Digital River (DRIV) 8-K Digital River Announces Second Quarter Financial Results

Exhibit 99.1

Digital River Announces Second Quarter Financial Results

MINNEAPOLIS--(BUSINESS WIRE)--Digital River, Inc. (NASDAQ: DRIV), a leading provider of global e-commerce solutions, reports its second quarter financial results.

Second Quarter and Six Months Ended June 30, 2008

GAAP Results

Second quarter revenue totaled $98.4 million, an increase of 26 percent from $78.2 million during the same period in 2007. These results exceeded management’s second quarter revenue guidance of $91 million.

In the first half of 2008, Digital River reported revenue of $202.0 million. This represents a 19 percent increase from revenue of $169.9 million in the similar period last year.

Second quarter GAAP net income was $13.2 million or $0.33 per diluted share and compared to GAAP net income of $14.5 million or $0.32 per diluted share in the second quarter of 2007. These results exceeded management’s guidance of $0.25 per diluted share for the second quarter.

In the first half of 2008, GAAP net income was $31.5 million, or $0.76 per diluted share. This compared to GAAP net income of $35.2 million, or $0.78 per diluted share in the first half of 2007.

Non-GAAP Results

Second quarter non-GAAP net income was $15.6 million or $0.37 per diluted share, exceeding management’s guidance of $0.33 per diluted share. This compared to non-GAAP net income of $18.1 million, or $0.39 per diluted share in the second quarter of 2007.

In the first half of 2008, non-GAAP net income was $37.2 million, or $0.87 per diluted share. This compared to non-GAAP net income of $43.1 million, or $0.93 per diluted share in the first half of 2007.

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 31 percent to arrive at non-GAAP net income through the second quarter of 2008. This amount is then divided by fully-diluted GAAP shares outstanding, which includes the impact of 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 second quarter results, which exceeded our guidance, were driven by strong performances across all areas of our business,” said Joel Ronning, Digital River’s CEO. “Our core software business continues to perform well, and our ability to translate this success into complementary verticals is paying off. We are making consistent progress extending our e-commerce services and winning new business in consumer electronics and games. While we are encouraged by the results we delivered in the first half of the year, we are maintaining cautious optimism for the remainder of 2008 based on the macro-economic environment.”

2008 Guidance

Forward-looking guidance for the quarter ending September 30, 2008, is as follows:

Third Quarter

• Revenue of $98.5 million;
• GAAP diluted net income per share of $0.37, assuming a 29 percent tax rate; and
• Non-GAAP diluted net income per share of $0.47, assuming a 27 percent tax rate.

Full Year

Forward-looking guidance for the period ending December 31, 2008, is as follows:

• Revenue of $410 million;
• GAAP diluted net income per share of $1.63, assuming a 28 percent tax rate; and
• Non-GAAP diluted net income per share of $2.00, assuming a 27 percent tax rate.

As previously announced, beginning in the third quarter of 2008, non-GAAP net income will be computed using a 27 percent income tax rate. The Company is reducing this rate from 31 percent because it is closer to current and expected GAAP tax rates over the next three to four years. A table modifying historical non-GAAP financial results, utilizing a 27 percent income tax rate accompanies this release.

Digital River will hold a conference call today at 4:30 p.m. EDT to discuss second quarter financial results. A live webcast of the conference call can be accessed from http://www.digitalriver.com/2008/q2earnings/. Alternatively, a live broadcast of the call may be heard by using conference ID # 54105238 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 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; Stockholm, Sweden; 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 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 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; 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 for the year ended December 31, 2007. 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 third quarter and full year 2008 reflect Digital River’s expectations as of July 30, 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.
Second Quarter Results
(Unaudited, in thousands)
Subject to reclassification
Condensed Consolidated Balance Sheets	As of
	June 30,			December 31,
	2008			2007
Assets:
Current assets
Cash and cash equivalents	$	276,927		$	381,788
Short-term investments		201,297			315,636
Accounts receivable, net		54,606			64,914
Deferred income taxes		2,808			7,899
Prepaid expenses and other		17,124			4,577
Total current assets		552,762			774,814
Property and equipment, net		32,971			31,102
Goodwill		280,908			261,885
Intangible assets, net		37,169			32,382
Long-term investments		109,108			-
Deferred income taxes		15,606			15,606
Other assets		6,654			11,955
Total assets	$	1,035,178		$	1,127,744
Liabilities and stockholders' equity:
Current liabilities
Convertible senior notes	$	195,000		$	-
Accounts payable		174,064			180,386
Accrued payroll		12,167			12,704
Deferred revenue		12,597			10,384
Accrued acquisition liabilities		7			399
Other accrued liabilities		33,996			41,229
Total current liabilities		427,831			245,102
Non-current liabilities
Convertible senior notes		-			195,000
Other liabilities		10,279			11,362
Total non-current liabilities		10,279			206,362
Total liabilities		438,110			451,464
Stockholders' equity
Common stock		432			425
Treasury stock at cost		(215,944	)		(77,707	)
Additional paid-in capital		610,378			597,128
Retained earnings		157,003			125,501
Accumulated other comprehensive income		45,199			30,933
Stockholders' equity		597,068			676,280
Total liabilities and stockholders' equity	$	1,035,178		$	1,127,744

