RealNetworks Announces First Quarter 2008 Results
RealNetworks Announces First Quarter 2008 Results
Announces Intention to Spin off Games Business
Board Authorizes Share Repurchase Program
SEATTLE, May 8 /PRNewswire-FirstCall/ -- Digital entertainment services company RealNetworks(R), Inc. (NASDAQ:RNWK) today announced results for the first quarter ended March 31, 2008.
Quarterly Highlights: -- Revenue of $147.6 million -- Net income of $2.4 million or $0.02 per diluted share -- Adjusted EBITDA of $19.9 million
"With solid first quarter performance, 2008 is off to a great start," said Rob Glaser, CEO of RealNetworks. "Our results exceeded our expectations across every major business."
In a separate release today, RealNetworks announced that it intends to spin off its games business and distribute shares in the newly created games company to its shareholders. Information on that announcement can be found at http://investor.realnetworks.com/games.
For the first quarter of 2008, revenue grew 14% to $147.6 million compared with $129.5 million for the first quarter of 2007. Revenue growth in the first quarter of 2008 compared with the first quarter of 2007 was due to: a 33% increase in Games revenue to $31.8 million; a 12% increase in Music revenue to $38.1 million; a 15% increase in Technology Products and Solutions revenue to $51.3 million, due in part to the acquisition of SonyNetServices and Exomi in 2007; and a 2% decline in Media Software and Services revenue to $26.4 million. Foreign currency exchange rate fluctuations positively affected 2008 first quarter revenue by approximately $2.0 million compared with the first quarter of 2007.
Net income for the first quarter of 2008 was $2.4 million or $0.02 per diluted share, compared with $40.0 million or $0.22 per diluted share in the first quarter of 2007. Results for the first quarter of 2007 included the final payment of $61 million related to Real's antitrust settlement and commercial agreements with Microsoft. Further information regarding these payments can be found in Real's SEC filings.
Adjusted EBITDA for the first quarter of 2008 was $19.9 million compared with $11.9 million in the first quarter of 2007. 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 first quarter of 2008 compared with 65% in the first quarter of 2007. Operating expenses for the first quarter of 2008 were $103.7 million, compared with $29.8 million in the first quarter of 2007. Operating expenses in the year-ago quarter were reduced by the $61 million payment related to the Microsoft settlement. Operating expenses in the first quarter of 2008 included $7.3 million of related party advertising in Rhapsody America.
As of March 31, 2008, Real had approximately $539.6 million in unrestricted cash, cash equivalents and short-term investments and $100 million of convertible debt.
Acquisition of Trymedia
In April 2008, Real acquired substantially all of the assets of Trymedia, a pioneer in casual games syndication from Macrovision for a total upfront cash payment of approximately $4 million. The acquisition is part of Real's strategy to build reach through syndicated distribution partnerships. With more than 250 partners including AOL, Yahoo!, Telstra and T-Online, Trymedia provides innovative syndication and commerce solutions that enable portals, online retailers and game developers to securely distribute PC games through physical and digital channels and maximize revenue throughout a game's lifetime.
Additional $50 million Stock Repurchase Program Authorized
In addition, the RealNetworks Board of Directors approved a share repurchase program of up to $50 million. Under the program, Real is authorized to repurchase up to $50 million of outstanding shares of common stock from time to time, depending on market conditions, share price and other factors. Repurchases may be made in the open market or through private transactions, in accordance with SEC requirements. Real may enter into a Rule 10(b)5-1 plan designed to facilitate the repurchase of all or a portion of the repurchase amount. Further, the repurchase program does not require Real to acquire a specific number of shares and may be terminated under certain conditions.
Real completed a previous $100 million stock repurchase program in the fourth quarter of 2007, repurchasing a total of approximately 13.9 million shares. Since the beginning of 2005, Real has repurchased approximately 44.2 million shares through its repurchase programs for $331.9 million.
