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RealNetworks Announces Third Quarter 2019 Financial Results

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

  • Third quarter revenue of $45.0 million compared to $44.2 million in the prior quarter; significant adjusted EBITDA loss improvement over the prior quarter
  • Expanded reach of SAFRTM through broadening network of partners, including NVIDIA
  • Games revenue up 30% year-over-year with a return to positive operating income driven by success of free-to-play casual mobile games, particularly Delicious World

Management Commentary

"In the third quarter, we continued to make solid progress with two key growth initiatives: our SAFR facial and object recognition platform and free-to-play casual mobile games," said Rob Glaser, Chairman and CEO of RealNetworks. "For SAFR, we entered into new verticals through partnerships with systems integrators and GPU market leader, NVIDIA. We also gained traction in our commercialization efforts through collaborations with leading Video Management Systems."

Mr. Glaser added, "In Games, our free-to-play casual mobile games continued to perform well and scale up. This is particularly true with Delicious World, which is on track to become our most successful casual game ever in terms of revenue and engagement even though it's only been in global release for six months. These successes, along with our ongoing commitment to carefully manage our costs, have resulted in a significant improvement on the bottom line."

Third Quarter 2019 Financial Highlights

  • Revenue was $45.0 million (inclusive of $27.3 million from Napster) compared to $44.2 million (inclusive of $28.6 million from Napster) in the prior quarter and $17.6 million in the prior year period.
  • Games revenue was $7.2 million, up 18% compared to $6.0 million in the prior quarter and up 30% compared to $5.5 million in the prior year period.
  • Gross profit margin was 42%, up from 38% in the prior quarter and down from 76% in the prior year period. Napster's gross profit margin for the third quarter of 2019 was 19%, while RealNetworks' gross profit margin without Napster was 76%.
  • Operating expenses decreased $1.4 million, or 5%, from the prior quarter and increased $6.7 million, or 37%, from the prior year period. Napster's operating expenses were $6.5 million for the third quarter of 2019.
  • Net loss attributable to RealNetworks was $(6.0) million, or $(0.16) per share, compared to net loss of $(9.2) million, or $(0.24) per share, in the prior quarter and a net loss of $(6.0) million, or $(0.16) per share, in the prior year period.
  • Adjusted EBITDA was a loss of $(3.2) million compared to a loss of $(6.3) million in the prior quarter and a loss of $(3.3) 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 September 30, 2019, the Company had $18.1 million in unrestricted cash and cash equivalents compared to $26.3 million at June 30, 2019.
  • In August 2019, RealNetworks and Napster entered into a loan agreement for a revolving line of credit for a maximum of $10.0 million to be used for working capital and general corporate purposes. As of September 30, 2019, $6.1 million remained available for borrowing.

Business Outlook

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

  • 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 $(2.0) million to $(5.0) 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 Wednesday, November 20, 2019, by dialing 1-844-512-2921 (United States) or 1-412-317-6671 (International) and entering the replay pin number: 13694934.

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 financial condition and liquidity, 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 and restructuring efforts; cash usage and conservation, and the pursuit of additional funding sources; 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
September 30,


Nine Months Ended
September 30,




2019


2018


2019


2018


 (in thousands, except per share data)









 Net revenue

$

44,993



$

17,579



$

128,713



$

52,953


 Cost of revenue

26,278



4,239



78,430



14,000


           Gross profit

18,715



13,340



50,283



38,953










 Operating expenses:








       Research and development

8,687



8,052



26,396



23,398


       Sales and marketing

8,470



4,998



24,972



15,878


       General and administrative

7,132



4,586



23,888



15,526


       Restructuring and other charges

691



632



1,587



1,320


       Lease exit and related benefit







(454)










           Total operating expenses

24,980



18,268



76,843



55,668










 Operating loss

(6,265)



(4,928)



(26,560)



(16,715)










 Other income (expenses):








       Interest expense

(220)





(429)




       Interest income



72



117



270


       Gain (loss) on equity investment, net





12,338




       Equity in net loss of Napster



(737)





(737)


       Other income (expenses), net

541



(112)



851



(195)










           Total other income (expenses), net

321



(777)



12,877



(662)










 Income (loss) before income taxes

(5,944)



(5,705)



(13,683)



(17,377)


 Income tax expense

310



272



812



708










Net income (loss) including noncontrolling interests

(6,254)



(5,977)



(14,495)



(18,085)


Net income (loss) attributable to noncontrolling interests

(286)





(858)




Net income (loss) attributable to RealNetworks

$

(5,968)



$

(5,977)



$

(13,637)



$

(18,085)










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

$

(0.16)



$

(0.16)



$

(0.36)



$

(0.48)


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

$

(0.16)



$

(0.16)



$

(0.36)



$

(0.48)










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

38,062



37,618



37,944



37,549


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

38,062



37,618



37,944



37,549


 

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)



September 30,
2019


December 31,
2018


 (in thousands)

ASSETS

 Current assets:




 Cash and cash equivalents

$

18,101



$

35,561


 Short-term investments



24


 Trade accounts receivable, net

27,947



11,751


 Deferred costs, current portion

950



331


 Prepaid expenses and other current assets

18,931



5,911


 Total current assets

65,929



53,578






 Equipment and software

31,853



37,458


 Leasehold improvements

3,255



3,292


 Total equipment, software, and leasehold improvements

35,108



40,750


 Less accumulated depreciation and amortization

32,171



37,996


 Net equipment, software, and leasehold improvements

2,937



2,754






 Operating lease assets

12,499




 Restricted cash equivalents

5,374



1,630


 Other assets

2,842



3,997


 Deferred costs, non-current portion

957



528


 Deferred tax assets, net

831



851


 Other intangible assets, net

20,309



26


 Goodwill

65,154



16,955






 Total assets

$

176,832



$

80,319






 LIABILITIES AND SHAREHOLDERS' EQUITY





 Current liabilities:




 Accounts payable

$

4,692



$

3,910


 Accrued royalties, fulfillment and other current liabilities

92,529



11,312


 Commitment to Napster



2,750


 Deferred revenue, current portion

6,134



2,125


 Notes payable

3,599




 Total current liabilities

106,954



20,097






 Deferred revenue, non-current portion

139



268


 Deferred rent



986


 Deferred tax liabilities, net

1,225



1,168


 Long-term lease liabilities

9,486




 Long-term debt

3,900




 Other long-term liabilities

11,195



960






 Total liabilities

132,899



23,479






 Total shareholders' equity

44,036



56,840






Noncontrolling interests

(103)








 Total equity

43,933



56,840






 Total liabilities and equity

$

176,832



$

80,319


 

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)



Nine Months Ended
September 30,


2019


2018


 (in thousands)


 Cash flows from operating activities:




 Net income (loss) including noncontrolling interests

$

(14,495)



$

(18,085)


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




Depreciation and amortization

4,397



1,738


Stock-based compensation

2,420



2,113


Equity in net loss of Napster



737


Deferred income taxes, net



5


(Gain) loss on equity investment, net

(12,338)




Foreign currency (gain) loss

(804)




Fair value adjustments to contingent consideration liability

700




Mark to market adjustment of warrants



78


Net change in certain operating assets and liabilities

(177)



(2,214)


  Net cash used in operating activities

(20,297)



(15,628)


 Cash flows from investing activities:




Purchases of equipment, software, and leasehold improvements

(1,068)



(698)


Proceeds from sales and maturities of short-term investments

24



7,607


Acquisition, net of cash acquired

12,260



(4,192)


 Net cash provided by investing activities

11,216



2,717


 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

(289)



(243)


Proceeds from notes payable and revolving credit facility

31,337




Repayments of notes payable and revolving credit facility

(35,768)




Payment of financing fees

(569)




Other financing activities

900




 Net cash used in financing activities

(4,245)



(129)


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

(390)



(962)


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

(13,716)



(14,002)


 Cash, cash equivalents and restricted cash, beginning of period

37,191



53,596


 Cash, cash equivalents and restricted cash, end of period

$

23,475



$

39,594


 

RealNetworks, Inc. and Subsidiaries

Supplemental Financial Information

(Unaudited)



2019


2018


 Q3


 Q2


Q1


 Q4


 Q3


 Q2


 Q1


 (in thousands)

Net Revenue by Segment














Consumer Media (A)

$

3,632



$

2,620



$

2,486



$

4,068



$

4,733



$

3,884



$

5,483


Mobile Services (B)

6,895



6,997



6,939



6,899



7,348



6,719



8,704


Games (C)

7,164



6,048



5,710



5,590



5,498



5,121



5,463


Napster (D)

27,302



28,583



24,337










     Total net revenue

$

44,993



$

44,248



$

39,472



$

16,557



$

17,579



$

15,724



$

19,650
















Net Revenue by Product














Consumer Media














- Software License (E)

$

1,987



$

944



$

735



$

2,049



$

2,746



$

1,808



$

3,337


- Subscription Services (F)

1,028



1,040



1,088



1,153



1,232



1,225



1,285


- Product Sales (G)

207



206



219



257



281



299



340


- Advertising & Other (H)

410



430



444



609



474



552



521
















Mobile Services














- Software License (I)

888



957



599



514



520



469



1,335


- Subscription Services (J)

6,007



6,040



6,340



6,385



6,828



6,250



7,369
















Games














- Subscription Services (K)

3,056



3,073



2,985



3,014



2,745



2,689



2,693


- Product Sales (L)

3,078



2,177



1,988



2,013



2,279



1,953



2,402


- Advertising & Other (M)

1,030



798



737



563



474



479



368
















Napster














- Subscription Services (N)

27,302



28,583



24,337
























     Total net revenue

$

44,993



$

44,248



$

39,472



$

16,557



$

17,579



$

15,724



$

19,650
















Net Revenue by Geography














United States

$

22,015



$

21,322



$

18,970



$

7,697



$

9,026



$

7,646



$

11,434


Rest of world

22,978



22,926



20,502



8,860



8,553



8,078



8,216


     Total net revenue

$

44,993



$

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 and our facial recognition platform, SAFR.

