RealNetworks Announces Second Quarter 2019 Financial Results

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

Quarter Ended
June 30,

Six Months Ended
June 30,

2019

2018

2019

2018

 (in thousands, except per share data)

 Net revenue

$

44,248

$

15,724

$

83,720

$

35,374

 Cost of revenue

27,282

4,625

52,152

9,761

           Gross profit

16,966

11,099

31,568

25,613

 Operating expenses:

       Research and development

8,876

7,652

17,709

15,346

       Sales and marketing

8,360

4,883

16,502

10,880

       General and administrative

8,392

5,339

16,756

10,940

       Restructuring and other charges

729

187

896

688

       Lease exit and related benefit

—

(129)

—

(454)

           Total operating expenses

26,357

17,932

51,863

37,400

 Operating loss

(9,391)

(6,833)

(20,295)

(11,787)

 Other income (expenses):

       Interest expense

(43)

—

(209)

—

       Interest income

40

111

117

198

       Gain (loss) on equity investment, net

—

—

12,338

—

       Other income (expenses), net

183

(42)

310

(83)

           Total other income (expenses), net

180

69

12,556

115

 Income (loss) before income taxes

(9,211)

(6,764)

(7,739)

(11,672)

 Income tax expense

244

166

502

436

Net income (loss) including noncontrolling interests

(9,455)

(6,930)

(8,241)

(12,108)

Net income (loss) attributable to noncontrolling interests

(253)

—

(572)

—

Net income (loss) attributable to RealNetworks

$

(9,202)

$

(6,930)

$

(7,669)

$

(12,108)

Net income (loss) per share attributable to RealNetworks- Basic:

$

(0.24)

$

(0.18)

$

(0.20)

$

(0.32)

Net income (loss) per share attributable to RealNetworks- Diluted:

$

(0.24)

$

(0.18)

$

(0.20)

$

(0.32)

 Shares used to compute basic net income (loss) per share

37,948

37,577

37,885

37,514

 Shares used to compute diluted net income (loss) per share

37,948

37,577

37,885

37,514

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

June 30,
2019

December 31,
2018

 (in thousands)

ASSETS

 Current assets:

 Cash and cash equivalents

$

26,339

$

35,561

 Short-term investments

—

24

 Trade accounts receivable, net

31,957

11,751

 Deferred costs, current portion

465

331

 Prepaid expenses and other current assets

20,382

5,911

 Total current assets

79,143

53,578

 Equipment and software

32,079

37,458

 Leasehold improvements

3,319

3,292

 Total equipment, software, and leasehold improvements

35,398

40,750

 Less accumulated depreciation and amortization

32,268

37,996

 Net equipment, software, and leasehold improvements

3,130

2,754

 Operating lease assets

13,672

—

 Restricted cash equivalents

2,124

1,630

 Other assets

2,739

3,997

 Deferred costs, non-current portion

797

528

 Deferred tax assets, net

854

851

 Other intangible assets, net

21,616

26

 Goodwill

65,395

16,955

 Total assets

$

189,470

$

80,319

 LIABILITIES AND SHAREHOLDERS' EQUITY

 Current liabilities:

 Accounts payable

$

5,224

$

3,910

 Accrued royalties, fulfillment and other current liabilities

97,951

11,312

 Commitment to Napster

—

2,750

 Deferred revenue, current portion

6,054

2,125

 Notes payable

7,878

—

 Total current liabilities

117,107

20,097

 Deferred revenue, non-current portion

179

268

 Deferred rent

—

986

 Deferred tax liabilities, net

1,262

1,168

 Long-term lease liabilities

10,384

—

 Other long-term liabilities

11,070

960

 Total liabilities

140,002

23,479

 Total shareholders' equity

49,382

56,840

Noncontrolling interests

86

—

 Total equity

49,468

56,840

 Total liabilities and equity

$

189,470

$

80,319

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Six Months Ended
June 30,

2019

2018

 (in thousands)

 Cash flows from operating activities:

 Net income (loss) including noncontrolling interests

$

(8,241)

$

(12,108)

 Adjustments to reconcile net income (loss) including noncontrolling interests to net cash used in operating activities:

Depreciation and amortization

2,959

1,231

Stock-based compensation

1,917

1,614

Deferred income taxes, net

—

(12)

(Gain) loss on equity investment, net

(12,338)

—

Foreign currency (gain) loss

(315)

—

Fair value adjustments to contingent consideration liability

300

—

Mark to market adjustment of warrants

—

50

Net change in certain operating assets and liabilities

(381)

(3,505)

  Net cash used in operating activities

(16,099)

(12,730)

 Cash flows from investing activities:

Purchases of equipment, software, and leasehold improvements

(873)

(580)

Proceeds from sales and maturities of short-term investments

24

5,726

Acquisition, net of cash acquired

12,260

(4,192)

 Net cash provided by investing activities

11,411

954

 Cash flows from financing activities:

