Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Digital River Inc. (NASDAQ:DRIV)

Q4 2007 Earnings Call

January 31, 2008 4:45 pm ET

Executives

Ed Merritt - VP of Investor Relations

Joel Ronning - CEO

Tom Donnelly - CFO

Analysts

Aaron Kessler - Piper Jaffray

Phil Winslow - Credit Suisse

Roth - Jefferies

Tim Klasell - Thomas Weisel Partners

Brad Manuilow - American Technology Research

Kyle Evans - Stephens Inc.

Sasa Zorovic - Goldman Sachs

John Langston

Robert Breza - RBC Capital Markets

Operator

Good afternoon my name is Jeremy and I will be your conference operator today. At this time, I would like to welcome everyone to the Digital River fourth quarter 2007 earnings call. (Operator Instructions).

Mr. Merritt, you may begin your conference.

Ed Merritt

Welcome to Digital River's fourth quarter and full year 2007 earnings call. I'm Ed Merritt, Digital River's Vice President of Investor Relations.

On the call with me today is Joel Ronning, our Chief Executive Officer and Tom Donnelly, our Chief Financial Officer.

I'd like to remind you that statements made during the course of this conference call that are not historical facts are forward-looking in nature, including statements regarding the company's future growth and financial results, as well as any statement containing the words "believes", "anticipates", "expects", and similar words. These statements involve known and unknown risks, uncertainties, and other factors, which may cause actual results to differ materially from expectations. For a detailed discussion of these risk factors and uncertainties, please refer to the company's filings with the Securities & Exchange Commission.

A webcast of our call today will be available for a period of two weeks on the Investor Relations section of Digital River's corporate website.

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

Joel Ronning

Thanks, Ed. And thanks to all of you for joining our call today. During the fourth quarter we delivered results clearly in line with our expectations. Total revenue was $96.9 million, which is up 17% from the fourth quarter 2006. GAAP net income was $20.3 million or $0.46 per share on a per share basis. This represents an increase of approximately 28% compared to the fourth quarter of 2006. And finally our non-GAAP net income was $24 million or $0.53 per share on a per share basis. This is an increase of 13% compared to the same period in 2006.

Before I turn the call over to Tom for the rest of the details on our financial results, I'd like to recap some of our fourth quarter and full year highlights and then discuss some of our key initiatives for 2008.

Let's start with the review of our core business, where we continue to see steady growth. Total revenue on a full year basis excluding Symantec grew over 29% year-over-year. Important contributors to the growth included revenue from new clients, a strong performance by our shareware business and our ability to increase the value of existing large client relationships to our strategic marketing programs.

I am pleased to report that strategic marketing fee revenue doubled in 2007, as compared to 2006. Microsoft is a great case and point here. During our third quarter earnings call, we pointed at some early success we were seeing with Microsoft’s strategic marketing programs. In particular, we are running site optimization test that we believe would positively influence Office 2007 download sales and trial conversions.

I am pleased to report that not only do these tests continue to yield compelling results but we've expanded our marketing relationship with Microsoft to include managed e-mail campaigns and affiliate marketing. Like site optimization, these programs are now driving compelling results. With major site launches behind us in 2007, we expect significant growth from Microsoft this year, growth generated through both marketing programs as well as trial conversions and product sales on existing sites.

Another important component of our core software business is Symantec. During our third quarter earnings call, we said we are focused on launching the largest subscription sites to contribute the majority of the revenue. I'm happy to report these Symantec sites are now live.

As planned more than 80% of the anticipated subscription business from Symantec has been transitioned to Digital River. While Symantec remains our largest software client, our Symantec concentration was down 7.4% for the quarter and the year when compared to 2006. In the fourth quarter, Symantec accounted for 37.5% of Digital River's total revenue. For 2008, we again anticipate concentration to drop and our guidance assumes full year concentration in the low 30s.

