RealNetworks Announces Second Quarter 2014 Results

- Rob Glaser named as permanent CEO;

- RealPlayer Cloud continues to gain traction with over 5 million accounts;

- Hired 2 new excellent senior executives, Mike Mulica and Atul Bali, and redeployed a 3rd, Max Pellegrini;

- Continued progress in long term strategic transition and growth strategy; and

- Cash and short-term investments of $195.0 million

30 Jul, 2014, 16:02 ET from RealNetworks, Inc.

SEATTLE, July 30, 2014 /PRNewswire/ -- RealNetworks, Inc. (Nasdaq: RNWK), a leader in personal digital entertainment, today announced results for the second quarter ended June 30, 2014.

For the second quarter of 2014, revenue was $40.8 million, compared to $45.7 million in the previous quarter and $49.9 million in the second quarter of 2013.

"In the second quarter of 2014, we continued to make good progress in our transition into a being a multi-device, cloud-based products and services company," said Rob Glaser, Chairman and CEO of RealNetworks. "Of particular note is RealPlayer Cloud's rapid growth -- RealPlayer Cloud now has over 5 million users worldwide, up from over 2 million three months ago, and, in aggregate, our users are now uploading over 4.5 terabytes of video per day." RealPlayer Cloud is Real's next generation video product and service, which makes it easy to watch, save and share video across every type of popular digital device.

"During the second quarter, we brought in Mike Mulica to lead the integration of our worldwide sales efforts across our RealPlayer and Mobile Entertainment divisions in order to strengthen our focus on partnerships with global carriers.  We also redeployed Max Pellegrini to run the combined product teams and all associated direct-to-consumer marketing.  On the games front, we also strengthened our senior team by bringing in Atul Bali to run our overall Games business and by bringing back Rutger Peters and Erik Goossens, the co-founders of Zylom which we acquired in 2006, to run the Casual Games part of the business.   We also just announced our new Slingo Adventure game, the first fruit of our Slingo acquisition a year ago.  Finally, we also continue to be encouraged by the progress being made by Rhapsody (of which we own approximately 45%), which announced yesterday that it now has over 2 million subscribers."

The company also announced today that Rob Glaser has been named permanent CEO of RealNetworks. See announcement at http://www.realnetworks.com/press/releases/2014/Glaser-permanent-CEO.aspx.    

"While our transition plan will take time to complete and will require more capital than originally anticipated,  I'm very confident that we are on the right track and making progress that is setting us up for a return to long-term growth and profitability," said Glaser.

GAAP net loss for the second quarter of 2014 was $(21.0) million or $(0.59) per diluted share, compared to $(18.5) million or $(0.52) per diluted share in the second quarter of 2013. Adjusted EBITDA for the second quarter of 2014 was a loss of $(13.1) million, compared to $(5.8) million for the second quarter of 2013. A reconciliation of GAAP operating income (loss) to adjusted EBITDA is provided in the financial tables that accompany this release.

As of June 30, 2014, the company had $195.0 million in unrestricted cash, cash equivalents and short-term investments, compared to $226.2 million as of December 31, 2013.

Business Outlook

For the third quarter of 2014, RealNetworks expects total revenue in the range of $33.0 million to $36.0 million. We expect adjusted EBITDA for the quarter to be a loss in the range of $(18.0) million to $(20.0) million.

Webcast and Conference Call Information

The company will host a conference call today to review results and discuss the company's performance at 5 p.m. ET/2 p.m. PT by calling 888-790-3440 or +1-517-308-9350 (Passcode: Second Quarter Earnings). A live webcast of the call will be available at http://investor.realnetworks.com and an on-demand webcast will be available approximately one hour following the conclusion of the conference call. A telephonic replay will be available until 9 p.m. PT, August 20, 2014 by calling 888-566-0046 or +1-203-369-3677 (Passcode: 6895485)

RNWK-F

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 www.realnetworks.com/about-us.

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.

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 adjusted EBITDA 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 operating income (loss) to adjusted EBITDA and to adjusted EBITDA by reportable segment.

