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Q4 2006 Earnings Call Transcript

Published: 9 Feb 2007

[Operator:]

Good afternoon. My name is Marie and I will be your conference operator today. At this time, I would like to welcome everyone to the Digital River Q4 Earnings Call. (Operator Instructions). Thank you. It is now my pleasure to turn the floor over to your host, Vice President of Investor Relations, Bob Kleiber. Sir, you may begin your conference.

[Bob Kleiber:]

Thanks Marie, and good afternoon everybody and thanks for joining us on the call. With me today for the call are Joel Ronning, the Chief Executive Officer of Digital River, and Tom Donnelly, our Chief Financial Officer. Before we begin, please be aware that statements made during the course of this conference call that are not historical facts are considered forward-looking in nature including statements regarding the Company’s future growth and financial results as well as any statement containing the words beliefs, anticipates, expects, or similar words. These statements involve known and unknown risks, uncertainties, and other factors which may cause actual results to differ materially. For a detailed discussion of these risk factors and uncertainties, please refer to Digital River's filings with the Securities and Exchange Commission. A webcast of the call will be available for a period of two weeks on the Investor Relations section of Digital River’s corporate website. With that, I'll turn the call over to Joel Ronning. Joel?

[Joel Ronning:]

Great, thanks Bob. And thanks to all of you for joining us today. I am pleased to report we exceeded our revenue expectations both on a quarterly and annual basis. During the fourth quarter our revenue totaled $83 million, a solid 35% increase over the same period last year. This growth rate is especially strong, when you consider that it was also tempered by some external factors, which included the delays in PC sales due to the pending Vista launch, which slowed the market a bit, delays in incremental business and transaction volumes we are anticipating from Symantec as well as some delays in other product launches from other clients. We believe these delays are simply that, a shift in timing with revenues following a little later than we had originally anticipated. Meanwhile we remain confident in our underlying business and the long term growth drivers which will provide continued momentum through 2007. For the full year 2006, we generated $307.6 million in revenue, up nearly 40% over 2005. Now before I turn the call over to Tom for the rest of the details on our earnings performance and financial results, I would like to recap some of our fourth quarter and full year highlights. Looking back over 2006, we again demonstrated the ability of this organization to focus and execute on strategic growth initiatives. 2006 was a year in which we further strengthened our leadership position in the e-commerce market. Some of our greatest accomplishments incurred in three areas, client wins, global markets and strategic marketing services. First client wins; we continue to cure contracts with the industry's largest players. In 2006, we signed our expanded contracts with leading companies such as ACD Systems, Business Objects, Fisher-Price and Skype. We signed a two year contract extension with Symantec that has important long term benefits for our business. This past quarter, we were actively involved in laying the ground work and strategy for aggressive acquisition and retention programs, and supporting Symantec's internal launch of auto renewals. In addition, we are rapidly approaching handling key pieces of their subscription business. Most notably in 2006, we significantly expanded our relationship with Microsoft, signing a three year master agreement to provide global e-commerce services for direct and indirect online sales of Microsoft products. Last year we invested heavily in three key areas to support the expansion of Microsoft's online business. First, we launched 15 global online sites to support trial downloads of Microsoft's 2007 Office products in 21 countries. Last week, we launched eight global commerce stores to convert Office trials to fully paid versions in North America, Europe, Asia and Africa. From these stores we also handle OEM conversions and PCs. Second, we support the launch of Microsoft's Windows marketplace; a key platform for online sales of Windows based software. Last week we began managing the purchase and download of Office 2007 as well as upgrades from Windows XP to Vista. And finally in 2006, we built online stores for nearly 20 retailers