PR Newswire | Aug 5, 2020 04:02PM EDT

08/05 15:01 CDT

RealNetworks Announces Second Quarter 2020 Financial Results SEATTLE, Aug. 5, 2020

SEATTLE, Aug. 5, 2020 /PRNewswire/ -- RealNetworks, Inc. (Nasdaq: RNWK), a leader in digital media software and services, today announced its financial results for the second quarter ended June 30, 2020.

* Consolidated revenue of $40.4 million; core revenue without Napster of $17.1 million, up 9% year-over-year * Games revenue up 23% year-over-year and 12% quarter-over-quarter driven by success of free-to-play strategy * Introduced two innovative new AI-powered consumer PC software products: RealPlayer(r) 20/20 and StarSearch(tm) by Real(r) * SAFR was awarded two Phase II Small Business Innovation Research (SBIR) contracts with the United States Air Force worth $1.9 million * The RealNetworks Foundation committed $1 million in 2020 grants to help address racial injustice and the COVID-19 Pandemic * Appointed Mike Ensing President and Chief Operating Officer, succeeding Max Pellegrini

Management Commentary"In Q2 Real delivered solid results. We were very pleased with our strong operational execution in the first full quarter of living and working during the global pandemic," said Rob Glaser, Founder, Chairman, and Chief Executive Officer of RealNetworks. "We generated a 9% year-over-year increase in our core revenue when not including Napster. In addition, we narrowed our adjusted EBITDA loss, our fourth consecutive quarter of year-over-year improvement in this metric. We are putting an appropriate amount of fuel into our growth businesses while also closely managing our overall expenses."

Mr. Glaser continued, "We were excited to introduce two new consumer products in commemoration of the 25th anniversary of the streaming industry. RealPlayer(r) 20/20 and StarSearch(tm) by Real(r) utilize the power of AI and our SAFR computer vision platform to make streaming in today's world even better. In addition, we are continuing to enhance our world-class SAFR platform and service focused primarily on the traditional security and safety markets along with innovations focused on new needs at the intersection of public health and public safety. In particular, we were honored to be awarded two SBIR contracts by the U.S. Air Force. These contracts both enable us to continue to enhance the SAFR platform and also support the important missions of our U.S. armed forces while enhancing their safety."

Second Quarter 2020 Financial Highlights

* Revenue was $40.4 million compared to $43.1 million in the prior quarter and $44.2 million in the prior year period. RealNetworks' core revenue without Napster was $17.1 million, up 2% from $16.8 million in the prior quarter and up 9% from $15.7 million in the prior year period. * Games revenue was $7.5 million, up 12% compared to $6.6 million in the prior quarter and up 23% compared to $6.0 million in the prior year period. * Gross profit margin was 43%, down from 44% in the prior quarter and up from 38% in the prior year period. RealNetworks' core gross profit margin without Napster was 75%, down from 76% in the prior quarter and up from 73% in the prior year period. * Operating expenses decreased $1.8 million, or 7%, from the prior quarter and decreased $4.1 million, or 15%, from the prior year period. * Net loss attributable to RealNetworks was $(5.1) million, or $(0.13) per diluted share, compared to a net loss of $(4.6) million, or $(0.12) per diluted share, in the prior quarter and a net loss of $(9.2) million, or $(0.24) per diluted share, in the prior year period. * Adjusted EBITDA was a loss of $(2.2) million compared to a loss of $(3.3) million in the prior quarter and a loss of $(6.3) million in the prior year period. * At June 30, 2020, the Company had $19.7 million in unrestricted cash and cash equivalents compared to $19.0 million at March 31, 2020.

