Thu, 05/02/2019

RealNetworks Announces First Quarter 2019 Financial Results

SEATTLE, May 2, 2019 /PRNewswire/ -- RealNetworks, Inc. (Nasdaq: RNWK), a leader in digital media software and services, today announced its financial results for the first quarter ended March 31, 2019. The results below reflect the consolidation of Napster's financial results into RealNetworks' financial statements for the first quarter of 2019 following the closing of the acquisition on January 18, 2019. Napster is reported as a new segment in RealNetworks' financial statements and related disclosures for the first quarter of 2019.

  • First quarter revenue of $39.5 million
  • Positive net income of $1.5 million, driven by one-time gain associated with acquisition of Napster to 84% majority owner
  • Announced SAFR for Security, integrating Real's best-of-breed video facial recognition product with leading Video Management Systems

Management Commentary

"We continued to drive forward with SAFR, which we believe is our single largest growth opportunity," said Rob Glaser, Chairman and CEO of RealNetworks. "Most notably, we launched SAFR for Security, which delivers tremendous value to security professionals by integrating our best-of-breed facial recognition solution with market leading Video Management Systems such as Genetec, Milestone Systems, and Digifort. We also significantly strengthened our senior management team by bringing in Jay Burrell as RealNetworks' Chief Revenue Officer for Computer Vision."

Mr. Glaser added, "Our majority stake in Napster adds significant scale to our business. We look forward to continuing to work closely with Napster's CEO, Bill Patrizio, and the rest of the Napster management team to build on the great work they have done in the past year-and-a-half turning Napster around."

First Quarter 2019 Financial Highlights

  • Revenue was $39.5 million (inclusive of $24.3 million from Napster) and compared to $16.6 million in the prior quarter and $19.7 million in the prior year period. Revenue for the first quarter of 2019 included a $0.6 million reduction to Napster's revenue as a result of purchase accounting.
  • Gross margin was 37%, down from 77% in the prior quarter and 74% in the prior year period. Napster's gross margin for the first quarter of 2019 was 16%.
  • Operating expenses increased $7.1 million, or 39%, from the prior quarter and increased $6.0 million, or 31%, from the prior year period. Napster's operating expenses were $5.5 million for the first quarter of 2019. Included in total operating expenses were $0.8 million of transaction costs related to the acquisition of Napster.
  • Net income attributable to RealNetworks was $1.5 million, or $0.04 per share, compared to net loss of $(6.9) million, or $(0.18) per share, in the prior quarter and a net loss of $(5.2) million, or $(0.14) per share, in the prior year period. Included in net income attributable to RealNetworks was of a gain of $12.3 million in the first quarter of 2019 related to the acquisition of Napster.
  • Adjusted EBITDA was a loss of $(7.9) million compared to a loss of $(4.1) million in the prior quarter and a loss of $(3.0) 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 March 31, 2019, the Company had $36.9 million in unrestricted cash and cash equivalents compared to $35.6 million at December 31, 2018. Napster's cash and cash equivalents were $10.1 million at the time of acquisition.

Business Outlook

For the second 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 $(4.5) million to $(7.5) million.

Acquisition of Napster

As previously disclosed, on January 18, 2019, RealNetworks completed the acquisition of additional debt and equity interests in Rhapsody International, Inc., which does business as Napster, bringing RealNetworks' interest in Napster to 84% following the acquisition. RealNetworks committed to pay $1.0 million cash in connection with the closing and, subject to certain conditions, up to an additional $14.0 million over the following five years, with additional consideration depending on subsequent events, for a potential total of up to $40.0 million. Napster will continue to run as an independent subsidiary of RealNetworks with its own board of directors, strategy, and management team.

RealNetworks recorded 100% of the estimated fair value of the assets acquired and liabilities assumed as of January 18, 2019, with the 16% of Napster that it does not own accounted for as a noncontrolling interest in the consolidated financial statements. Napster's results of operations and cash flows are included in the Company's consolidated results from the acquisition date forward. As part of this consolidation, the acquisition accounting treatment resulted in a non-cash gain of $12.3 million in the first quarter of 2019. RealNetworks' consolidated balance sheet reflects the estimated fair value of recognized intangibles (after amortization post-acquisition) totaling $22.7 million and residual goodwill of $48.5 million at March 31, 2019, and Napster's working capital deficit, which results in a consolidated working capital deficit.