and OEMs in North America that are supporting Windows Anytime Upgrade Program. Now when owners of Windows or the Vista's operating system would like to upgrade from basic to premium and ultimate versions, they can purchase the upgrade at one of these participating retail OEM sites. For these different Microsoft programs we are providing a range of e-Commerce services. In addition to managing the trail sites and conversion stores, we are handling payment processing, providing secure stores, downloads and recovery of license keys as well as delivering customer support and fraud prevention services. In short on the Microsoft front we made a lot of progress building our infrastructure in 2006. And now in 2007 we are focused on launching stores and generating revenue. In fact the recent store launches, which we are very successful, took place only nine days ago. In the next 90 days more data will be available to us and we can provide you greater insight into our progress over the coming quarters. As I reflect in all the client relationships we built last year, I want to extend a note of thanks not only to the committed group of talented professional at Digital River, but also to our clients for their continued support and loyalty. As an organization we are fortunate to be working with some of the greatest companies in the world. Moving on the global markets; here is another area where we continue to demonstrate our e-Commerce leadership in 2006. Our ability to mange complex global e-Commerce operations on a macro level while creating highly localized shopping experiences and a micro level is proving to be one of our most compelling market differentiators. Last year significantly expanded our European global operations in e-commerce capabilities, opening offices and resources on the ground in Ireland and Luxemburg. These newly staffed offices are now managing much of our non-US e-commerce activity as well as helping us accelerate our growth in international markets into tax efficient manner. In the Asia-Pacific region, 2006, it was a year of first for us. We opened online markets in India, we launched our first Mainland China store, we delivered our first double byte e-mails and held our first client summit in Asia. Asia-Pacific in particular continues to be an area of the world were we can add tremendous value for companies trying to capitalize on the market potential, having the right technologies, partnerships and cultural understanding to successfully build an online business here as incredibly labor, time and capital intensive, especially for US and European companies. By solving these challenges on behalf of our clients, we are breaking down barriers to entry and providing them a readymade gateway to the region. Initially, we expanded into Asia-Pacific to support the international growth of our US and European clients. Now, we are seeing an added benefit of our presence in the region by helping increasing number of publishers from Asia expand into US and Europe. We are excited to see our business grow on a truly global scale. Another important contributing factor in our market leadership position is 2006 has been our marketForce strategic marketing services. This is the third and final area I want to touch on this afternoon. Marketing services such as contextual advertising, comparison shopping management, managed e-mail programs, affiliate marketing, continue to be key factors and helping us deepen client relationships and win new business. During last quarter, we introduced an enhanced version of our e-mail marketing solution, expanding its global capabilities, adding reporting features in creating deeper integrations with best of breed online marketing tools. E-mail volumes top $1 billion in the fourth quarter, doubled the level over the first quarter of 2006. Last quarter we also engaged four additional clients in our marketForce programs for the first time. In the fourth quarter, our marketForce related revenue more than doubled quarter-over-quarter and grew approximately four-fold year-over-year. Our strong growth in this area last year can be attributed in part to our expanded European team, the successful launch of new marketing programs and our ability to deepen marketing relationships with clients. Overall we are pleased with our progress and results for the fourth quarter and full year 2006. We continue to demonstrate the ability of this organization in delivering on our strategic growth initiatives, profitability goals, and our mission. With that I'll turn the call over to Tom for details on our financial performance and then I'll come back with comments on our outlook.