Corporate Developments

* On June 1, 2020, the Company received a second letter from Nasdaq Staff indicating that the Company had regained compliance with Nasdaq Listing Rule 5450(a)(1). Nasdaq Staff further indicated that the matter is now closed. * On July 9, 2020, The RealNetworks Foundation, a philanthropic arm of RealNetworks, Inc., allocated an additional $1 million in grants for 2020 to help address the immediate needs stemming from racial injustice and COVID-19, two historic challenges that have disproportionally impacted communities of color. The RealNetworks Foundation has directed $500,000 to each cause, applying the funds to both local and national recipients. More information on the RealNetworks Foundation can be found at https://www.realnetworks.com/realnetworks-foundation. * On August 4, 2020, the Company announced the appointment of Mike Ensing to the position of President and Chief Operating Officer, succeeding Max Pellegrini. Mr. Ensing previously served as interim CFO and as a strategic advisor to the Company from early January to early May of this year. Mr. Ensing will assume worldwide responsibility for the operations of Real's core businesses and will help guide strategic decision-making.

Business Outlook

Given the ongoing uncertainty surrounding the global economy and the future impact of COVID-19, RealNetworks is not providing guidance for the third quarter ending September 30, 2020.

Conference Call and Webcast Information

RealNetworks will host a conference call today to review its results and discuss its performance at approximately 4:30 p.m. ET / 1:30 p.m. PT. Participants may join the conference call by dialing 1-855-327-6837 (United States) or 1-631-891-4304 (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, August 26, 2020, by dialing 1-844-512-2921 (United States) or 1-412-317-6671 (International) and entering the replay pin number: 10010362.

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

About RealNetworks

Building on a legacy of digital media expertise and innovation, RealNetworks has created a new generation of products that employ best-in-class artificial intelligence and machine learning to enhance and secure our daily lives. SAFR (www.safr.com) is the world's premier facial recognition platform for live video. Leading in real-world performance and accuracy as evidenced in testing by NIST, SAFR enables new applications for security, convenience, and analytics. For information about our other products, visit www.realnetworks.com.

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) including noncontrolling interests 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 our current expectations regarding our future growth, profitability, and market position, our financial condition and liquidity, our strategic focus and initiatives, product plans, agreements with partners, use of loan proceeds, our ability to maintain compliance with Nasdaq listing standards, and the growth and future prospects relating to our Napster segment. 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 our expectations as of today, and actual results may differ materially from the results predicted. Factors that could cause actual results for RealNetworks, on a consolidated basis, to differ from the results predicted include: our ability to realize operating efficiencies, growth and other benefits from the implementation of our growth initiatives and restructuring efforts; cash usage and conservation, and the pursuit of additional funding sources; successful monetization of our products and services; competitive risks, including the emergence or growth of competing technologies, products and services; potential outcomes and effects of claims and legal proceedings; risks associated with key customer or strategic relationships and business acquisitions; challenges caused by the COVID-19 pandemic; disruptions in the global financial markets, including changes in consumer spending and impacts to credit availability; fluctuations in foreign currencies; and unique risk factors that relate to our Napster segment, such as risks stemming from its streaming music service and related music royalties. More information about potential risk factors that could affect our business and financial results is included in RealNetworks' annual report on Form 10-K for the most recent year ended December 31, 2019, 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 our financial statements and forward-looking financial guidance requires us 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. RealNetworks assumes no obligation to update any forward-looking statements or information, which are in effect as of their respective dates.

For More Information:Investor Relations for RealNetworks Kimberly Orlando, Addo Investor Relations 310-829-5400 IR@realnetworks.comRNWK-F

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



Quarter Ended Six Months Ended June 30, June 30,

2020 2019 2020 2019



(in thousands, except per share data)



Net revenue $40,424 $44,248 $83,569 $83,720

Cost of revenue 23,033 27,282 47,209 52,152

Gross profit 17,391 16,966 36,360 31,568



Operating expenses:

Research and development 7,802 8,876 16,420 17,709

Sales and marketing 6,927 8,360 15,044 16,502

General and administrative 6,680 8,392 13,793 16,756

Restructuring and other charges 881 729 1,090 896



Total operating expenses 22,290 26,357 46,347 51,863



Operating loss (4,899) (9,391) (9,987) (20,295)



Other income (expenses):

Interest expense (278) (43) (540) (209)

