RealNetworks Announces Second Quarter 2012 Results

RealNetworks Announces Second Quarter 2012 Results

SEATTLE, Aug. 8, 2012 /PRNewswire/ -- RealNetworks, Inc. (Nasdaq: RNWK) today announced results for the second quarter ended June 30, 2012.

Quarterly Summary:


-- Revenue of $65.5 million
-- Net income of $81.0 million or $2.32 per diluted share
-- Adjusted EBITDA of $(6.5) million
-- Cash and short term investments of $282.9 million as of June 30, 2012
-- Results reflect $120.0 million sale of patent assets to Intel on April
5, 2012
"It's clear that there's a lot of work to do to get RealNetworks back on track," said Rob Glaser, Chairman and interim CEO of RealNetworks. "We are moving quickly to put a plan in place to do so."

Second Quarter Results

For the second quarter of 2012, revenue was $65.5 million, a sequential decrease of 2% from the first quarter of 2012, and a decrease of 22% compared with the second quarter of 2011. Revenue trends in each of RealNetworks' businesses in the second quarter of 2012 compared with the year-earlier quarter were: a 22% decline in Emerging Products revenue to $9.9 million, a 16% decrease in Core Products revenue to $38.3 million, and a 31% decrease in Games revenue to $17.4 million.

Net income for the second quarter of 2012 was $81.0 million, or $2.32 per diluted share, compared with a net loss of $(6.8) million, or $(0.20) per share, in the second quarter of 2011. Net income for the most-recent quarter included the net gain on the sale of patent assets to Intel Corp. of approximately $117.9 million, and $3.1 million in gains on the sale of other assets, including a portion of the company's investment in LoEn Entertainment, Inc. RealNetworks' share of Rhapsody losses increased to $(2.1) million in the second quarter of 2012 from $(1.0) million in the second quarter of 2011. Tax expense of $(24.3) million in the second quarter of 2012, compared with $(1.0) million in the year-ago quarter, included taxes associated with the gain from the sale of patent assets.

Adjusted EBITDA loss for the second quarter was $(6.5) million, compared with adjusted EBITDA income of $2.2 million for the second quarter of 2011. A reconciliation of GAAP operating income and loss to adjusted EBITDA is provided in the financial tables that accompany this release.

As of June 30, 2012, RealNetworks had $282.9 million in unrestricted cash, cash equivalents and short-term investments, of which approximately $37.8 million is held in foreign jurisdictions, compared with cash of $185.1 million at Dec. 31, 2011. The increase in the cash balance reflects the proceeds from the sale of patent assets to Intel and other asset sales. In addition, RealNetworks had $42.5 million in restricted cash and available-for-sale securities as of June 30, 2012.

Segment Operating Results


2012 2012 2011
---- ----
Q2 Q1 Q2
--- --- ---
(in thousands)
Revenue
Core
Products $38,250 $37,697 $45,735
Emerging
Products 9,913 10,159 12,717
Games 17,363 19,108 25,300
Corporate - - -
---------
Total $65,526 $66,964 $83,752
----- ------- ------- -------

Operating Income (loss)
Core
Products $4,140 $1,801 $7,208
Emerging
Products 1,021 508 370
Games (1,302) (983) 2,049
Corporate 100,309 (19,868) (14,411)
---------
Total $104,168 $(18,542) $(4,784)
----- -------- -------- -------

Adjusted EBITDA
Core
Products $6,628 $4,400 $9,900
Emerging
Products 1,266 754 707
Games (619) (324) 2,748
Corporate (13,784) (12,247) (11,133)
---------
Total $(6,509) $(7,417) $2,222
----- ------- ------- ------


Business Outlook

For the third quarter of 2012, RealNetworks expects revenue of $59 million to $62 million. The company expects revenue from Games, Core Products and Emerging Products to decline sequentially and year over year. RealNetworks expects to report a third-quarter adjusted EBITDA loss of $(9) million to $(12) million.

