Current Report

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 8-K
 
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): July 30, 2009
 
RealNetworks, Inc.
(Exact name of registrant as specified in its charter)
 
         
WASHINGTON   0-23137   91-1628146
(State or other   (Commission File   (I.R.S. Employer
jurisdiction   Number)   Identification No.)
of incorporation)    
2601 Elliott Avenue, Suite 1000
Seattle, Washington 98121
(Address of principal executive offices) (Zip code)
 
(206) 674-2700
Registrant’s telephone number, including area code
 
Not Applicable
(Former name or former address if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
o   Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
o   Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
o   Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
o   Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 
 

 

 

Item 2.02. Results of Operations and Financial Condition
     On July 30, 2009, RealNetworks, Inc. (the “Company” or “RealNetworks”) announced via press release the Company’s results for its second quarter ended June 30, 2009. A copy of the Company’s press release is attached hereto as Exhibit 99.1 and additional information regarding the inclusion of non-GAAP financial measures in certain of the Company’s public disclosures, including its second quarter 2009 financial results announcement, is included as Exhibit 99.2. The information in Item 2.02 of this Form 8-K is intended to be furnished to the Securities and Exchange Commission (“SEC”). This information shall not be deemed “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), or incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
Item 9.01. Financial Statements and Exhibits
     (d) Exhibits.
     Pursuant to the rules and regulations of the SEC, the attached exhibits are deemed to have been furnished to, but not filed with, the SEC:
     
Exhibit No.   Description
 
   
99.1
  Press Release issued by RealNetworks, Inc. dated July 30, 2009
 
99.2
  Information Regarding Non-GAAP Financial Measures

 

 

SIGNATURE
     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
         
  REALNETWORKS, INC.
  		 
  By:   /s/ Michael Eggers    
    Michael Eggers  
    Senior Vice President,
Chief Financial Officer
and Treasurer 		 
 
Dated: July 30, 2009

 

 

EXHIBIT INDEX
     
Exhibit Number   Description
 
   
99.1
  Press Release issued by RealNetworks, Inc. dated July 30, 2009
 
99.2
  Information Regarding Non-GAAP Financial Measures

 

Exhibit 99.1
REALNETWORKS ANNOUNCES SECOND QUARTER 2009 RESULTS
SEATTLE — July 30, 2009 — Digital entertainment services company RealNetworks ® , Inc. (Nasdaq: RNWK) today announced results for the second quarter ended June 30, 2009.
Quarterly Highlights:
  •   Revenue of $135.7 million
 
  •   Net loss of $(188.3) million or $(1.40) per share
 
  •   Adjusted EBITDA of $4.1 million
 
  •   Cash and short term investments of $362.8 million as of June 30, 2009
“In spite of a difficult consumer environment, our business remained relatively stable in the second quarter,” said Rob Glaser, RealNetworks’ Chairman and CEO. “Looking forward, even though we expect the economy to remain weak, we expect to show sequential improvement in the second half of the year based in part on new products such as our innovative RealPlayer SP.”
Second Quarter Results
For the second quarter of 2009, revenue was $135.7 million, a decrease of 11%, compared with $152.6 million in the second quarter of 2008. Foreign currency exchange rate fluctuations negatively affected 2009 second quarter revenue by approximately $6.3 million compared with the year-ago quarter. Excluding the effects of these foreign exchange rate changes, revenue declined 7% year over year. Revenue trends in each of Real’s businesses in the second quarter of 2009, including the effects of foreign currency exchange rate changes, compared with the year-earlier quarter were: a 9% increase in Music revenue to $40.5 million, offset by a 10% decrease in Technology Products and Solutions revenue to $46.2 million, a 15% decrease in Games revenue to $29.8 million, and a 34% decrease in Media Software and Services revenue to $19.3 million.
Net loss for the second quarter of 2009 was $(188.3) million, or $(1.40) per share, compared with a net loss of $(1.3) million, or $(0.01) per share, in the second quarter of 2008. Included in the second quarter 2009 net loss were non-cash goodwill impairment charges of $175.6 million. Adjusted EBITDA for the second quarter of 2009 was $4.1 million compared with $17.4 million in the second quarter of 2008. A reconciliation of GAAP net income to adjusted EBITDA is provided in the financial tables that accompany this release.
Gross margin was 59% in the second quarter of 2009 compared with 64% in the second quarter of 2008. Income tax provision was $(1.2) million in the second quarter of 2009, compared with $(3.7) million in the year-earlier period. Interest income in the second quarter of 2009 was $754,000 compared with $3.4 million in the year-earlier period.
As of June 30, 2009, Real had approximately $362.8 million in unrestricted cash, cash equivalents and short-term investments, of which nearly 90% is located in the U.S. In addition, Real had approximately $37 million in restricted cash and equity investments at June 30, 2009.