Interest income 23 40 28 117

Gain (loss) on equity investments, net (53) - (53) 12,338

Other income (expenses), net (134) 183 661 310



Total other income (expenses), net (442) 180 96 12,556



Income (loss) before income taxes (5,341) (9,211) (9,891) (7,739)

Income tax expense 213 244 352 502



Net income (loss) including noncontrolling interests (5,554) (9,455) (10,243) (8,241)

Net income (loss) attributable to noncontrolling interests (442) (253) (489) (572)

Net income (loss) attributable to RealNetworks $(5,112)$(9,202)$(9,754)$(7,669)



Net income (loss) per share attributable to RealNetworks- Basic: $(0.13) $(0.24) $(0.26) $(0.20)

Net income (loss) per share attributable to RealNetworks- Diluted:$(0.13) $(0.24) $(0.26) $(0.20)



Shares used to compute basic net income (loss) per share 38,243 37,948 38,236 37,885

Shares used to compute diluted net income (loss) per share 38,243 37,948 38,236 37,885

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



June 30, December 31, 2020 2019

(in thousands)

ASSETS

Current assets:

Cash and cash equivalents $19,688 $16,805

Trade accounts receivable, net 28,289 29,507

Deferred costs, current portion 743 823

Prepaid expenses and other current assets 5,688 7,445

Total current assets 54,408 54,580



Equipment and software 30,862 32,167

Leasehold improvements 2,916 3,311

Total equipment, software, and leasehold improvements 33,778 35,478

Less accumulated depreciation and amortization 31,297 32,657

Net equipment, software, and leasehold improvements 2,481 2,821



Operating lease assets 10,058 11,592

Restricted cash equivalents 5,374 5,374

Other assets 992 1,891

Deferred costs, non-current portion 1,004 1,021

Deferred tax assets, net 756 761

Other intangible assets, net 16,931 19,286

Goodwill 62,336 62,428



Total assets $154,340$159,754



LIABILITIES AND SHAREHOLDERS' EQUITY



Current liabilities:

Accounts payable $4,125 $4,927

Accrued royalties, fulfillment and other current liabilities75,865 77,303

Deferred revenue, current portion 6,181 6,620

Notes payable 4,495 7,331

Total current liabilities 90,666 96,181



Deferred revenue, non-current portion 396 96

Deferred tax liabilities, net 1,122 1,172

Long-term lease liabilities 7,088 8,466

Long-term debt 8,495 3,900

Other long-term liabilities 8,232 11,666



Total liabilities 115,999 121,481



Total shareholders' equity 39,332 38,775



Noncontrolling interests (991) (502)



Total equity 38,341 38,273



Total liabilities and equity $154,340$159,754

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



Six Months Ended June 30,

2020 2019

(in thousands)



Cash flows from operating activities:

Net income (loss) including noncontrolling interests $(10,243)$(8,241)

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

Depreciation and amortization 2,832 2,959

Stock-based compensation 703 1,917

(Gain) loss on equity investments, net 53 (12,338)

Foreign currency (gain) loss (612) (315)

Fair value adjustments to contingent consideration liability (200) 300

Net change in certain operating assets and liabilities (1,110) (381)

Net cash used in operating activities (8,577) (16,099)

Cash flows from investing activities:

Purchases of equipment, software, and leasehold improvements (326) (873)

Proceeds from sales and maturities of short-term investments - 24

Acquisition, net of cash acquired - 12,260



Net cash (used in) provided by investing activities (326) 11,411



Cash flows from financing activities:

Proceeds from issuance of common stock (stock options and stock purchase plan) - 144

Proceeds from issuance of preferred stock 10,000 -

Tax payments from shares withheld upon vesting of restricted stock (5) (287)

Proceeds from notes payable and long-term debt 18,776 19,760

Repayments of notes payable and long-term debt (16,889) (24,018)

Other financing activities - 450

Net cash provided by (used in) financing activities 11,882 (3,951)

Effect of exchange rate changes on cash, cash equivalents and restricted cash (96) (89)

Net increase (decrease) in cash, cash equivalents and restricted cash 2,883 (8,728)

