RealNetworks Announces Fourth Quarter And Full Year 2019 Fin

|Feb 5|magazine52 min read

SEATTLE, Feb. 5, 2020 /PRNewswire/ -- RealNetworks, Inc. (Nasdaq: RNWK), a leader in digital media software and services, today announced its financial results for the fourth quarter and full year ended December 31, 2019.

  • 2019 revenue of $172.1 million
  • 2019 Games revenue up 18% year-over-year driven by success of free-to-play strategy
  • Continued traction with SAFR with new customers and partners around the world

Management Commentary

"Strategically, I consider 2019 to be a very successful year," said Rob Glaser, Chairman and CEO of RealNetworks. "We achieved significant traction on two of our key growth initiatives: free-to-play casual mobile games and SAFR. Our free-to-play strategy drove significant topline growth in our Games business. Delicious World is already our highest revenue generating game ever despite having launched globally in mid-2019. SAFR also remains a top growth focus of the Company. We continue to get good initial traction with customers and partners around the world."

Mr. Glaser added, "Our focus for 2020 will be to continue to drive these key initiatives forward while also running our operations efficiently. While we will make ongoing investments to support our key growth initiatives, we are committed to thoughtfully managing costs along the way as we did during 2019. Our progress in this regard can be seen in our significant improvement in adjusted EBITDA loss in the second half of 2019 as compared to the first half of 2019."

Full Year 2019 Financial Highlights

  • Revenue was $172.1 million (inclusive of $106.3 million from Napster) compared to $69.5 million in 2018.
  • Games revenue was $25.5 million, up 18% compared to $21.7 million in 2018.
  • Operating expenses increased by $27.4 million, or 37%, from 2018. Napster's operating expenses were $25.8 million in 2019.
  • Net loss attributable to RealNetworks was $(20.0) million, or $(0.53) per diluted share, compared to net loss of $(25.0) million, or $(0.66) per diluted share in 2018. Included in net income attributable to RealNetworks was a gain of $12.3 million in the first quarter of 2019 related to the acquisition of Napster.
  • Adjusted EBITDA was a loss of $(20.1) million compared to a loss of $(16.2) million in 2018. A reconciliation of GAAP net income (loss) including noncontrolling interests to adjusted EBITDA, a non-GAAP measure, is provided in the financial tables that accompany this release.
  • At December 31, 2019, the Company had $16.8 million in unrestricted cash and cash equivalents compared to $18.1 million at September 30, 2019.

Fourth Quarter 2019 Financial Highlights

  • Revenue was $43.4 million (inclusive of $26.1 million from Napster) compared to $45.0 million (inclusive of $27.3 million from Napster) in the prior quarter and $16.6 million in the prior year period.
  • Games revenue was $6.6 million, down 8% compared to $7.2 million in the prior quarter and up 17% compared to $5.6 million in the prior year period.
  • Gross profit margin was 43%, up from 42% in the prior quarter and down from 77% in the prior year period. Napster's gross profit margin for the fourth quarter of 2019 was 21%, while RealNetworks' gross profit margin without Napster was 76%.
  • Operating expenses decreased $0.4 million, or 2%, from the prior quarter and increased $6.2 million, or 34%, from the prior year period. Napster's operating expenses were $7.1 million for the fourth quarter of 2019.
  • Net loss attributable to RealNetworks was $(6.4) million, or $(0.17) per diluted share, compared to net loss of $(6.0) million, or $(0.16) per diluted share, in the prior quarter and a net loss of $(6.9) million, or $(0.18) per diluted share, in the prior year period.
  • Adjusted EBITDA was a loss of $(2.7) million compared to a loss of $(3.2) million in the prior quarter and a loss of $(4.1) million in the prior year period.