Business Outlook
The following forward-looking statements reflect Real's expectations as of May 8, 2008. It is not Real's general practice to update these forward-looking statements until its next quarterly results announcement. For the full year 2008, Real expects revenue in the range of $628 million to $648 million, which includes approximately $12 million as a result of the acquisition of Trymedia. Real expects 2008 GAAP net income per share of $(0.05) to $0.00, and adjusted EBITDA of $62 million to $74 million, which reflects the higher-than-anticipated results of the first quarter offset by an approximate $5 million dilutive impact from the acquisition of Trymedia. Real's earnings per share guidance for 2008 includes tax expense of between $3 million and $6 million, and pretax income is expected to be between a loss of $(5) million and income of $6 million.
For the second quarter of 2008, Real expects revenue in the range of $151 million to $155 million, which includes approximately $4 million as a result of the acquisition of Trymedia. Real expects second quarter GAAP net income per share of $(0.04) to $0.00, and expects adjusted EBITDA of between $14 million and $17 million, which includes an approximate $2 million dilutive impact from the acquisition of Trymedia. Real's earnings per share guidance for the second quarter of 2008 includes tax expense in the range of $2 million to a benefit of $0.5 million, and pretax income is expected to be between a loss of $(3.5) million and a loss of $(0.5) million. For 2008, Real expects that small changes in its pre-tax earnings will result in large changes to its GAAP tax rate, which could significantly impact Real's quarterly GAAP results.
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(R) to listen to the conference call, which can be downloaded for free at http://www.real.com/. The on-demand webcast will be available approximately two hours following the conclusion of the live webcast. Participants may access the conference call by dialing 800-857-5305
(773-681-5857 for international callers). The passcode is "First Quarter Earnings," and the leader is Rob Glaser. Telephonic replay will be available until 8:00 p.m. (Eastern), May 22, 2008. Dial In: 866-424-3998 (for domestic callers); and 203-369-0851 (for international callers).
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 REALNETWORKS
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(R), the first mainstream media player to enable one-click downloading and recording of Internet video; the award-winning Rhapsody(R) digital music service, which delivers more than 1 billion songs per year; RealArcade(R), one of the largest 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://www.realnetworks.com/company.
About Non-GAAP Financial Measures
To supplement RealNetworks' condensed consolidated financial statements presented in accordance with GAAP, we present investors with certain non-GAAP financial measures, including adjusted EBITDA, adjusted EBITDA by reporting segment, adjusted cost of revenue and adjusted operating expenses.
-- Adjusted EBITDA and adjusted EBITDA by reporting segment consist of net income excluding the impact of the following: interest income, net; income taxes; depreciation; amortization (net of minority 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; income and expenses including charitable contributions related to the Microsoft agreements; and gain on initial formation of Rhapsody America. -- Adjusted cost of revenue consists of GAAP cost of revenue excluding stock-based compensation expenses, and acquisition costs including amortization of intangible assets (net of minority 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 (benefits) and acquisition costs including amortization of intangible assets (net of minority interest effect) and expenses for employee stock options that were converted to cash rights.
RealNetworks believes that the presentation of adjusted EBITDA, adjusted EBITDA by reporting segment, adjusted cost of revenue and adjusted operating expenses provides 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 our past financial reports, and also facilitates comparisons with other companies in our 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 our operating results and facilitates comparisons of our core operating performance against prior periods and our business model objectives. We have 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 us to other companies, and as a supplemental means to evaluate our ongoing operations. Externally, we believe that adjusted EBITDA continues to be useful to investors in their assessment of our operating performance and the valuation of our company.
Internally, adjusted EBITDA, 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 our board of directors; -- evaluating the operating performance of our company which includes direct and incrementally controllable revenue and costs of operations, but excludes items considered by management to be either non-cash or non-operating such as interest income and expense, stock-based compensation, tax expense, deferred tax valuation allowance changes, depreciation and amortization; -- managing and comparing performance internally across our businesses and externally against our peers; -- establishing internal operating budgets; and -- evaluating and valuing potential acquisition candidates.
