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RealNetworks Announces Second Quarter 2019 Financial Results

SEATTLE, Aug. 1, 2019 /PRNewswire/ -- RealNetworks, Inc. (RNWK), a leader in digital media software and services, today announced its financial results for the second quarter ended June 30, 2019.

  • Second quarter revenue of $44.2 million
  • Strong early success with SAFRTM
  • Successful  worldwide roll-out of 2nd free-to-play game, Delicious World
  • Remain committed to proactive expense management

Management Commentary

"In the second quarter, we achieved solid results overall with two particularly strong areas: our SAFR Facial Recognition platform and our free-to-play casual mobile games," said Rob Glaser, Chairman and CEO of RealNetworks. "SAFR bookings were up significantly quarter-over-quarter. SAFR also continued to shine technically, retaining its position in the NIST ratings as the fastest and smallest of the most accurate Facial Recognition Systems."

Mr. Glaser added, "We also demonstrated solid traction in free-to-play casual mobile games. Our second free-to-play title, Delicious World, launched at the end of the second quarter and is off to a terrific start."

Second Quarter 2019 Financial Highlights

  • Revenue was $44.2 million (inclusive of $28.6 million from Napster) compared to $39.5 million (inclusive of $24.3 million from Napster) in the prior quarter and $15.7 million in the prior year period. The second quarter of 2019 reflects the first full quarter consolidation of Napster's financial statements.
  • Gross profit margin was 38%, up from 37% in the prior quarter and down from 71% in the prior year period. Napster's gross profit margin for the second quarter of 2019 was 19%, while RealNetworks' gross profit margin without Napster was 73%.
  • Operating expenses increased $0.9 million, or 3%, from the prior quarter and increased $8.4 million, or 47%, from the prior year period. Napster's operating expenses were $6.6 million for the second quarter of 2019. Included in the second quarter of 2019 total operating expenses were $0.4 million of transaction costs related to the acquisition of Napster and $0.3 million of expenses recorded for the change in fair value of the contingent consideration liability related to the acquisition of Napster.
  • Net loss attributable to RealNetworks was $(9.2) million, or $(0.24) per share, compared to net income of $1.5 million, or $0.04 per share, in the prior quarter and a net loss of $(6.9) million, or $(0.18) per share, in the prior year period. Net income attributable to RealNetworks in the first quarter of 2019 included a gain of $12.3 million related to the acquisition of Napster.
  • Adjusted EBITDA was a loss of $(6.3) million compared to a loss of $(7.9) million in the prior quarter and a loss of $(5.8) million in the prior year period. A reconciliation of GAAP net income (loss) including noncontrolling interests to adjusted EBITDA, a non-GAAP measure, is provided in the financial tables that accompany this release.
  • At June 30, 2019, the Company had $26.3 million in unrestricted cash and cash equivalents compared to $36.9 million at March 31, 2019.

Business Outlook

For the third quarter of 2019, RealNetworks expects to achieve the following results including noncontrolling interests:

  • Total revenue is expected to be in the range of $43.0 million to $46.0 million
  • Adjusted EBITDA loss is expected to be in the range of $(2.5) million to $(5.5) million.

Conference Call and Webcast Information

The Company will host a conference call today to review results and discuss its performance shortly after 4:30 p.m. ET / 1:30 p.m. PT. Participants may join the conference call by dialing 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 Thursday, August 22, 2019, by dialing 1-844-512-2921 (United States) or 1-412-317-6671 (International) and entering the replay pin number: 13692194.

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

About RealNetworks

Building on a legacy of digital media expertise and innovation, RealNetworks has created a new generation of products that employ best-in-class artificial intelligence and machine learning to enhance and secure our daily lives. SAFR (www.safr.com) is the world's premier facial recognition platform for live video. Leading in real-world performance and accuracy as evidenced in testing by NIST, SAFR enables new applications for security, convenience, and analytics. Kontxt (www.kontxt.com) is the foremost platform for categorizing A2P messages to help mobile carriers build customer loyalty and drive new revenue through text message classification and antispam. For information about our other products, visit www.realnetworks.com.

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) including noncontrolling interests 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 our 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 Napster segment. 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 our expectations as of today, and actual results may differ materially from the results predicted. Factors that could cause actual results for RealNetworks, on a consolidated basis, to differ from the results predicted include: our ability to realize operating efficiencies, growth and other benefits from the implementation of our growth initiatives; successful monetization of our products and services; competitive risks, including the emergence or growth of competing technologies, products and services; potential outcomes and effects of claims and legal proceedings; risks associated with key customer or strategic relationships and business acquisitions; disruptions in the global financial markets, including changes in consumer spending and impacts to credit availability; fluctuations in foreign currencies; and unique risk factors that relate to our Napster segment, such as risks stemming from its streaming music service and related music royalties. More information about potential risk factors that could affect our 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 our financial statements and forward-looking financial guidance requires us 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. RealNetworks assumes no obligation to update any forward-looking statements or information, which are in effect as of their respective dates.

