Wed, 11/07/2018

RealNetworks Announces Third Quarter 2018 Results

SEATTLE, Nov. 7, 2018 /PRNewswire/ --

  • Revenue of $17.6 million compared to $15.7 million in the prior quarter and $18.6 million in the prior year period
  • Significant progress with roll-out of our SAFR facial recognition platform through two new partnerships with systems integrators
  • Launched Scener, an innovative social platform that synchronizes premium streaming shows with commentary videos

RealNetworks, Inc. (Nasdaq: RNWK), a leader in digital media software and services, today announced results for the third quarter ended September 30, 2018.

Management Commentary

"We are encouraged by our performance in the third quarter, which marked a return to sequential revenue growth," said Rob Glaser, Chairman and Chief Executive Officer of RealNetworks. "We are very excited by the market's initial reaction to our SAFR facial recognition platform, which we announced on July 17th.  We have already signed partnerships with two major systems integrators: Net One Partners in Japan and Seventh in Brazil, with more on the way.  We also launched Scener in the third quarter. Scener is a new product and business that was incubated inside of RealNetworks to redefine the over-the-top video experience by integrating synchronized commentary directly with OTT video."

Third Quarter 2018 Financial Highlights from Continuing Operations

  • Revenue was $17.6 million compared to $15.7 million in the prior quarter and $18.6 million in the prior year period.
  • Gross margin from continuing operations was 76%, up from 71% in the prior quarter and 71% in the prior year period.
  • Operating expenses increased $0.3 million, or 1.9%, from the prior quarter and increased $0.6 million, or 3.4%, from the prior year period.
  • Net loss was $(6.0) million, or $(0.16) per share, compared to net loss of $(6.9) million, or $(0.18) per share, in the prior quarter and a net loss of $(4.5) million, or $(0.12) per share, in the prior year period.
  • Adjusted EBITDA was a loss of $(3.4) million compared to a loss of $(5.7) million in the prior quarter and a loss of $(2.6) million in the prior year period. A reconciliation of GAAP net income (loss) to adjusted EBITDA, a non-GAAP measure, is provided in the financial tables that accompany this release.
  • At September 30, 2018, the Company had $39.1 million in unrestricted cash, cash equivalents and short-term investments, compared to $42.1 million at June 30, 2018.

Business Outlook

For the fourth quarter of 2018, RealNetworks expects to achieve the following results:

  • Total revenue is expected to be in the range of $17.5 million to $19.5 million
  • Adjusted EBITDA loss is expected to be in the range of $(2.0) million to $(4.0) million.

New Revenue Recognition Accounting Standard

As of January 1, 2018, we adopted Accounting Standards Codification 606 (Topic 606), Revenue from Contracts with Customers, which affects the accounting for our revenue. We adopted Topic 606 using the modified retrospective transition method, under which the prior periods presented have not been recast to reflect adoption of the new standard.

For additional details on the impact of the standard, see our Annual Report on Form 10-K for the year ended December 31, 2017, and our 2018 Quarterly Reports on Form 10-Q.

Conference Call and Webcast Information

The company will host a conference call today to review results and discuss the company's performance shortly after 4:30 p.m. ET/1:30 p.m. PT. You may join the conference call by calling 1-877-451-6152 (United States) or 1-201-389-0879 (International). A telephonic replay of the call will also be available shortly after the completion of the call, until 11:59 pm ET on Wednesday, November 28, 2018, by dialing 1-844-512-2921 (United States) or 1-412-317-6671 (International) and entering the replay pin number: 13683626.

A live webcast will be available on RealNetworks' Investor Relations site under Events at http://investor.realnetworks.com and will be archived online upon completion of the conference call.

For More Information

Investor Relations for RealNetworks

Laura Bainbridge, Addo IR

310-829-5400

IR@realnetworks.com

RNWK-F

About RealNetworks

RealNetworks creates innovative technology products and services that make it easy to connect with and enjoy digital media. RealNetworks invented the streaming media category 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. Find RealNetworks' corporate information at www.realnetworks.com.