Although we are conservative in our outlook for several reasons, this decline reflects our new contract terms, the impact of auto renewals on product upgrade and subscription sales, and the absence of extended download sales in subscription purchases. Extended download sales represent the largest portion of our Symantec indirect revenue.

At the same time, I want to emphasize that our opportunity with Symantec continues to very strong and we do have additional opportunities for revenues that are not assumed in our guidance today. However, based on the facts I just discussed, we are tempered in our outlook for our Symantec revenue for 2008.

It's important to note that this conservative position is based on our revenue from Symantec and has no reflection on Symantec's consumer business. In addition to maintaining strong growth across our core software business in 2007, we also made notable progress expanding into adjacent and complementary vertical markets.

In a consumer electronics space, we won new business or expanded relationships with industry leaders such as BenQ, Skype, Canon, and a major European cell phone manufacturer. We added these wins to an existing base of consumer electronics manufacturers that includes ATI Technologies, Fujitsu Computer Products of America, Gateway, Lexmark, Sharp Electronics and Western Digital Corporation.

Games is another complementary vertical where we mobilized our resources in 2007 and generated some major wins. In the fourth quarter we signed the contract extension with Matrix Games and launched the North American store for Midway, a leading interactive software entertainment publisher.

We add these two wins to a list of agreement signed earlier in 2007 with major game companies, including Electronic Arts, TURBINE, Encore, SouthPeak Interactive, Sierra Online, and a division of Vivendi Games.

Last year the further expansion of our global overseas business was also a major focus for the company. In 2007, we extended our global footprint with the acquisition of Sweden-based Netgiro Systems, one of Europe's leading internet payment service providers.

This acquisition represents part of an ongoing commitment to increase our global presences in e-commerce capabilities. In addition to EMEA, we also strengthened our presence in Asia Pacific, a yet emerging market where e-commerce growth rates continue to outpace the U.S. and Europe.

In 2007, we established a wholly-owned subsidiary in China, which for the first time began processing transactions to support local sales for global sites. We also saw growing activity in regions such as Taiwan, Korea, New Zealand and Australia.

As we discussed on earlier calls, our ability to manage complex e-commerce operations on a global level, while creating customized shopping experiences on a local level has proven to be one of the most compelling market differentiators.

In 2007 international sales were approximately 43% of total gross e-commerce sales compared to 41% in 2006. Overall we made solid progress in 2007 supporting our core business and establishing a foothold in the complementary markets that offer a natural extension for e-commerce expertise.

As we look ahead to 2008, our plan is to aggressive build on our success by making a number of strategic investments. We became a leader in the software market by investing in our company. The digital download is now synonymous with Digital River and is one of our core competencies. However, as this business is scaled at high growth rates over the past several years, we will likely under invest in other areas of our business.

In 2008 we intend to reinvest our incremental profits, a decision that we believe is key to accelerating at a long-term growth as we expand revenues in new vertical markets.

In 2008 we intend to reinvestment incremental profits of approximately $20 million and additional $10 million in capital. We will be making these investments in four key areas. First, we will continue to invest in our core software business. Today Digital River leads the software market. We intend to defend our leadership position with further advancement to our primary converse infrastructure and reporting capabilities.

Our plan here is to drive high quality, enhance marketing functionality, system scalability and greater operational efficiencies in order to generate incremental growth opportunities for our clients in the company.

Second, we intend to make additional investments in our subscription and payment offerings. For subscription, our strategy is two-prone. We intend to further bolster our position in the software market by adding more advance functionality to support service software as service applications. We also planned and aggressively pursue new opportunities within gaming and other digital content markets where content continues to be monetize in new and very creative ways.

In payments, we intend to broaden and deepen our product and surplus offering. We look forward to expanding our relationships with financial institutions across the globe to provide comprehensive, multi-region e-commerce transaction solutions.

Third, we will continue to investment in developing key vertical markets, in particular consumer electronics and games. We've already established the presence in these markets and we intend to accelerate our development, marketing and sales efforts this year.

