RealNetworks Announces First Quarter 2017 Results

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

Quarter Ended
March 31,

2017

2016

 (in thousands, except per
share data)

 Net revenue

$

30,576

$

28,230

 Cost of revenue

17,293

15,172

           Gross profit

13,283

13,058

 Operating expenses:

       Research and development

7,349

9,319

       Sales and marketing

7,155

9,225

       General and administrative

5,303

8,077

       Restructuring and other charges

1,564

385

       Lease exit and related charges

—

831

           Total operating expenses

21,371

27,837

 Operating income (loss)

(8,088)

(14,779)

 Other income (expenses):

       Interest income, net

128

117

       Gain (loss) on investments, net

—

3

       Equity in net loss of Rhapsody

(748)

—

       Other income (expense), net

(226)

(287)

           Total other income (expense), net

(846)

(167)

 Income (loss) before income taxes

(8,934)

(14,946)

 Income tax expense (benefit)

490

225

 Net income (loss)

$

(9,424)

$

(15,171)

 Basic net income (loss) per share

$

(0.25)

$

(0.42)

 Diluted net income (loss) per share

$

(0.25)

$

(0.42)

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

37,030

36,520

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

37,030

36,520

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

March 31,
 2017

December 31,
 2016

 (in thousands)

ASSETS

 Current assets:

 Cash and cash equivalents

$

38,498

$

33,721

 Short-term investments

27,778

43,331

 Trade accounts receivable, net

26,833

22,162

 Deferred costs, current portion

541

760

 Prepaid expenses and other current assets

4,843

4,910

    Total current assets

98,493

104,884

 Equipment and software

44,640

46,231

 Leasehold improvements

3,330

3,317

    Total equipment, software, and leasehold improvements

47,970

49,548

 Less accumulated depreciation and amortization

43,181

44,294

    Net equipment, software, and leasehold improvements

4,789

5,254

 Restricted cash equivalents and investments

2,700

2,700

 Other assets

2,412

1,742

 Deferred costs, non-current portion

1,071

1,246

 Deferred tax assets, net

836

816

 Other intangible assets, net

729

938

 Goodwill

12,915

12,857

    Total assets

$

123,945

$

130,437

 LIABILITIES AND SHAREHOLDERS' EQUITY

 Current liabilities:

 Accounts payable

$

19,432

$

18,225

 Accrued and other current liabilities

15,425

15,425

 Commitment to Rhapsody

—

1,500

 Deferred revenue, current portion

3,918

3,430

    Total current liabilities

38,775

38,580

 Deferred revenue, non-current portion

724

240

 Deferred rent

679

748

 Deferred tax liabilities, net

87

87

 Other long-term liabilities

1,890

2,201

    Total liabilities

42,155

41,856

 Shareholders' equity

81,790

88,581

 Total liabilities and shareholders' equity

$

123,945

$

130,437

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Quarter ended March 31,

2017

2016

 (in thousands)

 Cash flows from operating activities:

 Net income (loss)

$

(9,424)

$

(15,171)

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

  Depreciation and amortization

921

2,598

  Stock-based compensation

1,434

3,171

  Equity in net loss of Rhapsody

748

—

  Deferred income taxes, net

(20)

(128)

  Loss (gain) on investments, net

—

(3)

  Fair value of warrants granted in 2015 and 2017, net of subsequent mark to market adjustments in 2017 and 2016

(471)

44

  Net change in certain operating assets and liabilities

(2,598)

(1,722)

      Net cash provided by (used in) operating activities

(9,410)

(11,211)

 Cash flows from investing activities:

 Purchases of equipment, software, and leasehold improvements

(207)

(828)

 Purchases of short-term investments

(6,142)

(17,876)

 Proceeds from sales and maturities of short-term investments

21,695

23,401

 Decrease (increase) in restricted cash equivalents and investments, net

—

(210)

 Advance to Rhapsody

(1,500)

—

   Net cash provided by (used in) investing activities

13,846

4,487

 Cash flows from financing activities:

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

34

16

Tax payments from shares withheld upon vesting of restricted stock

(181)

(787)

   Net cash provided by (used in) financing activities

(147)

(771)

 Effect of exchange rate changes on cash and cash equivalents

488

719

   Net increase (decrease) in cash and cash equivalents

4,777

(6,776)

 Cash and cash equivalents, beginning of year

33,721

47,315

 Cash and cash equivalents, end of year

$

38,498

$

40,539

RealNetworks, Inc. and Subsidiaries

Supplemental Financial Information

(Unaudited)

2017

2016

Q1

 Q4

 Q3

 Q2

 Q1

 (in thousands)

Net Revenue by Line of Business

Consumer Media (A)

$

5,669

$

6,443

$

6,482

$

6,400

$

5,726

Mobile Services (B)

19,084

18,833

17,683

17,297

16,465

Games (C)

5,823

6,177

6,886

6,037

6,039

     Total net revenue

$

30,576

$

31,453

$

31,051

$

29,734

$

28,230

Net Revenue by Product

Consumer Media

- License (D)

