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): October 29, 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 October 29, 2009, RealNetworks, Inc. (the “Company” or “RealNetworks”) announced via press release the Company’s results for its third quarter ended September 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 third 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 October 29, 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: October 29, 2009

 

 

EXHIBIT INDEX
         
Exhibit Number   Description
  99.1    
Press Release issued by RealNetworks, Inc. dated October 29, 2009
  99.2    
Information Regarding Non-GAAP Financial Measures

 

Exhibit 99.1
REALNETWORKS ANNOUNCES THIRD QUARTER 2009 RESULTS
SEATTLE – Oct. 29, 2009 – Digital entertainment services company RealNetworks ® , Inc. (Nasdaq: RNWK) today announced results for the third quarter ended Sept. 30, 2009.
Quarterly Highlights:
  •   Revenue of $140.3 million
 
  •   Net income attributable to common shareholders of $1.5 million
 
  •   Adjusted EBITDA of $16.1 million
 
  •   Cash and short term investments of $373.2 million as of Sept. 30, 2009
“In the third quarter, we achieved two key financial objectives: we returned to sequential revenue growth and we reduced our operating costs. As a result we significantly increased our EBITDA,” said Rob Glaser, RealNetworks’ Chairman and CEO. “In the quarter, we also made significant progress delivering great new products and services that support two major fundamental platforms, Facebook and the iPhone/iPod Touch.”
Third Quarter Results
For the third quarter of 2009, revenue was $140.3 million, a decrease of 8%, compared with $152.0 million in the third quarter of 2008. Foreign currency exchange rate fluctuations negatively affected 2009 third quarter revenue by approximately $3.6 million compared with the year-ago quarter. Excluding the effects of these foreign exchange rate changes, revenue declined 5% year over year. Revenue trends in each of Real’s businesses in the third quarter of 2009, including the effects of foreign currency exchange rate changes, compared with the year-earlier quarter were: a slight increase in Media Software and Services revenue to $24.6 million, offset by a 7% decrease in Music revenue to $38.8 million, an 8% decrease in Technology Products and Solutions revenue to $47.4 million, and a 14% decrease in Games revenue to $29.5 million.
Net income attributable to common shareholders for the third quarter of 2009 was $1.5 million, or less than $.01 per share, compared with a net loss of $(4.5) million, or $(0.03) per share, in the third quarter of 2008. Adjusted EBITDA for the third quarter of 2009 was $16.1 million compared with $11.4 million in the third quarter of 2008. In the third quarter of 2009, RealNetworks received insurance payments to reimburse litigation-defense costs that reduced G&A expense and increased EBITDA by approximately $3.9 million. A reconciliation of GAAP net income to adjusted EBITDA is provided in the financial tables that accompany this release.
Gross margin was 62% in the third quarter of 2009 compared with 59% in the third quarter of 2008. Income tax provision was $(0.7) million in the third quarter of 2009, unchanged from the year-earlier period. Interest income in the third quarter of 2009 was $1.3 million compared with $2.9 million in the year-earlier period.
As of Sept. 30, 2009, Real had approximately $373.2 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 $35.5 million in restricted cash and equity investments at Sept. 30, 2009.

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Business Outlook
For the fourth quarter of 2009, Real expects overall revenue to increase sequentially but to decline year-over-year. Sequentially, the company expects revenue to increase in Games and Technology Products and Solutions, to be flat in Music, and to decline in Media Software and Services. Compared with the year-ago fourth quarter, the company expects fourth-quarter Media Software and Services and Technology Products and Solutions revenue to be flat, and expects revenue in Music and Games to decline.
The foregoing forward-looking statements reflect Real’s expectations as of Oct. 29, 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: Third Quarter Earnings
Leader: Rob Glaser
Telephonic replay will be available until 8:00 p.m. (Eastern), November 12, 2009.
Replay dial in:
800-945-7680 Domestic
203-369-3509 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 casual games destinations on the Web; and a variety of mobile entertainment services, such