In the consumer electronic space, we remained very bullish on our growth prospects. Here we intend to capitalize on our ability by making technology improvements and enable us to better source and deliver physical product in a direct-to-consumer model without taking on inventory risk.

The size and quality of our consumer electronics pipeline continues to increase. In fact, we're building sites and finalizing contracts with three large consumer electronics brands. In general, we have found that if a consumer electronics manufacturer is pursuing a global, direct-to-consumer strategy, Digital River has by far the best e-commerce solution in the market.

In the games space, we also continue to be very bullish about our future growth prospects. We believe that broadband adoption as well as the extended entertainment and social experience of online play will continue to drive the digital distribution of games.

In 2008, we plan to make incremental investments to ensure that our market leading software, commerce platform earns the same leading position within games that it retains in software. By focusing our development efforts on new and enhanced merchandising tools, subscription management capabilities and micro transaction revenues models, our goal is to maximize revenue for our clients.

Our biggest barrier in the consumer electronics and games market, similar to the software environment a few years ago is our client sensitivity to channel conflict. Our biggest competition is in our solutions. Both are gating factors that we successfully addressed when software publishers made their entry in to e-commerce.

Finally, and keeping with our historical track record, we will continue to invest in acquisitions to further enhance our core services, accelerate our growth in strategic markets. Earlier this month, we closed two acquisitions that will enable us to further strengthen our core CD2Go and on Demand physical fulfillment services.

We acquired Oregon-based custom CD and Georgia-based SwiftCD by leveraging their technologies and strong ties to the game industry. We intend to open up new delivery channels for trial offers and cross promotions and explore verticals outside software that typically use backup physical media to support digital product sales verticals such as entertainment and online photo and video sites. Combined, we acquired custom CD and SwiftCD for approximately $16 million in cash.

Before I turn the call over to Tom, let me leave you with a few final comments about the investments which I just outlined. Let's talk about timing. These investments will take place throughout 2008 and are expected to begin to provide some leverage in the second half of this year.

To provide you a longer range of visibility, we believe these investments lead to non-GAAP margins in the upper 20% range and total revenue growth in the mid-teens. Furthermore, we believe that this is an opportunity time to make these investments.

As Tom will review in a minute, we have a strong cash position and financial flexibility to take action now. We continue to show solid growth across the broader client base in our core business, as well as in the new vertical markets.

Combined, these factors provide diversification away from our dependence on a few large clients. To provide the runway we need to advance our leadership position in the new markets.

With that I'll turn the call over to Tom for the rest of the details and the financial performance. Tom?

Tom Donnelly

Thanks, Joel. Our fourth quarter revenue was $96.9 million, up 17% from $83 million reported in the fourth quarter of 2006. International e-commerce gross sales were approximately 44% of total gross sales in the fourth quarter on par with the fourth quarter of 2006.

Revenues directly and indirectly related to Symantec were 37.5% of total revenues in the fourth quarter, compared to 44.9% in the same period of 2006. Direct Symantec revenues during the quarter were 26% of total revenue compared to 29% in the fourth quarter of 2006.

As was the case in the third quarter indirect revenues were lower as a percent of total Symantec-related revenues, primarily due to the lack of EDS revenues on subscription renewals and the impact of auto renewals on product upgrade sales. The overall business absent Symantec-related revenues grew over 32% for the quarter.

For the full year ended December 31, 2007 total revenue hit a record $349.3 million, up almost 14% over 2006. Overall we are pleased with the company's top line performance this year given the large impact of the renegotiated Symantec contract and a slow start on the Microsoft business and a soft economy over the latter part of the fiscal year.

GAAP net income for the fourth quarter totaled $20.3 million or $0.46 per share and was above our guidance of $0.45 per share. This compares to net income of $16.4 million or $0.36 per share in the fourth quarter of 2006. These results represent quarter-over-quarter improvements of over 24% in net income and almost 28% in net income per share. For the full year ended December 31, 2007 GAAP net income totaled $70.8 million and was up over 16% when compared to net income of $60.8 million reported in 2006.

