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Demandware Announces Third Quarter 2015 Financial Results

November 2, 2015 4:16 PM

39% GAAP Subscription Revenue Growth, 47% Growth on a Constant Currency Basis

BURLINGTON, Mass.--(BUSINESS WIRE)-- Demandware®, Inc. (NYSE: DWRE), the industry-leading provider of enterprise cloud commerce solutions, today announced financial results for its third quarter ended September 30, 2015.

Third Quarter Highlights

“We had a strong third quarter,” stated Tom Ebling, Chief Executive Officer, Demandware. “Our global portfolio continues to expand with our first new customer acquisitions in Japan and Italy. Existing customers continue to leverage the scale of our platform to grow their businesses through global expansion, launching additional brands and engaging consumers across channels. In addition, we’re seeing increased adoption of our predictive email and order management solutions.”

“We achieved 47% constant currency growth in subscription revenue, exceeding our guidance,” said Tim Adams, Chief Financial Officer, Demandware. “Our strategic investments in growth and innovation are enabling our customers to meet evolving consumer expectations and drive our industry-leading growth. Furthermore, we achieved positive non-GAAP net income in the quarter, and we expect to be profitable this year on a non-GAAP basis.”

Total revenue for the third quarter was $57.6 million, a 49% increase from $38.7 million in the third quarter of 2014. Our GAAP net loss for the third quarter of 2015 was $11.9 million, or $(0.33) per share, as compared to a GAAP net loss of $6.3 million, or $(0.18) per share, for the third quarter of 2014. Non-GAAP net income for the third quarter of 2015 was $2.6 million, or $0.07 per basic and diluted share, as compared to non-GAAP net income of $1.1 million, or $0.03 per basic and diluted share, for the third quarter of 2014.(1)

At September 30, 2015, we had $183.4 million in cash, cash equivalents and short term investments on the balance sheet, as compared to $243.7 million at December 31, 2014.

(1) Indicates a non-GAAP measure. Refer to “Non-GAAP Financial Measures” below and the accompanying reconciliations for more detailed information about these non-GAAP measures.

Outlook

“I am enthusiastic about Demandware’s growth opportunities,” said Tom Ebling. “We are expanding into new geographies, further penetrating large enterprise retail brands, and enabling unified commerce experiences. Our new deal pipeline looks very strong with a sizeable number of large enterprise prospects, positioning us well for the future.”

Tim Adams remarked, “For 2015, we are updating our subscription revenue guidance, with the midpoint at the low end of our prior range, which we believe balances the many strengths of our business with lower than expected volumes among a small group of specialty apparel customers. We are narrowing our total revenue guidance to the high end of our prior range, driven by services, and are raising our 2015 non-GAAP net income guidance. Demandware’s strong business model continues to deliver over 40% year over year growth in subscription revenue on a constant currency basis.”

For the 2015 year, the company expects:

$ in millions Current Guidance Previous Guidance

FY’15Low

FY’15High

FY’15Low

FY’15High

Subscription Revenue $199 $201 $200 $205
Total Revenue $233 $235 $230 $235
GAAP Net (Loss) $(43) $(41) $(52) $(48)
Non-GAAP Gross Margin 74% 75% 70% 75%
Non-GAAP Net Income $5 $7 ($2) $2

Quarterly Conference Call

To access the call which will take place today at 5:00 p.m. ET, please dial (877) 474-9503 in the U.S. or +1 (857) 244-7556 internationally. The passcode for the call is: 64838118. A live webcast of the call will also be available on the investor relations section of the company’s website. An audio replay will be available following the conclusion of the call through November 9, 2015. The replay number is (888) 286-8010 in the U.S. or +1 (617) 801-6888 internationally. The passcode for the replay is: 15376497. The replay will also be available as a webcast on Demandware’s Investor Relations website.