Anticipating significant restructuring activities in the second half of 2012, RealNetworks is not providing full-year guidance for 2012.

The foregoing forward-looking statements reflect RealNetworks' expectations as of August 8, 2012. It is not RealNetworks' 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 second quarter at 5:00 p.m. ET on August 8. 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 p.m. ET / 2 p.m. PT

Dial in:

888-790-3162 Domestic

415-228-4854 International

Passcode: Second Quarter Earnings

Leader: Rob Glaser

Telephonic replay will be available until 8 p.m. ET, August 22, 2012.
Replay dial in:

866-425-0182 Domestic

203-369-0874 International

For More Information:

Marj Charlier, Investor Relations at RealNetworks, Inc.

206-892-6785 or mcharlier@realnetworks.com

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 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' current expectations for revenue; adjusted EBITDA; the development of its business plans; and plans to undertake restructuring activities. 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; 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 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; 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 Six Months Ended
June 30, June 30,
-------- --------

2012 2011 2012 2011
---- ---- ---- ----
(in thousands, except per share data)

Net revenue $65,526 $83,752 $132,490 $171,053

Cost of revenue 25,962 30,666 53,389 62,732

Gross profit 39,564 53,086 79,101 108,321
------ ------ ------ -------

Sale of patents and other 117,933 - 116,353 -
technology assets, net of costs(A)

Operating expenses:
Research and development 16,028 17,809 33,846 37,704
Sales and marketing 22,694 28,853 46,490 57,333
General and administrative 13,068 10,874 26,344 16,496
Restructuring and other charges 1,539 508 3,148 7,412
Loss (gain) on excess office facilities - (174) - (174)

Total operating expenses 53,329 57,870 109,828 118,771
------ ------ ------- -------

Operating income (loss) 104,168 (4,784) 85,626 (10,450)
------- ------ ------ -------

Other income (expenses):
Interest income, net 225 311 869 690
Gain (loss) on sale of equity and other investments, net 3,078 - 3,078 -
Equity in net loss of Rhapsody investment (2,114) (1,018) (2,482) (4,299)
Other income (expense), net (49) (311) 1,426 (433)
--- ---- ----- ----

Total other income (expense), net 1,140 (1,018) 2,891 (4,042)
----- ------ ----- ------

Income (loss) before income taxes 105,308 (5,802) 88,517 (14,492)
Income tax (expense) benefit (24,311) (1,047) (24,535) (4,662)
------- ------ ------- ------

Net income (loss) $80,997 $(6,849) $63,982 $(19,154)
======= ======= ======= ========

Basic net income (loss) per share $2.33 $(0.20) $1.85 $(0.56)
Diluted net income (loss) per share $2.32 $(0.20) $1.83 $(0.56)

Shares used to compute basic net income (loss) per share 34,752 34,135 34,620 34,067
Shares used to compute diluted net income (loss) per share 34,900 34,135 34,914 34,067


(A) On April 5, 2012, RealNetworks completed the sale of certain patents and other technology assets to Intel for a cash purchase of $120.0 million.





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


June 30, December 31,
2012 2011
---- ----
(in thousands)
ASSETS

Current assets:
Cash and cash
equivalents $199,540 $106,333
Short-term
investments 83,406 78,739
Trade accounts
receivable, net 38,512 41,165
Deferred costs,
current portion 1,701 1,424
Prepaid expenses and
other current assets 17,933 21,902
------ ------

Total current assets 341,092 249,563
------- -------

Equipment, software, and leasehold
improvements, at cost:
Equipment and software 106,391 104,352
Leasehold improvements 26,130 25,947
------ ------
Total equipment,
software, and
leasehold
improvements 132,521 130,299
Less accumulated
depreciation and
amortization 94,975 92,825
------ ------