Adjusted EBITDA, 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 our 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. We expect to continue to incur expenses similar to the non-GAAP adjustments described above, and exclusion of these items from our 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 our non-GAAP financial measures are:
-- Adjusted EBITDA and adjusted EBITDA by reporting segment are measures which we have 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 our net income and net income per share. We compensate for these limitations by prominently disclosing GAAP net income, which we believe is the most directly comparable GAAP measure, and providing investors with reconciliations from GAAP net income to adjusted EBITDA 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 our acquisitions. Adjusted operating expenses are limited in that they do not include stock-based compensation expenses, antitrust litigation expenses (benefit) and certain costs associated with our acquisitions. We compensate for these limitations by prominently disclosing the reported GAAP results and providing investors with a reconciliation from GAAP to the adjusted amount.
In the financial tables of our earnings press release, RealNetworks has included reconciliations of GAAP net income to adjusted EBITDA, income before income taxes 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.
Forward-Looking Statements: This press release contains forward-looking statements that involve risks and uncertainties, including statements relating to Real's announced intention to spin off its games business and distribute
shares in the games business to Real's shareholders and statements relating to Real's future revenue, GAAP net income (loss) per share, adjusted EBITDA, pre-tax income, income tax expense, interest income, depreciation and amortization and stock-based compensation expense. Actual results may differ materially from the results predicted. Factors that could cause actual results to differ from the results predicted include: risks associated with the ability to complete the proposed spin off transactions and their impact on the games business and Real's remaining businesses; potentially large changes in Real's GAAP tax rate that could result from even small changes in Real's pretax earnings; 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; risks associated with the creation and operation of Rhapsody America; risks associated with acquisitions generally, and the acquisitions of WiderThan, Sony NetServices, GameTrust, Trymedia and Exomi in particular, including the risks of integration, unknown liabilities and operations in new markets and geographies; the potential that we will be unable to continue to enter into commercially attractive agreements with third parties for the provision of compelling content for our subscription service offerings; the emergence of new entrants and competition in the market for digital media subscription offerings and online music sales; the impact on our gross margins of content costs and from the mix of subscribers to subscription offerings with higher content costs than others; competitive risks, including competing technologies, products and services, and the competitive activities of our larger competitors, some of which have strong ties to streaming media users through other products; risks associated with the introduction of new products and services; risks inherent in strategic relationships, especially with competitors, and 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, and its quarterly reports on Form 10-Q and from time to time in other reports filed by RealNetworks with the Securities and Exchange Commission. More information about risks relating to the potential spin off of the games business is listed in the safe harbor for forward looking statements contained in the press release announcing the proposed spin off transaction as well as in our Form 10-Q to be filed for the quarter ended March 31, 2008. 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 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.
