RealNetworks Announces First Quarter 2012 Results

May 02, 2012, 16:00 ET from RealNetworks, Inc.

SEATTLE, May 2, 2012 /PRNewswire/ -- RealNetworks, Inc. (Nasdaq: RNWK) today announced results for the first quarter ended March 31, 2012.

Quarterly Summary:

  • Revenue of $67.0 million
  • Net loss of $(17.0) million or $(0.49) per share  
  • Adjusted EBITDA of $(7.4) million  
  • Cash and short term investments of $167.0 million as of March 31, 2012
  • Closed $120 million sale of patent assets to Intel on April 5, 2012  

"In the first quarter, we made progress on our turn-around plan for RealNetworks," said Thomas Nielsen, President and CEO of RealNetworks. "While it will take a while for financial results to reflect the work we are doing, we are confident that we are on the right path in simplifying our company and developing a strategy for future growth."

First Quarter Results

For the first quarter of 2012, revenue was $67.0 million, a sequential decrease of 17% from the fourth quarter of 2011, and a decrease of 23% compared with the first quarter of 2011. Revenue trends in each of RealNetworks' businesses in the first quarter of 2012 compared with the year-earlier quarter were: a 9% decrease in Emerging Products revenue to $10.2 million, a 22% decrease in Core Products revenue to $37.7 million and a 32% decrease in Games revenue to $19.1 million.  

Net loss for the first quarter of 2012 was $(17.0) million, or $(0.49) per share, compared with a net loss of $(12.3) million, or $(0.36) per share, in the first quarter of 2011. The loss for the most-recent quarter was affected primarily by the decline in revenue. The loss widened in spite of a decline in restructuring costs to $(1.6) million, compared with $(6.9) million in the first quarter of 2011; a decline in RealNetworks' share of Rhapsody losses to $(0.4) million in the first quarter of 2012 from $(3.3) million in the first quarter of 2011; and lower tax expense of $(0.2) million, compared with $(3.6) million in the year-ago quarter. The year-ago net loss reflected a $6.4 million insurance reimbursement for legal expenses.

Adjusted EBITDA for the first quarter was $(7.4) million, excluding costs related to the Intel transaction, compared with adjusted EBITDA of $7.5 million for the first quarter of 2011.  A reconciliation of GAAP operating income (loss) to adjusted EBITDA is provided in the financial tables that accompany this release.

As of March 31, 2012, RealNetworks had $167.0 million in unrestricted cash, cash equivalents and short-term investments, of which approximately $42.6 million is held in foreign jurisdictions, compared with cash of $185.1 million at Dec. 31, 2011.  The $167.0 million at March 31, 2012, does not include the $120.0 million cash proceeds from the sale of patent assets to Intel, which closed on April 5, 2012. In addition, RealNetworks had $55.8 million in restricted cash and available-for-sale securities as of March 31, 2012, an increase of $8.4 million from Dec. 31, 2011. 

Segment Operating Results

2012

2011

2011

Q1

Q4

 Q1 

 (in thousands) 

Revenue 

Core Products

$        37,697

$        46,693

$        48,107

Emerging Products

10,159

11,974

11,135

Games

19,108

21,552

28,059

Corporate

-

-

-

Total   

$        66,964

$        80,219

$        87,301

Operating Income (loss)

Core Products

$          1,801

$      (10,733)

$          7,737

Emerging Products

508

26

(296)

Games

(983)

228

2,711

Corporate

(19,868)

(13,198)

(15,818)

Total   

$      (18,542)

$      (23,677)

$        (5,666)

Adjusted EBITDA

Core Products

$          4,400

$        11,382

$        10,260

Emerging Products

754

986

(188)

Games

(324)

883

3,340

Corporate

(12,247)

(9,411)

(5,870)

Total   

$        (7,417)

$          3,840

$          7,542

Business Outlook

For the second quarter of 2012, RealNetworks expects revenue of $66 million to $69 million. The company expects revenue from Core Products to increase sequentially and decline year-over-year, and revenue from Emerging Products to be flat sequentially and decline year-over-year.  The company expects revenue in Games to decline sequentially and year-over-year. RealNetworks expects to report a second-quarter adjusted EBITDA loss similar to that of the first quarter.