Net equipment,
software, and
leasehold
improvements 37,546 37,474

Restricted cash
equivalents and
investments 10,174 10,168
Equity method
investments 5,316 7,798
Available for sale
securities 32,296 37,204
Other assets 3,088 2,954
Deferred costs, non-
current portion 276 843
Deferred tax assets,
net, non-current
portion 4,535 18,419
Other intangible
assets, net 5,050 7,169
Goodwill 6,188 6,198
----- -----

Total assets $445,561 $377,790
======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable $22,443 $17,151
Accrued and other
liabilities 63,053 59,194
Deferred revenue,
current portion 10,187 11,835
Accrued loss on excess
office facilities,
current portion 593 596
--- ---

Total current
liabilities 96,276 88,776

Deferred revenue, non-
current portion 185 195
Accrued loss on excess
office facilities,
non-current portion 1,536 2,151
Deferred rent 2,692 2,944
Deferred tax
liabilities, net,
non-current portion 1,132 1,443
Other long-term
liabilities 9,871 10,994
----- ------

Total liabilities 111,692 106,503
------- -------


Shareholders' equity 333,869 271,287
------- -------

Total liabilities and
shareholders' equity $445,561 $377,790
======== ========





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

Six Months Ended June 30,
-------------------------
2012 2011
---- ----
(in thousands)

Cash flows from
operating activities:
Net income (loss) $63,982 $(19,154)
Adjustments to
reconcile net income
(loss) to net cash
used in operating
activities:
Depreciation and
amortization 8,162 8,116
Stock-based
compensation 4,065 6,129
Equity in net loss of
Rhapsody investment 2,482 4,299
Excess tax benefit from
stock option exercises - (57)
Deferred income taxes,
net 22,496 (351)
Gain on sale of patent
and other technology
assets, net of costs (116,353) -
Gain on sale of equity
and other investments,
net (3,078) -
Realized translation
gain (1,611) -
Other (79) 147
Net change in certain
operating assets and
liabilities 2,493 (4,619)
----- ------

Net cash provided by
(used in) operating
activities (17,441) (5,490)
------- ------

Cash flows from
investing activities:
Purchases of equipment,
software, and
leasehold improvements (4,989) (3,134)
Proceeds from sale of
patents and other
technology assets, net
of costs 116,353 -
Proceeds from sale of
equity and other
investments 4,165 -
Purchases of short-
term investments (18,637) (54,844)
Proceeds from sales and
maturities of short-
term investments 13,970 62,005
Decrease (increase) in
restricted cash
equivalents and
investments, net (5) (141)
Payment of acquisition
costs, net of cash
acquired - (2,888)

Net cash provided by
(used in) investing
activities 110,857 998
------- ---

Cash flows from
financing activities:
Proceeds from issuance
of common stock (stock
options and stock
purchase plan) 1,221 1,610
Tax payments from
shares withheld upon
vesting of restricted
stock (884) -
Excess tax benefit from
stock option exercises - 57

Net cash provided by
(used in) financing
activities 337 1,667
--- -----

Effect of exchange rate
changes on cash and
cash equivalents (546) 3,537
---- -----

Net increase (decrease)
in cash and cash
equivalents 93,207 712

Cash and cash
equivalents, beginning
of period 106,333 236,018
------- -------

Cash and cash
equivalents, end of
period $199,540 $236,730
======== ========





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

2012 2011
---- ----
Q2 Q1 Q4 Q3 Q2 Q1
--- --- --- --- --- ---
(in thousands)
Net Revenue by Line of Business:
Core Products (A) $38,250 $37,697 $46,693 $50,705 $45,735 $48,107
Emerging Products (B) 9,913 10,159 11,974 10,764 12,717 11,135
Games (C) 17,363 19,108 21,552 22,945 25,300 28,059
------ ------ ------ ------ ------ ------
Total net revenue $65,526 $66,964 $80,219 $84,414 $83,752 $87,301
======= ======= ======= ======= ======= =======

