RealNetworks Announces Third Quarter 2014 Results

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

Quarters Ended
September 30,

Nine Months Ended
September 30,

2014

2013

2014

2013

 (in thousands, except per share data)

 Net revenue

$

34,157

$

48,958

$

120,706

$

155,601

 Cost of revenue

18,928

18,990

58,500

59,015

 Extinguishment of liability

—

—

(10,580)

—

           Gross profit

15,229

29,968

72,786

96,586

 Operating expenses:

       Research and development

12,784

15,707

40,110

45,951

       Sales and marketing

13,283

19,427

51,022

59,830

       General and administrative

7,723

9,869

25,617

28,506

       Restructuring and other charges

2,048

1,877

3,805

4,075

       Lease exit and related charges

154

—

703

3,066

       Loss on litigation settlements

—

11,525

—

11,525

           Total operating expenses

35,992

58,405

121,257

152,953

 Operating income (loss)

(20,763)

(28,437)

(48,471)

(56,367)

 Other income (expenses):

       Interest income, net

80

166

396

992

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

—

—

2,371

—

       Equity in net loss of Rhapsody investment

(1,530)

(2,629)

(4,170)

(6,209)

       Other income (expense), net

325

(118)

153

(146)

           Total other income (expense), net

(1,125)

(2,581)

(1,250)

(5,363)

 Income (loss) before income taxes

(21,888)

(31,018)

(49,721)

(61,730)

 Income tax expense (benefit)

290

357

1,256

(210)

 Net income (loss)

$

(22,178)

$

(31,375)

$

(50,977)

$

(61,520)

 Basic net income (loss) per share

$

(0.62)

$

(0.88)

$

(1.42)

$

(1.73)

 Diluted net income (loss) per share

$

(0.62)

$

(0.88)

$

(1.42)

$

(1.73)

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

36,003

35,670

35,912

35,490

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

36,003

35,670

35,912

35,490

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

September 30,
 2014

December 31,
 2013

 (in thousands)

ASSETS

 Current assets:

 Cash and cash equivalents

$

114,073

$

151,235

 Short-term investments

63,948

74,920

 Trade accounts receivable, net

17,679

24,613

 Deferred costs, current portion

1,023

1,601

 Deferred tax assets, current

296

306

 Prepaid expenses and other current assets

8,382

9,124

   Total current assets

205,401

261,799

 Equipment, software, and leasehold improvements, at cost:

 Equipment and software

83,230

86,721

 Leasehold improvements

3,616

3,482

   Total equipment, software, and leasehold improvements

86,846

90,203

 Less accumulated depreciation and amortization

68,392

67,031

   Net equipment, software, and leasehold improvements

18,454

23,172

 Restricted cash equivalents and investments

3,000

3,000

 Equity method investment

10,000

12,473

 Available for sale securities

2,848

7,181

 Other assets

2,925

2,332

 Deferred costs, non-current portion

913

946

 Deferred tax assets, net, non-current portion

1,424

1,409

 Other intangible assets, net

10,954

12,993

 Goodwill

17,615

17,476

 Total assets

$

273,534

$

342,781

 LIABILITIES AND SHAREHOLDERS' EQUITY

 Current liabilities:

 Accounts payable

$

18,155

$

19,987

 Accrued and other current liabilities

25,885

41,893

 Deferred tax liabilities, net, current portion

768

899

 Deferred revenue, current portion

6,908

7,498

   Total current liabilities

51,716

70,277

 Deferred revenue, non-current portion

143

166

 Deferred rent

1,293

1,318

 Deferred tax liabilities, net, non-current portion

1,805

1,556

 Other long-term liabilities

563

483

 Total liabilities

55,520

73,800

 Shareholders' equity

218,014

268,981

 Total liabilities and shareholders' equity

$

273,534

$

342,781

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Nine Months Ended
September 30,

2014

2013

 (in thousands)

 Cash flows from operating activities:

 Net income (loss)

$

(50,977)

$

(61,520)

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

   Depreciation and amortization

8,876

15,045

   Stock-based compensation

4,158

5,671

   Equity in net loss of Rhapsody

4,170

6,209

   Deferred income taxes, net

(64)

(1,238)

   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

1,194

7,514

      Net cash provided by (used in) operating activities

(45,642)

(28,303)

 Cash flows from investing activities:

 Purchases of equipment, software, and leasehold improvements

(2,054)

(5,798)

 Proceeds from sale of available for sale securities

2,754

—

 Purchases of short-term investments

(63,574)

(85,670)

 Proceeds from sales and maturities of short-term investments

74,546

110,359

 Decrease in restricted cash equivalents and investments

—

5,000

 Acquisitions of businesses, net of cash acquired

(733)

(22,480)

 Other

(467)

—

   Net cash provided by (used in) investing activities

10,472

1,411

 Cash flows from financing activities:

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

641

408

 Tax payments from shares withheld upon vesting of restricted stock

(403)

(911)

 Payment of contingent consideration

(696)

(828)

   Net cash provided by (used in) financing activities

(458)

(1,331)

 Effect of exchange rate changes on cash and cash equivalents

(1,534)

(96)

   Net increase (decrease) in cash and cash equivalents

(37,162)

(28,319)

 Cash and cash equivalents, beginning of period

151,235

163,198

 Cash and cash equivalents, end of period

$

114,073

$

134,879

RealNetworks, Inc. and Subsidiaries

Supplemental Financial Information

(Unaudited)