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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 third 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. 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; 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; the potential outcomes and effects of claims and legal proceedings on Real’s business, prospects, financial condition or results of operations; 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 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

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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     Nine Months Ended  
    September 30,     September 30,  
    2009     2008     2009     2008  
    (in thousands, except per share data)  
 
                               
Net revenue
  $ 140,264     $ 151,955     $ 416,762     $ 452,166  
 
                               
Cost of revenue
    53,686       62,164       165,321       173,202  
 
                       
 
                               
Gross profit
    86,578       89,791       251,441       278,964  
 
                       
 
                               
Operating expenses:
                               
Research and development
    29,425       31,076       86,907       85,147  
Sales and marketing
    39,573       55,080       125,531       161,730  
Advertising with related party (A)
    7,941       15,153       22,229       31,733  
General and administrative
    13,039       15,453       55,208       50,874  
Impairment of goodwill
    —       —       175,583       —  
Restructuring and other charges
    877       —       1,671       686  
 
                       
 
                               
Total operating expenses
    90,855       116,762       467,129       330,170  
 
                       
 
                               
Operating loss
    (4,277 )     (26,971 )     (215,688 )     (51,206 )
 
                       
 
                               
Other income (expenses):
                               
Interest income, net
    1,253       2,865       3,190       11,198  
Equity in net loss of investments
    (273 )     (226 )     (1,197 )     (424 )
Gain on sale of equity investments, net
    604       —       809       222  
Gain on sale of interest in Rhapsody America (B)
    —       7,405       —       14,502  
Other income (expense), net
    (888 )     818       (482 )     1,636  
 
                       
 
                               
Total other income (expense), net
    696       10,862       2,320       27,134  
 
                       
 
                               
Loss before income taxes
    (3,581 )     (16,109 )     (213,368 )     (24,072 )
Income taxes
    (686 )     (728 )     (3,445 )     (8,436 )
 
                       
 
                               
Net loss
    (4,267 )     (16,837 )     (216,813 )     (32,508 )
Net loss attributable to the noncontrolling interest in Rhapsody America (C)
    5,787       12,337       17,868       29,129  
 
                       
Net income (loss) attributable to common shareholders
  $ 1,520     $ (4,500 )   $ (198,945 )   $ (3,379 )
 
                       
 
                               
Basic net income (loss) per share available to common shareholders
  $ 0.00     $ (0.03 )   $ (1.50 )   $ (0.02 )
 
                               
Diluted net income (loss) per share available to common shareholders
  $ 0.00     $ (0.03 )   $ (1.50 )   $ (0.02 )
 
                               
Shares used to compute basic net income (loss) per share available to common shareholders
    134,793       141,975       134,531       142,611  
Shares used to compute diluted net income (loss) per share available to common shareholders
    134,978       141,975       134,531       142,611  
 
(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 Noncontrolling Interests in Consolidated Financial Statements, an amendment to ARB No. 51 (SFAS 160) which requires the appreciation of gains on the sale of noncontrolling 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)
                 
    September 30,     December 31,  
    2009     2008  
    (in thousands)  
 
               
ASSETS
 
               
Current assets:
               
Cash and cash equivalents
  $ 204,777     $ 232,968  
Short-term investments
    168,420       137,766  
Trade accounts receivable, net
    67,060       70,201  
Deferred costs, current portion
    5,383       4,026  
Prepaid expenses and other current assets
    31,388       34,599  
 
           
 
               
Total current assets
    477,028       479,560  
 
           
 
               
Equipment, software, and leasehold improvements, at cost:
               
Equipment and software
    147,430       135,788  
Leasehold improvements
    31,003       30,719  
 
           
Total equipment, software, and leasehold improvements
    178,433       166,507  
Less accumulated depreciation and amortization
    119,903       103,500  
 
           
 
