International Entertainment News: RealNetworks Announces First Quarter 2011 Results

RealNetworks Announces First Quarter 2011 Results

SEATTLE,May 5, 2011 /PRNewswire/ -- RealNetworks, Inc. (Nasdaq: RNWK) today announced results for the first quarter ended March 31, 2011.

Quarterly Highlights:

-- Revenue of $87.3 million
-- Net loss of $(12.3) million or $(0.09) per share
-- Adjusted EBITDA of $7.5 million
-- Cash and short term investments of $331.5 million as of March 31, 2011

"These results reflect revenue and EBITDA performances above our expectations for the quarter, and demonstrate the hard work we have done to simplify and restructure our business and reduce our operating expenses," said Mike Lunsford, interim CEO of Real. "I believe we have created a stable and efficient structure on which we can implement our growth strategies."

First Quarter Results

For the first quarter of 2011, revenue from Real's Core Products, Emerging Products and Games businesses was $87.3 million, a decrease of 6% compared with the first quarter of 2010 and a sequential decline of 11% from the fourth quarter. Revenue from Real's music business was $35.7 million in the first quarter of 2010, and total revenue, including music, in the first quarter of 2010 was $128.6 million. Beginning in the second quarter of 2010, revenue and other operating results of Real's music business from its Rhapsody joint venture have not been consolidated in Real's financial statements as a result of the restructuring of Rhapsody completed on March 31, 2010. Foreign currency exchange rate fluctuations did not significantly affect 2011 first quarter revenue comparison with the year ago quarter. Revenue trends in each of Real's businesses in the first quarter of 2011 compared with the year-earlier quarter were: a 3% decrease in Emerging Products revenue to $11.1 million, a 6% decrease in Core Products revenue to $48.1 million, and a 7% decrease in Games revenue to $28.1 million.

Net loss for the first quarter of 2011 was $(12.3) million, or $(0.09) per share, compared with net income of $3.2 million, or $0.05 per share, in the first quarter of 2010. First quarter 2011 results include a reduction in operating expense of $6.4 million due to an insurance reimbursement relating to previously settled litigation, and results from the first quarter of last year include a $10.9 million gain on the deconsolidation of Rhapsody. The most recent quarter also included restructuring charges of $6.9 million, compared with restructuring charges in the year-ago quarter of $5.6 million. Adjusted EBITDA for the first quarter of 2011 was $7.5 million, compared with $5.7 million for the first quarter of 2010. Adjusted EBITDA for this quarter included the insurance reimbursement, and the year-ago quarter's adjusted EBITDA included a contribution of $4.2 million from the music segment. A reconciliation of GAAP operating income (loss) to adjusted EBITDA is provided in the financial tables that accompany this release.

As of March 31, 2011, Real had $331.5 million in unrestricted cash, cash equivalents and short-term investments compared with $334.3 million at Dec. 31, 2010. In addition, Real had $42.7 million in restricted cash and equity investments, including its equity interest in the Rhapsody joint venture, at March 31, 2011.

Segment Operating Results

2011 2010 2010
---- ----
Q1 Q4 Q1
--- --- ---
(in thousands)
Revenue
Core Products $48,107 $58,030 $51,203
Emerging Products 11,135 12,558 11,428
Games 28,059 27,229 30,236
Corporate - - -
--- --- ---
Total excluding Music 87,301 97,817 92,867
Music - - 35,733
--- --- ------
Total $87,301 $97,817 $128,600
----- ------- ------- --------

Operating Income (loss)
Core Products $7,737 $12,500 $9,378
Emerging Products (296) 4,020 2,931
Games 2,711 1,788 (238)
Corporate (15,818) (12,329) (26,691)
------- ------- -------
Total excluding Music (5,666) 5,979 (14,620)
Music - - (42)
--- --- ---
Total $(5,666) $5,979 $(14,662)
----- ------- ------ --------

Adjusted EBITDA
Core Products $10,260 $15,523 $12,799
Emerging Products (188) 4,109 3,009
Games 3,340 2,452 1,685
Corporate (5,870) (8,811) (15,982)
------ ------ -------
Total excluding Music 7,542 13,273 1,511
Music - - 4,214
--- --- -----
Total $7,542 $13,273 $5,725
----- ------ ------- ------

