RealNetworks Announces Second Quarter 2008 Results
SEATTLE, July 31 /PRNewswire-FirstCall/ -- Digital entertainment services company RealNetworks(R), Inc. (NASDAQ:RNWK) today announced results for the second quarter ended June 30, 2008.
Quarterly Highlights: * Revenue of $152.6 million * Net loss of $1.3 million or $0.01 per share * Adjusted EBITDA of $17.4 million
"We achieved solid results in the second quarter," said Rob Glaser, CEO of RealNetworks. "We also launched a major initiative -- Music Without Limits -- that substantially strengthens Rhapsody by integrating mobile music and legal mp3s from all major labels."
For the second quarter of 2008, revenue grew 12% to $152.6 million compared with $136.2 million for the second quarter of 2007. Revenue growth in the second quarter of 2008 compared with the second quarter of 2007 was due to: a 40% increase in Games revenue to $34.9 million, of which $4 million was due to the acquisition of TryMedia; a 15% increase in Media Software and Services revenue to $29.2 million; a 5% increase in Technology Products and Solutions revenue to $51.3 million; and a 1% increase in music revenue to $37.2 million. Foreign currency exchange rate fluctuations positively affected 2008 second quarter revenue by approximately $1.1 million compared with the second quarter of 2007.
Net loss for the second quarter of 2008 was $1.3 million or $0.01 per share, compared with net income of $1.3 million or $0.01 per diluted share in the second quarter of 2007. Income taxes were $3.7 million compared with $2.2 million in the year-earlier period, and interest income was $3.4 million compared with $8.1 million. Adjusted EBITDA for the second quarter of 2008 was $17.4 million compared with $12.7 million in the second 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 64% in the second quarter of 2008, consistent with the gross margin a year earlier. Operating expenses for the second quarter of 2008 were $109.7 million, compared with $92.1 million in the second quarter of 2007. Operating expenses in the second quarter of 2008 included $9.2 million of related party advertising in Rhapsody America.
As of June 30, 2008, Real had approximately $523 million in unrestricted cash, cash equivalents and short-term investments, and $100 million of convertible debt. On July 1, $99.9 million of the convertible debt was repaid.
During the quarter, RealNetworks repurchased 218,000 shares of its common stock for approximately $1.5 million under a repurchase authorization approved by the board in April, 2008. Since the beginning of 2005, Real has repurchased approximately 44.4 million shares through its repurchase programs for $333.5 million.
Business Outlook
The following forward-looking statements reflect Real's expectations as of July 31, 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 $620 million to $630 million. Real expects 2008 GAAP net loss per share to be between $(0.06) and $(0.02) and adjusted EBITDA of between $63 million to $70 million. Real's earnings per share guidance for 2008 includes tax expense of between $7 million and $9 million, and pretax income is expected to be between a loss of $(2) million and income of $6 million.
For the third quarter of 2008, Real expects revenue in the range of $151 million to $155 million. Real expects third quarter GAAP net loss per share of $(0.05) to $(0.03), and expects adjusted EBITDA of between $10 million and $13 million. Real's earnings per share guidance for the third quarter of 2008 includes a tax benefit in the range of $1.4 million to $1.0 million, and pretax income is expected to be between a loss of $(8.6) million and a loss of $(5.2) 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 affect 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 "Second Quarter Earnings," and the leader is Rob Glaser.
Telephonic replay will be available until 8:00 p.m. (Eastern), August 14, 2008. Dial In: 866-435-5410 (for domestic callers); and 203-369-1030 (for international callers).
