RealNetworks Announces First Quarter 2010 Results

SEATTLE, May 6 /PRNewswire-FirstCall/ -- Digital entertainment services company RealNetworks, Inc. (Nasdaq: RNWK) today announced results for the first quarter ended March 31, 2010.

Quarterly Highlights:

  • Revenue of $128.6 million
  • Net income attributable to common shareholders of $3.2 million or $0.05 per share
  • Adjusted EBITDA of $5.7 million
  • Cash and short term investments of $335.2 million as of March 31, 2010

"We made significant progress toward achieving our milestones to transform RealNetworks over the coming year into a growing and profitable company," said Bob Kimball, president and acting CEO of RealNetworks. "While we are moving fast to transform the company, our plans to simplify, restructure and grow RealNetworks require substantial work, and it will take some time before we see the financial benefit of our efforts."  

First Quarter Results

For the first quarter of 2010, revenue declined 9% to $128.6 million compared with $140.8 million for the first quarter of 2009.  Foreign currency exchange rate fluctuations positively affected 2010 first quarter revenue by approximately $3.4 million compared with the year-ago quarter. Excluding the effects of foreign exchange rate changes, revenue declined 11% year over year.  Revenue trends in each of Real's businesses in the first quarter of 2010 compared with the year-earlier quarter were: a 2% increase in Media Software and Services revenue to $20.7 million, a 4% decrease in Technology Products and Solutions revenue to $41.9 million, an 8% decrease in Games revenue to $30.2 million, and a 19% decrease in Music revenue to $35.7 million.

Net income attributable to common shareholders for the first quarter of 2010 was $3.2 million, or $0.05 per share, compared with net loss of $(12.1) million, or $(0.10) per share, in the first quarter of 2009. Net income for the first quarter of 2010 was significantly increased by a one-time $2.6 million tax benefit and a $10.9 million gain on the deconsolidation of the company's Rhapsody joint venture, which was restructured on March 31, 2010.  Net income for the first quarter of 2010 also included restructuring charges of $5.6 million for employee severance costs and asset impairments, while net loss in the year-ago quarter included restructuring charges of $800,000. Adjusted EBITDA for the first quarter of 2010 was $5.7 million, compared with $5.6 million for the first quarter of 2009.  A reconciliation of GAAP net income (loss) attributable to common shareholders to adjusted EBITDA is provided in the financial tables that accompany this release.

As of March 31, 2010, Real had $335.2 million in unrestricted cash, cash equivalents and short-term investments compared with $384.9 million at December 31, 2009.  In addition, Real had $64.4 million in restricted cash and equity investments, including an approximate 47.5% equity interest in the restructured Rhapsody, at March 31, 2010. Of the $49.7 million decrease in cash, cash equivalents and short-term investments from December 31, 2009, $44.2 million was related to non-strategic business activities we have exited, including $5.5 million for the payment of the RealDVD settlement and related legal costs and $38.7 million relating to Rhapsody.  The $38.7 million consisted of $18.0 million to capitalize Rhapsody and to repurchase the international radio business from Rhapsody, $11.2 million for the payment of the fourth-quarter Rhapsody advertising payable to Viacom, and approximately $9.5 million for the payment of other Rhapsody payables, primarily royalties.  The remaining $5.5 million decline in cash was primarily due to capital expenditures and ordinary course working capital changes.  During the quarter, total liabilities declined by $41.8 million.

Gross margin in the first quarter was 62%, compared with 60% for the first quarter a year earlier.  Income tax provision was a benefit of $3.6 million, which included the tax benefit from the Rhapsody deconsolidation, compared with a tax expense of $1.5 million in the year-earlier period. Interest income in the first quarter of 2010 was $380,000 compared with $1.2 million in the year-earlier period.