[Tom Donnelly:]

Thanks, Joel. Our fourth quarter revenue was $83 million up 35% from $61.6 million reported in the fourth quarter of 2005. International sales were approximately 44% of total sales in the fourth quarter compared to 40% in the fourth quarter of 2005. Revenues directly and indirectly related to the sales of Symantec products were 45% of total revenues in the fourth quarter compared to 48.5% in the same period of 2005. For the full year ended December 31, 2006, total revenue was $307.6 million, up nearly 40% from $220.4 million reported in 2005. Revenues directly related to Symantec products for the year accounted for 30% of total revenues. Indirect revenues, which include other products such as extended download services, backup CD's and sales of Symantec products through one network accounted for an additional 17% of total revenues in 2006. This compares to 30% and 14% respectively, in the prior year. We currently anticipate that the Symantec concentration has now peaked and will begin to step down in future periods, not due to lower revenues related to Symantec but because other clients are growing at a faster pace. GAAP net income, for the fourth quarter, total $16.4 million or $0.36 per share including $3.5 million of stock compensation expense. This compares to restated net income of $18.1 million or $0.45 per diluted share in the fourth quarter of 2005, with minimal stock compensation expense. We recall that the company reversed the valuation allowance on certain tax assets in the fourth quarter of 2005, resulting in a $6.7 million one time benefit. In addition, our restatement added an additional $400,000 of tax benefit to the fourth quarter 2005 results. A more relevant measure of our operating performance is GAAP pre-tax income which grew 23% in the fourth quarter of 2006, compared to the same period of 2005. Absent stock compensation expense which was minimal in our restated 2005 fourth quarter results, GAAP pre-tax income would have grown 40%. For the full year ended December 31st, 2006 GAAP net income was $60.8 million or $1.40 per diluted share. This compares to restated GAAP net income of $56.5 million or $1.41 per share in the prior year. Again note that 2005 included minimal stock expense and had a significantly lowered GAAP tax rate. Switching to non-GAAP results in the fourth quarter; non-GAAP net income totaled $21.6 million or $0.47 per share compared with non-GAAP net income of $15.4 million or $0.37 per share in the fourth quarter of 2005. This represents a 40% year-over-year improvement in non-GAAP net income and a 27% increase in non-GAAP net income per share. For the full year ended December 31, 2006 non-GAAP net income was $79.7 million or $1.79 per diluted share. This compares to restated non-GAAP net income of $55.5 million or $1.34 per share in the prior year. This represents a 44% year-over-year improvement in non-GAAP net income and 34% increase in non-GAAP net income per share. As expected, operating margin for the fourth quarter improved on a GAAP and non-GAAP basis when compared to the third quarter of 2006. For the year non-GAAP operating margin, which excludes amortization and stock compensation expense came in just over 30%. For the fourth quarter, total cost and expenses grew approximately $22.2 million over the restated fourth quarter of 2005. Excluding stock compensation expense in both years, total cost and expenses grew $18.7 million or 44%, reflecting investments the company has been making to drive future growth, as well as the impact of recent acquisitions. Looking at the individual fourth quarter expense lines compared to the fourth quarter of 2005 and excluding stock compensation expense, direct cost of services was up 23% primarily due to increased sales activity. Network and infrastructure costs were up 37%, primarily due to increased sales activity and new international operations. Sales and marketing expenses were up 43%, specific factors that drove the increase include, incremental payment processing fees tied to higher transaction volumes, higher cost associated with our marketForce services, additions to headcount to target the consumer electronics vertical, additions to headcount and operations in the Asia-Pacific region and investments related to Microsoft. R&D expense was up 45%, again reflecting continued investment in various growth initiatives and finally G&A costs were up 57% year-over-year. G&A expenses were higher in the fourth quarter sequentially due to year-end bonus accruals and outside professional fees related to the stock option review and the related litigation. Other income, predominately interest income, benefited from a continued favorable interest rate environment. FX gain in the quarter was under $200,000. Our GAAP tax rate in the fourth quarter was approximately 34% and 32% for the year in line with previously provided guidance. Our US NOL at the end of the quarter was approximately $61.6 million and our international NOL was approximately $1.3 million. Turning to the cash flow, net cash provided by operating activities totaled approximately $117.6 million in 2006 compared to $119.8 million in 2005. Excluding changes in operating assets and liabilities, which I have referred to as balance sheet leverage, net cash flow from operations for 2006 was $109.6 million, up 31% from $83.7 million in 2005. On a comparable basis, including the tax benefit for stock based compensation in 2006, cash flow from operations would have been $118.6 million up 42% from the prior year. CapEx was approximately $3.1 million in the fourth quarter, and just under $16 million for the full year. We ended the year with approximately $626 million in cash and short-term investments. There was no activity during the quarter under our stock buyback program. Regarding the options matter, we will continue to cooperate with the SEC's informal enquiry; a process we expect will take several months. As we have pending litigation related to this matter, we are limited in our ability to comment on the topic. Disclosure on the scope and results of the special committee investigation will be included in our 10-K, which we plan to file on March 1st. Now on the guidance; for the first quarter of 2007 we currently expect revenue of $88 million, GAAP net income of $0.44 per share assuming a quarterly tax rate of 31% and including $3.5 million of stock compensation expense and non-GAAP net income of $0.53 per share. For the full year ending December 31st 2007, our guidance is as follows, total revenue of $380 million which is unchanged from our prior guidance, GAAP net income of $1.86 per share, including $14.1 million of stock compensation expense and at 31% anticipated annual effective tax rate. This increase in guidance compared to the $1.74 we provided last October is attributable to a lower GAAP tax-rate significantly lower acquisition and amortization and lower stock compensation expense. And for the full year, we expect non-GAAP net income of $2.14 per share which is unchanged from our prior guidance. We expect CapEx for 2007 to be in $18 million range. Few comments on the updated 2007 guidance; as most of you know we announced a new contract with Symantec in the fourth quarter of 2006. At that time we provided Symantec with lower pricing in exchange for the opportunity to manage more business over time. The incremental business opportunity will be unfolding over the next few quarters, a little slower than we had originally anticipated. In addition, we anticipate up to $1 million of additional cost in the first quarter of 2007 related to the completion of our internal stock option review and ongoing support of the SEC inquiry and related litigation costs. To that end our first quarter guidance is slightly lower than the directional guidance we gave last October. However, we remained very confident in the business and look forward to delivering solid 2007 financial results. With that I will turn the call back over to Joel.