For More Information:
Investor Relations for RealNetworks
Kimberly Orlando, Addo Investor Relations
310-829-5400
IR@realnetworks.com
RNWK-F

 

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)



Quarter Ended
June 30,


Six Months Ended
June 30,




2019


2018


2019


2018


 (in thousands, except per share data)









 Net revenue

$

44,248



$

15,724



$

83,720



$

35,374


 Cost of revenue

27,282



4,625



52,152



9,761


           Gross profit

16,966



11,099



31,568



25,613










 Operating expenses:








       Research and development

8,876



7,652



17,709



15,346


       Sales and marketing

8,360



4,883



16,502



10,880


       General and administrative

8,392



5,339



16,756



10,940


       Restructuring and other charges

729



187



896



688


       Lease exit and related benefit



(129)





(454)










           Total operating expenses

26,357



17,932



51,863



37,400










 Operating loss

(9,391)



(6,833)



(20,295)



(11,787)










 Other income (expenses):








       Interest expense

(43)





(209)




       Interest income

40



111



117



198


       Gain (loss) on equity investment, net





12,338




       Other income (expenses), net

183



(42)



310



(83)










           Total other income (expenses), net

180



69



12,556



115










 Income (loss) before income taxes

(9,211)



(6,764)



(7,739)



(11,672)


 Income tax expense

244



166



502



436










Net income (loss) including noncontrolling interests

(9,455)



(6,930)



(8,241)



(12,108)


Net income (loss) attributable to noncontrolling interests

(253)





(572)




Net income (loss) attributable to RealNetworks

$

(9,202)



$

(6,930)



$

(7,669)



$

(12,108)










Net income (loss) per share attributable to RealNetworks- Basic:

$

(0.24)



$

(0.18)



$

(0.20)



$

(0.32)


Net income (loss) per share attributable to RealNetworks- Diluted:

$

(0.24)



$

(0.18)



$

(0.20)



$

(0.32)










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

37,948



37,577



37,885



37,514


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

37,948



37,577



37,885



37,514


 

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)



June 30,
2019


December 31,
2018


 (in thousands)

ASSETS

 Current assets:




 Cash and cash equivalents

$

26,339



$

35,561


 Short-term investments



24


 Trade accounts receivable, net

31,957



11,751


 Deferred costs, current portion

465



331


 Prepaid expenses and other current assets

20,382



5,911


 Total current assets

79,143



53,578






 Equipment and software

32,079



37,458


 Leasehold improvements

3,319



3,292


 Total equipment, software, and leasehold improvements

35,398



40,750


 Less accumulated depreciation and amortization

32,268



37,996


 Net equipment, software, and leasehold improvements

3,130



2,754






 Operating lease assets

13,672




 Restricted cash equivalents

2,124



1,630


 Other assets

2,739



3,997


 Deferred costs, non-current portion

797



528


 Deferred tax assets, net

854



851


 Other intangible assets, net

21,616



26


 Goodwill

65,395



16,955






 Total assets

$

189,470



$

80,319






 LIABILITIES AND SHAREHOLDERS' EQUITY





 Current liabilities:




 Accounts payable

$

5,224



$

3,910


 Accrued royalties, fulfillment and other current liabilities

97,951



11,312


 Commitment to Napster



2,750


 Deferred revenue, current portion

6,054



2,125


 Notes payable

7,878




 Total current liabilities

117,107



20,097






 Deferred revenue, non-current portion

179



268


 Deferred rent



986


 Deferred tax liabilities, net

1,262



1,168


 Long-term lease liabilities

10,384




 Other long-term liabilities

11,070



960






 Total liabilities

140,002



23,479






 Total shareholders' equity

49,382



56,840






Noncontrolling interests

86








 Total equity

49,468



56,840






 Total liabilities and equity

$

189,470



$

80,319


 

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)



Six Months Ended
June 30,


2019


2018


 (in thousands)


 Cash flows from operating activities:




 Net income (loss) including noncontrolling interests

$

(8,241)



$

(12,108)


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




Depreciation and amortization

2,959



1,231


Stock-based compensation

1,917



1,614


Deferred income taxes, net



(12)


(Gain) loss on equity investment, net

(12,338)




Foreign currency (gain) loss

(315)




Fair value adjustments to contingent consideration liability

300




Mark to market adjustment of warrants



50


Net change in certain operating assets and liabilities

(381)



