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RealNetworks Announces Fourth Quarter And Full Year 2018 Results

SEATTLE, Feb. 6, 2019 /PRNewswire/ -- RealNetworks, Inc. (RNWK), a leader in digital media software and services, today announced results for the fourth quarter and full year ended December 31, 2018.

  • 2018 revenue of $69.5 million, compared to $78.7 million in 2017
  • Commercializing four key growth initiatives: SAFR, Kontxt, RMHD and mobile games
  • Reduced 2018 operating expenses by 3% year-over-year
  • Subsequent to year-end, doubled stake to become 84% majority owner of Napster at compelling economic terms for RealNetworks

Management Commentary

"In 2018 we did not achieve our financial goals.  Nonetheless, 2018 was a solid year strategically, in which we made progress on our key growth initiatives, especially SAFR, our world-class facial recognition platform," said Rob Glaser, Chairman and CEO of RealNetworks. "2019 will also be an important year of commercial progress for SAFR, as well as our other key growth initiatives: Kontxt, our anti-spam and classification platform for messaging; RMHD, our video codec in China; and GameHouse, our casual mobile games business."

Mr. Glaser added, "We are also delighted to welcome Napster more fully back into the RealNetworks family through our recent acquisition of an additional 42% stake, bringing our ownership to 84%.  Bill Patrizio and his team have done an outstanding job of refocusing Napster around B2B and returning Napster to profitability.  Through the first nine months of 2018, Napster generated over $14 million in operating income. The addition of Napster significantly increases our scale, with combined full-year revenue of over $200 million."

Fourth Quarter 2018 Financial Highlights from Continuing Operations

  • Revenue was $16.6 million compared to $17.6 million in the prior quarter and $18.9 million in the prior year period.
  • Gross margin from continuing operations was 77%, up from 76% in the prior quarter and 74% in the prior year period.
  • Operating expenses were flat from the prior quarter and decreased by $0.3 million, or 1%, from the prior year period.
  • Net loss was $(6.9) million, or $(0.18) per share, compared to net loss of $(6.0) million, or $(0.16) per share, in the prior quarter and a net income of $0.4 million, or $0.01 per share, in the prior year period. In the prior year period, net income included the $4.5 million gain on the final receipt of cash from the 2015 sale of the Slingo and social casino business.
  • Adjusted EBITDA was a loss of $(4.1) million compared to a loss of $(3.4) million in the prior quarter and a loss of $(3.6) million in the prior year period. A reconciliation of GAAP net income (loss) to adjusted EBITDA, a non-GAAP measure, is provided in the financial tables that accompany this release.

Full Year 2018 Financial Highlights from Continuing Operations

  • Revenue was $69.5 million, down from $78.7 million in the prior year.
  • Operating expenses declined by $2.1 million, or 3%, from the prior year.
  • Net loss was $(25.0) million, or $(0.66) per share, compared to $(17.4) million, or $(0.47) per share in the prior year.
  • Adjusted EBITDA was a loss of $(16.3) million, compared to a loss of $(12.0) million in the prior year. A reconciliation of GAAP net income (loss) to adjusted EBITDA, a non-GAAP measure, is provided in the financial tables that accompany this release.
  • At December 31, 2018, the Company had $35.6 million in unrestricted cash, cash equivalents and short-term investments, compared to $39.1 million at September 30, 2018.

Business Outlook

Following its acquisition of an additional 42% interest in Rhapsody International (dba Napster), RealNetworks will include 100% of Napster in its consolidated financial statements, which will include a 16% noncontrolling interest. As a result, as of the acquisition date forward, Napster is reflected in the Company's financial outlook for the first quarter of 2019. The Company's outlook also accounts for one-time transaction related costs.

For the first quarter of 2019, RealNetworks expects to achieve the following results including noncontrolling interest:

  • Total revenue is expected to be in the range of $40.0 million to $43.0 million.
  • Adjusted EBITDA loss is expected to be in the range of $(5.0) million to $(8.0) million.

New Revenue Recognition Accounting Standard

As of January 1, 2018, we adopted Accounting Standards Codification 606 (Topic 606), Revenue from Contracts with Customers, which affects the accounting for our revenue. We adopted Topic 606 using the modified retrospective transition method, under which the prior periods presented have not been recast to reflect adoption of the new standard.

For additional details on the impact of the standard, see our Annual Report on Form 10-K for the year ended December 31, 2017, and our 2018 Quarterly Reports on Form 10-Q.

Conference Call and Webcast Information

The company will host a conference call today to review results and discuss the company's performance shortly after 4:30 p.m. ET/1:30 p.m. PT. You may join the conference call by calling 1-877-451-6152 (United States) or 1-201-389-0879 (International). A telephonic replay of the call will also be available shortly after the completion of the call, until 11:59 pm ET on Wednesday, February 27, 2019, by dialing 1-844-512-2921 (United States) or 1-412-317-6671 (International) and entering the replay pin number: 13686405.

