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RealNetworks Announces Fourth Quarter and Full-Year 2010 Results

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RealNetworks, Inc. and Subsidiaries Condensed Consolidated Statement of Operations (.PDF)

SEATTLE - February 10, 2011 - RealNetworks, Inc. (Nasdaq: RNWK) today announced results for the fourth quarter and fiscal year ended Dec. 31, 2010.

Quarterly Highlights:

  • Revenue of $97.8 million
  • Net income of $1.2 million or $0.01 per share
  • Adjusted EBITDA of $13.3 million

 

Full Year Highlights:

  • Revenue of $401.7 million
  • Net income attributable to common shareholders of $3.0 million or $0.05 per share
  • Adjusted EBITDA of $25.3 million
  • Cash and short term investments of $334.3 million as of December 31, 2010

 

"These results demonstrate the hard work and discipline managers and employees have exercised over the past year in transforming RealNetworks," said Bob Kimball, CEO of Real. "In the fourth quarter, we generated positive operating cash flow, continued to reduce our operating expenses, and increased adjusted EBITDA both sequentially and year-over-year.

"Earlier this week, we took the final major step to restructure RealNetworks," Mr. Kimball added. "We believe we have created a stable and efficient base upon which we can build for growth. We expect to utilize our strong consumer and mobile carrier distribution channels and innovative technologies and services to play a leading role in improving how people use and enjoy their digital media."

Fourth Quarter Results
For the fourth quarter of 2010, revenue from Real's Core Products, Emerging Products and Games businesses was $97.8 million, a sequential increase of 13% from the third quarter, and a decrease of 9% compared with the fourth quarter of 2009. Revenue from Real's music business was $37.6 million in the fourth quarter of 2009, and total revenue, including music, in the fourth quarter of 2009 was $145.5 million. Beginning in the second quarter of 2010, revenue and other operating results of Real's music business from its Rhapsody joint venture are not consolidated in Real's financial statements as a result of the restructuring of Rhapsody completed on March 31, 2010. Foreign currency exchange rate fluctuations negatively affected 2010 fourth quarter revenue by approximately $1.9 million compared with the year-ago quarter. Revenue trends in each of Real's businesses in the fourth quarter of 2010 compared with the year-earlier quarter were: a 4% decrease in Emerging Products revenue to $12.6 million, a 10% decrease in Core Products revenue to $58.0 million, and an 11% decrease in Games revenue to $27.2 million. Net income for the fourth quarter of 2010 was $1.2 million, or $0.01 per share, compared with net loss of $(17.8) million, or $(0.14) per share, in the fourth quarter of 2009. Adjusted EBITDA for the fourth quarter of 2010 was $13.3 million, compared with $8.5 million for the fourth quarter of 2009. A reconciliation of GAAP operating income (loss) to adjusted EBITDA is provided in the financial tables that accompany this release. Gross margin in the fourth quarter rose to 63%, compared with 61% for the fourth quarter a year earlier, primarily due to the deconsolidation of the lower-margin Rhapsody music business beginning in the second quarter of 2010. As of Dec. 31, 2010, Real had $334.3 million in unrestricted cash, cash equivalents and short-term investments compared with $329.2 million at Sept. 30, 2010, and $384.9 million at Dec. 31, 2009. In addition, Real had $51.0 million in restricted cash and equity investments, including its equity interest in the Rhapsody joint venture, at the end of the year.

Segment Operating Results

Full Year Results
For 2010, revenue from Real's Core Products, Emerging Products and Games businesses was $366.0 million, a decrease of 9% compared with $401.4 million for 2009. Revenue from Real's music business was $35.7 million in 2010, all in the first quarter, and $160.9 million for four quarters in 2009. Total revenue in 2010 was $401.7 million and total revenue for 2009 was $562.3 million. Of the $160.5 million decline, $125.1 million was due to the separation of the Rhapsody music business at the end of the first quarter in 2010. Foreign currency exchange rate fluctuations positively affected 2010 revenue by approximately $1.1 million compared with 2009. Revenue trends in each of Real's businesses for the full year 2010 compared with 2009 were: an 8% decrease in Emerging Products revenue to $41.8 million, a 9% decrease in Core Products revenue to $212.8 million, and a 9% decrease in Games revenue to $111.4 million.

