Digital River Management Discusses Q3 2012 Results - Earnings Call Transcript

| About: Digital River, (DRIV)

Digital River (NASDAQ:DRIV)

Q3 2012 Earnings Call

November 01, 2012 4:45 pm ET


Ed Merritt - Vice President of Investor Relations

Thomas F. Madison - Lead Director, Chairman of Audit Committee, Chairman of Nominating & Corporate Governance Committee, Member of Finance Committee and Member of Compensation Committee

Joel A. Ronning - Founder, Chairman and Chief Executive Officer

Thomas M. Donnelly - President and Chief Operating Officer

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


Philip Winslow - Crédit Suisse AG, Research Division

Shyam Patil - Raymond James & Associates, Inc., Research Division

Charles Eugene Munster - Piper Jaffray Companies, Research Division

Gregor Schauer - Robert W. Baird & Co. Incorporated, Research Division


Good day, ladies and gentlemen, and welcome to Digital River Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Mr. Ed Merritt from Digital River. Sir, you may begin.

Ed Merritt

Thanks, and welcome to Digital River's Third Quarter 2012 Earnings Call. I'm Ed Merritt, Digital River's Vice President of Investor Relations. Joining us on the call today from Digital River is Tom Madison, our Lead Director and newly named interim CEO; Joel Ronning, our Founder; Tom Donnelly, our President and Chief Operating Officer; and Stephan 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 relate to the company's future growth and financial results and may contain the words believe, anticipate, expect, guidance and similar words. These 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 our call today will be available on the Investor Relations section of Digital River's corporate website.

With that, I'll turn the call over to Tom Madison.

Thomas F. Madison

Thanks, Ed. And thanks to all of you for joining us today. In addition to our quarter 3 earnings and updated guidance, today we announced a leadership change, and I wanted to join today's call to give you the board's perspective on these events.

We announced that Joel Ronning is stepping down as CEO of Digital River, and that I will serve as interim CEO as we conduct a search for a permanent successor. Joel will continue to serve as Chairman of the Board until year end when he will step down from the Board of Directors. On behalf of the board, I would like to recognize Joel for all that he's done, both for his vision in founding Digital River in 1994 and for his invaluable contributions in building the company into a $400 million global enterprise. Digital River is now an industry leader in online commerce and global payments, thanks to that vision. Joel is a brilliant entrepreneur, who has taken the company a long way over the past 18 years. We deeply appreciate his hard work, dedication and commitment to creating the strong company that Digital River is today.

In light of Joel's departure, the board has began a search to find a permanent CEO. We will consider both internal and external candidates and have retained Spencer Stuart, a leading executive search firm, to assist us. Our goal is to identify a CEO who will build on our strong foundation, an executive with a deep focus on strategy execution and a track record of generating shareholder value.

In the meantime, I will serve as interim CEO working with Digital River's strong management team to ensure continuity until a permanent replacement is named.

I will now turn the call over to Joel, who would like make a few comments. Joel?

Joel A. Ronning

Great. Thanks, Tom, and good afternoon, everyone. I'd just like to spend a few minutes reflecting on my past 18 years at Digital River. In 1994, I started this company with a vision that products would be sold over the internet or at that time was a precursor to the internet, at the earliest stages of online commerce. Today, that vision has resulted in a company with almost $400 million in revenue, offices all over the world and partnerships with some of the leading consumer brands around the globe.

Most importantly, I've had an opportunity to work with some of the best talent, hands down, in Global Commerce. I'm talking about our employees. It's been wonderful to work with this group of individuals, who over the years have established themselves as the go-to experts in solving the toughest issues in e-commerce. I've had the privilege of being part of this company for many years, and I know firsthand that it has just scratched the surface of its potential and has tremendous opportunity to grow for years to come.

Thank you again. And now I will turn the call back to Tom Madison.