               
Net equipment, software, and leasehold improvements
    58,530       63,007  
 
               
Restricted cash equivalents and investments
    13,700       14,742  
Equity investments
    21,768       18,582  
Other assets
    4,180       3,775  
Deferred costs, non-current portion
    8,945       6,120  
Deferred tax assets, net, non-current portion
    9,867       9,236  
Other intangible assets, net
    12,761       18,727  
Goodwill
    —       175,264  
 
           
 
               
Total assets
  $ 606,779     $ 789,013  
 
           
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
               
Accounts payable
  $ 39,264     $ 36,575  
Accrued and other liabilities
    111,295       118,688  
Deferred revenue, current portion
    35,812       39,835  
Related party payable (A)
    8,007       13,155  
Accrued loss on excess office facilities, current portion
    4,338       4,317  
 
           
 
               
Total current liabilities
    198,716       212,570  
 
           
 
               
Deferred revenue, non-current portion
    1,933       1,961  
Accrued loss on excess office facilities, non-current portion
    —       2,893  
Deferred rent
    4,534       4,614  
Deferred tax liabilities, net, non-current portion
    859       1,379  
Other long-term liabilities
    11,027       11,660  
 
           
 
               
Total liabilities
    217,069       235,077  
 
           
 
               
Noncontrolling interest in Rhapsody America (B)
    5,440       378  
 
               
Shareholders’ equity
    384,270       553,558  
 
           
 
               
Total liabilities and shareholders’ equity
  $ 606,779     $ 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)
                 
    Nine Months Ended September 30,  
    2009     2008  
    (in thousands)  
 
               
Cash flows from operating activities:
               
Net loss
  $ (216,813 )   $ (32,508 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    22,881       38,032  
Stock-based compensation
    15,545       17,475  
Loss on disposal of equipment, software, and leasehold improvements
    302       157  
Equity in net loss of investments
    1,197       198  
Gain on sale of equity investment, net
    (809 )     (222 )
Excess tax benefit from stock option exercises
    (9 )     (108 )
Impairment of goodwill
    175,583       —  
Accrued restructuring and other charges
    (3,786 )     —  
Accrued loss on excess office facilities
    (2,872 )     (2,537 )
Deferred income taxes, net
    545       2,640  
Gain on sale of interest in Rhapsody America
    —       (14,502 )
Other
    39       111  
Net change in certain operating assets and liabilities, net of acquisitions
    (8,295 )     (29,750 )
 
           
 
               
Net cash used in operating activities
    (16,492 )     (21,014 )
 
           
 
               
Cash flows from investing activities:
               
Purchases of equipment, software, and leasehold improvements
    (11,445 )     (24,807 )
Purchases of short-term investments
    (124,043 )     (151,378 )
Proceeds from sales and maturities of short-term investments
    93,389       130,136  
Purchases of intangible assets
    —       (1,808 )
Proceeds from the sales of equity investments
    1,014       1,225  
Purchases of equity investments
    (2,000 )     (4,500 )
Payment of acquisition costs, net of cash acquired
    (3,324 )     (10,192 )
Decrease in restricted cash equivalents and investments, net
    1,042       776  
 
           
 
               
Net cash used in investing activities
    (45,367 )     (60,548 )
 
           
 
               
Cash flows from financing activities:
               
Net proceeds from sales of common stock under employee stock purchase plan and exercise of stock options
    819       8,834  
Payments of convertible debt obligations
    —       (100,000 )
Net proceeds from sales of interest in Rhapsody America
    26,912       31,640  
Excess tax benefit from stock option exercises
    9       108  
Repurchases of common stock
    —       (23,062 )
 
           
 
               
Net cash provided by (used in) financing activities
    27,740       (82,480 )
 
           
 
               
Effect of exchange rate changes on cash and cash equivalents
    5,928       (7,512 )
 
           
 
               
Net decrease in cash and cash equivalents
    (28,191 )     (171,554 )
 
