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Digital River, Inc. (NASDAQ:DRIV)

Q1 2006 Earnings Conference Call

April 27th 2006, 4:45 PM.

Executives:

Bob Kleiber, Vice President, Investor Relations

Joel Ronning, Chief Executive Officer

Thomas Donnelly, Chief Financial Officer

Analysts:

Jeetil Patel, Deutsche Bank Securities

Safa Rashtchy, Piper Jaffray

Lee Westerfield, Harris Nesbitt

Robert Breza, RBC Capital

Ray Conley, Palo Alto Investors

Sasa Zorovic, Oppenheimer & Company

Dennis Simpson, Credit Suisse First Boston

Operator

Good afternoon ladies and gentlemen, my name is Reith and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Digital River First Quarter Earnings Conference Call. Operator Instructions. It is now my pleasure to turn the floor over to your host Bob Kleiber, Vice President of Investor Relation. Sir, you may begin your conference.

Bob Kleiber, Vice President of Investor Relations

Good, thanks Reith, good afternoon everybody and thanks for joining us on the call. With me today are Joel Ronning, our Chief Executive Officer and Tom Donnelly, our Chief Financial Officer. Before we begin the call, please be aware 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 “believe”, “anticipate”, “expect” and other similar words. These statements involve known and unknown risks, uncertainties and other factors which may cause actual results to differ materially. For a detailed discussion of these risk factors and uncertainties, please refer to the company’s filings with the Securities and Exchange Commission. A web cast of our call today will be available for a period of two weeks on the investor relation section of Digital River’s corporate web site at www.digitalriver.com. With that, I would like to turn the call over to Joel Ronning. Joel?

Joel Ronning, Chief Executive Officer

Thanks Bob, and thanks to all of you for joining us today. During the first quarter of 2006, we exceeded our revenue and earnings expectations. We delivered $78 million of revenue which is up 43% over the same period last year and 27% over the fourth quarter of 2005. Our solid first quarter performance can be attributed to several factors including strong consumer spending, increasing contributions by our market for a strategic marketing services, growing penetration in global markets and a few minor virus outbreaks.

During the first quarter on a GAAP basis, our diluted net income per share was up 17% over the first quarter of last year. On a non-GAAP basis, our diluted net income per share was up 39% over the first quarter of 2005, and 35% over the fourth quarter of 2005. In the first quarter, we capitalized on multiple expansion opportunities. Before I turn the call over to Tom, I want to provide more details on our progress in four of our strategic growth areas including global markets, the oneNetwork market place, marketForce strategic marketing services, and finally our recent acquisitions.

First, global markets. During the first quarter, we significantly expanded our global operations in e-commerce capabilities. In Europe, we established two wholly-owned subsidiaries and opened two new offices. Digital River Ireland is headquartered in Shannon, Ireland and Digital River International is located in Luxembourg. With an expanded data centre, our newly staff offices are now managing our non-US e-commerce activity and providing a combination of clients in corporate functions, including sales, client services, human resources, finance, customer service, fraud prevention in IT. These offices not only offer added support for our growing base of international clients, who will also help us accelerate our growth in international markets in the tax sufficient manner.

To further support our expansion in the global markets and local buying preferences, during the first quarter we introduced new payment options including online banking in Finland and Sweden, direct debit in Spain and the Netherlands, real time account transfers in Korea and Eddy payment methods in Japan including Eddy Mobile which allows customers to use the e-mail system under mobile phones to complete via payment for an online transaction.

As we increased the number of payment options we offer, we in fact gearing to a broader base of global online chapters by making it easier and more convenient for them to buy using their preferred payment method.

Today, we believe Digital River offers a largest number of payment options available from any e-commerce provider. In addition to launching new payment methods, we rolled out our new currencies, out new currencies to support our expansion in Asia-pacific markets. These currencies include Malaysian Ringgit, Indian Rupees and Chinese Renminbi. Today, we are supporting sites that offer localized languages, currencies, payment methods and fulfillment options in a broad and growing range in Asia-pacific countries including Japan, Taiwan, China, Hong Kong, Korea, Australia, New Zealand, Singapore, Malaysia and India.

Before I move on to the next topic, let me say that the continued expansion of our global footprint is incredibly important in strategic both Digital River and our clients. Selling into global markets is a difficult and complex task. Our clients understand this and value it. By adding more global features and capabilities to our e-commerce platforms, we can help them access new markets, create more opportunities and drive more revenue.

