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RealNetworks Announces Third Quarter 2020 Financial Results

·11 min read

SEATTLE , Nov. 3, 2020 /PRNewswire/ -- RealNetworks, Inc. (Nasdaq: RNWK), a leader in digital media software and services, today announced its financial results for the third quarter ended September 30, 2020 . This release refers to "continuing" and "discontinued" operations due to the pending sale of Napster, RealNetworks' 84%-owned subsidiary, to MelodyVR Group PLC, which is expected to close in the fourth quarter of 2020. Effective as of the signing date, August 25, 2020 , Napster is treated as a discontinued operation for accounting and disclosure purposes; therefore, unless otherwise noted, results presented in this release relate to the continuing operations of RealNetworks, which exclude Napster.

  • Revenue from continuing operations of $16.6 million and net loss of $(3.2) million

  • Significant progress with SAFR initiative

  • Progress with monetizing and scaling assets

Management Commentary
"In Q3 we continued to make solid progress on several fronts" said Rob Glaser , Founder, Chairman, and Chief Executive Officer of RealNetworks. "Our commitment to improving business performance led to our fifth consecutive quarter of year-over-year improvement in our adjusted EBITDA loss. Our two largest growth opportunities remain our free-to-play Games, which grew 60% year-over-year, and the SAFR platform. We also made great progress in streamlining, optimizing and monetizing other parts of Real, as demonstrated by the pending sale of Napster to MelodyVR and the successful capital raise for Scener. Finally, we also significantly strengthened our management team by bringing in Mike Ensing as President and COO, and Brad Donaldson as VP, Computer Vision to lead the strategic development and market expansion of SAFR."

Third Quarter 2020 Financial Highlights from Continuing Operations

  • Revenue was $16.6 million compared to $17.1 million in the prior quarter and $17.7 million in the prior year period.

  • Games revenue was $7.6 million , up 2% compared to $7.5 million in the prior quarter and up 6% compared to $7.2 million in the prior year period.

  • Gross profit margin was 75%, unchanged from 75% in the prior quarter and down from 76% in the prior year period.

  • Operating expenses decreased $0.3 million , or 2%, from the prior quarter and decreased $3.2 million , or 17%, from the prior year period.

  • Net loss attributable to RealNetworks was $(3.2) million , or $(0.08) per diluted share, compared to a net loss of $(3.1) million , or $(0.08) per diluted share, in the prior quarter and a net loss of $(5.2) million , or $(0.14) per diluted share, in the prior year period.

  • Adjusted EBITDA was a loss of $(1.9) million compared to a loss of $(1.4) million in the prior quarter and a loss of $(3.2) million in the prior year period.

  • At September 30, 2020 , the Company had $13.2 million in unrestricted cash and cash equivalents compared to $14.4 million at June 30, 2020 and $8.5 million at December 31, 2019 .

Corporate Developments

  • On August 25, 2020 , Napster signed a definitive agreement to be sold to MelodyVR, subject to closing conditions, with a total transaction value of approximately $70 million . Terms of the merger require payment by MelodyVR of $26.3 million in combined cash and MelodyVR stock at closing, and MelodyVR will assume approximately $44 million in Napster liabilities. The final value to RealNetworks from the transaction is subject to several factors including deal costs, Napster's repayment of $3.9 million in debt, an escrow of $3.0 million , the mix of cash and MelodyVR stock and the market value of that stock, and payment by RealNetworks to Columbus Nova for the January 2019 acquisition of its interest in Napster. The transaction is expected to close in the fourth quarter of 2020, at which point RealNetworks will provide further details.

  • On September 18, 2020 , the Company announced the appointment of Brad Donaldson as Vice President, Computer Vision to lead the strategic development and market expansion of the SAFR product line.

Business Outlook

Given the ongoing uncertainty surrounding the global economy and the future impact of COVID-19, RealNetworks is not providing guidance for the fourth quarter ending December 31, 2020 .

Conference Call and Webcast Information

RealNetworks will host a conference call today to review its results and discuss its performance at approximately 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 Tuesday, November 24, 2020 , by dialing 1-844-512-2921 ( United States ) or 1-412-317-6671 (International) and entering the replay pin number: 13711759.