               
Cash and cash equivalents, beginning of period
    232,968       476,697  
 
           
 
               
Cash and cash equivalents, end of period
  $ 204,777     $ 305,143  
 
           

 

 

RealNetworks, Inc. and Subsidiaries
Supplemental Financial Information
(Unaudited)
                                                         
    2009     2008  
    Q3     Q2     Q1     Q4     Q3     Q2     Q1  
                            (in thousands)                          
 
                                                       
Net Revenue by Line of Business:
                                                       
Consumer products and services (A)
  $ 92,836     $ 89,517     $ 97,194     $ 100,282     $ 100,322     $ 101,353     $ 96,286  
Technology products and solutions (B)
    47,428       46,208       43,579       52,362       51,633       51,295       51,277  
 
                                         
 
                                                       
Total net revenue
  $ 140,264     $ 135,725     $ 140,773     $ 152,644     $ 151,955     $ 152,648     $ 147,563  
 
                                         
 
                                                       
Consumer Products and Services:
                                                       
Subscriptions (C)
  $ 52,401     $ 54,446     $ 59,052     $ 57,853     $ 57,776     $ 55,658     $ 55,193  
Media properties (D)
    21,001       14,753       15,536       18,337       19,946       23,472       18,702  
E-commerce and other (E)
    19,434       20,318       22,606       24,092       22,600       22,223       22,391  
 
                                         
 
                                                       
Total consumer products and services revenue
  $ 92,836     $ 89,517     $ 97,194     $ 100,282     $ 100,322     $ 101,353     $ 96,286  
 
                                         
 
                                                       
Consumer Products and Services:
                                                       
Music (F)
  $ 38,765     $ 40,452     $ 44,053     $ 43,882     $ 41,591     $ 37,170     $ 38,079  
Media software and services (G)
    24,580       19,291       20,318       22,695       24,531       29,238       26,409  
Games (H)
    29,491       29,774       32,823       33,705       34,200       34,945       31,798  
 
                                         
 
                                                       
Total consumer products and services revenue
  $ 92,836     $ 89,517     $ 97,194     $ 100,282     $ 100,322     $ 101,353     $ 96,286  
 
                                         
 
                                                       
Net Revenue by Geography:
                                                       
United States
  $ 95,758     $ 90,685     $ 96,666     $ 101,369     $ 102,363     $ 100,898     $ 99,169  
Rest of world
    44,506       45,040       44,107       51,275       49,592       51,750       48,394  
 
                                         
 
                                                       
Total net revenue
  $ 140,264     $ 135,725     $ 140,773     $ 152,644     $ 151,955     $ 152,648     $ 147,563  
 
                                         
 
                                                       
Subscribers (presented as greater than) *:
                                                       
Total subscribers (I)
    38,950       37,700       36,450       34,100       32,650       35,000       32,200  
Technology products and solutions application services subscribers (J)
    37,500       36,300       33,850       31,500       29,950       32,450       29,500  
Music subscribers:
                                                       
Consumer music subscribers:
                                                       
Rhapsody subscribers
    700       750       800       775       750       600       600  
Radio subscribers
    75       75       1,200       1,225       1,250       1,225       1,275  
 
                                         
Total consumer music subscribers
    775       825       2,000       2,000       2,000       1,825       1,875  
Technology products and solutions application services music subscribers (K)
    1,075       975       900       875       850       800       800  
 
                                         
Total Music Subscribers**
    1,850       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  
    September 30,     June 30,     March 31,     December 31,     September 30,     June 30,     March 31,  
    2009     2009     2009     2008     2008     2008     2008  
    (in thousands)
 