RealNetworks, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited) Quarters Ended March 31, 2008 2007 (in thousands, except per share data) Net revenue $147,563 $129,472 Cost of revenue 55,393 45,943 Gross profit 92,170 83,529 Operating expenses: Research and development 25,006 23,479 Sales and marketing 53,596 49,700 Advertising with related party (A) 7,340 - General and administrative 17,084 17,354 Restructuring charge 686 - Subtotal operating expenses 103,712 90,533 Antitrust litigation benefit, net (B) - (60,747) Total operating expenses 103,712 29,786 Operating (loss) income (11,542) 53,743 Other income (expenses): Interest income, net 4,958 9,102 Equity in net loss of investments (91) (132) Minority interest in Rhapsody America (C) 8,615 - Gain on sale of interest in Rhapsody America (D) 3,726 - Other income 768 467 Other income, net 17,976 9,437 Income before income taxes 6,434 63,180 Income taxes (4,008) (23,219) Net income $2,426 $39,961 Basic net income per share $0.02 $0.25 Diluted net income per share $0.02 $0.22 Shares used to compute basic net income per share 142,491 161,350 Shares used to compute diluted net income per share 154,736 178,053 (A) Consists of advertising purchased by Rhapsody America from MTV Networks (MTVN). MTVN has a 49% ownership interest in Rhapsody America. (B) Consists of amounts received under the Settlement and Commercial agreements with Microsoft, net of certain legal fees, personnel costs, public relations and other professional service fees incurred related to antitrust complaints against Microsoft, including proceedings in the European Union. (C) Minority interest reflects MTVN's 49% ownership share in the losses of Rhapsody America. (D) Consists of gains realized from MTVN's note payments to Rhapsody America. RealNetworks, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (Unaudited) March 31, December 31, 2008 2007 (in thousands) ASSETS Current assets: Cash and cash equivalents $478,737 $476,697 Short-term investments 60,892 79,932 Trade accounts receivable, net 72,718 84,674 Deferred costs, current portion 7,149 6,408 Prepaid expenses and other current assets 29,760 33,845 Total current assets 649,256 681,556 Equipment, software, and leasehold improvements, at cost: Equipment and software 116,899 109,621 Leasehold improvements 30,789 30,632 Total equipment, software, and leasehold improvements 147,688 140,253 Less accumulated depreciation and amortization 89,401 83,756 Net equipment, software, and leasehold improvements 58,287 56,497 Restricted cash equivalents 15,518 15,509 Equity investments 9,125 9,976 Other assets 13,909 10,161 Deferred tax assets, net, non-current portion 41,176 40,913 Other intangible assets, net 97,904 107,677 Goodwill 347,848 353,153 Total assets $1,233,023 $1,275,442 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $46,228 $56,160 Accrued and other liabilities 100,800 114,136 Deferred revenue, current portion 40,308 39,564 Related party payable (A) 8,299 17,241 Convertible debt 100,000 100,000 Accrued loss on excess office facilities, current portion 4,171 3,389 Total current liabilities 299,806 330,490 Deferred revenue, non-current portion 1,874 2,663 Accrued loss on excess office facilities, non-current portion 5,688 7,311 Deferred rent 4,637 4,518 Deferred tax liabilities, net, non-current portion 20,227 22,060 Other long-term liabilities 10,402 13,683 Total liabilities 342,634 380,725 Minority interest (B) 14,678 19,613 Shareholders' equity 875,711 875,104 Total liabilities and shareholders' equity $1,233,023 $1,275,442 (A) Related party payable reflects amounts owed to MTVN. (B) Minority interest reflects MTVN's 49% ownership in the net assets of Rhapsody America. RealNetworks, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) Quarters Ended March 31, 2008 2007 (in thousands) Cash flows from operating activities: Net income $2,426 $39,961 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 12,971 9,933 Stock-based compensation 5,489 5,685 Loss on disposal of equipment, software, and leasehold improvements 75 41 Equity in net loss of investments 91 132 Excess tax benefit from stock option