RealNetworks Announces Third Quarter 2008 Results
Listen to the earnings call (audio only)
SEATTLE - October 29, 2008 - Digital entertainment services company RealNetworks®, Inc. (Nasdaq: RNWK) today announced results for the third quarter ended September 30, 2008.
- Revenue of $152.0 million
- Net loss of $4.5 million or $0.03 per share
- Adjusted EBITDA of $11.4 million
"In spite of a difficult and turbulent macro-economic environment, RealNetworks delivered results in line with our guidance. In particular, we are pleased with the initial results of our Music Without Limits initiative," said Rob Glaser, CEO of RealNetworks.
For the third quarter of 2008, revenue grew 5% to $152.0 million compared with $145.1 million for the third quarter of 2007. Revenue growth in the third quarter of 2008 compared with the third quarter of 2007 was due to: a 19% increase in Games revenue to $34.2 million and a 10% increase in Music revenue to $41.6 million; offset in part by a 3% decline in Media Software and Services revenue to $24.5 million and a 3% decline in Technology Products and Solutions revenue to $51.6 million. Foreign currency exchange rate fluctuations positively affected 2008 third quarter revenue by approximately $170,000 compared with the third quarter of 2007.
Net loss for the third quarter of 2008 was $4.5 million or $(0.03) per share, compared with net income of $4.3 million or $0.03 per diluted share in the third quarter of 2007. Income taxes were $728,000 compared with $2.0 million in the year-earlier period, and interest income was $2.9 million compared with $7.3 million. Adjusted EBITDA for the third quarter of 2008 was $11.4 million compared with $13.6 million in the third quarter of 2007. A reconciliation of GAAP net loss to adjusted EBITDA is provided in the financial tables that accompany this release.
Gross margin was 59% in the third quarter of 2008, compared with 61% a year earlier. Operating expenses for the third quarter of 2008 were $116.8 million, compared with $103.8 million in the third quarter of 2007. Operating expenses in the third quarter of 2008 included $15.2 million of related party advertising in Rhapsody America, compared with $7.7 million in the year-earlier period.
As of September 30, 2008, Real had approximately $406 million in unrestricted cash, cash equivalents and short-term investments. During the quarter, the company repaid $100 million in convertible debt.
During the quarter, RealNetworks repurchased 3.6 million shares of its common stock for approximately $23 million under a repurchase authorization approved by the board in April, 2008. As of September 30, 2008, $26 million remained available under the stock repurchase program. Since the beginning of 2005, Real has repurchased approximately 48 million shares through its repurchase programs for approximately $357 million.
The following forward-looking statements reflect Real's expectations as of Oct. 29, 2008. It is not Real's general practice to update these forward-looking statements until its next quarterly results announcement.
For the fourth quarter 2008, Real expects revenue in the range of $150 million to $157 million. As compared with previous estimates, Real expects a reduction of approximately $8 million in fourth quarter 2008 revenue as a result of the strengthening U.S. dollar. Approximately 20% - 25% of Real's revenue is denominated in currencies other than the U.S. dollar, most notably the euro and Korean won. Despite the negative impact to revenue, the strengthening U.S. dollar should have a slightly positive effect on earnings per share due to costs that Real pays in euros and Korean won. Real also expects a continued deterioration in the on-line ad sales market, as well as lower consumer and corporate IT spending. All of these factors contribute to lowered expectations for fourth quarter revenue. Real expects fourth quarter 2008 GAAP net loss per share to be between $(0.04) and $(0.01) and adjusted EBITDA of between $6 million and $11 million. Real's earnings per share guidance for the fourth quarter of 2008 includes a tax benefit of between $5.0 million and $3.5 million, and pretax income is expected to be a loss of between $(10.5) million and $(5.5) million. Real expects that small changes in its pre-tax earnings will result in large changes to its GAAP tax rate, which could significantly affect Real's quarterly GAAP results.
For the full year 2008, Real expects revenue in the range of $602 million to $609 million. Real expects full year 2008 GAAP net loss per share to be between $(0.06) and $(0.03) and adjusted EBITDA of $55 million to $60 million. Real's earnings per share guidance for the full year 2008 includes tax expense of between $(3.0) million and $(4.5) million, and pretax income is expected to be a loss of between $(5.5) million and $(0.5) million.