About Demandware

Demandware, the category defining leader of enterprise cloud commerce solutions, empowers the world’s leading retailers to continuously innovate in our complex, consumer-driven world. Demandware’s open cloud platform provides unique benefits including seamless innovation, the LINK ecosystem of integrated best-of-breed partners, and community insight to optimize customer experiences. These advantages enable Demandware customers to lead their markets and grow faster. For more information, visit www.demandware.com, call +1-888-553-9216 or email [email protected].

Demandware is a registered trademark of Demandware, Inc.

Forward-looking Statements

This release contains forward-looking statements, including statements regarding Demandware's future financial performance, market growth, the demand for Demandware's solutions, and general business conditions. Any forward-looking statements contained in this press release are based upon Demandware's historical performance and its current plans, estimates and expectations and are not a representation that such plans, estimates, or expectations will be achieved. These forward-looking statements represent Demandware's expectations as of the date of this press release. Subsequent events may cause these expectations to change, and Demandware disclaims any obligation to update the forward-looking statements in the future. These forward-looking statements are subject to known and unknown risks and uncertainties that may cause actual results to differ materially. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, our ability to attract new customers; the extent to which customers renew their contracts for our solution; the seasonality of our business; our ability to manage our growth; the variance of our business from quarter to quarter; the continued growth of the market for digital commerce software; the timing and success of solutions offered by our competitors; unpredictable macro-economic conditions; the loss of any of our key employees; the length of the sales and implementation cycles for our solutions; increased demands on our infrastructure and costs associated with operating as a public company; failure to protect our intellectual property; changes in current tax or accounting rules; and other risks and uncertainties. Further information on potential factors that could affect actual results is included in Demandware’s latest Quarterly Report on Form 10-Q filed with the SEC.

Non-GAAP Financial Measures

Demandware has provided in this release financial information that has not been prepared in accordance with GAAP. This information includes non-GAAP gross margin, non-GAAP subscription gross margin, non-GAAP operating income (loss), non-GAAP operating expenses, non-GAAP net income (loss) and non-GAAP net income (loss) per share. This press release also presents subscription revenue and percent change in subscription revenue on a GAAP and a “constant currency” basis so that revenue can be viewed without the impact of fluctuations in foreign currency exchange rates, allowing for a period-to-period comparison of underlying business performance. Demandware uses these non-GAAP financial measures internally in analyzing its financial results and believes they are useful to investors, as a supplement to GAAP measures, in evaluating Demandware’s ongoing operational performance. Demandware believes that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing its financial measures with other companies in Demandware's industry, many of which present similar non-GAAP financial measures to investors to help investors better understand the ongoing operating performance of the business. Non-GAAP gross margin, non-GAAP subscription gross margin, non-GAAP operating income (loss), non-GAAP operating expenses, non-GAAP net income (loss) and non-GAAP net income (loss) per share exclude amortization expenses related to stock-based compensation, contingent compensation expense related to acquisitions, amortization of intangible assets and the non-cash tax benefit related to our acquisitions. Our non-GAAP gross margin and non-GAAP net income guidance for 2015 also exclude amortization expenses related to stock-based compensation, contingent compensation expense related to acquisitions, amortization of intangible assets and the non-cash tax benefit related to our acquisitions. Stock-based compensation is often difficult to predict and often excluded by other companies to help investors understand the operational performance of their business. Subscription revenue on a constant currency basis excludes the impact of foreign currency exchange rates, which is calculated by applying the prior period’s foreign currency exchange rates to the current period foreign currency revenue, because foreign currency exchange rates are subject to volatility and can obscure underlying performance. Non-GAAP financial measures that the Company uses may differ from measures that other companies may use. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Investors are encouraged to review the reconciliation of these non-GAAP measures to their most directly comparable GAAP financial measure. A reconciliation of GAAP to the non-GAAP financial measures has been provided in the tables included as part of this press release.

Demandware, Inc.

