RealNetworks Announces First Quarter 2010 Results

06 May, 2010, 16:00 ET from RealNetworks, Inc.

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:  http://investor.realnetworks.com

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

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

RNWK-F

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 http://investor.realnetworks.com.

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.

RealNetworks, RealPlayer and GameHouse are trademarks or registered trademarks of RealNetworks, Inc. or its subsidiaries.  All other companies or products listed herein are trademarks or registered trademarks of their respective owners.

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

Quarters Ended

March 31,

2010

2009

(in thousands, except per share data)

Net revenue

$ 128,600

$ 140,773

Cost of revenue

49,159

56,021

Gross profit

79,441

84,752

Operating expenses:

Research and development

34,675

28,559

Sales and marketing

37,827

43,685

Advertising with related party (A)

1,065

7,423

General and administrative

14,921

22,831

Restructuring and other charges

5,615

794

Total operating expenses

94,103

103,292

Operating loss  

(14,662)

(18,540)

Other income (expenses):

Interest income, net

380

1,183

Equity in net loss of investments

-

(655)

Gain (loss) on sale of equity investments, net

-

137

Gain on deconsolidation of Rhapsody

10,929

-

Other income (expense), net

99

855

Total other income (expense), net

11,408

1,520

Loss before income taxes

(3,254)

(17,020)

Income tax benefit (expense)

3,572

(1,549)

Net income (loss)

318

(18,569)

Net loss attributable to the noncontrolling interest in Rhapsody (B)

2,910

6,433

Net income (loss) attributable to common shareholders

$     3,228

$ (12,136)

Basic net income (loss) per share available to common shareholders

$       0.05

$     (0.10)

Diluted net income (loss) per share available to common shareholders

$       0.05

$     (0.10)

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

135,130

134,380

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

139,573

134,380

(A) Consists of advertising purchased by Rhapsody from MTV Networks (MTVN).  MTVN had a 49% ownership interest in Rhapsody prior to the restructuring transactions that occurred on March 31, 2010.  

(B) Noncontrolling interest in Rhapsody reflects MTVN's 49% ownership share in the losses of Rhapsody prior to the restructuring transactions that occurred on March 31, 2010.

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

March 31,

December 31,

2010

2009

(in thousands)

ASSETS

Current assets:

Cash and cash equivalents  

$ 202,605

$           277,030

Short-term investments

132,611

107,870

Trade accounts receivable, net

53,976

60,937

Related party receivable (A)

5,994

-

Deferred costs, current portion

4,038

5,192

Prepaid expenses and other current assets

30,239

30,624

Total current assets

429,463

481,653

Equipment, software, and leasehold improvements, at cost:

Equipment and software

139,743

151,951

Leasehold improvements

30,448

31,041

Total equipment, software, and leasehold improvements

170,191

182,992

Less accumulated depreciation and amortization

120,900

125,878

Net equipment, software, and leasehold improvements

49,291

57,114

Restricted cash equivalents and investments

13,700

13,700

Equity investments

50,689

19,553

Other assets

3,974

4,030

Deferred costs, non-current portion

11,064

10,182

Deferred tax assets, net, non-current portion

8,597

10,001

Other intangible assets, net

9,434

10,650

Total assets

$ 576,212

$           606,883

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:

Accounts payable

$   35,671

$             32,703

Accrued and other liabilities

102,049

124,934

Deferred revenue, current portion

23,184

31,374

Related party payable (B)

-

11,216

Accrued loss on excess office facilities, current portion

2,095

3,228

Total current liabilities

162,999

203,455

Deferred revenue, non-current portion

966

1,933

Deferred rent

4,380

4,464

Deferred tax liabilities, net, non-current portion

884

961

Other long-term liabilities

12,750

13,006

Total liabilities

181,979

223,819

Noncontrolling interest in Rhapsody (C)

-

7,253

Shareholders' equity

394,233

375,811

Total liabilities and shareholders' equity  

$ 576,212

$           606,883

(A) Related party receivable reflects amounts receivable from Rhapsody International, formed on March 31, 2010.

(B) Related party payable reflects amounts owed to MTVN.

(C) Noncontrolling interest in Rhapsody reflects MTVN's 49% ownership interest in the net assets of Rhapsody at December 31, 2009. Due to the restructuring transactions which occurred on March 31, 2010, Rhapsody's balance sheet is no longer included within RealNetworks consolidated financial statements.

