RealNetworks Announces Third Quarter 2013 Results

RealNetworks Announces Third Quarter 2013 Results

SEATTLE, Oct. 30, 2013 /PRNewswire/ -- RealNetworks, Inc. (Nasdaq: RNWK) today announced results for the third quarter ended September 30, 2013.

Financial Summary


-- Revenue of $49.0 million
-- Net loss of $(31.4) million or $(0.88) per share
-- Adjusted EBITDA loss of $(8.4) million
-- Cash and short-term investments of $218.4 million as of September 30,
2013
Recent Highlights


-- On September 24, launched RealPlayer Cloud, the first integrated video
player and cloud service
-- Acquired Muzicall Limited, a leading service provider for mobile
carriers and media companies in Europe, for $6.7 million
-- Settled our two most significant outstanding litigation matters for an
aggregate of $11.5 million


"We are pleased with our continued progress towards revitalizing RealNetworks," said Rob Glaser, Chairman and interim CEO of RealNetworks. "Last month we launched RealPlayer Cloud, our breakthrough product that makes it easy to move, watch, save and share video across every popular digital device. The initial market response to RealPlayer Cloud has been excellent and we think lays the foundation for a great future."



Third Quarter Results

For the third quarter of 2013, revenue was $49.0 million, a sequential decrease of (2)% from the second quarter of 2013, and a decrease of (17)% compared with the third quarter of 2012. Revenue trends in each of RealNetworks' businesses in the third quarter of 2013 compared with the year-earlier quarter were: a (18)% decrease in RealPlayer Group revenue to $17.6 million, a (13)% decrease in Mobile Entertainment revenue to $19.9 million and a (24)% decrease in Games revenue to $11.4 million.

Net loss for the third quarter of 2013 was $(31.4) million, or $(0.88) per share, compared with net loss of $(22.2) million, or $(0.63) per share, in the third quarter of 2012.

Adjusted EBITDA loss for the third quarter of 2013 was $(8.4) million, compared with an adjusted EBITDA loss of $(6.0) million for the third quarter of 2012. A reconciliation of GAAP operating income (loss) to adjusted EBITDA is provided in the financial tables that accompany this release.

As of September 30, 2013, RealNetworks had $218.4 million in unrestricted cash, cash equivalents and short-term investments compared with $271.4 million as of December 31, 2012, of which approximately $37.5 million was held in foreign jurisdictions. In addition, RealNetworks had $39.5 million in restricted cash and available-for-sale securities as of September 30, 2013, compared with $44.3 million as of December 31, 2012.

Segment Operating Results



2013 2013 2012
---- ---- ----

Q3 Q2 Q3
--- --- ---

(in thousands)

Revenue

RealPlayer
Group $17,641 $18,383 $21,392

Mobile
Entertainment 19,948 18,592 22,820

Games 11,369 12,875 14,876

Corporate - - -
---

Total $48,958 $49,850 $59,088
----- ------- ------- -------


Operating Income (loss)

RealPlayer
Group $(72) $(27) $1,575

Mobile
Entertainment (1,477) (990) (1,856)

Games (3,360) (2,261) (2,136)

Corporate (23,528) (13,226) (20,758)
--------

Total $(28,437) $(16,504) $(23,175)
----- -------- -------- --------


Adjusted EBITDA

RealPlayer
Group $624 $470 $2,275

Mobile
Entertainment 503 694 341

Games (2,704) (1,315) (1,321)

Corporate (6,792) (5,602) (7,337)
-------

Total $(8,369) $(5,753) $(6,042)
----- ------- ------- -------
Business Outlook

For the fourth quarter of 2013, RealNetworks expects total revenue of $47.0 million to $50.0 million, with all segments declining year over year, and with Mobile Entertainment increasing, Games flat and RealPlayer Group declining sequentially. We expect adjusted EBITDA for the quarter to be a loss of $(8.0) million to $(11.0) million.

The foregoing forward-looking statements reflect RealNetworks' expectations as of October 30, 2013. 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 third quarter at5:00 p.m. ET on October 30. The Webcast will be available at: http://investor.realnetworks.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: Third Quarter Earnings

Leader: Rob Glaser

Telephonic replay will be available until 8 p.m. ET, November 20, 2013.
Replay dial in:

800-568-9796 Domestic

203-369-3292 International

Passcode: 103013

RNWK-F

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.