A live webcast will be available on RealNetworks' Investor Relations site under Events at http://investor.realnetworks.com and will be archived online upon completion of the conference call.

For More Information

Investor Relations for RealNetworks
Laura Bainbridge, Addo IR
310-829-5400
IR@realnetworks.com
RNWK-F

About RealNetworks

RealNetworks creates innovative technology products and services that make it easy to connect with and enjoy digital media. RealNetworks invented the streaming media category 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. Find RealNetworks' corporate information at www.realnetworks.com.

RealNetworks® and the company's respective logos are trademarks, registered trademarks, or service marks of RealNetworks, Inc. Other products and company names mentioned are the 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) from continuing operations 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 d/b/a Napster 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 impact of Napster's financial condition and results of operations upon consolidation with those of RealNetworks; 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


Year Ended


December 31,


December 31,


2018


2017


2018


2017


 (in thousands, except per share data)









 Net revenue

$

16,557



$

18,865



$

69,510



$

78,718


 Cost of revenue

3,727



4,965



17,727



23,164


           Gross profit

12,830



13,900



51,783



55,554










 Operating expenses:








       Research and development

7,391



7,625



30,789



29,710


       Sales and marketing

5,262



5,419



21,140



22,953


       General and administrative

5,180



5,358



20,706



20,996


       Restructuring and other charges

553



255



1,873



2,526


       Lease exit and related benefit





(454)












           Total operating expenses

18,386



18,657



74,054



76,185










 Operating loss

(5,556)



(4,757)



(22,271)



(20,631)










 Other income (expenses):








       Interest income, net

74



83



344



436


       Gain (loss) on investments, net



4,500





4,500


       Equity in net loss of Napster

(20)



(2,894)



(757)



(3,991)


       Other income (expense), net

92



(217)



(103)



(506)










           Total other income (expense), net

146



1,472



(516)



439










 Loss from continuing operations before income taxes

(5,410)



(3,285)



(22,787)



(20,192)


 Income tax expense (benefit)

1,494



(3,732)



2,202



(2,778)










Net income (loss) from continuing operations

(6,904)



447



(24,989)



(17,414)


Net income from discontinued operations, net of tax



392





1,109


 Net income (loss)

$

(6,904)



$

839



$

(24,989)



$

(16,305)










Net income (loss) per share - Basic:








Continuing operations

$

(0.18)



$

0.01



$

(0.66)



$

(0.47)


Discontinued operations



0.01





0.03


Net income (loss) per share - Basic

$

(0.18)



$

0.02



$

(0.66)



$

(0.44)


Net income (loss) per share - Diluted:








Continuing operations

$

(0.18)



$

0.01



$

(0.66)



$

(0.47)


Discontinued operations



0.01





0.03


Net income (loss) per share - Diluted

$

(0.18)



$

0.02



$

(0.66)



$

(0.44)










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

37,680



37,315



37,582



37,163


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

37,680



37,383



37,582



37,163


 

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)



December 31,
2018


December 31,
2017


 (in thousands)

ASSETS

 Current assets:




 Cash and cash equivalents

$

35,561



$

51,196


 Short-term investments

24



8,779


 Trade accounts receivable, net

11,751



12,689


 Deferred costs, current portion

331



426


 Prepaid expenses and other current assets

5,911



3,715


Current assets of discontinued operations



17,456


 Total current assets

53,578



94,261






 Equipment and software

37,458



46,417


 Leasehold improvements

3,292



3,536


 Total equipment, software, and leasehold improvements

40,750



49,953


 Less accumulated depreciation and amortization

37,996



46,093


 Net equipment, software, and leasehold improvements

2,754



3,860






 Restricted cash equivalents

1,630



2,400


 Other assets

3,997



5,588


 Deferred costs, non-current portion

528



955


 Deferred tax assets, net

851



1,047


 Other intangible assets, net

26



325


 Goodwill

16,955



13,060






 Total assets

$

80,319



$

121,496






 LIABILITIES AND SHAREHOLDERS' EQUITY





 Current liabilities:




 Accounts payable

$

3,910



$

3,785


 Accrued and other current liabilities

11,312



12,365


 Commitment to Napster

2,750



2,750


 Deferred revenue, current portion

2,125



3,097


Current liabilities of discontinued operations



17,107


 Total current liabilities

20,097



39,104






 Deferred revenue, non-current portion

268



443


 Deferred rent

986



982


 Deferred tax liabilities, net

1,168



19


 Other long-term liabilities

960



1,775






 Total liabilities

23,479



42,323










 Shareholders' equity

56,840



79,173






 Total liabilities and shareholders' equity

$

80,319



$

121,496


 