[Joel Ronning:]

Thanks Tom. Before we move to the Q&A portion of the call, I want to share a few observations about the business in 2007. Our focus this year is in two areas, operational execution enhancing the value proposition for our clients and prospects. We must be exceptionally good in delivering on the incremental opportunities for Symantec. On the roll-out, start up a dozens of new stores for Microsoft, and the opening of stores for new clients such as Skype as well as the day-to-day operation of hundreds of thousand of stores we run over our 40,000 plus clients worldwide. I believe, we have the most talented e-commerce team in the business and they continue to prove themselves everyday. We will also be focused on refining and expanding our marketForce programs globally. We planned to expand our existing offerings to more clients by broadening the availability of our marketStudio suite of tools. We provide access to sophisticated e-marketing capabilities without requirement for high touch involvement by Digital River. In addition we plan to raise the bar of excellence by rolling out our new marketForce services, designed to help clients further optimize our strategies and sites and ultimately close more revenue. Early test of some of our new e-marketing programs are already generating impressive results. We are looking forward to providing more color on these programs as we launch them throughout the year. In 2007 we will be also looking to expand and grow the unique partnerships we have with large distributors, retailers and consulting organizations. We believe these relationships will enable us to provide an even more comprehensive solution to both our digital and physical goods clients. Further, we will continue to expand our global footprint to bring more of the world within reach of every one of our clients. We intend to improve our value proposition even further by helping US companies grow their businesses in international markets, and international companies grow their businesses in the United States. We are seeing great momentum here and it's exciting to be part of this natural exchange and progression in our business. While we focus on executing the business we've recently won, we will also be looking to add significant new clients to the roster and substantially grow some of our existing client relationships. Looking forward, we expect to see more client activity particularly in the game space as well as in the PC and consumer electronics verticals. 2007 promises to be exciting for Digital River as we focus on delivering another year of strong growth. We have great opportunities before us and this team is up for the challenge. With that let's open it for questions.

[Bob Kleiber:]

Thanks Joel. We are going to open it for questions now and I would just ask that you limit yourself to one question and a follow-up so that we can get to as many questions as possible. So, with that Marie, why don’t you go ahead and open it up for Q&A.

[Operator:]

Certainly sir. (Operator Instructions). Thank you. Our first question comes from Robert Breza from RBC Capital Markets. Please go ahead.

[Robert Breza:]

Good afternoon everybody. One question for you Joel; you talked about Symantec coming in a little slower uptake. In your prepared remarks you talked also about kind of PC shipments and then this just being a delay in that, that’s really it. Any other color you kind of walk us through maybe what you saw around maybe a Christmas holiday with the whole idea of the coupons being offered for Vista et cetera. And then as a follow-up for you Tom, when you talked about the $1 million extra cost to litigation, normally we would exclude that. That is kind of more or less a one-time charge, is that a fair characterization of that $1 million that you talked about as well? Thank you.

[Joel Ronning:]

Yes, well I certainly hope it isn’t repeatable quarter-after-quarter. We obviously incurred cost in the fourth quarter and certainly will in the first quarter and prior a little less in the second quarter. I wouldn’t exclude it, I mean you can, that’s up to you, its your model. But we certainly wouldn’t expect that to repeat itself long into the future.

[Tom Donnelly:]

And it will not be called out on the P&L as a separate line item, as a charge, it'll just be in G&A expenses.

[Joel Ronning:]

Alright. And then the other question, you had Robert was the slower uptake, I wouldn’t describe it as slower uptake, we just got some pretty involved integrations and some pretty involved development to bring these new products out working with Symantec, or these new services for them. And they are just, there are massive and its taken a little bit longer on both sides than we expected, but we are now comfortable that we are getting on a pretty good calendar there that’s we are on task to get those operations launched some time soon. And so we are feeling good about that. It took us longer than we expected, and it did happen. The other thing that was, we have been through -- I went through a couple of different operating system launches, and we are seeing a lot of classic signals of the market staling a little bit, mostly what we are seeing is, we are seeing a pretty strong uptake on the product and Vista, just kind of the anecdotal evidence we are seeing at stores and frankly on our client sites. So, even though we are being a little cautious here about Q1, the early numbers are -- they are very early, that’s the problem, they are just very early. We have only being really doing this little over a week. The early numbers are looking pretty good.