Corporate Developments

  • On January 9, 2020, the Company announced the hiring of Mike Ensing as interim Chief Financial Officer following Cary Baker's resignation to pursue a new opportunity. Mr. Ensing joined RealNetworks as a full-time strategic advisor on January 10, 2020 and will succeed Mr. Baker as interim CFO on February 15, 2020. The Company has retained an executive search firm and has commenced a formal search for a permanent CFO.
  • On December 3, 2019, the Company strengthened its Board of Directors with the appointment of two new directors, Tim Wan and Erik Prusch. Mr. Wan has 20 years of financial and business experience, including 15 years with RealNetworks, and is currently the Chief Financial Officer at Asana, Inc., a privately held company that develops and offers a SaaS-based work management platform. Mr. Prusch has over 25 years of executive experience, having successfully led several technology and consumer-facing businesses through periods of innovation and adaptation.

Business Outlook

For the first quarter ending March 31, 2020, RealNetworks expects to achieve the following results including noncontrolling interests:

  • Total revenue is expected to be in the range of $40.0 million to $43.0 million.
  • Adjusted EBITDA loss is expected to be in the range of $(4.0) million to $(1.0) million.

Conference Call and Webcast Information

The Company will host a conference call today to review its results and discuss its performance at approximately 4:30 p.m. ET / 1:30 p.m. PT. Participants may join the conference call by dialing 1-877-451-6152 (United States) or 1-201-389-0879 (International). A telephonic replay of the call will also be available shortly after the completion of the call, until 11:59 pm ET on Wednesday, February 26, 2020, by dialing 1-844-512-2921 (United States) or 1-412-317-6671 (International) and entering the replay pin number: 13697915.

A live webcast will be available on RealNetworks' Investor Relations site under the Events & Presentations section at http://investor.realnetworks.com and will be archived online upon completion of the conference call.

About RealNetworks

Building on a legacy of digital media expertise and innovation, RealNetworks has created a new generation of products that employ best-in-class artificial intelligence and machine learning to enhance and secure our daily lives. SAFR (www.safr.com) is the world's premier facial recognition platform for live video. Leading in real-world performance and accuracy as evidenced in testing by NIST, SAFR enables new applications for security, convenience, and analytics. Kontxt (www.kontxt.com) is the foremost platform for categorizing A2P messages to help mobile carriers build customer loyalty and drive new revenue through text message classification and antispam. For information about our other products, visit www.realnetworks.com.

About Non-GAAP Financial Measures

To supplement RealNetworks' consolidated financial information presented in accordance with GAAP in this press release, the company also discloses certain non-GAAP financial measures, including adjusted EBITDA and contribution margin by reportable segment, which management believes provide investors with useful information. 

In the financial tables of our earnings press release, RealNetworks has included reconciliations of GAAP net income (loss) including noncontrolling interests to adjusted EBITDA and operating income (loss) by reportable segment to contribution margin by reportable segment.

The rationale for management's use of non-GAAP measures is included in the supplementary materials presented with the quarterly earnings materials.  Please refer to Exhibit 99.2 ("Information Regarding Non-GAAP Financial Measures") to the company's report on Form 8-K, which is being submitted today to the SEC.

Forward-Looking Statements

This press release contains forward-looking statements that involve risks and uncertainties, including statements relating to our current expectations regarding future revenue and adjusted EBITDA, our future growth, profitability, and market position, our financial condition and liquidity, our strategic focus and initiatives, agreements with partners, and the growth and future prospects relating to our Napster segment. All statements contained in this press release that do not relate to matters of historical fact should be considered forward-looking statements. These statements reflect our expectations as of today, and actual results may differ materially from the results predicted. Factors that could cause actual results for RealNetworks, on a consolidated basis, to differ from the results predicted include: our ability to realize operating efficiencies, growth and other benefits from the implementation of our growth initiatives and restructuring efforts; cash usage and conservation, and the pursuit of additional funding sources; successful monetization of our products and services; competitive risks, including the emergence or growth of competing technologies, products and services; potential outcomes and effects of claims and legal proceedings; risks associated with key customer or strategic relationships and business acquisitions; disruptions in the global financial markets, including changes in consumer spending and impacts to credit availability; fluctuations in foreign currencies; and unique risk factors that relate to our Napster segment, such as risks stemming from its streaming music service and related music royalties. More information about potential risk factors that could affect our business and financial results is included in RealNetworks' annual report on Form 10-K for the most recent year ended December 31, its quarterly reports on Form 10-Q and in other reports and documents filed by RealNetworks from time to time with the Securities and Exchange Commission. The preparation of our financial statements and forward-looking financial guidance requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, and revenues and expenses during the reported period. Actual results may differ materially from these estimates under different assumptions or conditions. RealNetworks assumes no obligation to update any forward-looking statements or information, which are in effect as of their respective dates.