Thomas F. Madison

Thanks, Joel. In a minute, I'll turn the call over the Tom Donnelly to provide detailed insight into our results and business strategy and how we see the evolving -- that evolving during the next several quarters. And then Stephan Schulz will discuss our third quarter financial results. But before I do, I'd like to provide the board's perspective on our performance and expectations.

We had a good third quarter and expect to end 2012 with results consistent with earlier guidance. However, as we look to 2013, we are facing some headwinds due to macroeconomic conditions, client attrition, as well as a necessary ramp up in investments to ensure our technology infrastructure keeps up with where we want to and need to be.

Tom Donnelly will review the specific initiatives we're taking to address some significant challenges we see next year. But I do want to be clear, the board and management team are focused on executing these initiatives and are committed to delivering shareholder value.

While we recognize the need to make changes in our business, importantly, Digital River will be executing off of a strong business foundation. We have a solid base of clients, representing some of the world's most impressive brands and we have a growing pipeline of new clients. Our business is supported by more than 15 years of global commerce experience and success. And finally, we are on a very solid financial footing with over $700 million of cash and investments on our balance sheet.

In addition, we have a strong team to help us drive the company forward. In particular, I'm pleased to have a great partner in Tom Donnelly, our former CFO and currently our President and Chief Operating Officer. As the board conducts its search for a permanent CEO, Tom will play a key role and is an internal candidate for the permanent position. I look forward to working closely with him in the months ahead.

And with that, I'd like to turn the call over to Tom Donnelly.

Thomas M. Donnelly

Thanks, Tom. I'm pleased we exceeded our revenue and earnings guidance for the third quarter. We delivered revenue of $91.7 million, which was $700,000 better than the high-end of our guidance range. We also performed well from an earnings perspective, meeting the top end of our non-GAAP EPS guidance by $0.02 per share.

The performance in our top line revenue can be attributed to Enterprise Commerce which performed slightly better than our expectations, driven primarily by new product launches from a few key clients. And we continued to see strong revenue growth in World Payments, which increased 30% year-over-year using constant currencies.

As we've noted on previous calls, Payments continues to perform well for us and we're deeply committed to this space. To help accelerate our growth, in September, we announced our intent to acquire Canadian-based LML Payment Systems in an all cash transaction valued at about $102.8 million. Netting out LML's cash, our expected out-of-pocket will be closer to $72 million. LML has a great SMB payment processing platform with rapid client on boarding capabilities. Today, their online processing business is growing nicely at about 29% year-over-year and they support more than 14,000 online merchants.

Additionally, they have a great mobile payment solution gaining traction in Canada and deep relationships with Toronto-Dominion Bank and Wells Fargo.

After the acquisition is closed, which we expect to take place in early 2013, our combined companies will process over $20 billion in online transactions.

Now moving on to what we see in the fourth quarter. We have better visibility in the fourth quarter in terms of launches and holiday promotions. We expect to see higher traffic on key selling days, but also believe we'll see some consumer pricing pressure and lower average order values on Black Friday and Cyber Monday.

Many bricks-and-mortar retailers have announced pricing initiatives to match internet pricing on select products. We'll be monitoring this closely to see how we can help our clients drive more sales during the holiday season.

I think it's important we take a minute to speak about 2013. Like many companies, we continue to have concerns about the overall softness in the economy, especially in Europe, as well as the recent decline in PC sales. We've seen some client attrition in 2012 and this could continue to next year. Additionally, our supporting business revenue has declined in 2012 and we expect a similar decline in 2013. Taking all of these challenges into consideration, we believe it will be difficult to achieve revenue growth next year, including LML Payments revenue.

Following our normal process, we'll provide more detail in 2013 financial guidance on our next earnings call. However, today we think it's important to share the plans we currently have in place and the actions that we are taking right now to solidify existing revenues and aggressively respond to trends we're seeing in the market. We've mapped out 3 key actions we'll undertake, which include some technology initiatives designed to deliver more flexible solutions to our clients at reduced costs.

