RealNetworks Announces Third Quarter 2014 Results

RealNetworks Announces Third Quarter 2014 Results

-- Continued strong growth in RealPlayer Cloud user base, with over 8 million accounts;

-- RealPlayer Cloud available on 12 platforms, including native Mac;

-- Successfully launched Slingo Adventure on Facebook, iOS and Android platforms; and

-- Cash and short-term investments of $178.0 million

SEATTLE, Nov. 3, 2014 /PRNewswire/ -- RealNetworks, Inc. (Nasdaq: RNWK), a leader in personal digital entertainment, today announced results for the third quarter ended September 30, 2014.

For the third quarter of 2014, revenue was $34.2 million, compared to $40.8 million in the previous quarter and $49.0 million in the third quarter of 2013.

"During the third quarter of 2014, we continued to make progress in our strategic transition to our new multi-device, multi-platform, cloud-based products and services, led by RealPlayer Cloud" said Rob Glaser, Chairman and CEO of RealNetworks. "Just over a year after its introduction, RealPlayer Cloud has over 8 million users worldwide, up from 5 million three months ago. RealPlayer Cloud makes it easy to watch, save and share video across every type of popular digital device."

"In addition, we're encouraged by our progress in our other businesses. In our Games division, we successfully launched our Slingo Adventure game on Facebook during the third quarter, and on the iOS and Android platforms more recently. We also saw continued revenue growth for Rhapsody, of which we own approximately 45%. At the same time, we continued to manage costs carefully, making cost reductions related to our legacy businesses of over $15 million annually."

GAAP net loss for the third quarter of 2014 was $(22.2) million or $(0.62) per diluted share, compared to $(31.4) million or $(0.88) per diluted share in the third quarter of 2013. Adjusted EBITDA for the third quarter of 2014 was a loss of $(14.4) million compared to $(8.4) million for the third quarter of 2013. A reconciliation of GAAP operating income (loss) to adjusted EBITDA is provided in the financial tables that accompany this release.

As of September 30, 2014, the company had $178.0 million in unrestricted cash, cash equivalents and short-term investments, compared to $226.2 million as of December 31, 2013.

Business Outlook

For the fourth quarter of 2014, RealNetworks expects total revenue in the range of $33.0 million to $36.0 million. We expect adjusted EBITDA for the quarter to be a loss in the range of $(16.0) million to $(18.0) million.

Webcast and Conference Call Information

The company will host a conference call today to review results and discuss the company's performance at 5 p.m. ET/2 p.m. PT by calling 888-790-3440 or +1-517-308-9350 (Passcode: Third Quarter Earnings). A live webcast of the call will be available at http://investor.realnetworks.com/ and an on-demand webcast will be available approximately one hour following the conclusion of the conference call. A telephonic replay will be available until 11:59 p.m. PT, November 25, 2014 by calling 866-443-2932 or +1-203-369-1106 (Passcode: 110314).

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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 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 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, our future growth, profitability, strategic focus and initiatives. All statements contained in this press release that do not relate to matters of historical fact should be considered forward-looking statements. These statements reflect RealNetworks' expectations as of today, and actual results may differ materially from the results predicted. Factors that could cause actual results to differ from the results predicted include: risks associated with the implementation of RealNetworks' growth plan, strategic initiatives, and restructuring efforts; its ability to successfully introduce and monetize new products and services; competitive risks, including the growth of competing technologies, products and services, and the emergence of new entrants and competition in the market; 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,
------------- -------------


2014 2013 2014 2013
---- ---- ---- ----

(in thousands, except per share data)


Net revenue $34,157 $48,958 $120,706 $155,601


Cost of revenue 18,928 18,990 58,500 59,015


Extinguishment of liability - - (10,580) -
--- --- ------- ---


Gross profit 15,229 29,968 72,786 96,586
------ ------ ------ ------


Operating expenses:

Research and development 12,784 15,707 40,110 45,951

Sales and marketing 13,283 19,427 51,022 59,830

General and administrative 7,723 9,869 25,617 28,506

Restructuring and other charges 2,048 1,877 3,805 4,075

Lease exit and related charges 154 - 703 3,066

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


Total operating expenses 35,992 58,405 121,257 152,953
------ ------ ------- -------


Operating income (loss) (20,763) (28,437) (48,471) (56,367)
------- ------- ------- -------


