RealNetworks Announces Third Quarter 2017 Results

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

Quarter Ended
September 30,

Nine Months Ended
September 30,

2017

2016

2017

2016

 (in thousands, except per share data)

 Net revenue

$

30,002

$

31,051

$

93,689

$

89,015

 Cost of revenue

16,534

16,740

51,117

47,610

           Gross profit

13,468

14,311

42,572

41,405

 Operating expenses:

       Research and development

7,152

6,699

22,085

23,185

       Sales and marketing

4,883

7,183

17,534

24,157

       General and administrative

5,081

7,086

15,638

21,380

       Restructuring and other charges

557

499

2,271

1,297

       Lease exit and related charges

—

1,233

—

2,191

           Total operating expenses

17,673

22,700

57,528

72,210

 Operating income (loss)

(4,205)

(8,389)

(14,956)

(30,805)

 Other income (expenses):

       Interest income, net

116

119

353

316

       Gain (loss) on investments, net

—

6,021

—

5,978

       Equity in net loss of Rhapsody

—

(233)

(1,097)

(629)

       Other income (expense), net

(50)

(243)

(288)

(515)

           Total other income (expense), net

66

5,664

(1,032)

5,150

 Income (loss) before income taxes

(4,139)

(2,725)

(15,988)

(25,655)

 Income tax expense (benefit)

195

331

1,156

919

 Net income (loss)

$

(4,334)

$

(3,056)

$

(17,144)

$

(26,574)

 Basic net income (loss) per share

$

(0.12)

$

(0.08)

$

(0.46)

$

(0.72)

 Diluted net income (loss) per share

$

(0.12)

$

(0.08)

$

(0.46)

$

(0.72)

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

37,200

36,805

37,112

36,693

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

37,200

36,805

37,112

36,693

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

September 30,
 2017

December 31,
 2016

 (in thousands)

ASSETS

 Current assets:

 Cash and cash equivalents

$

45,597

$

33,721

 Short-term investments

13,482

43,331

 Trade accounts receivable, net

26,651

22,162

 Deferred costs, current portion

508

760

 Prepaid expenses and other current assets

4,558

4,910

   Total current assets

90,796

104,884

 Equipment and software

45,557

46,231

 Leasehold improvements

3,464

3,317

   Total equipment, software, and leasehold improvements

49,021

49,548

 Less accumulated depreciation and amortization

44,962

44,294

   Net equipment, software, and leasehold improvements

4,059

5,254

 Restricted cash equivalents and investments

2,400

2,700

 Other assets

2,177

1,742

 Deferred costs, non-current portion

1,010

1,246

 Deferred tax assets, net

871

816

 Other intangible assets, net

429

938

 Goodwill

13,042

12,857

   Total assets

$

114,784

$

130,437

 LIABILITIES AND SHAREHOLDERS' EQUITY

 Current liabilities:

 Accounts payable

$

18,560

$

18,225

 Accrued and other current liabilities

12,933

15,425

 Commitment to Rhapsody

—

1,500

 Deferred revenue, current portion

3,008

3,430

   Total current liabilities

34,501

38,580

 Deferred revenue, non-current portion

553

240

 Deferred rent

798

748

 Deferred tax liabilities, net

98

87

 Other long-term liabilities

1,651

2,201

 Total liabilities

37,601

41,856

 Shareholders' equity

77,183

88,581

 Total liabilities and shareholders' equity

$

114,784

$

130,437

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Nine Months Ended
September 30,

2017

2016

 (in thousands)

 Cash flows from operating activities:

  Net income (loss)

$

(17,144)

$

(26,574)

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

    Depreciation and amortization

2,402

5,897

    Stock-based compensation

3,045

4,557

    Equity in net loss of Rhapsody

1,097

629

    Deferred income taxes, net

(55)

(198)

    Loss (gain) on investments, net

—

(5,978)

    Realized translation loss (gain)

—

272

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

(367)

112

    Net change in certain operating assets and liabilities

(6,521)

(1,011)

        Net cash provided by (used in) operating activities

(17,543)

(22,294)

 Cash flows from investing activities:

    Purchases of equipment, software, and leasehold improvements

(541)

(2,009)