First, we expect to maintain a level of investment in our core infrastructure in 2013 similar to the amount we spent in 2012. As part of our technology roadmap, we will continue to rearchitect our core Global Commerce platform and its underlying databases to further increase stability and performance. We'll significantly enhance our processing capacity so we can deliver greater throughput on large volume days. We'll integrate LML's capabilities into our global payments offering. And finally, continue our global expansion with an emphasis on moving into Russia.

The second action we are taking is to transition our architecture and platform toward a more modular plug-and-play commerce ecosystem. We are unbundling core components and making them available to clients on an à la carte basis and adjusting our pricing strategy accordingly. This will allow us to connect our solution to even more service providers in the industry, enabling us to dramatically expand our commerce and payment services and their addressable markets. All of these initiatives are based on client and market feedback.

We will also reduce operating expenses. Some of the initiatives I just noted will involve incremental investment, but we know we need to rationalize expenses in light of expected revenue. As I stated earlier, we've already started this transition and we expect that it will continue throughout 2013. We'll provide more details on these initiatives and update you on our progress on the next earnings call in early February.

The initiatives I discussed are designed to address client retention, advance our technology offering and help return us to growth in the future.

Moving on to our pipeline and operations. Our pipeline for Digital, Physical and Payments continues to look strong as more companies realize selling direct to the end buyer is a necessary revenue channel. Digital River's global expertise continues to resonate well with our prospects and client base.

During the third quarter, in Digital, we signed many new and expanded agreements. We grew our relationship with Siemens, Novell, Corel, Individual Software and Grass Valley. We also signed multiyear extensions with 2 of our top clients, Trend Micro and Kaspersky. Microsoft, our largest software customer, continues to be a valued and strategic partner. For, we are now live internationally in 20 countries and territories, most recently launching the U.K., Germany, France and The Netherlands.

In the third quarter, we benefited from a strong back-to-school season.

Moving onto Physical. In the third quarter, we grew our relationship with Lenovo, expanding their business across Europe. We secured a new finished goods contract with Acer for North America and Europe. We expanded our relationship with Samsung, where we are now managing U.S. sales for their e-commerce site. And just this week, we signed a global multiyear e-commerce agreement with ASUS.

In addition, we signed a new agreement with Johnson Health Tech. This company is our first client in the fitness and sports industry, as well as Asia's #1 and the world's #3 fitness equipment manufacturer and marketer.

Payments is another area where we made great progress. In the third quarter, we signed new or expanded agreements such as -- with companies such as RIM, Brother, BurgerMap, Nu skin, Swatch, Isagenix, Vistaprint and Intrepid Travel. As I mentioned earlier World Payments grew their revenue 30% year-over-year and they saw an increase of 44% in transaction volume. They also continued to expand their global payment footprint through new relationships in the U.S. with Wells Fargo merchant services, and in Asia, with National Australia Bank. All in all, we made solid progress in a number of areas during the third quarter.

Now I'll turn the call over to Stephan.

Stephan B. Schulz

Thank you, Tom, and good afternoon, everyone. Third quarter revenue came in ahead of our guidance at $91.7 million, which is slightly above our guidance range of $88 million to $91 million. As a percentage of total revenue, international revenue decreased slightly to 45.8% from 46.2% in the same period last year. Softer sales in Europe drove this slight decline.

Enterprise revenue in the third quarter was $71.7 million, which was down from $72.5 million or 1% compared to last year. On a constant currency basis, Enterprise revenue was $74 million and represented an increase of about 2% over last year's revenue of $72.5 million.

Within Enterprise Commerce and using constant currencies, Digital Commerce, consisting primarily of software and games, increased about 2% from last year's third quarter. Physical Commerce declined about 13% from last year and as we mentioned on our last earnings call, we see a very strong new business pipeline and had some solid Q3 wins within Consumer Electronics, but current revenue has been negatively impacted by client bankruptcies and some soft product launches by some key clients.