Sequential Yr/Yr
Change Change
------ ------
(in thousands)
Revenue
Core Products -17% -6%
Emerging Products -11% -3%
Games 3% -7%
Corporate
Total excluding Music -11% -6%
Music NM
Total -11% -32%
----- --- ---

Operating Income (loss)
Core Products -38% -17%
Emerging Products -107% -110%
Games 52% -1239%
Corporate 28% -41%
Total excluding Music -195% -61%
Music NM
Total -195% -61%
----- ---- ---

Adjusted EBITDA
Core Products -34% -20%
Emerging Products -105% -106%
Games 36% 98%
Corporate -33% -63%
Total excluding Music -43% 399%
Music NM
Total -43% 32%
----- --- ---

Business Outlook

For the second quarter of 2011, Real expects total revenue to decline slightly both sequentially and year-over-year. Real expects revenue will increase in Emerging Products, and will decline slightly in Games and Core Products sequentially and year-over-year. Real expects adjusted EBITDA for the second quarter to decline sequentially, primarily due to the insurance reimbursement in the first quarter, but to increase over the adjusted EBITDA reported in the second quarter of 2010.

Real's outlook for the year anticipates seasonality in revenue and adjusted EBITDA, which typically decline from the fourth quarter to the first quarter, and increase 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 is not changing the guidance given in February. Real expects a small decline in 2011 revenue compared with 2010, excluding Music, due in part 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 May 5, 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 first quarter at5:00 p.m. ET on May 5. The Webcast will be available at: http://investor.realnetworks.com

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 Details5:00 p.m. ET / 2:00 p.m. PTDial in: 800-857-5305 Domestic773-681-5857 InternationalPasscode: First Quarter EarningsLeader: Mike Lunsford

Telephonic replay will be available until 8 p.m. ET, May 19, 2011.Replay dial in:866-489-3785 Domestic203-369-1665 International

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 first 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 and future growth. 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: 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 introduction and 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; fluctuations in foreign currencies; risks associated with key customer or strategic relationships, business acquisitions and the introduction of new products and services; 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 and RealPlayer 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.

RealNetworks, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)

Quarters Ended
March 31,
---------
2011 2010
---- ----
(in thousands, except per
share data)

Net revenue $87,301 $128,600

Cost of revenue 32,066 49,159
------ ------

Gross profit 55,235 79,441
------ ------

Operating expenses:
Research and development 19,895 34,675
Sales and marketing 28,480 37,827
Advertising with related party (A) - 1,065
General and administrative 5,622 14,921
Restructuring and other charges 6,904 5,615
----- -----

Total operating expenses 60,901 94,103
------ ------

Operating income (loss) (5,666) (14,662)
------ -------

Other income (expenses):
Interest income, net 379 380
Equity in net loss of Rhapsody and other
equity method investments (B) (3,281) -
Gain on deconsolidation of Rhapsody - 10,929
Other income (expense), net (122) 99
---- ---

Total other income (expense), net (3,024) 11,408
------ ------

Income (loss) before income taxes (8,690) (3,254)
Income tax (expense) benefit (3,615) 3,572
------ -----

Net income (loss) (12,305) 318
Net loss attributable to the
noncontrolling interest in Rhapsody (C) - 2,910
--- -----
Net income (loss) attributable to common
shareholders $(12,305) $3,228
======== ======

Basic net income (loss) per share
available to common shareholders $(0.09) $0.05
Diluted net income (loss) per share
available to common shareholders $(0.09) $0.05

Shares used to compute basic net income
(loss) per share available to common
shareholders 136,264 135,130
Shares used to compute diluted net
income (loss) per share available to
common shareholders 136,264 139,573

(A) Consists of advertising purchased by Rhapsody from MTV Networks
(MTVN). MTVN had a 49% ownership interest in Rhapsody prior to the
restructuring transactions that occurred on March 31, 2010. See
note (B) for more details regarding the restructuring and the
related deconsolidation.

(B) On March 31, 2010, we completed the restructuring of Rhapsody
which resulted in our ownership decreasing to approximately 47% of
the outstanding equity in Rhapsody and no longer having operating
control. Since the restructuring was completed on the last day of
the quarter ended March 31, 2010, our statement of operations for
the first quarter of 2010 includes results from Rhapsody's
operations. Beginning with the quarter ended June 30, 2010,
Rhapsody's revenue or other operating results are no longer
consolidated within our financial statements and we are not
recording any operating or other financial results for our Music
segment. We now report our share of Rhapsody's income or losses as
"Equity in net loss of Rhapsody and other equity method investments"
in "Other income (expenses)".

