Melissa Fisher - Vice President of Corporate Development, Investor Relations & Treasury
David C. Dobson - Chief Executive Officer and Director
Stefan B. Schulz - Chief Financial Officer, Principal Accounting Officer and Treasurer
Robert P. Breza - RBC Capital Markets, LLC, Research Division
Philip Winslow - Crédit Suisse AG, Research Division
Rohit Kulkarni - Robert W. Baird & Co. Incorporated, Research Division
Digital River (DRIV) Q3 2013 Earnings Call October 30, 2013 4:45 PM ET
Good day, ladies and gentlemen, and welcome to the Digital River Third Quarter Earnings Conference Call. [Operator Instructions] And as a reminder, today's conference is being recorded.
I would now like to turn the conference over to your host for today, Ms. Melissa Fisher, Vice President of Treasury, Investor Relations and Corporate Development. Ma'am, you may begin.
Welcome to Digital River's Third Quarter 2013 Earnings Call. I'm Melissa Fisher, Digital River's Vice President of Investor Relations, Treasury and Corporate Development. Joining us on the call today are Dave Dobson, our CEO; and Stefan Schulz, our Chief Financial Officer.
I'd like to remind you that there may be statements made during the course of this conference call that are not historical facts and are forward-looking in nature. These statements may relate to the company's future growth and financial results and contain the words believe, anticipate, expect, guidance and similar words. These forward-looking statements involve both known and unknown risks, uncertainties and other factors, which may cause actual results to differ materially from expectations. For a detailed review of these risks, please refer to the company's filings with the Securities and Exchange Commission.
Also, a webcast of this call will be available on the Investor Relations section of Digital River's corporate website.
Now I'll turn the call over to Dave Dobson.
David C. Dobson
Well, thank you, Melissa, and I thank everybody for joining us this afternoon.
I'd like to start out today's call by providing a quick recap of our recent Investor Day in September. Then I'll provide an update on our strategic transformation and key business highlights from the third quarter. Following my opening comments, I'll turn the call over to Stefan, who will provide more details on our quarter's financial performance. Before we close our call today, we'll obviously open up and take your questions.
Let's talk a little bit about what we said at the Investor Day a short month ago. As many of you know, we recently held an Investor Day in New York City. We enjoyed the meeting with many of you in person. If you did not have an opportunity to hear the live presentation, I encourage you to go to our website and access the replay.
One of the goals of the meeting was to provide greater transparency into our business. We talked in depth about our Commerce, Payments and Marketing businesses, and a large, addressable market opportunity before us. We also outlined the timing and steps of our strategic transformation plan and gave insight into our target financial model.
For those of you who attended, I think you'll agree that some of the most compelling feedback came from our customers who participated in the presentation. I want to personally thank Lenovo, Microsoft and Ticketmaster for sharing their perspectives on how the Digital River partnerships have created value for their online businesses. We believe their comments reinforces several important points.
First, our ability to deliver commerce-as-a-service globally on a multi-tenant SaaS platform, along with our payment solution, continues to offer a compelling customer value proposition.
Second, our global commerce expertise and on-the-ground presence are key competitive differentiators and are integral to helping our customers scale quickly and cost effectively in worldwide -- in the worldwide geographies.
And finally, the key components of our technology evolution, which include modularizing the components of our commerce stack are squarely aligned with our customers' future commerce expectations and strategies. Ultimately, we expect this to drive more customers and revenue for Digital River.
With that, let me turn to third quarter and the progress we are making across our businesses.
On the financial front, our third quarter revenue, including our divested businesses, totaled $90.3 million, which was within our guidance range. In addition, we had non-GAAP net loss of $0.03 per share, both including and excluding our divestitures. These earnings results exceeded the high-end of our guidance.
Consistent with our previous quarters, Payments continues to represent the fastest-growing area of our business. Our third quarter year-over-year payment revenue increased 143%, including LML, and 47%, excluding LML.
Moving on towards transformation update.
