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Digital River Inc. (DRIV)

Q2 2009 Earnings Call

July 29, 2009 4:30 pm ET


Ed Merritt – Vice President of Investor Relations

Joel Ronning – Chief Executive Officer

Tom Donnelly – Chief Financial Officer


Robert Breza - RBC Capital Markets

Philip Winslow - Credit Suisse

Jeetil Patel - Deutsche Bank Securities

[Paul] for Colin Sebastian - Lazard Capital Markets

Shyam Patil - Raymond James

Carter Malloy - Stephens Inc.



Good afternoon. My name is Brandon and I’ll be your conference operator today. At this time I would like to welcome everyone to the second quarter 2009 earnings conference call. (Operator Instructions)

Thank you. Mr. Ed Merritt, you may begin your conference.

Ed Merritt

Thank you. Welcome to Digital River’s second quarter 2009 earnings call. I’m Ed Merritt, Digital River’s Vice President of Investor Relations, and on the call is Joel Ronning, our Chief Executive Officer and Tom Donnelly, our Chief Financial Officer.

Joel is traveling today and joining us via conference call. While we don’t anticipate this will have any impact on our call, we wanted you to be aware in case there are short delays in response times.

I’d like to remind you that statements made during the course of this conference call that are not historical facts are forward-looking in nature, including statements regarding the company’s future growth and financial results, as well as any statement containing the words believes, anticipates, expects and similar words. These statements involve known and unknown risks, uncertainties and other factors which may cause actual results to differ materially from expectations. For a detailed discussion of these risk factors and uncertainties, please refer to the company’s filings with the Securities and Exchange Commission.

A webcast of our call today will be available for a period of two weeks on the Investor Relations section of Digital River’s corporate website.

With that, I’d like to turn the call over to Joel Ronning. Joel?

Joel Ronning

Thanks Ed and thanks to all of you for joining our call today. In the second quarter, total revenue was $96.6 million, GAAP EPS was $0.31 and non-GAAP EPS was $0.42. I’m pleased to report that our second quarter revenue was squarely in line with expectations. Even though our year-to-year results continue to be tempered by the slow economy, we remain encouraged by the growth in our sales pipeline, our new product roadmap and our recent wins in the business-to-business software market.

Last year we outlined our core business strategy which was to strengthen our leadership position in software, diversify into complementary markets including consumer electronics and games, and finally invest in new technologies to unlock opportunities in horizontal markets such as subscriptions and business-to-business or B2B. During the first half of 2009 we continued to execute against this strategy, bearing down and realigning resources to deliver results.

In the second quarter we continued to expand our core software business. We launched an online store for Tripwire, a leader in data center compliance and infrastructure software.

We also expanded our relationship with a large U.S. based PC manufacturer. Based on a new software distribution agreement we will preload PC desktops with the software marketplace of well known brands and titles. We’re excited about this solution for several reasons. First, it represents a new distribution channel for our client base. Second, it confirms that our strategy to sell across adjacent markets like software and CE and that that strategy’s adding value for our clients and our company.

I’m also excited to report that we now have tangible traction with our new B2B solutions in the software market. In the second quarter we expanded our relationships with two long term clients. Autodesk contracted with us to use our channel partner network, a new B2B solution that automates the managing of complex margin, delivery and payment solutions to resellers and distributors. And Nuance is implementing our volume licensing solution to support online sales for its small to mid-size business customers.

We also welcomed Lominger International as a new B2B client and rolled out an online store to automate business purchases of its leadership training materials. These B2B wins are directly attributed to investments we’ve made in new product development. We’re excited to see more of these B2B opportunities in our pipeline to help clients more effectively sell directly to their business customers.

We believe that B2B represents a sizable market opportunity for Digital River. Recent research indicates that there are over 27 million small and medium sized businesses worldwide and in 2007 they spent nearly $114 billion on packaged software alone. Other surveys have reported that more than half of the SMB owners have either purchased or would purchase software online.

During the second quarter we also grew our relationship with Semantic and Microsoft. For Semantic we launched a new U.S. store that offers students a discount on purchases of Norton Antivirus. We also continued to make progress optimizing site flows for Semantics’ trial ware, OEM and retail programs. Our work on these programs is yielding some impressive early results. Overall, our relationship with Semantic continues to be strong. We’re excited about several significant opportunities in Semantics’ SMB business. We have more details to report in future quarters as these products mature. In the meantime we look forward to working with Semantic on new product strategies and remain committed to the company’s continued success.

For Microsoft we began managing all global sales for its home use program. In addition, we added a German site to its popular student initiative called Ultimate Steal. These programs offer our enterprise customers and students deep discounts on purchases of Microsoft titles including Office. We’re excited to work with Microsoft on these opportunities which drive broad consumer adoption of their products. We expect to make more announcements on new projects related to upcoming Microsoft product launches and promotions in the near future.

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