Core Products Revenue by Product:
SaaS (D) $23,286 $23,463 $28,255 $30,381 $30,216 $30,526
Systems Integration / 965 426 771 3,844 388 1,840
Professional Services (E)
Technology Licensing (F) 7,189 6,207 9,246 6,250 6,508 6,425
Consumer Subscriptions (G) 6,810 7,601 8,421 10,230 8,623 9,316
Total Core Products net revenue $38,250 $37,697 $46,693 $50,705 $45,735 $48,107
======= ======= ======= ======= ======= =======

Net Revenue by Geography:
United States $28,614 $31,814 $37,298 $38,969 $41,984 $44,469
Rest of world 36,912 35,150 42,921 45,445 41,768 42,832
------ ------ ------ ------ ------ ------

Total net revenue $65,526 $66,964 $80,219 $84,414 $83,752 $87,301
======= ======= ======= ======= ======= =======

Product Metrics (subscribers and ICM presented as greater
than):
Addressable subscribers of mobile operators under
contract (H) 725,000 725,000 725,000 700,000 775,000 775,000
SaaS subscribers (I) 30,600 30,500 30,050 34,000 34,550 35,900
Monthly SaaS ARPU (in cents) (J) $0.16 $0.15 $0.19 $0.17 $0.18 $0.18
ICM delivered in billions (K) 162 166 165 162 157 151
Consumer subscribers(L) 350 400 425 500 475 500


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, 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.

Core Products Revenue by Product:
(D) 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.

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

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

(G) Consumer Subscriptions includes revenue from SuperPass as well as our international radio subscription services.

Product Metrics:
(H) 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.

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

(J) 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.

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

(L) Consumer subscribers primarily includes our SuperPass and GamePass products.





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

2012 2011 2012 2011
---- ---- ---- ----
Q2 Q1 Q2 YTD YTD
--- --- --- --- ---
(in thousands)
-------------
Core Products
-------------

Net revenue $38,250 $37,697 $45,735 $75,947 $93,842
Cost of revenue 17,681 17,828 19,353 35,509 40,337
Gross profit 20,569 19,869 26,382 40,438 53,505

Gross margin 54% 53% 58% 53% 57%

Operating expenses 16,429 18,068 19,174 34,497 38,560
------ ------ ------ ------ ------
Operating income (loss) $4,140 $1,801 $7,208 $5,941 $14,945

Adjusted EBITDA $6,628 $4,400 $9,900 $11,028 $20,160

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

Net revenue $9,913 $10,159 $12,717 $20,072 $23,852
Cost of revenue 1,800 2,105 2,978 3,905 4,518
Gross profit 8,113 8,054 9,739 16,167 19,334

Gross margin 82% 79% 77% 81% 81%

Operating expenses 7,092 7,546 9,369 14,638 19,260
----- ----- ----- ------ ------
Operating income (loss) $1,021 $508 $370 $1,529 $74

Adjusted EBITDA $1,266 $754 $707 $2,020 $519

Games
-----

Net revenue $17,363 $19,108 $25,300 $36,471 $53,359
Cost of revenue 5,572 6,661 8,040 12,233 16,574
----- ----- ----- ------ ------
Gross profit 11,791 12,447 17,260 24,238 36,785

Gross margin 68% 65% 68% 66% 69%

Operating expenses 13,093 13,430 15,211 26,523 32,025
------ ------ ------ ------ ------
Operating income (loss) $(1,302) $(983) $2,049 $(2,285) $4,760

Adjusted EBITDA $(619) $(324) $2,748 $(943) $6,088

Corporate
---------

Net revenue $ - $ - $ - $ - $ -
Cost of revenue 909 833 295 1,742 1,303
--- --- --- ----- -----
Gross profit (909) (833) (295) (1,742) (1,303)

