RealNetworks Announces Second Quarter 2014 Results

              RealNetworks Announces Second Quarter 2014 Results  - Rob Glaser named as permanent CEO;  - RealPlayer Cloud continues to gain traction with over 5 million accounts;  - Hired 2 new excellent senior executives, Mike Mulica and Atul Bali, and redeployed a 3rd, Max Pellegrini;  - Continued progress in long term strategic transition and growth strategy; and  - Cash and short-term investments of $195.0 million  PR Newswire  SEATTLE, July 30, 2014  SEATTLE, July 30, 2014 /PRNewswire/ --RealNetworks, Inc. (Nasdaq: RNWK), a leader in personal digital entertainment, today announced results for the second quarter ended June 30, 2014.  For the second quarter of 2014, revenue was $40.8 million, compared to $45.7 million in the previous quarter and $49.9 million in the second quarter of 2013.  "In the second quarter of 2014, we continued to make good progress in our transition into a being a multi-device, cloud-based products and services company," said Rob Glaser, Chairman and CEO of RealNetworks. "Of particular note is RealPlayer Cloud's rapid growth -- RealPlayer Cloud now has over 5 million users worldwide, up from over 2 million three months ago, and, in aggregate, our users are now uploadingover 4.5 terabytes of video per day." RealPlayer Cloud is Real's next generation video product and service, which makes it easy to watch, save and share video across every type of popular digital device.  "During the second quarter, we brought in Mike Mulica to lead the integration of our worldwide sales efforts across our RealPlayer and Mobile Entertainment divisions in order to strengthen our focus on partnerships with global carriers. We also redeployed Max Pellegrini to run the combined product teams and all associated direct-to-consumer marketing. On the games front, we also strengthened our senior team by bringing in Atul Bali to run our overall Games business and by bringing back Rutger Peters and Erik Goossens, the co-founders of Zylom which we acquired in 2006, to run the Casual Games part of the business. We also just announced our new Slingo Adventure game, the first fruit of our Slingo acquisition a year ago. Finally, we also continue to be encouraged by the progress being made by Rhapsody (of which we own approximately 45%), which announced yesterday that it now has over 2 million subscribers."  The company also announced today that Rob Glaser has been named permanent CEO of RealNetworks. See announcement at http://www.realnetworks.com/press/releases/2014/Glaser-permanent-CEO.aspx.   "While our transition plan will take time to complete and will require more capital than originally anticipated, I'm very confident that we are on the right track and making progress that is setting us up for a return to long-term growth and profitability," said Glaser.  GAAP net loss for the second quarter of 2014 was $(21.0) million or $(0.59) per diluted share, compared to $(18.5) million or $(0.52) per diluted share in the second quarter of 2013. Adjusted EBITDA for the second quarter of 2014 was a loss of $(13.1) million, compared to $(5.8) million for the second quarter of 2013. A reconciliation of GAAP operating income (loss) to adjusted EBITDA is provided in the financial tables that accompany this release.  As of June 30, 2014, the company had $195.0 million in unrestricted cash, cash equivalents and short-term investments, compared to $226.2 million as of December 31, 2013.  Business Outlook  For the third quarter of 2014, RealNetworks expects total revenue in the range of $33.0 million to $36.0 million. We expect adjusted EBITDA for the quarter to be a loss in the range of $(18.0) million to $(20.0) million.  Webcast and Conference Call Information  The company will host a conference call today to review results and discuss the company's performance at 5 p.m. ET/2 p.m. PT by calling 888-790-3440 or +1-517-308-9350 (Passcode: Second Quarter Earnings). A live webcast of the call will be available at http://investor.realnetworks.comand an on-demand webcast will be available approximately one hour following the conclusion of the conference call. A telephonic replay will be available until 9 p.m. PT, August 20, 2014 by calling 888-566-0046 or +1-203-369-3677 (Passcode: 6895485)  RNWK-F  About RealNetworks  RealNetworks creates innovative applications and services that make it easy to connect with and enjoy digital media. RealNetworks invented the streaming media category in 1995 and continues to connect consumers with their digital media both directly and through partners, aiming to support every network, device, media type and social network. RealNetworks' corporate information is located at www.realnetworks.com/about-us.  RealNetworks, RealPlayer and GameHouse are trademarks or registered trademarks of RealNetworks, Inc. or its subsidiaries. All other companies or products listed herein are trademarks or registered trademarks of their respective owners.  About Non-GAAP Financial Measures  To supplement RealNetworks' consolidated financial information presented in accordance with GAAP in this press release, the company also discloses certain non-GAAP financial measures, including adjusted EBITDA and adjusted EBITDA 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 operating income (loss) to adjusted EBITDA and to adjusted EBITDA by reportable segment.  