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Business Outlook
Due to the high level of uncertainty regarding consumer spending, global economic trends, foreign currency exchange rate fluctuations and credit markets, RealNetworks is not providing quantitative guidance. The company expects 2009 to continue to be a challenging year for consumer spending, online advertising and corporate infrastructure spending.
For the third quarter of 2009, Real expects overall revenue to increase sequentially but to decline year-over-year. Sequentially, the company expects revenue to be flat or increase in each of our segments. Compared with the year-ago third quarter, Real expects third-quarter Media Software and Services revenue to be flat, and revenue in Music, Games and Technology Products and Solutions to decline.
The foregoing forward-looking statements reflect Real’s expectations as of July 30, 2009. It is not Real’s general practice to update these forward-looking statements until its next quarterly results announcement.
Webcast and Conference Call Information
The company will host a webcast and conference call today at 5:00pm (Eastern)/ 2:00pm (Pacific). The live webcast featuring slides and audio will be available at http://investor.realnetworks.com. Listeners must use RealPlayer ® to listen to the conference call, which can be downloaded for free at www.real.com. The on-demand webcast will be available approximately two hours following the conclusion of the live webcast.
Conference Call Details
5:00 p.m. (Eastern) / 2:00 p.m. (Pacific)
Dial In:
800-857-5305 Domestic
773-681-5857 International
Passcode: Second Quarter Earnings
Leader: Rob Glaser
Telephonic replay will be available until 8:00 p.m. (Eastern), Aug. 13, 2009.
Dial In:
866-873-2049 Domestic
402-220-5369 International
RNWK-F
For More Information Contact
Press: Bill Hankes, (206) 892-6614, bhankes@real.com
Financial: Marj Charlier, (206) 892-6718, mcharlier@real.com
About Real Networks
RealNetworks, Inc. delivers digital entertainment services to consumers via PC, portable music player, home entertainment system and mobile phone. Real created the streaming media category in 1995 and has continued to lead the market with pioneering products and services, including: RealPlayer ® , the first mainstream media player to enable one-click downloading and recording of Internet video; the award-winning Rhapsody ® digital music service, which delivers more than 1 billion songs per year; RealArcade ® , one of the largest

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casual games destinations on the Web; and a variety of mobile entertainment services, such as ringback tones, offered to consumers through leading wireless carriers around the world. RealNetworks’ corporate information is located at http://investor.realnetworks.com.
About Non-GAAP Financial Measures
To supplement RealNetworks’ condensed consolidated financial statements presented in accordance with GAAP in this press release, the company also discloses certain non-GAAP financial measures, including adjusted revenue, adjusted EBITDA excluding impairments, adjusted EBITDA, adjusted EBITDA by reporting segment, adjusted cost of revenue and adjusted operating expenses, 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) to adjusted EBITDA, to adjusted EBITDA excluding impairments, and to adjusted EBITDA by reporting segment; GAAP cost of revenue to adjusted cost of revenue; and GAAP operating expenses to adjusted operating expenses for the relevant periods.
The rationale for management’s use of non-GAAP measures is included in the supplementary materials presented with the second quarter earnings materials, available in 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 Real’s current expectations for future revenue and other financial results, future success of Real’s new products, continued weakness of the economy and future trends in consumer and corporate infrastructure spending and online advertising. All statements contained in this press release that do not relate to matters of historical fact should be considered forward-looking statements. Actual results may differ materially from the results predicted. Factors that could cause actual results to differ from the results predicted include: fluctuations in foreign currencies; the potential outcomes and effects of claims and legal proceedings, including those relating to RealDVD and the ongoing VeriSign arbitration, on Real’s business prospects financial condition or results of operations; development and consumer acceptance of legal online music distribution services generally and RealNetworks’ content services in particular because these are relatively new and unproven business models and markets; the potential that Real will be unable to continue to enter into commercially attractive agreements with third parties for the provision of compelling content for its subscription service offerings and the distribution of Real’s carrier application services; the emergence of new entrants and competition in the market for digital media subscription offerings, online music sales and downloadable casual games; competitive risks, including the emergence or growth of competing technologies, products and services; risks associated with 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; risks inherent in strategic relationships, especially with competitors, and with respect to technology and service integration efforts; and risks relating to the ability of Real’s strategic partners to generate subscribers for Real’s digital content services. 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

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assumptions that affect the reported amount of assets and liabilities and the reported amounts of 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, Rhapsody, RealPlayer and RealArcade 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.

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RealNetworks, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
                                 
    Quarters Ended     Six Months Ended  
    June 30,     June 30,  
    2009     2008     2009     2008  
    (in thousands, except per share data)  
Net revenue
  $ 135,725     $ 152,648     $ 276,498     $ 300,211  
Cost of revenue
    55,614       55,645       111,635       111,038  
 
                       
Gross profit
    80,111       97,003       164,863       189,173  
 
                       
 
                               
Operating expenses:
                               
Research and development
    28,923       29,065       57,482       54,071  
Sales and marketing
    42,273       53,054       85,958       106,650  
Advertising with related party (A)
    6,865       9,240       14,288       16,580  
General and administrative
    19,338       18,337       42,169       35,421  
Impairment of goodwill
    175,583       —       175,583       —  
Restructuring and other charges
    —       —       794       686  
 
                       
Total operating expenses
    272,982       109,696       376,274       213,408  
 
                       
Operating loss
    (192,871 )     (12,693 )     (211,411 )     (24,235 )
 
                       
 
                               
Other income (expenses):
                               
Interest income, net
    754       3,375       1,937       8,333  
Equity in net loss of investments
    (269 )     (107 )     (924 )     (198 )
Gain on sale of equity investments, net
    68       222       205       222  
Gain on sale of interest in Rhapsody America (B)
    —       3,371       —       7,097  
Other income (expense), net
    (449 )     50       406       818  
 
                       
Total other income (expense), net
    104       6,911       1,624       16,272  
 
                       
Loss before income taxes
    (192,767 )     (5,782 )     (209,787 )     (7,963 )
Income taxes
    (1,210 )     (3,700 )     (2,759 )     (7,708 )
 
                       
 
                               
Net loss
    (193,977 )     (9,482 )     (212,546 )     (15,671 )
Net loss attributable to the noncontrolling interest in Rhapsody America (C)
    5,648       8,177       12,081       16,792  
 
                       
Net income (loss) attributable to common shareholders
  $ (188,329 )   $ (1,305 )   $ (200,465 )   $ 1,121  
 
                       
 
                               
Basic net income (loss) per share available to common shareholders
  $ (1.40 )   $ (0.01 )   $ (1.51 )   $ 0.01  
 
                               
Diluted net income (loss) per share available to common shareholders
  $ (1.40 )   $ (0.01 )   $ (1.51 )   $ 0.01  
 
                               
Shares used to compute basic net income (loss) per share available to common shareholders
    134,420       142,905       134,394       142,946  
Shares used to compute diluted net income (loss) per share available to common shareholders
    134,420       142,905       134,394       156,000  
 
(A)   Consists of advertising purchased by Rhapsody America from MTV Networks (MTVN). MTVN has a 49% ownership interest in Rhapsody America.
 