(C) Net loss attributable to the noncontrolling interest in Rhapsody
reflects MTVN's 49% ownership share in the losses of Rhapsody prior
to the restructuring transactions that occurred on March 31, 2010.

RealNetworks, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)

March 31, December 31,
2011 2010
---- ----
(in thousands)
ASSETS

Current assets:
Cash and cash equivalents $249,108 $236,018
Short-term investments 82,374 98,303
Trade accounts receivable,
net 46,350 48,324
Deferred costs, current
portion 8,883 9,173
Related party receivable -
Rhapsody (A) 417 351
Prepaid expenses and other
current assets 33,500 30,441
------ ------

Total current assets 420,632 422,610
------- -------

Equipment, software, and leasehold
improvements, at cost:
Equipment and software 145,691 144,623
Leasehold improvements 25,578 25,367
------ ------
Total equipment, software,
and leasehold
improvements 171,269 169,990
Less accumulated
depreciation and
amortization 129,087 126,619
------- -------

Net equipment, software,
and leasehold
improvements 42,182 43,371

Restricted cash
equivalents and
investments 10,000 10,000
Equity method investments 12,236 15,486
Available for sale
securities 20,484 27,541
Other assets 3,424 3,316
Deferred costs, non-
current portion 17,436 18,401
Deferred tax assets, net,
non-current portion 12,901 12,805
Other intangible assets,
net 6,324 6,952
Goodwill 5,078 4,960
----- -----

Total assets $550,697 $565,442
======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable $24,695 $30,413
Accrued and other
liabilities 86,730 85,702
Deferred revenue, current
portion 21,078 19,036
Accrued loss on excess
office facilities,
current portion 1,200 1,144
----- -----

Total current liabilities 133,703 136,295
------- -------

Deferred revenue, non-
current portion 168 460
Accrued loss on excess
office facilities, non-
current portion 3,101 3,380
Deferred rent 3,268 3,514
Deferred tax liabilities,
net, non-current portion 1,014 1,049
Other long-term
liabilities 8,910 7,999
----- -----

Total liabilities 150,164 152,697
------- -------

Shareholders' equity 400,533 412,745
------- -------

Total liabilities and
shareholders' equity $550,697 $565,442
======== ========

(A) Related party receivable reflects amounts Rhapsody International,
formed on March 31, 2010, owes RealNetworks.

RealNetworks, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)

Quarter Ended March 31,
-----------------------
2011 2010
---- ----
(in thousands)

Cash flows from operating activities:
Net income (loss) $(12,305) $318
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Depreciation and amortization 3,819 7,314
Stock-based compensation 3,453 3,921
Gain on disposal of equipment, software,
and leasehold improvements (28) (2)
Equity in net loss of Rhapsody and other
equity method investments 3,281 -
Gain on deconsolidation of Rhapsody - (10,929)
Excess tax benefit from stock option
exercises (26) (29)
Accrued restructuring and other charges 2,280 4,455
Deferred income taxes, net (161) (1,359)
Other 133 -
Net change in certain operating assets
and liabilities, net of acquisitions
and disposals (5,632) (36,145)
------ -------

Net cash used in operating activities (5,186) (32,456)
------ -------

Cash flows from investing activities:
Purchases of equipment, software, and
leasehold improvements (1,165) (4,692)
Purchases of short-term investments (22,091) (26,613)
Proceeds from sales and maturities of
short-term investments 38,020 1,872
Payment in connection with the
restructuring of Rhapsody - (18,000)
Repayment of temporary funding on
deconsolidation of Rhapsody - 5,869
--- -----

Net cash provided by (used in) investing
activities 14,764 (41,564)
------ -------

Cash flows from financing activities:
Net proceeds from sales of common stock
under employee stock purchase
plan and exercise of stock options 1,101 341
Payments received on MTVN note - 1,213
Excess tax benefit from stock option
exercises 26 29
--- ---

Net cash provided by financing
activities 1,127 1,583
----- -----

Effect of exchange rate changes on cash
and cash equivalents 2,385 (1,988)
----- ------

