DRIV

Digital River, Inc. (DRIV)

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Digital River, Inc. (DRIV)

Q3 2009 Earnings Call Transcript

November 3, 2009 4:45 pm ET

Executives

Ed Merritt – VP, IR and Director, Treasury Operations

Joel Ronning – Founder, Chairman and CEO

Tom Donnelly – CFO

Analysts

Nat Schindler – Merrill Lynch

Colin Sebastian – Lazard Capital Markets

Craig Nankervis – First Analysis

Sameet Sinha – JMP Securities

Shyam Patil – Raymond James & Associates

Sandeep Aggarwal – Collins Stewart

Tim Klasell – Thomas Weisel

Gene Munster – Piper Jaffray

Jeetil Patel – Deutsche Bank

Carter Malloy – Stephens, Inc.

Shawn Milne – Janney Montgomery Scott

Presentation

Operator

Good afternoon. My name is Eli and I will be your conference operator today. At this time, I would like to welcome everyone to the Digital River third quarter 2009 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator instructions) Thank you.

I would now like to turn the call over to Ed Merritt. Sir, you may begin your conference.

Ed Merritt

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

I would like to remind you the statements made during the course of this conference call that are not historical facts are forward-looking in nature. These statements relate to the company's future growth and financial results and may contain the words “believes,” “anticipates,” “expects” and similar words.

These statements involve known and unknown risks, uncertainties and other factors which may cause other 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 Web site.

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

Joel Ronning

Thanks, Ed. And thanks to all of you for joining us. On today's call in addition to discussing the third quarter results we would like to update you on a Symantec situation and outline some of the actions we’re taking. We'll also give you some high level guidance for the fourth quarter.

But first, I would like to begin by saying a few words about why I remain highly optimistic about our future. Mainly that our business is growing and healthy, built on a proven strategy, highly scalable and positioned for growth. Whereas you can see reflected in our third quarter results our business is healthy and growing and the pace of that growth is accelerating.

Yes, Symantec news was disappointing, but we've explained in our call three weeks ago. Symantec revenues have been steadily declining in proportion to our overall revenues. Symantec (inaudible) of revenues were 34% of our total revenues in 2008 compared to 39% in 2007 and 47% in 2006.

In the third quarter of 2009 Symantec related revenues were 29% of our total revenues compared to 33% in the third quarter of 2008. As you can see the percentage of total revenues from the Symantec business, is down significantly from a few years ago. Our efforts to expand our non-Symantec business are paying off.

Our third quarter revenue excluding Symantec grew 8% year-over-year, increasing from 2% year-over-year in the second quarter of 2009. Adjusting for the impact of foreign currency this growth rate was 10% in the third quarter. We expect this growth rate to accelerate in the fourth quarter.

Second, our business strategy is working. We continue to expand relationship with existing clients offering them a broader range of services and doing so in more countries. In addition we’ve proven that we’ve infrastructure and expertise to successfully expand and diversify in the new markets.

We’ve one business with major brands of consumer electronics and games and finally we’ve shown that we can leverage new products and technology to unlock opportunities in horizontal markets. We've reported early success in the Business-to-Business market in 2009 and are looking forward to closing opportunities for new online subscription offering in 2010.

Last quarter we completed the integration of what we believe is the industry's most advanced set of subscription capabilities. Our clients will now be able to manage recurring revenue business models in a single integrated construct. With subscriptions we intend to pursue incremental opportunities and likely outside of core markets we serve today.

Third, we built this organization to scale and are planned for growth. In response to increased volume and ramping customer forecasts on our global commerce platform we’ve enhanced our technical infrastructure with some of the most advanced technology on the market. As a result, we increased our capacity substantially and improved our system performance by more than 25%, which will ultimately offer end customers a better shopping experience.

We also recently launched our SAP system. This year long project was transformative investment that will allow us to scale much more efficiently. We’ve revamped our enterprise data management structure including significant enhancements to internal and client reporting.

With our new systems in place we will be able to offer client reporting capabilities add depth and breadth of global e-commerce transparency unmatched in the industry.

Finally, market forces continue to play in our favor. I believe we’re pursuing our strategy exactly at the right time. Estimates place 2009 U.S. retail e-commerce sales at approximately 132 billion, growing to over $200 billion by 2013.

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