In the first quarter, international markets accounted for 40% of sales, up from 36% during the same period in 2005. The second area of growing opportunity continues to be our oneNetwork market place. If you are not already familiar with oneNetwork, you can think about the giant global online marketplace. Through oneNetwork, we deliver a massive catalog filled with our clients price to more than 50,000 retailers and affiliates for resale. Digital River stands at the centre of this market place, is the trusted third party, managing transactions, delivering price to buyers and paying our clients, affiliates and retail partners.

Part of our unique selling position, in the affiliate marketing landscape, as we can control the end-to-end sales process and as a result, ensure our client to transactions are secured and commissions will be paid. During the first quarter, we put additional resources in energy into growing both the number and quality of our affiliates. In the first quarter, our oneNetwork affiliate program experience tremendous organic growth. Program revenue was up 85% compared to the fourth quarter of 2005, versus one quarter.

The oneNetwork market place access an extended and readymade sales force for our clients. It’s another channel that we help or we used to help our clients reach a larger prospect pace and drive incremental revenue.

As I mentioned earlier, our marketForce strategic marketing services another area that continues to contribute to our revenue growth. In the first quarter, marketForce revenue increased seven fold comparing to the same period last year. Keeping that in mind while our marketForce is relatively new program, it’s becoming much more meaningful to our business. During last quarter, we have launched 14 new programs for existing clients, engaged 3 new clients in marketForce and rolled out a new product contextual advertising.

Contextual advertising, which is our newest marketForce program, is highly targeted pay-for-performance online advertising. Soon that what we do at page search work, we’re taking on the complex tasks of managing and optimizing contextual advertising for our clients across multiple providers including Google, Yahoo, and Carnival (phonetic). In near future, we plan to add MSN and others. By leveraging our contextual advertising program in demand expertise, clients can achieve a much greater ROI versus more traditional online advertising which is based on cost for impression. In the future, we believe online advertising will continue to move towards the targeted pay-for-performance model.

The last strategic growth area, I want to highlight this afternoon is acquisitions. Our recent acquisition of Commerce5 and Direct Response Technologies are giving a standard opportunity diversify our revenue base and win new business. In the first quarter Commerce5 expand its relationship with two key clients. They have launched a new site for Invidium and signed contracts with four new clients including our leading maker of integrated video, voice data and web solutions.

Moving forward, we continue to look for Commerce5 to help us make deeper inroads into high tech manufacturing consumer electronics markets. To create a stronger brand presence in the near future, our enterprise e-commerce platforms which today include Commerce5 will be renamed Digital River Global Direct. Our goal here is to bring the diverse capabilities to our e-commerce platforms under single brand name and make Global Direct our primary selling brand in the market.

The name Global Direct more clearly reflects our business in primary value proposition, which to help clients aggressively grow their direct online sales on a global basis. At the same time managing the many complexities require to successfully penetrate local markets. Last quarter, our other recent acquisitions Direct Response Technologies also made progress expanding its business. We acquired a Direct Response in January and today the company is DirectTrack technology which is recognized the world class affiliate system, serves us the backbone of our oneNetwork platform.

During the first quarter 2006, Direct Response is base of affiliate networks grew by 25% over the fourth quarter of 2005. Our number of DirectTrack platform supports the sale of physical as well as digital goods across a wide variety of affiliate models including sales, clicks, leads and impressions. Overall, we are very pleased with the progress for making on both our Direct Response and Commerce5 acquisitions, we are tracking the plan, we have already demonstrated our ability to successfully integrate our teams and technologies.

In the near-term, we believe these acquisitions would be instrumental in generating incremental revenues of market to the highly complementary to our core software business. During the first quarter, other international and domestic sales wins came from multiple vertical markets representing gain recent publishers and manufacturers. Some of the companies we signed our long sites for included Fisher-Price, Falcon STAR, MPSoft and CREO, a division of Kodak. To better support our new and existing clients in the first quarter, we rolled out a significant upgrade to our more controlled tools at. As you might remember from previous calls, we will be making substantial investments to provide clients more hands on control over their online stores, something they may asking for.