(B)   Consists of gains realized from MTVN’s note payments to Rhapsody America. Effective January 1, 2009, the Company adopted SFAS No. 160 Non-controlling Interests in Consolidated Financial Statements, an amendment to ARB No. 51 (SFAS 160) which requires the appreciation of gains on the sale of non-controlling interest to be recorded as an equity transaction.
 
(C)   Noncontrolling interest in Rhapsody America reflects MTVN’s 49% ownership share in the losses of Rhapsody America.

 

 

RealNetworks, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
                 
    June 30,     December 31,  
    2009     2008  
    (in thousands)  
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 197,492     $ 232,968  
Short-term investments
    165,266       137,766  
Trade accounts receivable, net
    64,413       70,201  
Deferred costs, current portion
    6,111       4,026  
Prepaid expenses and other current assets
    36,699       34,599  
 
           
 
               
Total current assets
    469,981       479,560  
 
           
 
               
Equipment, software, and leasehold improvements, at cost:
               
Equipment and software
    143,374       135,788  
Leasehold improvements
    30,954       30,719  
 
           
Total equipment, software, and leasehold improvements
    174,328       166,507  
Less accumulated depreciation and amortization
    114,109       103,500  
 
           
 
               
Net equipment, software, and leasehold improvements
    60,219       63,007  
 
               
Restricted cash equivalents and investments
    14,600       14,742  
Equity investments
    22,384       18,582  
Other assets
    3,782       3,775  
Deferred costs, non-current portion
    6,980       6,120  
Deferred tax assets, net, non-current portion
    9,442       9,236  
Other intangible assets, net
    14,268       18,727  
Goodwill
    —       175,264  
 
           
 
               
Total assets
  $ 601,656     $ 789,013  
 
           
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
               
Current liabilities:
               
Accounts payable
  $ 34,666     $ 36,575  
Accrued and other liabilities
    117,445       118,688  
Deferred revenue, current portion
    39,816       39,835  
Related party payable (A)
    6,930       13,155  
Accrued loss on excess office facilities, current portion
    4,214       4,317  
 
           
 
               
Total current liabilities
    203,071       212,570  
 
           
 
               
Deferred revenue, non-current portion
    2,003       1,961  
Accrued loss on excess office facilities, non-current portion
    1,010       2,893  
Deferred rent
    4,564       4,614  
Deferred tax liabilities, net, non-current portion
    811       1,379  
Other long-term liabilities
    11,475       11,660  
 
           
 
               
Total liabilities
    222,934       235,077  
 
           
 
               
Noncontrolling interest in Rhapsody America (B)
    3,627       378  
 
               
Shareholders’ equity
    375,095       553,558  
 
           
 
               
Total liabilities and shareholders’ equity
  $ 601,656     $ 789,013  
 
           
 
(A)   Related party payable reflects amounts owed to MTVN.
 
(B)   Noncontrolling interest in Rhapsody America reflects MTVN’s 49% ownership interest in the net assets of Rhapsody America.

 

 

RealNetworks, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
                 
    Six Months Ended June 30,  
    2009     2008  
    (in thousands)  
Cash flows from operating activities:
               
Net loss 
  $ (212,546 )   $ (15,671 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    15,522       25,701  
Stock-based compensation
    10,818       11,520  
(Gain) loss on disposal of equipment, software, and leasehold improvements
    (34 )     182  
Equity in net loss of investments
    924       198  
Gain on sale of equity investment, net
    (205 )     (222 )
Excess tax benefit from stock option exercises
    (9 )     (88 )
Impairment of goodwill
    175,583       —  
Accrued restructuring and other charges
    (3,675 )     —  
Accrued loss on excess office facilities
    (1,986 )     (1,592 )
Deferred income taxes, net
    (682 )     (2,138 )
Gain on sale of interest in Rhapsody America
    —       (7,097 )
Other
    24       89  
Net change in certain operating assets and liabilities, net of acquisitions
    (1,975 )     (39,160 )
 
           
 
               
Net cash used in operating activities
    (18,241 )     (28,278 )
 
           
 
               
Cash flows from investing activities:
               
Purchases of equipment, software, and leasehold improvements
    (7,608 )     (15,231 )
Purchases of short-term investments
    (66,192 )     (95,671 )
Proceeds from sales and maturities of short-term investments
    38,692       68,741  
Proceeds from the sales of equity investments
    205       1,225  
Purchases of equity investments
    (2,000 )     —  
Payment of acquisition costs, net of cash acquired
    (3,154 )     (10,164 )
Decrease in restricted cash equivalents and investments, net
    141       839  
 
           
 
               
Net cash used in investing activities
    (39,916 )     (50,261 )
 
           
 
               
Cash flows from financing activities:
               
Net proceeds from sales of common stock under employee stock purchase plan and exercise of stock options
    819       6,041  
Net proceeds from sales of interest in Rhapsody America
    19,537       14,607  
Excess tax benefit from stock option exercises
    9       88  
Repurchases of common stock
    —       (681 )
 
           
 
               
Net cash provided by financing activities
    20,365       20,055  
 
           
 
               
Effect of exchange rate changes on cash and cash equivalents
    2,316       (2,408 )
 
           
 
               
Net increase (decrease) in cash and cash equivalents
    (35,476 )     (60,892 )
 