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Quarters Ended March 31,

2010

2009

(in thousands)

Cash flows from operating activities:

Net income (loss)

$                 318

$          (18,569)

Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:

Depreciation and amortization

7,314

7,776

Stock-based compensation

3,921

5,222

Gain on disposal of equipment, software, and leasehold improvements

(2)

(33)

Equity in net loss of investments

-

655

Gain on sale of equity investment, net

-

(137)

Gain on deconsolidation of Rhapsody

(10,929)

-

Excess tax benefit from stock option exercises

(29)

(9)

Accrued restructuring and other charges

4,455

(2,951)

Deferred income taxes, net

(1,359)

(212)

Other

-

10

Net change in certain operating assets and liabilities, net of acquisitions and disposals

(36,145)

12,209

Net cash (used in) provided by operating activities

(32,456)

3,961

Cash flows from investing activities:

Purchases of equipment, software, and leasehold improvements

(4,692)

(3,042)

Purchases of short-term investments

(26,613)

(52,415)

Proceeds from sales and maturities of short-term investments

1,872

25,396

Proceeds from the sales of equity investments

-

137

Purchases of equity investments

-

(2,000)

Payment of acquisition costs, net of cash acquired

-

(3,154)

Payment in connection with the restructuring of Rhapsody

(18,000)

-

Repayment of temporary funding on deconsolidation of Rhapsody

5,869

-

Decrease in restricted cash equivalents and investments, net

-

(25)

Net cash used in investing activities

(41,564)

(35,103)

Cash flows from financing activities:

Net proceeds from sales of common stock under employee stock purchase

plan and exercise of stock options

341

12

Payments received on MTVN note

1,213

7,667

Capital contribution to Rhapsody from MTVN

-

5,000

Excess tax benefit from stock option exercises

29

9

Net cash provided by financing activities

1,583

12,688

Effect of exchange rate changes on cash and cash equivalents

(1,988)

(2,805)

Net decrease in cash and cash equivalents

(74,425)

(21,259)

Cash and cash equivalents, beginning of period

277,030

232,968

Cash and cash equivalents, end of period

$          202,605

$          211,709

RealNetworks, Inc. and Subsidiaries

Supplemental Financial Information

(Unaudited)

2010

2009

Q1

Q4

Q3

Q2

Q1

(in thousands)

Net Revenue by Line of Business:

Consumer products and services (A)

$   86,708

$   91,233

$               92,836

$   89,517

$   97,194

Technology products and solutions (B)

41,892

54,269

47,428

46,208

43,579

Total net revenue

$ 128,600

$ 145,502

$             140,264

$ 135,725

$ 140,773

Consumer Products and Services:

Subscriptions (C)

$   49,805

$   50,492

$               52,401

$   54,446

$   59,052

Media properties (D)

17,168

20,327

21,001

14,753

15,536

E-commerce and other (E)

19,735

20,414

19,434

20,318

22,606

Total consumer products and services revenue

$   86,708

$   91,233

$               92,836

$   89,517

$   97,194

Consumer Products and Services:

Music (F)

$   35,733

$   37,598

$               38,765

$   40,452

$   44,053

Media software and services (G)

20,739

22,899

24,580

19,291

20,318

Games  (H)

30,236

30,736

29,491

29,774

32,823

Total consumer products and services revenue

$   86,708

$   91,233

$               92,836

$   89,517

$   97,194

Net Revenue by Geography:

United States

$   84,550

$   91,175

$               95,758

$   90,685

$   96,666

Rest of world

44,050

54,327

44,506

45,040

44,107

Total net revenue

$ 128,600

$ 145,502

$             140,264

$ 135,725

$ 140,773

Subscribers (presented as greater than) *:

Total subscribers (I)

39,250

40,250

38,950

37,700

36,450

Technology products and solutions application   services subscribers (J)

37,950

38,850

37,500

36,300

33,850

Music subscribers:

Consumer music subscribers:

Rhapsody subscribers

650

675

700

750

800

Radio subscribers

75

75

75

75

1,200

Total consumer music subscribers

725

750

775

825

2,000

Technology products and solutions application   services music subscribers (K)

1,300

1,150

1,075

975

900

Total Music Subscribers**

2,025

1,900

1,850

1,800

2,900

* Total music subscribers includes subscribers from our technology products and SaaS services, such as music-on-demand, as well as our consumer music services, such as Rhapsody and Premium Radio. Although music-on-demand subscribers are included in the technology products and solutions application services subscribers and total music subscribers, these subscribers are only counted once as part of our total subscribers.