RealNetworks® and the company's respective logos are trademarks, registered trademarks, or service marks of RealNetworks, Inc. Other products and company names mentioned are the 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) from continuing operations 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 d/b/a Napster 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)

 
   

Quarter Ended

September 30,

 

Nine Months Ended

September 30,

     
   

2018

 

2017

 

2018

 

2017

   

 (in thousands, except per share data)

                 

 Net revenue

 

$

17,579

   

$

18,557

   

$

52,953

   

$

59,853

 

 Cost of revenue

 

4,239

   

5,343

   

14,000

   

18,199

 

           Gross profit

 

13,340

   

13,214

   

38,953

   

41,654

 
                 

 Operating expenses:

               

       Research and development

 

8,052

   

7,152

   

23,398

   

22,085

 

       Sales and marketing

 

4,998

   

4,883

   

15,878

   

17,534

 

       General and administrative

 

4,586

   

5,081

   

15,526

   

15,638

 

       Restructuring and other charges

 

632

   

557

   

1,320

   

2,271

 

       Lease exit and related benefit

 

   

   

(454)

   

 
                 

           Total operating expenses

 

18,268

   

17,673

   

55,668

   

57,528

 
                 

 Operating loss

 

(4,928)

   

(4,459)

   

(16,715)

   

(15,874)

 
                 

 Other income (expenses):

               

       Interest income, net

 

72

   

116

   

270

   

353

 

       Equity in net loss of Napster

 

(737)

   

   

(737)

   

(1,097)

 

       Other income (expense), net

 

(112)

   

(50)

   

(195)

   

(289)

 
                 

           Total other income (expense), net

 

(777)

   

66

   

(662)

   

(1,033)

 
                 

 Loss from continuing operations before income taxes

 

(5,705)

   

(4,393)

   

(17,377)

   

(16,907)

 

 Income tax expense

 

272

   

139

   

708

   

954

 
                 

Loss from continuing operations

 

(5,977)

   

(4,532)

   

(18,085)

   

(17,861)

 

Net income from discontinued operations, net of tax

 

   

198

   

   

717

 

 Net loss

 

$

(5,977)

   

$

(4,334)

   

$

(18,085)

   

$

(17,144)

 
                 

Net income (loss) per share - Basic:

               

Continuing operations

 

$

(0.16)

   

$

(0.12)

   

$

(0.48)

   

$

(0.48)

 

Discontinued operations

 

   

   

   

0.02

 

Net loss per share - Basic

 

$

(0.16)

   

$

(0.12)

   

$

(0.48)

   

$

(0.46)

 

Net income (loss) per share - Diluted:

               

Continuing operations

 

$

(0.16)

   

$

(0.12)

   

$

(0.48)

   

$

(0.48)

 

Discontinued operations

 

   

   

   

0.02

 

Net loss per share - Diluted

 

$

(0.16)

   

$

(0.12)

   

$

(0.48)

   

$

(0.46)

 
                 

 Shares used to compute basic net income (loss) per share

 

37,618

   

37,200

   

37,549

   

37,112

 

 Shares used to compute diluted net income (loss) per share

 

37,618

   

37,200

   

37,549

   

37,112

 

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

 
 

September 30,

 2018

 

December 31,

 2017

 

 (in thousands)

ASSETS

 Current assets:

     

 Cash and cash equivalents

$

37,964

   

$

51,196

 

 Short-term investments

1,172

   

8,779

 

 Trade accounts receivable, net

13,090

   

12,689

 

 Deferred costs, current portion

365

   

426

 

 Prepaid expenses and other current assets

4,719

   

3,715

 

Current assets of discontinued operations

   

17,456

 

 Total current assets

57,310

   

94,261

 
       

 Equipment and software

40,016

   

46,417

 

 Leasehold improvements

3,431

   

3,536

 

 Total equipment, software, and leasehold improvements

43,447

   

49,953

 

 Less accumulated depreciation and amortization

40,531

   

46,093

 

 Net equipment, software, and leasehold improvements

2,916

   

3,860

 
       

 Restricted cash equivalents

1,630

   

2,400

 

 Other assets

5,723

   

5,588

 

 Deferred costs, non-current portion

593

   

955

 

 Deferred tax assets, net

1,019

   

1,047

 

 Other intangible assets, net

120

   

325

 