Proceeds from issuance of common stock (stock options and stock purchase plan)

144

114

Tax payments from shares withheld upon vesting of restricted stock

(287)

(243)

Proceeds from notes payable

19,760

—

Repayments of notes payable

(24,018)

—

Other financing activities

450

—

 Net cash provided by (used in) financing activities

(3,951)

(129)

 Effect of exchange rate changes on cash, cash equivalents and restricted cash

(89)

(731)

 Net increase (decrease) in cash, cash equivalents and restricted cash

(8,728)

(12,636)

 Cash, cash equivalents and restricted cash, beginning of period

37,191

53,596

 Cash, cash equivalents and restricted cash, end of period

$

28,463

$

40,960

RealNetworks, Inc. and Subsidiaries

Supplemental Financial Information

(Unaudited)

2019

2018

 Q2

Q1

 Q4

 Q3

 Q2

 Q1

 (in thousands)

Net Revenue by Segment

Consumer Media (A)

$

2,620

$

2,486

$

4,068

$

4,733

$

3,884

$

5,483

Mobile Services (B)

6,997

6,939

6,899

7,348

6,719

8,704

Games (C)

6,048

5,710

5,590

5,498

5,121

5,463

Napster (D)

28,583

24,337

—

—

—

—

     Total net revenue

$

44,248

$

39,472

$

16,557

$

17,579

$

15,724

$

19,650

Net Revenue by Product

Consumer Media

- Software License (E)

$

944

$

735

$

2,049

$

2,746

$

1,808

$

3,337

- Subscription Services (F)

1,040

1,088

1,153

1,232

1,225

1,285

- Product Sales (G)

206

219

257

281

299

340

- Advertising & Other (H)

430

444

609

474

552

521

Mobile Services

- Software License (I)

957

599

514

520

469

1,335

- Subscription Services (J)

6,040

6,340

6,385

6,828

6,250

7,369

Games

- Subscription Services (K)

3,073

2,985

3,014

2,745

2,689

2,693

- Product Sales (L)

2,177

1,988

2,013

2,279

1,953

2,402

- Advertising & Other (M)

798

737

563

474

479

368

Napster

- Subscription Services (N)

28,583

24,337

—

—

—

—

     Total net revenue

$

44,248

$

39,472

$

16,557

$

17,579

$

15,724

$

19,650

Net Revenue by Geography

United States

$

21,322

$

18,970

$

7,697

$

9,026

$

7,646

$

11,434

Rest of world

22,926

20,502

8,860

8,553

8,078

8,216

     Total net revenue

$

44,248

$

39,472

$

16,557

$

17,579

$

15,724

$

19,650

Net Revenue by Segment

(A) The Consumer Media segment primarily includes revenue from the licensing of our portfolio of video codec technologies. Also included is RealPlayer and related products, such as the distribution of third-party software products, advertising on RealPlayer websites, sales of RealPlayer Plus software to consumers, and consumer subscriptions such as RealPlayer Plus and SuperPass.

(B) The Mobile Services segment primarily includes revenue from SaaS services and sales of professional services provided to mobile carriers.

(C) The Games segment primarily includes revenue from sales of mobile and PC games, online games subscription services, player purchases of in-game virtual goods, and advertising on games sites and social network sites.

(D) The Napster segment primarily includes revenue from subscription music offerings from on-demand streaming services and conditional downloads. Napster revenues are included in our consolidated results from the January 18, 2019 acquisition date forward.

Net Revenue by Product

(E) Software licensing revenue within Consumer Media includes revenues from licenses of our video codec technologies.

(F) Subscriptions revenue within Consumer Media includes revenue from subscriptions such as our RealPlayer Plus and SuperPass offerings.

(G) Product sales within Consumer Media includes sales of RealPlayer Plus software to consumers.

(H) Advertising & other revenue within Consumer Media includes distribution of third-party software products and advertising on RealPlayer websites.

(I) Software license revenue within Mobile Services includes revenue from our integrated RealTimes platform.

(J) Subscription services revenue within Mobile Services includes revenue from ringback tones and our messaging platform services, as well as from related professional services provided to mobile carriers.

(K) Subscription services revenue within Games includes revenue from online games subscriptions.

(L) Product sales revenue within Games includes revenue from retail and wholesale games-related revenue, sales of mobile games, and player purchases of in-game virtual goods.

(M) Advertising & other revenue within Games includes advertising on games sites and social network sites.

(N) Subscription services revenue within Napster includes music tracks by way of on-demand streaming and conditional downloads offered directly to end consumers and distribution partners.