Real's fourth quarter and full year 2008 results are more difficult than usual to predict in light of the high level of uncertainties regarding consumer spending, global economic trends, foreign exchange rate fluctuations, credit markets and corporate valuations. Real's actual results could differ materially from its expectations.
Webcast and Conference Call Information
The Company will host a webcast and conference call today at 5:00pm (Eastern)/ 2:00pm (Pacific). The live webcast, featuring slides and audio, will be available at investor.realnetworks.com. Listeners must use RealPlayer® to listen to the conference call, which can be downloaded for free at www.real.com. The on-demand webcast will be available approximately two hours following the conclusion of the live webcast. Participants may access the conference call by dialing 800-857-5305 (773-681-5857 for international callers). The passcode is "Third Quarter Earnings," and the leader is Rob Glaser. Telephonic replay will be available until 8:00 p.m. (Eastern), November 12, 2008. Dial In: 866-451-9005 (for domestic callers); and 203-369-1208 (for international callers).
For More Information Contact
RealNetworks, Inc. delivers digital entertainment services to consumers via PC, portable music player, home entertainment system and mobile phone. Real created the streaming media category in 1995 and has continued to lead the market with pioneering products and services, including: RealPlayer®, the first mainstream media player to enable one-click downloading and recording of Internet video; the award-winning Rhapsody® digital music service, which delivers more than 1 billion songs per year; RealArcade®, one of the largest casual games destinations on the Web; and a variety of mobile entertainment services, such as ringback tones, offered to consumers through leading wireless carriers around the world. RealNetworks' corporate information is located at www.realnetworks.com/company.
About Non-GAAP Financial Measures
To supplement RealNetworks' condensed consolidated financial statements presented in accordance with GAAP, we present investors with certain non-GAAP financial measures, including adjusted EBITDA, adjusted EBITDA by reporting segment, adjusted cost of revenue and adjusted operating expenses.
Adjusted EBITDA and adjusted EBITDA by reporting segment consist of net income excluding the impact of the following: interest income, net; income taxes; depreciation; amortization (net of minority interest effect); stock-based compensation; expenses for employee stock options that were converted to cash rights; equity investment gains and losses from sales or impairments; income and expenses including charitable contributions related to the Microsoft agreements; and gain on initial formation of Rhapsody America.
Adjusted cost of revenue consists of GAAP cost of revenue excluding stock-based compensation expenses, and acquisition costs including amortization of intangible assets (net of minority interest effect) and expenses for employee stock options that were converted to cash rights.
Adjusted operating expenses consist of GAAP operating expenses excluding stock-based compensation expenses, antitrust litigation expenses (benefits) and acquisition costs including amortization of intangible assets (net of minority interest effect) and expenses for employee stock options that were converted to cash rights.
RealNetworks believes that the presentation of adjusted EBITDA, adjusted EBITDA by reporting segment, adjusted cost of revenue and adjusted operating expenses provides important supplemental information to management and investors regarding financial and business trends relating to the company's financial condition and results of operations. Management believes that the use of these non-GAAP financial measures provides consistency and comparability with our past financial reports, and also facilitates comparisons with other companies in our industry, many of which use similar non-GAAP financial measures to supplement their GAAP results. Management has historically used these non-GAAP measures when evaluating operating performance because the inclusion or exclusion of the items described above provides additional useful measures of our operating results and facilitates comparisons of our core operating performance against prior periods and our business model objectives. We have chosen to provide this information to investors in order to enable them to perform additional analyses of past, present and future operating performance, to enable them to compare us to other companies, and as a supplemental means to evaluate our ongoing operations. Externally, we believe that adjusted EBITDA continues to be useful to investors in their assessment of our operating performance and the valuation of our company.
Internally, adjusted EBITDA, adjusted EBITDA by reporting segment, adjusted cost of revenue, and adjusted operating expenses are significant measures used by management for purposes of:
supplementing the financial results and forecasts reported to our board of directors;
evaluating the operating performance of our company which includes direct and incrementally controllable revenue and costs of operations, but excludes items considered by management to be either non-cash or non-operating such as interest income and expense, stock-based compensation, tax expense, depreciation and amortization;
managing and comparing performance internally across our businesses and externally against our peers;
establishing internal operating budgets; and
evaluating and valuing potential acquisition candidates.