Gross margin N/A N/A N/A N/A N/A

Gain on sale of patents and other
technology assets, net of costs 117,933 (1,580) - 116,353 -
Operating expenses 16,715 17,455 14,116 34,170 28,926
------ ------ ------ ------ ------
Operating income (loss) $100,309 $(19,868) $(14,411) $80,441 $(30,229)

Adjusted EBITDA $(13,784) $(12,247) $(11,133) $(26,031) $(17,003)

Total
-----

Net revenue $65,526 $66,964 $83,752 $132,490 $171,053
Cost of revenue 25,962 27,427 30,666 53,389 62,732
Gross profit 39,564 39,537 53,086 79,101 108,321

Gross margin 60% 59% 63% 60% 63%

Gain on sale of patents and other
technology assets, net of costs 117,933 (1,580) - 116,353 -
Operating expenses 53,329 56,499 57,870 109,828 118,771
------ ------ ------ ------- -------
Operating income (loss) $104,168 $(18,542) $(4,784) $85,626 $(10,450)

Adjusted EBITDA $(6,509) $(7,417) $2,222 $(13,926) $9,764







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

2012 2011 2012 2011
---- ---- ---- ----
Q2 Q1 Q2 YTD YTD
--- --- --- --- ---
(in thousands)
-------------
Core Products
-------------

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

Operating income (loss) $4,140 $1,801 $7,208 $5,941 $14,945
Acquisitions related intangible asset amortization 786 802 710 1,588 1,184
Depreciation and amortization 1,702 1,797 1,982 3,499 4,031
Adjusted EBITDA $6,628 $4,400 $9,900 $11,028 $20,160

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

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

Operating income (loss) $1,021 $508 $370 $1,529 $74
Acquisitions related intangible asset amortization 79 79 53 158 53
Depreciation and amortization 166 167 284 333 392
Adjusted EBITDA $1,266 $754 $707 $2,020 $519

Games
-----

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

Operating income (loss) $(1,302) $(983) $2,049 $(2,285) $4,760
Acquisitions related intangible asset amortization 207 209 256 416 510
Depreciation and amortization 476 450 443 926 818
Adjusted EBITDA $(619) $(324) $2,748 $(943) $6,088

Corporate
---------

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

Operating income (loss) $100,309 $(19,868) $(14,411) $80,441 $(30,229)
Other income (expense), net (49) 1,475 (311) 1,426 (433)
Depreciation and amortization 628 614 569 1,242 1,128
Restructuring and other charges 1,539 1,609 508 3,148 7,412
Stock-based compensation 1,722 2,343 2,686 4,065 5,293
Gain on sale of patents and other technology assets, net of costs (117,933) 1,580 - (116,353) -
Loss (Gain) on excess office facilities - - (174) - (174)
--- --- ---- --- ----
Adjusted EBITDA $(13,784) $(12,247) $(11,133) $(26,031) $(17,003)

Total
-----

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

Operating income (loss) $104,168 $(18,542) $(4,784) $85,626 $(10,450)
Other income (expense), net (49) 1,475 (311) 1,426 (433)
Acquisitions related intangible asset amortization 1,072 1,090 1,019 2,162 1,747
Depreciation and amortization 2,972 3,028 3,278 6,000 6,369
Loss (Gain) on excess office facilities - - (174) - (174)
Restructuring and other charges 1,539 1,609 508 3,148 7,412
Stock-based compensation 1,722 2,343 2,686 4,065 5,293
Gain on sale of patents and other technology assets, net of costs (117,933) 1,580 - (116,353) -
-------- ----- --- -------- ---
Adjusted EBITDA $(6,509) $(7,417) $2,222 $(13,926) $9,764


SOURCE RealNetworks, Inc.

RealNetworks, Inc.

CONTACT: Barbara Krause, Krause Taylor Associates for RealNetworks, Inc., +1-408-981-2429, barbara@krause-taylor.com

Web Site: http://www.realnetworks.com


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