This new 6.0 release delivers important functionality and usability enhancements during easy to use client interface. It gives clients to access to powerful new store designing tools enhance TV testing and more help desk and training support. We believe that 6.0, our current commerce system is the best enterprise e-commerce platform in the world. It enables clients to control major aspects of their sites on a global basis including site content, product catalog, and price management campaigns and payment options. It allows them to do this while maintaining nearly a 100% of time across 8 global data centres.

This trend translate tremendous efficiencies, not only for our clients but also for us. Early results have been extremely positive. So it’s releasing 6.0 we have seen some complex enterprise site appointment strength from more than 30 days to as well as 5 days. To meet this is an astounding fact, enterprise e-commerce sites are coming up in 5 days. I believe our 6.0 release is a new goal standard for global enterprise e-commerce.

With that, I will turn the call over to Tom.

Thomas Donnelly, Chief Financial Officer

Thanks Joel, our first quarter revenue was $78 million, up 43% from $54.5 million reported in the first quarter of 2005, and up 27% sequentially from the $61.6 million reported in the fourth quarter of 2005. International revenues were 40% from total revenues consistent with the fourth quarter of 2005. Our two weeks in acquisitions Commerce5 and Direct Response which we closed in late in the fourth quarter and early in the first quarter respectively were on plan and were not major factors in the upside for the quarter.

You will notice in our financial statements released today that our expected effective tax rate has dropped from 34% to 31% for the year due to a change in our international structure which I will discuss later on the call. GAAP net income for the quarter totaled $16.4 million or $0.41 per share, compared with net income of $14 million or $0.35 per share in the first quarter of 2005. Keep in mind that 2005 results did not include stock compensation expense. Our tax rate in the first quarter of 2006 was 31% compared to 26% in the first quarter of 2005. GAAP pre-tax income grew 25% on a year-over-year basis. Absence stock compensation expense GAAP pre-tax income would have grown 43%.

Switching to non-GAAP results in the first quarter, non-GAAP net income totaled $20.7 million or $0.50 a share compared with non-GAAP net income of $14.7 million or $0.36 per share for the first quarter of 2005 computed on the same basis, with the same tax rate. This represents a 41% year-over-year improvement in non-GAAP net income and a 39% increase in non-GAAP net income per share.

For your convenience, we provided a quarterly table for 2005 non-GAAP results restating them using a 31% tax rate. As expected on a GAAP basis, our operating margin was lower sequentially primarily due to stock compensation expense, and higher acquisition amortization when compared to the fourth quarter of 2005. On a non-GAAP basis, excluding stock compensation expense and acquisition amortization, operating margin was 34.7%, up above 60 basis points when compared to the fourth quarter of 2005.

On the cost and expense side, most operating expense categories increase sequentially in absolute dollars due to four primary factors. The acquisition of Commerce5 and Direct Response, stock compensation expense, opening physical locations in Ireland and Luxembourg and investments in our growth initiatives. Specifically and in all cases excluding stock based compensation expense, network in infrastructure costs were up sequentially 31% primarily due to our recent acquisitions, increased sales activities and cost relating the mobilizing our IRIS data centre and customers service organization.

Sales and marketing expenses were up sequentially, 26% primarily due to higher payment processing expenses associated with higher transaction volumes, continued investment in our growth initiatives and recent acquisitions. R&D expense was up 21% sequentially again reflecting our continued investment and our growth initiatives and the impact of recent acquisition and general and administrative costs were up 33% sequentially primarily related to recent acquisitions, cost related to Irish and Luxembourg offices and the related tax structuring costs and charitable giving during the quarter.

On April 3rd we announced the establishment of subsidiaries in Ireland and Luxembourg. This international structure will drive tax efficiencies for Digital River which we expect will result in a 3% drop in our corporate income tax rate for 2006 as reflected in our financial statements released today. Therefore, our GAAP and non-GAAP guidance for the second quarter and full year 2006, assume a 31% effective tax rate. On a preliminary basis, we expect our tax rate in 2007 to remain at 31%. Eventually, we expect an overall tax rate of 27% to 28%. Please keep in mind as you model the company that there are many assumptions driving this long-term tax rate. Our US NOL at the end of the quarter was approximately $97 million and our international NOL was approximately $5.9 million.