In the third quarter, we made important advancements on our strategic transformation. As we discussed on our previous calls, our transformation framework includes 3 components: First, making substantial investments in our technology platform and infrastructure to improve our ability to innovate more quickly for our customers and increase customer retention. Second, improving our focus and execution on how we allocate our resources, leverage acquired assets and streamline our business across a select number of market segments where we can differentiate and deliver sustainable growth. And third, improving our operating efficiency to increase our overall competitiveness and position us to deliver improved operating margins over time.
I'd like to spend a few minutes talking about the progress we've made in each of these areas. Let's start with some of the results being driven by our technology investments.
In total, we'll invest more than $100 million in both 2013 and 2014 on our technology infrastructure. We believe these investments will drive increased reliability and greater throughput at a lower cost, as well as increase customer satisfaction and retention.
Last quarter, we completed a major milestone in our data center migration. I'm very pleased to say that our commerce processing is now completely migrated out of our legacy environment. Our new data center, which is built on state-of-the-art virtualized technology standards is operating as fully -- as a fully-integrated part of our global footprint. We remain on-plan to reduce the number of data centers we operate from 8 to 4 on a global basis by the end of next year.
In addition, we continue to make meaningful progress on the re-architecture and modularization of our platform. We have added significant new talent to our engineering organization. We also are executing against our plans to modernize logical elements of our commerce experience and Commerce business infrastructure. Recently, we implemented a third-party content management system for one of our largest customers, which enables them to control and self-manage the consumer-web experience. This solution is tightly integrated into our global commerce platform and directly aligns with our evolution to an open API-driven plug-and-play architecture.
Moving on to the second part of our transformation, which includes focused execution and growth across selected target markets. During Investor Day, we went into detail about our growth strategy. Today, I'd like to talk about our growth plans for the near-term and the progress we are making.
Through the first half of 2014, our focus will be on our current customers and optimizing our core Commerce, Payments and Marketing businesses, while deemphasizing investments outside of these areas. To that end, in the third quarter, we announced the divestiture of our Digital River Education Services and our CustomCD businesses.
We also won new contracts and expanded existing customer relationships across our 4 segments. In the Commerce space, we won new business with Rosetta Stone, a leading provider of language and reading solutions, to sell subscriptions of their software in international locals. We closed a new deal with Thunder Tiger to deploy a direct-to-consumer strategy across the U.S., Taiwan, China, Australia and Germany. Thunder Tiger is a Taiwanese manufacturer of radio-controlled model airplanes, helicopters, boats and engines. And we signed a new contract with a world-leading book publisher. This win is directly aligned with our transformation plan to evolve our existing presence in software and games across new digital product categories. These categories include publishing, as well as other cloud-enabled services, such as subscriptions and usage-based billing models.
In other Commerce wins, we expanded our relationship with McAfee, a host to manage a mobile tablet-friendly store for their U.K. customers, and a discount store for their employees. And finally, we grew our relationship with Microsoft, supporting their launch of Surface 2 pre-orders in 19 markets and releases of new Xbox360 games. In addition, we continue to manage pre-orders for Xbox One through the Microsoft global online stores, and from within their console, by leveraging our new APIs. As we look forward, our Digital River team has been very focused on helping Microsoft and all of our customers prepare for the holiday season, as well with the launches of Windows 8, Surface 2 and the Xbox One console and games.
In the Payments segment, we signed new agreements with Time Warner; Wix, a fast-growing, Israeli-based website publishing service; as well as Miranda, a U.S. health and wellness company. We also won a new contract with Globus, a global leader in first-class travel, to launch our inter-country payment solution in Europe. We broadened our customer base, adding over 1,100 new clients, and we grew existing relationships with NuSkin, Skullcandy, Astro Gaming, Spotify, Expedia, BlackBerry, Scentsy and MathWorks.
To further expand our global Payments capabilities, we continue to broaden our ecosystem of payment partnerships. We partnered with Barclaycard to expand our credit and debit card processing capabilities in Europe. We expanded our relationship with PayPal to offer express checkout and bill-me-later options. And we teamed up with Meridian, provider of international VAT solutions, compliance and remittance services to offer expanded tax cross-border management capabilities.
