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RealNetworks Announces First Quarter 2020 Financial Results
[May 06, 2020]

RealNetworks Announces First Quarter 2020 Financial Results


SEATTLE, May 6, 2020 /PRNewswire/ -- RealNetworks, Inc. (Nasdaq: RNWK), a leader in digital media software and services, today announced its financial results for the first quarter ended March 31, 2020.

  • Generated consolidated revenue of $43.1 million
  • Games revenue up 16% year-over-year driven by success of free-to-play strategy
  • Pivoting SAFR strategy to focus on the intersection of public health and public safety
  • CEO Rob Glaser invested $10.0 million into the Company
  • Judd Lee Named Senior Vice President, Chief Financial Officer and Treasurer

Management Commentary

"The new decade is off to a completely unexpected start, as everyone knows. We mourn the loss of a quarter of a million people around the world due to COVID-19. We're also very mindful that, for most of the world, including our home country, the pandemic continues to be massively disruptive to our daily lives," said Rob Glaser, Chairman and CEO of RealNetworks.

Mr. Glaser continued, "In that context, at RealNetworks, we have four primary areas of focus: 

(1)   The safety and well-being of our employees and their families, our customers, and our communities;  
(2)   Running Real in a fundamentally different way than we have run the company before;
(3)   Operating with mission, focus, and excellence; and 
(4)   Finding new ways for us to contribute with our products and services to the new challenges the world is facing." 

"I'm very impressed by how well our team is responding to these challenges with purpose, focus, clarity, and creativity. Our first quarter financial performance reflects this, especially in the third month of the quarter. I am grateful to our team members for their excellent work, and am hopeful that the impact of the team's great work will become even more significant and impactful in the weeks and months ahead," concluded Mr. Glaser.

First Quarter 2020 Financial Highlights

  • Revenue was $43.1 million (inclusive of $26.3 million from Napster) compared to $43.4 million (inclusive of $26.1 million from Napster) in the prior quarter and $39.51 million (inclusive of $24.3 million from Napster) in the prior year period.
  • Games revenue was $6.6 million, consistent with the prior quarter and up 16% compared to $5.7 million in the prior year period.
  • Gross profit margin was 44%, up from 43% in the prior quarter and 37% in the prior year period.
  • Operating expenses decreased $0.5 million, or 2%, from the prior quarter and decreased $1.4 million, or 6%, from the prior year period.
  • Net loss attributable to RealNetworks was $(4.6) million, or $(0.12) per diluted share, compared to a net loss of $(6.4) million, or $(0.17) per diluted share, in the prior quarter and net income of $1.5 million, or $0.04 per diluted share, in the prior year period. Net income in the first quarter of 2019 included a $12.3 million gain from the acquisition of Napster.
  • Adjusted EBITDA was a loss of $(3.3) million compared to a loss of $(2.7) million in the prior quarter and a loss of $(7.9) million in the prior year period.
  • At March 31, 2020, the Company had $19.0 million in unrestricted cash and cash equivalents compared to $16.8 million at December 31, 2019.

1The first quarter of 2019 included a partial quarter of revenue from Napster following the acquisition by RealNetworks on January 18, 2019 of an additional 42% interest in Napster.

Corporate Developments

  • On February 10, 2020, the Company entered into a purchase agreement with Rob Glaser, RealNetworks' Founder, Chairman of the Board, Chief Executive Officer, and largest shareholder by which Mr. Glaser acquired approximately 8 million shares of RealNetworks Series B Preferred Stock, for aggregate gross proceeds to RealNetworks of approximately $10.0 million.
  • As planned, on April 20, 2020, Judd Lee succeeded Michael Ensing as Senior Vice President, Chief Financial Officer and Treasurer. Mr. Lee has served as Chief Financial Officer and in senior leadership roles for technology companies and investment firms for over two decades and brings to RealNetworks an extensive background in financial management, strategic planning, and operational accounting and finance.
  • On April 24, 2020, RealNetworks received $2.9 million in funding pursuant to the Paycheck Protection Program ("PPP") established as part of the Coronavirus Aid, Relief, and Economic Security (or CARES) Act. RealNetworks intends to use the proceeds from the loan to cover payroll costs, rent and utilities, in accordance with program guidelines. In early May 2020, Napster expects to receive $1.7 million pursuant to the program.
  • RealNetworks received a notification from The Nasdaq Stock Market that as of April 23, 2020, the company no longer meets Nasdaq's minimum bid price requirement. Amid the extreme market uncertainty, Nasdaq recently implemented a grace period through June 30, 2020 for compliance with its bid price rule, allowing companies to focus on managing their businesses through the challenges caused by the COVID-19 pandemic. RealNetworks has until December 28, 2020 to regain compliance with the minimum bid price requirement and expects to take action well before then to bring the company back into compliance.

Business Outlook

Given the ongoing uncertainty surrounding the global economy and the future impact of COVID-19, RealNetworks is not providing guidance for the second quarter ending June 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 1-877-451-6152 (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, May 27, 2020, by dialing 1-844-512-2921 (United States) or 1-412-317-6671 (International) and entering the replay pin number: 13701794.