               
Cash and cash equivalents, beginning of period
    232,968       476,697  
 
           
 
               
Cash and cash equivalents, end of period
  $ 197,492     $ 415,805  
 
           

 

 

RealNetworks, Inc. and Subsidiaries
Supplemental Financial Information
(Unaudited)
                                                 
    2009     2008  
    Q2     Q1     Q4     Q3     Q2     Q1  
                    (in thousands)                  
Net Revenue by Line of Business:
                                               
Consumer products and services (A)
  $ 89,517     $ 97,194     $ 100,282     $ 100,322     $ 101,353     $ 96,286  
Technology products and solutions (B)
    46,208       43,579       52,362       51,633       51,295       51,277  
 
                                   
 
                                               
Total net revenue
  $ 135,725     $ 140,773     $ 152,644     $ 151,955     $ 152,648     $ 147,563  
 
                                   
 
                                               
Consumer Products and Services:
                                               
Subscriptions (C)
  $ 54,446     $ 59,052     $ 57,853     $ 57,776     $ 55,658     $ 55,193  
Media properties (D)
    14,753       15,536       18,337       19,946       23,472       18,702  
E-commerce and other (E)
    20,318       22,606       24,092       22,600       22,223       22,391  
 
                                   
 
                                               
Total consumer products and services revenue
  $ 89,517     $ 97,194     $ 100,282     $ 100,322     $ 101,353     $ 96,286  
 
                                   
 
                                               
Consumer Products and Services:
                                               
Music (F)
  $ 40,452     $ 44,053     $ 43,882     $ 41,591     $ 37,170     $ 38,079  
Media software and services (G)
    19,291       20,318       22,695       24,531       29,238       26,409  
Games (H)
    29,774       32,823       33,705       34,200       34,945       31,798  
 
                                   
 
                                               
Total consumer products and services revenue
  $ 89,517     $ 97,194     $ 100,282     $ 100,322     $ 101,353     $ 96,286  
 
                                   
 
                                               
Net Revenue by Geography:
                                               
United States
  $ 90,685     $ 96,666     $ 101,369     $ 102,363     $ 100,898     $ 99,169  
Rest of world
    45,040       44,107       51,275       49,592       51,750       48,394  
 
                                   
 
                                               
Total net revenue
  $ 135,725     $ 140,773     $ 152,644     $ 151,955     $ 152,648     $ 147,563  
 
                                   
 
                                               
   Subscribers (presented as greater than) *:
                                               
Total subscribers (I)
    37,700       36,450       34,100       32,650       35,000       32,200  
Technology products and solutions application services subscribers (J)
    36,300       33,850       31,500       29,950       32,450       29,500  
   Music subscribers:
                                               
Consumer music subscribers:
                                               
Rhapsody subscribers
    750       800       775       750       600       600  
Radio subscribers
    75       1,200       1,225       1,250       1,225       1,275  
 
                                   
Total consumer music subscribers
    825       2,000       2,000       2,000       1,825       1,875  
Technology products and solutions application services music subscribers (K)
    975       900       875       850       800       800  
 
                                   
Total Music Subscribers**
    1,800       2,900       2,875       2,850       2,625       2,675  
 
*   Total music subscribers includes subscribers from our technology products and solutions application subscription services, such as music-on-demand, as well as our consumer music services, such as Rhapsody and Premium Radio. Although music-on-demand subscribers are included in the technology products and solutions application services subscribers and total music subscribers, these subscribers are only counted once as part of our total subscribers.
 
**   Prior periods have been changed to reflect current period presentation. Totals may not equal due to rounding convention.
 
(A)   Revenue is derived from consumer digital media subscription services, RealPlayer Plus and related products, sales and distribution of third party software products, content such as games and music and advertising.
 
(B)   The Technology Products and Solutions (TPS) segment includes revenue and related costs from: sales of ringback tones, music-on-demand, video-on-demand, messaging, and information services; sales of media delivery system software, including Helix system software and related authoring and publishing tools, both directly to customers and indirectly through original equipment manufacturer channels; support and maintenance services sold to customers who purchase software products; broadcast hosting services; and consulting and professional services that are offered to customers.
 
(C)   Revenue is derived from consumer digital media subscription services including: SuperPass, RadioPass, Rhapsody, GamePass and FunPass.
 
(D)   Revenue is derived from advertising and through the distribution of third party products.
 
(E)   Revenue is derived from RealPlayer Plus and related products, sales of third party software products, and content such as games and music.
 
(F)   The Music segment primarily includes revenue and related costs from: Rhapsody America’s Rhapsody and Radiopass subscription services; sales of digital music content through the Rhapsody service and the RealPlayer music store; and advertising from music websites.
 
(G)   The Media Software and Services (MSS) segment primarily includes revenue and related costs from: the SuperPass premium subscription service; RealPlayer Plus and related products; sales and distribution of third-party software products; and all advertising other than that related directly to our Music and Games businesses.
 
(H)   The Games segment primarily includes revenue and related costs from: the sale of individual games on our websites RealArcade.com, GameHouse.com and Zylom.com; the sales of games subscription services; advertising through our games websites; the sale of games through the syndication on partner sites, and sales of games through wireless carriers.
 
(I)   Total subscribers include technology products and solutions application services and consumer subscription services including: ringback tones, music-on-demand, video-on-demand, Rhapsody, Rhapsody-to-Go, RadioPass, SuperPass, and GamePass.
 
(J)   Technology products and solutions application service subscribers include: ringback tones, music-on-demand and video-on-demand.
 
(K)   Technology products and solutions application services music subscribers include music-on-demand.