                                                       
Net income (loss) attributable to common shareholders
  $ 1,520     $ (188,329 )   $ (12,136 )   $ (240,499 )   $ (4,500 )   $ (1,305 )   $ 2,426  
Interest income, net
    (1,253 )     (754 )     (1,183 )     (2,255 )     (2,865 )     (3,375 )     (4,958 )
Stock-based compensation
    4,727       5,596       5,222       6,056       5,955       6,031       5,489  
Loss (gain) on equity investments, net
    (604 )     (68 )     (137 )     12       —       (222 )     —  
Conversion of WiderThan stock options to a cash equivalent
    1       3       17       11       16       26       89  
Depreciation and amortization (net of noncontrolling interest effect)
    5,432       5,815       5,726       5,784       6,165       6,186       6,282  
Acquisitions related intangible asset amortization (net of noncontrolling interest effect)
    1,784       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
    877       —       794       6,147       —       —       686  
Pro forma gain on sale of interest in Rhapsody America
    3,839       3,444       4,010       6,568       —       —       —  
Expenses related to antitrust litigation
    —       —       —       179       174       202       202  
Income taxes
    686       1,210       1,549       17,392       728       3,700       4,008  
 
                                         
 
                                                       
Adjusted EBITDA excluding impairments
  $ 17,009     $ 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
    (877 )     —       (794 )     (6,147 )     —       —       (686 )
 
                                         
Adjusted EBITDA
  $ 16,132     $ 4,149     $ 4,836     $ (14,533 )   $ 11,425     $ 17,414     $ 19,853  
 
                                         

 

 

RealNetworks, Inc. and Subsidiaries
Segment Results of Operations
(Unaudited)
                                                 
    Quarter Ended September 30, 2009  
    Music (A)     MSS (B)     Games (C)     TPS (D)     Other     Grand Total  
    (in thousands)  
 
                                               
Net revenue
  $ 38,765     $ 24,580     $ 29,491     $ 47,428     $ —     $ 140,264  
 
                                               
Cost of revenue
    23,720       4,090       7,728       18,148       —       53,686  
 
                                   
 
                                               
Gross profit
    15,045       20,490       21,763       29,280       —       86,578  
 
                                   
Gross margin
    39 %     83 %     74 %     62 %     —       62 %
 
                                               
Operating expenses:
                                               
Advertising with related party
    7,941       —       —       —       —       7,941  
Restructuring and other charges
    312       139       258       168       —       877  
Other operating expenses
    16,897       13,110       26,823       25,367       (160 )     82,037  
 
                                   
Total operating expenses
    25,150       13,249       27,081       25,535       (160 )     90,855  
 
                                   
 
                                               
Income (loss) from operations
    (10,105 )     7,241       (5,318 )     3,745       160       (4,277 )
 
                                   
 
                                               
Other income (expenses):
                                               
Interest income, net
    —       —       —       —       1,253       1,253  
Equity in net loss of investments
    —       —       —       —       (273 )     (273 )
Gain on sale of equity investments, net
    —       —       —       —       604       604  
Other income (expenses), net
    —       —       —       —       (888 )     (888 )
 
                                   
 
                                               
Total other income (expenses), net
    —       —       —       —       696       696  
 
                                   
 
                                               
Income (loss) before income taxes
    (10,105 )     7,241       (5,318 )     3,745       856       (3,581 )
Income taxes
    —       —       —       —       (686 )     (686 )
 
                                   
Net income (loss)
    (10,105 )     7,241       (5,318 )     3,745       170       (4,267 )
Net income (loss) attributable to noncontrolling interest in Rhapsody America
    5,787       —       —       —       —       5,787  
 
                                   
Net income (loss) attributable to common shareholders
  $ (4,318 )   $ 7,241     $ (5,318 )   $ 3,745     $ 170     $ 1,520  
 