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. Kontxt (www.kontxt.com) is the foremost platform for categorizing A2P messages to help mobile carriers build customer loyalty and drive new revenue through text message classification and antispam. 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 regain 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.com
RNWK-F

 





RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)



Quarter Ended
March 31,





2020


2019








 (in thousands, except per share data)






 Net revenue

$

43,145



$

39,472



 Cost of revenue

24,176



24,870



           Gross profit

18,969



14,602








 Operating expenses:





       Research and development

8,618



8.833



       Sales and marketing

8,117



8,142



       General and administrative

7,113



8,364



       Restructuring and other charges

209



167








           Total operating expenses

24,057



25,506








 Operating loss

(5,088)



(10,904)








 Other income (expenses):





       Interest expense

(262)



(166)



       Interest income

5



77



       Gain (loss) on equity investment, net



12,338



       Other income (expenses), net

795



127








           Total other income (expenses), net

538



12,376








 Income (loss) before income taxes

(4,550)



1,472



 Income tax expense

139



258








Net income (loss) including noncontrolling interests

(4,689)



1,214



Net income (loss) attributable to noncontrolling interests

(47)



(319)



Net income (loss) attributable to RealNetworks

$

(4,642)



$

1,533








Net income (loss) per share attributable to RealNetworks- Basic:

$

(0.12)



$

0.04



Net income (loss) per share attributable to RealNetworks- Diluted:

$

(0.12)



$

0.04








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

38,229



37,820



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

38,229



37,912




 

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)



March 31,
2020


December 31,
2019


 (in thousands)

ASSETS

 Current assets:




 Cash and cash equivalents

$

19,046



$

16,805


 Trade accounts receivable, net

26,991



29,507


 Deferred costs, current portion

865



823


 Prepaid expenses and other current assets

8,873



7,445


    Total current assets

55,775



54,580






 Equipment and software

30,419



32,167


 Leasehold improvements

2,903



3,311


    Total equipment, software, and leasehold improvements

33,322



35,478


 Less accumulated depreciation and amortization

30,801



32,657


    Net equipment, software, and leasehold improvements

2,521



2,821






 Operating lease assets

10,961



11,592


 Restricted cash equivalents

5,374



5,374


 Other assets

1,150



1,891


 Deferred costs, non-current portion

1,156



1,021


 Deferred tax assets, net

752



761


 Other intangible assets, net

18,016



19,286


 Goodwill

62,202



62,428






 Total assets

$

157,907



$

159,754






 LIABILITIES AND SHAREHOLDERS' EQUITY





 Current liabilities:




 Accounts payable

$

4,996



$

4,927


 Accrued royalties, fulfillment and other current liabilities

77,127



77,303


 Deferred revenue, current portion

6,437



6,620


 Notes payable

4,797



7,331


    Total current liabilities

93,357



96,181






 Deferred revenue, non-current portion

287



96


 Deferred tax liabilities, net

1,116



1,172


 Long-term lease liabilities

7,770



8,466


 Long-term debt

3,900



3,900


 Other long-term liabilities

8,420



11,666






 Total liabilities

114,850



121,481






 Total shareholders' equity

43,606



38,775






Noncontrolling interests

(549)



(502)






 Total equity

43,057



38,273






 Total liabilities and equity

$

157,907



$

159,754


 

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)



Three Months Ended
March 31,


2020


2019






 (in thousands)


 Cash flows from operating activities:




Net income (loss) including noncontrolling interests

$

(4,689)



$

1,214


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




Depreciation and amortization

1,436



1,482


Stock-based compensation

380



1,384


(Gain) loss on equity investment, net



(12,338)


Foreign currency (gain) loss

(767)



(151)


Fair value adjustments to contingent consideration liability

(300)




Net change in certain operating assets and liabilities

(684)



(910)


  Net cash used in operating activities

(4,624)



(9,319)


 Cash flows from investing activities:




Purchases of equipment, software, and leasehold improvements

(94)



(482)


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

(94)



11,802






 Cash flows from financing activities:




Proceeds from issuance of preferred stock

10,000




Tax payments from shares withheld upon vesting of restricted stock



(271)


Proceeds from notes payable and revolving credit facility

8,768



9,733


Repayments of notes payable and revolving credit facility

(11,172)



(8,437)


Other financing activities



450


 Net cash provided by financing activities

7,596



1,475


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

(637)



(207)


 Net increase in cash, cash equivalents and restricted cash

2,241



3,751


 Cash, cash equivalents and restricted cash, beginning of period

22,179



37,191


 Cash, cash equivalents and restricted cash, end of period

$

24,420



$

40,942


 

RealNetworks, Inc. and Subsidiaries

Supplemental Financial Information

(Unaudited)




2020


2019



Q1


 Q4


 Q3


 Q2


 Q1



 (in thousands)

Net Revenue by Segment










Consumer Media (A)


$

3,495



$

4,432



$

3,632



$

2,620



$

2,486


Mobile Services (B)


6,690



6,312



6,895



6,997



6,939


Games (C)


6,637



6,567



7,164



6,048



5,710


Napster (D)