Cash, cash equivalents and restricted cash, beginning of period 22,179 37,191

Cash, cash equivalents and restricted cash, end of period $25,062 $28,463

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



2020 2019

Q2 Q1 Q4 Q3 Q2 Q1

(in thousands)

Net Revenue by Segment

Consumer Media (A) $ 3,159 $ 3,495 $ 4,432 $ 3,632 $ 2,620 $ 2,486

Mobile Services (B) 6,461 6,690 6,312 6,895 6,997 6,939

Games (C) 7,465 6,637 6,567 7,164 6,048 5,710

Napster (D) 23,339 26,323 26,089 27,302 28,583 24,337

Total net revenue $ 40,424 $ 43,145 $ 43,400 $ 44,993 $ 44,248 $ 39,472



Net Revenue by Product

Consumer Media

- Software License (E) $ 1,702 $ 2,020 $ 2,856 $ 1,987 $ 944 $ 735

- Subscription Services (F) 898 929 992 1,028 1,040 1,088

- Product Sales (G) 261 222 193 207 206 219

- Advertising & Other (H) 298 324 391 410 430 444



Mobile Services

- Software License (I) 972 831 657 888 957 599

- Subscription Services (J) 5,489 5,859 5,655 6,007 6,040 6,340



Games

- Subscription Services (K) 2,730 2,770 3,007 3,056 3,073 2,985

- Product Sales (L) 3,712 2,978 2,580 3,078 2,177 1,988

- Advertising & Other (M) 1,023 889 980 1,030 798 737



Napster

- Subscription Services (N) 23,339 26,323 26,089 27,302 28,583 24,337



Total net revenue $ 40,424 $ 43,145 $ 43,400 $ 44,993 $ 44,248 $ 39,472



Net Revenue by Geography

United States $ 20,785 $ 22,420 $ 21,053 $ 22,015 $ 21,322 $ 18,970

Rest of world 19,639 20,725 22,347 22,978 22,926 20,502

Total net revenue $ 40,424 $ 43,145 $ 43,400 $ 44,993 $ 44,248 $ 39,472



Net Revenue by Segment

(A) The Consumer Media segment 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 segment primarily includes revenue from SaaS services and sales of professional services provided to mobile carriers.

(C) The Games segment primarily includes revenue from player purchases of in-game virtual goods within our free-to-play games, mobile and PC games, online games subscription services, and advertising on games sites and social network sites.

(D) The Napster segment primarily includes revenue from subscription music offerings from on-demand streaming services and conditional downloads. Napster revenues are included in our consolidated results from the January 18, 2019 acquisition date forward.

Net Revenue by Product

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

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

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

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

(I) Software license revenue within Mobile Services includes revenue from our integrated RealTimes platform and our facial recognition platform, SAFR.

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

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

(L) Product sales revenue within Games includes revenue from player purchases of in-game virtual goods, retail and wholesale games-related revenue, sales of mobile games.

(M) Advertising & other revenue within Games includes advertising on games sites and social network sites.

(N) Subscription services revenue within Napster includes music tracks by way of on-demand streaming and conditional downloads offered directly to end consumers and distribution partners.

RealNetworks, Inc. and Subsidiaries Segment Results of Operations and Reconciliation to non-GAAP Contribution Margin (Unaudited)



2020 2019 2020 2019

Q2 Q1 Q2 YTD YTD

(in thousands)

Consumer Media



Net revenue $3,159 $3,495 $2,620 $6,654 $5,106

Cost of revenue 519 611 803 1,130 1,636

Gross profit 2,640 2,884 1,817 5,524 3,470



Gross margin 84 %83 %69 %83 %68 %



Operating expenses 2,204 2,458 2,877 4,662 5,996

Operating income (loss), a GAAP measure $436 $426 $(1,060) $862 $(2,526)

Depreciation and amortization 15 13 56 28 110



Contribution margin, a non-GAAP measure $451 $439 $(1,004) $890 $(2,416)