 

 

RealNetworks, Inc. and Subsidiaries
Supplemental Financial Information
(Unaudited)
Reconciliation of GAAP net income (loss) attributable to common shareholders to adjusted EBITDA excluding impairments and adjusted EBITDA is as follows:
                                                 
    Quarters Ended  
    June 30,     March 31,     December 31,     September 30,     June 30,     March 31,  
    2009     2009     2008     2008     2008     2008  
    (in thousands)  
Net income (loss) attributable to common shareholders
  $ (188,329 )   $ (12,136 )   $ (240,499 )   $ (4,500 )   $ (1,305 )   $ 2,426  
Interest income, net
    (754 )     (1,183 )     (2,255 )     (2,865 )     (3,375 )     (4,958 )
Stock-based compensation
    5,596       5,222       6,056       5,955       6,031       5,489  
Loss (gain) on equity investments, net
    (68 )     (137 )     12       —       (222 )     —  
Conversion of WiderThan stock options to a cash equivalent
    3       17       11       16       26       89  
Depreciation and amortization (net of noncontrolling interest effect)
    5,815       5,726       5,784       6,165       6,186       6,282  
Acquisitions related intangible asset amortization (net of noncontrolling interest effect)
    1,649       1,768       1,872       5,752       6,171       6,315  
Impairment of goodwill and long-lived assets
    175,583       —       190,347       —       —       —  
Impairment of deferred costs and prepaid royalties
    —       —       19,666       —       —       —  
Restructuring and other charges
    —       794       6,147       —       —       686  
Pro forma gain on sale of interest in Rhapsody America
    3,444       4,010       6,568       —       —       —  
Expenses related to antitrust litigation
    —       —       179       174       202       202  
Income taxes
    1,210       1,549       17,392       728       3,700       4,008  
 
                                   
 
                                               
Adjusted EBITDA excluding impairments
  $ 4,149     $ 5,630     $ 11,280     $ 11,425     $ 17,414     $ 20,539  
 
                                   
 
                                               
Impairments:
                                               
Impairment of deferred costs and prepaid royalties
    —       —       (19,666 )     —       —       —  
Restructuring and other charges
    —       (794 )     (6,147 )     —       —       (686 )
 
                                   
Adjusted EBITDA
  $ 4,149     $ 4,836     $ (14,533 )   $ 11,425     $ 17,414     $ 19,853  
 
                                   

 

 

RealNetworks, Inc. and Subsidiaries
Segment Results of Operations
(Unaudited)
                                                 
    Quarter Ended June 30, 2009  
    Music (A)     MSS (B)     Games (C)     TPS (D)     Other     Grand Total  
                    (in thousands)                          
Net revenue
  $ 40,452     $ 19,291     $ 29,774     $ 46,208     $ —     $ 135,725  
Cost of revenue
    24,945       2,590       8,801       19,278       —       55,614  
 
                                   
 
                                               
Gross profit
    15,507       16,701       20,973       26,930       —       80,111  
 
                                   
Gross margin
    38 %     87 %     70 %     58 %     —       59 %
 
                                               
Operating expenses:
                                               
Advertising with related party
    6,865       —       —       —       —       6,865  
Impairment of goodwill
    37,029       46,776       41,247       50,531       —       175,583  
Other operating expenses
    19,808       18,417       26,761       25,512       36       90,534  
 
                                   
Total operating expenses
    63,702       65,193       68,008       76,043       36       272,982  
 
                                   
 
                                               
Income (loss) from operations
    (48,195 )     (48,492 )     (47,035 )     (49,113 )     (36 )     (192,871 )
 
                                   
 
                                               
Other income (expenses):
                                               
Interest income, net
    —       —       —       —       754       754  
Equity in net loss of investments
    —       —       —       —       (269 )     (269 )
Gain on sale of equity investments, net
    —       —       —       —       68       68  
Other income (expenses), net
    —       —       —       —       (449 )     (449 )
 
                                   
 
                                               
Total other income (expenses), net
    —       —       —       —       104       104  
 
                                   
 
                                               
Income (loss) before income taxes
    (48,195 )     (48,492 )     (47,035 )     (49,113 )     68       (192,767 )
Income taxes
    —       —       —       —       (1,210 )     (1,210 )
 
                                   
Net income (loss)
    (48,195 )     (48,492 )     (47,035 )     (49,113 )     (1,142 )     (193,977 )
Net income (loss) attributable to noncontrolling interest in Rhapsody America
    5,648       —       —       —       —       5,648  
 
                                   
Net income (loss) attributable to common shareholders
  $ (42,547 )   $ (48,492 )   $ (47,035 )   $ (49,113 )   $ (1,142 )   $ (188,329 )
 
                                   
 
                                               
Reconciliation of segment GAAP net income (loss) attributable to common shareholders to segment adjusted EBITDA is as follows:
 
                                               
Net income (loss) attributable to common shareholders
  $ (42,547 )   $ (48,492 )   $ (47,035 )   $ (49,113 )   $ (1,142 )   $ (188,329 )
Income taxes
    —       —       —       —       1,210       1,210  
Interest income, net
    —       —       —       —       (754 )     (754 )
Stock-based compensation
    738       798       1,596       2,464       —       5,596  
Conversion of WiderThan stock options to a cash equivalent
    —       —       —       3       —       3  
Acquisitions related intangible asset amortization (F)
    278       —       101       1,270       —       1,649  
Pro forma gain on sale of interest in Rhapsody America
    3,444       —       —       —       —       3,444  
Impairment of goodwill
    37,029       46,776       41,247       50,531       —       175,583  
Gain on sale of equity investments, net
    —       —       —       —       (68 )     (68 )
Depreciation and amortization (F)
    1,071       856       1,041       2,847       —       5,815  
 
                                   
Adjusted EBITDA
  $ 13     $ (62 )   $ (3,050 )   $ 8,002     $ (754 )   $ 4,149  
 
                                   

 

 