The rationale for management's use of non-GAAP measures is included in the supplementary materials presented with the 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, strategic focus and initiatives. 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: risks associated with the implementation of RealNetworks' growth plan, strategic initiatives, and restructuring efforts; its ability to successfully introduce and monetize new products and services; competitive risks, including the growth of competing technologies, products and services, and the emergence of new entrants and competition in the market; 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)

Quarters Ended June 30,

Six Months Ended June 30,

2014

2013

2014

2013

(in thousands, except per share data)

Net revenue

$

40,825

$

49,850

$

86,549

$

106,643

Cost of revenue

20,786

19,519

39,572

40,025

Extinguishment of liability

(10,580)

      Gross profit

20,039

30,331

57,557

66,618

Operating expenses:

   Research and development

13,267

14,993

27,326

30,244

   Sales and marketing

16,016

19,269

37,739

40,403

   General and administrative

8,577

8,691

17,894

18,637

   Restructuring and other charges

541

816

1,757

2,198

   Lease exit and related charges

470

3,066

549

3,066

      Total operating expenses

38,871

46,835

85,265

94,548

Operating income (loss)

(18,832)

(16,504)

(27,708)

(27,930)

Other income (expenses):

   Interest income, net

180

179

316

826

   Gain (loss) on sale of available for sale securities, net

2,371

   Equity in net loss of Rhapsody investment

(1,802)

(1,347)

(2,640)

(3,580)

   Other income (expense), net

(95)

(137)

(172)

(28)

      Total other income (expense), net

(1,717)

(1,305)

(125)

(2,782)

Income (loss) before income taxes

(20,549)

(17,809)

(27,833)

(30,712)

Income tax expense (benefit)

480

662

966

(567)

Net income (loss)

$

(21,029)

$

(18,471)

$

(28,799)

$

(30,145)

Basic net income (loss) per share

$

(0.59)

$

(0.52)

$

(0.80)

$

(0.85)

Diluted net income (loss) per share

$

(0.59)

$

(0.52)

$

(0.80)

$

(0.85)

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

35,890

35,455

35,865

35,399

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

35,890

35,455

35,865

35,399

 

 

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

June 30, 2014

December 31, 2013

(in thousands)

ASSETS

Current assets:

Cash and cash equivalents

$

124,450

$

151,235

Short-term investments

70,583

74,920

Trade accounts receivable, net

21,580

24,613

Deferred costs, current portion

992

1,601

Deferred tax assets, current

311

306

Prepaid expenses and other current assets

9,910

9,124

   Total current assets

227,826

261,799

Equipment, software, and leasehold improvements, at cost:

Equipment and software

86,755

86,721

Leasehold improvements

3,915

3,482

  Total equipment, software, and leasehold improvements

90,670

90,203

Less accumulated depreciation and amortization

70,212

67,031

  Net equipment, software, and leasehold improvements

20,458

23,172

Restricted cash equivalents and investments

3,000

3,000

Equity method investment

10,000

12,473

Available for sale securities

3,182

7,181

Other assets

3,073

2,332

Deferred costs, non-current portion

1,062

946

Deferred tax assets, net, non-current portion

1,405

1,409

Other intangible assets, net

11,928

12,993

Goodwill

18,005

17,476

  Total assets

$

299,939

$

342,781

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:

Accounts payable

$

20,363

$

19,987

Accrued and other current liabilities

26,874

41,893

Deferred tax liabilities, net, current portion

911

899

Deferred revenue, current portion

7,835

7,498

  Total current liabilities

55,983

70,277

Deferred revenue, non-current portion

145

166

Deferred rent

1,269

1,318

Deferred tax liabilities, net, non-current portion

1,725

1,556

Other long-term liabilities

607

483

  Total liabilities

59,729

73,800

Shareholders' equity

240,210

268,981

Total liabilities and shareholders' equity

$

299,939

$

342,781

 

 

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Six Months Ended June 30,

2014

2013

(in thousands)

Cash flows from operating activities:

Net income (loss)

$

(28,799)

$

(30,145)

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

Depreciation and amortization

6,145

9,874

Stock-based compensation

3,010

4,058

Equity in net loss of Rhapsody

2,640

3,580

Deferred income taxes, net

10

(1,668)

Gain on sale of available for sale securities

(2,371)

Realized translation gain

(48)

(35)

Extinguishment of liability

(10,580)

Other

51

Net change in certain operating assets and liabilities

(785)

1,400

Net cash provided by (used in) operating activities

(30,778)

(12,885)

Cash flows from investing activities:

Purchases of equipment, software, and leasehold improvements

(1,689)

(3,181)

Proceeds from sale of available for sale securities

2,754

Purchases of short-term investments

(48,326)

(70,647)

Proceeds from sales and maturities of short-term investments

52,663

71,327

Acquisitions of businesses, net of cash acquired

(733)

(16,107)

Other

(467)

  Net cash provided by (used in) investing activities

4,202

(18,608)

Cash flows from financing activities:

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

580

392

Tax payments from shares withheld upon vesting of restricted stock

(307)

(800)

Payment of contingent consideration

(696)

(828)

  Net cash provided by (used in) financing activities

(423)

(1,236)

Effect of exchange rate changes on cash and cash equivalents

214

(1,259)

  Net increase (decrease) in cash and cash equivalents

(26,785)

(33,988)

