RealNetworks Announces Third Quarter 2013 Results

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

Quarters Ended

September 30,

Nine Months Ended

September 30,

2013

2012

2013

2012

(in thousands, except per share data)

Net revenue

$

48,958

$

59,088

$

155,601

$

191,578

Cost of revenue

18,990

25,244

59,015

78,633

      Gross profit

29,968

33,844

96,586

112,945

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

—

—

—

116,353

Operating expenses:

   Research and development

15,707

15,321

45,951

49,167

   Sales and marketing

19,427

21,972

59,830

68,462

   General and administrative

9,869

8,759

28,506

35,103

   Restructuring and other charges

1,877

10,724

4,075

13,872

   Lease exit and related charges

—

243

3,066

243

   Loss on litigation settlements

11,525

—

11,525

—

      Total operating expenses

58,405

57,019

152,953

166,847

Operating income (loss)

(28,437)

(23,175)

(56,367)

62,451

Other income (expenses):

   Interest income, net

166

164

992

1,033

   Gain (loss) on sale of equity and other investments, net

—

2,210

—

5,288

   Equity in net loss of Rhapsody investment

(2,629)

(1,613)

(6,209)

(4,095)

   Other income (expense), net

(118)

248

(146)

1,674

      Total other income (expense), net

(2,581)

1,009

(5,363)

3,900

Income (loss) before income taxes

(31,018)

(22,166)

(61,730)

66,351

Income tax expense (benefit)

357

48

(210)

24,583

Net income (loss)

$

(31,375)

$

(22,214)

$

(61,520)

$

41,768

Basic net income (loss) per share

$

(0.88)

$

(0.63)

$

(1.73)

$

1.20

Diluted net income (loss) per share

$

(0.88)

$

(0.63)

$

(1.73)

$

1.19

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

35,670

34,998

35,490

34,747

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

35,670

34,998

35,490

35,000

(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.

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

September 30,

2013

December 31,

2012

(in thousands)

ASSETS

Current assets:

Cash and cash equivalents

$

134,879

$

163,198

Short-term investments

83,527

108,216

Trade accounts receivable, net

26,494

30,754

Deferred costs, current portion

1,622

825

Deferred tax assets - current

3,942

2,869

Prepaid expenses and other current assets

12,152

17,002

Total current assets

262,616

322,864

Equipment, software, and leasehold improvements, at cost:

Equipment and software

94,054

98,041

Leasehold improvements

3,516

22,767

Total equipment, software, and leasehold improvements

97,570

120,808

Less accumulated depreciation and amortization

73,105

91,492

Net equipment, software, and leasehold improvements

24,465

29,316

Restricted cash equivalents and investments

5,000

10,000

Equity method investment

12,656

19,204

Available for sale securities

34,485

34,334

Other assets

2,844

3,153

Deferred costs, non-current portion

1,032

531

Deferred tax assets, net, non-current portion

1,576

4,911

Other intangible assets, net

14,051

3,275

Goodwill

17,518

6,309

Total assets

$

376,243

$

433,897

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:

Accounts payable

$

20,562

$

19,013

Accrued and other current liabilities

58,024

57,530

Deferred revenue, current portion

7,604

8,675

Total current liabilities

86,190

85,218

Deferred revenue, non-current portion

167

169

Deferred rent

613

2,250

Deferred tax liabilities, net, non-current portion

3,166

432

Other long-term liabilities

492

3,100

Total liabilities

90,628

91,169

Shareholders' equity

285,615

342,728

Total liabilities and shareholders' equity

$

376,243

$

433,897

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Nine Months Ended

September 30,

2013

2012

(in thousands)

Cash flows from operating activities:

Net income (loss)

$

(61,520)

$

41,768

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

   Depreciation and amortization

15,045

12,478

   Stock-based compensation

5,671

6,419

   Loss on asset disposal

—

1,965

   Equity in net loss of Rhapsody

6,209

4,095

   Deferred income taxes, net

(1,238)