Turning to cash flow, net cash from operating activities was strong in the first quarter totaling approximately $40.5 million. Note, that due to a change in the accounting rules, the excess tax benefit of stock based compensation is now reported in the financing section of the cash flow statement, not in the operation section. This benefit was historically recorded in the operation section. Measured under the old methodology, net cash flow from operating activities grew 54% in the first quarter of 2006, compared with the first quarter of 2005. Excluding changes in operating assets and liabilities, which I have referred to in the past is balance sheet leverage, net cash flow from operations grew 53% on a year-over-year basis.

We ended the quarter with approximately $553 million in cash in short-term investment. On March 22nd we announced the sale of 4 million shares of our common stock. The offering closed March 28th resulting in net proceeds before expenses of approximately $173 million. We expect to use the proceeds for acquisitions and other corporate development efforts.

Another item of note, which you can calculate using numbers provided in our recently filed proxy statement is the positive trending of our stock option overhang. Calculated as a percentage of total shares outstanding, our overhang at December 31st 2005, was approximately 19% down from 25% at the end of 2004 and 33% at the end of 2003. At the end of this quarter, our overhang from stock options was approximately 16%. There was no activity during the quarter under our stock buyback program.

Now for guidance, for the second quater of 2006, we currently expect revenue of $70 million, GAAP net income of $0.28 per share including $3.6 million of stock compensation expense and non-GAAP net income of $0.37 per share. For the full year ending December 31st 2006, we revised our guidance as follows. Total revenue of $300 million, GAAP net income of $1.36 per share, including $4.2 million of stock compensation expense and non-GAAP net income of $1.70 per share. $14.2 million I guess I made a mistake.

The second quarter 14.2 million of stock compensation expense consistent with the guidance we gave in January. The second quarter guidance reflects our normal seasonality, we expect a moderate revenue uptick in the third quarter and a typical seasonally strong fourth quarter.

On the EPS side, the guidance does reflect the lower tax rate discussed earlier in the call, as well as the 4 million additional shares that are outstanding related to our recent financing. In addition, based on the improved revenue outlook, the EPS guidance does assume an expansion in operating margin for the year and net income for the year when compared to our guidance since late January.

Finally for all of 2006, we are moderately increasing our expectation around CapEx to $12 million to $13 million primarily due to global expansion. With that I will turn the call back over to Joel.

Joel Ronning, Chief Executive Officer

Great. Thanks Tom. During the third quarter, I said that I cannot remember a time it has been more growth potential for Digital River. Last quarter, I reaffirm that message. Since then, my perspective hasn’t changed one bid. In 2006, we are looking at more opportunity that we have ever seen before. This includes expanded relationship with major global clients. Deeper partnerships with our retail channel, increase velocity around our global expansion, accelerate a penetration of our marketForce services and significant expansion of our oneNetwork marketplace.

Our growth initiatives are further supported by our strong cash position. In the first quarter, we completed the placement of 4 million shares of stock and raised approximately $173 million this time is brought up. We believe this additional cash enhances our flexibility and reduces our dependence on having new stock for acquisitions. Please remember one critical thing -- one more critical thing rather. The rock solid balance sheet is the price of admission to the global commerce market. We believe the cash we have raised will give us additional leverage to further strengthen our leadership position in the market. Over the years, we have been in acquisitive company after more than 20 acquisitions, we demonstrated our ability to successfully integrate diverse cultures, technologies and infrastructures. In 2006, we intend to continue pursuing acquisitions and enhance our product offerings expand our global footprint and open new uncomplimentary markets.

Before I open the call for questions, I would like to thank all of our associates for an outstanding quarter, your deep commitment to quality, service in our business goals continues to generate increasing value for our clients and shareholders. Operator?

Thomas Donnelly, Chief Financial Officer

We would like to go ahead and open up for questions now and I would just like to remind you that we ask you to limit yourself to one question and a follow-up, and then go ahead and feel free to get back in the queue, that way we can get to as many questions as possible. So with that Reith, why don’t we go ahead and have the question and answer period start.

Question-and-Answer Session

Operator

Operator Instructions. Our first question comes from Jeetil Patel of Deutsche Bank.

Q - Jeetil Patel

Thank you very much. Hey guys, can you talk about I guess the reinvestment you are doing in the business today, I guess can you give us a sense of I guess when do you expect kind of a returns on those investments you think it’s more of a second half or 2000 or 2007,2008 event. And then secondly, you talked about some major global clients, do you think as you look at kind of the opportunity going forward, do you think it’s among your existing accounts the C5 account base or perhaps accounts that we just haven’t even heard of our, you guys have worked with today.