Condensed Consolidated Balance Sheets

(unaudited, in thousands)

September 30, December 31,

2015

2014
ASSETS
Current assets:
Cash and cash equivalents $ 105,223 $ 158,827
Short-term investments 78,130 84,880
Accounts receivable, net of allowance for doubtful accounts 49,208 42,441
Prepaid expenses and other current assets 8,415 8,564
Total current assets 240,976 294,712
Property and equipment, net 24,671 14,028
Intangible assets, net 23,066 10,266
Goodwill 60,034 24,379
Other assets 3,906 1,785
Total assets $ 352,653 $ 345,170

LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable $ 2,573 $ 3,581
Accrued expenses 26,524 24,871
Deferred revenue 24,317 22,799
Other current liabilities 5,710 282
Total current liabilities 59,124 51,533
Long-term liabilities:
Deferred revenue 14,018 12,168
Other long-term liabilities 2,795 1,424
Total liabilities 75,937 65,125
Redeemable noncontrolling interest 566 823
Stockholders’ equity:
Common stock 361 353
Additional paid-in capital 426,219 391,896
Treasury stock, at cost (137 ) (137 )
Accumulated other comprehensive loss (593 ) (352 )
Accumulated deficit (149,700 ) (112,538 )
Total stockholders’ equity 276,150 279,222
Total liabilities, redeemable noncontrolling interest and stockholders’ equity $ 352,653 $ 345,170

Demandware, Inc.

Condensed Consolidated Statements of Operations

(unaudited; in thousands, except per share data)

Three Months Ended September 30, Nine Months Ended September 30,
2015 2014 2015 2014
Revenue:
Subscription $ 47,758 $ 34,281 $ 135,180 $ 96,691
Services and other 9,824 4,450 26,536 11,360
Total revenue 57,582 38,731 161,716 108,051
Cost of revenue:
Subscription 9,891 6,907 28,476 18,607
Services and other 7,005 3,878 19,750 11,091
Total cost of revenue 16,896 10,785 48,226 29,698
Gross profit 40,686 27,946 113,490 78,353
Operating expenses:
Sales and marketing 23,724 15,668 74,059 49,772
Research and development 17,125 8,795 47,312 23,806
General and administrative 11,568 8,630 35,163 26,386
Total operating expenses 52,417 33,093 156,534 99,964
Loss from operations (11,731 ) (5,147 ) (43,044 ) (21,611 )
Other income (expense):
Interest income 105 80 296 221
Interest expense — (41 ) — (124 )
Other (expense) income (28 ) (1,042 ) 251 (1,031 )
Other income (expense), net 77 (1,003 ) 547 (934 )
Loss before income taxes (11,654 ) (6,150 ) (42,497 ) (22,545 )
Income tax provision (benefit) 383 199 (5,073 ) 691
Net loss (12,037 ) (6,349 ) (37,424 ) (23,236 )
Net loss attributable to noncontrolling interest (118 ) — (262 ) —
Net loss attributable to Demandware $ (11,919 ) $ (6,349 ) $ (37,162 ) $ (23,236 )
Net loss per share attributable to Demandware, basic and diluted $ (0.33 ) $ (0.18 ) $ (1.04 ) $ (0.67 )

Weighted average number of common shares outstanding, basic and diluted

35,968 34,958 35,684 34,695

Demandware, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited, in thousands)