And finally, in our Marketing Services business, we continue to launch managed marketing service programs primarily around site optimization, affiliate and e-mail marketing, and search engine optimization for Commerce customers such as Kaspersky Labs, Lenovo, McAfee, Trend Micro and Ubisoft.
In addition, our e-note [ph] business unit, BlueHornet Mail Works [ph] enhanced its social loop solution, adding features that enable marketers to create and optimize cross-channel social media and e-mail campaigns. We're actively working on cross-selling BlueHornet services across our enterprise and SMB Commerce and Payments customers.
Finally, let's wrap up our transformation update by talking briefly about the third component, which is improving our operational efficiency, and ultimately, our financial capacity.
In the third quarter, we took action on several operational fronts. First, we have centralized and continually evolve our global procurement function. In fact, we've identified improvements and projects on third-party spend that have contributed to a run rate savings of $7 million, an annualized expense improvement that we believe will be in place by the end of 2013.
And second, to better align our people resources with our transformation strategy and establish a strong foundation for growth, we continue to rebalance the mix of roles, skills and experience within our workforce. Recently, we reduced our global headcount by 7%. Even though we have eliminated positions in some areas of the business, we will continue to hire in high-priority areas. Stefan will provide more details on the impact of our headcount reduction later in the call.
I'm also very pleased to announce some significant additions to our leadership team. I'm delighted to welcome Ted Cahall to Digital River as our new Executive Vice President and Chief Operating Officer. Ted will be leading our product development, engineering and QA, information-technology and our global delivery services business. Ted joins us from Microsoft, where he was the corporate Vice President in charge of the MSN business unit, operating in more than 50 countries. Prior to Microsoft, Ted served in various senior executive roles at AOL, including their Chief Technology Officer. He also served as the Executive Vice President and Chief Operating Officer at United Online, and the Chief Technology Officer at CNET Networks. In addition, he spent the early part of his career at Bank of America and AT&T Bell Labs.
Delighted to have Ted on the team.
I'm also pleased to announce a second addition to our executive leadership team, Tom Peterson. In his new role as Digital River's Executive Vice President and General Manager for Commerce, Tom will lead our cross-company strategy and execution of our enterprise and small-medium business commerce businesses.
Tom comes to Digital River from Hewlett-Packard, where he was the Executive Director of Global Accounts, working with multinational retailers, branded manufacturers and digital product companies. Before joining HP, Tom was the President of Global Retail for Information Resources, a leading global retail shopper behavior, promotion services and pricing strategy consulting firm. He also spent 30 years at IBM, most recently as the Worldwide General Manager and Executive Vice President for IBM's consumer products industry.
Ted and Tom bring deep experience in our core markets and a strong global perspective to our transformation strategy. We're looking forward to their contributions as we accelerate our transformation, strengthen our competitive position and increase the value we deliver to our customers.
And finally, I'd like to welcome Ed Eger to our Board of Directors. Ed was formerly Senior Vice President, General Manager of the Americas at PayPal and an advisor to the CEO at eBay. In this role, he was asked -- excuse me, he was tasked with establishing PayPal as the preferred online method for consumers and merchants in North and South America. We are thrilled to have his additional payments and international experience on our Board as we execute on our transformation.
With that, let me turn the call over to Stefan, who will provide details on our third quarter financial performance and update you on our fourth quarter and full year expectations.
Stefan B. Schulz
All right. Thank you, Dave, and good afternoon, everyone. Before I get into the details of our third quarter, I wanted to remind you of a couple of changes that impact our reporting. First, we're changing our reported revenue categories from enterprise commerce and supporting revenues to commerce and payments revenues. Second, we will be reporting results from continuing operations and discontinued operations as we have recently divested of 2 businesses that were formerly part of our supporting line. In order to ensure clarity during this transition quarter, we will be providing both the historical measures, as well as the new measures.
We'll also be providing 2 new operational metrics on a trailing 12-month basis, the loyalty index, as well as gross volumes processed. When combined with our new revenue reporting, we believe these metrics will help you better gauge the level of improvements we're making across our business and provide you more insight into how we're performing in the markets we're participating.
Now moving on to our third quarter details.