Digital River, Inc.
Second Quarter Results
(Unaudited, in thousands, except per share amounts)
Subject to reclassification
Condensed Consolidated Statement of Income
	Three months ended June 30,						Six months ended June 30,
	2008			2007			2008			2007
Revenue	$	98,374		$	78,227		$	202,008		$	169,858
Costs and expenses:
Direct cost of services		4,469			2,426			8,644			4,989
Network and infrastructure		10,396			7,334			20,584			14,829
Sales and marketing		39,247			32,793			78,977			66,982
Product research and development		13,074			8,235			25,744			16,887
General and administrative		10,834			9,543			21,078			19,656
Depreciation and amortization		3,957			3,291			7,791			6,149
Amortization of acquisition-related intangibles		2,170			1,607			4,346			4,353
Total costs and expenses		84,147			65,229			167,164			133,845
Income from operations		14,227			12,998			34,844			36,013
Interest income		4,298			8,264			10,544			16,146
Other expense, net		(1,653	)		(257	)		(2,402	)		(1,146	)
Income before income tax expense		16,872			21,005			42,986			51,013
Income tax expense		3,653			6,512			11,484			15,814
Net income	$	13,219		$	14,493		$	31,502		$	35,199
Net income per share - basic	$	0.36		$	0.35		$	0.84		$	0.86
Net income per share - diluted	$	0.33		$	0.32		$	0.76		$	0.78
Shares used in per share calculation - basic		36,594			41,169			37,562			40,823
Shares used in per share calculation - diluted		41,647			46,637			42,556			46,488
Calculation of GAAP Diluted Net Income Per Share
	Three months ended June 30,						Six months ended June 30,
	2008			2007			2008			2007
GAAP net income	$	13,219		$	14,493		$	31,502		$	35,199
Add back debt interest expense and issuance cost amortization, net of tax benefit		435			435			869			870
Adjusted net income for GAAP EPS calculation	$	13,654		$	14,928		$	32,371		$	36,069
Net income per share - diluted	$	0.33		$	0.32		$	0.76		$	0.78
Shares used in per share calculation - diluted		41,647			46,637			42,556			46,488

Digital River, Inc.
Second Quarter Results
(Unaudited, in thousands)
Subject to reclassification
Condensed Consolidated Statements of Cash Flows
	Six months ended June 30,
	2008			2007
Operating Activities:
Net income	$	31,502		$	35,199
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of acquisition-related intangibles		4,346			4,353
Change in accounts receivable allowance, net of acquisitions		603			570
Depreciation and amortization		7,791			6,149
Stock-based compensation expense		6,538			7,125
Excess tax benefits from stock-based compensation		(1,001	)		(10,027	)
Deferred and other income taxes		5,934			11,383
Change in operating assets and liabilities (net of acquisitions):
Accounts receivable		12,495			6,515
Prepaid and other assets		(6,876	)		(1,417	)
Accounts payable		(12,582	)		(15,997	)
Deferred revenue		1,867			298
Income tax payable		(10,548	)		2,861
Other accrued liabilities		(50	)		1,068
Net cash provided by operating activities		40,019			48,080
Investing Activities:
Purchases of investments		(227,625	)		(173,092	)
Sales of investments		232,650			137,395
Cash paid for acquisitions, net of cash received		(17,352	)		(8,540	)
Purchases of equipment and capitalized software		(9,532	)		(6,577	)
Net cash used for investing activities		(21,859	)		(50,814	)
Financing Activities:
Exercise of stock options		4,439			7,703
Sales of common stock under employee stock purchase plan		1,446			1,244
Repurchase of common stock		(137,858	)		-
Repurchase of restricted stock to satisfy tax withholding obligation		(379	)		(377	)
Excess tax benefits from stock-based compensation		1,001			10,027
Net cash (used for)/ provided by financing activities		(131,351	)		18,597
Effect of exchange rate changes on cash		8,330			3,009
Net (decrease)/ increase in cash and cash equivalents		(104,861	)		18,872
Cash and cash equivalents, beginning of period		381,788			390,243
Cash and cash equivalents, end of period	$	276,927		$	409,115
Cash paid for interest on Convertible Senior Notes	$	1,219		$	1,219