For More Information:
Investor Relations for RealNetworks
Kimberly Orlando, Addo Investor Relations
310-829-5400
[email protected]
RNWK-F

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)



Quarter Ended


Twelve Months Ended


December 31,


December 31,


2019


2018


2019


2018


 (in thousands, except per share data)









 Net revenue

$

43,400



$

16,557



$

172,113



$

69,510


 Cost of revenue

24,697



3,727



103,127



17,727


           Gross profit

18,703



12,830



68,986



51,783










 Operating expenses:








       Research and development

8,452



7,391



34,848



30,789


       Sales and marketing

7,806



5,262



32,778



21,140


       General and administrative

7,417



5,180



31,305



20,706


       Restructuring and other charges

911



553



2,498



1,873


       Lease exit and related benefit







(454)










           Total operating expenses

24,586



18,386



101,429



74,054










 Operating loss

(5,883)



(5,556)



(32,443)



(22,271)










 Other income (expenses):








       Interest expense

(207)





(636)




       Interest income

14



74



131



344


       Gain (loss) on equity investment, net





12,338




       Equity in net loss of Napster



(20)





(757)


       Other income (expenses), net

(431)



92



420



(103)










           Total other income (expenses), net

(624)



146



12,253



(516)










 Income (loss) before income taxes

(6,507)



(5,410)



(20,190)



(22,787)


 Income tax expense

256



1,494



1,068



2,202










Net income (loss) including noncontrolling interests

(6,763)



(6,904)



(21,258)



(24,989)


Net income (loss) attributable to noncontrolling interests

(399)





(1,257)




Net income (loss) attributable to RealNetworks

$

(6,364)



$

(6,904)



$

(20,001)



$

(24,989)










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

$

(0.17)



$

(0.18)



$

(0.53)



$

(0.66)


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

$

(0.17)



$

(0.18)



$

(0.53)



$

(0.66)










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

38,142



37,680



37,994



37,582


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

38,142



37,680



37,994



37,582


 

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)



December 31,
2019


December 31,
2018


 (in thousands)

ASSETS

 Current assets:




 Cash and cash equivalents

$

16,805



$

35,561


 Short-term investments



24


 Trade accounts receivable, net

29,507



11,751


 Deferred costs, current portion

823



331


 Prepaid expenses and other current assets

7,445



5,911


 Total current assets

54,580



53,578






 Equipment and software

32,167



37,458


 Leasehold improvements

3,311



3,292


 Total equipment, software, and leasehold improvements

35,478



40,750


 Less accumulated depreciation and amortization

32,657



37,996


 Net equipment, software, and leasehold improvements

2,821



2,754






 Operating lease assets

11,592




 Restricted cash equivalents

5,374



1,630


 Other assets

1,891



3,997


 Deferred costs, non-current portion

1,021



528


 Deferred tax assets, net

761



851


 Other intangible assets, net

19,286



26


 Goodwill

62,428



16,955






 Total assets

$

159,754



$

80,319






 LIABILITIES AND SHAREHOLDERS' EQUITY





 Current liabilities:




 Accounts payable

$

4,927



$

3,910


 Accrued royalties, fulfillment and other current liabilities

77,303



11,312


 Commitment to Napster



2,750


 Deferred revenue, current portion

6,620



2,125


 Notes payable

7,331




 Total current liabilities

96,181



20,097






 Deferred revenue, non-current portion

96



268


 Deferred rent



986


 Deferred tax liabilities, net

1,172



1,168


 Long-term lease liabilities

8,466




 Long-term debt

3,900




 Other long-term liabilities

11,666



960






 Total liabilities

121,481



23,479






 Total shareholders' equity

38,775



56,840






Noncontrolling interests

(502)