$

3,672

$

4,252

$

4,136

$

3,914

$

3,104

- Subscriptions (E)

1,564

1,671

1,931

1,871

1,975

- Media Properties (F)

433

520

415

615

647

Mobile Services

- SaaS (G)

18,987

18,726

17,141

17,208

16,220

- Technology License & Other (H)

97

107

542

89

245

Games

- License (I)

2,862

3,178

3,683

2,793

2,761

- Subscriptions (J)

2,828

2,836

3,005

3,024

3,029

- Media Properties (K)

133

163

198

220

249

     Total net revenue

$

30,576

$

31,453

$

31,051

$

29,734

$

28,230

Net Revenue by Geography

United States

$

9,740

$

10,125

$

10,642

$

10,355

$

10,383

Rest of world

20,836

21,328

20,409

19,379

17,847

     Total net revenue

$

30,576

$

31,453

$

31,051

$

29,734

$

28,230

Net Revenue by Line of Business

(A) The Consumer Media division primarily includes revenue from RealPlayer and related products, such as the distribution of third-party software products, advertising on RealPlayer websites, sales of RealPlayer Plus software licenses to consumers, sales of intellectual property licenses, 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 games, sales of games licenses, online games subscription services, advertising on games sites and social network sites, and microtransactions from online games.

Net Revenue by Product

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

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

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

(G) SaaS revenue within Mobile Services includes revenue from music on demand, ringback tones, intercarrier messaging services, and RealTimes.

(H) Technology licensing and other revenue within Mobile Services includes revenue from professional services provided to mobile carriers.

(I) Licensing revenue within Games includes retail games-related revenue and sales of mobile games.

(J) Subscriptions revenue within Games includes revenue from online games subscriptions as well as microtransactions from mobile games.

(K) Media Properties 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)

2017

2016

Q1

Q4

Q1

 (in thousands)

Consumer Media

Net revenue

$

5,669

$

6,443

$

5,726

Cost of revenue

1,405

1,589

2,417

   Gross profit

4,264

4,854

3,309

   Gross margin

75

%

75

%

58

%

Operating expenses

4,010

4,459

5,376

Operating income (loss), a GAAP measure

$

254

$

395

$

(2,067)

Depreciation and amortization

167

239

1,303

  Contribution margin, a non-GAAP measure

$

421

$

634

$

(764)

Mobile Services

Net revenue

$

19,084

$

18,833

$

16,465

Cost of revenue

13,914

13,679

10,917

   Gross profit

5,170

5,154

5,548

   Gross margin

27

%

27

%

34

%

Operating expenses

8,119

7,786

9,794

Operating income (loss), a GAAP measure

$

(2,949)

$

(2,632)

$

(4,246)

Acquisitions related intangible asset amortization

196

198

308

Depreciation and amortization

203

290

422

Contribution margin, a non-GAAP measure

$

(2,550)

$

(2,144)

$

(3,516)

Games

Net revenue

$

5,823

$

6,177

$

6,039

Cost of revenue

1,937

2,054

1,845

   Gross profit

3,886

4,123

4,194

   Gross margin

67

%

67

%

69

%

Operating expenses

4,947

4,975

5,295

Operating income (loss), a GAAP measure

$

(1,061)

$

(852)

$

(1,101)

Acquisitions related intangible asset amortization

27

27

25

Depreciation and amortization

141

146

179

   Contribution margin, a non-GAAP measure

$

(893)

$

(679)

$

(897)

Corporate

Cost of revenue

$

37

$

36

$

(7)

   Gross profit

(37)

(36)

7

   Gross margin

N/A

N/A

N/A

Operating expenses

4,295

3,244

7,372

Operating income (loss), a GAAP measure

$

(4,332)

$

(3,280)

$

(7,365)

Other income (expense), net

(226)

(128)

(287)

Depreciation and amortization

187

260

361

Restructuring and other charges

1,564

192

385

Stock-based compensation

1,434

867

3,171

Lease exit and related charges

—

48

831

   Contribution margin, a non-GAAP measure

$

(1,373)

$

(2,041)

$

(2,904)

RealNetworks, Inc. and Subsidiaries

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

(Unaudited)

2017

2016

 Q1

 Q4

 Q1

 (in thousands)

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

Net income (loss)

$

(9,424)

$

(9,976)

$

(15,171)

Income tax expense (benefit)

490

203

225

Interest income, net

(128)

(133)

(117)

Gain (loss) on investments, net

—

(2,495)

(3)

Equity in net loss of Rhapsody

748

5,904

—

Acquisitions related intangible asset amortization

223

225

333

Depreciation and amortization

698

935

2,265

Restructuring and other charges

1,564

192

385

Stock-based compensation

1,434

867

3,171

Lease exit and related charges

—

48

831

   Adjusted EBITDA, a non-GAAP measure

$

(4,395)

$

(4,230)

$

(8,081)