Three Months Ended Nine Months Ended
September 30, September 30,
2015 2014 2015 2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (12,037 ) $ (6,349 ) $ (37,424 ) $ (23,236 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization 3,140 1,572 8,912 4,515
Consulting expense settled with equity awards 77 196 632 273
Bad debt expense 873 100 1,444 369
Stock-based compensation 10,259 6,370 27,045 19,371
Deferred income taxes 44 — (5,933 ) —
Amortization of premium on marketable securities 118 237 320 593
Other non-cash reconciling items 217 326 277 369
Changes in operating assets and liabilities: — —
Accounts receivable (5,817 ) (2,206 ) 1,265 1,596
Prepaid expenses and other current assets 2,023 423 1,250 (4,861 )
Other assets and liabilities 1,015 356 4,356 (1,849 )
Accounts payable (572 ) (1,202 ) (442 ) (917 )
Accrued expenses 1,681 2,196 (330 ) (277 )
Deferred revenue (2,647 ) 1,337 (1,244 ) 3,160
Net cash (used in) provided by operating activities (1,626 ) 3,356 128 (894 )
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,420 ) (304 ) (15,711 ) (8,587 )
Purchase of marketable securities (38,594 ) (29,238 ) (89,725 ) (111,513 )
Sale and maturity of marketable securities 28,956 18,281 100,442 49,231
Acquisition, net of cash acquired — — (54,733 ) (12,136 )
Net cash used in investing activities (12,058 ) (11,261 ) (59,727 ) (83,005 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from shares purchased under the Employee Stock Purchase Plan — — 803 643
Proceeds from exercise of stock options 740 942 5,720 5,658
Payments of equipment notes — (2,124 ) — (3,345 )
Payments of software financing agreement — — — (766 )
Net cash provided by financing activities 740 (1,182 ) 6,523 2,190
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS 7 (463 ) (528 ) (467 )
DECREASE IN CASH AND CASH EQUIVALENTS (12,937 ) (9,550 ) (53,604 ) (82,176 )
CASH AND CASH EQUIVALENTS—Beginning of period 118,160 169,799 158,827 242,425
CASH AND CASH EQUIVALENTS—End of period $ 105,223 $ 160,249 $ 105,223 $ 160,249

Demandware, Inc.

Stock Based Compensation Expense

(unaudited, in thousands)

Three Months Ended Nine Months Ended
September 30, September 30,
2015 2014 2015 2014
Cost of subscription revenue $ 254 $ 177 $ 744 $ 477
Cost of service revenue 823 532 2,335 1,441
Sales and marketing 3,087 1,868 8,344 5,335
Research and development 3,738 1,825 8,637 5,156
General and administration 2,357 1,968 6,985 6,962
$ 10,259 $ 6,370 $ 27,045 $ 19,371

Demandware, Inc.

Contingent Compensation Expense Related to Acquisitions

(unaudited, in thousands)

Three Months Ended Nine Months Ended
September 30, September 30,
2015 2014 2015 2014
Sales and marketing $ 1,150 $ 441 $ 3,331 $ 1,203
Research and development 1,932 441 5,570 1,203
$ 3,082 $ 882 $ 8,901 $ 2,406

Demandware, Inc.

Amortization Expense Related to Acquired Intangible Assets

(unaudited, in thousands)

Three Months Ended Nine Months Ended
September 30, September 30,
2015 2014 2015 2014
Cost of subscription revenue $ 1,102 $ 228 $ 3,256 $ 630
Sales and marketing 122 3 344 77
$ 1,224 $ 231 $ 3,600 $ 707

Demandware, Inc.

Non-Cash Taxes

(unaudited, in thousands)

Three Months Ended Nine Months Ended
September 30, September 30,
2015 2014 2015 2014
Non-cash tax (benefit) $ — $ — $ (6,088 ) $ —

Demandware, Inc.

Reconciliation of Non-GAAP Financial Measures to Comparable GAAP Measures

(unaudited; in thousands, except per share data)

Three Months Ended Nine Months Ended
September 30, September 30,
2015 2014 2015 2014

Reconciliation between GAAP operating (loss) and non-GAAP operating income (loss):

GAAP operating (loss) $ (11,731 ) $ (5,147 ) $ (43,044 ) $ (21,611 )
Add back:
Stock-based compensation 10,259 6,370 27,045 19,371
Contingent compensation expense related to acquisitions 3,082 882 8,901 2,406
Amortization expense related to acquired intangible assets 1,224 231 3,600 707
Non-GAAP operating income (loss) $ 2,834 $ 2,336 $ (3,498 ) $ 873
Reconciliation between GAAP operating expenses and non-GAAP operating expenses:
GAAP operating expenses $ 52,417 $ 33,093 $ 156,534 $ 99,964
Less:
Stock-based compensation 9,182 5,661 23,966 17,453
Contingent compensation expense related to acquisitions 3,082 882 8,901 2,406
Amortization expense related to acquired intangible assets 122 3 344 77
Non-GAAP operating expenses $ 40,031 $ 26,547 $ 123,323 $ 80,028