As Dave mentioned earlier, our third quarter revenue, including the divested businesses, was $90.3 million, a decrease of 1% over last year. This was within our guidance range of $88 million to $92 million.
Excluding the divested businesses, third quarter revenue was $87.3 million, representing a slight increase over last year's comparable revenue of $87.1 million.
International commerce in the quarter accounted for about 47% of total revenue, up from 46% last year.
Within our revenues, commerce was $72.5 million, which was down 11% from last year's commerce revenues of $81 million. This decline is consistent with our Q3 expectations, driven by a decline in attrition we have previously discussed.
Our Payments revenue was $14.8 million, an increase of 143% from last year's Payments revenues of $6.1 million. Excluding LML, Payments grew 47%. This organic growth, while very strong, is down from the 60-plus percent growth rates we reported in the last several quarters. This is consistent with our expectations as we anticipate Payments growth to normalize between 20% and 30%.
Now I'd like to provide an update on our 2 new operational metrics. The first is a loyalty index, and it's essentially an annual measure of client retention based on dollars, not number of clients.
In the third quarter, our loyalty metric for commerce increased to 93% from 92% in Q2. This reflects the fact that we have not experienced any further meaningful attrition beyond what was communicated on our Q3 call last year. Our loyalty metrics for commerce only relates to our core commerce activity and does not include other service, such as our marketing services business.
Our loyalty metric for Payments also increased from 99% in the second quarter to 100% in the third quarter. I want to remind you that when you look at the Payments -- loyalty index, it only represents the Digital River world payments for the legacy part of our Payments business. Because LML has not been with Digital River for 1 year, we're unable to compare retention to last year. We will include LML in this metric starting in the first quarter of 2014.
The second new metric is our trailing 12-month gross volume. In commerce, we process approximately $2 billion for the trailing 12 months ended in September, which was consistent with the trailing 12-month metric we've reported in the second quarter. Gross volume processed by Payments was $26 billion versus $25 billion processed over the trailing 12 months in the second quarter.
As a reminder, the gross volume of transactions processed does not have a linear relationship to our revenues. For example, funds deploy a wide variety of Digital River commerce solutions with different price points, and once again, other commerce-related services, such as our marketing services revenue that are not reflected in this metric.
Now shifting to expenses. Total non-GAAP cost and expenses increased $9 million from the same quarter last year, including $5.1 million of expenses related to the LML acquisition. The remaining increase was primarily attributable to $4.2 million in the incremental investments related to our technology innovation and transformation initiatives, approximately $2.5 million related to incentive compensation as the metrics needed to earn the incentives were not met last year in 2012. These increases were partially offset by a lower variable cost of about $3 million.
The GAAP net loss for the third quarter from continuing operations totaled $7.6 million, or a loss of $0.24 per share on a fully diluted basis. Including discontinued operations, the GAAP net loss was $12.5 million, or a loss of $0.40 per share. Last year, the loss was $0.02 per share in Q3.
On a non-GAAP basis, net loss from continuing operations was $1 million or $0.03 per share, which beat the top-end of our guidance range. Last year, we earned $0.19 per share.
Including discontinued operations, the third-quarter non-GAAP net loss and net loss per share were the same as our continuing operations results. But last year, the non-GAAP net income, including discontinued operations, was $6.6 million or $0.20 per share.
For added clarity around our continuing and discontinued operations and the changes made to our revenue classification, we've added before and after tables on our website at digitalriver.com/investorrelations. Also, as in previous quarters, we have included a table at the end of our earnings release which reconciles our GAAP and non-GAAP results.
Turning to cash and cash flow. Our net cash used for operations for the 9 months ended September 30 was $45.6 million, as compared to net cash used by operations of $24.3 million in the same period last year. Lower net income was the driver to the reduction in cash used in operations. Excluding the impact of working capital changes, our operating cash flow for the first 9 months of 2013 was $26.4 million, which was down from last year's cash flow of $41.4 million.
Capital expenditures were $15.7 million in the first 9 months of 2013 compared to $14.4 million last year, as we continued making improvements to our technical architecture in the third quarter.