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.

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 adjusted EBITDA 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 operating income (loss) to adjusted EBITDA and to adjusted EBITDA by reportable segment.

The rationale for management's use of non-GAAP measures is included in the supplementary materials presented with the third 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 regarding future revenue and adjusted EBITDA, future market performance, and its plans to attain growth and profitability and undertake certain strategic initiatives. 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 growth plan, strategic initiatives, and restructuring efforts; 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; fluctuations in foreign currencies; 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 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, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)




Quarters Ended Nine Months Ended

September 30, September 30,
------------- -------------


2013 2012 2013 2012
---- ---- ---- ----

(in thousands, except per share data)


Net revenue $48,958 $59,088 $155,601 $191,578


Cost of revenue 18,990 25,244 59,015 78,633
------ ------ ------ ------


Gross profit 29,968 33,844 96,586 112,945
------ ------ ------ -------


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


Operating expenses:

Research and development 15,707 15,321 45,951 49,167

Sales and marketing 19,427 21,972 59,830 68,462

General and administrative 9,869 8,759 28,506 35,103

Restructuring and other
charges 1,877 10,724 4,075 13,872

Lease exit and related
charges - 243 3,066 243

Loss on litigation
settlements 11,525 - 11,525 -
------ --- ------ ---


Total operating expenses 58,405 57,019 152,953 166,847
------ ------ ------- -------


Operating income (loss) (28,437) (23,175) (56,367) 62,451
------- ------- ------- ------


Other income (expenses):

Interest income, net 166 164 992 1,033

Gain (loss) on sale of
equity and other
investments, net - 2,210 - 5,288

Equity in net loss of
Rhapsody investment (2,629) (1,613) (6,209) (4,095)

Other income (expense), net (118) 248 (146) 1,674
---- --- ---- -----


Total other income
(expense), net (2,581) 1,009 (5,363) 3,900
------ ----- ------ -----


Income (loss) before income
taxes (31,018) (22,166) (61,730) 66,351

Income tax expense (benefit) 357 48 (210) 24,583
--- --- ---- ------


Net income (loss) $(31,375) $(22,214) $(61,520) $41,768
======== ======== ======== =======


Basic net income (loss) per
share $(0.88) $(0.63) $(1.73) $1.20

Diluted net income (loss)
per share $(0.88) $(0.63) $(1.73) $1.19


Shares used to compute basic
net income (loss) per share 35,670 34,998 35,490 34,747

Shares used to compute
diluted net income (loss)
per share 35,670 34,998 35,490 35,000



(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)


September 30, December 31,

2013 2012
---- ----

(in thousands)

ASSETS

Current assets:

Cash and cash
equivalents $134,879 $163,198

Short-term
investments 83,527 108,216

Trade accounts
receivable, net 26,494 30,754

Deferred costs,
current portion 1,622 825

Deferred tax
assets -current 3,942 2,869

Prepaid expenses
and other
current assets 12,152 17,002
------ ------

Total current
assets 262,616 322,864
------- -------


Equipment, software, and
leasehold improvements, at cost:

Equipment and
software 94,054 98,041

Leasehold
improvements 3,516 22,767
----- ------

Total equipment,
software, and
leasehold
improvements 97,570 120,808

Less accumulated
depreciation and
amortization 73,105 91,492
------ ------

Net equipment,
software, and
leasehold
improvements 24,465 29,316


Restricted cash
equivalents and
investments 5,000 10,000

Equity method
investment 12,656 19,204

Available for
sale securities 34,485 34,334

Other assets 2,844 3,153

Deferred costs,
non-current
portion 1,032 531

Deferred tax
assets, net,
non-current
portion 1,576 4,911

Other intangible
assets, net 14,051 3,275

Goodwill 17,518 6,309
------ -----


Total assets $376,243 $433,897
======== ========


LIABILITIES AND SHAREHOLDERS' EQUITY


Current liabilities:

Accounts payable $20,562 $19,013

Accrued and other
current
liabilities 58,024 57,530

Deferred revenue,
current portion 7,604 8,675
----- -----

Total current
liabilities 86,190 85,218


Deferred revenue,
non-current
portion 167 169

Deferred rent 613 2,250

Deferred tax
liabilities,
net, non-
current portion 3,166 432

Other long-term
liabilities 492 3,100
--- -----


Total liabilities 90,628 91,169
------ ------



Shareholders'
equity 285,615 342,728
------- -------


Total liabilities
and
shareholders'
equity $376,243 $433,897
======== ========








RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)


Nine Months Ended

September 30,
-------------

2013 2012
---- ----

(in thousands)


Cash flows from operating
activities:

Net income
(loss) $(61,520) $41,768

Adjustments to reconcile net income (loss) to net cash used in operating activities:

Depreciation
and
amortization 15,045 12,478

Stock-
based
compensation 5,671 6,419

Loss on
asset
disposal - 1,965

Equity in
net loss
of
Rhapsody 6,209 4,095

Deferred
income
taxes,
net (1,238) 22,399

Gain on
sale of
patent
and other
technology
assets,
net of
costs - (116,353)

Gain on
sale of
equity
and other
investments,
net - (5,288)

Realized
translation
gain (35) (1,968)

Other 51 -

Net change
in
certain
operating
assets
and
liabilities 7,514 3,735
----- -----

Net cash
provided
by (used
in)
operating
activities (28,303) (30,750)
------- -------


Cash flows from investing
activities:

Purchases
of
equipment,
software,
and
leasehold
improvements (5,798) (6,478)

Proceeds
from sale
of
patents
and other
technology
assets,
net of
costs - 116,353

Proceeds
from sale
of equity
and other
investments - 7,244

Purchases
of short-
term
investments (85,670) (76,191)

Proceeds
from
sales and
maturities
of short-
term
investments 110,359 51,885

Decrease
(increase)
in
restricted
cash
equivalents
and
investments,
net 5,000 103

Acquisitions
of
businesses,
net of
cash
acquired (22,480) -

Net cash
provided
by (used
in)
investing
activities 1,411 92,916
----- ------

Cash flows from financing
activities:

Proceeds
from
issuance
of common
stock
(stock
options
and stock
purchase
plan) 408 3,240

Tax
payments
from
shares
withheld
upon
vesting
of
restricted
stock (911) (964)

Payment of
contingent
consideration (828) -

Net cash
provided
by (used
in)
financing
activities (1,331) 2,276
------ -----

Effect of
exchange
rate
changes
on cash
and cash
equivalents (96) (73)
--- ---

Net
increase
(decrease)
in cash
and cash
equivalents (28,319) 64,369

Cash and
cash
equivalents,
beginning
of period 163,198 106,333
------- -------

Cash and
cash
equivalents,
end of
period $134,879 $170,702
======== ========











RealNetworks, Inc. and Subsidiaries

Supplemental Financial Information

(Unaudited)


2013 2012
---- ----

Q3 Q2 Q1 Q4 Q3 Q2 Q1
--- --- --- --- --- --- ---

(in thousands)

Net Revenue by Line of
Business

RealPlayer Group (A) $17,641 $18,383 $22,383 $25,838 $21,392 $22,158 $22,081

Mobile Entertainment (B) 19,948 18,592 20,495 25,718 22,820 26,005 25,775

Games (C) 11,369 12,875 13,915 15,708 14,876 17,363 19,108

Total net revenue $48,958 $49,850 $56,793 $67,264 $59,088 $65,526 $66,964
======= ======= ======= ======= ======= ======= =======


Net Revenue by Product

RealPlayer Group
----------------

- License (D) $7,281 $6,766 $8,332 $10,956 $6,757 $8,334 $7,733

- Subscriptions (E) 3,616 4,193 4,924 6,192 7,056 6,810 7,601

- Media Properties (F) 6,745 7,424 9,127 8,690 7,579 7,014 6,747


Mobile Entertainment
--------------------

- SaaS (G) 18,155 17,002 18,674 22,793 20,696 23,286 23,464

-Systems Integration /
Professional Services (H) 322 300 291 1,295 247 965 426

-Technology License &
Other (I) 1,470 1,290 1,530 1,630 1,877 1,754 1,885


Games
-----

- License (J) 3,421 4,089 5,249 5,222 5,136 6,053 7,587

- Subscriptions (K) 5,733 5,980 6,312 6,876 6,952 7,536 8,170

- Media Properties (L) 2,215 2,806 2,354 3,610 2,788 3,774 3,351


Total net revenue $48,958 $49,850 $56,793 $67,264 $59,088 $65,526 $66,964
======= ======= ======= ======= ======= ======= =======


