International Entertainment News: RealNetworks Announces Second Quarter 2011 Results

RealNetworks Announces Second Quarter 2011 Results

SEATTLE, July 28, 2011 /PRNewswire/ -- RealNetworks, Inc. (Nasdaq: RNWK) today announced results for the second quarter ended June 30, 2011.

Quarterly Highlights:

-- Revenue of $83.8 million
-- Net loss of $(6.8) million or $(0.05) per share
-- Adjusted EBITDA of $2.2 million
-- Cash and short term investments of $327.9 million as of June 30, 2011
-- Board declares a special dividend of $1.00 per share and 1-for-4 reverse
stock split

"While our overall financial results for the quarter were not up to our expectations, we delivered against several of our key milestones for the year, including the launch of Unifi with Vodafone-Germany, the relaunch of GameHouse.com and a successful update campaign for RealPlayer," said Mike Lunsford, interim CEO of RealNetworks.

"As we continue with the strategic review of our business, we have determined that we have more cash than we anticipate needing for our future operations or strategic initiatives," Mr. Lunsford continued. "Therefore, we are declaring a special dividend to shareholders of $1.00 per share."

Second Quarter Results

For the second quarter of 2011, revenue was $83.8 million, a decrease of 6% compared with the second quarter of 2010 and a sequential decline of 4% from the first quarter. Foreign currency exchange rate fluctuations positively affected second quarter revenue by $2.9 million compared with the year-earlier quarter. Revenue trends in each of RealNetworks' businesses in the second quarter of 2011 compared with the year-earlier quarter were: a 41% increase in Emerging Products revenue to $12.7 million, a 12% decrease in Core Products revenue to $45.7 million, and a 10% decrease in Games revenue to $25.3 million.

Net loss for the second quarter of 2011 was $(6.8) million, or $(0.05) per share, compared with a net loss of $(25.9) million, or $(0.19) per share, in the second quarter of 2010. Second quarter 2010 results included $11.9 million in restructuring charges and loss on excess office facilities. Adjusted EBITDA for the second quarter of 2011 was $2.2 million, compared with $604,000 for the second quarter of 2010. A reconciliation of GAAP operating income (loss) to adjusted EBITDA is provided in the financial tables that accompany this release.

As of June 30, 2011, RealNetworks had $327.9 million in unrestricted cash, cash equivalents and short-term investments compared with $334.3 million at Dec. 31, 2010. In addition, RealNetworks had $47.7 million in restricted cash and equity investments, including its equity interest in the Rhapsody joint venture, at June 30, 2011.

Segment Operating Results

2011 2011 2010
---- ----
Q2 Q1 Q2
--- -- --
(in thousands)
Revenue
Core Products $45,735 $48,107 $51,742
Emerging Products 12,717 11,135 8,997
Games 25,300 28,059 28,145
Corporate - - -
--- --- ---
Total excluding Music 83,752 87,301 88,884
Music - - -
--- --- ---
Total $83,752 $87,301 $88,884
----- ------- ------- -------

Operating Income (loss)
Core Products $7,208 $7,737 $11,149
Emerging Products 370 (296) (2,009)
Games 2,049 2,711 85
Corporate (14,411) (15,818) (30,919)
------- ------- -------
Total excluding Music (4,784) (5,666) (21,694)
Music - - -
--- --- ---
Total $(4,784) $(5,666) $(21,694)
----- ------- ------- --------

Adjusted EBITDA
Core Products $9,900 $10,260 $14,675
Emerging Products 707 (188) (1,732)
Games 2,748 3,340 1,948
Corporate (11,133) (5,870) (14,287)
------- ------ -------
Total excluding Music 2,222 7,542 604
Music - - -
--- --- ---
Total $2,222 $7,542 $604
----- ------ ------ ----

Sequential Yr/Yr
Change Change
------ ------
(in thousands)
Revenue
Core Products -5% -12%
Emerging Products 14% 41%
Games -10% -10%
Corporate
Total excluding Music -4% -6%
Music
Total -4% -6%
----- --- ---

Operating Income (loss)
Core Products -7% -35%
Emerging Products -225% -118%
Games -24% 2311%
Corporate -9% -53%
Total excluding Music -16% -78%
Music
Total -16% -78%
----- --- ---

Adjusted EBITDA
Core Products -4% -33%
Emerging Products -476% -141%
Games -18% 41%
Corporate 90% -22%
Total excluding Music -71% 268%
Music
Total -71% 268%
----- --- ---

Business Outlook

For the third quarter of 2011, Real expects total revenue to be consistent with year-ago revenue and to increase sequentially. Real expects revenue in Emerging Products will increase year-over-year and be flat sequentially; revenue in Core Products will decline year-over-year and increase sequentially; and revenue in Games will decline year-over-year and sequentially. Real expects adjusted EBITDA for the third quarter to decline compared with the year-ago quarter and to increase sequentially.