Digital River, Inc.
GAAP to non-GAAP Reconciliations
(Unaudited, in thousands, except per share amounts)
UTILIZING 31% INCOME TAX RATE
Calculation of non-GAAP Diluted Net Income Per Share
	Three months ended				Six months ended
	March 31,		June 30,		June 30,
	2007		2007		2007
GAAP pre-tax income	$	30,008	$	21,005	$	51,013
Add back: amortization of acquisition-related intangibles		2,746		1,607		4,353
Add back: stock-based compensation expense		3,476		3,649		7,125
Non-GAAP pre-tax income		36,230		26,261		62,491
Income tax expense @ 31%		11,231		8,141		19,372
Non-GAAP net income	$	24,999	$	18,120	$	43,119
Non-GAAP net income per share - diluted	$	0.54	$	0.39	$	0.93
Shares used in per share calculation - diluted		46,348		46,637		46,488
	Three months ended				Six months ended
	March 31,		June 30,		June 30,
	2008		2008		2008
GAAP pre-tax income	$	26,114	$	16,872	$	42,986
Add back: amortization of acquisition-related intangibles		2,176		2,170		4,346
Add back: stock-based compensation expense		3,031		3,507		6,538
Non-GAAP pre-tax income		31,321		22,549		53,870
Income tax expense @ 31%		9,710		6,990		16,700
Non-GAAP net income	$	21,611	$	15,559	$	37,170
Non-GAAP net income per share - diluted	$	0.50	$	0.37	$	0.87
Shares used in per share calculation - diluted		43,506		41,647		42,556
Breakdown of stock-based compensation expense
	Three months ended				Six months ended
	March 31,		June 30,		June 30,
	2008		2008		2008
Direct cost of services	$	192	$	247	$	439
Network and infrastructure		32		31		63
Sales and marketing		1,102		1,283		2,385
Product research and development		262		336		598
General and administrative		1,443		1,610		3,053
Total	$	3,031	$	3,507	$	6,538

Digital River, Inc.
GAAP to non-GAAP Reconciliations
(Unaudited, in thousands, except per share amounts)
UTILIZING 27% INCOME TAX RATE
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,
	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 @ 27%		9,782			7,090		7,343			9,373		33,588
Non-GAAP net income	$	26,448		$	19,171	$	19,853		$	25,343	$	90,815
Non-GAAP net income per share - diluted	$	0.57		$	0.41	$	0.44		$	0.56	$	1.98
Shares used in per share calculation - diluted		46,348			46,637		45,386			45,401		45,914
	Three months ended										Six months ended
	March 31,			June 30,							June 30,
	2008			2008							2008
GAAP pre-tax income	$	26,114		$	16,872						$	42,986
Add back: amortization of acquisition-related intangibles		2,176			2,170							4,346
Add back: stock-based compensation expense		3,031			3,507							6,538
Non-GAAP pre-tax income		31,321			22,549							53,870
Income tax expense @ 27%		8,457			6,088							14,545
Non-GAAP net income	$	22,864		$	16,461						$	39,325
Non-GAAP net income per share - diluted	$	0.53		$	0.40						$	0.92
Shares used in per share calculation - diluted		43,506			41,647							42,556
Breakdown of stock-based compensation expense
	Three months ended										Six months ended
	March 31,			June 30,							June 30,
	2008			2008							2008
Direct cost of services	$	192		$	247						$	439
Network and infrastructure		32			31							63
Sales and marketing		1,102			1,283							2,385
Product research and development		262			336							598
General and administrative		1,443			1,610							3,053
Total	$	3,031		$	3,507						$	6,538
Non-GAAP Guidance Reconciliation
	Q3 - 2008					FY - 2008
	Guidance					Guidance
Expected GAAP net income per share - diluted	$	0.37				$	1.63
Add back amortization of acquisition-related costs		0.05					0.20
Add back stock-based compensation expense		0.09					0.33
Tax variability		(0.03	)				(0.12	)
Deduct impact of convertible senior notes		(0.01	)				(0.04	)
Expected non-GAAP diluted net income per share	$	0.47				$	2.00

CONTACT:
Digital River, Inc.
Investor Relations Contact:
Ed Merritt, 952-540-3362
Vice President, Investor Relations
emerritt@digitalriver.com
or
Media Relations Contact:
Gerri Dyrek, 952-253-8396
Director, Public Relations
gdyrek@digitalriver.com