Anticipating significant restructuring activities in 2012, which we expect will include acquisitions and divestitures as well as changes in RealNetworks' operating segments, RealNetworks is not providing full-year guidance for 2012.

The foregoing forward-looking statements reflect RealNetworks' expectations as of May 2, 2012.  It is not RealNetworks' general practice to update these forward-looking statements until its next quarterly results announcement.

Webcast and Conference Call Information

The company will host an audio Webcast conference call to review results and discuss the company's operations for the first quarter at 5:00 p.m. ET on May 2.  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. ET / 2:00 p.m. PT Dial in: 888-323-9869 Domestic 517-308-9139 International Passcode: First Quarter Earnings Leader: Thomas Nielsen

Telephonic replay will be available until 8 p.m. ET, May 16, 2012. Replay dial in: 800-944-8789 Domestic 402-220-3521 International

About RealNetworks:  

RealNetworks creates innovative applications and services that make it easy to connect with and enjoy digital media. RealNetworks invented the streaming media category in 1995 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. RealNetworks' corporate information is located at http://www.realnetworks.com/about-us

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 EBITDA and adjusted EBITDA by reporting segment, which management believes provide investors with useful information. 

In the financial tables of our earnings press release, RealNetworks has included reconciliations of GAAP operating income (loss) to adjusted EBITDA and to adjusted EBITDA by reporting segment.

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 RealNetworks' current expectations for revenue, adjusted EBITDA, the development of its strategy for future growth, and plans to undertake restructuring activities, including acquisitions and divestitures.  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; RealNetworks' ability to realize operating efficiencies, growth 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 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; 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 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, 

2012

2011

 (in thousands, except per share data) 

 Net revenue 

$  66,964

$  87,301

 Cost of revenue 

27,427

32,066

 Gross profit 

39,537

55,235

 Sale of patents and other technology assets, net of costs (A) 

(1,580)

-

 Operating expenses: 

 Research and development 

17,818

19,895

 Sales and marketing 

23,796

28,480

 General and administrative 

13,276

5,622

 Restructuring and other charges 

1,609

6,904

 Total operating expenses 

56,499

60,901

 Operating income (loss) 

(18,542)

(5,666)

 Other income (expenses): 

 Interest income, net 

644

379

 Equity in net loss of Rhapsody investment 

(368)

(3,281)

 Other income (expense), net 

1,475

(122)

 Total other income (expense), net 

1,751

(3,024)

 Income (loss) before income taxes 

(16,791)

(8,690)

 Income tax (expense) benefit  

(224)

(3,615)

 Net income (loss) attributable to common shareholders 

$(17,015)

$(12,305)

 Basic net income (loss) per share 

$     (0.49)

$     (0.36)

 Diluted net income (loss) per share 

$     (0.49)

$     (0.36)

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

34,488

34,066

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

34,488

34,066

(A) On April 5, 2012, RealNetworks completed the sale of certain patents and other technology assets to Intel for a cash purchase of $120.0 million. Because the transaction closed subsequent to March 31, 2012, the gain on the transaction will be reflected in our financial statements for the second quarter of 2012. For the first quarter of 2012, $1.6 million of direct costs of the transaction were incurred.

 RealNetworks, Inc. and Subsidiaries 

 Condensed Consolidated Balance Sheets 

 (Unaudited) 

 March 31, 

 December 31, 

2012

2011

 (in thousands) 

 ASSETS 

 Current assets: 

 Cash and cash equivalents  

$    83,332

$          106,333

 Short-term investments 

83,681

78,739

 Trade accounts receivable, net 

40,160

41,165

 Deferred costs, current portion 

1,338

1,424

 Prepaid expenses and other current assets 

24,984

21,902

 Total current assets 

233,495

249,563

 Equipment, software, and leasehold improvements, at cost: 

