adjusted net income of 8 cents per share in the
third quarter of 2012, better than Zacks Consensus Estimate of 3
cents per share.
On a reported basis, Digital River posted a net loss of $734
million or 2 cents per diluted share, toward the high end of
management's loss guidance of 9 cents - 2 cents. The reported
figure deteriorated considerably from 15 cents earned in the
Digital River generated revenues of $91.7 million in the third
quarter of 2012, up 3.9% year over year and marginally ahead of
management's guidance of $88 million - $91 million.
The year-over-year growth in revenues was attributed to
better-than-expected performance at Enterprise, driven primarily
by new product launches from a few key clients. Enterprise
revenue was $71.7 million, down 1% year over year. On a constant
currency basis, Enterprise revenue increased 2% year over
Within Enterprise Commerce, Digital Commerce, which consists
primarily of software and games, increased 2% year over year.
Physical Commerce decreased 13% year over year as strong new
business pipeline and some solid within Consumer Electronics was
more than offset by client bankruptcies and some soft product
launches by some key clients.
World Payments spiked 30% year over year. Digital River
continues to see significant growth opportunities in the Payments
space. The company recently announced that it will acquire LML
Payments to bolster this segment.
Support revenue came in at $20 million, down 13% from a year
In September, Digital River announced that it will acquire LML
Payment Systems Inc. for $3.45 per share or $102.8 million.
Digital River expects to complete the transaction by the fourth
quarter of 2012 or the first quarter of 2013.
The acquisition is expected to be accretive to the bottom line
in 2013 but no revenue contribution in 2013. After adjusting for
cash on LML's balance sheet, the final acquisition cost will be
around $72 million. The acquisition is expected to be accretive
to the bottom line in 2013 but no revenue contribution in
During the third quarter, Digital River signed many new and
expanded agreements. The company extended its relationship with
Siemens, Novell, Corel, Individual Software and Grass Valley. The
company also signed multi year extensions with two of its top
clients, Trend Micro and Kaspersky. Meanwhile,
) is the company's largest customer and continues to be so.
On a geographical basis, international revenue decreased
slightly to 45.8% from 46.2% in the year-ago quarter due to weak
business in Europe.
During the first nine months of 2012, Digital River generated
$24.3 million of cash from operations versus cash generation of
$5.1 million in the year-ago quarter due to lower net income and
changes in working capital. The company incurred $14.4 million in
capital expenditures in the first nine months of 2012. Capital
expenditures in the third quarter were $8.2 million and the
company estimates to spend $25 million in 2012.
Digital River ended the quarter with cash and equivalents of
$465.5 million, down from $497.1 million at the end of the
In a separate development, Digital Rivera announced that
founder Joel A. Ronning has stepped down as Chief Executive
Officer. Mr. Ronning will continue to serve as Chairman of the
Board until December 31, 2012, when he will retire from the
board. He will be replaced by Thomas F. Madison, who has been
named as the interim Chief Executive Officer.
Going forward, management expects to report revenues between
$96 million and $100 million in the fourth quarter of 2012. On a
segment basis, Enterprise Commerce would account for about $81
million and the support businesses about $19 million. The company
expects to report EPS in the range of 8 cents - 15 cents.
Excluding one-time items, net income per share is expected to
come around 25 cents - 31 cents.
For 2012, Digital River projects revenues between $381 million
and $385 million. The company expects to report EPS in the range
of 20 cents - 27 cents. Excluding one-time items, net income per
share is expected to come around 96 cents - $1.01.
The guidance for the year has been lowered based on one-time
expenses related to a legal settlement and LML acquisition costs
along with planned investments in technology infrastructure.
For 2013, the company is likely to face some headwinds due to
macroeconomic conditions, client attrition and additional
necessary ramp up in investments to ensure an updated technology
infrastructure. Digital River forecasts that overall softness in
the economy, especially in Europe coupled with recent decline in
PC sales will make it challenging to post a growth in revenue.
The company saw some client attrition in 2012 and expects the
same in 2013 along with a decline in supporting business
We continue to maintain our long-term Neutral recommendation
on Digital River. Our recommendation is supported by a Zacks #3
Rank, which translates into a short-term rating of
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