As of September 30, 2013, cash and non-equity investments totaled $621 million. This is an increase of $11 million from the end of the second quarter. The primary drivers of this change were the generation of cash from operations in the third quarter of $18 million, offset by the repurchase of $12.7 million of common stock.
Under our current buyback authorization, we have repurchased $46 million in common stock at an average price of $16.69 per share. As of September 30, there were $54 million remaining under the current authorization.
Company cash, which we define as cash and non-equity investments, less client cash, was $511 million.
Now moving on to our guidance for the fourth quarter and full year, which excludes the contribution of our divested businesses.
For the fourth quarter, we expect revenues to be between $96.5 million and $100.5 million, which implies revenues will be within our previously announced range.
Commerce would account for about $80.5 million and $83.5 million. This implies a similar rate of decline as experienced in the third quarter, as our commerce revenue comparison continues to be impacted by the previously announced attrition. Reaching the high-end of this range is primarily based on achieving expected results from a major product launch.
Payments revenue would be between $16 million and $17 million. Inside of this range, we expect organic payments growth to slow to approximately 25%, which is aligned with our longer-term growth expectations.
Next quarter is the last quarter we will break out LML from Payments. Beginning in January, we will have owned LML for a full-year, and as such, all Payments growth will be organic.
Expenses on a non-GAAP basis are expected to increase approximately $4.5 million to $6.5 million, above last year's level in the fourth quarter. This reflects $3 million to $4.5 million of increased investment in key technology and infrastructure areas, $1 million in sales and marketing, and the inclusion of LML operations, which will account for an additional $5 million, offset by approximately $4 million of lower variable costs and about $0.5 million of lower G&A.
Fourth quarter GAAP EPS is expected to range between a net loss of $0.10 to a net loss of $0.03 per share, and non-GAAP EPS per share is expected to be in the range of $0.17 to $0.22 per share, using a non-GAAP tax rate of 21%.
The workforce reductions Dave mentioned earlier will not have a significant impact on Q4 expenses due to the timing of the action. However, we will incur a onetime cost of approximately $1.9 million in the fourth quarter, and expect this action will provide about $9 million in expense savings on an annualized basis beginning in 2014.
Our fourth quarter guidance implies the following full-year 2013 result:
Revenue, excluding discontinued operations between $385 million and $389 million, of which Commerce revenue is projected to be between $324 million and $327 million, and Payments revenue of between $61 million and $62 million. This is $1 million below what we guided on Investor Day due to delays in certain European deployments for LML.
On a continuing operations basis, the fourth quarter guidance range implies total revenues will increase between 4% and 5% over 2012.
Full-year GAAP results are now projected to range from a net loss of $0.67 to a net loss of $0.60 per share.
And finally, full-year non-GAAP EPS is projected to be between $0.56 and $0.61 per share.
We have no additional details to share on our preliminary thoughts for 2014 other than what we provided during our Investor Day. We will provide more color early next year.
To summarize, after delivering revenue consistent with our expectations and stronger EPS results again in the third quarter, and remaining within our guidance range for the year, we continue to execute our plan and are on-track with our longer-term transformational goals.
With that, I'll turn the call back over to Dave for his closing comments.
David C. Dobson
That's great. Thank you, Stefan. Before we move on to Q&A, I want to recap some key points that you heard from us today.
First, we continue to make steady progress on our transformation. We are continuing to evolve our technology footprint and platform, we're growing our Commerce, Payments and Marketing businesses, as well as take actions to improve our operational efficiency, including divesting some non-core businesses.
Feedback from our customers continues to affirm that we're moving in the right direction, and that our transformation plans are aligned with our future expectations and strategies.
And second, we made some key leadership additions to the team, adding important industry talent that will be instrumental in helping accelerate our transformation in the areas of operations, customer delivery, product and global sales.
With that, let's now move to Q&A. [Operator Instructions] So Mary, please open up the lines.
[Operator Instructions] Our first question comes from Gene Munster from Piper Jaffray.
Thanks for the details and the loyalty index, too. The new measurement. And Dave, when you came on board, you said one of the things you wanted to do was just reduce customer churn, and obviously, that's what the index gets to. As you look forward at other kind of key customers over the next that could be up for renewal, is there any ones that -- we know Microsoft is that, but any other variations that we should be aware of, that potentially could move that index in a better or worse direction over the next 12 months? And then a follow-up question.