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)



Year Ended
December 31,


2018


2017


 (in thousands)


 Cash flows from operating activities:




 Net loss

$

(24,989)



$

(16,305)


 Adjustments to reconcile net loss to net cash used in operating activities:

  Depreciation and amortization

2,135



2,936


  Stock-based compensation

2,508



3,675


  Equity in net loss of Napster

757



3,991


  Deferred income taxes, net

1,170



(3,871)


  Loss (gain) on investments, net



(4,500)


  Fair value of warrants granted in 2015 and 2017, net of subsequent mark to market adjustments in 2018 and 2017

124



(216)


  Net change in certain operating assets and liabilities

(926)



(7,060)


   Net cash used in operating activities

(19,221)



(21,350)


 Cash flows from investing activities:




 Purchases of equipment, software, and leasehold improvements

(765)



(734)


 Purchases of short-term investments



(13,905)


 Proceeds from sales and maturities of short-term investments

8,755



48,457


 Acquisition, net of cash acquired

(4,192)




 Advance to Napster



(1,500)


 Proceeds from the sale of Slingo and social casino business



4,500


  Net cash provided by investing activities

3,798



36,818


 Cash flows from financing activities:




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

199



239


 Tax payments from shares withheld upon vesting of restricted stock

(261)



(356)


  Net cash used in financing activities

(62)



(117)


 Effect of exchange rate changes on cash, cash equivalents and restricted cash

(920)



1,824


  Net increase (decrease) in cash, cash equivalents and restricted cash

(16,405)



17,175


 Cash, cash equivalents and restricted cash, beginning of period

53,596



36,421


 Cash, cash equivalents and restricted cash, end of period

$

37,191



$

53,596


 

RealNetworks, Inc. and Subsidiaries

Supplemental Financial Information

(Unaudited)



2018


2017


 YTD


 Q4


 Q3


 Q2


Q1


 YTD


 Q4


 Q3


 Q2


 Q1


 (in thousands)

Net Revenue by Line of Business




















Consumer Media (A)

$

18,168



$

4,068



$

4,733



$

3,884



$

5,483



$

22,569



$

5,752



$

4,197



$

6,951



$

5,669


Mobile Services (B)

29,670



6,899



7,348



6,719



8,704



30,752



7,155



7,678



7,720



8,199


Games (C)

21,672



5,590



5,498



5,121



5,463



25,397



5,958



6,682



6,934



5,823


     Total net revenue

$

69,510



$

16,557



$

17,579



$

15,724



$

19,650



$

78,718



$

18,865



$

18,557



$

21,605



$

19,691






















Net Revenue by Product




















Consumer Media




















- Software License (D)

$

9,940



$

2,049



$

2,746



$

1,808



$

3,337



$

13,643



$

3,595



$

2,012



$

4,741



$

3,295


- Subscription Services (E)

4,895



1,153



1,232



1,225



1,285



5,891



1,362



1,434



1,531



1,564


- Product Sales (F)

1,177



257



281



299



340



1,310



350



322



261



377


- Advertising & Other (G)

2,156



609



474



552



521



1,725



445



429



418



433






















Mobile Services




















- Software License (H)

2,838



514



520



469



1,335



2,337



388



688



642



619


- Subscription Services (I)

26,832



6,385



6,828



6,250



7,369



28,415



6,767



6,990



7,078



7,580






















Games




















- Subscription Services (J)

11,141



3,014



2,745



2,689



2,693



11,024



2,707



2,708



2,781



2,828


- Product Sales (K)

8,647



2,013



2,279



1,953



2,402



13,806



3,086



3,851



4,007



2,862


- Advertising & Other (L)

1,884



563



474



479



368



567



165



123



146



133






















     Total net revenue

$

69,510



$

16,557



$

17,579



$

15,724



$

19,650



$

78,718



$

18,865



$

18,557



$

21,605



$

19,691






















Net Revenue by Geography




















United States

$

35,803



$

7,697



$

9,026



$

7,646



$

11,434



$

40,833



$

10,120



$

10,084



$

10,889



$

9,740


Rest of world

33,707



8,860



8,553



8,078



8,216



37,885



8,745



8,473



10,716



9,951


     Total net revenue

$

69,510



$

16,557



$

17,579



$

15,724



$

19,650



$

78,718



$

18,865



$

18,557



$

21,605



$

19,691



Net Revenue by Line of Business

(A) The Consumer Media division primarily includes revenue from the licensing of our portfolio of video codec technologies. Also included is RealPlayer and related products, such as the distribution of third-party software products, advertising on RealPlayer websites, sales of RealPlayer Plus software to consumers, 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 and PC games, online games subscription services, and advertising on games sites and social network sites.

Net Revenue by Product

(D) Software licensing revenue within Consumer Media includes revenues from licenses of our video codec technologies.