 Goodwill

17,060

   

13,060

 
       

 Total assets

$

86,371

   

$

121,496

 
       

 LIABILITIES AND SHAREHOLDERS' EQUITY

       

 Current liabilities:

     

 Accounts payable

$

3,914

   

$

3,785

 

 Accrued and other current liabilities

11,916

   

12,365

 

 Commitment to Napster

2,750

   

2,750

 

 Deferred revenue, current portion

1,969

   

3,097

 

Current liabilities of discontinued operations

   

17,107

 

 Total current liabilities

20,549

   

39,104

 
       

 Deferred revenue, non-current portion

312

   

443

 

 Deferred rent

953

   

982

 

 Deferred tax liabilities, net

170

   

19

 

 Other long-term liabilities

1,082

   

1,775

 
       

 Total liabilities

23,066

   

42,323

 
       
       

 Shareholders' equity

63,305

   

79,173

 
       

 Total liabilities and shareholders' equity

$

86,371

   

$

121,496

 

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 
 

Nine Months Ended

September 30,

 

2018

 

2017

 

 (in thousands)

 

 Cash flows from operating activities:

     

 Net loss

$

(18,085)

   

$

(17,144)

 

 Adjustments to reconcile net loss to net cash used in operating activities:

  Depreciation and amortization

1,738

   

2,402

 

  Stock-based compensation

2,113

   

3,045

 

  Equity in net loss of Napster

737

   

1,097

 

  Deferred income taxes, net

5

   

(55)

 

  Fair value of warrants granted in 2015 and 2017, net of subsequent mark to market adjustments in 2018 and 2017

78

   

(367)

 

  Net change in certain operating assets and liabilities

(2,214)

   

(6,521)

 

    Net cash used in operating activities

(15,628)

   

(17,543)

 

 Cash flows from investing activities:

     

  Purchases of equipment, software, and leasehold improvements

(698)

   

(541)

 

  Purchases of short-term investments

   

(13,905)

 

  Proceeds from sales and maturities of short-term investments

7,607

   

43,754

 

  Acquisition, net of cash acquired

(4,192)

   

 

  Advance to Napster

   

(1,500)

 

   Net cash provided by investing activities

2,717

   

27,808

 

 Cash flows from financing activities:

     

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

114

   

130

 

Tax payments from shares withheld upon vesting of restricted stock

(243)

   

(338)

 

 Net cash used in financing activities

(129)

   

(208)

 

 Effect of exchange rate changes on cash, cash equivalents and restricted cash

(962)

   

1,519

 

 Net increase (decrease) in cash, cash equivalents and restricted cash

(14,002)

   

11,576

 

 Cash, cash equivalents and restricted cash, beginning of period

53,596

   

36,421

 

 Cash, cash equivalents and restricted cash, end of period

$

39,594

   

$

47,997

 

RealNetworks, Inc. and Subsidiaries

Supplemental Financial Information

(Unaudited)

 
 

2018

 

2017

 

 Q3

 

 Q2

 

Q1

 

 Q4

 

 Q3

 

 Q2

 

 Q1

 

 (in thousands)

Net Revenue by Line of Business

                         

Consumer Media (A)

$

4,733

   

$

3,884

   

$

5,483

   

$

5,752

   

$

4,197

   

$

6,951

   

$

5,669

 

Mobile Services (B)

7,348

   

6,719

   

8,704

   

7,155

   

7,678

   

7,720

   

8,199

 

Games (C)

5,498

   

5,121

   

5,463

   

5,958

   

6,682

   

6,934

   

5,823

 

     Total net revenue

$

17,579

   

$

15,724

   

$

19,650

   

$

18,865

   

$

18,557

   

$

21,605

   

$

19,691

 
                           

Net Revenue by Product

                         

Consumer Media

                         

- Software License (D)

$

2,746

   

$

1,808

   

$

3,337

   

$

3,595

   

$

2,012

   

$

4,741

   

$

3,295

 

- Subscription Services (E)

1,232

   

1,225

   

1,285

   

1,362

   

1,434

   

1,531

   

1,564

 

- Product Sales (F)

281

   

299

   

340

   

350

   

322

   

261

   

377

 