(3,505)


  Net cash used in operating activities

(16,099)



(12,730)


 Cash flows from investing activities:




Purchases of equipment, software, and leasehold improvements

(873)



(580)


Proceeds from sales and maturities of short-term investments

24



5,726


Acquisition, net of cash acquired

12,260



(4,192)


 Net cash provided by investing activities

11,411



954


 Cash flows from financing activities:




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

144



114


Tax payments from shares withheld upon vesting of restricted stock

(287)



(243)


Proceeds from notes payable

19,760




Repayments of notes payable

(24,018)




Other financing activities

450




 Net cash provided by (used in) financing activities

(3,951)



(129)


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

(89)



(731)


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

(8,728)



(12,636)


 Cash, cash equivalents and restricted cash, beginning of period

37,191



53,596


 Cash, cash equivalents and restricted cash, end of period

$

28,463



$

40,960


 

RealNetworks, Inc. and Subsidiaries

Supplemental Financial Information

(Unaudited)



2019


2018


 Q2


Q1


 Q4


 Q3


 Q2


 Q1


 (in thousands)

Net Revenue by Segment












Consumer Media (A)

$

2,620



$

2,486



$

4,068



$

4,733



$

3,884



$

5,483


Mobile Services (B)

6,997



6,939



6,899



7,348



6,719



8,704


Games (C)

6,048



5,710



5,590



5,498



5,121



5,463


Napster (D)

28,583



24,337










     Total net revenue

$

44,248



$

39,472



$

16,557



$

17,579



$

15,724



$

19,650














Net Revenue by Product












Consumer Media












- Software License (E)

$

944



$

735



$

2,049



$

2,746



$

1,808



$

3,337


- Subscription Services (F)

1,040



1,088



1,153



1,232



1,225



1,285


- Product Sales (G)

206



219



257



281



299



340


- Advertising & Other (H)

430



444



609



474



552



521














Mobile Services












- Software License (I)

957



599



514



520



469



1,335


- Subscription Services (J)

6,040



6,340



6,385



6,828



6,250



7,369














Games












- Subscription Services (K)

3,073



2,985



3,014



2,745



2,689



2,693


- Product Sales (L)

2,177



1,988



2,013



2,279



1,953



2,402


- Advertising & Other (M)

798



737



563



474



479



368














Napster












- Subscription Services (N)

28,583



24,337






















     Total net revenue

$

44,248



$

39,472



$

16,557



$

17,579



$

15,724



$

19,650














Net Revenue by Geography












United States

$

21,322



$

18,970



$

7,697



$

9,026



$

7,646



$

11,434


Rest of world

22,926



20,502



8,860



8,553



8,078



8,216


     Total net revenue

$

44,248



$

39,472



$

16,557



$

17,579



$

15,724



$

19,650














Net Revenue by Segment













(A) The Consumer Media segment 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 segment primarily includes revenue from SaaS services and sales of professional services provided to mobile carriers.

(C) The Games segment primarily includes revenue from sales of mobile and PC games, online games subscription services, player purchases of in-game virtual goods, and advertising on games sites and social network sites.

(D) The Napster segment primarily includes revenue from subscription music offerings from on-demand streaming services and conditional downloads. Napster revenues are included in our consolidated results from the January 18, 2019 acquisition date forward.

Net Revenue by Product












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

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

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

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

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

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

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

(L) Product sales revenue within Games includes revenue from retail and wholesale games-related revenue, sales of mobile games, and player purchases of in-game virtual goods.

(M) Advertising & other revenue within Games includes advertising on games sites and social network sites.

(N) Subscription services revenue within Napster includes music tracks by way of on-demand streaming and conditional downloads offered directly to end consumers and distribution partners.

 

RealNetworks, Inc. and Subsidiaries

Segment Results of Operations and Reconciliation to non-GAAP Contribution Margin

(Unaudited)



2019


2018


2019


2018


Q2


Q1


Q2


YTD


YTD


 (in thousands)

Consumer Media




















Net revenue

$

2,620



$

2,486



$

3,884



$

5,106



$

9,367


Cost of revenue

803



833



1,028



1,636



2,021


Gross profit

1,817



1,653



2,856



3,470



7,346












Gross margin

69

%


66

%


74

%


68

%


78

%











Operating expenses

2,877



3,119



3,439



5,996



7,357


Operating income (loss), a GAAP measure

$

(1,060)



$

(1,466)



$

(583)



$

(2,526)



$

(11)


Depreciation and amortization

56



54



51



110



97












Contribution margin, a non-GAAP measure

$

(1,004)



$

(1,412)



$

(532)



$

(2,416)