Due to the limited time since the closing of the transaction and the complexity of the transaction, the purchase price allocation is preliminary and subject to change, which may result from additional information becoming available and additional analyses being performed on these acquired assets and assumed liabilities. Such changes could impact the estimated fair value of any of the assets and liabilities assumed, noncontrolling interests, and gain recognized from consolidation.

For additional details on the Napster acquisition, see RealNetworks' Annual Report on Form 10-K for the year ended December 31, 2018 and its upcoming 10-Q for the quarter ended March 31, 2019.

New Lease Accounting Standard

As of January 1, 2019, RealNetworks adopted the new accounting guidance related to leases, using the modified retrospective transition method, under which prior periods presented have not been recast to reflect adoption of the new guidance. As a result of this new guidance, the Company now capitalizes its operating leases, which previously were off-balance sheet obligations subject to disclosure but not recognition. Capitalization of the operating leases resulted in the recognition of a material amount of Operating lease assets and related Operating lease liabilities on its consolidated balance sheet, but did not impact its consolidated statement of operations.

For additional details on the impact of the new guidance, see the Company's upcoming 10-Q for the quarter ended March 31, 2019.

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. 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 Thursday, May 23, 2019, by dialing 1-844-512-2921 (United States) or 1-412-317-6671 (International) and entering the replay pin number: 13689686.

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.

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

March 31,

 

2019

 

2018

 

 (in thousands, except per

share data)

       

 Net revenue

$

39,472

   

$

19,650

 

 Cost of revenue

24,870

   

5,136

 

           Gross profit

14,602

   

14,514

 
       

 Operating expenses:

     

       Research and development

8,833

   

7,694

 

       Sales and marketing

8,142

   

5,997

 

       General and administrative

8,364

   

5,601

 

       Restructuring and other charges

167

   

501

 

       Lease exit and related benefit

   

(325)

 
       

           Total operating expenses

25,506

   

19,468

 
       

 Operating loss

(10,904)

   

(4,954)

 
       

 Other income (expenses):

     

       Interest expense

(166)

   

 

       Interest income

77

   

87

 

       Gain (loss) on equity investment, net

12,338

   

 

       Other income (expenses), net

127

   

(41)

 
       

           Total other income (expenses), net

12,376

   

46

 
       

 Income (loss) before income taxes

1,472

   

(4,908)

 

 Income tax expense

258

   

270

 
       

Net income (loss) including noncontrolling interests

1,214

   

(5,178)

 

Net income (loss) attributable to noncontrolling interests

(319)

   

 

Net income (loss) attributable to RealNetworks

$

1,533

   

$

(5,178)

 
       

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

$

0.04

   

$

(0.14)

 

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

$

0.04

   

$

(0.14)

 
       

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

37,820

   

37,449

 

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

37,912

   

37,449

 

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

 
 

March 31,

2019

 

December 31,

2018

 

 (in thousands)

ASSETS

 Current assets:

     

 Cash and cash equivalents

$

36,897

   

$

35,561

 

 Short-term investments

   

24

 

 Trade accounts receivable, net

32,427

   

11,751

 

 Deferred costs, current portion

299

   

331

 

 Prepaid expenses and other current assets

21,210

   

5,911

 

 Total current assets

90,833

   

53,578

 
       

 Equipment and software

35,779

   

37,458

 

 Leasehold improvements

3,207

   

3,292

 

 Total equipment, software, and leasehold improvements

38,986

   

40,750

 

 Less accumulated depreciation and amortization

35,923

   

37,996

 

 Net equipment, software, and leasehold improvements

3,063

   

2,754

 
       

 Operating lease assets

13,943

   

 

 Restricted cash equivalents

4,045

   

1,630

 

 Other assets

2,687

   

3,997

 

 Deferred costs, non-current portion

372

   

528

 

 Deferred tax assets, net

846

   

851

 

 Other intangible assets, net

22,692

   

26

 

 Goodwill

65,368

   

16,955

 
       

 Total assets

$

203,849

   

$

80,319

 
       

 LIABILITIES AND SHAREHOLDERS' EQUITY

       

 Current liabilities:

     

 Accounts payable

$

4,564

   

$

3,910

 

 Accrued royalties, fulfillment and other current liabilities

97,890

   

11,312

 

 Commitment to Napster

   

2,750

 

 Deferred revenue, current portion

6,031

   

2,125

 

 Notes payable

13,313

   

 

 Total current liabilities

121,798

   

20,097

 
       

 Deferred revenue, non-current portion

225

   