 Equipment and software 

108,173

104,352

 Leasehold improvements 

26,224

25,947

 Total equipment, software, and leasehold improvements 

134,397

130,299

 Less accumulated depreciation and amortization 

95,672

92,825

 Net equipment, software, and leasehold improvements 

38,725

37,474

 Restricted cash equivalents and investments 

10,173

10,168

 Equity method investments 

7,430

7,798

 Available for sale securities 

45,630

37,204

 Other assets 

2,960

2,954

 Deferred costs, non-current portion 

691

843

 Deferred tax assets, net, non-current portion 

18,320

18,419

 Other intangible assets, net 

6,177

7,169

 Goodwill 

6,297

6,198

 Total assets 

$  369,898

$          377,790

 LIABILITIES AND SHAREHOLDERS' EQUITY 

 Current liabilities: 

 Accounts payable 

$    17,935

$             17,151

 Accrued and other liabilities 

58,783

59,194

 Deferred revenue, current portion 

11,270

11,835

 Accrued loss on excess office facilities, current portion 

505

596

 Total current liabilities 

88,493

88,776

 Deferred revenue, non-current portion 

220

195

 Accrued loss on excess office facilities, non-current portion 

1,843

2,151

 Deferred rent 

2,867

2,944

 Deferred tax liabilities, net, non-current portion 

1,217

1,443

 Other long-term liabilities 

9,884

10,994

 Total liabilities 

104,524

106,503

 Shareholders' equity 

265,374

271,287

 Total liabilities and shareholders' equity  

$  369,898

$          377,790

 RealNetworks, Inc. and Subsidiaries 

 Condensed Consolidated Statements of Cash Flows 

 (Unaudited) 

 Quarters Ended March 31,  

2012

2011

 (in thousands) 

 Cash flows from operating activities: 

 Net income (loss) 

$  (17,015)

$   (12,305)

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

 Depreciation and amortization 

4,118

3,819

 Stock-based compensation 

2,343

3,453

 Equity in net loss of Rhapsody investment 

368

3,281

 Excess tax benefit from stock option exercises 

-

(26)

 Deferred income taxes, net 

(19)

(161)

 Realized translation gain 

(1,611)

-

 Other 

(3)

105

 Net change in certain operating assets and liabilities 

(5,423)

(3,352)

 Net cash provided by (used in) operating activities 

(17,242)

(5,186)

 Cash flows from investing activities: 

 Purchases of equipment, software, and leasehold improvements 

(2,798)

(1,165)

 Purchases of short-term investments 

(9,969)

(22,091)

 Proceeds from sales and maturities of short-term investments 

5,027

38,020

 Net cash provided by (used in) investing activities 

(7,740)

14,764

 Cash flows from financing activities: 

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

675

1,101

 Excess tax benefit from stock option exercises 

-

26

 Net cash provided by (used in) financing activities 

675

1,127

 Effect of exchange rate changes on cash and cash equivalents 

1,306

2,385

 Net increase (decrease) in cash and cash equivalents 

(23,001)

13,090

 Cash and cash equivalents, beginning of period 

106,333

236,018

 Cash and cash equivalents, end of period 

$    83,332

$  249,108

 RealNetworks, Inc. and Subsidiaries 

 Supplemental Financial Information 

 (Unaudited) 

2012

2011

 Q1 

 Q4 

 Q3 

 Q2 

 Q1 

 (in thousands) 

 Net Revenue by Line of Business: 

 Core Products (A) 

$37,697

$46,693

$50,705

$45,735

$48,107

 Emerging Products (B) 

10,159

11,974

10,764

12,717

11,135

 Games (C)  

19,108

21,552

22,945

25,300

28,059

  Total net revenue 

$66,964

$80,219

$84,414

$83,752

$87,301

 Core Products Revenue by Product: 

 SaaS (D) 

$23,463

$28,255

$30,381

$30,216

$30,526

 Systems Integration / Professional Services (E) 

426

771

3,844

388

1,840

 Technology Licensing (F) 

6,207

9,246

6,250

6,508

6,425

 Consumer Subscriptions (G) 

