Press Releases

RealNetworks Announces Third Quarter 2017 Results

SEATTLE, Nov. 1, 2017 /PRNewswire/ --

  • Revenue of $30.0 million
  • Reduced operating expenses by $5.0 million, or 22% year-over-year
  • Continued progress in key growth initiatives as evidenced by strategic alliance with CIBN Oriental Network

RealNetworks, Inc. (Nasdaq: RNWK), a leader in digital media software and services, today announced results for the third quarter ended September 30, 2017.

Management Commentary

"Overall our third quarter results were solid operationally and great strategically," said Rob Glaser, Chairman and CEO of RealNetworks. "Of particular note is our strategic alliance with CIBN in China around our RealMedia HD next generation video codec platform."  

Third Quarter 2017 Financial Highlights

  • Revenue was $30.0 million, down from $33.1 million in the prior quarter and $31.1 million in the prior year period.
  • Operating expenses declined by $0.8 million, or 4%, from the prior quarter and by $5.0 million, or 22%, from the same period in 2016.
  • Net loss was $(4.3) million or $(0.12) per share, compared to $(3.4) million or $(0.09) per share in the prior quarter and $(3.1) million or $(0.08) per share in the third quarter of 2016.
  • Adjusted EBITDA was a loss of $(2.3) million compared to a loss of $(0.8) million in the prior quarter and $(4.4) million in the third quarter of 2016. A reconciliation of GAAP net income (loss) to adjusted EBITDA, a non-GAAP measure, is provided in the financial tables that accompany this release.
  • As of September 30, 2017, the Company had $59.1 million in unrestricted cash, cash equivalents and short-term investments, compared to $62.5 million as of June 30, 2017.

Business Outlook

For the fourth quarter of 2017, RealNetworks expects to achieve the following results:

  • Total revenue is expected to be in the range of $29 million to $31 million.
  • Adjusted EBITDA loss is expected to be in the range of $(2.0) million to $(4.0) million.

Included in our guidance for the fourth quarter of 2017 is revenue from our music on demand customer in Korea.  The nature of our relationship with this customer has evolved over time.  Over the course of the relationship, profitability has declined meaningfully and currently delivers less than 3% gross margin on contracted revenues. The contract is set to expire at the end of 2017 and we do not anticipate renewal.  

Revenue attributable to this contract was $11.4 million and $33.8 million for the three and nine months ended September 30, 2017, respectively.  For the three and nine months ended September 30, 2017, gross profit attributable to this contract was $250 thousand and $900 thousand, respectively.

If the contract is not renewed, for periods after 2017, we would expect minimal impact to our consolidated gross profit, despite a material decline in consolidated revenue.

Conference Call and Webcast Information

The company will host a conference call today to review results and discuss the company's 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 or 1-201-389-0879. 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 22, 2017, by dialing 1-844-512-2921 (United States) or 1-412-317-6671 (International) and entering the replay pin number: 13671750.

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.

For More Information

Investor Relations for RealNetworks
Laura Bainbridge, Addo IR
310-829-5400
IR@realnetworks.com
RNWK-F

About RealNetworks

RealNetworks creates innovative applications and services that make it easy to connect with and enjoy digital media. RealNetworks invented the streaming media category and continues to connect consumers with their digital media both directly and through partners, aiming to support every network, device, media type and social network. Find RealNetworks' corporate information at www.realnetworks.com.

RealNetworks® and the company's respective logos are trademarks, registered trademarks, or service marks of RealNetworks, Inc. Other products and company names mentioned are the trademarks of their respective owners.

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) 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 RealNetworks' current expectations regarding future revenue, gross profit 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 Rhapsody affiliate. 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 RealNetworks' expectations as of today, and actual results may differ materially from the results predicted. Factors that could cause actual results to differ from the results predicted include: RealNetworks' ability to realize operating efficiencies, growth and other benefits from the implementation of its growth plan, strategic initiatives, and restructuring efforts; the emergence of new entrants and competition in the market for digital media products and services; other competitive risks, including the growth of competing technologies, products and services; the potential outcomes and effects of claims and legal proceedings on RealNetworks' business, prospects, financial condition or results of operations; risks associated with key customer or strategic relationships, business acquisitions and the introduction of new products and services; changes in consumer and advertising spending in response to disruptions in the global financial markets; fluctuations in foreign currencies; and changes in RealNetworks' effective tax rate. More information about potential risk factors that could affect RealNetworks' 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 RealNetworks' financial statements and forward-looking financial guidance requires the company 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. The company assumes no obligation to update any forward-looking statements or information, which are in effect as of their respective dates.

 

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)


 

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