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.

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.

The foregoing forward-looking statements reflect Real's expectations as of July 28, 2011. It is not RealNetworks' general practice to update these forward-looking statements until its next quarterly results announcement.

Dividend and Reverse Stock Split

In a separate release, RealNetworks also announced today that its Board of Directors declared a special dividend of $1.00 per share of its common stock, payable on Aug. 23, 2011, to holders of record as of the close of business Aug. 9, 2011. The cash dividend will total approximately $136.8 million.

The board also approved a one-for-four reverse stock split of RealNetworks common stock, which it expects to implement at the close of business on Aug. 30, 2011. The company expects to have approximately 34.2 million shares outstanding after the reverse split, compared with 136.8 million as of June 30, 2011.

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 second quarter at 5:00 p.m. ET on July 28. 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 Details
5:00 p.m. ET / 2:00 p.m. PT
Dial in:
800-857-5305 Domestic
773-681-5857 International
Passcode: Second Quarter Earnings
Leader: Mike Lunsford

Telephonic replay will be available until 8 p.m. ET, August 11, 2011.
Replay dial in:
866-395-9179 Domestic
203-369-0503 International

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 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. RealNetworks' 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 second 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 RealNetworks' plan to pay a special dividend, to effect a reverse stock split, and its current expectations for future revenue, adjusted EBITDA, adjusted EBITDA margin, seasonality of financial results and future growth and the assumptions relating to such statements. 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: RealNetworks' 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 RealNetworks' 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; changes in consumer and advertising spending in response to disruptions in the global financial markets; 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 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.

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

Quarters Ended
June 30,

2011 2010
---- ----
(in thousands, except per share data)

Net revenue $83,752 $88,884

Cost of revenue 30,666 29,149
------ ------

Gross profit 53,086 59,735
------ ------

Operating expenses:
Research and development 17,809 27,583
Sales and marketing 28,853 27,382
Advertising with related party
(A) - -
General and administrative 10,874 14,590
Restructuring and other charges 508 4,792
Loss (gain) on excess office
facilities (174) 7,082
---- -----

Total operating expenses 57,870 81,429
------ ------

Operating income (loss) (4,784) (21,694)
------ -------

Other income (expenses):
Interest income, net 311 551
Equity in net loss of Rhapsody
and other equity method
investments (B) (1,018) (5,427)
Loss on sale of equity
investments, net - (50)
Gain on deconsolidation of
Rhapsody - -
Other income (expense), net (311) 994
---- ---

Total other income (expense),
net (1,018) (3,932)
------ ------

Income (loss) before income
taxes (5,802) (25,626)
Income tax (expense) benefit (1,047) (281)
------ ----

Net income (loss) (6,849) (25,907)
Net loss attributable to the
noncontrolling interest in
Rhapsody (C) - -
--- ---
Net income (loss) attributable
to common shareholders $(6,849) $(25,907)
======= ========

Basic net income (loss) per
share available to common
shareholders $(0.05) $(0.19)
Diluted net income (loss) per
share available to common
shareholders $(0.05) $(0.19)

Shares used to compute basic net
income (loss) per share
available to common
shareholders 136,539 135,277
Shares used to compute diluted
net income (loss) per share
available to common
shareholders 136,539 135,277

Six Months Ended
June 30,

2011 2010
---- ----
(in thousands, except per share data)

Net revenue $171,053 $217,484

Cost of revenue 62,732 78,308
------ ------

Gross profit 108,321 139,176
------- -------

Operating expenses:
Research and development 37,704 62,258
Sales and marketing 57,333 65,209
Advertising with related party
(A) - 1,065
General and administrative 16,496 29,511
Restructuring and other charges 7,412 10,407
Loss (gain) on excess office
facilities (174) 7,082
---- -----

Total operating expenses 118,771 175,532
------- -------

Operating income (loss) (10,450) (36,356)
------- -------

Other income (expenses):
Interest income, net 690 931
Equity in net loss of Rhapsody
and other equity method
investments (B) (4,299) (5,427)
Loss on sale of equity
investments, net - (50)
Gain on deconsolidation of
Rhapsody - 10,929
Other income (expense), net (433) 1,093
---- -----

