Thu, 08/03/2017

RealNetworks Announces Second Quarter 2017 Results

SEATTLE, Aug. 3, 2017 /PRNewswire/ --

  • Revenue of $33.1 million grew 11% year-over-year and 8% sequentially
  • Reduced year-over-year operating expenses by $3.2 million
  • Continued investments in key growth initiatives

RealNetworks, Inc. (Nasdaq: RNWK), a leader in digital media software and services, today announced results for the second quarter ended June 30, 2017.

Management Commentary

"We are pleased with our second quarter results, which saw solid performance in all three of our divisions," said Rob Glaser, Chairman and CEO of RealNetworks. "We also made good progress in lowering our cost structure and realigning our resources to support a few key growth initiatives. We believe these growth initiatives, the first of which will come to market later this year, will deliver meaningful revenue contributions in 2018 and beyond."

Second Quarter 2017 Financial Highlights

  • Revenue was $33.1 million, up from $30.6 million in the prior quarter and up from $29.7 million in the second quarter of 2016.
  • Operating expenses declined by $2.9 million, or 14%, from the prior quarter and by $3.2 million, or 15%, from the same period in 2016.
  • Net loss was $(3.4) million or $(0.09) per share, compared to $(9.4) million or $(0.25) per share in the prior quarter and $(8.3) million or $(0.23) per share in the second quarter of 2016.
  • Adjusted EBITDA was a loss of $(0.8) million, compared to a loss of $(4.4) million in the prior quarter and $(4.8) million in the second quarter of 2016. A reconciliation of GAAP net income (loss) to adjusted EBITDA, a non-GAAP measure, is provided in the financial tables that accompany this release.
  • As of June 30, 2017, the Company had $62.5 million in unrestricted cash, cash equivalents and short-term investments, compared to $66.3 million as of March 31, 2017.

Business Outlook

For the third quarter of 2017, RealNetworks expects to achieve the following results:

  • Total revenue is expected to be in the range of $29 million to $31 million. 
  • Adjusted EBITDA loss is expected to be in the range of $(2.0) million to $(4.0) 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. You may join the conference call by calling 888-831-6080 or +1-210-234-0017 (Passcode: 2ND QUARTER). 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 11:59 p.m. PT, August 24, 2017 by calling 800-388-4923 or +1-203-369-3800 (Passcode: 832017).

For More Information

Investor Relations for RealNetworks
Laura Bainbridge, Addo IR
310-829-5400
IR@realnetworks.com
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 and RealTimes 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 contribution margin 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 net income (loss) to adjusted EBITDA and operating income (loss) by reportable segment to contribution margin by reportable segment.

The rationale for management's use of non-GAAP measures is included in the supplementary materials presented with the quarterly 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, and market position, our strategic focus and initiatives, agreements with partners, and the growth and future prospects relating to our Rhapsody affiliate. 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: RealNetworks' ability to realize operating efficiencies, growth and other benefits from the implementation of its growth plan, strategic initiatives, and restructuring efforts; 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; 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)







Quarter Ended
June 30,

Six Months Ended
June 30,





2017

2016

2017

2016


 (in thousands, except per share data)









Net revenue

$

33,112

$

29,734

$

63,687

$

57,964

Cost of revenue

17,290

15,698

34,583

30,870

   Gross profit

15,822

14,036

29,104

27,094









Operating expenses:







   Research and development

7,584

7,167

14,933

16,486

   Sales and marketing

5,496

7,749

12,651

16,974

   General and administrative

5,254

6,217

10,557

14,294

   Restructuring and other charges

150

413

1,714

798

   Lease exit and related charges

—

127

—

958









      Total operating expenses

18,484

21,673

39,855

49,510









Operating income (loss)

(2,662)

(7,637)

(10,751)

(22,416)









Other income (expenses):







   Interest income, net

109

80

237

197

   Gain (loss) on investments, net

—

(46)

—

(43)

   Equity in net loss of Rhapsody

(349)

(396)

(1,097)

(396)

   Other income (expense), net

(13)

15

(238)

(272)









      Total other income (expense), net

(253)

(347)

(1,098)

(514)









Income (loss) before income taxes

(2,915)

(7,984)

(11,849)

(22,930)

Income tax expense (benefit)

471

363

961

588









Net income (loss)

$

(3,386)

$

(8,347)

$

(12,810)

$

(23,518)









Basic net income (loss) per share

$

(0.09)

$

(0.23)

$

(0.35)

$

(0.64)

Diluted net income (loss) per share

$

(0.09)

$

(0.23)

$

(0.35)

$

(0.64)