Net increase (decrease) in cash and cash
equivalents 13,090 (74,425)

Cash and cash equivalents, beginning of
period 236,018 277,030
------- -------

Cash and cash equivalents, end of period $249,108 $202,605
======== ========

RealNetworks, Inc. and Subsidiaries
Supplemental Financial Information
(Unaudited)

2011 2010
---- ----
Q1 Q4 Q3
--- --- ---
(in thousands)
Net Revenue by Line of
Business:
Core Products (A) $48,107 $58,030 $51,870
Emerging Products (B) 11,135 12,558 8,778
Games (C) 28,059 27,229 25,784
------ ------ ------
Total net revenue
excluding music 87,301 97,817 86,432
Music (D) - - -
--- --- ---
Total net revenue
including music $87,301 $97,817 $86,432
======= ======= =======

Core Products Revenue by
Product:
SaaS (E) $30,526 $35,656 $31,885
Systems Integrations /
Professional Services (F) 1,840 4,388 953
Technology Licensing (G) 6,425 7,632 7,473
Consumer subscriptions (H) 9,316 10,354 11,559
Total Core Products net
revenue $48,107 $58,030 $51,870
======= ======= =======

Net Revenue by Geography:
United States $44,469 $48,048 $46,874
Rest of world 42,832 49,769 39,558
------ ------ ------

Total net revenue $87,301 $97,817 $86,432
======= ======= =======

Product Metrics
(subscribers and ICM
presented as greater
than):
Addressable subscribers of
mobile operators under
contract (I) 775,000 700,000 700,000
SaaS subscribers (J) 35,900 36,700 37,500
Monthly SaaS ARPU (in
cents) (K) $0.18 $0.20 $0.16
ICM delivered in billions
(L) 151 136 134
Consumer subscribers(M) 500 550 600

2010
----
Q2 Q1
--- ---
(in thousands)
Net Revenue by Line of
Business:
Core Products (A) $51,742 $51,203
Emerging Products (B) 8,997 11,428
Games (C) 28,145 30,236
------ ------
Total net revenue
excluding music 88,884 92,867
Music (D) - 35,733
--- ------
Total net revenue
including music $88,884 $128,600
======= ========

Core Products Revenue by
Product:
SaaS (E) $32,388 $33,614
Systems Integrations /
Professional Services (F) 998 367
Technology Licensing (G) 7,736 7,910
Consumer subscriptions (H) 10,620 9,312
Total Core Products net
revenue $51,742 $51,203
======= =======

Net Revenue by Geography:
United States $48,351 $84,550
Rest of world 40,533 44,050
------ ------

Total net revenue $88,884 $128,600
======= ========

Product Metrics
(subscribers and ICM
presented as greater
than):
Addressable subscribers of
mobile operators under
contract (I) 675,000 650,000
SaaS subscribers (J) 37,600 37,950
Monthly SaaS ARPU (in
cents) (K) $0.16 $0.16
ICM delivered in billions
(L) 128 120
Consumer subscribers(M) 600 575

Net Revenue by Line of Business:
(A) The Core Products segment primarily includes revenue from SaaS
services, system integration and professional services to carriers
and mobile handset companies, sales of technology licenses of our
software products such as Helix for handsets, and consumer
subscriptions such as SuperPass and our international radio
subscription services.

(B) The Emerging Products segment primarily includes revenue from
RealPlayer and related products, such as revenue from distribution
of third party software products, advertising on RealPlayer websites
and sales of RealPlayerPlus software licenses to consumers.

(C) The Games segment primarily includes revenue from sales of games
licenses, online games subscription services, advertising on game
sites and social network sites, games syndication services,
microtransactions from online and social games and sales of mobile
games.

(D) On March 31, 2010, we completed the restructuring of Rhapsody,
which resulted in our ownership decreasing to approximately 47% of
the outstanding equity in Rhapsody, and our loss of operating
control over Rhapsody. Beginning with the quarter ended June 30,
2010, Rhapsody's revenue or other operating results are no longer
consolidated within our financial statements and we are not
recording any operating or other financial results for our Music
segment. We now report our share of Rhapsody's income or losses as
"Equity in net loss of Rhapsody and other equity method investments"
in "Other income (expense)".