RNWK-F 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, 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 (loss), which we believe is the most directly comparable GAAP measure, and providing investors with reconciliations from GAAP net income (loss) 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 (loss) 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 current expectations for future revenue, GAAP net income (loss) per share, adjusted EBITDA, tax expense and 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 previously announced casual games 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 June 30, 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 Six Months Ended June 30, June 30, 2008 2007 2008 2007 (in thousands, except per share data) Net revenue $152,648 $136,171 $300,211 $265,643 Cost of revenue 55,645 49,199 111,038 95,142 Gross profit 97,003 86,972 189,173 170,501 Operating expenses: Research and development 29,065 25,005 54,071 48,484 Sales and marketing 53,054 50,081 106,650 99,781 Advertising with related party (A) 9,240 - 16,580 - General and administrative 18,337 17,063 35,421 34,417 Restructuring charge - - 686 - Subtotal operating expenses 109,696 92,149 213,408 182,682 Antitrust litigation benefit, net (B) - - - (60,747) Total operating expenses 109,696 92,149 213,408 121,935 Operating (loss) income (12,693) (5,177) (24,235) 48,566 Other income (expenses): Interest income, net 3,375 8,065 8,333 17,167 Equity in net loss of investments (107) - (198) (132) Gain on sale of equity investment, net 222 132 222 132 Minority interest in Rhapsody America (C) 8,177 - 16,792 - Gain on sale of interest in Rhapsody America (D) 3,371 - 7,097 - Other income 50 485 818 952 Other income, net 15,088 8,682 33,064 18,119 Income before income taxes 2,395 3,505 8,829 66,685 Income taxes (3,700) (2,178) (7,708) (25,397) Net income $(1,305) $1,327 $1,121 $41,288 Basic net income per share $(0.01) $0.01 $0.01 $0.26 Diluted net income per share $(0.01) $0.01 $0.01 $0.24 Shares used to compute basic net income per share 142,905 153,880 142,946 157,929 Shares used to compute diluted net income per share 142,905 169,033 156,000 173,822 (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) June 30, December 31, 2008 2007 (in thousands) ASSETS Current assets: Cash and cash equivalents $415,805 $476,697 Short-term investments 106,862 79,932 Trade accounts receivable, net 71,177 84,674 Deferred costs, current portion 8,598 6,408 Prepaid expenses and other current assets 39,168 33,845 Total current assets 641,610 681,556 Equipment, software, and leasehold improvements, at cost: Equipment and software 124,406 109,621 Leasehold improvements 30,875 30,632 Total equipment, software, and leasehold improvements 155,281 140,253 Less accumulated depreciation and amortization 94,763 83,756 Net equipment, software, and leasehold improvements 60,518 56,497 Restricted cash equivalents and investments 14,670 15,509 Equity investments 8,126 9,976 Other assets 16,419 10,161 Deferred tax assets, net, non-current portion 40,169 40,913 Other intangible assets, net 90,506 107,677 Goodwill 341,551 353,153 Total assets $1,213,569 $1,275,442 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $29,748 $56,160 Accrued and other liabilities 106,654 114,136 Deferred revenue, current portion 40,680 39,564 Related party payable (A) 9,992 17,241 Convertible debt 100,000 100,000 Accrued loss on excess office facilities, current portion 4,311 3,389 Total current liabilities 291,385 330,490 Deferred revenue, non-current portion 1,608 2,663 Accrued loss on excess office facilities, non- current portion 4,797 7,311 Deferred rent 4,675 4,518 Deferred tax liabilities, net, non- current portion 18,311 22,060 Other long-term liabilities 10,152 13,683 Total liabilities 330,928 380,725 Minority interest (B) 10,931 19,613 Shareholders' equity 871,710 875,104 Total liabilities and shareholders' equity $1,213,569 $1,275,442 (A) Related party payable reflects amounts owed to MTVN. (B) Minority interest reflects MTVN's 49% ownership interest in the net assets of Rhapsody America. RealNetworks, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, 2008 2007 (in thousands) Cash flows from operating activities: Net income $1,121 $41,288 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 25,701 20,905 Stock-based compensation 11,520 11,307 Loss on disposal of equipment, software, and leasehold improvements 182 163 Equity in net loss of investments 198 132 Gain on sale of equity investment, net (222) (132) Excess tax benefit from stock option exercises (88) (596) Accrued loss on excess office facilities (1,593) (1,795) Unrealized gain on trading securities - (2,102) Purchase of trading securities - (270,000) Deferred income taxes (2,138) (6,069) Minority interest in Rhapsody America (16,792) - Gain on sale of interest in Rhapsody America (7,097) - Other 89 51 Net change in certain assets and liabilities, net of acquisitions (39,159) 552 Net cash used in operating activities (28,278) (206,296) Cash flows from investing activities: Purchases of equipment, software, and leasehold improvements (15,231) (11,525) Purchases of short-term investments (95,671) (38,768) Proceeds from sales and maturities of short-term investments 68,741 70,343 Purchases of intangible assets - (2,060) Proceeds from the sales of equity investments 1,225 1,615 Payment of acquisition costs, net of cash acquired (10,164) (25,351) Decrease in restricted cash equivalents and investments 