- Advertising & Other (G)

474

   

552

   

521

   

445

   

429

   

418

   

433

 
                           

Mobile Services

                         

- Software License (H)

520

   

469

   

1,335

   

388

   

688

   

642

   

619

 

- Subscription Services (I)

6,828

   

6,250

   

7,369

   

6,767

   

6,990

   

7,078

   

7,580

 
                           

Games

                         

- Subscription Services (J)

2,745

   

2,689

   

2,693

   

2,707

   

2,708

   

2,781

   

2,828

 

- Product Sales (K)

2,279

   

1,953

   

2,402

   

3,086

   

3,851

   

4,007

   

2,862

 

- Advertising & Other (L)

474

   

479

   

368

   

165

   

123

   

146

   

133

 
                           

     Total net revenue

$

17,579

   

$

15,724

   

$

19,650

   

$

18,865

   

$

18,557

   

$

21,605

   

$

19,691

 
                           

Net Revenue by Geography

                         

United States

$

9,026

   

$

7,646

   

$

11,434

   

$

10,120

   

$

10,084

   

$

10,889

   

$

9,740

 

Rest of world

8,553

   

8,078

   

8,216

   

8,745

   

8,473

   

10,716

   

9,951

 

     Total net revenue

$

17,579

   

$

15,724

   

$

19,650

   

$

18,865

   

$

18,557

   

$

21,605

   

$

19,691

 
                           

Net Revenue by Line of Business

(A) The Consumer Media division primarily includes revenue from the licensing of our portfolio of video codec technologies. Also included is RealPlayer and related products, such as the distribution of third-party software products, advertising on RealPlayer websites, sales of RealPlayer Plus software to consumers, 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 mobile and PC games, online games subscription services, and advertising on games sites and social network sites.

   

Net Revenue by Product

(D) Software licensing revenue within Consumer Media includes revenues from licenses of our video codec technologies.

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

(F) Product sales within Consumer Media includes sales of RealPlayer Plus software to consumers.

(G) Advertising & other revenue within Consumer Media includes distribution of third-party software products and advertising on RealPlayer websites.

(H) Software license revenue within Mobile Services includes revenue from our integrated RealTimes platform.

(I) Subscription services revenue within Mobile Services includes revenue from ringback tones and our intercarrier messaging services, as well as from related professional services provided to mobile carriers.

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

(K) Product sales revenue within Games includes revenue from retail and wholesale games-related revenue and sales of mobile games.

(L) Advertising & other 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)

 
   

2018

 

2017

 

2018

 

2017

   

Q3

 

Q2

 

Q3

 

YTD

 

YTD

   

 (in thousands)

Consumer Media

                   
                     

Net revenue

 

$

4,733

   

$

3,884

   

$

4,197

   

$

14,100

   

$

16,817

 

Cost of revenue

 

955

   

1,028

   

981

   

2,976

   

3,545

 

   Gross profit

 

3,778

   

2,856

   

3,216

   

11,124

   

13,272

 
                     

   Gross margin

 

80

%

 

74

%

 

77

%

 

79

%

 

79

%

                     

Operating expenses

 

3,448

   

3,439

   

3,217

   

10,805

   

10,957

 

Operating income (loss), a GAAP measure

 

$

330

   

$

(583)

   

$

(1)

   

$

319

   

$

2,315

 

Depreciation and amortization

 

49

   

51

   

42

   

146

   

368

 
                     

  Contribution margin, a non-GAAP measure

 

$

379

   

$

(532)

   

$

41

   

$

465

   

$

2,683

 
                     

Mobile Services

                   
                     

Net revenue

 

$

7,348

   

$

6,719

   

$

7,678

   

$

22,771

   

$

23,597

 

Cost of revenue

 

2,052

   

2,134

   

2,134

   

6,502

   

7,750

 

   Gross profit

 

5,296

   

4,585

   

5,544

   

16,269

   

15,847

 
                     

   Gross margin

 

72

%

 

68

%

 

72

%

 

71

%

 

67

%

                     

Operating expenses

 

6,825

   

6,969

   

6,437

   

21,160

   

21,261

 

Operating income (loss), a GAAP measure

 

$

(1,529)