    Proceeds from sale of equity and other investments

—

2,110

    Purchases of short-term investments

(13,905)

(59,124)

    Proceeds from sales and maturities of short-term investments

43,754

68,473

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

300

190

    Acquisitions

—

(150)

    Advance to Rhapsody

(1,500)

—

    Proceeds from the sale of Slingo and social casino business

—

4,000

       Net cash provided by (used in) investing activities

28,108

13,490

 Cash flows from financing activities:

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

130

166

    Tax payments from shares withheld upon vesting of restricted stock

(338)

(843)

       Net cash provided by (used in) financing activities

(208)

(677)

 Effect of exchange rate changes on cash and cash equivalents

1,519

450

       Net increase (decrease) in cash and cash equivalents

11,876

(9,031)

 Cash and cash equivalents, beginning of year

33,721

47,315

 Cash and cash equivalents, end of year

$

45,597

$

38,284

RealNetworks, Inc. and Subsidiaries

Supplemental Financial Information

(Unaudited)

2017

2016

 Q3

 Q2

Q1

 Q4

 Q3

 Q2

 Q1

 (in thousands)

Net Revenue by Line of Business

Consumer Media (A)

$

4,197

$

6,951

$

5,669

$

6,443

$

6,482

$

6,400

$

5,726

Mobile Services (B)

19,123

19,227

19,084

18,833

17,683

17,297

16,465

Games (C)

6,682

6,934

5,823

6,177

6,886

6,037

6,039

     Total net revenue

$

30,002

$

33,112

$

30,576

$

31,453

$

31,051

$

29,734

$

28,230

Net Revenue by Product

Consumer Media

- License (D)

$

2,334

$

5,002

$

3,672

$

4,252

$

4,136

$

3,914

$

3,104

- Subscriptions (E)

1,434

1,531

1,564

1,671

1,931

1,871

1,975

- Media Properties (F)

429

418

433

520

415

615

647

Mobile Services

- SaaS (G)

19,000

19,146

18,987

18,726

17,141

17,208

16,220

- Technology License & Other (H)

123

81

97

107

542

89

245

Games

- License (I)

3,851

4,007

2,862

3,178

3,683

2,793

2,761

- Subscriptions (J)

2,708

2,781

2,828

2,836

3,005

3,024

3,029

- Media Properties (K)

123

146

133

163

198

220

249

     Total net revenue

$

30,002

$

33,112

$

30,576

$

31,453

$

31,051

$

29,734

$

28,230

Net Revenue by Geography

United States

$

10,084

$

10,889

$

9,740

$

10,125

$

10,642

$

10,355

$

10,383

Rest of world

19,918

22,223

20,836

21,328

20,409

19,379

17,847

     Total net revenue

$

30,002

$

33,112

$

30,576

$

31,453

$

31,051

$

29,734

$

28,230

Net Revenue by Line of Business

(A) The Consumer Media division primarily includes revenue from RealPlayer and related products, such as the distribution of third-party software products, advertising on RealPlayer websites, sales of RealPlayer Plus software licenses to consumers, sales of intellectual property licenses, and consumer subscriptions such as RealPlayer Plus and SuperPass.

(B) The Mobile Services division primarily includes revenue from SaaS services and sales of professional services provided to mobile carriers.

(C) The Games division primarily includes revenue from sales of mobile games, sales of games licenses, online games subscription services, advertising on games sites and social network sites, and microtransactions from online games.

Net Revenue by Product

(D) Licensing revenue within Consumer Media includes sales of intellectual property licenses and RealPlayer Plus software licenses to consumers.

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

(F) Media Properties revenue within Consumer Media includes distribution of third-party software products and advertising on RealPlayer websites.

(G) SaaS revenue within Mobile Services includes revenue from music on demand, ringback tones, intercarrier messaging services, and RealTimes.

(H) Technology licensing and other revenue within Mobile Services includes revenue from professional services provided to mobile carriers.

(I) Licensing revenue within Games includes retail games-related revenue and sales of mobile games.

(J) Subscriptions revenue within Games includes revenue from online games subscriptions as well as microtransactions from mobile games.

(K) Media Properties revenue within Games includes advertising on games sites and social network sites.