David C. Dobson
All right. Thanks, Gene. First of all, thanks for the feedback on these 2 new metrics. And as we talked about at Investor Day, we plan to introduce more metrics going forward that, I think, increase the transparency into our business. With our loyalty index going from 92% to 93% in our Commerce business, as Stefan commented on, because that's a trailing 12-month metric, to have the metric move even 100 basis points in the quarter is -- means that attrition has significantly slowed down. As Stefan said, it's not material. As we look forward, clearly, we think the investments we're making in our platform and our technology to improve reliability and increase our rate of innovation, we'll continue to drive what we think is significantly lower levels of attrition of our customer base. So there's nothing more than what we factored into our fourth quarter forecast. There's some of the early color we provided at Investor Day relative to 2014, that would be -- there's no new information from what we provided at that point. So we think we're on the right track, Gene. We feel pretty good about the reductions in attrition that we've seen over the last 2 quarters and that we would expect to see going forward.
Okay. And then my follow-up question, in terms of kind of unbundling the platform. Any feedback in how that's resonating and getting newer customers into the Digital River fold? I think it was one of the objectives, was to kind of lower that entry-level point. How has that been trending, tracking? Or have we even really started to offer that?
David C. Dobson
Yes. I'll start with your last comment. It's still early. So we're probably realistically 12 months away. We originally talked about mid-2014 before our point where we would say we've got a modularized platform. But there are some early signs of things that we've done, first off, that are getting good traction. I'll talk about a couple. First, our Payments business. Over the last year, we've really accelerated the ability for new customers to take on our Payments business, and we're now starting to go back and market additional parts of our Commerce stack to our Payments customers, and we expect, over time, that'll add value. Inside of the Payments business, we continue to open that up and add new value-added services like fraud services, as an example, and then new value-added services that we've built that have driven some of the significant growth we've had over the last few quarters. The other example are some of the work we're doing around our APIs. We're now integrating third-party content management systems, and we've actually got a customer. We can't communicate the specifics of that at this point, but we've announced the customer. It's working and fully-deployed with a content management system, which is a great example of one of the earliest adoptions of our modularized framework. Finally, Gene, we had a customer advisory council. It's the first one we've had in our company for a long time. We had 20 of some of our largest customers from around the world here just a short week ago, and we reviewed our strategy and our modularization in detail to those customers, and there was overwhelming support for where we're taking the company, where we're taking our offering platform. So from that perspective, we're encouraged. But it's still pretty early on. And we expect some time mid-2014, we'll start to be able to report out specific examples of where we're winning business based on the impact of our modularized platform.
Our next question comes from Robert Breza from RBC Capital Markets.
Robert P. Breza - RBC Capital Markets, LLC, Research Division
Wondered if you could just comment a little bit about the workforce reduction that you took during the quarter here to 7%. And really, I guess, just want to think about maybe to go forward, I mean, do you think this is kind of the last cut? I've known over -- for the past few years, we've seen a few cuts. But do you think you've got the business rightsized now? And just how do we think about workforce reductions going forward?
David C. Dobson
Rob, yes, I'd love to tell you that this is the last. We're done. But here's the way we're thinking about it, and let me provide a little bit of detail of what we did. Because it was -- it wasn't on -- it was not an across-the-board reduction. We were very selective. As we were executing our strategy, we're actually hiring in areas of engineering in our platforms. So the effect of cut in other areas of our business was more significant than 7%, and we went to our G&A functions, our operations functions, we went to sales and marketing. Those are the areas that took the lion's share of the reductions. And so we did that as we rebalanced and aligned our resources, our people resources with our strategy. It was just consistent with this point about being very focused and very disciplined on how we're allocating our resources. With regards to our go-forward plans, as we execute, the short answer is, yes. If we execute our plans the way we've called, we would not expect to go through this type of rebalancing going forward. But we'll always be fine-tuning our resources and making investments in the areas that are growing more quickly and reducing those areas that aren't growing as quickly or not where we expect them to be. But for the most part, I'm hopeful that we don't have to report on these things on a regular basis, and we really try to get this behind us so we could enter into 2014 on a very clean note.