22,399

   Gain on sale of patent and other technology assets, net of costs

—

(116,353)

   Gain on sale of equity and other investments, net

—

(5,288)

   Realized translation gain

(35)

(1,968)

   Other

51

—

   Net change in certain operating assets and liabilities

7,514

3,735

Net cash provided by (used in) operating activities

(28,303)

(30,750)

Cash flows from investing activities:

Purchases of equipment, software, and leasehold improvements

(5,798)

(6,478)

Proceeds from sale of patents and other technology assets, net of costs

—

116,353

Proceeds from sale of equity and other investments

—

7,244

Purchases of short-term investments

(85,670)

(76,191)

Proceeds from sales and maturities of short-term investments

110,359

51,885

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

5,000

103

Acquisitions of businesses, net of cash acquired

(22,480)

—

   Net cash provided by (used in) investing activities

1,411

92,916

Cash flows from financing activities:

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

408

3,240

Tax payments from shares withheld upon vesting of restricted stock

(911)

(964)

Payment of contingent consideration

(828)

—

   Net cash provided by (used in) financing activities

2,276

Effect of exchange rate changes on cash and cash equivalents

(96)

(73)

   Net increase (decrease) in cash and cash equivalents

(28,319)

64,369

Cash and cash equivalents, beginning of period

163,198

106,333

Cash and cash equivalents, end of period

$

134,879

$

170,702

RealNetworks, Inc. and Subsidiaries

Supplemental Financial Information

(Unaudited)

2013

2012

Q3

Q2

Q1

Q4

Q3

Q2

Q1

(in thousands)

Net Revenue by Line of Business

RealPlayer Group (A)

$

17,641

$

18,383

$

22,383

$

25,838

$

21,392

$

22,158

$

22,081

Mobile Entertainment (B)

19,948

18,592

20,495

25,718

22,820

26,005

25,775

Games (C)

11,369

12,875

13,915

15,708

14,876

17,363

19,108

     Total net revenue

$

48,958

$

49,850

$

56,793

$

67,264

$

59,088

$

65,526

$

66,964

Net Revenue by Product

RealPlayer Group

- License (D)

$

7,281

$

6,766

$

8,332

$

10,956

$

6,757

$

8,334

$

7,733

- Subscriptions (E)

3,616

4,193

4,924

6,192

7,056

6,810

7,601

- Media Properties (F)

6,745

7,424

9,127

8,690

7,579

7,014

6,747

Mobile Entertainment

- SaaS (G)

18,155

17,002

18,674

22,793

20,696

23,286

23,464

- Systems Integration / Professional Services (H)

322

300

291

1,295

247

965

426

- Technology License & Other (I)

1,470

1,290

1,530

1,630

1,877

1,754

1,885

Games

- License (J)

3,421

4,089

5,249

5,222

5,136

6,053

7,587

- Subscriptions (K)

5,733

5,980

6,312

6,876

6,952

7,536

8,170

- Media Properties (L)

2,215

2,806

2,354

3,610

2,788

3,774

3,351

     Total net revenue

$

48,958

$

49,850

$

56,793

$

67,264

$

59,088

$

65,526

$

66,964

Net Revenue by Geography

United States

$

21,039

$

21,463

$

28,024

$

28,315

$

29,101

$

28,614

$

31,814

Rest of world

27,919

28,387

28,769

38,949

29,987

36,912

35,150

     Total net revenue

$

48,958

$

49,850

$

56,793

$

67,264

$

59,088

$

65,526

$

66,964

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.

(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.

(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, video on demand, ringtones, ringback tones, and intercarrier messaging services provided to network services providers who are largely mobile phone networks.

(H) Systems Integration / Professional Services revenue within Mobile Entertainment includes professional services, other than those associated with software sales, provided to mobile carriers.