 Total equity

38,273



56,840






 Total liabilities and equity

$

159,754



$

80,319


 

RealNetworks, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)



Twelve Months Ended
December 31,


2019


2018


 (in thousands)


 Cash flows from operating activities:




Net income (loss) including noncontrolling interests

$

(21,258)



$

(24,989)


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




Depreciation and amortization

5,834



2,135


Stock-based compensation

2,881



2,508


Equity in net loss of Napster



757


Deferred income taxes, net

(6)



1,170


(Gain) loss on equity investment, net

(12,338)




Foreign currency (gain) loss

(310)




Fair value adjustments to contingent consideration liability

1,000




Mark to market adjustment of warrants



124


Net change in certain operating assets and liabilities

(1,149)



(926)


  Net cash used in operating activities

(25,346)



(19,221)


 Cash flows from investing activities:




Purchases of equipment, software, and leasehold improvements

(1,192)



(765)


Proceeds from sales and maturities of short-term investments

24



8,755


Acquisition, net of cash acquired

12,249



(4,192)


 Net cash provided by investing activities

11,081



3,798


 Cash flows from financing activities:




Proceeds from issuance of common stock (stock options and stock purchase plan)

199



199


Tax payments from shares withheld upon vesting of restricted stock

(309)



(261)


Proceeds from notes payable and revolving credit facility

41,201




Repayments of notes payable and revolving credit facility

(41,992)




Payment of financing fees

(622)




Other financing activities

900




 Net cash used in financing activities

(623)



(62)


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

(124)



(920)


 Net increase (decrease) in cash, cash equivalents and restricted cash

(15,012)



(16,405)


 Cash, cash equivalents and restricted cash, beginning of period

37,191



53,596


 Cash, cash equivalents and restricted cash, end of period

$

22,179



$

37,191


 

RealNetworks, Inc. and Subsidiaries

Supplemental Financial Information

(Unaudited)



2019


2018


 YTD


 Q4


 Q3


 Q2


Q1


 YTD


 Q4


 Q3


 Q2


 Q1


 (in thousands)

Net Revenue by Segment




















Consumer Media (A)

$

13,170



$

4,432



$

3,632



$

2,620



$

2,486



$

18,168



$

4,068



$

4,733



$

3,884



$

5,483


Mobile Services (B)

27,143



6,312



6,895



6,997



6,939



29,670



6,899



7,348



6,719



8,704


Games (C)

25,489



6,567



7,164



6,048



5,710



21,672



5,590



5,498



5,121



5,463


Napster (D)

106,311



26,089



27,302



28,583



24,337












     Total net revenue

$

172,113



$

43,400



$

44,993



$

44,248



$

39,472



$

69,510



$

16,557



$

17,579



$

15,724



$

19,650






















Net Revenue by Product




















Consumer Media




















- Software License (E)

$

6,522



$

2,856



$

1,987



$

944



$

735



$

9,940



$

2,049



$

2,746



$

1,808



$

3,337


- Subscription Services (F)

4,148



992



1,028



1,040



1,088



4,895



1,153



1,232



1,225



1,285


- Product Sales (G)

825



193



207



206



219



1,177



257



281



299



340


- Advertising & Other (H)

1,675



391



410



430



444



2,156



609



474



552



521






















Mobile Services




















- Software License (I)

3,101



657



888



957



599



2,838



514



520



469



1,335


- Subscription Services (J)

24,042



5,655



6,007



6,040



6,340



26,832



6,385



6,828



6,250



7,369






















Games




















- Subscription Services (K)

12,121



3,007



3,056



3,073



2,985



11,141



3,014



2,745



2,689



2,693


- Product Sales (L)

9,823



2,580



3,078



2,177



1,988



8,647



2,013



2,279



1,953



2,402


- Advertising & Other (M)

3,545



980



1,030



798



737



1,884



563



474



479



368






















Napster




















- Subscription Services (N)