The rationale for management's use of non-GAAP measures is included in the supplementary materials presented with the 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, strategic focus and initiatives. 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: risks associated with the implementation of RealNetworks' growth plan, strategic initiatives, and restructuring efforts; its ability to successfully introduce and monetize new products and services; competitive risks, including the growth of competing technologies, products and services, and the emergence of new entrants and competition in the market; the potential outcomes and effects of claims and legal proceedings on RealNetworks' business, prospects, financial condition or results of operations; risks associated with key customer or strategic relationships, business acquisitions and the introduction of new products and services; changes in consumer and advertising spending in response to disruptions in the global financial markets; fluctuations in foreign currencies; and changes in RealNetworks' effective tax rate. More information about potential risk factors that could affect RealNetworks' business and financial results is included in RealNetworks' annual report on Form 10-K for the most recent year ended December 31, its quarterly reports on Form 10-Q and in other reports and documents filed by RealNetworks from time to time with the Securities and Exchange Commission. The preparation of RealNetworks' financial statements and forward-looking financial guidance requires the company to make estimates and assumptions that affect the reported amount of assets and liabilities, and revenues and expenses during the reported period. Actual results may differ materially from these estimates under different assumptions or conditions. The company assumes no obligation to update any forward-looking statements or information, which are in effect as of their respective dates.  RealNetworks, Inc. and Subsidiaries  Condensed Consolidated Statements of Operations  (Unaudited)                             Quarters Ended            Six Months Ended                             June 30,                  June 30,                             2014         2013         2014         2013                             (in thousands, except per share data) Net revenue                 $ 40,825     $ 49,850     $ 86,549     $ 106,643 Cost of revenue             20,786       19,519       39,572       40,025 Extinguishment of           —            —            (10,580)     — liability  Gross profit          20,039       30,331       57,557       66,618 Operating expenses:  Research and             13,267       14,993       27,326       30,244 development  Sales and marketing      16,016       19,269       37,739       40,403  General and              8,577        8,691        17,894       18,637 administrative  Restructuring and        541          816          1,757        2,198 other charges  Lease exit and related   470          3,066        549          3,066 charges  Total operating       38,871       46,835       85,265       94,548 expenses Operating income (loss)     (18,832)     (16,504)     (27,708)     (27,930) Other income (expenses):  Interest income, net     180          179          316          826  Gain (loss) on sale of available for sale          —            —            2,371        — securities, net  Equity in net loss of    (1,802)      (1,347)      (2,640)      (3,580) Rhapsody investment  Other income             (95)         (137)        (172)        (28) (expense), net  Total other income    (1,717)      (1,305)      (125)        (2,782) (expense), net Income (loss) before        (20,549)     (17,809)     (27,833)     (30,712) income taxes Income tax expense          480          662          966          (567) (benefit) Net income (loss)           $ (21,029)   $ (18,471)   $ (28,799)   $ (30,145) Basic net income (loss)     $ (0.59)     $ (0.52)     $ (0.80)     $ (0.85) per share Diluted net income (loss)   $ (0.59)     $ (0.52)     $ (0.80)     $ (0.85) per share Shares used to compute basic net income (loss)     35,890       35,455       35,865       35,399 per share Shares used to compute diluted net income (loss)   35,890       35,455       35,865       35,399 per share      RealNetworks, Inc. and Subsidiaries  Condensed Consolidated Balance Sheets  (Unaudited)                                                       June 30,    December 31,                                                       2014        2013                                                       (in thousands) ASSETS Current assets: Cash and cash equivalents                             $ 124,450   $  151,235 Short-term investments                                70,583      74,920 Trade accounts receivable, net                        21,580      24,613 Deferred costs, current portion                       992         1,601 Deferred tax assets, current                          311         