RealNetworks Announces Second Quarter 2016 Results

RealNetworks Announces Second Quarter 2016 Results

- Revenue of $29.7 million as GAAP net loss and adjusted EBITDA improve by over 60%;

- Stabilizing revenue, significantly reducing losses and making strides toward returning to revenue growth and profitability in 2016;

- Expanding in Latin America with two new deals with Telefonica Vivo, Brazil's largest mobile carrier;

- Launched two new first party titles in Games and both off to successful starts;

- Rebranded Rhapsody as Napster in North America; and

- Cash and short-term investments of $78.8 million

SEATTLE, Aug. 3, 2016 /PRNewswire/ -- RealNetworks, Inc. (Nasdaq: RNWK), a leader in personal digital entertainment, today announced results for the second quarter ended June 30, 2016.

For the second quarter of 2016, revenue was $29.7 million, compared to $28.2 million in the previous quarter and $31.8 million in the second quarter of 2015, excluding revenue from the Slingo and social casino games business, which was sold during the third quarter of 2015.

GAAP net loss for the second quarter of 2016 was $(8.3) million or $(0.23) per share, improved by 70% compared to $(27.8) million or $(0.77) per share in the second quarter of 2015. Adjusted EBITDA for the second quarter of 2016 was a loss of $(4.8) million, which improved by 61% compared to $(12.5) million for the second quarter of 2015, excluding the results of the Slingo and social casino games business, which was sold in August 2015. A reconciliation of GAAP net income (loss) to adjusted EBITDA is provided in the financial tables that accompany this release.

"In the second quarter of 2016, we continued to make progress in stabilizing revenue, reducing costs and positioning the company for growth and a return to profitability by the end of 2016," said Rob Glaser, Chairman and CEO of RealNetworks. "We are also excited that Telefonica Vivo, Brazil's largest carrier, has chosen to launch products based on both our Ringback Tone and RealTimes platforms. These two new design wins complement other recent progress we've made in our Mobile Services business with carriers such as Vodafone, KDDI, and Verizon."

The Company's GameHouse unit launched two new, first-party titles in the second quarter: Heart's Medicine - Time to Heal, and Fabulous - Angela's Fashion Fever. Both titles are off to strong starts, demonstrating that Real has been able to maintain high games quality while ramping up title production.

In addition to its progress with new product roll-outs, Real also made significant strides in lowering its operating costs. The Company's operating expenses in the second quarter of 2016 were down 25% from the same period in 2015, excluding stock compensation, restructuring charges, and expenses from the Slingo and social casino games business.

As of June 30, 2016, the Company had $78.8 million in unrestricted cash, cash equivalents and short-term investments, compared to $86.8 million as of March 31, 2016.

Business Outlook

For the third quarter of 2016, RealNetworks expects total revenue in the range of $28 million to $30 million and an adjusted EBITDA loss for the third quarter in the range of $(5.0) million to $(7.0) 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. You may join the conference call by calling 888-790-3440 or +1-517-308-9350 (Passcode: Second 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, August 24, 2016 by calling 866-441-1045 or +1-203-369-1053 (Passcode: 832016).

For More Information

Investor Relations for RealNetworks
+1-206-729-3625
IR@realnetworks.com

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 www.realnetworks.com/about-us.

RealNetworks and RealTimes 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 contribution margin 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 net income (loss) to adjusted EBITDA and operating income (loss) by reportable segment to contribution margin by reportable segment.

The rationale for management's use of non-GAAP measures is included in the supplementary materials presented with the quarterly 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, and market position, our strategic focus and initiatives, agreements with partners, and the growth and future prospects relating to our Rhapsody affiliate. 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: 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 Six Months Ended

June 30, June 30,
-------- --------


2016 2015 2016 2015
---- ---- ---- ----

(in thousands, except per share data)


Net revenue $29,734 $33,954 $57,964 $64,551

Cost of revenue 15,698 19,832 30,870 36,379

Gross profit 14,036 14,122 27,094 28,172
------ ------ ------ ------


Operating expenses:

Research and development 7,167 11,801 16,486 24,180

Sales and marketing 7,749 14,047 16,974 26,884

General and administrative 6,217 7,008 14,294 14,291

Restructuring and other
charges 413 1,964 798 2,449

Lease exit and related
charges 127 9 958 87
--- --- --- ---


Total operating expenses 21,673 34,829 49,510 67,891
------ ------ ------ ------


Operating income (loss) (7,637) (20,707) (22,416) (39,719)
------ ------- ------- -------


Other income (expenses):

Interest income, net 80 250 197 450

Gain (loss) on investments,
net (46) 94 (43) 393

Equity in net loss of
Rhapsody (396) (6,916) (396) (13,096)

Other income (expense), net 15 (112) (272) 331
--- ---- ---- ---


Total other income
(expense), net (347) (6,684) (514) (11,922)
---- ------ ---- -------


Income (loss) before income
taxes (7,984) (27,391) (22,930) (51,641)

Income tax expense (benefit) 363 390 588 609
--- --- --- ---


Net income (loss) $(8,347) $(27,781) $(23,518) $(52,250)
======= ======== ======== ========


Basic net income (loss) per
share $(0.23) $(0.77) $(0.64) $(1.45)

Diluted net income (loss)
per share $(0.23) $(0.77) $(0.64) $(1.45)


Shares used to compute basic
net income (loss) per share 36,755 36,106 36,637 36,105

Shares used to compute
diluted net income (loss)
per share 36,755 36,106 36,637 36,105



RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)


June 30, December 31,

2016 2015
---- ----

(in thousands)

ASSETS

Current assets:

Cash and cash
equivalents $36,133 $47,315

Short-term
investments 42,656 51,814

Trade accounts
receivable,
net 24,617 22,511

Deferred
costs,
current
portion 889 460

Prepaid
expenses and
other current
assets 4,716 7,140
----- -----

Total current
assets 109,011 129,240
------- -------


Equipment and
software 60,383 66,702

Leasehold
improvements 3,607 3,122
----- -----

Total
equipment,
software, and
leasehold
improvements 63,990 69,824

Less
accumulated
depreciation
and
amortization 56,887 61,024
------ ------

Net equipment,
software, and
leasehold
improvements 7,103 8,800


Restricted
cash
equivalents
and
investments 3,000 2,890

Available for
sale
securities 1,920 1,721

Other assets 2,243 2,307

Deferred
costs, non-
current
portion 1,136 212

Deferred tax
assets, net 1,006 957

Other
intangible
assets, net 1,545 2,136

Goodwill 12,973 13,080
------ ------


Total assets $139,937 $161,343
======== ========


LIABILITIES AND SHAREHOLDERS' EQUITY


Current liabilities:

Accounts
payable $17,442 $17,050

Accrued and
other current
liabilities 15,566 17,320

Deferred
revenue,
current
portion 3,278 3,497
----- -----

Total current
liabilities 36,286 37,867


Deferred
revenue, non-
current
portion 466 105

Deferred rent 665 620

Deferred tax
liabilities,
net 89 88

Other long-
term
liabilities 1,511 1,980
----- -----


Total
liabilities 39,017 40,660
------ ------



Shareholders'
equity 100,920 120,683
------- -------


Total
liabilities
and
shareholders'
equity $139,937 $161,343
======== ========



RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)


Six Months Ended

June 30,
--------


2016 2015
---- ----

(in thousands)


Cash flows from
operating activities:

Net
income
(loss) $(23,518) $(52,250)

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

Depreciation
and
amortization 4,224 4,894

Stock-
based
compensation 3,779 2,583

Equity
in
net
loss
of
Rhapsody 396 13,096

Deferred
income
taxes,
net (148) (23)

Loss
(gain)
on
investments,
net 43 (393)

Fair
value to
of market
warrants adjustments
granted in
in 2016
2015, and
net 2015
of
subsequent
mark 82 (1,128)

Interest
receivable
on
advance
to
Rhapsody - (121)

Net
change
in
certain
operating
assets
and
liabilities (3,209) (10,230)
------

Net
cash
provided
by
(used
in)
operating
activities (18,351) (43,572)
------- -------

Cash flows from
investing activities:

Purchases
of
equipment,
software,
and
leasehold
improvements (1,512) (859)