   

$

(2,384)

   

$

(893)

   

$

(4,891)

   

$

(5,414)

 

Acquisitions related intangible asset amortization

 

70

   

91

   

88

   

253

   

485

 

Depreciation and amortization

 

165

   

155

   

180

   

500

   

558

 
                     

Contribution margin, a non-GAAP measure

 

$

(1,294)

   

$

(2,138)

   

$

(625)

   

$

(4,138)

   

$

(4,371)

 
                     

Games

                   
                     

Net revenue

 

$

5,498

   

$

5,121

   

$

6,682

   

$

16,082

   

$

19,439

 

Cost of revenue

 

1,228

   

1,456

   

2,226

   

4,501

   

6,842

 

   Gross profit

 

4,270

   

3,665

   

4,456

   

11,581

   

12,597

 
                     

   Gross margin

 

78

%

 

72

%

 

67

%

 

72

%

 

65

%

                     

Operating expenses

 

5,447

   

5,095

   

5,071

   

15,459

   

15,108

 

Operating income (loss), a GAAP measure

 

$

(1,177)

   

$

(1,430)

   

$

(615)

   

$

(3,878)

   

$

(2,511)

 

Acquisitions related intangible asset amortization

 

23

   

20

   

27

   

43

   

79

 

Depreciation and amortization

 

91

   

146

   

169

   

402

   

467

 
                     

   Contribution margin, a non-GAAP measure

 

$

(1,063)

   

$

(1,264)

   

$

(419)

   

$

(3,433)

   

$

(1,965)

 
                     

Corporate

                   
                     

Cost of revenue

 

$

4

   

$

7

   

$

2

   

$

21

   

$

62

 

   Gross profit

 

(4)

   

(7)

   

(2)

   

(21)

   

(62)

 
                     

   Gross margin

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

                     

Operating expenses

 

2,548

   

2,429

   

2,948

   

8,244

   

10,202

 

Operating income (loss), a GAAP measure

 

$

(2,552)

   

$

(2,436)

   

$

(2,950)

   

$

(8,265)

   

$

(10,264)

 

Other income (expense), net

 

(112)

   

(42)

   

(50)

   

(195)

   

(289)

 

Depreciation and amortization

 

109

   

148

   

139

   

394

   

445

 

Restructuring and other charges

 

632

   

187

   

557

   

1,320

   

2,271

 

Stock-based compensation

 

499

   

457

   

748

   

2,113

   

3,045

 

Lease exit and related benefit

 

   

(129)

   

   

(454)

   

 
                     

   Contribution margin, a non-GAAP measure

 

$

(1,424)

   

$

(1,815)

   

$

(1,556)

   

$

(5,087)

   

$

(4,792)

 
                     

RealNetworks, Inc. and Subsidiaries

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

(Unaudited)

 
   

2018

 

2017

 

2018

 

2017

   

 Q3

 

 Q2

 

 Q3

 

 YTD

 

 YTD

       

(in thousands)

                     

Reconciliation of GAAP Net income (loss) from continuing operations to adjusted EBITDA:

           
                     

Net income (loss) from continuing operations

 

$

(5,977)

   

$

(6,930)

   

$

(4,532)

   

$

(18,085)

   

$

(17,861)

 

Income tax expense (benefit)

 

272

   

166

   

139

   

708

   

954

 

Interest income, net

 

(72)

   

(111)

   

(116)

   

(270)

   

(353)

 

Equity in net loss of Napster

 

737

   

   

   

737

   

1,097

 

Acquisitions related intangible asset amortization

 

93

   

111

   

115

   

296

   

564

 

Depreciation and amortization

 

414

   

500

   

530

   

1,442

   

1,838

 

Restructuring and other charges

 

632

   

187

   

557

   

1,320

   

2,271

 

Stock-based compensation

 

499

   

457

   

748

   

2,113

   

3,045

 

Lease exit and related benefit

 

   

(129)

   

   

(454)

   

 

   Adjusted EBITDA, a non-GAAP measure

 

$

(3,402)

   

$

(5,749)

   

$

(2,559)

   

$

(12,193)

   

$

(8,445)

 

SOURCE RealNetworks, Inc.