Net Revenue by Geography

United States $21,039 $21,463 $28,024 $28,315 $29,101 $28,614 $31,814

Rest of world 27,919 28,387 28,769 38,949 29,987 36,912 35,150

Total net revenue $48,958 $49,850 $56,793 $67,264 $59,088 $65,526 $66,964
======= ======= ======= ======= ======= ======= =======



Net Revenue by Line of Business

(A) The RealPlayer Group primarily
includes revenue from RealPlayer and
related products, such as the
distribution of third-party software
products, advertising on RealPlayer
websites, and sales of RealPlayer Plus
software licenses to consumers, sales of
intellectual property licenses, and
consumer subscriptions such as SuperPass.

(B) The Mobile Entertainment division
primarily includes revenue from SaaS
services, system integration, and
professional services to mobile carriers,
and sales of technology licenses of our
software products such as Helix.

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

Net Revenue by Product

(D) Licensing revenue within the
RealPlayer Group includes sales of
RealPlayer Plus software licenses to
consumers and sales of intellectual
property licenses.

(E) Subscriptions revenue within the
RealPlayer Group includes revenue from
subscriptions such as SuperPass.

(F) Media Properties revenue within the
RealPlayer Group includes distribution of
third-party software products and
advertising on RealPlayer websites.

(G) SaaS revenue within Mobile
Entertainment includes revenue from music
on demand, video on demand, ringtones,
ringback tones, and intercarrier
messaging services provided to network
services providers who are largely mobile
phone networks.

(H) Systems Integration /Professional
Services revenue within Mobile
Entertainment includes professional
services, other than those associated
with software sales, provided to mobile
carriers.

(I) Licensing revenue within Mobile
Entertainment includes revenue from
Helix-related products.

(J) Licensing revenue within Games
includes retail games-related revenue,
microtransactions from online and social
games and sales of mobile games.

(K) Subscriptions revenue within Games
includes revenue from online games
subscriptions.

(L) Media Properties revenue within Games
includes distribution of third-party
software products and advertising on
games sites and social network sites.










RealNetworks, Inc. and Subsidiaries

Segment Results of Operations

(Unaudited)


2013 2012 2013 2012
---- ---- ---- ----

Q3 Q2 Q3 YTD YTD
--- --- --- --- ---

(in thousands)

RealPlayer Group
----------------


Net revenue $17,641 $18,383 $21,392 $58,407 $65,631

Cost of revenue 3,264 4,409 6,735 12,984 16,026

Gross profit 14,377 13,974 14,657 45,423 49,605


Gross margin 81% 76% 69% 78% 76%


Operating expenses 14,449 14,001 13,082 44,656 41,849

Operating income (loss) $(72) $(27) $1,575 $767 $7,756


Adjusted EBITDA $624 $470 $2,275 $2,425 $9,347


Mobile Entertainment
--------------------


Net revenue $19,948 $18,592 $22,820 $59,035 $74,600

Cost of revenue 11,972 11,170 12,740 33,974 43,093

Gross profit 7,976 7,422 10,080 25,061 31,507


Gross margin 40% 40% 44% 42% 42%


Operating expenses 9,453 8,412 11,936 26,976 40,591

Operating income (loss) $(1,477) $(990) $(1,856) $(1,915) $(9,084)


Adjusted EBITDA $503 $694 $341 $4,579 $(2,145)


Games
-----


Net revenue $11,369 $12,875 $14,876 $38,159 $51,347

Cost of revenue 3,216 3,381 4,989 10,397 17,332

Gross profit 8,153 9,494 9,887 27,762 34,015


Gross margin 72% 74% 66% 73% 66%


Operating expenses 11,513 11,755 12,023 35,120 39,962

Operating income (loss) $(3,360) $(2,261) $(2,136) $(7,358) $(5,947)