Switching to non-GAAP results. In the fourth quarter, non-GAAP net income totaled almost $24 million or $0.53 per share in line with our guidance. This compares with non-GAAP net income of $21.6 million or $0.47 per share for the fourth quarter of 2006.

Operating margin for the fourth quarter improved on a GAAP basis when compared to the fourth quarter of 2006 by approximately 2% and was slightly down on a non-GAAP basis by approximately 50 basis points in line with our guidance.

For the fourth quarter, total costs and expenses grew $8.6 million over the fourth quarter of 2006, reflecting leverages; expenses grew $5.3 million slower than revenues. Looking at the individual fourth quarter expenses lines compared to the fourth quarter of 2006 and excluding stock compensation expense, direct cost of services was up 15% primarily due to increased sales and associated cost related to our physical on-demand and CD2Go products.

Network and infrastructure costs were up 23%, primarily related to initial infrastructure investments the company is making in support of our strategic objectives and the acquisition of our Netgiro.

Sales and marketing expenses were up 14% related to incremental payment processing fees on higher gross sales volume and additions to headcount in support of new market opportunities.

R&D expense increased 41% year-over-year due to infrastructure projects discussed on our prior calls and investments in new product development to support our market expansion efforts.

G&A costs were up 6% quarter-over-quarter, with increases primarily being driven by the Netgiro acquisition.

Interest income for the quarter was just under $8.2 million.

Other expense represents approximately $600,000 in interest expense on our convertible notes and approximately $900,000 of loss on foreign currency primarily related to the sudden strengthening of the dollar that occurred late in the quarter.

Our GAAP tax rate in the fourth quarter was approximately 32% compared to 34% in the same quarter of 2006. Our U.S. NOL at the end of the quarter was approximately $22 million and our international NOL was approximately $1 million.

Turning to cash flow. Net cash provided by operating activities for the 12-month period ending December 31, 2007 totaled approximately $146.4 million, up 25% when compared to the similar period of 2006. We remain very confident in the underlying business model and our ability to generate strong cash flow.

Excluding changes in operating assets and liabilities which I've referred to as balance sheet leverage, net cash flow from operations for the 12-month period was $120.2 million compared to $109.6 million for the similar period of 2006. This represents a year-over-year improvement of 10% in line with our non-GAAP net income growth.

As I've mentioned on prior calls, our tax rate based on anticipated international revenue mix should steadily decline over the next four years to a 27% to 28% rate.

CapEx was approximately $9 million in the fourth quarter, with the bulk of the investment related to expansion of our data center infrastructure. The company did take advantage of year end discounting by vendors moving some planned Q1 capital additions into the fourth quarter.

We ended the quarter with approximately $697 million in cash and short-term investments, and we did not repurchase any common stock during the quarter.

Now on the guidance, for the first quarter of 2008 we currently expect revenue of $98.5 million, GAAP net income of $0.40 per share including $3.4 million of stock compensation expense and non-GAAP net income of $0.48 per share.

For the full year we currently expect revenue of $395 million, GAAP net income of $1.58 per share including $40 million of stock compensation expense and non-GAAP net income of $1.88 per share.

A few comments related to the guidance. As it relates to the course software e-commerce business, the revenue guidance is tempered due to general uncertainty in the overall economy, particularly as it relates to the strength of the U.S. consumer, which drives the majority of this business.

In addition, we are being conservative in our outlook as it relates to our revenue related to Symantec as we enter the second year of auto renewals in the U.S. and the first year in international markets.

Also impacting our growth rate is some retraction in Europe. We recently lost two large European clients to In-House Solutions. And these clients on their Q4 run rate represent about $10 million in annualized revenue.