Other income (expenses):

Interest income, net 80 166 396 992

Gain (loss) on sale of available
for sale securities, net - - 2,371 -

Equity in net loss of Rhapsody
investment (1,530) (2,629) (4,170) (6,209)

Other income (expense), net 325 (118) 153 (146)
--- ---- --- ----


Total other income (expense), net (1,125) (2,581) (1,250) (5,363)
------ ------ ------ ------


Income (loss) before income taxes (21,888) (31,018) (49,721) (61,730)

Income tax expense (benefit) 290 357 1,256 (210)
--- --- ----- ----


Net income (loss) $(22,178) $(31,375) $(50,977) $(61,520)
======== ======== ======== ========


Basic net income (loss) per share $(0.62) $(0.88) $(1.42) $(1.73)

Diluted net income (loss) per
share $(0.62) $(0.88) $(1.42) $(1.73)


Shares used to compute basic net
income (loss) per share 36,003 35,670 35,912 35,490

Shares used to compute diluted net
income (loss) per share 36,003 35,670 35,912 35,490





RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)


September 30, December 31,
2014 2013
---- ----

(in thousands)

ASSETS

Current assets:

Cash and
cash
equivalents $114,073 $151,235

Short-
term
investments 63,948 74,920

Trade
accounts
receivable,
net 17,679 24,613

Deferred
costs,
current
portion 1,023 1,601

Deferred
tax
assets,
current 296 306

Prepaid
expenses
and other
current
assets 8,382 9,124
----- -----

Total
current
assets 205,401 261,799
------- -------


Equipment, software, and
leasehold improvements,
at cost:

Equipment
and
software 83,230 86,721

Leasehold
improvements 3,616 3,482
----- -----

Total
equipment,
software,
and
leasehold
improvements 86,846 90,203

Less
accumulated
depreciation
and
amortization 68,392 67,031
------ ------

Net
equipment,
software,
and
leasehold
improvements 18,454 23,172


Restricted
cash
equivalents
and
investments 3,000 3,000

Equity
method
investment 10,000 12,473

Available
for sale
securities 2,848 7,181

Other
assets 2,925 2,332

Deferred
costs,
non-
current
portion 913 946

Deferred
tax
assets,
net, non-
current
portion 1,424 1,409

Other
intangible
assets,
net 10,954 12,993

Goodwill 17,615 17,476
------ ------


Total
assets $273,534 $342,781
======== ========


LIABILITIES AND SHAREHOLDERS' EQUITY


Current liabilities:

Accounts
payable $18,155 $19,987

Accrued
and other
current
liabilities 25,885 41,893

Deferred
tax
liabilities,
net,
current
portion 768 899

Deferred
revenue,
current
portion 6,908 7,498
----- -----

Total
current
liabilities 51,716 70,277


Deferred
revenue,
non-
current
portion 143 166

Deferred
rent 1,293 1,318

Deferred
tax
liabilities,
net, non-
current
portion 1,805 1,556

Other
long-
term
liabilities 563 483
--- ---


Total
liabilities 55,520 73,800
------ ------



Shareholders'
equity 218,014 268,981
------- -------


Total
liabilities
and
shareholders'
equity $273,534 $342,781
======== ========





RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)


Nine Months Ended
September 30,
-------------

2014 2013
---- ----

(in thousands)


Cash flows from operating activities:

Net income (loss) $(50,977) $(61,520)

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

Depreciation and amortization 8,876 15,045

Stock-based compensation 4,158 5,671

Equity in net loss of Rhapsody 4,170 6,209

Deferred income taxes, net (64) (1,238)

Gain on sale of available for
sale securities (2,371) -

Realized translation gain (48) (35)

Extinguishment of liability (10,580) -

Other - 51

Net change in certain
operating assets and
liabilities 1,194 7,514
----- -----

Net cash provided by (used in)
operating activities (45,642) (28,303)
------- -------

Cash flows from investing activities:

Purchases of equipment,
software, and leasehold
improvements (2,054) (5,798)

Proceeds from sale of
available for sale securities 2,754 -

Purchases of short-term
investments (63,574) (85,670)

Proceeds from sales and
maturities of short-term
investments 74,546 110,359

Decrease in restricted cash
equivalents and investments - 5,000

Acquisitions of businesses,
net of cash acquired (733) (22,480)

