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RealNetworks Announces Second Quarter 2018 Results

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RealNetworks Announces Second Quarter 2018 Results

PR Newswire

SEATTLE, Aug. 1, 2018 /PRNewswire/ --

  • Revenue of $15.7 million compared to $21.6 million in the prior year period and $19.7 million in the prior quarter
  • Reduced operating expenses by $0.6 million, or 3%, year-over-year and by $1.5 million, or 8%, sequentially
  • Gross margin from continuing operations of 71%, same as the prior year period
  • Continued progress on growth initiatives that will contribute to revenue in 2018
  • Launched SAFR, a state-of-the-art facial recognition platform, July 2018

RealNetworks, Inc. (NASDAQ:RNWK), a leader in digital media software and services, today announced results for the second quarter ended June 30, 2018.

Management Commentary

"It was a disappointing quarter financially and a strong quarter strategically," said Rob Glaser, Chairman and CEO of RealNetworks. "Revenue and Adjusted EBITDA fell short of our expectations, as a result of a few specific factors that don't lessen our confidence in our growth initiatives. We are particularly pleased with the mid-July launch of SAFR, our world class facial recognition platform. Initial market feedback has been very encouraging."

Second Quarter 2018 Financial Highlights from Continuing Operations

  • Revenue was $15.7 million compared to $19.7 million in the prior quarter and $21.6 million in the prior year period.
  • Operating expenses decreased $1.5 million, or 8%, from the prior quarter and decreased $0.6 million, or 3%, from the prior year period.
  • Net loss was $(6.9) million, or $(0.18) per share, compared to net loss of $(5.2) million, or $(0.14) per share, in the prior quarter and a net loss of $(3.8) million, or $(0.10) per share, in the prior year period.
  • Adjusted EBITDA was a loss of $(5.7) million compared to a loss of $(3.0) million in the prior quarter and a loss of $(1.3) million in the prior year period. A reconciliation of GAAP net income (loss) to adjusted EBITDA, a non-GAAP measure, is provided in the financial tables that accompany this release.
  • At June 30, 2018, the Company had $42.1 million in unrestricted cash, cash equivalents and short-term investments, compared to $54.3 million at March 31, 2018. This change included $4.2 million associated with our acquisition of Blue Giraffe, a Netherlands-based game development studio.

Business Outlook

For the third quarter of 2018, RealNetworks expects to achieve the following results:

  • Total revenue is expected to be in the range of $17 million to $19 million
  • Adjusted EBITDA loss is expected to be in the range of $(2.5) million to $(4.5) million.

New Revenue Recognition Accounting Standard

As of January 1, 2018, we adopted Accounting Standards Codification 606 (Topic 606), Revenue from Contracts with Customers, which affects the accounting for our revenue. We adopted Topic 606 using the modified retrospective transition method, under which the prior periods presented have not been recast to reflect adoption of the new standard.

For additional details on the impact of the standard, see our Annual Report on Form 10-K for the year ended December 31, 2017, and our 2018 Quarterly Reports on Form 10-Q.

Conference Call and Webcast Information

The company will host a conference call today to review results and discuss the company's performance shortly after 4:30 p.m. ET/1:30 p.m. PT. You may join the conference call by calling 1-877-451-6152 (United States) or 1-201-389-0879 (International). A telephonic replay of the call will also be available shortly after the completion of the call, until 11:59 pm ET on Wednesday, August 22, 2018, by dialing 1-844-512-2921 (United States) or 1-412-317-6671 (International) and entering the replay pin number: 13681039.

A live webcast will be available on RealNetworks' Investor Relations site under Events at http://investor.realnetworks.com and will be archived online upon completion of the conference call.

For More Information

Investor Relations for RealNetworks
Laura Bainbridge, Addo IR
310-829-5400
IR@realnetworks.com
RNWK-F

About RealNetworks

RealNetworks creates innovative technology products and services that make it easy to connect with and enjoy digital media. RealNetworks invented the streaming media category and continues to connect consumers with their digital media both directly and through partners, aiming to support every network, device, media type and social network. Find RealNetworks' corporate information at www.realnetworks.com.

RealNetworks® and the company's respective logos are trademarks, registered trademarks, or service marks of RealNetworks, Inc. Other products and company names mentioned are the trademarks of their respective owners.

About Non-GAAP Financial Measures

To supplement RealNetworks' consolidated financial information presented in accordance with GAAP in this press release, the company also discloses certain non-GAAP financial measures, including adjusted EBITDA and contribution margin by reportable segment, which management believes provide investors with useful information.

In the financial tables of our earnings press release, RealNetworks has included reconciliations of GAAP net income (loss) from continuing operations to adjusted EBITDA and operating income (loss) by reportable segment to contribution margin by reportable segment.