[Robert Breza:]

Great thank you.

[Bob Kleiber:]

Next question.

[Operator:]

Our next question is from Jeetil Patel from Deutsche Bank. Please go ahead.

[Jeetil Patel:]

Thanks, hey guys two questions; can you talk about I guess on the slower uptake or kind of ramp and build out of the Symantec, the added opportunities with renewals and subscription. I guess -- what kind of delay or how long -- how much longer is it taking in terms the build out as if on the order of three -- call it two to three months or should we look at it on the order of two to three quarters in terms that of shift out and the opportunity there. And then second, you talked about the gaming category, it seems like this the whole download model emerging there. Can talk to about how if you were to fit into that category, how would you approach it or I guess what does the opportunity look like as it relates to the gaming sector.

[Joel Ronning:]

Okay great. Jeetil our expectation is that we will see that -- we will see those integrations and that development completed this quarter, and so this is not a couple of quarters out. That’s our expectations and at the end it feels like we are [on to half] there. And the gaming market, the best way for us to get in there is to do we have done to many other clients delivery a really robust enterprise level e-commerce process for them with a great marketing and do that on a global basis. And so my suspicion is that we are going to be showing some clients here. They are going to help us kind of trail guide into that opportunity. So, keep our fingers crossed but we expect something to happen here sometime in the next quarter or two.

[Bob Kleiber:]

Next question.

[Operator:]

Our next question comes from Lee Westerfield from BMO Capital Markets.

[Lee Westerfield:]

Hi. Thanks gentlemen. Good evening.

[Joel Ronning:]

Hi Lee.

[Lee Westerfield:]

One question, as you in the last 60 to 90 days or so, at your 15th site that have been supporting the free trial for Microsoft; can you give us some color as to how much volume you have been experiencing and what capacity utilization at peek you may have encountered since there is a related conversion opportunity for those who have tried the Office and Vista in free trial to buy the product, if there is anything you can say as far as conversion of free trials into payment at this point.

[Joel Ronning:]

Okay. The trials are going beyond our expectations. So we are feeling pretty good about what we are seeing there. I think this is a really important product. We've got a number of users here and I can see why there seems to be a fair amount of uptake on that. The Office product looks like a pretty substantial upgrade. It's pretty elegant and we are convinced that the people who are using it, the quote that I am hearing from a number of people is, there is just no going back. So, we have got zero information yet on what conversion numbers are. We tend to be conservative, but the more I see in terms of -- it's kind of the level of excitement on the product and the more users I talk to, the more convinced I am thinking that this could be pretty good.

[Lee Westerfield:]

Joel, if I can ask you in a different way.

[Joel Ronning:]

Sure.

[Lee Westerfield:]

You must have done some internal modeling for your utilization, and for example, what kind of volume you might have guessed any way that you've would have gotten in the free-trial period. How does the results compare to your prospects -- prospecting six months ago?

[Joel Ronning:]

Yes, we haven't had any conversions yet.

[Lee Westerfield:]

Sorry, I didn’t mean conversions, I just mean free-trial downloads.

[Joel Ronning:]

That is -- that’s -- its almost impossible to really understand because what we can't do is, we really don't have any sense for what the volume is going to be, because you can't tell how the volume is going to be related to a product versus a client. So those two factors versus how hard they market it. There are so many factors there, you can't estimate it. We tend to be a very metrics driven organization and there is just way too many factors there to really get your arms around. What a good estimate of what -- what is the successful download volume versus a non-successful one. So, all I can say is that we are feeling pretty good about it.

[Lee Westerfield:]

Okay. Well, thank you very much.

[Joel Ronning:]

Okay.

[Bob Kleiber:]

Next question.

[Operator:]

Our next question comes from Sasa Zorovic from Oppenheimer. Please go ahead.

[Sasa Zorovic:]

Yes, thank you. Traditionally it has been the case that for you in the first quarter, of course, the tax season was very important. And that the first week of February was to be a critical one in the first quarter and then in the second quarter, of course that last week before the February, rather April 15th or I guess April 17th, where that was going to end up being this year. So, regarding that I was wondering, how have you seen sort of this first week of February work out so far? And then if any -- you are anticipating kind of a muting effect if you would, from more usage of the online versions of this tax preparations software rather than software downloads. If you could comment on that please?