exercises (50) (294) Accrued loss on excess office facilities (841) (943) Deferred income taxes (939) (3,944) Minority interest in Rhapsody America (8,615) - Gain on sale of interest in Rhapsody America (3,726) - Other 32 26 Net change in certain assets and liabilities, net of acquisitions (18,202) 11,492 Net cash (used in) provided by operating activities (11,289) 62,089 Cash flows from investing activities: Purchases of equipment, software, and leasehold improvements (7,203) (3,839) Purchases of short-term investments (49,798) (55,432) Proceeds from sales and maturities of short-term investments 68,838 57,124 Purchases of intangible assets - (2,038) Proceeds from the sales of equity investments 350 - Payment of acquisition costs, net of cash acquired (6,011) - Decrease (increase) in restricted cash equivalents (9) 1,800 Net cash provided by (used in) investing activities 6,167 (2,385) Cash flows from financing activities: Net proceeds from sales of common stock under employee stock purchase plan and exercise of stock options 1,072 3,776 Net proceeds from sales of interest in Rhapsody America 7,406 - Excess tax benefit from stock option exercises 50 294 Repurchase of common stock - (78,481) Net cash provided by (used in) financing activities 8,528 (74,411) Effect of exchange rate changes on cash (1,366) 687 Net increase (decrease) in cash and cash equivalents 2,040 (14,020) Cash and cash equivalents, beginning of period 476,697 525,232 Cash and cash equivalents, end of period $478,737 $511,212 RealNetworks, Inc. and Subsidiaries Supplemental Financial Information (Unaudited) 2008 2007 Q1 Q4 Q3 Q2 Q1 (in thousands) Net Revenue by Line of Business: Consumer products and services (A) $96,286 $96,998 $91,824 $87,115 $85,040 Technology products and solutions (B) 51,277 59,884 53,271 49,056 44,432 Total net revenue $147,563 $156,882 $145,095 $136,171 $129,472 Consumer Products and Services: Subscriptions (C) $55,193 $54,784 $55,551 $51,091 $51,490 Media properties (D) 18,702 20,438 16,071 17,748 15,932 E-commerce and other (E) 22,391 21,776 20,202 18,276 17,618 Total consumer products and services revenue $96,286 $96,998 $91,824 $87,115 $85,040 Consumer Products and Services: Music (F) $38,079 $40,540 $37,658 $36,801 $34,127 Media software and services (G) 26,409 25,572 25,346 25,419 27,011 Games (H) 31,798 30,886 28,820 24,895 23,902 Total consumer products and services revenue $96,286 $96,998 $91,824 $87,115 $85,040 Net Revenue by Geography: United States $99,169 $96,806 $91,281 $88,035 $84,554 Rest of world 48,394 60,076 53,814 48,136 44,918 Total net revenue $147,563 $156,882 $145,095 $136,171 $129,472 Subscribers (presented as greater than)*: Total subscribers (I) 32,200 30,200 29,250 26,150 24,550 Technology products and solutions application services subscribers (J) 29,500 27,600 26,600 23,600 21,900 Music subscribers: Consumer music subscribers (K) 1,875 1,900 1,925 1,850 1,875 Technology products and solutions application services music subscribers (L) 800 825 825 825 800 Total Music Subscribers** 2,675 2,725 2,750 2,675 2,675 * Beginning the quarter ended December 31, 2006, total subscribers reflect the inclusion of subscribers related to wireless carrier application subscription services. 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) Revenue is derived from carrier application services such as ringback tones and music-on-demand, media delivery system software, support and maintenance services, broadcast hosting services and consulting services. (C) Revenue is derived from consumer digital media subscription services including: SuperPass, RadioPass, Rhapsody, GamePass and stand-alone subscriptions. (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) Revenue is derived from Rhapsody and RadioPass subscription services and sales of music content, advertising generated from our music and music related websites and the distribution of third party products. (G) Revenue is derived from SuperPass subscriptions, RealPlayer Plus and related products, stand-alone subscription services, sales and distribution of third-party software products and advertising related to our