Adjusted EBITDA $(2,704) $(1,315) $(1,321) $(5,173) $(3,790)


Corporate
---------


Net revenue $ - $ - $ - $ - $ -

Cost of revenue 538 559 780 1,660 2,182

Gross profit (538) (559) (780) (1,660) (2,182)


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


Gain on sale of patents and
other technology assets, net
of costs - - - - 116,353

Operating expenses 22,990 12,667 19,978 46,201 44,445

Operating income (loss) $(23,528) $(13,226) $(20,758) $(47,861) $69,726


Adjusted EBITDA $(6,792) $(5,602) $(7,337) $(18,962) $(23,380)


Total
-----


Net revenue $48,958 $49,850 $59,088 $155,601 $191,578

Cost of revenue 18,990 19,519 25,244 59,015 78,633

Gross profit 29,968 30,331 33,844 96,586 112,945


Gross margin 61% 61% 57% 62% 59%


Gain on sale of patents and
other technology assets, net
of costs - - - - 116,353

Operating expenses 58,405 46,835 57,019 152,953 166,847

Operating income (loss) $(28,437) $(16,504) $(23,175) $(56,367) $62,451


Adjusted EBITDA $(8,369) $(5,753) $(6,042) $(17,131) $(19,968)








RealNetworks, Inc. and Subsidiaries

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

(Unaudited)


2013 2012 2013 2012
---- ---- ---- ----

Q3 Q2 Q3 YTD YTD
--- --- --- --- ---

(in thousands)

RealPlayer Group
----------------


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


Operating income (loss) $(72) $(27) $1,575 $767 $7,756

Acquisitions related
intangible asset
amortization 60 62 62 189 220

Depreciation and amortization 636 435 638 1,469 1,371

Adjusted EBITDA $624 $470 $2,275 $2,425 $9,347


Mobile Entertainment
--------------------


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


Operating income (loss) $(1,477) $(990) $(1,856) $(1,915) $(9,084)

Acquisitions related
intangible asset
amortization 1,055 638 796 2,506 2,384

Depreciation and amortization 925 1,046 1,401 3,988 4,555

Adjusted EBITDA $503 $694 $341 $4,579 $(2,145)


Games
-----


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


Operating income (loss) $(3,360) $(2,261) $(2,136) $(7,358) $(5,947)

Acquisitions related
intangible asset
amortization 314 230 171 565 587

Depreciation and amortization 342 716 644 1,620 1,570

Adjusted EBITDA $(2,704) $(1,315) $(1,321) $(5,173) $(3,790)


Corporate
---------


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


Operating income (loss) $(23,528) $(13,226) $(20,758) $(47,861) $69,726

Other income (expense), net (118) (137) 248 (146) 1,674

Depreciation and amortization 1,839 1,859 604 4,708 1,791

Restructuring and other
charges 1,877 816 10,724 4,075 13,872

Stock-based compensation 1,613 2,020 1,602 5,671 5,667

Gain on sale of patents and
other technology assets, net
of costs - - - - (116,353)

Lease exit and related
charges - 3,066 243 3,066 243

Loss on litigation
settlements 11,525 - - 11,525 -

Adjusted EBITDA $(6,792) $(5,602) $(7,337) $(18,962) $(23,380)


Total
-----


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


Operating income (loss) $(28,437) $(16,504) $(23,175) $(56,367) $62,451

Other income (expense), net (118) (137) 248 (146) 1,674

Acquisitions related
intangible asset
amortization 1,429 930 1,029 3,260 3,191

Depreciation and amortization 3,742 4,056 3,287 11,785 9,287

Lease exit and related
charges - 3,066 243 3,066 243

Loss on litigation
settlements 11,525 - - 11,525 -

Restructuring and other
charges 1,877 816 10,724 4,075 13,872

Stock-based compensation 1,613 2,020 1,602 5,671 5,667

Gain on sale of patents and
other technology assets, net
of costs - - - - (116,353)

Adjusted EBITDA $(8,369) $(5,753) $(6,042) $(17,131) $(19,968)






SOURCE RealNetworks, Inc.

RealNetworks, Inc.

CONTACT: Investor Relations: ir@realnetworks.com

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


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