Mobile Services



Net revenue $6,461 $6,690 $6,997 $13,151 $13,936

Cost of revenue 1,782 1,696 1,865 3,478 3,913

Gross profit 4,679 4,994 5,132 9,673 10,023



Gross margin 72 %75 %73 %74 %72 %



Operating expenses 5,682 7,588 7,438 13,270 14,999

Operating income (loss), a GAAP measure $(1,003) $(2,594) $(2,306) $(3,597) $(4,976)

Depreciation and amortization 102 98 106 200 337



Contribution margin, a non-GAAP measure $(901) $(2,496) $(2,200) $(3,397) $(4,639)



Games



Net revenue $7,465 $6,637 $6,048 $14,102 $11,758

Cost of revenue 1,958 1,794 1,655 3,752 3,325

Gross profit 5,507 4,843 4,393 10,350 8,433



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



Operating expenses 4,976 4,923 5,288 9,899 10,325

Operating income (loss), a GAAP measure $531 $(80) $(895) $451 $(1,892)

Acquisitions related intangible asset amortization - - - - 23

Depreciation and amortization 66 138 84 204 167



Contribution margin, a non-GAAP measure $597 $58 $(811) $655 $(1,702)



Napster



Net revenue $23,339 $26,323 $28,583 $49,662 $52,920

Cost of revenue 18,770 20,072 23,026 38,842 43,422

Gross profit 4,569 6,251 5,557 10,820 9,498



Gross margin 20 %24 %19 %22 %18 %



Operating expenses 6,609 6,461 6,638 13,070 12,170

Operating income (loss), a GAAP measure $(2,040) $(210) $(1,081) $(2,250) $(2,672)

Acquisitions related intangible asset amortization 1,124 1,125 1,129 2,249 2,072

Depreciation and amortization 59 32 69 91 184

Restructuring and other charges 177 122 - 299 -



Contribution margin, a non-GAAP measure $(680) $1,069 $117 $389 $(416)



Corporate



Cost of revenue $4 $3 $(67) $7 $(144)

Gross profit (4) (3) 67 (7) 144



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



Operating expenses 2,819 2,627 4,116 5,446 8,373

Operating income (loss), a GAAP measure $(2,823) $(2,630) $(4,049) $(5,453) $(8,229)

Other income (expense), net (134) 795 183 661 310

Foreign currency (gain) loss 155 (767) (164) (612) (315)

Depreciation and amortization 30 30 33 60 66

Fair value adjustments to contingent consideration liability100 (300) 300 (200) 300

Restructuring and other charges 704 87 729 791 896

Stock-based compensation 323 380 533 703 1,917



Contribution margin, a non-GAAP measure $(1,645) $(2,405) $(2,435) $(4,050) $(5,055)

RealNetworks, Inc. and Subsidiaries Reconciliation of Net income (loss) including noncontrolling interests to adjusted EBITDA, a non-GAAP measure (Unaudited)



2020 2019 2020 2019

Q2 Q1 Q2 YTD YTD

(in thousands)



Reconciliation of GAAP Net income (loss) including noncontrolling interests to adjusted EBITDA:



Net income (loss) including noncontrolling interests $ (5,554)$(4,689) $(9,455)$(10,243)$(8,241)

Income tax expense (benefit) 213 139 244 352 502

Interest expense 278 262 43 540 209

Interest income (23) (5) (40) (28) (117)

(Gain) loss on equity investments, net 53 - - 53 (12,338)

Foreign currency (gain) loss 155 (767) (164) (612) (315)

Acquisitions related intangible asset amortization 1,124 1,125 1,129 2,249 2,095

Depreciation and amortization 272 311 348 583 864

Fair value adjustments to contingent consideration liability 100 (300) 300 (200) 300

Restructuring and other charges 881 209 729 1,090 896

Stock-based compensation 323 380 533 703 1,917

Adjusted EBITDA, a non-GAAP measure $ (2,178)$(3,335) $(6,333)$(5,513) $(14,228)

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SOURCE RealNetworks, Inc.