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. 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) 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 our current expectations regarding our future growth, profitability, and market position, our financial condition and liquidity, our strategic focus and initiatives, product plans, agreements with partners, and expectations and contingencies relating to the sale of Napster. 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; challenges caused by the COVID-19 pandemic; 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, 2019 , 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,




2020


2019


2020


2019










 (in thousands, except per share data)









 Net revenue

$

16,554



$

17,691



$

50,461



$

48,491


 Cost of revenue

4,062



4,292



12,429



13,022


           Gross profit

12,492



13,399



38,032



35,469










 Operating expenses:








       Research and development

5,781



6,931



18,375



21,439


       Sales and marketing

5,130



5,644



15,969



17,501


       General and administrative

4,124



5,242



13,063



17,674


       Restructuring and other charges

307



691



1,097



1,587










           Total operating expenses

15,342



18,508



48,504



58,201










 Operating loss

(2,850)



(5,109)



(10,472)



(22,732)










 Other income (expenses):








       Interest expense

(7)





(12)




       Interest income

6





31



89


       Gain (loss) on equity investments, net

(37)





(90)



12,338


       Other income (expenses), net

(104)



85



63



197










           Total other income (expenses), net

(142)



85



(8)



12,624










 Loss from continuing operations before income taxes

(2,992)



(5,024)



(10,480)



(10,108)


 Income tax expense

316



233



606



515










Net loss from continuing operations

(3,308)



(5,257)



(11,086)



(10,623)


Net loss from discontinued operations, net of tax

(1)



(997)



(2,466)



(3,872)


Net loss

(3,309)



(6,254)



(13,552)



(14,495)


Net loss attributable to noncontrolling interests of continuing operations

(77)



(54)



(196)



(106)


Net income (loss) attributable to noncontrolling interests of discontinued
operations

6



(232)



(364)



(752)


Net loss attributable to RealNetworks

$

(3,238)



$

(5,968)



$

(12,992)



$

(13,637)










Net loss from continuing operations attributable to RealNetworks

$

(3,231)



$

(5,203)



$

(10,890)



$

(10,517)


Net loss from discontinued operations attributable to RealNetworks

(7)



(765)



(2,102)



(3,120)


Net loss attributable to RealNetworks

$

(3,238)



$

(5,968)



$

(12,992)



$

(13,637)










Net loss per share attributable to RealNetworks- Basic:








       Continuing operations

$

(0.08)



$

(0.14)



$

(0.28)



$

(0.28)


       Discontinued operations



(0.02)



(0.06)



(0.08)


              Net loss per share attributable to RealNetworks- Basic

$

(0.08)



$

(0.16)



$

(0.34)



$

(0.36)










Net loss per share attributable to RealNetworks- Diluted:








       Continuing operations

$

(0.08)



$

(0.14)



$

(0.28)



$

(0.28)


       Discontinued operations



(0.02)



(0.06)



(0.08)


              Net loss per share attributable to RealNetworks- Diluted

$

(0.08)



$

(0.16)



$

(0.34)



$

(0.36)










 Shares used to compute basic net loss per share

38,270



38,062



38,247



37,944


 Shares used to compute diluted net loss per share

38,270



38,062



38,247



37,944


 

RealNetworks, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)



September 30,

2020


December 31,

2019


 (in thousands)

ASSETS

 Current assets:




 Cash and cash equivalents

$

13,245



$

8,472


 Trade accounts receivable, net

13,015



12,767


 Deferred costs, current portion

364



537


 Prepaid expenses and other current assets

3,552



4,428


 Current assets of discontinued operations

89,547



28,376


   Total current assets

119,723



54,580






 Equipment and software

30,675



31,699


 Leasehold improvements

2,720



3,071


   Total equipment, software, and leasehold improvements

33,395



34,770


 Less accumulated depreciation and amortization

31,459



32,350


   Net equipment, software, and leasehold improvements

1,936



2,420






Operating lease assets

8,726



10,198


Restricted cash equivalents

4,630



4,880


Other assets

973



1,808


Deferred costs, non-current portion

71



388


Deferred tax assets, net

781



761


Goodwill

17,073



16,908


Non-current assets of discontinued operations



67,811






Total assets

$

153,913



$

159,754






LIABILITIES AND SHAREHOLDERS' EQUITY





Current liabilities:




Accounts payable

$

3,398



$

4,042


Accrued and other current liabilities

25,272



17,495


Deferred revenue, current portion

2,302



2,003


Current debt

3,900




Current liabilities of discontinued operations

70,713



72,641


Total current liabilities

105,585



96,181






Deferred revenue, non-current portion

46



96


Deferred tax liabilities, net

1,076



1,076


Long-term lease liabilities

6,672



8,234


Long-term debt

2,883



3,900


Other long-term liabilities

2,243



10,151


Non-current liabilities of discontinued operations



1,843






Total liabilities

118,505



121,481






Total shareholders' equity

36,470



38,775






Noncontrolling interests

(1,062)



(502)






Total equity

35,408



38,273






Total liabilities and equity

$

153,913



$

159,754


RealNetworks, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)



Nine Months Ended

September 30,


2020


2019


(in thousands)


Cash flows from operating activities:




Net loss from continuing operations

$

(11,086)



$

(10,623)


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




Depreciation and amortization

697



943


Stock-based compensation

1,093



2,420


(Gain) loss on equity investments, net

90



(12,338)


Foreign currency (gain) loss

25



(150)


Fair value adjustments to contingent consideration liability

(200)



700


Net change in certain operating assets and liabilities

(652)



739


Net cash provided by (used in) operating activities- continuing operations

(10,033)



(18,309)


Net cash provided by (used in) operating activities- discontinued operations

(4,086)



(1,988)


Net cash provided by (used in) operating activities

(14,119)



(20,297)






Cash flows from investing activities:




Purchases of equipment, software, and leasehold improvements

(261)



(831)


Proceeds from sales and maturities of short-term investments



24


Acquisition, net of cash acquired



12,260






Net cash (used in) provided by investing activities- continuing operations

(261)



11,453


Net cash provided by (used in) investing activities- discontinued operations

(192)



(237)


Net cash provided by (used in) investing activities

(453)



11,216






Cash flows from financing activities:




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



144


Proceeds from issuance of preferred stock

10,000




Tax payments from shares withheld upon vesting of restricted stock

(12)



(289)


Proceeds from notes payable and long-term debt

2,876



3,900


Payment of financing fees



(569)


Other financing activities

2,106



900


Net cash provided by (used in) financing activities- continuing operations

14,970



4,086


Net cash provided by (used in) financing activities- discontinued operations

2,007



(8,331)


Net cash provided by (used in) financing activities

16,977



(4,245)






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

32



(390)


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

2,437



(13,716)


Cash, cash equivalents and restricted cash, beginning of period

22,179



37,191


Cash, cash equivalents and restricted cash, end of period

24,616



23,475


Less: Cash, cash equivalents and restricted cash from discontinued operations

6,741



6,724


Cash and cash equivalents from continuing operations, end of period

$

17,875



$

16,751


RealNetworks, Inc. and Subsidiaries
Supplemental Financial Information
(Unaudited)



2020


2019


Q3


Q2


Q1


Q4


Q3


Q2


Q1


(in thousands)

Net Revenue by Segment














Consumer Media (A)

$

2,543



$

3,159



$

3,495



$

4,432



$

3,632



$

2,620



$

2,486


Mobile Services (B)

6,400



6,461



6,690



6,312



6,895



6,997



6,939


Games (C)

7,611



7,465



6,637



6,567



7,164



6,048



5,710


Total net revenue

$

16,554



$

17,085



$

16,822



$

17,311



$

17,691



$

15,665



$

15,135
















Net Revenue by Product














Consumer Media














- Software License (D)

$

642



$

1,702



$

2,020



$

2,856



$

1,987



$

944



$

735


- Subscription Services (E)

892



898



929



992



1,028



1,040



1,088


- Product Sales (F)

193



261



222



193



207



206



219


- Advertising & Other (G)

816



298



324



391



410



430



444
















Mobile Services














- Software License (H)

931



972



831



657



888



957



599


- Subscription Services (I)

5,469



5,489



5,859



5,655



6,007



6,040



6,340
















Games














- Subscription Services (J)

2,705



2,730



2,770



3,007



3,056



3,073



2,985


- Product Sales (K)

3,874



3,712



2,978



2,580



3,078



2,177



1,988


- Advertising & Other (L)

1,032



1,023



889



980



1,030



798



737






























Total net revenue

$

16,554



$

17,085



$

16,822



$

17,311



$

17,691



$

15,665



$

15,135
















Net Revenue by Geography














United States

$

11,855



$

10,742



$

10,214



$

10,153



$

10,588



$

9,480



$

9,503


Rest of world

4,699



6,343



6,608



7,158



7,103



6,185



5,632


Total net revenue

$

16,554



$

17,085



$

16,822



$

17,311



$

17,691



$

15,665



$

15,135
















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 player purchases of in-game virtual goods within our free-to-play games, 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 and our facial recognition platform, SAFR.

