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Digital River, Inc. (NASDAQ:DRIV)

2013 Annual Shareholder Meeting

May 23, 2013 4:30 pm ET

Executives

Stephan B. Schulz - Chief Financial Officer, Principal Accounting Officer and Treasurer

Thomas F. Madison - Chairman and Chairman of Nominating & Corporate Governance Committee

David C. Dobson - Chief Executive Officer

Kevin L. Crudden - Senior Vice President, General Counsel and Secretary

Operator

Welcome to the Digital River 2013 Annual Meeting of Stockholders. Please note this is event is being recorded. I would now like to turn the program over to Mr. Stephan Schulz, Digital River's Chief Financial Officer. Please go ahead.

Stephan B. Schulz

Thank you, operator. Good afternoon, everyone. Before I begin, though, I would ask that those of you in attendance here, please turn to your cell phones to a vibrate or off, please.

I want to welcome everyone to our 2013 Annual Meeting of Stockholders. As you know, today's meeting is being webcast to provide all stockholders an opportunity to participate.

When we open the meeting for questions, we plan to take questions from online attendees, as well as from those of you who are with us here today.

Also, please be advised that the statements that are going to be made during the course of this meeting that are not historical are forward-looking in nature, including statements containing the words, believes, anticipate, expects and similar words. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause actual results to differ materially from these expectations. For a detailed discussion of these risk factors and uncertainties, please see the company's filings with the Securities and Exchange Commission.

Now, I'd like to hand the call over to our Chairman of the Board, Tom Madison.

Thomas F. Madison

Am I on?

Stephan B. Schulz

You are.

Thomas F. Madison

I am. Thank you. I also would like to welcome all of you. And on behalf of all of the employees of Digital River and on behalf of the Board of Directors, we're happy that you're here. Annual meetings are a special time. It's an opportunity, obviously, for the company to talk about their plans and their future and give you an opportunity to ask any questions. So every annual meeting is a special time for all of us.

This particular annual meeting is special for another reason. And before I get to that, I'd like to introduce some people that are here with us today that are part of the Board and key players in helping management move forward. So let me introduce the Board of Directors: Al Castino, please stand when I introduce you; Cheryl Rosner; Doug Steenland; Perry Steiner; and Tim Pawlenty.

While I'm introducing people, let me also introduce our outside auditors from Ernst & Young: Doug Urbanciz and Sarah Erickson.

In November, I had the opportunity to come to Digital River and become more involved with the company on a full-time basis. I had an opportunity to meet a lot of clients, customers, employees and investors, and it was a very interesting time for me. So from November 1 until almost the 1st of March, I was deeply immersed in Digital River.

In addition to that, during that time frame, we had the opportunity to do a search for our new CEO. And we did an extensive search, worldwide search, and a lot of great candidates. And after sorting through all of the candidates, we came down with a selection. And as I think back about that process, I think it was valuable for the search committee, it was valuable for the board to go through that process and understand and know what talent is out there in this particular area, technology.

We selected Dave Dobson. And Dave brings to the company a significant amount of experience. As you can see on the view graph there, he's been involved with technology his whole career, a significant amount of time with IBM. He ran Corel software, a public and a private company, a software company, headquartered in Canada. Dave is from Canada. But this company was located in Canada. He was with Computer Associates, and most recently, with Pitney Bowes. And as you evaluate and look at, as we did as a search committee, I understood a little more about what Dave's capabilities are. And he brings to the company, not only the technology experience, but he brings to the company a significant amount of experience in strategy, in marketing and sales and general management. And I think you're all going to see as shareholders and as employees a leadership skill that will help drive and lead Digital River to many, many years of success.

As I said, annual meetings are special times for companies to communicate their message. But this one is particularly special because we now have a new CEO that will be our leader. So with that, I'd like to introduce Dave Dobson, the President and CEO of Digital River. Dave?

David C. Dobson

Thank you, Tom. Well, good afternoon, and thank you very much to my board colleagues, to some of our employees and especially to our shareholders. Again, welcome to our 2013 shareholders meeting.

I'm absolutely delighted to be here are [indiscernible] and if you can, thank you very much, flip the slides for me. I'm delighted to be here at Digital River. I've been here since the beginning of March, so almost 90 days, and I'm very excited to be a part of this team. I think it's an incredible time to be a part of this industry and to be a part of this company.