268

 

 Deferred rent

   

986

 

 Deferred tax liabilities, net

1,268

   

1,168

 

 Long-term lease liabilities

10,929

   

 

 Other long-term liabilities

10,875

   

960

 
       

 Total liabilities

145,095

   

23,479

 
       

 Total shareholders' equity

58,415

   

56,840

 
       

Noncontrolling interests

339

   

 
       

 Total equity

58,754

   

56,840

 
       

 Total liabilities and equity

$

203,849

   

$

80,319

 

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 
 

Three Months Ended

March 31,

 

2019

 

2018

 

 (in thousands)

 

 Cash flows from operating activities:

     

 Net income (loss) including noncontrolling interests

$

1,214

   

$

(5,178)

 

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

     

Depreciation and amortization

1,482

   

620

 

Stock-based compensation

1,384

   

1,157

 

Deferred income taxes, net

   

(40)

 

(Gain) loss on equity investment, net

(12,338)

   

 

Foreign currency (gain) loss

(151)

   

 

Mark to market adjustment of warrants

   

21

 

Net change in certain operating assets and liabilities

(910)

   

(2,005)

 

  Net cash used in operating activities

(9,319)

   

(5,425)

 

 Cash flows from investing activities:

     

Purchases of equipment, software, and leasehold improvements

(482)

   

(316)

 

Proceeds from sales and maturities of short-term investments

24

   

4,231

 

Acquisition, net of cash acquired

12,260

   

 

 Net cash provided by investing activities

11,802

   

3,915

 

 Cash flows from financing activities:

     

Tax payments from shares withheld upon vesting of restricted stock

(271)

   

(232)

 

Proceeds from notes payable

9,733

   

 

Repayments of notes payable

(8,437)

   

 

Other financing activities

450

   

 

 Net cash provided by (used in) financing activities

1,475

   

(232)

 

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

(207)

   

331

 

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

3,751

   

(1,411)

 

 Cash, cash equivalents and restricted cash, beginning of period

37,191

   

53,596

 

 Cash, cash equivalents and restricted cash, end of period

$

40,942

   

$

52,185

 

RealNetworks, Inc. and Subsidiaries

Supplemental Financial Information

(Unaudited)

 
 

2019

 

2018

 

Q1

 

 Q4

 

 Q3

 

 Q2

 

 Q1

 

 (in thousands)

Net Revenue by Segment

                 

Consumer Media (A)

$

2,486

   

$

4,068

   

$

4,733

   

$

3,884

   

$

5,483

 

Mobile Services (B)

6,939

   

6,899

   

7,348

   

6,719

   

8,704

 

Games (C)

5,710

   

5,590

   

5,498

   

5,121

   

5,463

 

Napster (D)

24,337

   

   

   

   

 

     Total net revenue

$

39,472

   

$

16,557

   

$

17,579

   

$

15,724

   

$

19,650

 
                   

Net Revenue by Product

                 

Consumer Media

                 

- Software License (E)

$

735

   

$

2,049

   

$

2,746

   

$

1,808

   

$

3,337

 

- Subscription Services (F)

1,088

   

1,153

   

1,232

   

1,225

   

1,285

 

- Product Sales (G)

219

   

257

   

281

   

299

   

340

 

- Advertising & Other (H)

444

   

609

   

474

   

552

   

521

 
                   

Mobile Services

                 

- Software License (I)

599

   

514

   

520

   

469

   

1,335

 

- Subscription Services (J)

6,340

   

6,385

   

6,828

   

6,250

   

7,369

 
                   

Games

                 

- Subscription Services (K)

2,985

   

3,014

   

2,745

   

2,689

   

2,693

 

- Product Sales (L)

1,988

   

2,013

   

2,279

   

1,953

   

2,402

 

- Advertising & Other (M)

737

   

563

   

474

   

479

   

368

 
                   

Napster

                 

- Subscription Services (N)

24,337

   

   

   

   

 
                   

     Total net revenue

$

39,472

   

$

16,557

   

$

17,579

   

$

15,724

   

$

19,650

 
                   

Net Revenue by Geography

                 

United States

$

18,970

   

$

7,697

   

$

9,026

   

$

7,646

   

$

11,434

 

Rest of world

20,502

   

8,860

   

8,553

   

8,078

   

8,216

 

     Total net revenue

$

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 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

 

Q1

 

Q4

 

Q1

 

 (in thousands)

Consumer Media

         
           

