Press Releases

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.

 

RealNetworks Logo

 

Cision View original content to download multimedia:http://www.prnewswire.com/news-releases/realnetworks-announces-first-quarter-2019-financial-results-300843044.html

SOURCE RealNetworks, Inc.

()
Price:
Change:
Day High:
Day Low:
Volume:

Copyright Nasdaq.
Minimum 15 minutes delayed.

Electronic Delivery

Register for electronic delivery of our future annual reports, proxy statements and proxy ballots.