We've seen this happen with other clients in the past and many times they returned to Digital River when they realized how complex and costly it is to operate a globally e-commerce business.

On the flip side, we do expect strong growth in the balance of our portfolio with significant growth coming from Microsoft in line with the sequential quarterly growth we have seen over the first three quarters of the Office 2007 program.

Revenue also benefits moderately from the two small acquisitions made earlier this month which Joel mentioned. The combined initial cost of these acquisitions was approximately $16 million in cash and both have small earn-outs. We expect these acquisitions to be neutral to earnings in the first year.

To quantify the incremental spending, we are directing an infrastructure, quality and new market development. We have decided to invest approximately $20million or about $0.30 per share excluding incremental capital cost of approximately $10 million. We expect this investment to be spread evenly throughout the year. The spending will flow through the statement of operations primarily in research and development, sales and marketing and network and infrastructure.

G&A expenses should only increase slightly in future quarters compared to the fourth quarters, and direct cost of services will increase on par with revenue growth. In addition, depreciation and amortization and acquisition amortization are estimated to increase by 25% and 12% respectively for the full year.

Why the investment now? I think it's fair to say that historically the company has had tremendous focus in its planning approach to driving performance in the out-year. This year the company is committed to a longer-term view of its revenue and earnings growth profile.

In addition, we have in the past paid tremendous attention to the cyclical nature of our business, in particular planning our expenses under the lens of what is generally a soft second quarter. In addition, the company has not achieved disposition in the software market over night or without substantial investment. While we can clearly leverage our expertise to capture share in new vertical markets, our expansion efforts will require additional investment.

GAAP and non-GAAP operating margins are estimated to be down for the full year of 2008 by approximately 230 basis points and 250 basis points respectively. It is very important to note that absent our recent acquisitions of Netgiro and the CD companies, our pro forma operating margins would be up slightly for the year. As it relates to Netgiro we plan to continue our investment in payments and in time we expect the CD companies to blend nicely into our overall margin structure.

Given the timing of the investments we have discussed in these recent acquisitions, we expect about 700 basis points of retraction in non-GAAP operating margin over the first half of the year, with an offsetting 150 basis points expansion over the second half of the year when compared to 2007.

As you will notice in our release today, we now breakout interest income in our statement of operations. Due to the recent action the Fed had taken related to interest rates, we expect interest income to drop sequentially from almost $8.2 million to just under $7.5 million for the first quarter of 2008. For the full year, interest income is currently expected to drop by about $2.5 million or about $0.04 per share, with full year interest income forecast just under $30 million. These projections could be impacted by future interest rate cuts in the U.S. or Europe.

Absent the incremental investments discussed on the call today and the lost of interest income, non-GAAP EPS guidance would have been approximately $2.22 per share.

One last note is it relates to the sequential growth and spending. Historically, the company has much higher benefit cost in the first half of the year compared to the second half of the year due to payroll taxes.

To quantify this for you, this represents almost $2 million of the planned sequential rise in total costs and expenses from the fourth quarter to the first quarter of 2008.

We expect CapEx for the full year to be $20 million to $25 million with approximately $10 million related to product and infrastructure enhancements primarily related to reporting and data services. The guidance assumes a 31% tax rate for GAAP and non-GAAP EPS, although we currently anticipate a 30% GAAP tax rate for 2008.

We currently expect that we will be in the market repurchasing shares in the first quarter. No accretion related to any future repurchase is assumed in this guidance.

With that, I'll turn the call back over to Jeol.

Joel Ronning

Thanks, Tom. Before we open the call for questions, I would like to recap what we talked about today and leave you with few comments about our plans for 2008. The fundamentals of our core business are solid and the company continues to grow across a more diversified base of clients.

On a full year basis, our core business excluding Symantec revenue grew 29% year-over-year. We finished 2007 in a stronger position not only with key clients including industry leaders such as Microsoft, Electronic Arts and Skype but also in key markets such as consumer electronics and games.