26,323



26,089



27,302



28,583



24,337


     Total net revenue


$

43,145



$

43,400



$

44,993



$

44,248



$

39,472













Net Revenue by Product











Consumer Media











- Software License (E)


$

2,020



$

2,856



$

1,987



$

944



$

735


- Subscription Services (F)


929



992



1,028



1,040



1,088


- Product Sales (G)


222



193



207



206



219


- Advertising & Other (H)


324



391



410



430



444













Mobile Services











- Software License (I)


831



657



888



957



599


- Subscription Services (J)


5,859



5,655



6,007



6,040



6,340













Games











- Subscription Services (K)


2,770



3,007



3,056



3,073



2,985


- Product Sales (L)


2,978



2,580



3,078



2,177



1,988


- Advertising & Other (M)


889



980



1,030



798



737













Napster











- Subscription Services (N)


26,323



26,089



27,302



28,583



24,337













     Total net revenue


$

43,145



$

43,400



$

44,993



$

44,248



$

39,472













Net Revenue by Geography











United States


$

22,420



$

21,053



$

22,015



$

21,322



$

18,970


Rest of world


20,725



22,347



22,978



22,926



20,502


     Total net revenue


$

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 sales of mobile and PC games, online games subscription services, player purchases of in-game virtual goods, 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 retail and wholesale games-related revenue, sales of mobile games, and player purchases of in-game virtual goods.

(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



Q1


Q4


Q1



 (in thousands)

Consumer Media














Net revenue


$

3,495



$

4,432



$

2,486


Cost of revenue


611



690



833


Gross profit


2,884



3,742



1,653









Gross margin


83

%


84

%


66

%








Operating expenses


2,458



2,498



3,119


Operating income (loss), a GAAP measure


$

426



$

1,244



$

(1,466)


Depreciation and amortization


13



34



54









Contribution margin, a non-GAAP measure


$

439



$

1,278



$

(1,412)









Mobile Services














Net revenue


$

6,690



$

6,312



$

6,939


Cost of revenue


1,696



1,866



2,048


Gross profit


4,994



4,446



4,891









Gross margin


75

%


70

%


70

%








Operating expenses


7,588



7,198



7,561


Operating income (loss), a GAAP measure


$

(2,594)



$

(2,752)



$

(2,670)


Depreciation and amortization


98



100



231









Contribution margin, a non-GAAP measure


$

(2,496)



$

(2,652)



$

(2,439)









Games














Net revenue


$

6,637



$

6,567



$

5,710


Cost of revenue


1,794



1,716



1,670


Gross profit


4,843



4,851



4,040









Gross margin


73

%


74

%


71

%








Operating expenses


4,923



4,744



5,037


Operating income (loss), a GAAP measure


$

(80)



$

107



$

(997)


Acquisitions related intangible asset amortization






23


Depreciation and amortization


138



85



83









Contribution margin, a non-GAAP measure


$

58



$

192



$

(891)









Napster














Net revenue


$

26,323



$

26,089



$

24,337


Cost of revenue


20,072



20,493



20,396


Gross profit


6,251



5,596



3,941









Gross margin


24

%


21

%


16

%








Operating expenses


6,461



7,147



5,532


Operating income (loss), a GAAP measure


$

(210)



$

(1,551)



$

(1,591)


Acquisitions related intangible asset amortization


1,125



1,126



943


Depreciation and amortization


32



60



115


Restructuring and other charges


122



544











Contribution margin, a non-GAAP measure


$

1,069



$

179



$

(533)









Corporate














Cost of revenue


$

3



$

(68)



$

(77)


Gross profit


(3)



68



77









Gross margin


N/A



N/A



N/A









Operating expenses


2,627



2,999



4,257


Operating income (loss), a GAAP measure


$

(2,630)



$

(2,931)



$

(4,180)


Other income (expense), net


795



(431)



127


Foreign currency (gain) loss


(767)



494



(151)


Depreciation and amortization


30



32



33


Fair value adjustments to contingent consideration liability


(300)



300




Restructuring and other charges


87



367



167


Stock-based compensation


380



461



1,384









Contribution margin, a non-GAAP measure


$

(2,405)



$

(1,708)



$

(2,620)


 

RealNetworks, Inc. and Subsidiaries

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

(Unaudited)




2020


2019



Q1


 Q4


 Q1















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












Net income (loss) including noncontrolling interests


$

(4,689)



$

(6,763)



$

1,214


Income tax expense (benefit)


139



256



258


Interest expense


262



207



166


Interest income


(5)



(14)



(77)


(Gain) loss on equity investment, net






(12,338)


Foreign currency (gain) loss


(767)



494



(151)


Acquisitions related intangible asset amortization


1,125



1,126



966


Depreciation and amortization


311



311



516


Fair value adjustments to contingent consideration liability


(300)



300




Restructuring and other charges


209



911



167


Stock-based compensation


380



461



1,384


   Adjusted EBITDA, a non-GAAP measure


$

(3,335)



$

(2,711)



$

(7,895)


 

RealNetworks Logo

 

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SOURCE RealNetworks, Inc.


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