non-game and non-music related web properties. (H) Revenue is derived from GamePass subscription service, sales of games, advertising generated from our games and game-related websites and the distribution of third-party products. (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, GamePass, and stand-alone subscriptions. (J) Technology products and solutions application service subscribers include: ringback tones, music-on-demand and video-on-demand. (K) Consumer music subscribers include: Rhapsody, Rhapsody-to-Go, premium radio, and music-on-demand. (L) Technology products and solutions application services music subscribers include subscribers from application services including music-on-demand. RealNetworks, Inc. and Subsidiaries Supplemental Financial Information (Unaudited) Reconciliation of GAAP net income to adjusted EBITDA is as follows: Quarters Ended March 31, Dec. 31, Sept. 30, June 30, March 31, 2008 2007 2007 2007 2007 (in thousands) Net income in accordance with GAAP $2,426 $2,685 $4,342 $1,327 $39,961 Interest income, net (4,958) (6,417) (7,290) (8,065) (9,102) Stock-based compensation 5,489 6,627 5,984 5,622 5,685 Loss (gain) on equity investments - 34 - (132) - Conversion of WiderThan stock options to a cash equivalent 89 190 413 614 845 Depreciation and amortization 6,282 5,703 6,210 5,661 4,621 Acquisitions related intangible asset amortization (net of minority interest effect) 6,315 6,639 5,583 5,311 5,312 Gain on initial formation of Rhapsody America - - (3,866) - - Expenses (benefit) related to antitrust litigation: Income - - - - (61,000) Expenses 202 179 201 202 471 Charitable contributions - - - - 1,921 Income taxes 4,008 47 2,012 2,178 23,219 Adjusted EBITDA $19,853 $15,687 $13,589 $12,718 $11,933 RealNetworks, Inc. and Subsidiaries Segment Results of Operations (Unaudited) Quarter Ended March 31, 2008 Music Consumer TPS Grand (A) (B) (C) Other Total (in thousands) Net revenue $38,079 $58,207 $51,277 $- $147,563 Cost of revenue 21,519 12,613 21,261 - 55,393 Gross profit 16,560 45,594 30,016 - 92,170 Gross margin 43% 78% 59% - 62% Operating expenses: Advertising with related party 7,340 - - - 7,340 Restructuring charge - - - 686 686 Other operating expenses 25,631 37,632 32,186 237 95,686 Total operating expenses 32,971 37,632 32,186 923 103,712 Income (loss) from operations (16,411) 7,962 (2,170) (923) (11,542) Other income (expenses): Interest income, net - - - 4,958 4,958 Minority interest 8,615 - - - 8,615 Equity in net loss of investments - - - (91) (91) Gain on sale of interest in Rhapsody America 3,726 - - - 3,726 Other income - - - 768 768 Other income, net 12,341 - - 5,635 17,976 Income (loss) before income taxes $(4,070) $7,962 $(2,170) $4,712 $6,434
Reconciliation of segment GAAP income before taxes to segment adjusted EBITDA is as follows:
Income (loss) before income taxes $(4,070) $7,962 $(2,170) $4,712 $6,434 Interest income, net - - - (4,958) (4,958) Stock-based compensation 1,079 1,836 2,574 - 5,489 Conversion of WiderThan stock options to a cash equivalent - - 89 - 89 Acquisitions related intangible asset amortization (D) 384 805 5,126 - 6,315 Gain on initial formation of Rhapsody America - - - - - Depreciation and amortization (D) 1,410 2,041 2,831 - 6,282 Expenses (benefit) related to antitrust litigation: Income - - - - - Expenses - - - 202 202 Charitable contributions - - - - - Adjusted EBITDA $(1,197) $12,644 $8,450 $(44) $19,853 Quarter Ended March 31, 2007 Music Consumer TPS Grand (A) (B) (C) Other Total (in thousands) Net revenue $34,127 $50,913 $44,432 $- $129,472 Cost of revenue 18,875 9,128 17,940 - 45,943 Gross profit 15,252 41,785 26,492 - 83,529 Gross margin 45% 82% 60% - 65% Operating expenses: Other operating expenses 24,949 32,907 30,538 (58,608) 29,786 Total operating expenses 24,949 32,907 30,538 (58,608) 29,786 Income (loss) from operations (9,697) 8,878 (4,046) 58,608 53,743 Other income (expenses): Interest income, net - - - 9,102 9,102 Equity in net loss of investments - - - (132) (132) Other income - - - 467 467 Other income, net - - - 9,437 9,437 Income (loss) before income taxes $(9,697) $8,878 $(4,046) $68,045 $63,180