2014

2013

 Q3

 Q2

Q1

 Q4

 Q3

 Q2

 Q1

 (in thousands)

Net Revenue by Line of Business

RealPlayer Group (A)

$

6,565

$

8,556

$

15,215

$

16,799

$

17,641

$

18,383

$

22,383

Mobile Entertainment (B)

19,190

23,182

19,913

22,146

19,948

18,592

20,495

Games (C)

8,402

9,087

10,596

11,650

11,369

12,875

13,915

     Total net revenue

$

34,157

$

40,825

$

45,724

$

50,595

$

48,958

$

49,850

$

56,793

Net Revenue by Product

RealPlayer Group

- License (D)

$

3,255

$

3,273

$

5,018

$

7,128

$

7,281

$

6,766

$

8,332

- Subscriptions (E)

2,680

2,569

2,777

3,118

3,615

4,193

4,924

- Media Properties (F)

630

2,714

7,420

6,553

6,745

7,424

9,127

Mobile Entertainment

- SaaS (G)

17,919

20,175

18,463

20,406

18,156

17,002

18,674

- Technology License & Other (H)

1,271

3,007

1,450

1,740

1,792

1,590

1,821

Games

- License (I)

2,988

3,399

3,849

3,511

3,421

4,089

5,249

- Subscriptions (J)

4,320

4,440

5,241

5,688

5,733

5,980

6,312

- Media Properties (K)

1,094

1,248

1,506

2,451

2,215

2,806

2,354

     Total net revenue

$

34,157

$

40,825

$

45,724

$

50,595

$

48,958

$

49,850

$

56,793

Net Revenue by Geography

United States

$

12,280

$

15,092

$

20,428

$

19,724

$

21,039

$

21,463

$

28,024

Rest of world

21,877

25,733

25,296

30,871

27,919

28,387

28,769

     Total net revenue

$

34,157

$

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

Q3

Q2

Q3

YTD

 YTD

 (in thousands)

RealPlayer Group

Net revenue

$

6,565

$

8,556

$

17,641

$

30,336

$

58,407

Cost of revenue

3,566

3,620

3,264

10,704

12,984

Gross profit

2,999

4,936

14,377

19,632

45,423

   Gross margin

46

%

58

%

81

%

65

%

78

%

Operating expenses

12,392

12,489

14,449

42,668

44,656

Operating income (loss)

$

(9,393)

$

(7,553)

$

(72)

$

(23,036)

$

767

  Adjusted EBITDA

$

(8,770)

$

(6,893)

$

624

$

(21,154)

$

2,425

Mobile Entertainment

Net revenue

$

19,190

$

23,182

$

19,948

$

62,285

$

59,035

Cost of revenue

12,626

14,298

11,972

38,874

33,974

Gross profit

6,564

8,884

7,976

23,411

25,061

   Gross margin

34

%

38

%

40

%

38

%

42

%

Operating expenses

7,086

9,424

9,453

26,126

26,976

Operating income (loss)

$

(522)

$

(540)

$

(1,477)

$

(2,715)

$

(1,915)

   Adjusted EBITDA

$

447

$

808

$

503

$

916

$

4,579

Games

Net revenue

$

8,402

$

9,087

$

11,369

$

28,085

$

38,159

Cost of revenue

2,573

2,717

3,216

8,419

10,397

Gross profit

5,829

6,370

8,153

19,666

27,762

   Gross margin

69

%

70

%

72

%

70

%

73

%

Operating expenses

8,658

8,769

11,513

27,193

35,120

Operating income (loss)

$

(2,829)

$

(2,399)

$

(3,360)

$

(7,527)

$

(7,358)

   Adjusted EBITDA

$

(2,246)

$

(1,798)

$

(2,704)

$

(5,718)

$

(5,173)

Corporate

Net revenue

$

—

$

—

$

—

$

—

$

—

Cost of revenue

163

151

538

503

1,660

Extinguishment of liability

—

—

—

(10,580)

—

Gross profit

(163)

(151)

(538)

10,077

(1,660)

   Gross margin

 N/A

 N/A

 N/A

 N/A

 N/A

Operating expenses

7,856

8,189

22,990

25,270

46,201

Operating income (loss)

$

(8,019)

$

(8,340)

$

(23,528)

$

(15,193)

$

(47,861)

   Adjusted EBITDA

$

(3,788)

$

(5,198)

$

(6,792)

$

(15,400)

$

(18,962)

Total

Net revenue

$

34,157

$

40,825

$

48,958

$

120,706

$

155,601

Cost of revenue

18,928

20,786

18,990

58,500

59,015

Extinguishment of liability

—

—

—

(10,580)

—

Gross profit

15,229

20,039

29,968

72,786

96,586

   Gross margin

45

%

49

%

61

%

60

%

62

%

Operating expenses

35,992

38,871

58,405

121,257

152,953

Operating income (loss)

$

(20,763)

$

(18,832)

$

(28,437)

$

(48,471)

$

(56,367)

   Adjusted EBITDA

$

(14,357)

$

(13,081)

$

(8,369)

$

(41,356)

$

(17,131)

RealNetworks, Inc. and Subsidiaries

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

(Unaudited)

2014

2013

2014

2013

 Q3

 Q2

 Q3