World Payments increased 30% from last year. We continue to see significant growth opportunities in the Payments space and are investing accordingly as evidenced by our agreement to acquire LML Payments. I'll discuss this more in a few moments.

Support revenue ended the quarter at $20 million. As expected, support revenue declined about 13% from last year's third quarter levels. Total cost and expenses were well-managed but did increase about $400,000 from last year. We incurred several onetime items in our expenses this year that offset our expense management efforts. Some of these onetime items include $750,000 for a legal settlement, $600,000 related to fees associated with our pending acquisition of LML Payments and $1.7 million in consulting fees related to our technology and marketing initiatives. Excluding these nonrecurring items, our expenses would have declined by $2.7 million from last year's level.

GAAP net loss for the third quarter totaled $734,000 or a loss of $0.02 per share. This was at the better end of our GAAP guidance range for a loss between $0.09 to $0.02 per share. We earned $0.15 per share in the third quarter last year.

Now switching to non-GAAP earnings. In the third quarter, our non-GAAP net income totaled $6.6 million or $0.20 per share, also beating the top end of our guidance range, which was $0.12 to $0.18 per share. We earned $0.23 per share in the third quarter of last year.

Now turning to cash and cash flow, our net cash used in operating activities for the first 3 quarters of 2012 was $24.3 million as compared to net cash provided by operations of $5.1 million last year. Lower net income and changes in working capital were the primary drivers of the change. Excluding the impact of working capital changes, our operating cash flows were lower than last year's level by $12.8 million. Similar to previous years, we anticipate an improvement in operating cash flow in Q4 that will turn the year-to-date usage of cash into a full-year positive cash flow on sequential improvements in earnings and working capital changes.

Our operating cash flow is highly dependent on changes in working capital. This is especially true on changes that result from timing differences between payments we receive on our clients behalf and the remittance of those funds to our clients. This timing usually works in our favor during the holiday season in Q4 and conversely works against us in other quarters.

As of September 30, 2012, cash and investments totaled $756 million. This was down about $64 million from the end of last year, primarily due to the timing of client payable remittances I mentioned earlier and the 2011 share repurchase program. Total cash and investments, excluding client cash and certain long-term investments, was about $609 million at September 30, 2012.

On our second quarter earnings call, we announced our Board of Directors had authorized a new $100 million common stock repurchase program. While our acquisition of LML Payments will not alter our share buyback plan going forward, we did not repurchase any common stock in light of our negotiations to acquire LML. Repurchases under this program will be opportunistic, similar to previous repurchases, and we have no predetermined end date for the share repurchase program.

Capital expenditures were $8.2 million in the third quarter and we anticipate spending about $25 million for capital expenditures this year, mainly investing in IT projects that support our initiatives to improve our scalability and system performance.

As noted earlier, on September 24, we announced the signing of a definitive agreement for Digital River to acquire LML Payment Systems in an all cash transaction valued at approximately $102.8 million, pending approval by the LML shareholders. After adjusting for cash on LML's balance sheet, we believe the final acquisition cost will be around $72 million. We believe there are natural synergies in our businesses, including the combination of their online transaction payment processing solution and our World Payments solution.

If the LML shareholders approve the acquisition, we expect to close early in Q1. Accordingly, we anticipate no revenue in our 2012 guidance from LML but expect this acquisition to be accretive to our 2013 earnings.

Now for some color on the remainder of 2012. For the fourth quarter, we expect revenue to be in the range of $96 million to $100 million. At the top end of this range, Enterprise Commerce would account for about $81 million and the support businesses would account for about $19 million. GAAP EPS to range from $0.08 to $0.15 per share, assuming a GAAP tax rate of 17%, and non-GAAP EPS in the range of $0.25 to $0.31 per share, assuming a non-GAAP tax rate of 21% and excluding charges from acquisition-related intangible amortization, LML acquisition fees and stock compensation expense.