                                                 
    Quarter Ended June 30, 2008  
    Music (A)     MSS (B)     Games (C)     TPS (D)     Other     Grand Total  
                    (in thousands)                  
Net revenue
  $ 37,170     $ 29,238     $ 34,945     $ 51,295       —     $ 152,648  
 
                                               
Cost of revenue
    20,693       3,707       10,655       20,590       —       55,645  
 
                                   
 
Gross profit
    16,477       25,531       24,290       30,705       —       97,003  
 
                                   
Gross margin
    44 %     87 %     70 %     60 %     —       64 %
 
                                               
Operating expenses:
                                               
Advertising with related party
    9,240       —       —       —       —       9,240  
Other operating expenses
    23,412       15,605       28,424       32,778       237       100,456  
 
                                   
Total operating expenses
    32,652       15,605       28,424       32,778       237       109,696  
 
                                   
 
                                               
Income (loss) from operations
    (16,175 )     9,926       (4,134 )     (2,073 )     (237 )     (12,693 )
 
                                   
 
                                               
Other income (expenses):
                                               
Interest income, net
    —       —       —       —       3,375       3,375  
Equity in net loss of investments
    —       —       —       —       (107 )     (107 )
Gain on sale of equity investments, net
    —       —       —       —       222       222  
Gain on sale of interest in Rhapsody America (E)
    3,371       —       —       —       —       3,371  
Other income (expenses), net
    —       —       —       —       50       50  
 
                                   
 
                                               
Total other income (expenses), net
    3,371       —       —       —       3,540       6,911  
 
                                   
 
                                               
Income (loss) before income taxes
    (12,804 )     9,926       (4,134 )     (2,073 )     3,303       (5,782 )
Income taxes
    —       —       —       —       (3,700 )     (3,700 )
 
                                   
Net income (loss)
    (12,804 )     9,926       (4,134 )     (2,073 )     (397 )     (9,482 )
Net income (loss) attributable to noncontrolling interest in Rhapsody America
    8,177       —       —       —       —       8,177  
 
                                   
Net income (loss) attributable to common shareholders
  $ (4,627 )   $ 9,926     $ (4,134 )   $ (2,073 )   $ (397 )   $ (1,305 )
 
                                   
 
                                               
Reconciliation of segment GAAP net income (loss) attributable to common shareholders to segment adjusted EBITDA is as follows:
 
                                               
Net income (loss) attributable to common shareholders
  $ (4,627 )   $ 9,926     $ (4,134 )   $ (2,073 )   $ (397 )   $ (1,305 )
Income taxes
    —       —       —       —       3,700       3,700  
Interest income, net
    —       —       —       —       (3,375 )     (3,375 )
Stock-based compensation
    1,089       801       1,530       2,611       —       6,031  
Conversion of WiderThan stock options to a cash equivalent
    —       —       —       26       —       26  
Acquisitions related intangible asset amortization (F)
    384       —       914       4,873       —       6,171  
Gain on sale of equity investments, net
    —       —       —       —       (222 )     (222 )
Depreciation and amortization (F)
    1,262       897       918       3,109       —       6,186  
Expenses (benefit) related to antitrust litigation:
                                               
Income
    —       —       —       —       —       —  
Expenses
    —       —       —       —       202       202  
Charitable contributions
    —       —       —       —       —       —  
 
                                   
Adjusted EBITDA
  $ (1,892 )   $ 11,624     $ (772 )   $ 8,546     $ (92 )   $ 17,414  
 
                                   
Note: Cost of revenue and operating expenses of the segments shown above include costs directly attributable to those segments and an allocation of general and administrative and other common or shared costs.
 
(A)   The Music segment primarily includes revenue and related costs from: Rhapsody America’s Rhapsody and Radiopass subscription services; sales of digital music content through the Rhapsody service and the RealPlayer music store; and advertising from music websites.
 
(B)   The Media Software and Services (MSS) segment primarily includes revenue and related costs from: the SuperPass premium subscription service; RealPlayer Plus and related products; sales and distribution of third-party software products; and all advertising other than that related directly to our Music and Games businesses.
 
(C)   The Games segment primarily includes revenue and related costs from: the sale of individual games on our websites RealArcade.com, GameHouse.com and Zylom.com; the sales of games subscription services; advertising through our games websites; the sale of games through the syndication on partner sites, and sales of games through wireless carriers.
 
(D)   The Technology Products and Solutions (TPS) segment includes revenue and related costs from: sales of ringback tones, music-on-demand, video-on-demand, messaging, and information services; sales of media delivery system software, including Helix system software and related authoring and publishing tools, both directly to customers and indirectly through original equipment manufacturer channels; support and maintenance services sold to customers who purchase software products; broadcast hosting services; and consulting and professional services that are offered to customers.
 
(E)   Comprises gains realized from MTVN’s note payments to Rhapsody America. Effective January 1, 2009, the Company adopted SFAS 160 which requires the appreciation of gains on the sale of non-controlling interest to be recorded as an equity transaction.
 
(F)   Net of noncontrolling interest effect.