106,311



26,089



27,302



28,583



24,337
































     Total net revenue

$

172,113



$

43,400



$

44,993



$

44,248



$

39,472



$

69,510



$

16,557



$

17,579



$

15,724



$

19,650






















Net Revenue by Geography




















United States

$

83,360



$

21,053



$

22,015



$

21,322



$

18,970



$

35,803



$

7,697



$

9,026



$

7,646



$

11,434


Rest of world

88,753



22,347



22,978



22,926



20,502



33,707



8,860



8,553



8,078



8,216


     Total net revenue

$

172,113



$

43,400



$

44,993



$

44,248



$

39,472



$

69,510



$

16,557



$

17,579



$

15,724



$

19,650



Net Revenue by Segment

(A) The Consumer Media segment primarily includes revenue from the licensing of our portfolio of video codec technologies. Also included is RealPlayer and related products, such as the distribution of third-party software products, advertising on RealPlayer websites, sales of RealPlayer Plus software to consumers, and consumer subscriptions such as RealPlayer Plus and SuperPass.

(B) The Mobile Services segment primarily includes revenue from SaaS services and sales of professional services provided to mobile carriers.

(C) The Games segment primarily includes revenue from sales of mobile and PC games, online games subscription services, player purchases of in-game virtual goods, and advertising on games sites and social network sites.

(D) The Napster segment primarily includes revenue from subscription music offerings from on-demand streaming services and conditional downloads. Napster revenues are included in our consolidated results from the January 18, 2019 acquisition date forward.

Net Revenue by Product

(E) Software licensing revenue within Consumer Media includes revenues from licenses of our video codec technologies.

(F) Subscriptions revenue within Consumer Media includes revenue from subscriptions such as our RealPlayer Plus and SuperPass offerings.

(G) Product sales within Consumer Media includes sales of RealPlayer Plus software to consumers.

(H) Advertising & other revenue within Consumer Media includes distribution of third-party software products and advertising on RealPlayer websites.

(I) Software license revenue within Mobile Services includes revenue from our integrated RealTimes platform and our facial recognition platform, SAFR.

(J) Subscription services revenue within Mobile Services includes revenue from ringback tones and our messaging platform services, as well as from related professional services provided to mobile carriers.

(K) Subscription services revenue within Games includes revenue from online games subscriptions.

(L) Product sales revenue within Games includes revenue from retail and wholesale games-related revenue, sales of mobile games, and player purchases of in-game virtual goods.

(M) Advertising & other revenue within Games includes advertising on games sites and social network sites.

(N) Subscription services revenue within Napster includes music tracks by way of on-demand streaming and conditional downloads offered directly to end consumers and distribution partners.

 

RealNetworks, Inc. and Subsidiaries

Segment Results of Operations and Reconciliation to non-GAAP Contribution Margin

(Unaudited)



2019


2018


2019


2018


Q4


Q3


Q4


YTD


YTD


 (in thousands)

Consumer Media




















Net revenue

$

4,432



$

3,632



$

4,068



$

13,170



$

18,168


Cost of revenue

690



705



882



3,031



3,858


Gross profit

3,742



2,927



3,186



10,139



14,310












Gross margin

84

%


81

%


78

%


77

%


79

%











Operating expenses

2,498



2,692



3,614



11,186



14,419


Operating income (loss), a GAAP measure

$

1,244



$

235



$

(428)



$

(1,047)



$

(109)


Depreciation and amortization

34



34



49



178



195












Contribution margin, a non-GAAP measure

$

1,278



$

269



$

(379)



$

(869)



$

86












Mobile Services




















Net revenue

$

6,312



$

6,895



$

6,899



$

27,143



$

29,670


Cost of revenue

1,866



1,721



2,121



7,500



8,623


Gross profit

4,446



5,174



4,778



19,643



21,047












Gross margin

70

%


75

%


69

%


72

%


71

%











Operating expenses

7,198



7,143



6,906



29,340



28,066


Operating income (loss), a GAAP measure

$

(2,752)



$

(1,969)



$

(2,128)



$

(9,697)



$

(7,019)


Acquisitions related intangible asset amortization





69





322


Depreciation and amortization

100



81



116



518



616












Contribution margin, a non-GAAP measure

$

(2,652)



$

(1,888)