(I) 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.

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

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



2020


2019


2020


2019


Q3


Q2


Q3


YTD


YTD


(in thousands)

Consumer Media




















Net revenue

$

2,543



$

3,159



$

3,632



$

9,197



$

8,738


Cost of revenue

593



519



705



1,723



2,341


Gross profit

1,950



2,640



2,927



7,474



6,397












Gross margin

77

%


84

%


81

%


81

%


73

%











Operating expenses

2,092



2,204



2,692



6,754



8,688


Operating income (loss), a GAAP measure

$

(142)



$

436



$

235



$

720



$

(2,291)


Depreciation and amortization

17



15



34



45



144












Contribution margin, a non-GAAP measure

$

(125)



$

451



$

269



$

765



$

(2,147)












Mobile Services




















Net revenue

$

6,400



$

6,461



$

6,895



$

19,551



$

20,831


Cost of revenue

1,511



1,782



1,721



4,989



5,634


Gross profit

4,889



4,679



5,174



14,562



15,197












Gross margin

76

%


72

%


75

%


74

%


73

%











Operating expenses

5,577



5,682



7,143



18,847



22,142


Operating income (loss), a GAAP measure

$

(688)



$

(1,003)



$

(1,969)



$

(4,285)



$

(6,945)


Depreciation and amortization

88



102



81



288



418












Contribution margin, a non-GAAP measure

$

(600)



$

(901)



$

(1,888)



$

(3,997)



$

(6,527)












Games




















Net revenue

$

7,611



$

7,465



$

7,164



$

21,713



$

18,922


Cost of revenue

1,955



1,958



1,934



5,707



5,259


Gross profit

5,656



5,507



5,230



16,006



13,663












Gross margin

74

%


74

%


73

%


74

%


72

%











Operating expenses

5,152



4,976



5,151



15,051



15,476


Operating income (loss), a GAAP measure

$

504



$

531



$

79



$

955



$

(1,813)


Acquisitions related intangible asset amortization





4





27


Depreciation and amortization

71



66



89



275



256












Contribution margin, a non-GAAP measure

$

575



$

597



$

172



$

1,230



$

(1,530)












Corporate




















Cost of revenue

$

3



$

4



$

(68)



$

10



$

(212)


Gross profit

(3)



(4)



68



(10)



212












Gross margin

N/A



N/A



N/A



N/A



N/A












Operating expenses

2,521



2,747



3,522



7,852



11,895


Operating income (loss), a GAAP measure

$

(2,524)



$

(2,751)



$

(3,454)



$

(7,862)



$

(11,683)


Other income (expense), net

(104)



(71)



85



63



197


Foreign currency (gain) loss

143



92



(33)



25



(150)


Depreciation and amortization

28



30



32



89



98


Fair value adjustments to contingent consideration liability



100



400



(200)



700


Restructuring and other charges

307



704



691



1,097



1,587


Stock-based compensation

390



323



503



1,093



2,420












Contribution margin, a non-GAAP measure

$

(1,760)



$

(1,573)



$

(1,776)



$

(5,695)



$

(6,831)


RealNetworks, Inc. and Subsidiaries
Reconciliation of Net income (loss) from continuing operations to adjusted EBITDA, a non-GAAP measure
(Unaudited)



2020


2019

2020


2019


Q3


Q2


Q3


YTD


YTD


(in thousands)











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

















Net loss from continuing operations

$

(3,308)



$

(3,162)



$

(5,257)



$

(11,086)



$

(10,623)


Income tax expense (benefit)

316



265



233



606



515


Interest expense

7



5





12




Interest income

(6)



(19)





(31)



(89)


(Gain) loss on equity investments, net

37



53





90



(12,338)


Foreign currency (gain) loss

143



92



(33)



25



(150)


Acquisitions related intangible asset amortization





4





27


Depreciation and amortization

204



213



236



697



916


Fair value adjustments to contingent consideration liability



100



400



(200)



700


Restructuring and other charges

307



704



691



1,097



1,587


Stock-based compensation

390



323



503



1,093



2,420


Adjusted EBITDA, a non-GAAP measure

$

(1,910)



$

(1,426)



$

(3,223)



$

(7,697)



$

(17,035)


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SOURCE RealNetworks, Inc.