(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


Q3


Q2


Q3


YTD


YTD


 (in thousands)

Consumer Media




















Net revenue

$

3,632



$

2,620



$

4,733



$

8,738



$

14,100


Cost of revenue

705



803



955



2,341



2,976


Gross profit

2,927



1,817



3,778



6,397



11,124












Gross margin

81

%


69

%


80

%


73

%


79

%











Operating expenses

2,692



2,877



3,448



8,688



10,805


Operating income (loss), a GAAP measure

$

235



$

(1,060)



$

330



$

(2,291)



$

319


Depreciation and amortization

34



56



49



144



146












Contribution margin, a non-GAAP measure

$

269



$

(1,004)



$

379



$

(2,147)



$

465












Mobile Services




















Net revenue

$

6,895



$

6,997



$

7,348



$

20,831



$

22,771


Cost of revenue

1,721



1,865



2,052



5,634



6,502


Gross profit

5,174



5,132



5,296



15,197



16,269












Gross margin

75

%


73

%


72

%


73

%


71

%











Operating expenses

7,143



7,438



6,825



22,142



21,160


Operating income (loss), a GAAP measure

$

(1,969)



$

(2,306)



$

(1,529)



$

(6,945)



$

(4,891)


Acquisitions related intangible asset amortization





70





253


Depreciation and amortization

81



106



165



418



500












Contribution margin, a non-GAAP measure

$

(1,888)



$

(2,200)



$

(1,294)



$

(6,527)



$

(4,138)












Games




















Net revenue

$

7,164



$

6,048



$

5,498



$

18,922



$

16,082


Cost of revenue

1,934



1,655



1,228



5,259



4,501


Gross profit

5,230



4,393



4,270



13,663



11,581












Gross margin

73

%


73

%


78

%


72

%


72

%











Operating expenses

5,151



5,288



5,447



15,476



15,459


Operating income (loss), a GAAP measure

$

79



$

(895)



$

(1,177)



$

(1,813)



$

(3,878)


Acquisitions related intangible asset amortization

4





23



27



43


Depreciation and amortization

89



84



91



256



402












Contribution margin, a non-GAAP measure

$

172



$

(811)



$

(1,063)



$

(1,530)



$

(3,433)












Napster




















Net revenue

$

27,302



$

28,583



$



$

80,222



$


Cost of revenue

21,986



23,026





65,408




Gross profit

5,316



5,557





14,814














Gross margin

19

%


19

%


%


18

%


%











Operating expenses

6,472



6,638





18,642




Operating income (loss), a GAAP measure

$

(1,156)



$

(1,081)



$



$

(3,828)



$


Acquisitions related intangible asset amortization

1,126



1,129





3,198




Depreciation and amortization

72



69





256














Contribution margin, a non-GAAP measure

$

42



$

117



$



$

(374)



$












Corporate




















Cost of revenue

$

(68)



$

(67)



$

4



$

(212)



$

21


Gross profit

68



67



(4)



212



(21)












Gross margin

N/A


N/A


N/A


N/A


N/A











Operating expenses

3,522



4,116



2,548



11,895



8,244


Operating income (loss), a GAAP measure

$

(3,454)



$

(4,049)



$

(2,552)



$

(11,683)



$

(8,265)


Other income (expense), net

541



183



(112)



851



(195)


Foreign currency (gain) loss

(489)



(164)



78



(804)



98


Depreciation and amortization

32



33



109



98



394


Fair value adjustments to contingent consideration liability

400



300





700




Restructuring and other charges

691



729



632



1,587



1,320


Stock-based compensation

503



533



499



2,420



2,113


Lease exit and related benefit









(454)












Contribution margin, a non-GAAP measure (1)

$

(1,776)



$

(2,435)



$

(1,346)



$

(6,831)



$

(4,989)



(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


Q3


Q2


Q3


 YTD


 YTD


(in thousands)











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

















Net income (loss) including noncontrolling interests

$

(6,254)



$

(9,455)



$

(5,977)



$

(14,495)



$

(18,085)


Income tax expense (benefit)

310



244



272



812



708


Interest expense

220



43





429




Interest income



(40)



(72)



(117)



(270)


(Gain) loss on equity investment, net







(12,338)




Foreign currency (gain) loss

(489)



(164)



78



(804)



98


Equity in net loss of Napster





737





737


Acquisitions related intangible asset amortization

1,130



1,129



93



3,225



296


Depreciation and amortization

308



348



414



1,172



1,442


Fair value adjustments to contingent consideration liability

400



300





700




Restructuring and other charges

691



729



632



1,587



1,320


Stock-based compensation

503



533



499



2,420



2,113


Lease exit and related benefit









(454)


   Adjusted EBITDA, a non-GAAP measure (1)

$

(3,181)



$

(6,333)



$

(3,324)



$

(17,409)



$

(12,095)



(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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