I think many of you know that Digital River has an incredible base of e-commerce assets. We have a very deep bench of talents. As I have traveled around the world and met with all of our 1,400 employees, I've had the chance to experience some of the capabilities and skills and expertise we have in our business.

We also have a world-class customer base. If you take a look at some of our customers, Microsoft, Kaspersky, AVAST, Samsung. We have some of the greatest brands in the world that we manage their e-commerce capabilities and stores.

We're also positioned at the center of an industry, which is not only very strategic and important to one of our customers, but one of the most exciting areas across the technology segment. It continues to grow. We believe the market we participate in is growing in high single digits, between 7% and 10%. And it continues to evolve at a very rapid pace.

Now by focusing our organization on the strategic plan that we've started to talk about and we'll spend more time over the next number of months and quarters describing our strategic plan, I believe Digital River has the potential to significantly improve the value that we create for our customers, and of course, for our shareholders.

So I believe this is a great time to be a part of this industry and taking advantage of the internet and commerce trends and a great time to be a part of this company.

Let me now just spend a few moments describing some of the observations that I've made in my first days here at Digital River. As I indicated earlier, I've had a chance to travel around the world. I've met with over 75% of our largest customers around the world. I've had a chance, either on one-on-one meetings or in group meetings, to meet with all of our employees and get a lot of feedback on what could we do differently, what could we do better.

I can tell you, from a customer standpoint, that the feedback has been very positive. It's one of the things that, as a incoming CEO, I studied a lot about the company. I had a lot of feedback and information provided by the Board of Directors. But you don't really know what the state of those customer relationships are until you actually have an opportunity to meet with them. And I can tell from Microsoft, which is our largest customer in the world, to many of our large customers, the relationships are very strong.

Customers told me that the talent that we put in front of them from a marketing services, from deploying their commerce sites to managing those relationships are some of the best skills in the world and it's how we differentiate ourselves in the marketplace. They also appreciate our global footprint. The fact that we can offer our commerce capabilities and enable them to sell, distribute and market those products in over 240 locations around the world is very valuable.

But I can also tell you that our customers told me that they expect us to be more innovative and they expect us to be able to respond more quickly to some of the things that they're seeing changing the marketplace. And I will discuss some of our plans on how we respond to those requirements that our customers have given us the opportunity to improve in the next few minutes.

So what I would like to do next is very quickly review 2012 results. In 2012, we delivered revenue of $386 million with a GAAP net loss of $196 million. This equates to a net loss per share of $5.90. The GAAP net loss in 2012 was the result of the company taking an impairment on certain goodwill assets during the fourth quarter. The payment was all noncash and not expected to impact future operating performance.

Our non-GAAP net income was $36 million or $1.02 per share. Non-GAAP income excludes the goodwill impairment, stock-based compensation and certain other items included and outlined in our filings with the SEC.

Now to be very clear, as I came on board and spent time talking to our members of our board and our leadership, the team has not been pleased with the performance of the company through 2012. I mean, with these financial results, I don't think we respect the potential we have as a company. And this team understands the need for change and that's what you're going to hear me describe today in our strategic plan and how we'll drive better performance going forward.

So let me talk briefly about some of the changes we're going to make and then I'll come back in a few minutes and provide more detail on this. So we have a very strong technology foundation here at Digital River and a very solid base of assets on which we can build our future success on. But going forward, we need to be more efficient at leveraging our e-commerce assets, which were very deep and broad. So we have to do a better job of leveraging the capabilities we have. We

have to deepen our relationships with our existing customers, improving customer satisfaction, and most importantly, retention.

Some of the issues we have seen over the last number of years and some of the largest relationships we've had have moved away from Digital River. And we believe that the strategy we're implementing going forward will change that and we'll be able to retain our customers for a long period of time.

We have to transform our world-class technology and drive new value for our customers and we're making substantial investments to do that, and again I'll spend more time in a few minutes describing what we're doing.

We have to prioritize our efforts around our core competencies. The company has grown, obviously, over the 20 years. We have done a lot of acquisitions and we've got an opportunity to be more focused on areas that we believe we can lead the world in delivering very high value for our customers. You're going to see this company become far more focused on where we apply our attention and our resources.

And finally, we need to apply very intense focus on being more efficient as an organization. We believe there's opportunities and capacity that's trapped in our organization that as we focus on how do we get more value, how do we actually get at some of that capacity and over time drive improved profitability as we begin to execute our plans.