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

37,103

36,755

37,067

36,637

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

37,103

36,755

37,067

36,637

 

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)


June 30,
 2017

December 31,
 2016

 (in thousands)

ASSETS

 Current assets:


 Cash and cash equivalents

$

37,855

$

33,721

 Short-term investments

24,619

43,331

 Trade accounts receivable, net

27,354

22,162

 Deferred costs, current portion

525

760

 Prepaid expenses and other current assets

4,798

4,910

   Total current assets

95,151

104,884




 Equipment and software

45,259

46,231

 Leasehold improvements

3,405

3,317

   Total equipment, software, and leasehold improvements

48,664

49,548

 Less accumulated depreciation and amortization

44,262

44,294

   Net equipment, software, and leasehold improvements

4,402

5,254




 Restricted cash equivalents and investments

2,700

2,700

 Other assets

2,277

1,742

 Deferred costs, non-current portion

1,020

1,246

 Deferred tax assets, net

857

816

 Other intangible assets, net

527

938

 Goodwill

12,985

12,857




   Total assets

$

119,919

$

130,437





 LIABILITIES AND SHAREHOLDERS' EQUITY




 Current liabilities:


 Accounts payable

$

18,603

$

18,225

 Accrued and other current liabilities

14,133

15,425

 Commitment to Rhapsody

—

1,500

 Deferred revenue, current portion

3,560

3,430

   Total current liabilities

36,296

38,580




 Deferred revenue, non-current portion

710

240

 Deferred rent

702

748

 Deferred tax liabilities, net

87

87

 Other long-term liabilities

1,771

2,201




   Total liabilities

39,566

41,856








 Shareholders' equity

80,353

88,581




 Total liabilities and shareholders' equity

$

119,919

$

130,437

 

RealNetworks, Inc. and Subsidiaries

 

Condensed Consolidated Statements of Cash Flows

(Unaudited)


Six Months Ended
June 30,

2017

2016

 (in thousands)

 Cash flows from operating activities:

   Net income (loss)

$

(12,810)

$

(23,518)

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




         Depreciation and amortization

1,757

4,224

         Stock-based compensation

2,297

3,779

         Equity in net loss of Rhapsody

1,097

396

         Deferred income taxes, net

(40)

(148)

         Loss (gain) on investments, net

—

43

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

(417)

82

         Net change in certain operating assets and liabilities

(5,830)

(3,209)

              Net cash provided by (used in) operating activities

(13,946)

(18,351)

 Cash flows from investing activities:


         Purchases of equipment, software, and leasehold improvements

(417)

(1,512)

         Purchases of short-term investments

(13,905)

(33,359)

         Proceeds from sales and maturities of short-term investments

32,617

42,517

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

—

(110)

         Acquisitions

—

(150)

         Advance to Rhapsody

(1,500)

—

              Net cash provided by (used in) investing activities

16,795

7,386

 Cash flows from financing activities:


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

130

166

         Tax payments from shares withheld upon vesting of restricted stock

(192)

(808)

              Net cash provided by (used in) financing activities

(62)

(642)

 Effect of exchange rate changes on cash and cash equivalents

1,347

425

              Net increase (decrease) in cash and cash equivalents

4,134

(11,182)

 Cash and cash equivalents, beginning of year

33,721

47,315

 Cash and cash equivalents, end of year

$

37,855

$

36,133

 

RealNetworks, Inc. and Subsidiaries

Supplemental Financial Information

(Unaudited)


2017

2016


 Q2

Q1

 Q4

 Q3

 Q2

 Q1

 (in thousands)

Net Revenue by Line of Business











Consumer Media (A)

$

6,951

$

5,669

$

6,443

$

6,482

$

6,400

$

5,726

Mobile Services (B)

19,227

19,084

18,833

17,683

17,297

16,465

Games (C)

6,934

5,823

6,177

6,886

6,037

6,039

     Total net revenue

$

33,112

$

30,576

$

31,453

$

31,051

$

29,734

$

28,230













Net Revenue by Product











Consumer Media











- License (D)

$

5,002

$

3,672

$

4,252

$

4,136

$

3,914

$

3,104

- Subscriptions (E)

1,531

1,564

1,671

1,931

1,871

1,975

- Media Properties (F)

418

433

520

415

615

647













Mobile Services











- SaaS (G)

19,146

18,987

18,726

17,141

17,208

16,220

- Technology License & Other (H)

81

97

107

542

89

245













Games











- License (I)

4,007

2,862

3,178

3,683

2,793

2,761

- Subscriptions (J)

2,781

2,828

2,836

3,005

3,024

3,029

- Media Properties (K)