                                   
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
  $ (4,318 )   $ 7,241     $ (5,318 )   $ 3,745     $ 170     $ 1,520  
Income taxes
    —       —       —       —       686       686  
Interest income, net
    —       —       —       —       (1,253 )     (1,253 )
Stock-based compensation
    560       732       1,361       2,074       —       4,727  
Conversion of WiderThan stock options to a cash equivalent
    —       —       —       1       —       1  
Acquisitions related intangible asset amortization (F)
    278       8       70       1,428       —       1,784  
Pro forma gain on sale of interest in Rhapsody America
    3,839       —       —       —       —       3,839  
Gain on sale of equity investments, net
    —       —       —       —       (604 )     (604 )
Depreciation and amortization (F)
    893       668       1,150       2,721       —       5,432  
 
                                   
Adjusted EBITDA
  $ 1,252     $ 8,649     $ (2,737 )   $ 9,969     $ (1,001 )   $ 16,132  
 
                                   

 

 

                                                 
    Quarter Ended September 30, 2008  
    Music (A)     MSS (B)     Games (C)     TPS (D)     Other     Grand Total  
    (in thousands)  
 
               
Net revenue
  $ 41,591     $ 24,531     $ 34,200     $ 51,633       —     $ 151,955  
 
                                               
Cost of revenue
    23,787       4,539       10,251       23,587       —       62,164  
 
                                   
 
                                               
Gross profit
    17,804       19,992       23,949       28,046       —       89,791  
 
                                   
Gross margin
    43 %     81 %     70 %     54 %     —       59 %
 
                                               
Operating expenses:
                                               
Advertising with related party
    15,153       —       —       —       —       15,153  
Other operating expenses
    27,202       16,064       28,412       29,719       212       101,609  
 
                                   
Total operating expenses
    42,355       16,064       28,412       29,719       212       116,762  
 
                                   
 
                                               
Income (loss) from operations
    (24,551 )     3,928       (4,463 )     (1,673 )     (212 )     (26,971 )
 
                                   
 
                                               
Other income (expenses):
                                               
Interest income, net
    —       —       —       —       2,865       2,865  
Equity in net loss of investments
    —       —       —       —       (226 )     (226 )
Gain on sale of interest in Rhapsody America (E)
    7,405       —       —       —       —       7,405  
Other income (expenses), net
    —       —       —       —       818       818  
 
                                   
 
               
Total other income (expenses), net
    7,405       —       —       —       3,457       10,862  
 
                                   
 
                                               
Income (loss) before income taxes
    (17,146 )     3,928       (4,463 )     (1,673 )     3,245       (16,109 )
Income taxes
    —       —       —       —       (728 )     (728 )
 
                                   
Net income (loss)
    (17,146 )     3,928       (4,463 )     (1,673 )     2,517       (16,837 )
Net income (loss) attributable to noncontrolling interest in Rhapsody America
    12,337       —       —       —       —       12,337  
 
                                   
Net income (loss) attributable to common shareholders
  $ (4,809 )   $ 3,928     $ (4,463 )   $ (1,673 )   $ 2,517     $ (4,500 )
 
                                   
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
  $ (4,809 )   $ 3,928     $ (4,463 )   $ (1,673 )   $ 2,517     $ (4,500 )
Income taxes
    —       —       —       —       728       728  
Interest income, net
    —       —       —       —       (2,865 )     (2,865 )
Stock-based compensation
    1,005       786       1,552       2,612       —       5,955  
Conversion of WiderThan stock options to a cash equivalent
    —       —       —       16       —       16  
Acquisitions related intangible asset amortization (F)
    422       —       611       4,719       —       5,752  
Depreciation and amortization (F)
    1,206       893       923       3,143       —       6,165  
Expenses related to antitrust litigation
    —       —       —       —       174       174  
 
                                   
Adjusted EBITDA
  $ (2,176 )   $ 5,607     $ (1,377 )   $ 8,817     $ 554     $ 11,425  
 
                                   
 
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 September 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
  $ 53,686     $ (309 )   $ (540 )   $ —     $ —     $ 52,837  
 
                                               
Operating expenses:
                                               