For the full year, we now expect revenue to fall between $381 million and $385 million. GAAP EPS to be between $0.20 and $0.27 per share and non-GAAP EPS to range from $0.96 and $1.01 per share, excluding charges from acquisition-related intangible amortization, LML acquisition fees, litigation settlements, stock compensation and restructuring charges incurred during early 2012.

While our current revenue estimates for the full year of 2012 fall within the ranges we provided last quarter, the high end of both GAAP and non-GAAP EPS are now expected to come in lower than our previous high-end guidance. GAAP EPS has been impacted by the onetime expenses I mentioned earlier, including a legal settlement and LML acquisition costs. Additionally, both GAAP and non-GAAP EPS have been reduced due to the planned investments in our technology infrastructure that Tom Donnelly mentioned earlier. Again, we will provide more details surrounding our 2013 financials on our next call.

Now I'll turn the call back over to Tom Madison.

Thomas F. Madison

Thanks, Stephan. Before we move on to take your questions, I want to recap a few key points.

Number one, we produced good third quarter results and do expect a solid fourth quarter. Number two, we are conducting a search for a new CEO and I will be the interim CEO until the search is concluded. Number three, we gave you some color on initiatives we are undertaking to strengthen our technology and processes that will enable us to better serve existing customers and drive their revenue growth. And number four, we know we have a lot of work ahead of us and face some significant challenges, but are very confident we have the right strategy and management team in place to execute to our plan and deliver attractive and sustainable shareholder value over time.

Okay, now let's move on to Q&A. As we have in the past, we'll ask each participant to ask only one question with one follow-up question, if you like.

Operator, please open the lines.

Question-and-Answer Session


[Operator Instructions] The first question comes from Philip Winslow from Credit Suisse.

Philip Winslow - Crédit Suisse AG, Research Division

I just wanted to clarify a point. I believe next year you said you guys potentially struggle to grow year-over-year and was is even including LML Payments. I mean, if I look at their last -- your quarterly filing, LML was doing $5.5 million, $6 million a quarter, so if I bake in, call it, 11 months of that into next year's numbers, it's a pretty meaningful drop and just call it organic revenue growth or I mean revenue decline actually next year. Just could you -- am I doing the math right there? And also what is driving that sort of decline and why do you have that sort of visibility into it?

Stephan B. Schulz

Yes, so, Phil, this is Stephan. I'll take that one. Tom Donnelly in his prepared remarks talked about 2 things that we see going into next year. Number one, we see economic conditions that I think a lot of other companies have talked about in their earnings calls, especially the calls that occurred here as it relates to Q3. So we are factoring that into our thoughts for 2013. In addition, we have seen some attrition in our own client base that Tom mentioned as well, that as that we factor that in to our 2013 numbers, we do see an organic -- potentially an organic decline in our revenue base. And so that is what went into our numbers, and that is what we're putting forth in terms of -- in terms of our guidance. And then in addition, Tom mentioned one other aspect which is the third aspect, which I failed to mention earlier. And that is our supporting businesses are -- declined 13% this quarter. And we expect that trend to continue into 2013, which is also a big contributor to what we see in 2013.

Thomas M. Donnelly

I'd say, Phil, too, I mean, we -- at the same time we do have some good things going on. We had some pretty significant wins in the Physical space this year, and we got a new operating system that it's very difficult to predict how well it's going to perform and impact PC sales. And we also got an upcoming Office launch by our largest client. So those are kind of your bookends there.


Our next question comes from Shyam Patil from Raymond James.

Shyam Patil - Raymond James & Associates, Inc., Research Division

I was just wondering if maybe you could provide us with a little bit of an update on the Microsoft relationship. I apologize if I'm asking something that's maybe been asked before. I actually hopped on the call a little bit late, but could you maybe just update us on what you're hearing from them and how that has been since you guys opened the U.S. store?