Net revenue

$

2,486

   

$

4,068

   

$

5,483

 

Cost of revenue

833

   

882

   

993

 

Gross profit

1,653

   

3,186

   

4,490

 
           

Gross margin

66

%

 

78

%

 

82

%

           

Operating expenses

3,119

   

3,614

   

3,918

 

Operating income (loss), a GAAP measure

$

(1,466)

   

$

(428)

   

$

572

 

Depreciation and amortization

54

   

49

   

46

 
           

Contribution margin, a non-GAAP measure

$

(1,412)

   

$

(379)

   

$

618

 
           

Mobile Services

         
           

Net revenue

$

6,939

   

$

6,899

   

$

8,704

 

Cost of revenue

2,048

   

2,121

   

2,316

 

Gross profit

4,891

   

4,778

   

6,388

 
           

Gross margin

70

%

 

69

%

 

73

%

           

Operating expenses

7,561

   

6,906

   

7,366

 

Operating income (loss), a GAAP measure

$

(2,670)

   

$

(2,128)

   

$

(978)

 

Acquisitions related intangible asset amortization

   

69

   

92

 

Depreciation and amortization

231

   

116

   

180

 
           

Contribution margin, a non-GAAP measure

$

(2,439)

   

$

(1,943)

   

$

(706)

 
           

Games

         
           

Net revenue

$

5,710

   

$

5,590

   

$

5,463

 

Cost of revenue

1,670

   

1,622

   

1,817

 

Gross profit

4,040

   

3,968

   

3,646

 
           

Gross margin

71

%

 

71

%

 

67

%

           

Operating expenses

5,037

   

4,865

   

4,917

 

Operating income (loss), a GAAP measure

$

(997)

   

$

(897)

   

$

(1,271)

 

Acquisitions related intangible asset amortization

23

   

23

   

 

Depreciation and amortization

83

   

82

   

165

 
           

Contribution margin, a non-GAAP measure

$

(891)

   

$

(792)

   

$

(1,106)

 
           

Napster

         
                       

Net revenue

$

24,337

   

$

   

$

 

Cost of revenue

20,396

   

   

 

Gross profit

3,941

   

   

 
           

Gross margin

16

%

 

%

 

%

           

Operating expenses

5,532

   

   

 

Operating income (loss), a GAAP measure

$

(1,591)

   

$

   

$

 

Acquisitions related intangible asset amortization

943

   

   

 

Depreciation and amortization

115

   

   

 
           

Contribution margin, a non-GAAP measure

$

(533)

   

$

   

$

 
           

Corporate

         
           

Cost of revenue

$

(77)

   

$

(898)

   

$

10

 

Gross profit

77

   

898

   

(10)

 
           

Gross margin

N/A

   

N/A

   

N/A

 
           

Operating expenses

4,257

   

3,001

   

3,267

 

Operating income (loss), a GAAP measure

$

(4,180)

   

$

(2,103)

   

$

(3,277)

 

Other income (expense), net

127

   

92

   

(41)

 

Foreign currency (gain) loss

(151)

   

(26)

   

22

 

Depreciation and amortization

33

   

58

   

137

 

Restructuring and other charges

167

   

553

   

501

 

Stock-based compensation

1,384

   

395

   

1,157

 

Lease exit and related benefit

   

   

(325)

 
           

Contribution margin, a non-GAAP measure (1)

$

(2,620)

   

$

(1,031)

   

$

(1,826)

 
 

(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

 

 Q1

 

 Q4

 

 Q1

 

(in thousands)

           

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

           

Net income (loss) including noncontrolling interests

$

1,214

   

$

(6,904)

   

$

(5,178)

 

Income tax expense (benefit)

258

   

1,494

   

270

 

Interest expense

166

   

   

 

Interest income

(77)

   

(74)

   

(87)

 

(Gain) loss on equity investment, net

(12,338)

   

   

 

Foreign currency (gain) loss

(151)

   

(26)

   

22

 

Equity in net loss of Napster

   

20

   

 

Acquisitions related intangible asset amortization

966

   

92

   

92

 

Depreciation and amortization

516

   

305

   

528

 

Restructuring and other charges

167

   

553

   

501

 

Stock-based compensation

1,384

   

395

   

1,157

 

Lease exit and related benefit

   

   

(325)

 

   Adjusted EBITDA, a non-GAAP measure (1)

$

(7,895)

   

$

(4,145)

   

$

(3,020)

 
 

(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.