[Tom Donnelly:]

Yeah, sure, Sasa this is Tom. I will take that. Just to put it in perspective, what we view in tax today is a much smaller piece of a much larger pie. Whereas a couple of years ago I think that could really moved the needle. Its relative, its quite a bit smaller. Obviously the online service has impacted that but we have been kind of able to absorb that as a company into the run rates and what we have has been pretty encouraging thus far.

[Sasa Zorovic:]

Okay. And then my follow-up would be regarding sort of the use of cash and you haven't done any buyback. Do you anticipate sort of becoming more aggressive with that and also regarding acquisitions; or planning to sort of do, pick up the pace there, if you could comment?

[Tom Donnelly:]

Yes, I mean obviously given the stock option matters, we couldn’t have participated the entire fourth quarter in a buyback. I think if its attractive and if its in the interest of shareholders we will do that. We are bringing down the overhang related to stock options but we are generating free cash flow. So, that’s certainly one of the areas that we look to use our capital. And regarding M&A, yes, we've been pretty active all year, looking at a lot of different transactions and we would expect to be acquisitive in 2007.

[Bob Kleiber:]

Next question please.

[Operator:]

Our next question comes from Rod Ratliff from Stanford Group. Please go ahead.

[Rod Ratliff:]

Hi guys. Joel, if you would touch on Asia-Pac for a second, and talk about the software opportunity over there, particularly security software and Digital Rights Management; what are you guys involve and what do see?

[Joel Ronning:]

We have got a pretty powerful Digital Rights Management application and this tends to be -- it kind of speaks to what Tom was relating to doing an acquisitions. We bought an application, I think five years ago; six years ago, and we bought it for literally almost nothing. And we have been working this application out which is now called SoftwarePassport which is our own DRM, it’s a fascinating product and we are hoping to launch this at some point into the far Eastern market where we could use the product and what's called the country based pricing model, where we can modify the pricing allowed in different countries. The pricing would be different in India versus Singapore versus China versus Japan. So, we have a lot of clients who are interested in that. Our clients tend to be conservative slow, thoughtful about this, because everyone would do with the user experience. But I would expect that we will someone taking us up on that offer and I believe we are one of the few companies in the world that can execute on that.

[Rod Ratliff:]

Well especially with the issue of piracy in China.

[Joel Ronning:]

Yes, absolutely. And I think a piracy has a lot to do with the economic capability of the consumer and when you are making $300,000 a year the concept of buying that $300 application is probably a non starter. So, we are working with a lot of our clients to help them set their pricing guidelines up so that China is treated differently as is sections of India and so. We are trying to get more and more targeted on a geographic basis and trying to figure how to do that, and I think we understand what needs to be done. We just got to get some of these tests going. But I think there will be large opportunities to do that, these markets are growing fast. As you know there are called so areas of China, strong middle class populations there. So, we are anticipating and we are going to start selling some stuff over there.

[Rod Ratliff:]

Where there any big virus outbreaks worldwide in the quarter?

[Joel Ronning:]

There was a nominal virus. This quarter wasn't there.

[Tom Donnelly:]

In the first quarter was nominal, but in the fourth quarter there was not. [Multiple Speakers]

[Joel Ronning:]

Yes, not in the Q4.

[Bob Kleiber:]

Okay. Next question Marie.

[Operator:]

Our next question comes from Nat Schindler from Piper Jaffray. Please go ahead.

[Nat Schindler:]

Hello. Two quick questions; one, on Commerce5 with a little over a year of that under your belt, can you give us an update on how far long you are in the consumer electronics space or in hardware space in general? And where do you see that going in the future? Also Microsoft, I was wondering if you could give us some color around this $380 million guidance target. With Symantec peaking at 46% this quarter, how much and probably going down as others grow faster, how much could Microsoft be of that or in a broad range?

[Tom Donnelly:]

Yes. I will take, this is Tom, I will take the first question. We can't get into breaking down our guidance by client. I think what we've said in the past is we didn't anticipate, there would be 10% customer and that wasn't an assumption. In the guidance we also said that it's possible they could be and our assumptions have not changed. But getting specifically down into individual client levels just doesn't work for our large public companies. So, I hope you appreciate that we just can't do that.

[Nat Schindler:]

Understand, and actually that was exactly what I was hoping for.