Other (467) -
---- ---

Net cash provided by (used in)
investing activities 10,472 1,411
------ -----

Cash flows from financing activities:

Proceeds from issuance of
common stock (stock options
and stock purchase plan) 641 408

Tax payments from shares
withheld upon vesting of
restricted stock (403) (911)

Payment of contingent
consideration (696) (828)

Net cash provided by (used in)
financing activities (458) (1,331)
---- ------

Effect of exchange rate
changes on cash and cash
equivalents (1,534) (96)
------ ---

Net increase (decrease) in
cash and cash equivalents (37,162) (28,319)

Cash and cash equivalents,
beginning of period 151,235 163,198
------- -------

Cash and cash equivalents, end
of period $114,073 $134,879
======== ========








RealNetworks, Inc. and Subsidiaries

Supplemental Financial Information

(Unaudited)


2014 2013
---- ----

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

(in thousands)

Net Revenue by Line of Business

RealPlayer Group (A) $6,565 $8,556 $15,215 $16,799 $17,641 $18,383 $22,383

Mobile Entertainment (B) 19,190 23,182 19,913 22,146 19,948 18,592 20,495

Games (C) 8,402 9,087 10,596 11,650 11,369 12,875 13,915

Total net revenue $34,157 $40,825 $45,724 $50,595 $48,958 $49,850 $56,793
======= ======= ======= ======= ======= ======= =======


Net Revenue by Product

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

- License (D) $3,255 $3,273 $5,018 $7,128 $7,281 $6,766 $8,332

- Subscriptions (E) 2,680 2,569 2,777 3,118 3,615 4,193 4,924

- Media Properties (F) 630 2,714 7,420 6,553 6,745 7,424 9,127


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

- SaaS (G) 17,919 20,175 18,463 20,406 18,156 17,002 18,674

- Technology License & Other (H) 1,271 3,007 1,450 1,740 1,792 1,590 1,821


Games
-----

- License (I) 2,988 3,399 3,849 3,511 3,421 4,089 5,249

- Subscriptions (J) 4,320 4,440 5,241 5,688 5,733 5,980 6,312

- Media Properties (K) 1,094 1,248 1,506 2,451 2,215 2,806 2,354


Total net revenue $34,157 $40,825 $45,724 $50,595 $48,958 $49,850 $56,793
======= ======= ======= ======= ======= ======= =======


Net Revenue by Geography

United States $12,280 $15,092 $20,428 $19,724 $21,039 $21,463 $28,024

Rest of world 21,877 25,733 25,296 30,871 27,919 28,387 28,769
------

Total net revenue $34,157 $40,825 $45,724 $50,595 $48,958 $49,850 $56,793
======= ======= ======= ======= ======= ======= =======


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 and our recently launched RealPlayer Cloud service.

(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 and our recently
launched RealPlayer Cloud service.

(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, ringback tones, intercarrier messaging services
provided to network services providers who are largely mobile phone
networks, and our recently launched LISTEN product.

(H) Licensing and other revenue within Mobile Entertainment includes
revenue from Helix-related products and professional services
provided to mobile carriers.

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

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

(K) 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)


2014 2013 2014 2013
---- ---- ---- ----

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

(in thousands)

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


Net revenue $6,565 $8,556 $17,641 $30,336 $58,407

Cost of revenue 3,566 3,620 3,264 10,704 12,984

Gross profit 2,999 4,936 14,377 19,632 45,423


Gross margin 46% 58% 81% 65% 78%


Operating expenses 12,392 12,489 14,449 42,668 44,656

Operating income (loss) $(9,393) $(7,553) $(72) $(23,036) $767


Adjusted EBITDA $(8,770) $(6,893) $624 $(21,154) $2,425


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


Net revenue $19,190 $23,182 $19,948 $62,285 $59,035

Cost of revenue 12,626 14,298 11,972 38,874 33,974

Gross profit 6,564 8,884 7,976 23,411 25,061


Gross margin 34% 38% 40% 38% 42%


Operating expenses 7,086 9,424 9,453 26,126 26,976

Operating income (loss) $(522) $(540) $(1,477) $(2,715) $(1,915)