7,601

8,421

10,230

8,623

9,316

 Total Core Products net revenue 

$37,697

$46,693

$50,705

$45,735

$48,107

 Net Revenue by Geography: 

 United States 

$31,814

$37,298

$38,969

$41,984

$44,469

 Rest of world 

35,150

42,921

45,445

41,768

42,832

 Total net revenue 

$66,964

$80,219

$84,414

$83,752

$87,301

Product Metrics (subscribers and ICM presented as greater than):

Addressable subscribers of mobile operators under contract (H)

725,000

725,000

700,000

775,000

775,000

SaaS subscribers (I)

30,500

30,050

34,000

34,550

35,900

Monthly SaaS ARPU (in cents) (J)

$    0.15

$    0.19

$    0.17

$    0.18

$    0.18

ICM delivered in billions (K)

166

165

162

157

151

Consumer subscribers(L)

400

425

500

475

500

 Net Revenue by Line of Business: 

(A)  The Core Products segment primarily includes revenue from SaaS services, system integration and professional services to carriers and mobile handset companies, sales of technology licenses of our software products such as Helix for handsets, consumer subscriptions such as SuperPass and our international radio subscription services.

(B)  The Emerging Products segment primarily includes revenue from RealPlayer and related products, such as the distribution of third party software products, advertising on RealPlayer websites and sales of RealPlayerPlus software licenses to consumers.

(C)  The Games segment primarily includes revenue from sales of games licenses, online games subscription services, advertising on game sites and social network sites, games syndication services, microtransactions from online and social games and sales of mobile games.

 Core Products Revenue by Product: 

(D)  Software as a Service (SaaS) revenue includes revenue from music on demand (MOD), video on demand (VOD), ringtones, ringback tones (RBT) and intercarrier messaging services provided to network service providers, who are largely mobile phone networks.

(E)  Systems Integrations / Professional Services revenue includes professional services, other than those associated with software sales, provided to mobile carriers and handset manufacturers.

(F)  Technology Licensing includes revenue from sales of software and other intellectual property licenses such as Helix server licenses and Helix software licenses for handsets.

(G)  Consumer Subscriptions includes revenue from SuperPass as well as our international radio subscription services.

 Product Metrics: 

(H)  Total subscribers reported at the end of the quarter of mobile carriers that offer one or more of our SaaS services, other than intercarrier messaging services, to their customers.

(I)  SaaS subscribers include RBT, MOD and VOD services, measured at the end of the quarter.

(J)  Monthly SaaS ARPU (Average Revenue Per User) is calculated by dividing (a) the total quarterly revenue from SaaS subscription services, including RBT, MOD, VOD, by (b) the number of SaaS subscribers at the end of the quarter, and dividing the resulting quotient by three.

(K)  ICM (Intercarrier message) represents the total number of messages delivered across our messaging platform during the quarter.

(L)  Consumer subscribers primarily includes our SuperPass and GamePass products. 

 RealNetworks, Inc. and Subsidiaries 

 Segment Results of Operations 

 (Unaudited) 

2012

2011

 Q1 

 Q4 

 Q1 

Core Products

Net revenue

$  37,697

$  46,693

$ 48,107

Cost of revenue

17,828

20,867

20,984

Impairment of deferred costs

-

19,329

-

Gross profit

19,869

6,497

27,123

Gross margin

53%

14%

56%

Operating expenses

18,068

17,230

19,386

Operating income (loss)  

$   1,801

$ (10,733)

$   7,737

 Adjusted EBITDA  

$   4,400

$  11,382

$ 10,260

Emerging Products

Net revenue

$  10,159

$  11,974

$ 11,135

Cost of revenue

2,105

3,448

1,540

Impairment of deferred costs

-

633

-

Gross profit

8,054

7,893

9,595

Gross margin

79%

66%

86%

Operating expenses

7,546

7,867

9,891

Operating income (loss)  

$      508

$         26

$     (296)

 Adjusted EBITDA  

$      754

$       986

$     (188)