 

 

RealNetworks, Inc. and Subsidiaries
Supplemental Financial Information
(Unaudited)
                                                 
    Quarter Ended June 30, 2009  
                    Acquisitions     WiderThan              
                    Related     Options              
                    Intangible     Converted     Antitrust        
    As     Stock-Based     Asset     to a Cash     Litigation        
    Reported     Compensation     Amortization (A)     Equivalent     Related     Adjusted  
                    (in thousands)                  
Expenses in accordance with GAAP
                                               
 
                                               
Cost of revenue
  $ 55,614     $ (363 )   $ (553 )   $ —     $ —     $ 54,698  
 
                                               
Operating expenses:
                                               
Research and development
  $ 28,923     $ (2,234 )   $ —     $ (3 )   $ —     $ 26,686  
Sales and marketing
    42,273       (1,199 )     (1,096 )     —       —       39,978  
General and administrative
    19,338       (1,800 )     —       —       —       17,538  
 
                                   
 
                                               
Adjusted operating expenses, net
  $ 90,534     $ (5,233 )   $ (1,096 )   $ (3 )   $ —     $ 84,202  
 
                                   
                                                 
    Quarter Ended June 30, 2008  
                    Acquisitions     WiderThan              
                    Related     Options              
                    Intangible     Converted     Antitrust        
    As     Stock-Based     Asset     to a Cash     Litigation        
    Reported     Compensation     Amortization (A)     Equivalent     Related     Adjusted  
                    (in thousands)                  
Expenses in accordance with GAAP
                                               
 
                                               
Cost of revenue
  $ 55,645     $ (662 )   $ (2,282 )   $ (1 )   $ —     $ 52,700  
 
                                               
Operating expenses:
                                               
Research and development
  $ 29,065     $ (2,146 )   $ —     $ —     $ —     $ 26,919  
Sales and marketing
    53,054       (1,433 )     (3,889 )     (7 )     —       47,725  
General and administrative
    18,337       (1,790 )     —       (18 )     (202 )     16,327  
 
                                   
 
                                               
Adjusted operating expenses, net
  $ 100,456     $ (5,369 )   $ (3,889 )   $ (25 )   $ (202 )   $ 90,971  
 
                                   
                                                 
    Six Months Ended June 30, 2009  
                    Acquisitions     WiderThan              
                    Related     Options              
                    Intangible     Converted     Antitrust        
    As     Stock-Based     Asset     to a Cash     Litigation        
    Reported     Compensation     Amortization (A)     Equivalent     Related     Adjusted  
                    (in thousands)                          
Expenses in accordance with GAAP
                                               
 
                                               
Cost of revenue
  $ 111,635     $ (993 )   $ (1,099 )   $ (1 )   $ —     $ 109,542  
 
                                               
Operating expenses:
                                               
Research and development
  $ 57,482     $ (4,058 )   $ —     $ (8 )   $ —     $ 53,416  
Sales and marketing
    85,958       (2,265 )     (2,318 )     (11 )     —       81,364  
General and administrative
    42,169       (3,502 )     —       —       —       38,667  
 
                                   
 
                                               
Adjusted operating expenses, net
  $ 185,609     $ (9,825 )   $ (2,318 )   $ (19 )   $ —     $ 173,447  
 
                                   
                                                 
    Six Months Ended June 30, 2008  
                    Acquisitions     WiderThan              
                    Related     Options              
                    Intangible     Converted     Antitrust        
    As     Stock-Based     Asset     to a Cash     Litigation        
    Reported     Compensation     Amortization (A)     Equivalent     Related     Adjusted  
                    (in thousands)                  
Expenses in accordance with GAAP
                                               
 
                                               
Cost of revenue
  $ 111,038     $ (896 )   $ (4,597 )   $ (22 )   $ —     $ 105,523  
 
                                               
Operating expenses:
                                               
Research and development
  $ 54,071     $ (4,059 )   $ —     $ (46 )   $ —     $ 49,966  
Sales and marketing
    106,650       (3,341 )     (7,889 )     (29 )     —       95,391  
General and administrative
    35,421       (3,224 )     —       (18 )     (404 )     31,775  
 
                                   
 
                                               
Adjusted operating expenses, net
  $ 196,142     $ (10,624 )   $ (7,889 )   $ (93 )   $ (404 )   $ 177,132  
 
                                   
 
(A)   - Net of noncontrolling interest effect.

 

 

RealNetworks, Inc. and Subsidiaries
Earnings Per Share Reconciliation
(Unaudited)
                                 
    Quarters Ended     Six Months Ended  
    June 30,     June 30,  
    2009     2008     2009     2008  
    (in thousands, except per share data)  
Net income (loss) attributable to common shareholders
  $ (188,329 )   $ (1,305 )   $ (200,465 )   $ 1,121  
Less accretion of MTVN’s preferred return in Rhapsody America
    (416 )     —       (1,850 )     —  
 
                       
Net income (loss) available to common shareholders
  $ (188,745 )   $ (1,305 )   $ (202,315 )   $ 1,121  
 
                       
 
                               
Shares used to compute basic net income (loss) per share available to common shareholders
    134,420       142,905       134,394       142,946  
Dilutive potential common shares:
                               
Stock options and restricted stock
    —       —       —       2,304  
Convertible debt
    —       —       —       10,750  
 
                       
Shares used to compute diluted net income (loss) per share available to common shareholders
    134,420       142,905       134,394       156,000  
 
                               
Basic net income (loss) per share available to common shareholders
  $ (1.40 )   $ (0.01 )   $ (1.51 )   $ 0.01  
Diluted net income (loss) per share available to common shareholders
  $ (1.40 )   $ (0.01 )   $ (1.51 )   $ 0.01  

 

EXHIBIT 99.2
About Non-GAAP Financial Measures
To supplement RealNetworks’ condensed consolidated financial statements presented in accordance with GAAP, the Company presents investors with certain non-GAAP financial measures, including adjusted revenue, adjusted EBITDA, adjusted EBITDA excluding impairments, adjusted EBITDA by reporting segment, adjusted cost of revenue and adjusted operating expenses.
•   Adjusted revenue consists of revenue excluding the impact of foreign exchange rate fluctuations experienced in the second quarter.
 
•   Adjusted EBITDA and adjusted EBITDA by reporting segment consist of net income (loss) attributable to common shareholders excluding the impact of the following: interest income, net; income taxes; depreciation and amortization (net of noncontrolling interest effect); stock-based compensation; expenses for employee stock options that were converted to cash rights; equity investment gains and losses from sales or impairments; expenses related to antitrust litigation; impairment of goodwill and long-lived assets (net of noncontrolling interest effect); and the effect of the change in accounting for the sale of noncontrolling interest in Rhapsody America.
 