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

(F) Product sales within Consumer Media includes sales of RealPlayer Plus software to consumers.

(G) Advertising & other revenue within Consumer Media includes distribution of third-party software products and advertising on RealPlayer websites.

(H) Software license revenue within Mobile Services includes revenue from our integrated RealTimes platform.

(I) Subscription services revenue within Mobile Services includes revenue from ringback tones and our intercarrier messaging services, as well as from related professional services provided to mobile carriers.

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

(K) Product sales revenue within Games includes revenue from retail and wholesale games-related revenue and sales of mobile games.

(L) Advertising & other 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)



2018


2017


2018


2017


Q4


Q3


Q4


YTD


YTD


 (in thousands)

Consumer Media




















Net revenue

$

4,068



$

4,733



$

5,752



$

18,168



$

22,569


Cost of revenue

882



955



915



3,858



4,460


   Gross profit

3,186



3,778



4,837



14,310



18,109












   Gross margin

78

%


80

%


84

%


79

%


80

%











Operating expenses

3,614



3,448



3,573



14,419



14,530


Operating income (loss), a GAAP measure

$

(428)



$

330



$

1,264



$

(109)



$

3,579


Depreciation and amortization

49



49



42



195



410












  Contribution margin, a non-GAAP measure

$

(379)



$

379



$

1,306



$

86



$

3,989












Mobile Services




















Net revenue

$

6,899



$

7,348



$

7,155



$

29,670



$

30,752


Cost of revenue

2,121



2,052



2,271



8,623



10,021


   Gross profit

4,778



5,296



4,884



21,047



20,731












   Gross margin

69

%


72

%


68

%


71

%


67

%











Operating expenses

6,906



6,825



6,709



28,066



27,970


Operating income (loss), a GAAP measure

$

(2,128)



$

(1,529)



$

(1,825)



$

(7,019)



$

(7,239)


Acquisitions related intangible asset amortization

69



70



89



322



574


Depreciation and amortization

116



165



174



616



732












Contribution margin, a non-GAAP measure

$

(1,943)



$

(1,294)



$

(1,562)



$

(6,081)



$

(5,933)












Games




















Net revenue

$

5,590



$

5,498



$

5,958



$

21,672



$

25,397


Cost of revenue

1,622



1,228



1,868



6,123



8,710


   Gross profit

3,968



4,270



4,090



15,549



16,687












   Gross margin

71

%


78

%


69

%


72

%


66

%











Operating expenses

4,865



5,447



5,293



20,324



20,401


Operating income (loss), a GAAP measure

$

(897)



$

(1,177)



$

(1,203)



$

(4,775)



$

(3,714)


Acquisitions related intangible asset amortization

23



23



18



66



97


Depreciation and amortization

82



91



163



484



630












   Contribution margin, a non-GAAP measure

$

(792)



$

(1,063)



$

(1,022)



$

(4,225)



$

(2,987)












Corporate




















Cost of revenue

$

(898)



$

4



$

(89)



$

(877)



$

(27)


   Gross profit

898



(4)



89



877



27












   Gross margin

N/A



N/A



N/A



N/A



N/A












Operating expenses

3,001



2,548



3,082



11,245



13,284


Operating income (loss), a GAAP measure

$

(2,103)



$

(2,552)



$

(2,993)



$

(10,368)



$

(13,257)


Other income (expense), net

92



(112)



(217)



(103)



(506)


Depreciation and amortization

58



109



48



452



493


Restructuring and other charges

553



632



255



1,873



2,526


Stock-based compensation

395



499



630



2,508



3,675


Lease exit and related benefit







(454)














   Contribution margin, a non-GAAP measure

$

(1,005)



$

(1,424)



$

(2,277)



$

(6,092)



$

(7,069)


 

RealNetworks, Inc. and Subsidiaries

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

(Unaudited)



2018


2017


2018


2017


 Q4


 Q3


 Q4


 YTD


 YTD


(in thousands)











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











Net income (loss) from continuing operations

$

(6,904)



$

(5,977)



$

447



$

(24,989)



$

(17,414)


Income tax expense (benefit)

1,494



272



(3,732)



2,202



(2,778)


Interest income, net

(74)



(72)



(83)



(344)



(436)


(Gain) loss on investments, net





(4,500)





(4,500)


Equity in net loss of Napster

20



737



2,894



757



3,991


Acquisitions related intangible asset amortization

92



93



107



388



671


Depreciation and amortization

305



414



427



1,747



2,265


Restructuring and other charges

553



632



255



1,873



2,526


Stock-based compensation

395



499



630



2,508



3,675


Lease exit and related benefit







(454)




   Adjusted EBITDA, a non-GAAP measure

$

(4,119)



$

(3,402)



$

(3,555)



$

(16,312)



$

(12,000)


 

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