Total other income (expense),
net (4,042) 7,476
------ -----

Income (loss) before income
taxes (14,492) (28,880)
Income tax (expense) benefit (4,662) 3,291
------ -----

Net income (loss) (19,154) (25,589)
Net loss attributable to the
noncontrolling interest in
Rhapsody (C) - 2,910
--- -----
Net income (loss) attributable
to common shareholders $(19,154) $(22,679)
======== ========

Basic net income (loss) per
share available to common
shareholders $(0.14) $(0.14)
Diluted net income (loss) per
share available to common
shareholders $(0.14) $(0.14)

Shares used to compute basic net
income (loss) per share
available to common
shareholders 136,266 135,209
Shares used to compute diluted
net income (loss) per share
available to common
shareholders 136,266 135,209

(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)

June 30, December 31,
2011 2010
---- ----
(in thousands)
ASSETS

Current assets:
Cash and cash
equivalents $236,730 $236,018
Short-term
investments 91,142 98,303
Trade accounts
receivable, net 46,011 48,324
Deferred costs,
current portion 9,882 9,173
Related party
receivable -
Rhapsody (A) 527 351
Prepaid expenses and
other current
assets 24,845 30,441
------ ------

Total current assets 409,137 422,610
------- -------

Equipment, software, and leasehold
improvements, at cost:
Equipment and
software 146,744 144,623
Leasehold
improvements 25,454 25,367
------ ------
Total equipment,
software, and
leasehold
improvements 172,198 169,990
Less accumulated
depreciation and
amortization 131,193 126,619
------- -------

Net equipment,
software, and
leasehold
improvements 41,005 43,371

Restricted cash
equivalents and
investments 10,141 10,000
Equity method
investments 11,397 15,486
Available for sale
securities 26,150 27,541
Other assets 3,064 3,316
Deferred costs, non-
current portion 16,443 18,401
Deferred tax assets,
net, non-current
portion 12,943 12,805
Other intangible
assets, net 9,837 6,952
Goodwill 6,502 4,960
----- -----

Total assets $546,619 $565,442
======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable $22,194 $30,413
Accrued and other
liabilities 82,199 85,702
Deferred revenue,
current portion 18,010 19,036
Accrued loss on
excess office
facilities, current
portion 1,391 1,144
----- -----

Total current
liabilities 123,794 136,295

Deferred revenue,
non-current
portion 88 460
Accrued loss on
excess office
facilities, non-
current portion 2,430 3,380
Deferred rent 3,032 3,514
Deferred tax
liabilities, net,
non-current
portion 2,015 1,049
Other long-term
liabilities 11,231 7,999
------ -----

Total liabilities 142,590 152,697
------- -------

Shareholders' equity 404,029 412,745
------- -------

Total liabilities
and shareholders'
equity $546,619 $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)

Six Month Ended June 30,
------------------------
2011 2010
---- ----
(in thousands)

Cash flows from operating
activities:
Net income (loss) $(19,154) $(25,589)
Adjustments to reconcile net
income (loss) to net cash used
in operating activities:
Depreciation and amortization 8,116 13,973
Stock-based compensation 6,129 6,692
Loss (gain) on disposal of
equipment, software, and
leasehold improvements 85 (3)
Equity in net loss of Rhapsody
and other equity method
investments 4,299 5,427
Loss on sale of equity
investment, net - 50
Gain on deconsolidation of
Rhapsody - (10,929)
Excess tax benefit from stock
option exercises (57) (18)
Accrued restructuring and other
charges 131 3,581
Accrued loss (gain) on excess
office facilities (174) 6,470
Deferred income taxes, net (351) (1,609)
Other 62 22
Net change in certain operating
assets and liabilities, net of
acquisitions, disposals, and
deconsolidation of Rhapsody (4,576) (54,404)
------ -------

Net cash used in operating
activities (5,490) (56,337)
------ -------

Cash flows from investing
activities:
Purchases of equipment, software,
and leasehold improvements (3,134) (9,507)
Purchases of short-term
investments (54,844) (65,754)
Proceeds from sales and
maturities of short-term
investments 62,005 16,559
Payment of acquisition costs, net
of cash acquired (2,888) -
Payment in connection with the
restructuring of Rhapsody - (18,000)
Repayment of temporary funding on
deconsolidation of Rhapsody - 5,869
Decrease (increase) in restricted
cash equivalents and
investments, net (141) 3,700
---- -----