Research and development
  $ 29,425     $ (1,788 )   $ —     $ —     $ —     $ 27,637  
Sales and marketing
    39,573       (1,099 )     (1,244 )     1       —       37,231  
General and administrative
    13,039       (1,531 )     —       —       —       11,508  
 
                                   
 
                                               
Adjusted operating expenses, net
  $ 82,037     $ (4,418 )   $ (1,244 )   $ 1     $ —     $ 76,376  
 
                                   
                                                 
    Quarter Ended September 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
  $ 62,164     $ (696 )   $ (1,995 )   $ (1 )   $ —     $ 59,472  
 
                                               
Operating expenses:
                                               
Research and development
  $ 31,076     $ (2,247 )   $ —     $ —     $ —     $ 28,829  
Sales and marketing
    55,080       (1,458 )     (3,757 )     (3 )     —       49,862  
General and administrative
    15,453       (1,554 )     —       (12 )     (174 )     13,713  
 
                                   
 
                                               
Adjusted operating expenses, net
  $ 101,609     $ (5,259 )   $ (3,757 )   $ (15 )   $ (174 )   $ 92,404  
 
                                   
                                                 
    Nine Months Ended September 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
  $ 165,321     $ (1,302 )   $ (1,639 )   $ (1 )   $ —     $ 162,379  
 
                                               
Operating expenses:
                                               
Research and development
  $ 86,907     $ (5,846 )   $ —     $ (8 )   $ —     $ 81,053  
Sales and marketing
    125,531       (3,364 )     (3,562 )     (12 )     —       118,593  
General and administrative
    55,208       (5,034 )     —       —       —       50,174  
 
                                   
 
                                               
Adjusted operating expenses, net
  $ 267,646     $ (14,244 )   $ (3,562 )   $ (20 )   $ —     $ 249,820  
 
                                   
                                                 
    Nine Months Ended September 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
  $ 173,202     $ (1,592 )   $ (6,592 )   $ (24 )   $ —     $ 164,994  
 
                                               
Operating expenses:
                                               
Research and development
  $ 85,147     $ (6,307 )   $ —     $ (9 )   $ —     $ 78,831  
Sales and marketing
    161,730       (4,798 )     (11,646 )     (31 )     —       145,255  
General and administrative
    50,874       (4,778 )     —       (67 )     (578 )     45,451  
 
                                   
 
                                               
Adjusted operating expenses, net
  $ 297,751     $ (15,883 )   $ (11,646 )   $ (107 )   $ (578 )   $ 269,537  
 
                                   
 
(A) —  Net of noncontrolling interest effect.

 

 

RealNetworks, Inc. and Subsidiaries
Earnings Per Share Reconciliation
(Unaudited)
                                 
    Quarters Ended     Nine Months Ended  
    September 30,     September 30,  
    2009     2008     2009     2008  
    (in thousands, except per share data)  
 
               
Net income (loss) attributable to common shareholders
  $ 1,520     $ (4,500 )   $ (198,945 )   $ (3,379 )
Less accretion of MTVN’s preferred return in Rhapsody America
    (925 )     —       (2,775 )     —  
 
                       
Net income (loss) available to common shareholders
  $ 595     $ (4,500 )   $ (201,720 )   $ (3,379 )
 
                       
 
                               
Shares used to compute basic net income (loss) per share available to common shareholders
    134,793       141,975       134,531       142,611  
Dilutive potential common shares:
                               
Stock options and restricted stock
    185       —       —       —  
Convertible debt
    —       —       —       —  
 
                       
Shares used to compute diluted net income (loss) per share available to common shareholders
    134,978       141,975       134,531       142,611  
 
                               
Basic net income (loss) per share available to common shareholders
  $ 0.00     $ (0.03 )   $ (1.50 )   $ (0.02 )
Diluted net income (loss) per share available to common shareholders
  $ 0.00     $ (0.03 )   $ (1.50 )   $ (0.02 )

 

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 third 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

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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.

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•   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.

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