So after the conclusion of the business portion of the meeting, I will walk you through more detail on the plan that myself and our management team is currently executing to transform our business and return to profitability longer term.

Now I'd like to hand the meeting to Kevin Crudden, our General Counsel, to take you through some of the business of the meeting.

Kevin L. Crudden

Thanks, Dave. Welcome, everyone. Am I too loud?

David C. Dobson

No, you're not.

Kevin L. Crudden

Okay. All right. I would now ask for this meeting to come to order. We will proceed with the formal business of the meeting as set forth in the notice of the annual meeting. When the votes are being tabulated, we'll make a brief presentation on the company's recent business activities and take some questions. Following the questions, we will announce the results of voting on all the proposals.

At this time, we have a complete list of stockholders of record of the company's common stock on March 28, 2013, which is the record date for today's meeting. I also has an affidavit certifying that on April 11, 2013, the notice of the annual meeting was deposited in the U.S. mail to all stockholders of record.

In accordance with Delaware law, the company has appointed Jan Dryman [ph] of Broadridge to act as Inspector of election at this meeting. Ms. Dryman [ph], who is in the back of the room here today with us, has taken and subscribed to the customary oath of office. Her function is to decide upon the qualification of voters, accept their votes and when balloting and all matters is completed, to tally the ballots cast as each matter.

I've been informed that the proxies have been received for 86% of our total number of outstanding shares today. This constitutes the quorum for today's meeting. Therefore, I hereby declare this meeting be duly constituted for the transaction of all business. If there are any additional proxies to be submitted to the inspector of election, please pass them to us and we'll calculate them as part of today's meeting.

We will now proceed with the formal business of the meeting.

There are 4 proposals to be considered by the stockholders today. The polls are now open for voting on all matters to be presented. The polls will be closed to voting after we go through the matters to be voted upon.

The first order of business is the election of 3 directors to serve until the 2016 annual meeting. Dave Dobson, Tim Pawlenty and Perry Steiner have been nominated for 3-year terms. Is there any discussion on any of these candidates?

The next proposals are the approval of the 2013 performance bonus plan, the advisory vote on the company's approach to executive compensation and the last item would be the ratification of our selection of Ernst & Young as our auditors for the fiscal year ending December 31, 2013. Are there any discussion on any of these proposals?

The voting is by proxy and written ballot. It is not necessary to vote in person if you have previously sent in or have submitted your signed proxy at this meeting. Each share of common stock is entitled to one vote. If there are any ballots, please share them with us for collection so we'd proceed with the meeting. Polls are now officially closed for voting and we'll now have the presentation while we're counting the votes.

I'd like to hand the meeting back over to Dave.

David C. Dobson

Great. Thank you. So now what I'd like to do, I'd like to spend a few minutes giving you a little bit more insight in our longer-term strategic transformation and on some of the progress we've made in the early part of 2013.

By the way, I'm noticing that this is Los Angeles and I don't know if there's any -- there's no hidden meaning there. No plans on moving.

Let me talk about our strategic transformation. This is really at the basis and the core of how we're going to return the company to sustainable growth and improved profitability over time.

We've broken out our transformation into 3 phases.

The first phase is an investment phase. We're now well into the investment phase that we needed to make. And we're making substantial investments in our technology platform to make our business and our solutions more responsive to the requirements we have from our customers around the world. And as you think of the business we're in, we provide global commerce capability to our customers, and our customers expect that our technology platform is truly world-class. And so this is not something that's an option for us. For us to have a world-class value proposition to our customers, we need to sustain our investments and we're making substantial investments to make sure our platform is very robust, is very reliable and it's scalable to meet the needs of our requirements. So we're in a very highly competitive environment to provide the e-commerce services and we plan on making these investments over the course of the next 4 to 6 quarters to strengthen our long-term competitive position.

As I said earlier, our objective at this phase is to deliver a more robust, resilient and scalable platform that will position us to be more responsive to the needs of our customers around the world and to drive much more efficiencies in our business as we go forward.

So ultimately, the benefit of this first phase of our transformation is improving the retention, particularly those larger customers that we have in our portfolio today that enable us to be more responsive to their needs.