**   Prior periods have been changed to reflect current period presentation. Totals may not equal due to rounding convention.

(A)  Revenue is derived from consumer digital media subscription services, RealPlayer Plus and related products, sales and distribution of third party software products, content such as games and music and advertising.

(B)  The Technology Products and Solutions (TPS) segment includes revenue and related costs from: sales of ringback tones, music-on-demand, video-on-demand, messaging, and information services; sales of media delivery system software, including Helix system software and related authoring and publishing tools, both directly to customers and indirectly through original equipment manufacturer channels; support and maintenance services sold to customers who purchase software products; broadcast hosting services; and consulting and professional services that are offered to customers.

(C)  Revenue is derived from consumer digital media subscription services including:  SuperPass, RadioPass, Rhapsody, GamePass and FunPass.

(D)  Revenue is derived from advertising and through the distribution of third party products.

(E)  Revenue is derived from RealPlayer Plus and related products, sales of third party software products, and content such as games and music.

(F) The Music segment primarily includes revenue and related costs from: Rhapsody and RadioPass subscription services; sales of digital music content through the Rhapsody service and the RealPlayer music store; and advertising from music websites.

(G)  The Media Software and Services (MSS) segment primarily includes revenue and related costs from: the SuperPass premium subscription service; RealPlayer Plus and related products; sales and distribution of third-party software products; and all advertising other than that related directly to our Music and Games businesses.  

(H)  The Games segment primarily includes revenue and related costs from: the sale of individual games on our websites RealArcade.com, GameHouse.com and Zylom.com; the sales of games subscription services; advertising through our games websites; the sale of games through the syndication on partner sites, and sales of games through wireless carriers.  

(I)  Total subscribers include technology products and solutions application services and consumer subscription services including: ringback tones, music-on-demand, video-on-demand, Rhapsody, Rhapsody-to-Go, RadioPass, SuperPass, and GamePass.

(J)  Technology products and solutions application service subscribers include: ringback tones, music-on-demand and video-on-demand.

(K)  Technology products and solutions application services music subscribers include music-on-demand.

RealNetworks, Inc. and Subsidiaries

Supplemental Financial Information

(Unaudited)

Reconciliation of GAAP net income (loss) attributable to common shareholders to adjusted EBITDA is as follows:

Quarters Ended

March 31,

December 31,

September 30,

June 30,

March 31,

2010

2009

2009

2009

2009

(in thousands)

Net income (loss) attributable to common shareholders

$       3,228

$           (17,819)

$                 1,520

$ (188,329)

$    (12,136)

Interest income, net

(380)

(779)

(1,253)

(754)

(1,183)

Stock-based compensation  

3,921

5,915

4,727

5,596

5,222

Loss (gain) on sale of equity investments, net

-

121

(604)

(68)

(137)

Impairment of equity investments

-

5,020

-

-

-

Gain on deconsolidation of Rhapsody

(10,929)

-

-

-

-

Conversion of WiderThan stock options to a cash equivalent

-

-

1

3

17

Depreciation and amortization (net of noncontrolling interest effect)

6,005

6,355

5,432

5,815

5,726

Acquisitions related intangible asset amortization (net of noncontrolling interest effect)

1,239

1,797

1,784

1,649

1,768

Impairment of goodwill and long-lived assets

-

-

-

175,583

-

Restructuring and other charges

5,615

2,346

877

-

794

Pro forma gain on sale of interest in Rhapsody

598

5,577

3,839

3,444

4,010

Income taxes

(3,572)

(124)

686

1,210

1,549

Adjusted EBITDA  

$       5,725

$               8,409

$               17,009

$      4,149

$       5,630

RealNetworks, Inc. and Subsidiaries

Segment Results of Operations

(Unaudited)

Quarter Ended March 31, 2010

Music (A)

MSS (B)

Games(C)

TPS (D)

Other

Grand Total

(in thousands)

Net revenue

$ 35,733

$ 20,739

$ 30,236

$ 41,892

$        -

$    128,600

Cost of revenue

21,930

2,764

7,812

16,653

-

49,159

Gross profit

13,803

17,975

22,424

25,239

-

79,441

Gross margin

39%

87%

74%

60%

-

62%

Operating expenses:

Advertising with related party

1,065

-

-

-

-

1,065

Restructuring and other charges

-

-

-

-

5,615

5,615

Other operating expenses

18,608

14,364

27,793

26,620

38

87,423

Total operating expenses

19,673

14,364

27,793

26,620

5,653

94,103

Income (loss) from operations

(5,870)

3,611

(5,369)

(1,381)

(5,653)

(14,662)

Other income (expenses):

Interest income, net

-

-

-

-

380

380

Equity in net loss of investments

-

-

-

-

-

-

Gain on deconsolidation of Rhapsody

10,929

-

-

-

-

10,929

Other income (expenses), net

-

-

-

-

99

99

Total other income (expenses), net

10,929

-

-

-

479

11,408

Income (loss) before income taxes

5,059

3,611

(5,369)

(1,381)

(5,174)

(3,254)

Income taxes

-

-

-

-

3,572

3,572

Net income (loss)

5,059

3,611

(5,369)

(1,381)

(1,602)

318

Net income (loss) attributable to noncontrolling interest in Rhapsody

2,910

-

-

-

-

2,910

Net income (loss) attributable to common shareholders

$   7,969

$   3,611

$  (5,369)

$ (1,381)

$ (1,602)

$        3,228

Reconciliation of segment GAAP net income (loss) attributable to common shareholders to segment adjusted EBITDA is as follows:

Net income (loss) attributable to common shareholders

$   7,969

$   3,611

$  (5,369)

$ (1,381)

$ (1,602)

$        3,228

Income taxes

-

-

-

-

(3,572)

(3,572)

Interest income, net

-

-

-

-

(380)

(380)

Stock-based compensation

522

556

1,100

1,743

-

3,921

Conversion of WiderThan stock options to a cash equivalent

-

-

-

-

-

-

Acquisitions related intangible asset amortization (E)

58

25

60

1,096

-

1,239

Pro forma gain on sale of interest in Rhapsody

598

-

-

-

-

598

Gain on deconsolidation of Rhapsody

(10,929)

-

-

-

-

(10,929)

Restructuring and other charges

-

-

-

-

5,615

5,615

Depreciation and amortization (E)

943

492

2,139

2,431

-

6,005

Adjusted EBITDA  

$    (839)

$   4,684

$  (2,070)

$   3,889

$       61

$        5,725

Quarter Ended March 31, 2009

Music (A)

MSS (B)

Games(C)

TPS (D)

Other

Grand Total

(in thousands) 

Net revenue

$ 44,053

$ 20,318

$ 32,823

$ 43,579

$        -

$    140,773

Cost of revenue

27,300

3,707

8,564

16,450

-

56,021

Gross profit

16,753

16,611

24,259

27,129

-

84,752

Gross margin

38%

82%

74%

62%

-

60%

Operating expenses:

Advertising with related party

7,423

-

-

-

-

7,423

Restructuring and other charges

-

-

-

-

794

794

Other operating expenses

22,093

19,882

26,846

26,216

38

95,075

Total operating expenses

29,516

19,882

26,846

26,216

832

103,292

Income (loss) from operations

(12,763)

(3,271)

(2,587)

913

(832)

(18,540)

Other income (expenses):

Interest income, net

-

-

-

-

1,183

1,183

Equity in net loss of investments

-

-

-

-

(655)

(655)

Loss on sale of equity investments, net

-

-

-

-

137

137

Other income (expenses), net

-

-

-

-

855

855

Total other income (expenses), net

-

-

-

-

1,520

1,520

Income (loss) before income taxes

(12,763)

(3,271)

(2,587)

913

688

(17,020)

Income taxes

-

-

-

-

(1,549)

(1,549)

Net income (loss)

(12,763)

(3,271)

(2,587)

913

(861)

(18,569)

Net income (loss) attributable to noncontrolling interest in Rhapsody

6,433

-

-

-

-

6,433

Net income (loss) attributable to common shareholders

$ (6,330)

$ (3,271)

$  (2,587)

$      913

$    (861)

$     (12,136)

Reconciliation of segment GAAP net income (loss) attributable to common shareholders to segment adjusted EBITDA is as follows:

Net income (loss) attributable to common shareholders

$ (6,330)

$ (3,271)

$  (2,587)

$      913

$    (861)

$     (12,136)

Income taxes

-

-

-

-

1,549

1,549

Interest income, net

-

-

-

-

(1,183)