Our next question comes from Tim Klasell from Northland Capital Markets.
This is Mark Rosenkranz on for Tim Klasell. I was just hoping -- could you expand a little bit on your pipeline of new customers, and in terms of what has been growing the fastest between like the consumer electronics, the traditional software and SaaS companies, or the business-to-business?
David C. Dobson
Mark, it's a great question. As we look at pipeline, the fastest area of growth continues to be in our Payments business, where we continue to add new customers, particularly in the small-medium business and merchant space. Inside of Commerce, overall, we continue to see a healthy pipeline, but I want to be a little bit more specific. As we said at Investor Day, we're actually making decisions where we've got customers that would like to do business with Digital River, and we've actually constrained our pipeline. We've actually said, "We're going to focus on maintaining growth of our existing core customers, and particularly our digital segment and existing consumer electronics customers." And the reason why we did that is that if we do this work around the platform, we wanted to make sure that we become -- we're very focused on supporting the requirements of our existing customer set. So inside of our core markets of digital and consumer electronics, our greatest area of growth opportunity is expanding our current portfolio inside existing accounts. So that's what we're seeing in the Commerce business, and that's actually what we're focused on. As we -- tying back to the question did that Gene had for us, as we start delivering a more modular platform, more modular framework, we're going to start delivering some of the capabilities to the marketplaces that we described at Investor Day. So with that as a kind of a setting the stage, we're seeing growth, particularly in what I'll call, in 2 areas. In the digital space, we're seeing nice growth in B2B, we're seeing growth in new digital areas like content management, reported in this quarter a new customer in the publishing space that we're very excited will be growth, and we expect to see more business in that area. And then finally, in what we used to call, the physical space, what we're now referring to, using market terminology, as branded manufacturers, we're seeing a very solid pipeline and we expect to be able to report some new wins and new customers of brands that you'll certainly recognize that are leveraging our -- the Digital River global footprint. So these are companies that might be in Taiwan or Europe or in the Americas that want to distribute and sell our products direct to their customers around the world. We're very well-positioned to do that today, and our pipeline continues to build.
[Operator Instructions] Our next question comes from Phil Winslow from Crédit Suisse.
Philip Winslow - Crédit Suisse AG, Research Division
You guys commented on some of the progress you're making in terms of just modularizing the EAV [ph] infrastructure from sort of a technology and feature standpoint. But one of the things I've been worrying, as we get into 2014, you said sort of mid-'14, it should be sort of complete from a technology perspective. What changes do you think you need make in sort of the sales and the go-to-market side to kind of conform with this sort of this newer, just call it technology stack and offering?
David C. Dobson
Yes. That's a good question, and just, I want to just correct one thing. I want to talk -- you said complete by mid-2014, not completely true. We will be in a position where we actually are offering modular components of our offering by mid-2014, but we plan to continue invest and develop new capabilities, as we described at Investor Day, beyond mid-2014. The first thing I would say, Phil, to your question is that the biggest thing we're implementing is a new -- the way we offer our products. So we have started to look at how we price our offerings. We're being very responsive to both market requirements and our customers in how we bundle our capabilities. And you're going to -- you will see us, over the course of the next 12 months, start to change the way we go to market, and that will include offering components. And the best example of that today is Payments, as we talked about earlier. But you will see over the course -- over the next 12 months, us to start to open up that offering and price that offering different and very consistent with what we reviewed at Investor Day. From a go-to-market standpoint, as we do this and we start to open up into new markets that we have described previously, we are starting to do much more customer segmentation and making sure that our go-to-market teams are aligned with those segments. So we're investing in our marketing teams to be able to identify who are the most attractive customers that fit the offerings that we have, and then aligning our sales resources around those segments that we've selected. So that's ahead of us. We announced -- with the announcement of Tom Peterson -- and by the way, just on these 2 gentlemen we announced, Ted Cahall is on board, started on Monday. Tom Peterson will join us on November 18. But Tom Peterson, we've organized his group around our selected marketing segments or our selected verticals. We got a dedicated vertical for Microsoft, we have a vertical focused on branded manufacturers and what used to be our physical opportunity, and we expect that to be a significant growth opportunity beginning in the second half of next year. And then we've got our software and digital segment, and then we've got our SMB Commerce business. So those are the 4 key markets in our Commerce segment, and we are going to be aligning our go-to-market teams on a global basis around those verticals. So that's the primary change going forward, as we execute our strategies. So hopefully, that answers your question, Phil.