A – Thomas Donnelly

Well, let me answer that first, the second question first Jeetil. Major global accounts we’re very excited about the accounts that C5 has, we think that, that those companies because of C5s, of the balance sheet that they didn’t possess prior to our acquisition, that their major clients companies like Hewlett-Packard and Gateway and so many and others will probably evident about giving them more and more opportunities to handle larger portions of their business and so we think that there is a big up size to those relationships, they are relatively small relationship with really, really tremendous brands and great companies. And given how much we know in terms of how to grow client business, we have been getting some pretty enthusiastic responses from those companies in terms of the ability that to get more business there, but once again these are multi billion dollar, tens of billion dollar organizations and they don’t move at the speed of sound and so we have a little bit of light work to do there, I think discontinuing to show up, will this hang around the neck and I expect will be invited into more opportunities with those guys so, C5 is bringing in a pretty good base of clients that are going to be -- I expect that they are going to grow pretty dramatically. And then we are getting access now through, I think it just a lot of that different organizations that we have brought in here, move on and then, Fireclick, Inc. and DirectTrack, we are getting NC5, we are getting more and more access to much larger higher quality prospects on a global basis, element5 over in Europe, so that part of our been part of our strategy is to bring these companies then into leverage. Across all these technologies platforms and offerings across leverage that across to all these prospects and client and so that seems to be working. The other number of clients you guys have not heard of that where we feel that we are making some pretty good traction win. And then in terms of the reinvestment, I think we are getting some pretty strong return rate now from the step, from the investments we’ve made in oneNetwork that thing has grown really fast. We’ve fore stead some pretty good dollars towards that and seems like it starting to payoff, and then marketForce, which has been out there, I suppose really provide a year and half coming up on two years from, if you look at the first higher that has grown like crazy and we are continuing to invest in an additional talent over there and that lot of that has to do with domain expertise and the people. And then part of the year, there will be slowest to respond to the investment but probably longest in terms of stability or strategic values in Asia-pacific region that’s, I think it’s fairly under developed from a commerce stand point, is very fragmented and expensive and difficult to get into and but once we get it done, I believe that our clients are going to respond and prospects will come to us because getting into places like China, is really hard, it takes a long time in streaming expensive, is less expensive for us obviously than it will be for one of our clients and I think there is -- it’s going to be a tremendous amount of opportunity by us having those relationships in place. I expect it will take us couple of years ago to open up some of these countries, but certainly any of our clients will have to go through that same process. So, the Asia-Pacific is going to take a little time but it’s going to have a long-term benefit for us.

Q - Jeetil Patel

Alright.

A - Joel

Next question.

Operator

Thank you, your next question comes from Safa Rashtchy of Piper Jaffray.

Q - Safa Rashtchy

Good afternoon, Tom, Joel congratulations, good quarter.

A - Joel

Great thanks.

Q - Safa Rashtchy

You know, as you expand your business and you are adding more clients, and you indicated some of that you have or close to a working relationship, but haven’t been disclosed your business becomes much more diversified. And I wonder if you are able to share some information with us some metrics that could give us a way to evaluate how business is progressing, if you can give us something now or maybe you can think about it for the future. Because what I am getting that is that maybe even something like the number of clients, with certain amount of revenues, it used to be that, that we basically look at you as the software enabling company with a major 50% focus with the security software, and especially for non-tech. Clearly you gone beyond that and I am just wondering what kind of metrics or at least quantity information if you can give us to be able to kind of track the progress of the company?

A – Tom Donnelly

Yes, I think we can certainly talk about that and potentially provide some on the future call. I say this; I would say it’s a base kind of underneath the one client where we do have concentration is becoming more and more dispersed, to the point where kind of movement in that area is almost insulated from the overall financial performance of the company. I think Joel also mentioned we have some pieces of the business, some pieces of the strategy that are really starting to perform well and perhaps we can think about some metrics around that our little bit more consistent for you guys to consider, because we do believe the business is going in the right direction here.