(1,183)

Stock-based compensation

865

698

1,397

2,262

-

5,222

Conversion of WiderThan stock options to a cash equivalent

-

-

-

17

-

17

Acquisitions related intangible asset amortization (E)

278

-

144

1,346

-

1,768

Pro forma gain on sale of interest in Rhapsody

4,010

-

-

-

-

4,010

Loss on sale of equity investments, net

-

-

-

-

(137)

(137)

Restructuring and other charges

-

-

-

-

794

794

Depreciation and amortization (F)

1,102

819

951

2,854

-

5,726

Adjusted EBITDA  

$      (75)

$ (1,754)

$       (95)

$   7,392

$     162

$        5,630

Note:  Cost of revenue and operating expenses of the segments shown above include costs directly attributable to those segments and an allocation of general and administrative and other common or shared costs.

(A) The Music segment primarily includes revenue and related costs from: Rhapsody and RadioPass subscription services; sales of digital music content through the Rhapsody service and the RealPlayer music store; and advertising from music websites.

(B) The Media Software and Services (MSS) segment primarily includes revenue and related costs from: the SuperPass premium subscription service; RealPlayer Plus and related products; sales and distribution of third-party software products; and all advertising other than that related directly to our Music and Games businesses.  

(C) The Games segment primarily includes revenue and related costs from: the sale of individual games on our websites RealArcade.com, GameHouse.com and Zylom.com; the sales of games subscription services; advertising through our games websites; the sale of games through the syndication on partner sites, and sales of games through wireless carriers.  

(D) The Technology Products and Solutions (TPS) segment includes revenue and related costs from: sales of ringback tones, music-on-demand, video-on-demand, messaging, and information services; sales of media delivery system software, including Helix system software and related authoring and publishing tools, both directly to customers and indirectly through original equipment manufacturer channels; support and maintenance services sold to customers who purchase software products; broadcast hosting services; and consulting and professional services that are offered to customers.

(E) Net of noncontrolling interest effect.

RealNetworks, Inc. and Subsidiaries

Supplemental Financial Information

(Unaudited)

Quarter Ended March 31, 2010

Acquisitions

WiderThan

Related

Options

Intangible

Converted

As

Stock-Based

Asset

to a Cash

Reported

Compensation

Amortization (A)

Equivalent

Adjusted

(in thousands)

Cost of revenue

$     49,159

$                   (231)

$                (520)

$               -

$     48,408

Operating expenses:

Research and development

$     34,675

$                (1,597)

$                     -

$               -

$     33,078

Sales and marketing

37,827

(996)

(719)

-

36,112

General and administrative

14,921

(1,097)

-

-

13,824

Adjusted operating expenses, net

$     87,423

$                (3,690)

$                (719)

$               -

$     83,014

Quarter Ended March 31, 2009

Acquisitions

WiderThan

Related

Options

Intangible

Converted

As

Stock-Based

Asset

to a Cash

Reported

Compensation

Amortization (A)

Equivalent

Adjusted

(in thousands)

Cost of revenue

$     56,021

$                   (630)

$                (546)

$               (1)

$     54,844

Operating expenses:

Research and development

$     28,559

$                (1,824)

$                     -

$               (5)

$     26,730

Sales and marketing

43,685

(1,066)

(1,222)

(11)

41,386

General and administrative

22,831

(1,702)

-

-

21,129

Adjusted operating expenses, net

$     95,075

$                (4,592)

$             (1,222)

$             (16)

$     89,245

(A) - Net of noncontrolling interest effect.

RealNetworks, Inc. and Subsidiaries

Earnings Per Share Reconciliation

(Unaudited)

Quarters Ended

March 31,

2010

2009

(in thousands, except per share data)

Net income (loss) attributable to common shareholders

$  3,228

$ (12,136)

Less accretion of MTVN's preferred return in Rhapsody

3,700

(1,434)

Net income (loss) available to common shareholders

$  6,928

$ (13,570)

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

135,130

134,380

Dilutive potential common shares:

Stock options and restricted stock  

4,443

-

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

139,573

134,380

Basic net income (loss) per share available to common shareholders

$    0.05

$     (0.10)

Diluted net income (loss) per share available to common shareholders

$    0.05

$     (0.10)

SOURCE RealNetworks, Inc.



RELATED LINKS

http://www.realnetworks.com