Proceeds
from
sale
of
available
for
sale
securities - 459

Purchases
of
short-
term
investments (33,359) (8,514)

Proceeds
from
sales
and
maturities
of
short-
term
investments 42,517 48,630

Decrease
(increase)
in
restricted
cash
equivalents
and
investments,
net (110) -

Acquisitions (150) (161)

Advance
to
Rhapsody - (5,000)

Net
cash
provided
by
(used
in)
investing
activities 7,386 34,555
----- ------

Cash flows from
financing activities:

Proceeds
from plan)
issuance
of
common
stock
(stock
options
and
stock
purchase 166 276

Tax
payments
from
shares
withheld
upon
vesting
of
restricted
stock (808) (10)

Net
cash
provided
by
(used
in)
financing
activities (642) 266
---- ---

Effect
of
exchange
rate
changes
on
cash
and
cash
equivalents 425 (1,839)
--- ------

Net
increase
(decrease)
in
cash
and
cash
equivalents (11,182) (10,590)

Cash
and
cash
equivalents,
beginning
of
period 47,315 103,253
------ -------

Cash
and
cash
equivalents,
end
of
period $36,133 $92,663
======= =======



RealNetworks, Inc. and Subsidiaries

Supplemental Financial Information

(Unaudited)


2016 2015
---- ----

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

(in thousands)

Net Revenue by Line of Business

Consumer Media (A) $6,400 $5,726 $6,848 $6,495 $7,281 $7,989

Mobile Services (B) 17,297 16,465 16,369 16,484 18,578 14,504

Games (C) 6,037 6,039 6,705 7,844 8,095 8,104

Total net revenue $29,734 $28,230 $29,922 $30,823 $33,954 $30,597
======= ======= ======= ======= ======= =======


Net Revenue by Product

Consumer Media
--------------

- License (D) $3,914 $3,104 $3,967 $3,628 $4,208 $4,672

-Subscriptions (E) 1,871 1,975 2,054 2,147 2,372 2,384

- Media Properties (F) 615 647 827 720 701 933


Mobile Services
---------------

- SaaS (G) 17,208 16,220 16,157 16,217 18,218 13,322

- Technology License & Other (H) 89 245 212 267 360 1,182


Games
-----

- License (I) 2,793 2,761 3,268 4,128 3,943 3,835

- Subscriptions (J) 3,024 3,029 3,126 3,231 3,373 3,570

- Media Properties (K) 220 249 311 485 779 699
--- --- --- --- --- ---


Total net revenue $29,734 $28,230 $29,922 $30,823 $33,954 $30,597
======= ======= ======= ======= ======= =======


Net Revenue by Geography

United States $10,355 $10,383 $10,781 $11,460 $12,303 $12,349

Rest of world 19,379 17,847 19,141 19,363 21,651 18,248
------ ------ ------ ------ ------ ------

Total net revenue $29,734 $28,230 $29,922 $30,823 $33,954 $30,597
======= ======= ======= ======= ======= =======


Net Revenue by Line of Business

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

(B) The Mobile Services division primarily
includes revenue from SaaS services and
sales of professional services provided
to mobile carriers.

(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 Consumer Media
includes sales of intellectual property
licenses and RealPlayer Plus software
licenses to consumers.

(E) Subscriptions revenue within Consumer
Media includes revenue from subscriptions
such as our RealPlayer Plus and SuperPass
offerings.

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

(G) SaaS revenue within Mobile Services
includes revenue from music on demand,
ringback tones, intercarrier messaging
services, and RealTimes.

(H) Technology licensing and other revenue
within Mobile Services includes revenue
from professional services provided to
mobile carriers.

(I) Licensing revenue within Games includes
retail games-related revenue and sales
of mobile games.

(J) Subscriptions revenue within Games
includes revenue from online games
subscriptions as well as
microtransactions from mobile and social
games.

(K) Media Properties revenue within Games
includes advertising on games sites and
social network sites.