146

133

163

198

220

249













     Total net revenue

$

33,112

$

30,576

$

31,453

$

31,051

$

29,734

$

28,230













Net Revenue by Geography











United States

$

10,889

$

9,740

$

10,125

$

10,642

$

10,355

$

10,383

Rest of world

22,223

20,836

21,328

20,409

19,379

17,847

     Total net revenue

$

33,112

$

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

2017

2016


Q2

Q1

Q2

YTD

YTD

 (in thousands)

Consumer Media




















Net revenue

$

6,951

$

5,669

$

6,400

$

12,620

$

12,126

Cost of revenue

1,159

1,405

1,561

2,564

3,978

   Gross profit

5,792

4,264

4,839

10,056

8,148











   Gross margin

83

%

75

%

76

%

80

%

67

%











Operating expenses

3,730

4,010

4,293

7,740

9,669

Operating income (loss), a GAAP measure

$

2,062

$

254

$

546

$

2,316

$

(1,521)

Depreciation and amortization

159

167

375

326

1,678











  Contribution margin, a non-GAAP measure

$

2,221

$

421

$

921

$

2,642

$

157











Mobile Services




















Net revenue

$

19,227

$

19,084

$

17,297

$

38,311

$

33,762

Cost of revenue

13,429

13,914

12,404

27,343

23,321

   Gross profit

5,798

5,170

4,893

10,968

10,441











   Gross margin

30

%

27

%

28

%

29

%

31

%











Operating expenses

6,705

8,119

8,784

14,824

18,578

Operating income (loss), a GAAP measure

$

(907)

$

(2,949)

$

(3,891)

$

(3,856)

$

(8,137)

Acquisitions related intangible asset amortization

201

196

209

397

517

Depreciation and amortization

175

203

608

378

1,030











Contribution margin, a non-GAAP measure

$

(531)

$

(2,550)

$

(3,074)

$

(3,081)

$

(6,590)











Games




















Net revenue

$

6,934

$

5,823

$

6,037

$

12,757

$

12,076

Cost of revenue

2,679

1,937

1,817

4,616

3,662

   Gross profit

4,255

3,886

4,220

8,141

8,414











   Gross margin

61

%

67

%

70

%

64

%

70

%











Operating expenses

5,090

4,947

4,725

10,037

10,020

Operating income (loss), a GAAP measure

$

(835)

$

(1,061)

$

(505)

$

(1,896)

$

(1,606)

Acquisitions related intangible asset amortization

25

27

34

52

59

Depreciation and amortization

157

141

154

298

333











   Contribution margin, a non-GAAP measure

$

(653)

$

(893)

$

(317)

$

(1,546)

$

(1,214)











Corporate




















Cost of revenue

$

23

$

37

$

(84)

$

60

$

(91)

   Gross profit

(23)

(37)

84

(60)

91











   Gross margin

N/A

N/A

N/A

N/A

N/A











Operating expenses

2,959

4,295

3,871

7,254

11,243

Operating income (loss), a GAAP measure

$

(2,982)

$

(4,332)

$

(3,787)

$

(7,314)

$

(11,152)

Other income (expense), net

(13)

(226)

15

(239)

(272)

Depreciation and amortization

119

187

246

306

607

Restructuring and other charges

150

1,564

413

1,714

798

Stock-based compensation

863

1,434

608

2,297

3,779

Lease exit and related charges

—

—

127

—

958











   Contribution margin, a non-GAAP measure

$

(1,863)

$

(1,373)

$

(2,378)

$

(3,236)

$

(5,282)

 

RealNetworks, Inc. and Subsidiaries

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

(Unaudited)


2017

2016

2017

2016

 Q2

 Q1

 Q2

 YTD

 YTD

 (in thousands)










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















Net income (loss)

$

(3,386)

$

(9,424)

$

(8,347)

$

(12,810)

$

(23,518)

Income tax expense (benefit)

471

490

363

961

588

Interest income, net

(109)

(128)

(80)

(237)

(197)

Gain (loss) on investments, net

—

—

46

—

43

Equity in net loss of Rhapsody

349

748

396

1,097

396

Acquisitions related intangible asset amortization

226

223

243

449

576

Depreciation and amortization

610

698

1,383

1,308

3,648

Restructuring and other charges

150

1,564

413

1,714

798

Stock-based compensation

863

1,434

608

2,297

3,779

Lease exit and related charges

—

—

127

—

958

   Adjusted EBITDA, a non-GAAP measure

$

(826)

$

(4,395)

$

(4,848)

$

(5,221)

$

(12,929)

 

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SOURCE RealNetworks, Inc.