The second phase of our transformation is really about being much more disciplined on how we allocate our resources to focus on growth and where we will grow the company. As I mentioned earlier, Digital River, over the course of many years, has been very acquisitive. We've brought on a number of companies and assets and people. And frankly, I don't believe we've done a good enough job in integrating any of those capabilities into the business. But while we have an incredible base of assets to work from, we're going to focus our energy and attention on smaller number of very high-impact growth areas and initial [ph] those moving forward. Longer term, we expect our strategy and execution in this area will result in sustainable growth at levels consistent with the markets that we're in.

The third phase of our transformation is about what I call creating financial capacity. This will drive operating efficiency in our business and really leverage our model. So as we make investments in technology, we expect to be able to get more leverage from those technology investments. And this will enable us not have to make the type of investments we're making almost on a onetime or a surge basis like we're making in 2013, but over time we would expect to be able to self-fund some of the investments we need to make because we're getting more leverage and capacity in our business. So this capacity will help us make additional investments on an ongoing basis, but also, over time, we'd expect to improve our profit margin as we continue to grow our business.

Next slide. I'd like to report on some of the progress we've made as we're in the early phases of our transformation. In January, we completed our acquisition of LML Payments. And I'm pleased to say that our Payments business, including LML, has grown 178% in the first quarter of 2013.

We have launched our new brand identity campaign. And if you have a chance to go to digitalriver.com over the last few weeks, you'll be able to see a much, much more modern look at who we are as a company and I think you'll get a sense that we've much better positioned ourselves as for the capabilities that we have.

We've rolled out a new governance model on how we manage our business. We've got a framework for company-wide decision making, planning and communicating, which better streamlines our decision-making ability and clarifies roles, responsibilities and accountability throughout the organization.

We've begun the work to consolidate our data centers. We had 8 data centers today around the world. We're in the process of consolidating that down to 4 and we believe we'll have that included as we exit 2013.

We've divested 2 assets, one, CCNow, and the other was an investment we made in a company called Softonic, and we announced that at the end of our first quarter results. And that was a successful investment, but it wasn't core to where we were going forward. So we divested that investment we made in Softonic.

And as I indicated earlier, we've entered the early stages of our strategic transformation, which we've discussed and we're very encouraged with some of the progress we've made early on. So you get a sense that we've been very focused on the areas that we said we would execute on. And I plan on, myself and my team, reporting out on these activities with very specific milestones each and every quarter as we go forward.

Next slide. So just in summary. I joined Digital River 90 days ago because I believe that the e-commerce segment is one of the most exciting areas of the technology marketplace that we participate in. As I've had a chance to talk to our customers around the world, if you think of how they this distribute their products, the commerce channel, the e-commerce channel, is one of the most strategic if not the most strategic channel in their business. So it's a great place to be.

We have an opportunity to be more efficient in the way we deploy our assets, and we believe we can create tremendous value for our customers and our shareholders.

We delivered a very strong first quarter and we're off to good start. But we're in the early stages of our strategic transformation. And we realize that we have more work to do to returning this business to sustainable revenue growth and profit growth. We believe that the result of increasing efficiency and creating value for our customers will drive sustainable growth and better returns to our shareholders over the long term, so we're very confident that the strategy we've outlined is the right formula for Digital River at this point and for the foreseeable future.

So now what I'd like to do, I'd like to open up the meeting for any questions for those of you, attendees, in the room or online.

Question-and-Answer Session

David C. Dobson

Operator, questions?

Operator

No, sir. Not from the phone.

David C. Dobson

Okay. Since we don't have any questions on the phone or in the room, I'd like to turn the meeting over to Kevin to announce the results of the voting and then close the meeting. Kevin?

Kevin L. Crudden

Thanks, again, Dave. The report of the inspector of election covering the proposals presented at this meeting is as follows: The proposal to elect Dave Dobson, Tim Pawlenty and Perry Steiner as directors of the company has been approved. The stockholders have supported the 2013 performance bonus plan. Stockholders have also supported the executive compensation program for the company. Lastly, the appointment of Ernst & Young as independent auditors for the fiscal year ending December 31, 2013, has been ratified.

The full tally of the votes will be published in the Form 8-K that we will be filing with the SEC in the next several days. The results can be obtained before that date from the company. This does conclude the formal portion of our meeting today. After adjournment, we invite you to stay for any refreshments and to meet with management.

And with that, this meeting is now adjourned. And thank you all for attending.

David C. Dobson

Thank you.

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