Net cash provided by (used in)
investing activities 998 (67,133)
--- -------

Cash flows from financing
activities:
Net proceeds from sales of common
stock under employee stock
purchase
plan and exercise of stock
options 1,610 1,272
Net proceeds from sales of
interest in Rhapsody - 1,213
Excess tax benefit from stock
option exercises 57 18
--- ---

Net cash provided by financing
activities 1,667 2,503
----- -----

Effect of exchange rate changes
on cash and cash equivalents 3,537 92
----- ---

Net increase (decrease) in cash
and cash equivalents 712 (120,875)

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

Cash and cash equivalents, end of
period $236,730 $156,155
======== ========

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

2011
----
Q2 Q1
-- --
(in thousands)
Net Revenue by Line of Business:
Core Products (A) $45,735 $48,107
Emerging Products (B) 12,717 11,135
Games (C) 25,300 28,059
------ ------
Total net revenue excluding music 83,752 87,301
Music (D) - -
--- ---
Total net revenue including music $83,752 $87,301
======= =======

Core Products Revenue by Product:
SaaS (E) $30,216 $30,526
Systems Integrations /Professional Services
(F) 388 1,840
Technology Licensing (G) 6,508 6,425
Consumer Subscriptions (H) 8,623 9,316
----- -----
Total Core Products net revenue $45,735 $48,107
======= =======

Net Revenue by Geography:
United States $41,984 $44,469
Rest of world 41,768 42,832
------ ------

Total net revenue $83,752 $87,301
======= =======

Product Metrics (subscribers and ICM presented
as greater than):
Addressable subscribers of mobile operators
under contract (I) 775,000 775,000
SaaS subscribers (J) 34,550 35,900
Monthly SaaS ARPU (in cents) (K) $0.18 $0.18
ICM delivered in billions (L) 157 151
Consumer subscribers(M) 475 500

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

Core Products Revenue by Product:
SaaS (E) $35,656 $31,885
Systems Integrations /Professional Services
(F) 4,388 953
Technology Licensing (G) 7,632 7,473
Consumer Subscriptions (H) 10,354 11,559
------ ------
Total Core Products net revenue $58,030 $51,870
======= =======

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

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

Product Metrics (subscribers and ICM presented
as greater than):
Addressable subscribers of mobile operators
under contract (I) 700,000 700,000
SaaS subscribers (J) 36,700 37,500
Monthly SaaS ARPU (in cents) (K) $0.20 $0.16
ICM delivered in billions (L) 136 134
Consumer subscribers(M) 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 the 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
----
Q2 Q1
-- --
(in thousands)
--------------
Core Products
-------------

Net revenue $45,735 $48,107
Cost of revenue 19,353 20,984
------ ------
Gross profit 26,382 27,123

Gross margin 58% 56%

Operating expenses 19,174 19,386
------ ------
Operating income (loss) $7,208 $7,737

Adjusted EBITDA $9,900 $10,260

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

Net revenue $12,717 $11,135
Cost of revenue 2,978 1,540
----- -----
Gross profit 9,739 9,595

Gross margin 77% 86%

Operating expenses 9,369 9,891
----- -----
Operating income (loss) $370 $(296)

Adjusted EBITDA $707 $(188)

Games
-----

Net revenue $25,300 $28,059
Cost of revenue 8,040 8,534
----- -----
Gross profit 17,260 19,525

Gross margin 68% 70%

Operating expenses 15,211 16,814
------ ------
Operating income (loss) $2,049 $2,711

Adjusted EBITDA $2,748 $3,340

Music
-----

Net revenue $- $-
Cost of revenue - -
--- ---
Gross profit - -

Gross margin N/A N/A

Operating expenses - -
--- ---
Operating income (loss) $- $-

Adjusted EBITDA $- $-

Corporate
---------

Net revenue $- $-
Cost of revenue 295 1,008
--- -----
Gross profit (295) (1,008)

Gross margin N/A N/A

Operating expenses 14,116 14,810
------ ------
Operating income (loss) $(14,411) $(15,818)

Adjusted EBITDA $(11,133) $(5,870)

Total
-----

Net revenue $83,752 $87,301
Cost of revenue 30,666 32,066
------ ------
Gross profit 53,086 55,235

Gross margin 63% 63%

Operating expenses 57,870 60,901
------ ------
Operating income (loss) $(4,784) $(5,666)

Adjusted EBITDA $2,222 $7,542

2010 2011 2010
---- ---- ----
Q2 YTD YTD
-- --- ---
(in thousands)
--------------
Core Products
-------------

Net revenue $51,742 $93,842 $102,945
Cost of revenue 18,085 40,337 35,824
------ ------ ------
Gross profit 33,657 53,505 67,121