Cash and cash equivalents, beginning of period

151,235

163,198

Cash and cash equivalents, end of period

$

124,450

$

129,210

 

 

RealNetworks, Inc. and Subsidiaries

Supplemental Financial Information

(Unaudited)

2014

2013

Q2

Q1

Q4

Q3

Q2

Q1

(in thousands)

Net Revenue by Line of Business

RealPlayer Group (A)

$

8,556

$

15,215

$

16,799

$

17,641

$

18,383

$

22,383

Mobile Entertainment (B)

23,182

19,913

22,146

19,948

18,592

20,495

Games (C)

9,087

10,596

11,650

11,369

12,875

13,915

      Total net revenue

$

40,825

$

45,724

$

50,595

$

48,958

$

49,850

$

56,793

Net Revenue by Product

RealPlayer Group

- License (D)

$

3,273

$

5,018

$

7,128

$

7,281

$

6,766

$

8,332

- Subscriptions (E)

2,569

2,777

3,118

3,615

4,193

4,924

- Media Properties (F)

2,714

7,420

6,553

6,745

7,424

9,127

Mobile Entertainment

- SaaS (G)

20,175

18,463

20,406

18,156

17,002

18,674

- Technology License & Other (H)

3,007

1,450

1,740

1,792

1,590

1,821

Games

- License (I)

3,399

3,849

3,511

3,421

4,089

5,249

- Subscriptions (J)

4,440

5,241

5,688

5,733

5,980

6,312

- Media Properties (K)

1,248

1,506

2,451

2,215

2,806

2,354

      Total net revenue

$

40,825

$

45,724

$

50,595

$

48,958

$

49,850

$

56,793

Net Revenue by Geography

United States

$

15,092

$

20,428

$

19,724

$

21,039

$

21,463

$

28,024

Rest of world

25,733

25,296

30,871

27,919

28,387

28,769

      Total net revenue

$

40,825

$

45,724

$

50,595

$

48,958

$

49,850

$

56,793

Net Revenue by Line of Business

(A) The RealPlayer Group primarily includes revenue from RealPlayer and related products, such as the distribution of third-party software products, advertising on RealPlayer websites, and sales of RealPlayer Plus software licenses to consumers, sales of intellectual property licenses, and consumer subscriptions such as SuperPass and our recently launched RealPlayer Cloud service.

(B) The Mobile Entertainment division primarily includes revenue from SaaS services, system integration, and professional services to mobile carriers, and sales of technology licenses of our software products such as Helix.

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

Net Revenue by Product

(D) Licensing revenue within the RealPlayer Group includes sales of RealPlayer Plus software licenses to consumers and sales of intellectual property licenses.

(E) Subscriptions revenue within the RealPlayer Group includes revenue from subscriptions such as SuperPass and our recently launched RealPlayer Cloud service.

(F) Media Properties revenue within the RealPlayer Group includes distribution of third-party software products and advertising on RealPlayer websites.

(G) SaaS revenue within Mobile Entertainment includes revenue from music on demand, ringback tones, intercarrier messaging services provided to network services providers who are largely mobile phone networks, and our recently launched LISTEN product.

(H) Licensing and other revenue within Mobile Entertainment includes revenue from Helix-related products and professional services provided to mobile carriers.

(I) Licensing revenue within Games includes retail games-related revenue, microtransactions from online and social games and sales of mobile games.

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

(K) Media Properties revenue within Games includes distribution of third-party software products and advertising on games sites and social network sites.

 

 

RealNetworks, Inc. and Subsidiaries

Segment Results of Operations

(Unaudited)

2014

2013

2014

2013

Q2

Q1

Q2

YTD

YTD

(in thousands)

RealPlayer Group

Net revenue

$

8,556

$

15,215

$

18,383

$

23,771

$

40,766

Cost of revenue

3,620

3,518

4,409

7,138

9,720

Gross profit

4,936

11,697

13,974

16,633

31,046

   Gross margin

58%

77%

76%

70%

76%

Operating expenses

12,489

17,787

14,001

30,276

30,207

Operating income (loss)

$

(7,553)

$

(6,090)

$

(27)

$

(13,643)

$

839

Adjusted EBITDA

$

(6,893)

$

(5,491)

$

470

$

(12,384)

$

1,801

Mobile Entertainment

Net revenue

$

23,182

$

19,913

$

18,592

$

43,095

$

39,087

Cost of revenue

14,298

11,950

11,170

26,248

22,002

Gross profit

8,884

7,963

7,422

16,847

17,085

   Gross margin

38%

40%

40%

39%

44%

Operating expenses

9,424

9,616

8,412

19,040

17,523

Operating income (loss)

$

(540)

$

(1,653)

$

(990)

$

(2,193)

$

(438)