Thomas M. Donnelly

Yes, sure. We've been running the U.S. store all year. The relationship is very strong. They obviously just had some significant launches of new products, one being the operating system, the other being a tablet. We've been beavering away launching international locales. I mentioned on the call, we're now live in the U.K., Germany, France and Netherlands most recently. And we're going to continue to be launching locales through mid-February of next year and we're very hopeful, not only for our relationship with Microsoft, but for a large portion of our client base that the new operating system is super successful. And we sure hope that it is.

Shyam Patil - Raymond James & Associates, Inc., Research Division

Okay. Great. And then if I could just have one more follow-up, can you just talk about that you're seeing in the consumer electronic business and what your expectations are going forward.

Thomas M. Donnelly

Yes. I mean, the revenue was down this quarter but it was largely due to some kind of what I would call acute client issues. We had one major client that's in bankruptcy and we have some other clients that haven't done so well in this recent market. Having said that, our largest pipeline in the company, both closed and from an opportunity perspective, is in that category. We expanded our relationships, as I said, last quarter with Lenovo, Acer and Samsung, and just this week, signed an agreement with ASUS. And there is more to come, I think, there. So we're feeling good about that. The most difficult thing to predict is how big, how fast with these clients. But there seems to be a growing market interest in going direct to buyer. I think largely brought on by the activities of their big competitor, Apple.


Our next question comes from Gene Munster from Piper Jaffray.

Charles Eugene Munster - Piper Jaffray Companies, Research Division

You mentioned some of the attrition from the customer base. And is there any way to see how much of that is maybe macro related or a shift just in terms of how your customers are approaching, how they do business? I mean, is any sort of bigger picture themes we should take away from what -- the feedback that you've heard from some of your customers?

Thomas M. Donnelly

Yes, keep in mind we announced some attrition at the midyear, right? And we did have what I would call smaller clients, but meaningful clients, that did go to competitors. We also forced a pretty sizable amount of attrition in our Shareware bid -- business which is now in the supporting business line. And this was business that the company didn't want to be engaged with. They were products that may or may not violate copyrights and the company just made a choice to exit that business. I think it was the right case. I don't think there is a general theme or a cause for alarm. But we do have some clients where we do a piece of their business and not all of their business. And I think that's always a risk and an opportunity, right? You can lose some or you can gain some, depending on how their efforts go. And so I think we're just being cautious. In 2011 and '10 we saw very little of this activity, either competitive or internal solution base, and we have seen some this year. And that will run -- that will be will a headwind next year, because remember we are a SaaS business, right? And when you lose a chunk of revenue, it takes a while to build it back up because you got to win the new client or expand the existing client and get the run rate backup and that just ends up being a bit of revenue headwind.

Charles Eugene Munster - Piper Jaffray Companies, Research Division

Okay. And I guess, just kind of a follow up, that doesn't sound like the customers have any specific message. But some of these, the themes that had been kind of put on the marketplace about just how software is being shifting to apps and all that, and you guys have said all along you believe that, that is the future and you will be well positioned for it. Is there anything that's changed, I think, in terms of how that is playing out? I mean, you've talked before that it will happen but it's going to take longer than people think. Is that still your belief?

Thomas M. Donnelly

Yes. I mean our data and outside data that we've seen would indicate that the software market is still a growth market, and that largely today, apps are incremental and really in different categories of what I would call software than the company is in. I think as far as apps longer term, yes, with these hardware device manufacturers, I think we're in a good position. We have, for instance, an app loaded on one of our major CE company's tablets, right, which is kind of exciting. But overall, we think it still is incremental. I will say digital has been a little soft in advance of the operating system release. And I think a lot really ties back to, do we have what we saw when Windows 7 launched here? Do we have a reinvigoration of PC buying and/or tablet buying and/or phone buying? That's kind of in our sweet spot which is really around the Microsoft operating system.

Charles Eugene Munster - Piper Jaffray Companies, Research Division

Okay. Just one final, final question. In terms of -- I know you talked about it earlier in the call too, but there's been pent-up demand for software. People have been on hold because of that obviously. Typically, when would you start to see some sort of benefit in 2013 based on that?