RealNetworks, Inc. and Subsidiaries

Segment Results of Operations and Reconciliation to non-GAAP Contribution Margin

(Unaudited)


2016 2015 2016 2015
---- ---- ---- ----

Q2 Q1 Q2 YTD YTD
--- --- --- --- ---

(in thousands)

Consumer Media
--------------


Net revenue $6,400 $5,726 $7,281 $12,126 $15,270

Cost of revenue 1,561 2,417 3,567 3,978 7,031

Gross profit 4,839 3,309 3,714 8,148 8,239


Gross margin 76% 58% 51% 67% 54%


Operating expenses 4,293 5,376 6,867 9,669 13,461
------

Operating income (loss), a GAAP measure $546 $(2,067) $(3,153) $(1,521) $(5,222)

Depreciation and amortization 375 1,303 478 1,678 989
--- ----- --- ----- ---


Contribution margin, a non-GAAP measure $921 $(764) $(2,675) $157 $(4,233)
---- ----- ------- ---- -------


Mobile Services
---------------


Net revenue $17,297 $16,465 $18,578 $33,762 $33,082

Cost of revenue 12,404 10,917 13,982 23,321 24,290

Gross profit 4,893 5,548 4,596 10,441 8,792


Gross margin 28% 34% 25% 31% 27%


Operating expenses 8,784 9,794 12,099 18,578 24,060
------

Operating income (loss), a GAAP measure $(3,891) $(4,246) $(7,503) $(8,137) $(15,268)

Acquisitions related intangible asset
amortization 209 308 384 517 776

Depreciation and amortization 608 422 579 1,030 1,159
--- --- --- ----- -----


Contribution margin, a non-GAAP measure $(3,074) $(3,516) $(6,540) $(6,590) $(13,333)
------- ------- ------- ------- --------


Games
-----


Net revenue $6,037 $6,039 $8,095 $12,076 $16,199

Cost of revenue 1,817 1,845 2,286 3,662 5,080

Gross profit 4,220 4,194 5,809 8,414 11,119


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


Operating expenses 4,725 5,295 8,719 10,020 17,402
------

Operating income (loss), a GAAP measure $(505) $(1,101) $(2,910) $(1,606) $(6,283)

Acquisitions related intangible asset
amortization 34 25 312 59 605

Depreciation and amortization 154 179 244 333 541
--- --- --- --- ---


Contribution margin, a non-GAAP measure $(317) $(897) $(2,354) $(1,214) $(5,137)
----- ----- ------- ------- -------


Corporate
---------


Cost of revenue $(84) $(7) $(3) $(91) $(22)

Gross profit 84 7 3 91 22


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


Operating expenses 3,871 7,372 7,144 11,243 12,968

Operating income (loss), a GAAP measure $(3,787) $(7,365) $(7,141) $(11,152) $(12,946)

Other income (expense), net 15 (287) (112) (272) 331

Depreciation and amortization 246 361 394 607 824

Restructuring and other charges 413 385 1,964 798 2,449

Stock-based compensation 608 3,171 1,254 3,779 2,583

Lease exit and related charges 127 831 9 958 87


Contribution margin, a non-GAAP measure $(2,378) $(2,904) $(3,632) $(5,282) $(6,672)
------- ------- ------- ------- -------



RealNetworks, Inc. and Subsidiaries

Reconciliation of Net income (loss) to adjusted EBITDA, a non-GAAP measure

(Unaudited)


2016 2015 2016 2015
---- ---- ---- ----

Q2 Q1 Q2 YTD YTD
--- --- --- --- ---

(in thousands)



Net income (loss) $(8,347) $(15,171) $(27,781) $(23,518) $(52,250)

Income tax expense (benefit) 363 225 390 588 609

Interest income, net (80) (117) (250) (197) (450)

Gain (loss) on investments,
net 46 (3) (94) 43 (393)

Equity in net loss of
Rhapsody 396 - 6,916 396 13,096

Acquisitions related
intangible asset
amortization 243 333 696 576 1,381

Depreciation and
amortization 1,383 2,265 1,695 3,648 3,513

Restructuring and other
charges 413 385 1,964 798 2,449

Stock-based compensation 608 3,171 1,254 3,779 2,583

Lease exit and related
charges 127 831 9 958 87

Adjusted EBITDA, a non-GAAP
measure $(4,848) $(8,081) $(15,201) $(12,929) $(29,375)
------- ------- -------- -------- --------


SOURCE RealNetworks, Inc.

RealNetworks, Inc.

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


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