Adjusted EBITDA

$

808

$

(339)

$

694

$

469

$

4,076

Games

Net revenue

$

9,087

$

10,596

$

12,875

$

19,683

$

26,790

Cost of revenue

2,717

3,129

3,381

5,846

7,181

Gross profit

6,370

7,467

9,494

13,837

19,609

   Gross margin

70%

70%

74%

70%

73%

Operating expenses

8,769

9,766

11,755

18,535

23,607

Operating income (loss)

$

(2,399)

$

(2,299)

$

(2,261)

$

(4,698)

$

(3,998)

Adjusted EBITDA

$

(1,798)

$

(1,674)

$

(1,315)

$

(3,472)

$

(2,469)

Corporate

Net revenue

$

$

$

$

$

Cost of revenue

151

189

559

340

1,122

Extinguishment of liability

(10,580)

(10,580)

Gross profit

(151)

10,391

(559)

10,240

(1,122)

   Gross margin

N/A

N/A

N/A

N/A

N/A

Operating expenses

8,189

9,225

12,667

17,414

23,211

Operating income (loss)

$

(8,340)

$

1,166

$

(13,226)

$

(7,174)

$

(24,333)

Adjusted EBITDA

$

(5,198)

$

(6,414)

$

(5,602)

$

(11,612)

$

(12,170)

Total

Net revenue

$

40,825

$

45,724

$

49,850

$

86,549

$

106,643

Cost of revenue

20,786

18,786

19,519

39,572

40,025

Extinguishment of liability

(10,580)

(10,580)

Gross profit

20,039

37,518

30,331

57,557

66,618

   Gross margin

49%

82%

61%

67%

62%

Operating expenses

38,871

46,394

46,835

85,265

94,548

Operating income (loss)

$

(18,832)

$

(8,876)

$

(16,504)

$

(27,708)

$

(27,930)

Adjusted EBITDA

$

(13,081)

$

(13,918)

$

(5,753)

$

(26,999)

$

(8,762)

RealNetworks, Inc. and Subsidiaries

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

(Unaudited)

2014

2013

2014

2013

Q2

Q1

Q2

YTD

YTD

(in thousands)

RealPlayer Group

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

Operating income (loss)

$

(7,553)

$

(6,090)

$

(27)

$

(13,643)

$

839

Acquisitions related intangible asset amortization

125

60

62

185

129

Depreciation and amortization

535

539

435

1,074

833

   Adjusted EBITDA

$

(6,893)

$

(5,491)

$

470

$

(12,384)

$

1,801

Mobile Entertainment

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

Operating income (loss)

$

(540)

$

(1,653)

$

(990)

$

(2,193)

$

(438)

Acquisitions related intangible asset amortization

628

607

638

1,235

1,451

Depreciation and amortization

720

707

1,046

1,427

3,063

   Adjusted EBITDA

$

808

$

(339)

$

694

$

469

$

4,076

Games

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

Operating income (loss)

$

(2,399)

$

(2,299)

$

(2,261)

$

(4,698)

$

(3,998)

Acquisitions related intangible asset amortization

314

314

230

628

251

Depreciation and amortization

287

311

716

598

1,278

   Adjusted EBITDA

$

(1,798)

$

(1,674)

$

(1,315)

$

(3,472)

$

(2,469)

Corporate

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

Operating income (loss)

$

(8,340)

$

1,166

$

(13,226)

$

(7,174)

$

(24,333)

Other income (expense), net

(95)

(77)

(137)

(172)

(28)

Depreciation and amortization

553

445

1,859

998

2,869

Lease exit and related charges

470

79

3,066

549

3,066

Restructuring and other charges

541

1,216

816

1,757

2,198

Stock-based compensation

1,673

1,337

2,020

3,010

4,058

Extinguishment of liability

(10,580)

(10,580)

   Adjusted EBITDA

$

(5,198)

$

(6,414)

$

(5,602)

$

(11,612)

$

(12,170)

Total

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

Operating income (loss)

$

(18,832)

$

(8,876)

$

(16,504)

$

(27,708)

$

(27,930)

Other income (expense), net

(95)

(77)

(137)

(172)

(28)

Acquisitions related intangible asset amortization

1,067

981

930

2,048

1,831

Depreciation and amortization

2,095

2,002

4,056

4,097

8,043

Lease exit and related charges

470

79

3,066

549

3,066

Restructuring and other charges

541

1,216

816

1,757

2,198

Stock-based compensation

1,673

1,337

2,020

3,010

4,058

Extinguishment of liability

(10,580)

(10,580)

   Adjusted EBITDA

$

(13,081)

$

(13,918)

$

(5,753)

$

(26,999)

$

(8,762)

 

 

SOURCE RealNetworks, Inc.



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