$

86












Mobile Services




















Net revenue

$

6,997



$

6,939



$

6,719



$

13,936



$

15,423


Cost of revenue

1,865



2,048



2,134



3,913



4,450


Gross profit

5,132



4,891



4,585



10,023



10,973












Gross margin

73

%


70

%


68

%


72

%


71

%











Operating expenses

7,438



7,561



6,969



14,999



14,335


Operating income (loss), a GAAP measure

$

(2,306)



$

(2,670)



$

(2,384)



$

(4,976)



$

(3,362)


Acquisitions related intangible asset amortization





91





183


Depreciation and amortization

106



231



155



337



335












Contribution margin, a non-GAAP measure

$

(2,200)



$

(2,439)



$

(2,138)



$

(4,639)



$

(2,844)












Games




















Net revenue

$

6,048



$

5,710



$

5,121



$

11,758



$

10,584


Cost of revenue

1,655



1,670



1,456



3,325



3,273


Gross profit

4,393



4,040



3,665



8,433



7,311












Gross margin

73

%


71

%


72

%


72

%


69

%











Operating expenses

5,288



5,037



5,095



10,325



10,012


Operating income (loss), a GAAP measure

$

(895)



$

(997)



$

(1,430)



$

(1,892)



$

(2,701)


Acquisitions related intangible asset amortization



23



20



23



20


Depreciation and amortization

84



83



146



167



311












Contribution margin, a non-GAAP measure

$

(811)



$

(891)



$

(1,264)



$

(1,702)



$

(2,370)












Napster




















Net revenue

$

28,583



$

24,337



$



$

52,920



$


Cost of revenue

23,026



20,396





43,422




Gross profit

5,557



3,941





9,498














Gross margin

19

%


16

%


%


18

%


%











Operating expenses

6,638



5,532





12,170




Operating income (loss), a GAAP measure

$

(1,081)



$

(1,591)



$



$

(2,672)



$


Acquisitions related intangible asset amortization

1,129



943





2,072




Depreciation and amortization

69



115





184














Contribution margin, a non-GAAP measure

$

117



$

(533)



$



$

(416)



$












Corporate




















Cost of revenue

$

(67)



$

(77)



$

7



$

(144)



$

17


Gross profit

67



77



(7)



144



(17)












Gross margin

N/A


N/A


N/A


N/A


N/A











Operating expenses

4,116



4,257



2,429



8,373



5,696


Operating income (loss), a GAAP measure

$

(4,049)



$

(4,180)



$

(2,436)



$

(8,229)



$

(5,713)


Other income (expense), net

183



127



(42)



310



(83)


Foreign currency (gain) loss

(164)



(151)



(2)



(315)



20


Depreciation and amortization

33



33



148



66



285


Fair value adjustments to contingent consideration liability

300







300




Restructuring and other charges

729



167



187



896



688


Stock-based compensation

533



1,384



457



1,917



1,614


Lease exit and related benefit





(129)





(454)












Contribution margin, a non-GAAP measure (1)

$

(2,435)



$

(2,620)



$

(1,817)



$

(5,055)



$

(3,643)



(1)2018 Corporate contribution margin was revised to exclude the impact of realized and unrealized foreign currency (gain) loss incurred in each respective period. Foreign currency (gain) loss is reported in Other income (expense), net, in our consolidated statement of operations.

 

RealNetworks, Inc. and Subsidiaries

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

(Unaudited)



2019


2018


2019


2018


Q2


 Q1


 Q2


 YTD


 YTD


(in thousands)











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

















Net income (loss) including noncontrolling interests

$

(9,455)



$

1,214



$

(6,930)



$

(8,241)



$

(12,108)


Income tax expense (benefit)

244



258



166



502



436


Interest expense

43



166





209




Interest income

(40)



(77)



(111)



(117)



(198)


(Gain) loss on equity investment, net



(12,338)





(12,338)




Foreign currency (gain) loss

(164)



(151)



(2)



(315)



20


Acquisitions related intangible asset amortization

1,129



966



111



2,095



203


Depreciation and amortization

348



516



500



864



1,028


Fair value adjustments to contingent consideration liability

300







300




Restructuring and other charges

729



167



187



896



688


Stock-based compensation

533



1,384



457



1,917



1,614


Lease exit and related benefit





(129)





(454)


   Adjusted EBITDA, a non-GAAP measure (1)

$

(6,333)



$

(7,895)



$

(5,751)



$

(14,228)



$

(8,771)



(1)2018 adjusted EBITDA was revised to exclude the impact of realized and unrealized foreign currency (gain) loss incurred in each respective period. Foreign currency (gain) loss is reported in Other income (expense), net, in our consolidated statement of operations.

 

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