[Bob Kleiber:]

And in terms of Commerce5 we just brought on Skype, the contract is for Skype, and we've got a pretty good pipeline of some very large consumer electronic companies we are swirling around, and I expect we are going to be announcing some more good stuff there. We've also been able to upgrade and deepen the relationships with a number of very large clients that came across with that relationships, who I think are getting more confidence in doing business with us, because I think just the mass of the organization now is increased quite a bit. And so, yes, we are pretty bullish on that. We think that that’s going to be a real good vertical for us.

[Nat Schindler:]

What exactly is a Skype contract?

[Tom Donnelly:]

Yes, they have a, it will be launching in the coming weeks, they have a store for consumer electronics that they sell to their Skype users. So, we are excited about the initial opportunity and there maybe with good execution bigger opportunities down the road with the company.

[Nat Schindler:]

Great, thank you.

[Tom Donnelly:]

Yes.

[Bob Kleiber:]

Next question please.

[Operator:]

Our next question comes from Tim Klasell from Thomas Weisel Partners. Please go ahead.

[Tim Klasell:]

Yes. Good afternoon everybody. So, the first question has to round Symantec. They mentioned that they are potentially lowering some of their margins to push more products through the OEMs. How does that affect your business?

[Joel Ronning:]

Yes. Their deals with their OEM partners are really separate from ours. We tend to handle the conversions from the trials. We don’t really get involved with their deal with the PC manufacturer and how much they pay for the real estate on the monitor. Then I have say though we are excited about the prospects of some growth driven through those relationships I think they are doing exactly the right thing on an acquisition drive, customer acquisitions is what, what that’s what half the game there.

[Tim Klasell:]

Okay, very good. And then if we can sort of jump over to the Office opportunity, I think they had launched late last month. What have you seen, I know that wouldn’t have impacted your December quarter, but what have you seen so far in the March quarter as far as actual downloads there was (inaudible) so mostly in the trial phase?

[Joel Ronning:]

We have done it for nine days, and we have got a number of the stores built out. We got a very large quantity of other stores to build on. So, it was just was way too early to give any kind of indication. But, we are feeling good about, we are excited, it’s a massive, massive opportunity with Microsoft.

[Tim Klasell:]

Okay, good. Very good, thank you.

[Bob Kleiber:]

Next question please Marie.

[Operator:]

Our next question comes from Kyle Evans from Stephens. Please go ahead.

[Carter Malloy:]

Hey guys this is actually Carter on the line for Kyle.

[Joel Ronning:]

Yes.

[Carter Malloy:]

Looking to get a little more color around you guys' marketForce and specifically one network direct, I know you had said it grew, the marketForce two times sequentially and four times year-over-year. But kind of looking for what you are expecting for the contribution from that to be in '07 and going forward?

[Joel Ronning:]

I think we are building it out, but Tom, maybe you want to speak to that a little bit more in terms of our expectations for?

[Tom Donnelly:]

Yes, I think, we would expect, I mean as the base gets bigger, it isn’t going to grow on the four-fold level.

[Joel Ronning:]

Yes, we can't do another 400% here.

[Tom Donnelly:]

Certainly it is a key value proportion for clients to drive more revenue for them and as it's kind of a mix, it’s a higher margin on a base sale. It's pretty difficult for us to give specific dollars related to it. But we do expect it to be a key value driver for our clients particularly the larger one's in the coming year.

[Joel Ronning:]

Right, now that is -- that’s a tremendous separator from us -- for us from anybody trying to do this internally. The different tool sets that we have acquired or we have developed are A, expensive; B, difficult to use; three, incredibly complex to integrate across. And so, we are realizing more and more the value of Digital River is really a marketing company helping companies optimize their e-commerce, and we view that as potentially a major strategic direction for the company. But, that marketForce platform and that marketForce group, the technologies, the entire concept is turning into of the biggest value offerings we have here. It's just -- it’s a tremendous separator from what one can do with one's on resources. So, you are going to continue to see us, we are going to bring out a lot of new products this year. And as I said earlier, the early results on those products are really-really strong. So I am very excited about this platform.

[Carter Malloy:]

But can you give us some kind of idea how many clients you actually have on that platform.

[Tom Donnelly:]

There is the remote control platform and, if you take all platforms many of them have some piece like e-mail so its thousands. As far as marketForce clients, where its tools plus people, I don’t have an exact number but it is certainly north of 20 of the top 40, I believe there is at least one marketing program.

[Carter Malloy:]

Okay, great. Thanks.