Net income attributable to common shareholders for the year was $3.0 million, or $0.05 per share, compared with a net loss attributable to common shareholders of $(216.8) million, or $(1.64) per share, in 2009. Net income for the most recent year included restructuring charges totaling $(19.8) million, an income tax benefit of $36.5 million resulting primarily from a third-quarter $30 million cash refund from the IRS and a gain on deconsolidation of Rhapsody of $10.9 million. The net loss in 2009 included impairments of $(175.6) million and restructuring charges of $(4.0) million.

In 2010, adjusted EBITDA was $25.3 million compared with $36.5 million in 2009. A reconciliation of GAAP operating income (loss) to adjusted EBITDA is provided in the financial tables that accompany this release.

Real's reported net income (loss) for the periods presented are based in part upon Real's share of Rhapsody's preliminary net loss, which remains subject to finalization. These amounts could change if the final amount of Rhapsody's net income or loss differs from the preliminary net loss. Changes to these amounts, if any, will not impact Real's cash position or the adjusted EBITDA results reported in this release.

Business Outlook
For the first quarter of 2011, Real expects aggregate revenue from its Core Products, Emerging Products and Games segments to decline by up to 17% sequentially, consistent with the declines in last year's first quarter compared with the fourth quarter of 2009, and to decline by up to 13% year-over-year. As a result of the decline in revenue, Real also expects adjusted EBITDA for the quarter to be less than the first quarter of last year.

Real's outlook for the year anticipates seasonality in revenue and adjusted EBITDA, which typically declines from the fourth quarter to the first quarter, and increases through the year. Real has generated more than 70% of its annual adjusted EBITDA in the second half of the year in each of the past two years. Real expects to see similar seasonal patterns for both revenue and adjusted EBITDA in 2011.

For the full year, Real anticipates a small decline in revenue compared with 2010, excluding Music, due primarily to the elimination or de-emphasis of products and services that generate low-profit or unprofitable revenue. Excluding the revenue from these products and services, Real expects 2011 revenue to be essentially flat compared with 2010, excluding Music. Real expects 2011 adjusted EBITDA and adjusted EBITDA margin to increase over 2010 due in large part to the restructuring, which has lowered the company's overall cost structure.

The foregoing forward-looking statements reflect Real's expectations as of Feb. 10, 2011. It is not Real's general practice to update these forward-looking statements until its next quarterly results announcement.

Webcast and Conference Call Information
The company will host an audio Webcast conference call to review results and discuss the company's operations for the fourth quarter at 5:00 p.m. ET on Feb. 10. The Webcast will be available at:

Webcast participants will need RealPlayer® to hear the webcast, which can be downloaded at www.real.com.

The on-demand Webcast will be available beginning approximately two hours following the conclusion of the live Webcast.

Conference Call Details
5:00 p.m. ET / 2:00 p.m. PT

Dial in:
800-857-5305 Domestic
773-681-5857 International

Passcode:
Fourth Quarter Earnings

Leader:
Bob Kimball

Telephonic replay will be available until 8:00 p.m. ET, February 24, 2011.

Replay dial in:
888-216-4453 Domestic
402-220-3881 International

For More Information
Financial
Marj Charlier
(206) 892-6718
mcharlier@real.com

Elizabeth Pheasant
(206) 674-2330
epheasant@real.com

Press Only
Sally Julien
(206) 399-1419
sally@sallyjulien.com

About RealNetworks
Real creates innovative applications and services that make it easy to connect with and enjoy digital media. Real invented the streaming media category in 1995 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. Real's corporate information is located at http://www.realnetworks.com/about-us

About Non-GAAP Financial Measures
To supplement RealNetworks' condensed consolidated financial statements presented in accordance with GAAP in this press release, the company also discloses certain non-GAAP financial measures, including adjusted EBITDA and adjusted EBITDA by reporting segment, which management believes provide investors with useful information.

In the financial tables of our earnings press release, RealNetworks has included reconciliations of GAAP operating income (loss) to adjusted EBITDA and to adjusted EBITDA by reporting segment.

The rationale for management's use of non-GAAP measures is included in the supplementary materials presented with the fourth quarter 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 Real's current expectations for future revenue, adjusted EBITDA, future growth, the completion of Real's restructuring activities and Real's future role as a provider of digital media services. All statements contained in this press release that do not relate to matters of historical fact should be considered forward-looking statements. Actual results may differ materially from the results predicted. Factors that could cause actual results to differ from the results predicted include: fluctuations in foreign currencies; Real's ability to realize operating efficiencies, growth and other benefits from the implementation of its strategic initiatives; 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 Real's 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; and changes in Real's 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 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, RealPlayer and GameHouse 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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