306 Prepaid expenses and other current assets             9,910       9,124  Total current assets                               227,826     261,799 Equipment, software, and leasehold improvements, at cost: Equipment and software                                86,755      86,721 Leasehold improvements                                3,915       3,482  Total equipment, software, and leasehold            90,670      90,203 improvements Less accumulated depreciation and amortization        70,212      67,031  Net equipment, software, and leasehold improvements 20,458      23,172 Restricted cash equivalents and investments           3,000       3,000 Equity method investment                              10,000      12,473 Available for sale securities                         3,182       7,181 Other assets                                          3,073       2,332 Deferred costs, non-current portion                   1,062       946 Deferred tax assets, net, non-current portion         1,405       1,409 Other intangible assets, net                          11,928      12,993 Goodwill                                              18,005      17,476  Total assets                                        $ 299,939   $  342,781 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable                                      $ 20,363    $  19,987 Accrued and other current liabilities                 26,874      41,893 Deferred tax liabilities, net, current portion        911         899 Deferred revenue, current portion                     7,835       7,498  Total current liabilities                           55,983      70,277 Deferred revenue, non-current portion                 145         166 Deferred rent                                         1,269       1,318 Deferred tax liabilities, net, non-current portion    1,725       1,556 Other long-term liabilities                           607         483  Total liabilities                                   59,729      73,800 Shareholders' equity                                  240,210     268,981 Total liabilities and shareholders' equity            $ 299,939   $  342,781      RealNetworks, Inc. and Subsidiaries  Condensed Consolidated Statements of Cash Flows  (Unaudited)                                                       Six Months Ended                                                       June 30,                                                       2014         2013                                                       (in thousands) Cash flows from operating activities: Net income (loss)                                     $ (28,799)   $ (30,145) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization                         6,145        9,874 Stock-based compensation                              3,010        4,058 Equity in net loss of Rhapsody                        2,640        3,580 Deferred income taxes, net                            10           (1,668) Gain on sale of available for sale securities         (2,371)      — Realized translation gain                             (48)         (35) Extinguishment of liability                           (10,580)     — Other                                                 —            51 Net change in certain operating assets and            (785)        1,400 liabilities Net cash provided by (used in) operating activities   (30,778)     (12,885) Cash flows from investing activities: Purchases of equipment, software, and leasehold       (1,689)      (3,181) improvements Proceeds from sale of available for sale securities   2,754        — Purchases of short-term investments                   (48,326)     (70,647) Proceeds from sales and maturities of short-term      52,663       71,327 investments Acquisitions of businesses, net of cash acquired      (733)        (16,107) Other                                                 (467)        —  Net cash provided by (used in) investing activities 4,202        (18,608) Cash flows from financing activities: Proceeds from issuance of common stock (stock options 580          392 and stock purchase plan) Tax payments from shares withheld upon vesting of     (307)        (800) restricted stock Payment of contingent consideration                   (696)        (828)  Net cash provided by (used in) financing activities (423)        (1,236) Effect of exchange rate changes on cash and cash      214          (1,259) equivalents  Net increase (decrease) in cash and cash            (26,785)     (33,988) equivalents Cash and cash equivalents, beginning of period        151,235      163,198 Cash and cash equivalents, end of period              $ 124,450    $ 129,210      RealNetworks, Inc. and Subsidiaries  Supplemental Financial Information  (Unaudited)               2014                  2013               Q2         Q1         Q4         Q3         Q2         Q1               (in thousands) Net Revenue by Line of Business RealPlayer    $ 8,556    $ 15,215   $ 16,799   $ 17,641   $ 18,383   $ 22,383 Group (A) Mobile Entertainment 23,182     19,913     22,146     19,948     18,592     20,495 (B) Games (C)     9,087      10,596     11,650     11,369     12,875     13,915  Total   $ 