Rhapsody Restructuring

On March 31, 2010, the company completed the restructuring of Rhapsody.  RealNetworks now owns approximately 47.5% of the equity in Rhapsody and no longer has operating control over Rhapsody.  Because the restructuring was completed on the last day of the quarter, RealNetworks' income and cash flow statements for the first quarter include results from Rhapsody's operations, but the company's first-quarter balance sheet reflects the deconsolidation, accounts for Rhapsody as an equity investment, and reflects the changes in certain assets and working capital items, including the final advertising payable to Viacom, due to the restructuring. Beginning with the second quarter of 2010, RealNetworks will not consolidate Rhapsody's operating results in any of its financial statements, and will report its share of Rhapsody's income or losses as "Gain or loss on equity-method investments" in "Other income."  

Business Outlook

For the second quarter of 2010, Real expects overall revenue from its TPS, MSS and Games businesses to decline slightly year-over-year and sequentially.  Real expects adjusted EBITDA for the second quarter of 2010 to be negative, in part because shared costs formerly absorbed by the Music business have not yet been completely eliminated in the company's corporate restructuring. Compared with the second quarter of 2009, the company expects revenue in MSS and Games to be flat and revenue in TPS to decline.  Sequentially, the company expects revenue in MSS and TPS to decline slightly and revenue in Games to be flat.

"We expect the second quarter to be the low point in both revenue and adjusted EBITDA for 2010," said Michael Eggers, chief financial officer of RealNetworks.  "As the effects of our restructuring begin to take hold, we expect both top and bottom line operating financial improvement in the second half of the year."

Approximately 25% of Real's revenue is denominated in currencies other than the U.S. dollar, most notably the euro and Korean won. Real expects reported revenues in future periods to be affected by foreign currency trends.

The foregoing forward-looking statements reflect Real's expectations as of May 6, 2010.  It is not Real's general practice to update these forward-looking statements until its next quarterly results announcement.

Webcast and Conference Call Information

The company will host a Webcast conference call to review results and discuss the company's operations for the first quarter at 5:00 p.m. ET on May 6, featuring audio. The Webcast will be available at:

Webcast participants will need RealPlayer® to hear the webcast, which can be downloaded at

The on-demand Webcast will be available beginning approximately two hours following the conclusion of the live Webcast.

Conference Call Details

5:00 p.m. (Eastern) / 2:00 p.m. (Pacific)

Dial in:

800-857-5305 Domestic

773-681-5857 International

Passcode: First Quarter Earnings

Leader: Bob Kimball

Telephonic replay will be available until 8:00 p.m. (Eastern), May 20, 2010.

Replay dial in:

800-964-4595 Domestic

402-998-1049 International


About RealNetworks

RealNetworks, Inc. delivers digital entertainment services to consumers via PC, portable music player, home entertainment system and mobile phone. Real created the streaming media category in 1995 and continues to offer pioneering products and services, including: RealPlayer®, the first mainstream media player to enable downloading, recording, editing and sharing of digital video; GameHouse®, one of the largest casual games services on the Internet; and a variety of mobile entertainment services, such as ringback tones, offered to consumers through leading wireless carriers around the world. RealNetworks' corporate information is located at

About Non-GAAP Financial Measures

To supplement RealNetworks' condensed consolidated financial statements presented in accordance with GAAP in this press release, the company also discloses certain non-GAAP financial measures, including adjusted revenue, adjusted EBITDA, adjusted EBITDA by reporting segment, adjusted cost of revenue and adjusted operating expenses, 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) attributable to common shareholders to adjusted EBITDA and to adjusted EBITDA by reporting segment; GAAP cost of revenue to adjusted cost of revenue; and GAAP operating expenses to adjusted operating expenses for the relevant periods.

The rationale for management's use of non-GAAP measures is included in the supplementary materials presented with the first quarter 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 Real's current expectations for future revenue and adjusted EBITDA, financial improvement and the impact of foreign currency rates in future periods and plans to transform the Company as well as to realize future benefits from those plans.  All statements contained in this press release that do not relate to matters of historical fact should be considered forward-looking statements.  Actual results may differ materially from the results predicted. Factors that could cause actual results to differ from the results predicted include: fluctuations in foreign currencies; risks associated with the ability of Real to realize financial benefits from the restructuring of Rhapsody; Real's ability to realize operating efficiencies and other benefits from the implementation of its strategic initiatives; 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 Real's 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; and changes in Real's GAAP 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 the reported amounts of 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.