Thomas M. Donnelly

I think -- there's a couple of things that are probably going to help the first half: One is we expect the launch of Office, which should be helpful; and number two, if there is a solid holiday in PCs, the time when consumers are most likely to buy software tends to be around or post the purchase of that new PC. We'll just have to see how the fourth quarter plays out. I know myself, I'm waiting to get my daughters each a new PC and I waited for the new operating system. So we're cautious but hopeful that we have a really good operating system launch here.


And we have one last call and that will come from Colin Sebastian from R.W. Baird.

Gregor Schauer - Robert W. Baird & Co. Incorporated, Research Division

Gregor Schauer, I'm actually filling in for Colin today. And the question I have is regarding the emergence of the Android and iOS platforms. I know you previously thought there were opportunities to monetize that platform. But how should we think about how Digital River would begin to change the strategy in the situation where the PC platform continues to lose ground at the expense of those platforms? Do you still feel as optimistic as you previously did about the opportunities to play in potential app stores or so forth? Or is there -- if that were to happen, would that require a very significant change in strategy? Of course, the future is not -- it's yet to be told but...

Thomas M. Donnelly

Yes. So I mean, as to games or software products, we sell a lot of products for the Apple operating system. We even sell some Microsoft products that run on the Apple operating system. We do think we are positioned well with Microsoft with the announcement of all of their tablets and all the new tablets. And as long as we're taking manufacturers direct-to-consumer and they're creating digital products, we should have an opportunity to be able to play in that space. And we have had several wins this year. We talked about a few of them on our prior calls in that space. But certainly nothing is moving in terms of revenue dollars like Apple is right now. There's a lot of free downloads in the app world, particularly on the Android operating system. We are seeing some opportunity to provide marketing services where the apps themselves become kind of the starter package into the full version app. And the beauty of the Microsoft operating system is really commerce can be conducted outside of their ecosystem, which is opposite of Apple where although that happens in a few cases, it is kind of prohibited by Apple as a practice. So I will say, we are more exposed to Microsoft and their OEM partners than clearly we are to Apple.

Gregor Schauer - Robert W. Baird & Co. Incorporated, Research Division

Right. Okay. And one quick follow-up. Just regarding the platform rearchitecting that you mentioned, the databases and some of the other fundamental technologies. Could you give us some sense of what timeframe you guys expecting this rearchitecting or overhauling to occur and what the practical implications are on the operations of the business, as you're managing your current business while you are trying to reimplement a new platform?

Thomas M. Donnelly

Right. Well I don't think -- I don't want you to think that we're reimplementing a new platform. We think we have plenty of capabilities in the existing platform. What we talked about is really what we started with the payment and payment related value-added services kind of pulling them out of a platform that served many services -- many service needs holistically to a client base. Where we see the market going is the market wants to consume, in some cases, not in all, more best-of-breed solutions. So we believe we need to open up our platform, for instance, to be able to integrate very effectively and easy with third-party content management systems. A specific example would be our content management system is good and just fine for a large percentage of our clients. But certain larger clients that have high-end graphic and workflow needs would like to use a third-party content management system. And today, we actually do integrate with third-party content management systems on many of our larger sites. What we're doing is really just operationalizing that and creating a framework for how our merchandising capability can be injected up into that content management system and productizing that and making it easier for customers to plug in different components of their overall e-commerce system rather than depending on Digital River for all components. Does that make sense?


I'm showing no further questions at this time. I'd like to hand the conference back over for any closing remarks.

Ed Merritt

Thanks to everyone for participating in this call. Before we close today, I just want to mention that Digital River will be participating on November 13th in New York City at the RBC Capital Markets Software and Services Day, and you'll have an opportunity to hear management speak about our business there. Thanks for joining us today and this concludes Digital River's Third Quarter 2012 Earnings Call.


Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect and have a wonderful day.

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