Adjusted EBITDA, adjusted EBITDA by reporting segment, adjusted cost of revenue, and adjusted operating expenses are not calculated in accordance with GAAP, and should be considered supplemental to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. Non-GAAP financial measures have limitations in that they do not reflect all of the costs associated with the operations of our business as determined in accordance with GAAP. As a result, you should not consider these measures in isolation or as a substitute for analysis of RealNetworks' results as reported under GAAP. We expect to continue to incur expenses similar to the non-GAAP adjustments described above, and exclusion of these items from our non-GAAP financial measures should not be construed as an inference that these costs are unusual or infrequent. Some of the limitations in relying on our non-GAAP financial measures are:
Adjusted EBITDA and adjusted EBITDA by reporting segment are measures which we have defined for internal and investor purposes and are not in accordance with GAAP. A further limitation associated with these measures is that they do not include all costs and income that impact our net income and net income per share. We compensate for these limitations by prominently disclosing GAAP net income (loss), which we believe is the most directly comparable GAAP measure, and providing investors with reconciliations from GAAP net income (loss) to adjusted EBITDA and adjusted EBITDA by reporting segment.
Adjusted cost of revenue is limited in that it does not include stock-based compensation expenses, and certain costs associated with our acquisitions. Adjusted operating expenses are limited in that they do not include stock-based compensation expenses, antitrust litigation expenses (benefit) and certain costs associated with our acquisitions. We compensate for these limitations by prominently disclosing the reported GAAP results and providing investors with a reconciliation from GAAP to the adjusted amount.
In the financial tables of our earnings press release, RealNetworks has included reconciliations of GAAP net income (loss) to adjusted EBITDA, income before income taxes to adjusted EBITDA by reporting segment, GAAP cost of revenue to adjusted cost of revenue and GAAP operating expenses to adjusted operating expenses for the relevant periods.
Forward Looking Statements: This press release contains forward-looking statements that involve risks and uncertainties, including statements relating to Real's current expectations for future revenue, GAAP net income (loss) per share, adjusted EBITDA, tax expense and pre-tax income, income tax expense, interest income, depreciation and amortization and stock-based compensation expense. Actual results may differ materially from the results predicted. Factors that could cause actual results to differ from the results predicted include: risks associated with the ability to complete the previously announced casual games spin off transactions and their impact on the games business and Real's remaining businesses; potentially large changes in Real's GAAP tax rate that could result from even small changes in Real's pretax earnings; fluctuations in foreign currencies, particularly changes in the US dollar relative to the euro and the Korean won; development and consumer acceptance of legal online music distribution services generally and RealNetworks' content services in particular because these are relatively new and unproven business models and markets; risks associated with the creation and operation of Rhapsody America; risks associated with acquisitions generally, and the acquisitions of WiderThan, Sony NetServices, Game Trust, Trymedia and Exomi in particular, including the risks of integration, unknown liabilities and operations in new markets and geographies; the potential that we will be unable to continue to enter into commercially attractive agreements with third parties for the provision of compelling content for our subscription service offerings and the distribution of our carrier application services; the emergence of new entrants and competition in the market for digital media subscription offerings and online music sales; the impact on our gross margins of content costs, including music publishing royalty rates that are subject to legislation, regulations, administrative and court proceedings and settlement negotiations, and from the mix of subscribers to subscription offerings with higher content costs than others; competitive risks, including competing technologies, products and services, and the competitive activities of our larger competitors, some of which have strong ties to streaming media users through other products; the potential outcomes and effects of claims and legal proceedings on our business, prospects, financial condition or results of operations; risks associated with the introduction of new products and services; changes in consumer and advertising spending in response to disruptions in the global financial markets; risks inherent in strategic relationships, especially with competitors, and technology and service integration efforts; and risks relating to the ability of Real's strategic partners to generate subscribers for Real's digital content services. 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, and its quarterly reports on Form 10-Q and from time to time in other reports filed by RealNetworks with the Securities and Exchange Commission. More information about risks relating to the potential spin off of the games business is listed in the safe harbor for forward looking statements contained in the press release announcing the proposed spin off transaction as well as in our Form 10-Q to be filed for the quarter ended September 30, 2008. 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 the reported amounts of 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, Rhapsody, RealPlayer and RealArcade are trademarks or registered trademarks of RealNetworks, Inc. or its subsidiaries. All other companies or products listed herein are trademarks or registered trademarks of their respective owners.
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