The rationale for management's use of non-GAAP measures is included in the supplementary materials presented with the quarterly earnings materials.  Please refer to Exhibit 99.2 ("Information Regarding Non-GAAP Financial Measures") to the company's report on Form 8-K, which is being submitted today to the SEC.

Forward-Looking Statements

This press release contains forward-looking statements that involve risks and uncertainties, including statements relating to RealNetworks' current expectations regarding future revenue and adjusted EBITDA, our future growth, profitability, and market position, our strategic focus and initiatives, agreements with partners, and the growth and future prospects relating to our Rhapsody d/b/a Napster affiliate. All statements contained in this press release that do not relate to matters of historical fact should be considered forward-looking statements.  These statements reflect RealNetworks' expectations as of today, and actual results may differ materially from the results predicted. Factors that could cause actual results to differ from the results predicted include: RealNetworks' ability to realize operating efficiencies, growth and other benefits from the implementation of its growth plan, strategic initiatives, and restructuring efforts; the emergence of new entrants and competition in the market for digital media products and services; other competitive risks, including the growth of competing technologies, products and services; the potential outcomes and effects of claims and legal proceedings on RealNetworks' business, prospects, financial condition or results of operations; risks associated with key customer or strategic relationships, business acquisitions and the introduction of new products and services; changes in consumer and advertising spending in response to disruptions in the global financial markets; fluctuations in foreign currencies; and changes in RealNetworks' effective tax rate. More information about potential risk factors that could affect RealNetworks' business and financial results is included in RealNetworks' annual report on Form 10-K for the most recent year ended December 31, its quarterly reports on Form 10-Q and in other reports and documents filed by RealNetworks from time to time with the Securities and Exchange Commission. The preparation of RealNetworks' financial statements and forward-looking financial guidance requires the company to make estimates and assumptions that affect the reported amount of assets and liabilities, and revenues and expenses during the reported period.  Actual results may differ materially from these estimates under different assumptions or conditions. The company assumes no obligation to update any forward-looking statements or information, which are in effect as of their respective dates.

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)




Quarter Ended
June 30,


Six Months Ended
June 30,






2018


2017


2018


2017



 (in thousands, except per share data)










 Net revenue


$

15,724



$

21,605



$

35,374



$

41,296


 Cost of revenue


4,625



6,287



9,761



12,856


           Gross profit


11,099



15,318



25,613



28,440











 Operating expenses:









       Research and development


7,652



7,584



15,346



14,933


       Sales and marketing


4,883



5,496



10,880



12,651


       General and administrative


5,339



5,254



10,940



10,557


       Restructuring and other charges


187



150



688



1,714


       Lease exit and related benefit


(129)





(454)













           Total operating expenses


17,932



18,484



37,400



39,855











 Operating loss


(6,833)



(3,166)



(11,787)



(11,415)











 Other income (expenses):









       Interest income, net


111



109



198



237


       Equity in net loss of Napster




(349)





(1,097)


       Other income (expense), net


(42)



(13)



(83)



(239)











           Total other income (expense), net


69



(253)



115



(1,099)











 Loss from continuing operations before income taxes


(6,764)



(3,419)



(11,672)



(12,514)


 Income tax expense


166



360



436



815











Loss from continuing operations


(6,930)



(3,779)



(12,108)



(13,329)


Net income from discontinued operations, net of tax




393





519


 Net loss


$

(6,930)



$

(3,386)



$

(12,108)



$

(12,810)











Net income (loss) per share - Basic:









Continuing operations


$

(0.18)



$

(0.10)



$

(0.32)



$

(0.35)


Discontinued operations




0.01





0.01


Net loss per share - Basic


$

(0.18)



$

(0.09)



$

(0.32)



$

(0.34)


Net income (loss) per share - Diluted:









Continuing operations


$

(0.18)



$

(0.10)



$

(0.32)



$

(0.35)


Discontinued operations




0.01





0.01


Net loss per share - Diluted


$

(0.18)



$

(0.09)



$

(0.32)



$

(0.34)











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


37,577



37,103



37,514



37,067


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


37,577



37,103



37,514



37,067


 

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)



June 30,
 2018


December 31,
 2017


 (in thousands)

ASSETS

 Current assets:




 Cash and cash equivalents

$

39,080



$

51,196


 Short-term investments

3,053



8,779


 Trade accounts receivable, net

13,127



12,689


 Deferred costs, current portion

375



426


 Prepaid expenses and other current assets

5,250



3,715


  Current assets of discontinued operations



17,456


   Total current assets

60,885



94,261






 Equipment and software

41,793



46,417


 Leasehold improvements

3,511



3,536


   Total equipment, software, and leasehold improvements

45,304



49,953


 Less accumulated depreciation and amortization

42,083



46,093


   Net equipment, software, and leasehold improvements

3,221



3,860






 Restricted cash equivalents

1,880



2,400


 Other assets

5,844



5,588


 Deferred costs, non-current portion

679



955


 Deferred tax assets, net

1,036



1,047


 Other intangible assets, net

215



325


 Goodwill

17,120



13,060






 Total assets

$

90,880



$

121,496






 LIABILITIES AND SHAREHOLDERS' EQUITY





 Current liabilities:




 Accounts payable

$

2,744



$

3,785


 Accrued and other current liabilities

12,261



12,365


 Commitment to Napster

2,750



2,750


 Deferred revenue, current portion

2,155



3,097


Current liabilities of discontinued operations



17,107


 Total current liabilities

19,910



39,104






 Deferred revenue, non-current portion

353



443


 Deferred rent

1,023



982


 Deferred tax liabilities, net

170



19


 Other long-term liabilities

1,054



1,775






 Total liabilities

22,510



42,323










 Shareholders' equity

68,370



79,173






 Total liabilities and shareholders' equity

$

90,880



$

121,496


 

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)



Six Months Ended
June 30,


2018


2017


 (in thousands)


 Cash flows from operating activities:




 Net loss

$

(12,108)



$

(12,810)


 Adjustments to reconcile net loss to net cash used in operating activities:

  Depreciation and amortization

1,231



1,757


  Stock-based compensation

1,614



2,297


  Equity in net loss of Napster



1,097


  Deferred income taxes, net

(12)



(40)


  Fair value of warrants granted in 2015 and 2017, net of subsequent mark to market adjustments in 2018 and 2017

50



(417)


  Net change in certain operating assets and liabilities

(3,505)



(5,830)


    Net cash used in operating activities

(12,730)



(13,946)


 Cash flows from investing activities:




  Purchases of equipment, software, and leasehold improvements

(580)



(417)


  Purchases of short-term investments



(13,905)


  Proceeds from sales and maturities of short-term investments

5,726



32,617


  Acquisition, net of cash acquired

(4,192)




  Advance to Napster



(1,500)


  Net cash provided by investing activities

954



16,795


 Cash flows from financing activities:




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

114



130


  Tax payments from shares withheld upon vesting of restricted stock

(243)



(192)


 Net cash used in financing activities

(129)



(62)


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

(731)



1,347


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

(12,636)



4,134


 Cash, cash equivalents and restricted cash, beginning of period

53,596



36,421


 Cash, cash equivalents and restricted cash, end of period

$

40,960



$

40,555


 

RealNetworks, Inc. and Subsidiaries

Supplemental Financial Information

(Unaudited)



2018


2017


 Q2


Q1


 Q4


 Q3


 Q2


 Q1


 (in thousands)

Net Revenue by Line of Business












Consumer Media (A)

$

3,884



$

5,483



$

5,752



$

4,197



$

6,951



$

5,669


Mobile Services (B)

6,719



8,704



7,155



7,678



7,720



8,199


Games (C)

5,121



5,463



5,958



6,682



6,934



5,823


     Total net revenue

$

15,724



$

19,650



$

18,865



$

18,557



$

21,605



$

19,691














Net Revenue by Product












Consumer Media












- Software License (D)

$

1,808



$

3,337



$

3,595



$

2,012



$

4,741



$

3,295


- Subscription Services (E)

1,225



1,285



1,362



1,434



1,531



1,564


- Product Sales (F)

299



340



350



322



261



377


- Advertising & Other (G)

552



521



445



429



418



433














Mobile Services












- Software License (H)

469



1,335



388



688



642



619


- Subscription Services (I)

6,250



7,369



6,767



6,990



7,078



7,580














Games












- Subscription Services (J)

2,689



2,693



2,707



2,708



2,781



2,828


- Product Sales (K)

1,953



2,402



3,086



3,851



4,007



2,862


- Advertising & Other (L)

479



368



165



123



146



133














     Total net revenue

$

15,724



$

19,650



$

18,865



$

18,557



$

21,605



$

19,691














Net Revenue by Geography












United States

$

7,646



$

11,434



$

10,120



$

10,084



$

10,889



$

9,740


Rest of world

8,078



8,216



8,745



8,473



10,716



9,951


     Total net revenue

$

15,724



$

19,650



$

18,865



$

18,557



$

21,605



$

19,691















Net Revenue by Line of Business












(A) The Consumer Media division 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 division primarily includes revenue from SaaS services and sales of professional services provided to mobile carriers.