Adjusted EBITDA $447 $808 $503 $916 $4,579


Games
-----


Net revenue $8,402 $9,087 $11,369 $28,085 $38,159

Cost of revenue 2,573 2,717 3,216 8,419 10,397

Gross profit 5,829 6,370 8,153 19,666 27,762


Gross margin 69% 70% 72% 70% 73%


Operating expenses 8,658 8,769 11,513 27,193 35,120

Operating income (loss) $(2,829) $(2,399) $(3,360) $(7,527) $(7,358)


Adjusted EBITDA $(2,246) $(1,798) $(2,704) $(5,718) $(5,173)


Corporate
---------


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

Cost of revenue 163 151 538 503 1,660

Extinguishment of liability - - - (10,580) -
--- ---

Gross profit (163) (151) (538) 10,077 (1,660)


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


Operating expenses 7,856 8,189 22,990 25,270 46,201

Operating income (loss) $(8,019) $(8,340) $(23,528) $(15,193) $(47,861)


Adjusted EBITDA $(3,788) $(5,198) $(6,792) $(15,400) $(18,962)


Total
-----


Net revenue $34,157 $40,825 $48,958 $120,706 $155,601

Cost of revenue 18,928 20,786 18,990 58,500 59,015

Extinguishment of liability - - - (10,580) -

Gross profit 15,229 20,039 29,968 72,786 96,586


Gross margin 45% 49% 61% 60% 62%


Operating expenses 35,992 38,871 58,405 121,257 152,953

Operating income (loss) $(20,763) $(18,832) $(28,437) $(48,471) $(56,367)


Adjusted EBITDA $(14,357) $(13,081) $(8,369) $(41,356) $(17,131)





RealNetworks, Inc. and Subsidiaries

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

(Unaudited)


2014 2013 2014 2013
---- ---- ---- ----

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

(in thousands)

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


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


Operating income (loss) $(9,393) $(7,553) $(72) $(23,036) $767

Acquisitions related intangible
asset amortization 103 125 60 288 189

Depreciation and amortization 520 535 636 1,594 1,469

Adjusted EBITDA $(8,770) $(6,893) $624 $(21,154) $2,425


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


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


Operating income (loss) $(522) $(540) $(1,477) $(2,715) $(1,915)

Acquisitions related intangible
asset amortization 287 628 1,055 1,522 2,506

Depreciation and amortization 682 720 925 2,109 3,988

Adjusted EBITDA $447 $808 $503 $916 $4,579


Games
-----


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


Operating income (loss) $(2,829) $(2,399) $(3,360) $(7,527) $(7,358)

Acquisitions related intangible
asset amortization 314 314 314 942 565

Depreciation and amortization 269 287 342 867 1,620

Adjusted EBITDA $(2,246) $(1,798) $(2,704) $(5,718) $(5,173)


Corporate
---------


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


Operating income (loss) $(8,019) $(8,340) $(23,528) $(15,193) $(47,861)

Other income (expense), net 325 (95) (118) 153 (146)

Depreciation and amortization 556 553 1,839 1,554 4,708

Lease exit and related charges 154 470 - 703 3,066

Loss (gain) on litigation
settlements - - 11,525 - 11,525

Restructuring and other charges 2,048 541 1,877 3,805 4,075

Stock-based compensation 1,148 1,673 1,613 4,158 5,671

Extinguishment of liability - - - (10,580) -

Adjusted EBITDA $(3,788) $(5,198) $(6,792) $(15,400) $(18,962)


Total
-----


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


Operating income (loss) $(20,763) $(18,832) $(28,437) $(48,471) $(56,367)

Other income (expense), net 325 (95) (118) 153 (146)

Acquisitions related intangible
asset amortization 704 1,067 1,429 2,752 3,260

Depreciation and amortization 2,027 2,095 3,742 6,124 11,785

Lease exit and related charges 154 470 - 703 3,066

Loss (gain) on litigation
settlements - - 11,525 - 11,525

Restructuring and other charges 2,048 541 1,877 3,805 4,075

Stock-based compensation 1,148 1,673 1,613 4,158 5,671

Extinguishment of liability - - - (10,580) -

Adjusted EBITDA $(14,357) $(13,081) $(8,369) $(41,356) $(17,131)


SOURCE RealNetworks, Inc.

RealNetworks, Inc.

CONTACT: Michael Newman, StreetConnect, Investor Relations for RealNetworks, +1-206-729-3625, IR@realnetworks.com

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


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