Core Products Revenue by Product:
(E) Software as a Service (SaaS) revenue includes revenue from music
on demand (MOD), video on demand (VOD), ringtones, ringback tones
(RBT) and intercarrier messaging services provided to network
service providers, who are largely mobile phone networks.

(F) Systems Integrations /Professional Services revenue includes
professional services, other than those associated with software
sales, provided to mobile carriers and handset manufacturers.

(G) Technology Licensing includes revenue from sales of software and
other intellectual property licenses such as Helix server licenses
and Helix software licenses for handsets.

(H) Consumer subscriptions includes revenue from SuperPass, as well
as our international radio subscription services.

Product Metrics:
(I) Total subscribers reported at the end of the quarter of mobile
carriers that offer one or more of our SaaS services, other than
intercarrier messaging services, to their customers.

(J) SaaS subscribers include RBT, MOD and VOD services, measured at
the end of the quarter.

(K) Monthly SaaS ARPU (Average Revenue Per User) is calculated by
dividing (a) the total quarterly revenue from SaaS subscription
services, including RBT, MOD, VOD, by (b) the number of SaaS
subscribers at the end of the quarter, and dividing the resulting
quotient by three.

(L) ICM (Intercarrier message) represents the total number of
messages delivered across our messaging platform during the quarter.

(M) Consumer subscribers primarily includes our SuperPass and
GamePass products. We repurchased our international radio
subscription services from Rhapsody as part of the restructuring
that occurred on March 31, 2010, and as a result, subscribers to our
international radio services are included beginning in the quarter
ended June 30, 2010.

RealNetworks, Inc. and Subsidiaries
Segment Results of Operations
(Unaudited)

2011 2010
---- ----
Q1 Q4 Q1
--- --- ---
(in thousands)
--------------
Core Products
-------------

Net revenue $48,107 $58,030 $51,203
Cost of revenue 20,984 25,679 17,739
------ ------ ------
Gross profit 27,123 32,351 33,464

Gross margin 56% 56% 65%

Operating expenses 19,386 19,851 24,086
------ ------ ------
Operating income
(loss) $7,737 $12,500 $9,378

Adjusted EBITDA $10,260 $15,523 $12,799

Emerging Products
-----------------

Net revenue $11,135 $12,558 $11,428
Cost of revenue 1,540 1,179 1,464
----- ----- -----
Gross profit 9,595 11,379 9,964

Gross margin 86% 91% 87%

Operating expenses 9,891 7,359 7,033
----- ----- -----
Operating income
(loss) $(296) $4,020 $2,931

Adjusted EBITDA $(188) $4,109 $3,009

Games
-----

Net revenue $28,059 $27,229 $30,236
Cost of revenue 8,534 7,861 7,703
----- ----- -----
Gross profit 19,525 19,368 22,533

Gross margin 70% 71% 75%

Operating expenses 16,814 17,580 22,771
------ ------ ------
Operating income
(loss) $2,711 $1,788 $(238)

Adjusted EBITDA $3,340 $2,452 $1,685

Music
-----

Net revenue $- $- $35,733
Cost of revenue - - 21,864
--- --- ------
Gross profit - - 13,869

Gross margin N/A N/A 39%

Operating expenses - - 13,911
--- --- ------
Operating income
(loss) $- $- $(42)

Adjusted EBITDA $- $- $4,214

Corporate
---------

Net revenue $- $- $-
Cost of revenue 1,008 986 389
----- --- ---
Gross profit (1,008) (986) (389)

Gross margin N/A N/A N/A

Operating expenses 14,810 11,343 26,302
------ ------ ------
Operating income
(loss) $(15,818) $(12,329) $(26,691)

Adjusted EBITDA $(5,870) $(8,811) $(15,982)

Total
-----

Net revenue $87,301 $97,817 $128,600
Cost of revenue 32,066 35,705 49,159
------ ------ ------
Gross profit 55,235 62,112 79,441

Gross margin 63% 63% 62%

Operating expenses 60,901 56,133 94,103
------ ------ ------
Operating income
(loss) $(5,666) $5,979 $(14,662)

Adjusted EBITDA $7,542 $13,273 $5,725

RealNetworks, Inc. and Subsidiaries
Reconciliation of segment operating income (loss) to adjusted EBITDA
by reporting segment
(Unaudited)

2011 2010
---- ----
Q1 Q4 Q1
--- --- ---
(in thousands)
--------------
Core Products
-------------