Numerator:

Reconciliation between GAAP net (loss) attributable to Demandware and non-GAAP net income (loss):
GAAP net (loss) attributable to Demandware $ (11,919 ) $ (6,349 ) $ (37,162 ) $ (23,236 )
Add back:
Stock-based compensation 10,259 6,370 27,045 19,371
Contingent compensation expense related to acquisitions 3,082 882 8,901 2,406
Amortization expense related to acquired intangible assets 1,224 231 3,600 707
Non-cash tax (benefit) (1) — — (6,088 ) —
Non-GAAP net income (loss) $ 2,646 $ 1,134 $ (3,704 ) $ (752 )
(1) In the first and second quarter of 2015, Demandware recorded a non-cash tax benefit associated with the acquisition of Tomax.

Denominator:

Reconciliation between GAAP and non-GAAP weighted average shares used in computing diluted non-GAAP net income per common share:
GAAP weighted average common shares outstanding, basic 35,968 34,958 35,684 34,695
Add back:
Effect of dilutive securities (2) 1,915 2,215 — —
Non-GAAP weighted average common shares outstanding, dilutive 37,883 37,173 35,684 34,695
Non-GAAP net income (loss) per share, basic and diluted: $ 0.07 $ 0.03 $ (0.10 ) $ (0.02 )
(2) These securities are anti-dilutive on a GAAP basis as a result of the Company's net loss, but are considered dilutive on a non-GAAP basis in periods where the Company has reported positive non-GAAP earnings.

Demandware, Inc.

Reconciliation of Non-GAAP Financial Measures to Comparable GAAP Measures (Continued)

(unaudited; in thousands)

Three Months Ended Nine Months Ended
September 30, September 30,
2015 2014 2015 2014
Reconciliation between GAAP subscription gross margin and non-GAAP subscription gross margin:
Subscription revenue $ 47,758 $ 34,281 $ 135,180 $ 96,691
Cost of subscription revenue 9,891 6,907 28,476 18,607
Subscription gross profit 37,867 27,374 106,704 78,084
Add back:

Stock-based compensation allocated to cost of subscription revenue

254 177 744 477

Amortization expense related to acquired intangible assets allocated to cost of subscription revenue

1,102 228 3,256 630
Non-GAAP Subscription Gross Profit 39,223 27,779 110,704 79,191
Non-GAAP Subscription Gross Margin 82 % 81 % 82 % 82 %
Reconciliation between GAAP total gross margin and non-GAAP total gross margin:
Total revenue $ 57,582 $ 38,731 $ 161,716 $ 108,051
Total cost of revenue 16,896 10,785 48,226 29,698
Gross profit 40,686 27,946 113,490 78,353
Add back:
Stock-based compensation allocated to cost of revenue 1,077 709 3,079 1,918

Amortization expense related to acquired intangible assets allocated to cost of revenue

1,102 228 3,256 630
Non-GAAP Total Gross Profit 42,865 28,883 119,825 80,901
Non-GAAP Total Gross Margin 74 % 75 % 74 % 75 %
Three Months Ended Nine Months Ended
September 30, September 30,
2015 2014

% ofGrowth

2015 2014

% ofGrowth

Reconciliation between GAAP subscription revenue growth and non-GAAP subscription revenue growth on a constant currency basis:
Subscription revenue $ 47,758 $ 34,281 39% $ 135,180 $ 96,691 40%
Impact of changes in exchange rates 352 (1,479 ) 1,154 (3,762 )
Subscription revenue on a constant currency basis $ 48,110 $ 32,802 47% $ 136,334 $ 92,929 47%

Investor Relations Contact:

James Hillier

Vice President, Investor Relations, Demandware

Office: 781-425-7675

Email: [email protected]

Source: Demandware, Inc.

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