Q - Safa Rashtchy

Yeah, that will be great because obviously business is doing very well but quite now it’s kind of like a big black box. My second follow-up is on the gaining sector, can you give us some update as to how you see the potential in there, are you doing anything substances in there or are there any opportunities in near term that may change future for you?

A – Thomas Donnelly

Well right now what we are doing Safa is, we are laying in some of the infrastructure of some integration into some of the biggest retailers and out there and we have got this basically a portal that we developed called “Games on the River” and so we got the content, we are assembling the content and now we are really working on is getting the -- I called the 6 lane highway into that, it is the back end of some of the biggest online retailers out there, I can’t disclose anything right now but I can tell you that’s our focusing on and once we get those connections in place I think we will have greater opportunities to drive a lot more content on kind of a global basis. But we think that, that’s going to be pretty strategic for us, so not that I can’t give you a specific update, I can just tell you kind of our strategy here.

Q - Safa Rashtchy

Okay, great, thank you.

A – Thomas Donnelly

Great, thank you.

Operator

Thank you, next question is coming from Lee Westerfield of Harris Nesbitt.

Q - Lee Westerfield

Thanks very much. Joel, I have a similar specific question relates to an announcement of First Data made today that they had expanded their relationship with Microsoft facility international payments. My question I am quite certain no, it maybe helpful for every body on the calls to understand your relationship with First Data and then if you can comment about your -- it is their expansion of kind of facilitation have any positive or adverse implications about your aspirations with the Microsoft?

A - Joel

Well, we have a relationship with both companies, the First Data is a good supplier and Microsoft is a great client and but everything that we know this does not involve anything that we’re aspiring to do with Microsoft is zero impact on where we are going there.

Q - Lee Westerfield

Okay, that’s helpful. Thank you.

A – Joel

Yeah.

Operator

Thank you, your next question is coming from Robert Breza of RBC Capital

Q - Robert Breza

I was wondering Joel you had a good expansion on the global side, can you maybe point us to any that a long term goal, is there any time goal you can set 12 months out on where you think you might be from a percentage of international revenue?

A - Joel

That’s a top one Bob, and I tell you, you know we want to be atleast 60% global penetration and it’s a self serving goal but it’s also pretty consistent with what the penetration is for e-commerce on a global basis. It’s self serving business a second you step by the United States, your increased complexity by a factor of 5 or 10 depending on where you’re going. And that’s obviously where it gets very tough for our clients to perform, but in terms of this year, it’s a little bit difficult to say because frankly as I kind of wrapped up my time or my comment, we are very acquisitive company and our offset is a little larger than it was five years ago when we were buying 1 or $2 million companies, and so in acquisition in Asia-pacific, we have a material impact on significant acquisition on our penetration on a global basis as would in acquisition here in the United States, that would delay that penetration so, I can’t tell you which way it’s going to go because as you know with acquisitions you know your best intentions are, you may be targeting someone but the stars just don’t align and so, you have to be a little bit opportunistic which is why we kind of go away with the portfolio approaches, it’s 50 different companies we are looking at any given time and we are always stack ranking them and comparing up against each other before we go in and pull the trigger. So, it can be so impacted by that acquisition strategy, I think it’s tough to say.

Q - Robert Breza

And just one follow-up. If you look at the growth that you guys see in the oneNetwork I think you said 85% in your prepared comments and offer a great Q4 as well, is it the affiliates -- the number of affiliates signing up, what was is that, obviously there is a one driver but if you kind of rank those drivers for us, how would you rank that I guess?

A - Joel

I think probably it’s like everything, there is a 80-20 there, we are getting a very, very large group of affiliates signing up, we got a very exciting message, deep margins we page on time. We control e-commerce you could know that what you sold is what you get paid for you know very accurate accounting which is, these are things that have been kind of infra structural issues inside that affiliate universe which were dissecting and NRP is our lower than than lot of those guys because we are already focused on catering commerce rather than making our living off of the affiliate business, we frankly I got to tell you, I think it’s the feature rather than a company, but it’s a huge feature for us. But ultimately, we love this CLE’s guys coming in but what you end up with is, is that that a lead group of really good affiliates that are really driving, there is and these guys what’s very cool of ice, very international group some of our largest affiliates are coming out of China. So, we’re getting a very pretty good global foot print to that, into that group. So, I think you have to bring in lots of them so that you can get through to the real wheat rather than the chap and then you end up having an access to whole bunch of little guys you can groom and grow. But I think like most companies it’s 80-20 role, 20% of those clients are really driving 80% of our revenue.

