RealNetworks Announces Second Quarter 2020 Financial Results

Press Releases

Aug 05, 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® 20/20 and StarSearch™ by Real®
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 25^th anniversary of the streaming industry. RealPlayer® 20/20 and StarSearch™ by Real® 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
[email protected]
RNWK-F

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

	Quarter Ended June 30,				Six Months Ended 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, 2020		December 31, 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 liabilities	75,865		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 liability	100			(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)