[Joel Ronning:]

And also in addition to that in the affiliate, I think there are thousands of clients using the affiliate tool so. We tend to separate it out between machine and people. On how many people are using what we call remote control tools and the remote -- this is what marketStudio is all about, which we expect we will continue to grow in to many tens of thousand hopefully. And then it's a relatively small group that we can handle on the high end with the marketForce because that is intensely people driven and a lot of domain knowledge and there is only so many really brave people that go around for these clients.

[Bob Kleiber:]

Next question please Marie.

[Operator:]

Our next question comes from Craig Nankervis from First Analysis. Please go ahead.

[Craig Nankervis:]

Yes. Hi guys. I guess firstly, on Microsoft can you discuss the prospect for selling indirect offering either for Office or for Vista insurance back-up CD, and if so is that in your '07 guidance?

[Tom Donnelly:]

Well, I think if you went out to the site you would see that we are in some stores through some channels selling those services. Yes, we haven't changed our guidance assumptions, and we assumed that we would have certain cross-sell opportunities. We do think there is potential for other services, other marketing services. But we are really in the early stage of a pretty massive rollout and that's kind of what was in our guidance last October, which is largely unchanged today.

[Craig Nankervis:]

Okay. So the indirect stuff was in the guidance originally, is what you are saying, right Tom.

[Tom Donnelly:]

Our first cut at it. Yeah our cut was what we knew then.

[Craig Nankervis:]

Okay. And then I guess just secondly Joel, you talked about delays from other clients as well beyond Symantec, and I was wondering if there is any common denominator in the delays that you saw from other clients. If you could maybe provide a little more color around that.

[Joel Ronning:]

No. Keep in mind that what we do is we run enterprise global e-commerce and integrating in the back-end and getting IS teams to work closely with those and getting them coordinated. We also, within that you find a lot of clients going through year-end code freezes and we also went through a year-end code freeze. So, there is just a lot of reason, you also start getting to the holidays. Once we hit Thanksgiving, some years people don’t slip, many years they do and this year we saw a number of client slips. It's just life and we are used to it, we are not surprised by it. And this is no longer kind of a mom and papa approach 10 years ago it was much easier. Today it's so much more involved when you dealing with these large and enterprise level clients.

[Craig Nankervis:]

Okay. Thanks very much.

[Bob Kleiber:]

Okay. Next question please.

[Operator:]

Our next question comes from Brad Manuilow from AmTech. Please go ahead.

[Brad Manuilow:]

Hey guys. Any color on how much of the change in Q1 guidance can be attributed to Symantec versus the other parts of your business? Thanks.

[Tom Donnelly:]

That granularity, not at that granular level, but we did say in the call script that some of the new business that we expected to come over from Symantec had delays and that we also had some other client delays and those two factors are the primary drivers.

[Brad Manuilow:]

Okay. Thanks.

[Bob Kleiber:]

Yeah. Next question please.

[Operator:]

(Operator Instructions) Our next question is a follow-up question from Rod Ratliff from Stanford Group. Please go ahead.

[Rod Ratliff:]

Hey guys, sorry to get back in line, but would you repeat what the international percentage was in the quarter. I missed in the script a while ago?

[Tom Donnelly:]

44% of total sales, up from 40% in the fourth quarter of '05. So, we are encouraged by that.

[Rod Ratliff:]

Thanks, Tom.

[Bob Kleiber:]

This is Bob Kleiber, I'll be e-mailing the script out to all the sell-side guys as soon as the call is over. Any other questions?

[Operator:]

Gentlemen, there appear to be no more questions at this time.

[Bob Kleiber:]

Okay, great, thanks very much everybody. And we look forward to chat with you during this quarter. Have a great day.

[Operator:]

Thank you, every one this concludes today's conference call. You may now disconnect, and please have a wonderful day.

[Bob Kleiber:]

Marie, are you there?

[Operator:]

Yes, I am.

[Bob Kleiber:]

Can we just get a final count on people?

[Operator:]

Count I had was 134.

[Bob Kleiber:]

Awesome, thank you.

[Operator:]

Yes.

[Bob Kleiber:]

Thank you so much. Great job Marie, I appreciate it.

[Bob Kleiber:]

My pleasure gentlemen. You are a lot of fun to work with, and I hope to do it again.

[Bob Kleiber:]

Okay thanks. Take care.

[Operator:]

Bye-bye, you too. Once again everyone, this concludes today's conference call, you may now disconnect and please have a wonderful day.