Gross margin 65% 57% 65%

Operating expenses 22,508 38,560 46,594
------ ------ ------
Operating income (loss) $11,149 $14,945 $20,527

Adjusted EBITDA $14,675 $20,160 $27,474

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

Net revenue $8,997 $23,852 $20,425
Cost of revenue 3,404 4,518 4,868
----- ----- -----
Gross profit 5,593 19,334 15,557

Gross margin 62% 81% 76%

Operating expenses 7,602 19,260 14,635
----- ------ ------
Operating income (loss) $(2,009) $74 $922

Adjusted EBITDA $(1,732) $519 $1,277

Games
-----

Net revenue $28,145 $53,359 $58,381
Cost of revenue 7,228 16,574 14,931
----- ------ ------
Gross profit 20,917 36,785 43,450

Gross margin 74% 69% 74%

Operating expenses 20,832 32,025 43,603
------ ------ ------
Operating income (loss) $85 $4,760 $(153)

Adjusted EBITDA $1,948 $6,088 $3,633

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 432 1,303 821
--- ----- ---
Gross profit (432) (1,303) (821)

Gross margin N/A N/A N/A

Operating expenses 30,487 28,926 56,789
------ ------ ------
Operating income (loss) $(30,919) $(30,229) $(57,610)

Adjusted EBITDA $(14,287) $(17,003) $(30,269)

Total
-----

Net revenue $88,884 $171,053 $217,484
Cost of revenue 29,149 62,732 78,308
------ ------ ------
Gross profit 59,735 108,321 139,176

Gross margin 67% 63% 64%

Operating expenses 81,429 118,771 175,532
------ ------- -------
Operating income (loss) $(21,694) $(10,450) $(36,356)

Adjusted EBITDA $604 $9,764 $6,329

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

2011
----
Q2 Q1
--- --
(in thousands)
--------------
Core Products
-------------

Reconciliation of segment GAAP operating
income (loss) to adjusted EBITDA by
reporting segment:

Operating income (loss) $7,208 $7,737
Acquisitions related intangible asset
amortization 710 474
Depreciation and amortization 1,982 2,049
Impairment of goodwill - -
--- ---
Adjusted EBITDA $9,900 $10,260

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

Reconciliation of segment GAAP operating
income (loss) to adjusted EBITDA by
reporting segment:

Operating income (loss) $370 $(296)
Acquisitions related intangible asset
amortization 53 -
Depreciation and amortization 284 108
Impairment of goodwill - -
--- ---
Adjusted EBITDA $707 $(188)

Games
-----

Reconciliation of segment GAAP operating
income (loss) to adjusted EBITDA by
reporting segment:

Operating income (loss) $2,049 $2,711
Acquisitions related intangible asset
amortization 256 254
Depreciation and amortization 443 375
Impairment of goodwill - -
--- ---
Adjusted EBITDA $2,748 $3,340

Music
-----

Reconciliation of segment GAAP operating
income (loss) to adjusted EBITDA by
reporting segment:

Operating income (loss) $- $-
Net loss attributable to noncontrolling
interest in Rhapsody - -
Acquisitions related intangible asset
amortization (A) - -
Depreciation and amortization (A) - -
Pro forma gain on sale of interest in
Rhapsody America - -
Impairment of goodwill - -
--- ---
Adjusted EBITDA $- $-

Corporate
---------

Reconciliation of segment GAAP operating
income (loss) to adjusted EBITDA by
reporting segment:

Operating income (loss) $(14,411) $(15,818)
Other income (expense), net (311) (122)
Depreciation and amortization 569 559
Restructuring and other charges 508 6,904
Stock-based compensation 2,686 2,607
Loss on excess office facilities (174) -
---- ---
Adjusted EBITDA $(11,133) $(5,870)

Total
-----

Reconciliation of GAAP operating income
(loss) to adjusted EBITDA:

Operating income (loss) $(4,784) $(5,666)
Net loss attributable to noncontrolling
interest in Rhapsody - -
Other income (expense), net (311) (122)
Acquisitions related intangible asset
amortization (A) 1,019 728
Depreciation and amortization (A) 3,278 3,091
Impairment of goodwill - -
Loss on excess office facilities (174) -
Pro forma gain on sale of interest in
Rhapsody America - -
Restructuring and other charges 508 6,904
Stock-based compensation 2,686 2,607
----- -----
Adjusted EBITDA $2,222 $7,542

2010 2011 2010
---- ---- ----
Q2 YTD YTD
-- --- ---
(in thousands)
--------------
Core Products
-------------