Our next question comes from Rohit Kulkarni from Robert W. Baird.
Rohit Kulkarni - Robert W. Baird & Co. Incorporated, Research Division
Okay. On Payments, just a big picture question as in -- as you anniversary LML, I look forward to next year [indiscernible] we can talk about this, what, in your view, would probably drive the next stage of expansion? In the past years, you talked about fraud prevention, tax management, cross-border being much in [indiscernible]. Any of these, or strategically, how are you thinking about getting that next leg of expansion on the Payments side of business?
David C. Dobson
Rohit, it's David Dobson. I'll comment on that. We actually have Souheil Badran here with us who runs our Payments business. I'll let him add color to my comments. But yes, the primary driver of growth going forward is what the team has done. It added new offerings. So we've gone from our gateway to our ISO offering into new value-added services, and we continue to go to our existing customers and offer them -- moving further up the value stack. And that's been a significant part of our growth up to this point, and we expect that to continue. Secondly is taking our customers global. Souheil's been very successful at having a highly-differentiated Payments offering where we have a very extensive global footprint and many, many payment types in many different countries. And we continue to take -- as we win customer relationships, we get significant organic growth by demonstrating our capabilities to those customers and growing them. And the third part of our growth will be adding new value-added services. And you've mentioned one like fraud. That's a great example of how we continue to add services to our customers. And the plan is to continue to add those services based on customer requirements. So with that, I'll pass it over. Souheil, if you'd like to add to that.
Yes, thank you, David. I would like to add 2 dimensions. One, to continue on the profit side is our mobile solution that we'll launch as well. We'll continue to expand and invest in our mobile solutions, make sure that we're compatible with what the market's looking for. But an important aspect is around distribution as well. We continue to expand our channel -- distribution channels through financial institutions and other third parties, and that is really a part of our success for us, so we'll invest more in that organization.
David C. Dobson
Good. Thanks, Souheil.
Rohit Kulkarni - Robert W. Baird & Co. Incorporated, Research Division
Great. And one quick question on Q4. Any additional color you can give about what you are seeing so far in October? And whether that has played a role in your guidance, largely unchanged, but any additional color you can give that?
David C. Dobson
No. The only thing -- and I'll make a quick comment and pass it to Stefan if he wants to add anything to that. But nothing we can provide. We're obviously 1 month into it. We're still at the early parts of getting ready for what we expect, is the biggest part of our year as we get into the holiday. But that really doesn't start for another couple of weeks to a few weeks. As Stefan did comment in his section, the guidance we've provided is certainly dependent on a couple of key product announcements and successful delivery by some of our largest customers, things that we expect to be big hits in the fourth quarter. So we've certainly reflected in what we communicated today what our expectations are, but they're highly-dependent on our customers being successful in the marketplace. Stefan, did you want to add anything to that?
Stefan B. Schulz
I think you covered it very well. Q4, especially, which is unique to what we see in the other quarters, and that is around the holiday period. And all signs are gearing towards that. I can tell you that the guidance we gave, we did factor in the volumes that we've seen to date. And -- but again, as Dave pointed out, a lot of our number comes from the holiday period, especially around Black Friday and Cyber Monday.
I show no further questions at this time and would like to turn the conference back to Melissa Fisher for closing remarks.
Thank you, Mary. Before we close today, I want to remind everyone that we will be presenting at the RBC Technology Internet Media and Telecommunications Conference in New York City on November 13, as well as the Crédit Suisse Annual Technology Conference in Scottsdale, Arizona on December 5. This concludes Digital River's Third Quarter 2013 Earnings Call. Thank you for joining us.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect at this time.