(I) Licensing revenue within Mobile Entertainment includes revenue from Helix-related products.

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

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

(L) 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)

2013

2012

2013

2012

Q3

Q2

Q3

YTD

YTD

(in thousands)

RealPlayer Group

Net revenue

$

17,641

$

18,383

$

21,392

$

58,407

$

65,631

Cost of revenue

3,264

4,409

6,735

12,984

16,026

Gross profit

14,377

13,974

14,657

45,423

49,605

Gross margin

81

%

76

%

69

%

78

%

76

%

Operating expenses

14,449

14,001

13,082

44,656

41,849

Operating income (loss)

$

(72)

$

(27)

$

1,575

$

767

$

7,756

Adjusted EBITDA

$

624

$

470

$

2,275

$

2,425

$

9,347

Mobile Entertainment

Net revenue

$

19,948

$

18,592

$

22,820

$

59,035

$

74,600

Cost of revenue

11,972

11,170

12,740

33,974

43,093

Gross profit

7,976

7,422

10,080

25,061

31,507

Gross margin

40

%

40

%

44

%

42

%

42

%

Operating expenses

9,453

8,412

11,936

26,976

40,591

Operating income (loss)

$

(1,477)

$

(990)

$

(1,856)

$

(1,915)

$

(9,084)

Adjusted EBITDA

$

503

$

694

$

341

$

4,579

$

(2,145)

Games

Net revenue

$

11,369

$

12,875

$

14,876

$

38,159

$

51,347

Cost of revenue

3,216

3,381

4,989

10,397

17,332

Gross profit

8,153

9,494

9,887

27,762

34,015

Gross margin

72

%

74

%

66

%

73

%

66

%

Operating expenses

11,513

11,755

12,023

35,120

39,962

Operating income (loss)

$

(3,360)

$

(2,261)

$

(2,136)

$

(7,358)

$

(5,947)

Adjusted EBITDA

$

(2,704)

$

(1,315)

$

(1,321)

$

(5,173)

$

(3,790)

Corporate

Net revenue

$

—

$

—

$

—

$

—

$

—

Cost of revenue

538

559

780

1,660

2,182

Gross profit

(538)

(559)

(780)

(1,660)

(2,182)

Gross margin

N/A

N/A

N/A

N/A

N/A

Gain on sale of patents and other technology assets, net of costs

—

—

—

—

116,353

Operating expenses

22,990

12,667

19,978

46,201

44,445

Operating income (loss)

$

(23,528)

$

(13,226)

$

(20,758)

$

(47,861)

$

69,726

Adjusted EBITDA

$

(6,792)

$

(5,602)

$

(7,337)

$

(18,962)

$

(23,380)

Total

Net revenue

$

48,958

$

49,850

$

59,088

$

155,601

$

191,578

Cost of revenue

18,990

19,519

25,244

59,015

78,633

Gross profit

29,968

30,331

33,844

96,586

112,945

Gross margin

61

%

61

%

57

%

62

%

59

%

Gain on sale of patents and other technology assets, net of costs

—

—

—

—

116,353

Operating expenses

58,405

46,835

57,019

152,953

166,847

Operating income (loss)

$

(28,437)

$

(16,504)

$

(23,175)

$

(56,367)

$

62,451

Adjusted EBITDA

$

(8,369)

$

(5,753)

$

(6,042)

$

(17,131)

$

(19,968)

RealNetworks, Inc. and Subsidiaries

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

(Unaudited)

2013

2012

2013

2012

Q3

Q2

Q3

YTD

YTD

(in thousands)

RealPlayer Group

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

Operating income (loss)

$

(72)

$

(27)

$

1,575

$

767

$

7,756

Acquisitions related intangible asset amortization

60

62

62

189

220

Depreciation and amortization

636

435

638

1,469

1,371

Adjusted EBITDA

$

624

$

470

$

2,275

$

2,425

$

9,347

Mobile Entertainment