•   Adjusted EBITDA excluding impairments consists of net income (loss) attributable to common shareholders excluding the impact of the following: interest income, net; income taxes; depreciation and amortization (net of noncontrolling interest effect); stock-based compensation; expenses for employee stock options that were converted to cash rights; equity investment gains and losses from sales or impairments; expenses related to antitrust litigation; impairment of goodwill and long-lived assets (net of noncontrolling interest effect); impairment of deferred costs and prepaid royalties; restructuring and other charges; and the effect of the change in accounting for the sale of noncontrolling interest in Rhapsody America.
 
•   Adjusted cost of revenue consists of GAAP cost of revenue excluding stock-based compensation expenses, acquisition costs including amortization of intangible assets (net of noncontrolling interest effect), and expenses for employee stock options that were converted to cash rights.
 
•   Adjusted operating expenses consist of GAAP operating expenses excluding stock-based compensation expenses, antitrust litigation expenses, acquisition costs including amortization of intangible assets (net of noncontrolling interest effect), and expenses for employee stock options that were converted to cash rights.
RealNetworks believes that the presentation of adjusted revenue, adjusted EBITDA, adjusted EBITDA excluding impairments, adjusted EBITDA by reporting segment, adjusted cost of revenue and adjusted operating expenses provide important supplemental information to management and investors regarding financial and business trends relating to the Company’s financial condition and results of operations. Management believes that the use of these non-GAAP financial measures provides consistency and comparability with RealNetworks’ past financial reports, and also facilitates comparisons with other companies in the Company’s industry, many of which use similar non-GAAP financial measures to supplement their GAAP results. Management has historically used these non-GAAP measures when evaluating operating performance because the inclusion or exclusion of the items described above provides additional useful measures of the Company’s operating results and facilitates comparisons of the Company’s core operating performance against prior periods and its business model objectives. The

 

 

Company has chosen to provide this information to investors in order to enable them to perform additional analyses of past, present and future operating performance, to enable them to compare RealNetworks with other companies, and as a supplemental means to evaluate the Company’s ongoing operations. In addition, RealNetworks believes that providing adjusted revenue allows investors to compare 2009 revenue with 2008 revenue in constant dollars, providing a more consistent view of revenue trends for its ongoing business. Externally, the Company believes that adjusted EBITDA and adjusted EBITDA excluding impairments are useful to investors in their assessment of RealNetworks’ operating performance and the valuation of the Company.
Internally, adjusted revenue, adjusted EBITDA, adjusted EBITDA excluding impairments, and adjusted EBITDA by reporting segment, adjusted cost of revenue and adjusted operating expenses are significant measures used by management for purposes of:
•   supplementing the financial results and forecasts reported to the Company’s board of directors;
 
•   evaluating the operating performance of RealNetworks which includes direct and incrementally controllable revenue and costs of operations, but excludes items considered by management to be non-cash or non-operating such as interest income and expense, stock-based compensation, tax expense, depreciation and amortization; impairment of goodwill and long-lived assets; or not within management’s control, such as significant fluctuations in foreign currencies;
 
•   managing and comparing performance internally across the Company’s businesses and externally against the Company’s peers;
 
•   establishing internal operating budgets; and
 
•   evaluating and valuing potential acquisition candidates.
Adjusted revenue, adjusted EBITDA, adjusted EBITDA excluding impairments, adjusted EBITDA by reporting segment, adjusted cost of revenue and adjusted operating expenses are not calculated in accordance with GAAP, and should be considered supplemental to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. Non-GAAP financial measures have limitations in that they do not reflect all of the costs associated with the operations of RealNetworks’ business as determined in accordance with GAAP. As a result, you should not consider these measures in isolation or as a substitute for analysis of RealNetworks’ results as reported under GAAP. The Company expects to continue to incur expenses similar to the non-GAAP adjustments described above, and exclusion of these items from its non-GAAP financial measures should not be construed as an inference that these costs are unusual or infrequent. Some of the limitations in relying on the Company’s non-GAAP financial measures are:
•   Adjusted EBITDA, adjusted EBITDA excluding impairments and adjusted EBITDA by reporting segment are measures that the Company has defined for internal and investor purposes and are not in accordance with GAAP. A further limitation associated with these measures is that they do not include all costs and income that impact the Company’s net income (loss) attributable to common shareholders and net income (loss) per share attributable to common shareholders. The Company compensates for these limitations by prominently disclosing GAAP net income (loss) attributable to common shareholders, which the Company believes is the most directly comparable GAAP measure, and providing investors with reconciliations from GAAP net income (loss) attributable to common shareholders to adjusted EBITDA, adjusted EBITDA excluding impairments and adjusted EBITDA by reporting segment.

 

 

•   Adjusted cost of revenue is limited in that it does not include stock-based compensation expenses and certain costs associated with the Company’s acquisitions. Adjusted operating expenses are limited in that they do not include stock-based compensation expenses, antitrust litigation expenses and certain costs associated with the Company’s acquisitions. The Company compensates for these limitations by prominently disclosing the reported GAAP results and providing investors with a reconciliation from GAAP to the adjusted amount.
RealNetworks has included reconciliations of GAAP net income (loss) attributable to common shareholders to adjusted EBITDA, to adjusted EBITDA excluding impairments, and to adjusted EBITDA by reporting segment; GAAP cost of revenue to adjusted cost of revenue; and GAAP operating expenses to adjusted operating expenses for the relevant periods in the financial tables of its earnings press release, which is included as Exhibit 99.1 to this report.