Reconciliation of segment GAAP income before taxes to segment adjusted EBITDA is as follows:
Income (loss) before income taxes $(9,697) $8,878 $(4,046) $68,045 $63,180 Interest income, net - - - (9,102) (9,102) Stock-based compensation 1,040 2,256 2,389 - 5,685 Conversion of WiderThan stock options to a cash equivalent - - 845 - 845 Acquisitions related intangible asset amortization (D) 22 723 4,567 - 5,312 Depreciation and amortization (D) 1,260 1,417 1,944 - 4,621 Expenses (benefit) related to antitrust litigation: Income - - - (61,000) (61,000) Expenses - - - 471 471 Charitable contributions - - - 1,921 1,921 Adjusted EBITDA $(7,375) $13,274 $5,699 $335 $11,933 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 Consumer segment primarily includes revenue and related costs from: the sale of individual games through our RealArcade service and our Games related websites; our GamePass and FunPass subscription service; our SuperPass and stand-alone premium video subscription services; RealPlayer Plus and related products; sales and distribution of third-party software products; and all advertising other than that related directly to our Music businesses. (C) TPS comprises our Technology Products and Solutions segment which includes revenue and related costs from: sales of ringback tone, 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 (OEM) 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. (D) Net of minority interest effect within our Music segment. RealNetworks, Inc. and Subsidiaries Supplemental Financial Information (Unaudited) Quarter Ended March 31, 2008 WiderThan Acquis- Options itions Conv- Related erted Anti- Stock- Intangible to a trust Based Asset Cash Litiga- As Compen- Amortiz- Equiv- tion Reported sation ation (A) alent Related Adjusted (in thousands) Expenses in accordance with GAAP Cost of revenue $55,393 $(234) $(2,315) $(21) $- $52,823 Operating expenses: Research and development $25,006 $(1,913) $- $(46) $- $23,047 Sales and marketing 53,596 (1,908) (4,000) (22) - 47,666 Advertising with related party 7,340 - - - - 7,340 General and administrative 17,084 (1,434) - - (202) 15,448 Restructuring charge 686 - - - - 686 Total adjusted operating expenses, net $103,712 $(5,255) $(4,000) $(68) $(202) $94,187 Quarter Ended March 31, 2007 WiderThan Acquis- Options itions Conv- Related erted Anti- Stock- Intangible to a trust Based Asset Cash Litiga- As Compen- Amortiz- Equiv- tion Reported sation ation alent Related Adjusted (in thousands) Expenses in accordance with GAAP Cost of revenue $45,943 $(159) $(2,144) $(127) $- $43,513 Operating expenses: Research and development $23,479 $(1,772) $- $(151) $- $21,556 Sales and marketing 49,700 (2,387) (3,168) (349) - 43,796 General and administrative 17,354 (1,367) - (218) (2,139) 13,630 Antitrust litigation benefit, net (60,747) - - - 60,747 - Total adjusted operating expenses, net $29,786 $(5,526) $(3,168) $(718) $58,608 $78,982 (A) - Net of minority interest effect. RealNetworks, Inc. and Subsidiaries Supplemental Financial Information
A reconciliation of GAAP net income guidance for the quarter ending June 30, 2008 and the full year ending December 31, 2008 to adjusted EBITDA guidance is as follows:
Quarter Ending Year Ending June 30, 2008 December 31, 2008 Low High Low High Net income in accordance with GAAP $(5.4) $- $(8.0) $- Interest income, net (3.2) (3.4) (13.0) (14.0) Stock-based compensation and conversion of WiderThan stock options to a cash equivalent 5.6 6.5 22.0 26.0 Depreciation and amortization, including acquisitions related intangible asset amortization (net of minority interest effect) 15.0 14.4 58.0 56.0 Income taxes 2.0 (0.5) 3.0 6.0 Total adjusted EBITDA $14.0 $17.0 $62.0 $74.0
First Call Analyst:
FCMN Contact: meggers@real.com
Source: RealNetworks, Inc.
CONTACT: press, Bill Hankes, +1-206-892-6614, bhankes@real.com; or
financial, Marj Charlier, +1-206-892-6718, mcharlier@real.com, both for
RealNetworks, Inc.
Web site: http://www.realnetworks.com/
Profile: International Entertainment
posted by EntertainmentNews @ 1:53 PM
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