RealNetworks, Inc. and Subsidiaries

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

(Unaudited)

2017

2016

2017

2016

Q3

Q2

Q3

YTD

YTD

 (in thousands)

Consumer Media

Net revenue

$

4,197

$

6,951

$

6,482

$

16,817

$

18,608

Cost of revenue

981

1,159

1,507

3,545

5,485

   Gross profit

3,216

5,792

4,975

13,272

13,123

   Gross margin

77

%

83

%

77

%

79

%

71

%

Operating expenses

3,217

3,730

4,271

10,957

13,940

Operating income (loss), a GAAP measure

$

(1)

$

2,062

$

704

$

2,315

$

(817)

Depreciation and amortization

42

159

295

368

1,973

  Contribution margin, a non-GAAP measure

$

41

$

2,221

$

999

$

2,683

$

1,156

Mobile Services

Net revenue

$

19,123

$

19,227

$

17,683

$

57,434

$

51,445

Cost of revenue

13,325

13,429

13,026

40,668

36,347

   Gross profit

5,798

5,798

4,657

16,766

15,098

   Gross margin

30

%

30

%

26

%

29

%

29

%

Operating expenses

6,437

6,705

8,075

21,261

26,653

Operating income (loss), a GAAP measure

$

(639)

$

(907)

$

(3,418)

$

(4,495)

$

(11,555)

Acquisitions related intangible asset amortization

88

201

208

485

725

Depreciation and amortization

180

175

403

558

1,433

Contribution margin, a non-GAAP measure

$

(371)

$

(531)

$

(2,807)

$

(3,452)

$

(9,397)

Games

Net revenue

$

6,682

$

6,934

$

6,886

$

19,439

$

18,962

Cost of revenue

2,226

2,679

2,203

6,842

5,865

   Gross profit

4,456

4,255

4,683

12,597

13,097

   Gross margin

67

%

61

%

68

%

65

%

69

%

Operating expenses

5,071

5,090

4,649

15,108

14,669

Operating income (loss), a GAAP measure

$

(615)

$

(835)

$

34

$

(2,511)

$

(1,572)

Acquisitions related intangible asset amortization

27

25

29

79

88

Depreciation and amortization

169

157

104

467

437

   Contribution margin, a non-GAAP measure

$

(419)

$

(653)

$

167

$

(1,965)

$

(1,047)

Corporate

Cost of revenue

$

2

$

23

$

4

$

62

$

(87)

   Gross profit

(2)

(23)

(4)

(62)

87

   Gross margin

N/A

N/A

N/A

N/A

N/A

Operating expenses

2,948

2,959

5,705

10,202

16,948

Operating income (loss), a GAAP measure

$

(2,950)

$

(2,982)

$

(5,709)

$

(10,264)

$

(16,861)

Other income (expense), net

(50)

(13)

(243)

(289)

(515)

Depreciation and amortization

139

119

634

445

1,241

Restructuring and other charges

557

150

499

2,271

1,297

Stock-based compensation

748

863

778

3,045

4,557

Lease exit and related charges

—

1,233

—

2,191

   Contribution margin, a non-GAAP measure

$

(1,556)

$

(1,863)

$

(2,808)

$

(4,792)

$

(8,090)

RealNetworks, Inc. and Subsidiaries

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

(Unaudited)

2017

2016

2017

2016

 Q3

 Q2

 Q3

 YTD

 YTD

 (in thousands)

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

Net income (loss)

$

(4,334)

$

(3,386)

$

(3,056)

$

(17,144)

$

(26,574)

Income tax expense (benefit)

195

471

331

1,156

919

Interest income, net

(116)

(109)

(119)

(353)

(316)

Gain (loss) on investments, net

—

—

(6,021)

—

(5,978)

Equity in net loss of Rhapsody

—

349

233

1,097

629

Acquisitions related intangible asset amortization

115

226

237

564

813

Depreciation and amortization

530

610

1,436

1,838

5,084

Restructuring and other charges

557

150

499

2,271

1,297

Stock-based compensation

748

863

778

3,045

4,557

Lease exit and related charges

—

—

1,233

—

2,191

   Adjusted EBITDA, a non-GAAP measure

$

(2,305)

$

(826)

$

(4,449)

$

(7,526)

$

(17,378)