Q - Robert Breza

Great. Nice quarter guys.

A - Joel

Yeah. Thanks a lot.

Operator

Thank you. Your next question is coming from Ray Conley of Palo Alto Investors.

Q – Ray Conley

Hey Joel. Could you guys talk a little bit about Symantec direct and related business concentration and comment on eventually goals before the message around whether or not Microsoft entering the AV market might be an issue in given their delays in product and so forth, that will be might have changed?

A – Tom Donnelly

Yeah, Ray, this is Tom, I will answer your first question. We will continue to file any customers that we are concentration with on an annual basis, it’s very sensitive of it. It would become very sensitive if we were to be announcing that on a quarterly basis and so I don’t expect that we will be able to do that for confidentiality reasons with our best client.

A – Joel

And then I think on the – what’s your second question, I wasn’t quite clear on that Ray?

Q – Ray Conley

The degree of caution you would express in the prior call recording Microsoft’s potential entry into the AB business, that will push that on Vesta and there has been delays in there prior count, is that affect your analysis or has it changed later on the Microsoft for that?

A - Joel

I think we were very cautious in Q3 over last year because we didn’t know what the priority going to be price and I think Microsoft has taken a good approach – prudent approach they got a product that was good value and they’re asking a decent price for so, they’re not disrupting the market that exist in. That was our biggest concern, so I think that concern has been largely diffused. And in terms of role out, I think it just continues to be less threatening news for the AB market.

Q – Ray Conley

Right, thanks.

Operator

Operator Instructions Your next question comes from Sasa Zorovic of Oppenheimer & Company.

Q - Sasa Zorovic

Thank you. My question would be record to your both dynamistic, but what percentage of your revenue was international?

A - Joel

That was 40% Sasa.

Q - Sasa Zorovic

40%. And how do you see the sort of what, though you have been talking about getting to the 50 plus percent, what sort of the time frame you would have for that at this point?

A - Joel

Our goal Sasa is 60 plus percent, 60 plus and I would say that couple of years out, that could dramatically change based on some of our – the acquisition opportunities and as you know we are continued to drive towards on bigger global footprints.

Q - Sasa Zorovic

Would it be that we would be at 50% by sometime year-end or you’re from now we get 60?

A - Joel

Well, Bob had that same question, Bob Breza from RBC and what I caution was is that we have been very acquisitive and depending on where we end up going whether it’s United States acquisition or combination of companies here, or combination of companies outside the United States, that would have a dramatic impact so it’s a tough one to say but I would say organically we are probably 2 to 3 years up.

Q - Sasa Zorovic

Thank you.

Operator

Thank you, your next question is coming from Phil Winslow of Credit Suisse.

Q – Dennis Simpson

Yeah hi, this is Dennis Simpson for Phil. And congrats on quarter guys.

A – Tom Donnelly

Thank you.

Q – Dennis Simpson

Regarding the solutions portfolio given some of the recent acquisitions, do you see any holds that you need to be selling?

A – Tom Donnelly

We are watching for a new product, we just got, one of the things we got across the back of the bow with DirectTrack was a really co product for search engine optimization, Keyword Max and is really, really valuable technology and that will be integrated into the front end of our system along with affiliate tool and Fireclick which is the analytic engine and Bluehorn which is our e-marketing e-mail engine. So, nothing is jumping out at its right now, we are watching this contextual advertising market carefully but haven’t found any real technologies, that are focused in that area, but who knows that maybe one that pops up but I have to say, I think we are going to buying one or two new technologies a year that we wanted to continue adding into that portfolio, either we will buy at or well-built or rented.

Q – Dennis Simpson

Okay, thanks.

A – Tom Donnelly

Great, thank you.

Operator

Operator Instructions. Sir, there do appear to be no further questions at this time.

Thomas Donnelly, Chief Financial Officer

Thanks Reith, thanks everybody for listening in, we are available for follow up questions and look forward to chatting with you during the second quarter and talk to you again at the end of the second quarter. Thanks very much, have a good afternoon.

Operator

This concludes today’s Digital River conference call. You may now disconnect.

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Source: Digital River, Inc. Q1 2006 Earnings Conference Call Transcript (DRIV)
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