(C) The Games division primarily includes revenue from sales of mobile and PC games, online games subscription services, and advertising on games sites and social network sites.

Net Revenue by Product












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

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

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

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

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

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

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

(K) Product sales revenue within Games includes revenue from retail and wholesale games-related revenue and sales of mobile games.

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

 

RealNetworks, Inc. and Subsidiaries

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

(Unaudited)



2018


2017


2018


2017


Q2


Q1


Q2


YTD


YTD


 (in thousands)

Consumer Media




















Net revenue

$

3,884



$

5,483



$

6,951



$

9,367



$

12,620


Cost of revenue

1,028



993



1,159



2,021



2,564


   Gross profit

2,856



4,490



5,792



7,346



10,056












   Gross margin

74

%


82

%


83

%


78

%


80

%











Operating expenses

3,439



3,918



3,730



7,357



7,740


Operating income (loss), a GAAP measure

$

(583)



$

572



$

2,062



$

(11)



$

2,316


Depreciation and amortization

51



46



159



97



326












  Contribution margin, a non-GAAP measure

$

(532)



$

618



$

2,221



$

86



$

2,642












Mobile Services




















Net revenue

$

6,719



$

8,704



$

7,720



$

15,423



$

15,919


Cost of revenue

2,134



2,316



2,426



4,450



5,616


   Gross profit

4,585



6,388



5,294



10,973



10,303












   Gross margin

68

%


73

%


69

%


71

%


65

%











Operating expenses

6,969



7,366



6,705



14,335



14,824


Operating income (loss), a GAAP measure

$

(2,384)



$

(978)



$

(1,411)



$

(3,362)



$

(4,521)


Acquisitions related intangible asset amortization

91



92



201



183



397


Depreciation and amortization

155



180



175



335



378












Contribution margin, a non-GAAP measure

$

(2,138)



$

(706)



$

(1,035)



$

(2,844)



$

(3,746)












Games




















Net revenue

$

5,121



$

5,463



$

6,934



$

10,584



$

12,757


Cost of revenue

1,456



1,817



2,679



3,273



4,616


   Gross profit

3,665



3,646



4,255



7,311



8,141












   Gross margin

72

%


67

%


61

%


69

%


64

%











Operating expenses

5,095



4,917



5,090



10,012



10,037


Operating income (loss), a GAAP measure

$

(1,430)



$

(1,271)



$

(835)



$

(2,701)



$

(1,896)


Acquisitions related intangible asset amortization

20





25



20



52


Depreciation and amortization

146



165



157



311



298












   Contribution margin, a non-GAAP measure

$

(1,264)



$

(1,106)



$

(653)



$

(2,370)



$

(1,546)












Corporate




















Cost of revenue

$

7



$

10



$

23



$

17



$

60


   Gross profit

(7)



(10)



(23)



(17)



(60)












   Gross margin

N/A


N/A


N/A


N/A


N/A











Operating expenses

2,429



3,267



2,959



5,696



7,254


Operating income (loss), a GAAP measure

$

(2,436)



$

(3,277)



$

(2,982)



$

(5,713)



$

(7,314)


Other income (expense), net

(42)



(41)



(13)



(83)



(239)


Depreciation and amortization

148



137



119



285



306


Restructuring and other charges

187



501



150



688



1,714


Stock-based compensation

457



1,157



863



1,614



2,297


Lease exit and related benefit

(129)



(325)





(454)














   Contribution margin, a non-GAAP measure

$

(1,815)



$

(1,848)



$

(1,863)



$

(3,663)



$

(3,236)












 

RealNetworks, Inc. and Subsidiaries

Reconciliation of Net income (loss) from continuing operations to adjusted EBITDA, a non-GAAP measure

(Unaudited)




2018


2017


2018


2017



 Q2


 Q1


 Q2


 YTD


 YTD



(in thousands)












Reconciliation of GAAP Net income (loss) from continuing operations to adjusted EBITDA:


















Net income (loss) from continuing operations


$

(6,930)



$

(5,178)



$

(3,779)



$

(12,108)



$

(13,329)


Income tax expense (benefit)


166



270



360



436



815


Interest income, net


(111)



(87)



(109)



(198)



(237)


Equity in net loss of Napster






349





1,097


Acquisitions related intangible asset amortization


111



92



226



203



449


Depreciation and amortization


500



528



610



1,028



1,308


Restructuring and other charges


187



501



150



688



1,714


Stock-based compensation


457



1,157



863



1,614



2,297


Lease exit and related benefit


(129)



(325)





(454)




   Adjusted EBITDA, a non-GAAP measure


$

(5,749)



$

(3,042)



$

(1,330)



$

(8,791)



$

(5,886)


 

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SOURCE RealNetworks, Inc.

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