For 2008 we have outlined a solid plan for the future of the company. We believe it's well thought out, it's achievable and we've got the financial flexibility to deliver on it.

Before we close I'd like to thank our clients for their continued support and loyalty. As an organization we're fortunate to be working with some of the greatest companies in the world. I also want to extend a note of thanks to the committed associates of Digital River who continue to raise the bar on e-commerce excellence.

With that, let's open it up for questions.

Question-and-Answer Session

Operator

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Aaron Kessler.

Aaron Kessler - Piper Jaffray

Great. Thanks, guys. Couple of questions. First on the Q1 guidance, I know you've kind of talked about some other issues for 2008, but typically we see about 10% sequential jump. Is that just due to the lower Symantec expectations? Or is there anything else in the Q1 guidance we should be thinking about?

Tom Donnelly

Yeah. You hit on one. I think, overall, we said we're a little bit tempered, and then we talked about kind of some sudden attrition from our couple of clients in Europe, which is clearly kind of impacting. Those were four more clients in Q4. We've been there before, or maybe Joel wants to make a comment here. We've seen people go in-house many, many times and I think more often than that, we got a chance to get them back.

Joel Ronning

Show back, yeah. I mean, I think we found that it's difficult in some cases for us to compete with the message being sent by an in-house staff saying they can do this for a lot less than a company like Digital River. And, what we find is the level of complexity, the level of risk, the downtime, the lack of e-marketing into these companies, we have a tremendous track record of these clients coming back after a year or two. But it does take time for them to sort out how complicated this business is.

And I want to add one other note that just in the past three years, we've invested over $200 million just in R&D and network infrastructure, and that's just to do the job that we do, due to the level of quality that we deliver to these clients. There is no way these guys can do these on their own.

Aaron Kessler - Piper Jaffray

Okay. In terms of the Symantec relationships, hope you can flush that out a little more in terms of, I think you talked about a newly signed contract. I assume that was the one you are referring to at the end of '06, or has there been a contract since then? And then also can you just clarify what you meant by the extended download sales? Thank you.

Joel Ronning

Yeah, I think we are talking about the same contract and we have discussed this, I think may be not, we discussed this a bit on the last call. The lion's share of our indirect revenues, as we call them, related to Symantec is download insurance that Digital River sells, and as we transition over subscription sale that product is not offered. So that impacts the indirect revenue, and it is the reason why, over the last few quarters, you have seen that indirect revenue drop as a percentage of the overall revenue compared to a year prior.

Operator

Your next question comes from the line of Phil Winslow.

Phil Winslow - Credit Suisse

Hi, guys. Just a question back on Symantec. Joel, you mentioned Symantec contribution going into the low 30s. So taking a midpoint there, 32.5, that will be down about 13% to 13.5% year-over-year, so pretty significant sort of acceleration decline averaging the 5% that you saw this year. What are you baking in into that, exactly, and sort of why the acceleration decline?

Joel Ronning

While I guess, Phil, overall we are just being very cautious. We got caught a little, so I was surprised by both the Microsoft and Symantec relationship last year, and we are going into the year with -- we are tempering everything, the consumer markets, watching what has happened with their auto renewal business. I think a lot of this is just us being fairly conservative. Tom, do you want to add anything here?

Tom Donnelly

No, I think getting the crystal ball out and understating what the second year impact of auto renewals are, and I guess we're partially through the first year of international, auto renewals is difficult to do. Fundamentally, this was a business model change, right? And eventually, we're going to reach kind of equilibrium and the auto renewal clients are going to kind of come back out into the general population, and will need to be marketed to again, and we're hopeful there. But that would be the only thing I would add.

Operator

Your next question comes from the line of Ross MacMillan.

Roth - Jefferies

Hi, guys. This is Roth here for Ross. I guess I just wanted to make sure I heard right on the two customers that have gone away. Is that $10 million annualized among each of them or among both of them?