Games 

Net revenue

$  19,108

$  21,552

$ 28,059

Cost of revenue

6,661

6,875

8,534

Gross profit

12,447

14,677

19,525

Gross margin

65%

68%

70%

Operating expenses

13,430

14,449

16,814

Operating income (loss)  

$     (983)

$       228

$   2,711

 Adjusted EBITDA  

$     (324)

$       883

$   3,340

Corporate

Net revenue

$        -

$         -

$        -

Cost of revenue

833

899

1,008

Gross profit

(833)

(899)

(1,008)

Gross margin

 N/A 

 N/A 

 N/A 

Sale of patents and other technology assets, net of costs

1,580

-

-

Operating expenses

17,455

12,299

14,810

Operating income (loss)  

$ (19,868)

$ (13,198)

$(15,818)

 Adjusted EBITDA  

$ (12,247)

$   (9,411)

$  (5,870)

Total

Net revenue

$  66,964

$  80,219

$ 87,301

Cost of revenue

27,427

32,089

32,066

Impairment of deferred costs

-

19,962

-

Gross profit

39,537

28,168

55,235

Gross margin

59%

35%

63%

Sale of patents and other technology assets, net of costs

1,580

-

-

Operating expenses

56,499

51,845

60,901

Operating income (loss)  

$ (18,542)

$ (23,677)

$  (5,666)

 Adjusted EBITDA  

$  (7,417)

$    3,840

$   7,542

 RealNetworks, Inc. and Subsidiaries 

 Reconciliation of segment GAAP operating income (loss) to adjusted EBITDA by reporting segment  

 (Unaudited) 

2012

2011

 Q1 

 Q4 

 Q1 

Core Products

Reconciliation of segment GAAP operating income (loss) to adjusted EBITDA by reporting segment:

Operating income (loss) 

$   1,801

$ (10,733)

$   7,737

Acquisitions related intangible asset amortization 

802

789

474

Depreciation and amortization 

1,797

1,997

2,049

Impairment of deferred costs

-

19,329

-

 Adjusted EBITDA  

$   4,400

$  11,382

$ 10,260

Emerging Products

Reconciliation of segment GAAP operating income (loss) to adjusted EBITDA by reporting segment:

Operating income (loss)  

$      508

$         26

$     (296)

Acquisitions related intangible asset amortization 

79

79

-

Depreciation and amortization 

167

248

108

Impairment of deferred costs

-

633

-

 Adjusted EBITDA  

$      754

$       986

$     (188)

Games 

Reconciliation of segment GAAP operating income (loss) to adjusted EBITDA by reporting segment:

Operating income (loss)  

$     (983)

$       228

$   2,711

Acquisitions related intangible asset amortization 

209

229

254

Depreciation and amortization 

450

426

375

 Adjusted EBITDA  

$     (324)

$       883

$   3,340

Corporate

Reconciliation of segment GAAP operating income (loss) to adjusted EBITDA by reporting segment:

Operating income (loss)  

$ (19,868)

$ (13,198)

$(15,818)

Other income (expense), net

1,475

188

(122)

Depreciation and amortization 

614

608

559

Restructuring and other charges

1,609

800

6,904

Stock-based compensation

2,343

2,663

2,607

Sale of patents and other technology assets, net of costs

1,580

-

-

Gain on excess office facilities

-

(472)

-

 Adjusted EBITDA  

$ (12,247)

$   (9,411)

$  (5,870)

 Total  

Reconciliation of GAAP operating income (loss) to adjusted EBITDA:

Operating income (loss)  

$ (18,542)

$ (23,677)

$  (5,666)

Other income (expense), net

1,475

188

(122)

Acquisitions related intangible asset amortization

1,090

1,097

728

Depreciation and amortization

3,028

3,279

3,091

Gain on excess office facilities

-

(472)

-

Restructuring and other charges

1,609

800

6,904

Stock-based compensation

2,343

2,663

2,607

Impairment of deferred costs

-

19,962

-

Sale of patents and other technology assets, net of costs

1,580

-

-

 Adjusted EBITDA  

$  (7,417)

$    3,840

$   7,542

SOURCE RealNetworks, Inc.



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