$

(1,943)



$

(9,179)



$

(6,081)












Games




















Net revenue

$

6,567



$

7,164



$

5,590



$

25,489



$

21,672


Cost of revenue

1,716



1,934



1,622



6,975



6,123


Gross profit

4,851



5,230



3,968



18,514



15,549












Gross margin

74

%


73

%


71

%


73

%


72

%











Operating expenses

4,744



5,151



4,865



20,220



20,324


Operating income (loss), a GAAP measure

$

107



$

79



$

(897)



$

(1,706)



$

(4,775)


Acquisitions related intangible asset amortization



4



23



27



66


Depreciation and amortization

85



89



82



341



484












Contribution margin, a non-GAAP measure

$

192



$

172



$

(792)



$

(1,338)



$

(4,225)












Napster




















Net revenue

$

26,089



$

27,302



$



$

106,311



$


Cost of revenue

20,493



21,986





85,901




Gross profit

5,596



5,316





20,410














Gross margin

21

%


19

%


%


19

%


%











Operating expenses

7,147



6,472





25,789




Operating income (loss), a GAAP measure

$

(1,551)



$

(1,156)



$



$

(5,379)



$


Acquisitions related intangible asset amortization

1,126



1,126





4,324




Depreciation and amortization

60



72





316




Restructuring and other charges

544







544














Contribution margin, a non-GAAP measure

$

179



$

42



$



$

(195)



$












Corporate




















Cost of revenue

$

(68)



$

(68)



$

(898)



$

(280)



$

(877)


Gross profit

68



68



898



280



877












Gross margin

N/A



N/A



N/A



N/A



N/A












Operating expenses

2,999



3,522



3,001



14,894



11,245


Operating income (loss), a GAAP measure

$

(2,931)



$

(3,454)



$

(2,103)



$

(14,614)



$

(10,368)


Other income (expense), net

(431)



541



92



420



(103)


Foreign currency (gain) loss

494



(489)



(26)



(310)



72


Depreciation and amortization

32



32



58



130



452


Fair value adjustments to contingent consideration liability

300



400





1,000




Restructuring and other charges

367



691



553



1,954



1,873


Stock-based compensation

461



503



395



2,881



2,508


Lease exit and related benefit









(454)












Contribution margin, a non-GAAP measure (1)

$

(1,708)



$

(1,776)



$

(1,031)



$

(8,539)



$

(6,020)



(1)2018 Corporate contribution margin was revised to exclude the impact of realized and unrealized foreign currency (gain) loss incurred in each respective period. Foreign currency (gain) loss is reported in Other income (expense), net, in our consolidated statement of operations.

 

RealNetworks, Inc. and Subsidiaries

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

(Unaudited)



2019


2018


2019


2018


 Q4


Q3


 Q4


 YTD


 YTD




(in thousands)











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











Net income (loss) including noncontrolling interests

$

(6,763)



$

(6,254)



$

(6,904)



$

(21,258)



$

(24,989)


Income tax expense (benefit)

256



310



1,494



1,068



2,202


Interest expense

207



220





636




Interest income

(14)





(74)



(131)



(344)


(Gain) loss on equity investment, net







(12,338)




Foreign currency (gain) loss

494



(489)



(26)



(310)



72


Equity in net loss of Napster





20





757


Acquisitions related intangible asset amortization

1,126



1,130



92



4,351



388


Depreciation and amortization

311



308



305



1,483



1,747


Fair value adjustments to contingent consideration liability

300



400





1,000




Restructuring and other charges

911



691



553



2,498



1,873


Stock-based compensation

461



503



395



2,881



2,508


Lease exit and related benefit









(454)


   Adjusted EBITDA, a non-GAAP measure (1)

$

(2,711)



$

(3,181)



$

(4,145)



$

(20,120)



$

(16,240)



(1)2018 adjusted EBITDA was revised to exclude the impact of realized and unrealized foreign currency (gain) loss incurred in each respective period. Foreign currency (gain) loss is reported in Other income (expense), net, in our consolidated statement of operations.

 

 

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SOURCE RealNetworks, Inc.