Tom Donnelly

Both of them together, full year.

Roth - Jefferies

Okay.

Tom Donnelly

So, that would be like 2.5 a quarter.

Operator

Your next question comes from the line of Tim Klasell.

Tim Klasell - Thomas Weisel Partners

Yeah. Two quick questions. First, on the additional investments you are spreading out throughout the year, is that something that, I know you are not giving the long-term guidance, but this is a increase level spend that you think will go on indefinitely and how should we be thinking about margin structure with that? Then I have quick follow-up.

Joel Ronning

Well, I'll take the first half of that. No, we don't see this going on indefinitely. I think we did speak to that in the script. And would you want to grab the second?

Tom Donnelly

Yeah. We said we expect leverage on a year-over-year basis in the second half.

Tim Klasell - Thomas Weisel Partners

And then second question was the ongoing margin expectations.

Tom Donnelly

Yeah. I think Joel said high 20, so we…

Tim Klasell - Thomas Weisel Partners

Okay. And then just on the (inaudible) looks like we've gone sequentially 24%, 29% now 32% growth. How much of that is driven by Microsoft and how much by whatever else is helping to drive that?

Joel Ronning

I think that's well disbursed across a pretty large client base. So we can't break out Microsoft, but I can tell that it's well disbursed.

Tom Donnelly

And we did have some contribution, obviously in the fourth quarter from the acquisition of Netgiro that we made September 1st. So, I think if you account through that it's pretty normalized throughout the year.

Operator

Your next question comes from the line of Brad Manuilow.

Brad Manuilow - American Tech Research

Thanks for taking my question. Just quickly on working capital. How should we look at the ongoing working capital requirements going forward, will they grow in line with revenues or there will be any deviation?

Tom Donnelly

That's an interesting question, I mean I think we're have an internal amount of money, above kind of our accounts payable declines, that we need to keep. We do obviously have a large cash balance, so our probable absolute working capital requirements are clearly not what our working capital is. We said we expect to be in the market buying our own shares and I think we also said, kind of, a core strategic initiative is to continue to acquire companies.

I think the market relative to, kind of, our appetite for multiples is probably moving more into our sweet spot then it maybe has been. And remember, we don't carry inventory so I don't see any -- and CapEx is kind of a percentage of overall corporate needs here. It’s relatively like we've made persistent investments in our data center infrastructure over the years, and as a kind of percentage of overall corporate spend.

So we do one final note, maybe kind of keep our eye on the convertible bonds, which can be put back to the company next January. And I think whether we'll need capital there, is going to largely depend on our execution against our business plan this year and where we're trading in relation to the convertible price, the conversion price, which is $44 a share.

Operator

Your next question comes from the line of Kyle Evans.

Kyle Evans - Stephens Inc

Hi. Thanks for taking my questions. I have got two quick ones. The CD companies that you bought, I'm assuming that's built into your $395. What should we assume for contribution on that?

Joel Ronning

Contribution of revenue? Well, they did about -- Absent One was a client of Digital River, but they did about $6 million combined last year.

Operator

Your next question comes from the line of Sasa Zorovic. Ma'am, your line is open.

Sasa Zorovic - Goldman Sachs

Can you hear me? Hello?

Joel Ronning

Yes, we can hear you, sir.

Sasa Zorovic - Goldman Sachs

Yeah. So my question would be regarding Symantec. So we're kind of looking sort of exiting Symantec was -- I remember you said 37.12% of revenue in the fourth quarter for the overall year, we're looking to be at about you said low-30s in terms of concentration. How does that break between price and volume, should we be looking at an overall pricing to remain fairly constant during the year '08?

Joel Ronning

Yeah. I sense that pricing will probably remain fairly constant. Tom, you want to add anything to that?

Tom Donnelly

You mean the pricing of their products, Sasa, or the pricing relationship we have with them.

Sasa Zorovic - Goldman Sachs

Yeah.