40,825   $ 45,724   $ 50,595   $ 48,958   $ 49,850   $ 56,793 net revenue Net Revenue by Product RealPlayer Group - License (D) $ 3,273    $ 5,018    $ 7,128    $ 7,281    $ 6,766    $ 8,332 - Subscriptions 2,569      2,777      3,118      3,615      4,193      4,924 (E) - Media Properties    2,714      7,420      6,553      6,745      7,424      9,127 (F) Mobile Entertainment - SaaS (G)    20,175     18,463     20,406     18,156     17,002     18,674 - Technology License &     3,007      1,450      1,740      1,792      1,590      1,821 Other (H) Games - License (I) 3,399      3,849      3,511      3,421      4,089      5,249 - Subscriptions 4,440      5,241      5,688      5,733      5,980      6,312 (J) - Media Properties    1,248      1,506      2,451      2,215      2,806      2,354 (K)  Total   $ 40,825   $ 45,724   $ 50,595   $ 48,958   $ 49,850   $ 56,793 net revenue Net Revenue by Geography United States $ 15,092   $ 20,428   $ 19,724   $ 21,039   $ 21,463   $ 28,024 Rest of world 25,733     25,296     30,871     27,919     28,387     28,769  Total   $ 40,825   $ 45,724   $ 50,595   $ 48,958   $ 49,850   $ 56,793 net revenue  Net Revenue by Line of Business (A) The RealPlayer Group primarily includes revenue from RealPlayer and related products, such as the distribution of third-party software products, advertising on RealPlayer websites, and sales of RealPlayer Plus software licenses to consumers, sales of intellectual property licenses, and consumer subscriptions such as SuperPass and our recently launched RealPlayer Cloud service. (B) The Mobile Entertainment division primarily includes revenue from SaaS services, system integration, and professional services to mobile carriers, and sales of technology licenses of our software products such as Helix. (C) The Games division primarily includes revenue from sales of games licenses, online games subscription services, advertising on games sites and social network sites, microtransactions from online and social games, and sales of mobile games. Net Revenue by Product (D) Licensing revenue within the RealPlayer Group includes sales of RealPlayer Plus software licenses to consumers and sales of intellectual property licenses. (E) Subscriptions revenue within the RealPlayer Group includes revenue from subscriptions such as SuperPass and our recently launched RealPlayer Cloud service. (F) Media Properties revenue within the RealPlayer Group includes distribution of third-party software products and advertising on RealPlayer websites. (G) SaaS revenue within Mobile Entertainment includes revenue from music on demand, ringback tones, intercarrier messaging services provided to network services providers who are largely mobile phone networks, and our recently launched LISTEN product. (H) Licensing and other revenue within Mobile Entertainment includes revenue from Helix-related products and professional services provided to mobile carriers. (I) Licensing revenue within Games includes retail games-related revenue, microtransactions from online and social games and sales of mobile games. (J) Subscriptions revenue within Games includes revenue from online games subscriptions. (K) Media Properties revenue within Games includes distribution of third-party software products and advertising on games sites and social network sites.      RealNetworks, Inc. and Subsidiaries  Segment Results of Operations  (Unaudited)                 2014                      2013         2014         2013                 Q2           Q1           Q2           YTD          YTD                (in thousands) RealPlayer Group Net revenue     $ 8,556      $ 15,215     $ 18,383     $ 23,771     $ 40,766 Cost of         3,620        3,518        4,409        7,138        9,720 revenue Gross profit    4,936        11,697       13,974       16,633       31,046  Gross        58%          77%          76%          70%          76% margin Operating       12,489       17,787       14,001       30,276       30,207 expenses Operating       $ (7,553)    $ (6,090)    $ (27)       $ (13,643)   $ 839 income (loss) Adjusted        $ (6,893)    $ (5,491)    $ 470        $ (12,384)   $ 1,801 EBITDA Mobile Entertainment Net revenue     $ 23,182     $ 19,913     $ 18,592     $ 43,095     $ 39,087 Cost of         14,298       11,950       11,170       26,248       22,002 revenue Gross profit    8,884        7,963        7,422        16,847       17,085  Gross        38%          40%          40%          39%          44% margin Operating       9,424        9,616        8,412        19,040       17,523 expenses Operating       $ (540)      $ (1,653)    $ (990)      $ (2,193)    $ (438) income (loss) Adjusted        $ 808        $ (339)      $ 694        $ 469        $ 4,076 EBITDA Games Net revenue     $ 9,087      $ 10,596     $ 12,875     $ 19,683     $ 26,790 Cost of         2,717        3,129        3,381        5,846        7,181 revenue Gross profit    6,370        7,467        9,494        13,837       19,609  Gross        70%          70%          74%          70%          73% margin Operating       8,769        9,766        11,755       18,535       23,607 expenses Operating       $ (2,399)    $ (2,299)    $ (2,261)    $ (4,698)    $ (3,998) income (loss) Adjusted        $ (1,798)    $ (1,674)    $ (1,315)    $ (3,472)    $ (2,469) EBITDA Corporate Net revenue     $ —          $ —          $ —          $ —          $ — Cost of         151          189          559          340          1,122 revenue Extinguishment  —            (10,580)     —            (10,580)     — of liability Gross profit    (151)        10,391       (559)        10,240       (1,122)  Gross        N/A          N/A          N/A          N/A          N/A margin Operating       8,189        9,225        12,667       17,414       23,211 expenses Operating       $ (8,340)    $ 1,166      $ (13,226)   $ (7,174)    $ (24,333) income (loss) Adjusted        $ (5,198)    $ (6,414)    $ (5,602)    $ (11,612)   $ (12,170) EBITDA Total Net revenue     $ 40,825     $ 45,724     $ 49,850     $ 86,549     $ 106,643 Cost of         20,786       18,786       19,519       39,572       40,025 revenue Extinguishment  —            (10,580)     —            (10,580)     — of liability Gross profit    20,039       37,518       30,331       57,557       66,618  Gross        49%          82%          61%          67%          62% margin Operating       38,871       46,394       46,835       85,265       94,548 expenses Operating       $ (18,832)   $ (8,876)    $ (16,504)   $ (27,708)   $ (27,930) income (loss) Adjusted        $ (13,081)   $ (13,918)   $ (5,753)    $ (26,999)   $ (8,762) EBITDA  RealNetworks, Inc. and Subsidiaries  Reconciliation of segment GAAP operating income (loss) to adjusted EBITDA by segment  (Unaudited)                 2014                      2013         2014         2013                 Q2           Q1           Q2           YTD          YTD                 (in thousands) RealPlayer Group Reconciliation of segment GAAP operating income (loss) to adjusted EBITDA by segment: Operating       $ (7,553)    $ (6,090)    $ (27)       $ (13,643)   $ 839 income (loss) Acquisitions related intangible      125          60           62           185          129 asset amortization Depreciation and             535          539          435          1,074        833 amortization  Adjusted     $ (6,893)    $ (5,491)    $ 470        $ (12,384)   $ 1,801 EBITDA Mobile Entertainment Reconciliation of segment GAAP operating income (loss) to adjusted EBITDA by segment: Operating       $ (540)      $ (1,653)    $ (990)      $ (2,193)    $ (438) income (loss) Acquisitions related intangible      628          607          638          1,235        1,451 asset amortization Depreciation and             720          707          1,046        1,427        3,063 amortization  Adjusted     $ 808        $ (339)      $ 694        $ 469        $ 4,076 EBITDA Games Reconciliation of segment GAAP operating income (loss) to adjusted EBITDA by segment: Operating       $ (2,399)    $ (2,299)    $ (2,261)    $ (4,698)    $ (3,998) income (loss) Acquisitions related intangible      314          314          230          628          251 asset amortization Depreciation and             287          311          716          598          1,278 amortization  Adjusted     $ (1,798)    $ (1,674)    $ (1,315)    $ (3,472)    $ (2,469) EBITDA Corporate Reconciliation of segment GAAP operating income (loss) to adjusted EBITDA by segment: Operating       $ (8,340)    $ 1,166      $ (13,226)   $ (7,174)    $ (24,333) income (loss) Other income    (95)         (77)         (137)        (172)        (28) (expense), net Depreciation and             553          445          1,859        998          2,869 amortization Lease exit and related         470          79           3,066        549          3,066 charges Restructuring and other       541          1,216        816          1,757        2,198 charges Stock-based     1,673        1,337        2,020        3,010        4,058 compensation Extinguishment  —            (10,580)     —            (10,580)     — of liability  Adjusted     $ (5,198)    $ (6,414)    $ (5,602)    $ (11,612)   $ (12,170) EBITDA Total Reconciliation of GAAP operating income (loss) to adjusted EBITDA: Operating       $ (18,832)   $ (8,876)    $ (16,504)   $ (27,708)   $ (27,930) income (loss) Other income    (95)         (77)         (137)        (172)        (28) (expense), net Acquisitions related intangible      1,067        981          930          2,048        1,831 asset amortization Depreciation and             2,095        2,002        4,056        4,097        8,043 amortization Lease exit and related         470          79           3,066        549          3,066 charges Restructuring and other       541          1,216        816          1,757        2,198 charges Stock-based     1,673        1,337        2,020        3,010        4,058 compensation Extinguishment  —            (10,580)     —            (10,580)     — of liability  Adjusted     $ (13,081)   $ (13,918)   $ (5,753)    $ (26,999)   $ (8,762) EBITDA      SOURCE RealNetworks, Inc.  Website: http://www.realnetworks.com Contact: Michael Newman, StreetConnect, Investor Relations for RealNetworks, +1-206-729-3625, IR@realnetworks.com  
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