RealNetworks, Inc. and Subsidiaries

Segment Results of Operations and Reconciliation to non-GAAP Contribution Margin

(Unaudited)

2019

2018

2019

2018

Q2

Q1

Q2

YTD

YTD

 (in thousands)

Consumer Media

Net revenue

$

2,620

$

2,486

$

3,884

$

5,106

$

9,367

Cost of revenue

803

833

1,028

1,636

2,021

Gross profit

1,817

1,653

2,856

3,470

7,346

Gross margin

69

%

66

%

74

%

68

%

78

%

Operating expenses

2,877

3,119

3,439

5,996

7,357

Operating income (loss), a GAAP measure

$

(1,060)

$

(1,466)

$

(583)

$

(2,526)

$

(11)

Depreciation and amortization

56

54

51

110

97

Contribution margin, a non-GAAP measure

$

(1,004)

$

(1,412)

$

(532)

$

(2,416)

$

86

Mobile Services

Net revenue

$

6,997

$

6,939

$

6,719

$

13,936

$

15,423

Cost of revenue

1,865

2,048

2,134

3,913

4,450

Gross profit

5,132

4,891

4,585

10,023

10,973

Gross margin

73

%

70

%

68

%

72

%

71

%

Operating expenses

7,438

7,561

6,969

14,999

14,335

Operating income (loss), a GAAP measure

$

(2,306)

$

(2,670)

$

(2,384)

$

(4,976)

$

(3,362)

Acquisitions related intangible asset amortization

—

—

91

—

183

Depreciation and amortization

106

231

155

337

335

Contribution margin, a non-GAAP measure

$

(2,200)

$

(2,439)

$

(2,138)

$

(4,639)

$

(2,844)

Games

Net revenue

$

6,048

$

5,710

$

5,121

$

11,758

$

10,584

Cost of revenue

1,655

1,670

1,456

3,325

3,273

Gross profit

4,393

4,040

3,665

8,433

7,311

Gross margin

73

%

71

%

72

%

72

%

69

%

Operating expenses

5,288

5,037

5,095

10,325

10,012

Operating income (loss), a GAAP measure

$

(895)

$

(997)

$

(1,430)

$

(1,892)

$

(2,701)

Acquisitions related intangible asset amortization

—

23

20

23

20

Depreciation and amortization

84

83

146

167

311

Contribution margin, a non-GAAP measure

$

(811)

$

(891)

$

(1,264)

$

(1,702)

$

(2,370)

Napster

Net revenue

$

28,583

$

24,337

$

—

$

52,920

$

—

Cost of revenue

23,026

20,396

—

43,422

—

Gross profit

5,557

3,941

9,498

—

Gross margin

19

%

16

%

—

%

18

%

—

%

Operating expenses

6,638

5,532

—

12,170

—

Operating income (loss), a GAAP measure

$

(1,081)

$

(1,591)

$

—

$

(2,672)

$

—

Acquisitions related intangible asset amortization

1,129

943

—

2,072

—

Depreciation and amortization

69

115

—

184

—

Contribution margin, a non-GAAP measure

$

117

$

(533)

$

—

$

(416)

$

—

Cost of revenue

$

(67)

$

(77)

$

7

$

(144)

$

17

Gross profit

67

77

(7)

144

(17)

Gross margin

N/A

N/A

N/A

N/A

N/A

Operating expenses

4,116

4,257

2,429

8,373

5,696

Operating income (loss), a GAAP measure

$

(4,049)

$

(4,180)

$

(2,436)

$

(8,229)

$

(5,713)

Other income (expense), net

183

127

(42)

310

(83)

Foreign currency (gain) loss

(164)

(151)

(2)

(315)

20

Depreciation and amortization

33

33

148

66

285

Fair value adjustments to contingent consideration liability

300

—

—

300

—

Restructuring and other charges

729

167

187

896

688

Stock-based compensation

533

1,384

457

1,917

1,614

Lease exit and related benefit

—

—

(129)

—

(454)

Contribution margin, a non-GAAP measure ⁽¹⁾

$

(2,435)

$

(2,620)

$

(1,817)

$

(5,055)

$

(3,643)

RealNetworks, Inc. and Subsidiaries

Reconciliation of Net income (loss) including noncontrolling interests to adjusted EBITDA, a non-GAAP measure

(Unaudited)

2019

2018

2019

2018

Q2

 Q1

 Q2

 YTD

 YTD

(in thousands)

Reconciliation of GAAP Net income (loss) including noncontrolling interests to adjusted EBITDA:

Net income (loss) including noncontrolling interests

$

(9,455)

$

1,214

$

(6,930)

$

(8,241)

$

(12,108)

Income tax expense (benefit)

244

258

166

502

436

Interest expense

43

166

—

209

—

Interest income

(40)

(77)

(111)

(117)

(198)

(Gain) loss on equity investment, net

—

(12,338)

—

(12,338)

—

Foreign currency (gain) loss

(164)

(151)

(2)

(315)

20

Acquisitions related intangible asset amortization

1,129

966

111

2,095

203

Depreciation and amortization

348

516

500

864

1,028

Fair value adjustments to contingent consideration liability

300

—

—

300

—

Restructuring and other charges

729

167

187

896

688

Stock-based compensation

533

1,384

457

1,917

1,614

Lease exit and related benefit

—

—

(129)