Tom Donnelly

We don't expect any change nor have the rumors about there being another renegotiation. At least Joel and I don't know if there is another renegotiation going on, so if it is, that isn't to our knowledge.

Operator

Your next question comes from the line of [John Langston].

John Langston

Yeah. Thanks for taking my question guys. I want to ask you, last quarter you were talking, kind of, about some issues you were going to possibly have with your gaming clients, as far as getting your software in with the games as far as buying sort and so forth like that. I want to see if you can give us a little bit more color on some advancement you all have made on that front.

Joel Ronning

You talked about in-app purchasing?

John Langston

Yes.

Joel Ronning

Yeah. We're working with a number of clients to help them develop out some of that capability. It's fairly complicated process and it's not something we’ll have done anytime, in the next month or two weeks. A lot of that has to be done very closely in conjunction with the client. There is a lot of (inaudible) B021:1:04 going into build of the product itself. But that's a projects that we are working towards.

Operator

Your next question comes from the line of Robert Breza

Robert Breza - RBC Capital Markets

Hi, thanks for taking my questions. Joel, in your prepared remarks you talked about Microsoft and expecting significant growth, can you just kind of talk us through what you saw in Q4, did it meet your expectations, exceed your expectations in Q4? Just kind of a qualitative answer would be great.

Joel Ronning

Steady as she goes, solid client, feeling good. In a year or two, we are expecting it to be a good deal better than year one, and year one was pretty much a startup year. So, I can't give you much more details than that. We're really happy with the relationship. I believe that both sides are extremely green and I think we've proven our value to them. And I think they realize that we are the best guys in the world for doing what we do here on a global basis. So as we should be, I think we are feeling good about the relationship. But in terms of giving a color on the last quarter, I probably can't go into a lot of detail, although I have to say we're feeling pretty good.

Operator

Your next question comes from the line of Brad Manuilow.

Brad Manuilow - American Technology Research

Just a quick follow- up, and I made in this earlier, but can you explain what the $1.6 million in other expense was during the quarter and how we should look at that going forward? Thank you.

Joel Ronning

Yeah. $600,000 was related to the interest on the convertible on the convert and that's steady as she goes every quarter until such time is the bonds are called their put to the company, and $900,000 was related to foreign currency loss. And as you look back in the quarters I guess that will be in the K because of that will be disclosed in the K.

We typically have a gain or a loss depending on generally sharp movements in foreign currency because we have the exposure on the gross receivables as oppose to kind of our net P&L. So currency moves quickly and the dollar got stronger in a hurry in December, we tend to have about seven times exposure on that.

And we do buy some forwards to prevent it on an overall basis, but it's the sharp moves that can yields some losses there and the balance was just revaluing some of our balance sheet items related to where we have three subsidiaries in Europe now.

Operator

Ladies and gentlemen, we have time for one more question.

Joel Ronning

Just follow-up question, too.

Operator

Your next question comes from the line of Kyle Evans.

Kyle Evans - Stephens Inc.

Hi. Thanks, guys. Can you help us to understand the change and thinking on buyback in those share in 4Q and you are going to buying it back in 1Q and also update us on your capacity on the buyback?

Joel Ronning

I think I'll repeat what we said, we expect to be in the market this quarter and we have a $137 million left on the current authorization.

Operator

Ladies and gentlemen, at this time, I would like to turn the call back over to Mr. Merritt.

Ed Merritt

Before we conclude our call, I would like to mention that Digital River will be participating in two upcoming investor conferences. First, will be at the Thomas Weisel Technology Telecom and Internet Conference on February 6th and 7th, then on February 26th and 27th, we will be participating at the Goldman Sachs Technology Investment Symposium.

Thank you for joining us on this call. That concludes the Digital River fourth quarter and full year 2007 earnings call.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Digital River Q4 2007 Earnings Call Transcript
This Transcript
All Transcripts