839 1,800 Net cash used in investing activities (50,261) (3,946) Cash flows from financing activities: Net proceeds from sales of common stock under employee stock purchase plan and exercise of stock options 6,041 12,277 Net proceeds from sales of interest in Rhapsody America 14,607 - Excess tax benefit from stock option exercises 88 596 Repurchase of common stock (681) (107,905) Net cash provided by (used in) financing activities 20,055 (95,032) Effect of exchange rate changes on cash (2,408) (410) Net decrease in cash and cash equivalents (60,892) (305,684) Cash and cash equivalents, beginning of period 476,697 525,232 Cash and cash equivalents, end of period $415,805 $219,548 RealNetworks, Inc. and Subsidiaries Supplemental Financial Information (Unaudited) 2008 2007 Q2 Q1 Q4 Q3 Q2 Q1 (in thousands) Net Revenue by Line of Business: Consumer products and services (A) $101,353 $96,286 $96,998 $91,824 $87,115 $85,040 Technology products and solutions (B) 51,295 51,277 59,884 53,271 49,056 44,432 Total net revenue $152,648 $147,563 $156,882 $145,095 $136,171 $129,472 Consumer Products and Services: Subscriptions (C) $55,658 $55,193 $54,784 $55,551 $51,091 $51,490 Media properties (D) 23,472 18,702 20,438 16,071 17,748 15,932 E-commerce and other (E) 22,223 22,391 21,776 20,202 18,276 17,618 Total consumer products and services revenue $101,353 $96,286 $96,998 $91,824 $87,115 $85,040 Consumer Products and Services: Music (F) $37,170 $38,079 $40,540 $37,658 $36,801 $34,127 Media software and services (G) 29,238 26,409 25,572 25,346 25,419 27,011 Games (H) 34,945 31,798 30,886 28,820 24,895 23,902 Total consumer products and services revenue $101,353 $96,286 $96,998 $91,824 $87,115 $85,040 Net Revenue by Geography: United States $100,898 $99,169 $96,806 $91,281 $88,035 $84,554 Rest of world 51,750 48,394 60,076 53,814 48,136 44,918 Total net revenue $152,648 $147,563 $156,882 $145,095 $136,171 $129,472 Subscribers (presented as greater than) *: Total subscribers (I) 35,000 32,200 30,200 29,250 26,150 24,550 Technology products and solutions application services subscribers (J) 32,450 29,500 27,600 26,600 23,600 21,900 Music subscribers: Consumer music subscribers (K) 1,875 1,875 1,900 1,925 1,850 1,875 Technology products and solutions application services music subscribers (L) 800 800 825 825 825 800 Total Music Subscribers** 2,675 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 (loss) to adjusted EBITDA is as follows: Quarters Ended June 30, March 31, Dec. 31, Sept. 30, June 30, March 31, 2008 2008 2007 2007 2007 2007 (in thousands) Net income (loss) in accordance with GAAP $(1,305) $2,426 $2,685 $4,342 $1,327 $39,961 Interest income, net (3,375) (4,958) (6,417) (7,290) (8,065) (9,102) Stock-based compensation 6,031 5,489 6,627 5,984 5,622 5,685 Loss (gain) on equity investments, net (222) - 34 - (132) - Conversion of WiderThan stock options to a cash equivalent 26 89 190 413 614 845 Depreciation and amortization (net of minority interest effect) 6,186 6,282 5,703 6,210 5,661 4,621 Acquisitions related intangible asset amortization (net of minority interest effect) 6,171 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 202 202 179 201 202 471 Charitable contributions - - - - - 1,921 Income taxes 3,700 4,008 47 2,012 2,178 23,219 Adjusted EBITDA $17,414 $19,853 $15,687 $13,589 $12,718 $11,933 RealNetworks, Inc. and Subsidiaries Segment Results of Operations (Unaudited) Quarter Ended June 30, 2008 Grand Music (A) Consumer (B) TPS (C) Other Total (in thousands) Net revenue $37,170 $64,183 $51,295 $- $152,648 Cost of revenue 20,693 14,362 20,590 - 55,645 Gross profit 16,477 49,821 30,705 - 97,003 Gross margin 44% 78% 60% - 64% Operating expenses: Advertising with related party 9,240 - - - 9,240 Other operating expenses 23,412 44,029 32,778 237 100,456 Total operating expenses 32,652 44,029 32,778 237 109,696 Income (loss) from operations (16,175) 5,792 (2,073) (237) (12,693) Other income (expenses): Interest income, net - - - 3,375 3,375 Minority interest 8,177 - - - 8,177 Equity in net loss of investments - - - (107) (107) Gain on sale of equity investment, net - - - 222 222 Gain on sale of interest in Rhapsody America 3,371 - - - 3,371 Other income - - - 50 50 Other income, net 11,548 - - 3,540 15,088 Income (loss) before income taxes $(4,627) $5,792 $(2,073) $3,303 $2,395 Reconciliation of segment GAAP income (loss) before taxes to segment adjusted EBITDA is as follows: Income (loss) before income taxes $(4,627) $5,792 $(2,073) $3,303 $2,395 Interest income, net - - - (3,375) (3,375) Stock-based compensation 1,089 2,331 2,611 - 6,031 Conversion of WiderThan stock options to a cash equivalent - - 26 - 26 Acquisitions related intangible asset amortization (D) 384 914 4,873 6,171 Gain on initial formation of Rhapsody America - - - - - Gain on sale of equity investments, net - - - (222) (222) Depreciation and amortization (D) 1,262 1,815 3,109 - 6,186 Expenses (benefit) related to antitrust litigation: Income - - - - - Expenses - - - 202 202 Charitable contributions - - - - - Adjusted EBITDA $(1,892) $10,852 $8,546 $(92) $17,414 Quarter Ended June 30, 2007 Grand Music (A) Consumer (B) TPS (C) Other Total (in thousands) Net revenue $36,801 $50,314 $49,056 $- $136,171 Cost of revenue 19,804 9,436 19,959 - 49,199 Gross profit 16,997 40,878 29,097 - 86,972 Gross margin 46% 81% 59% - 64% Operating expenses: Other operating expenses 24,037 34,814 33,096 202 92,149 Total operating expenses 24,037 34,814 33,096 202 92,149 Income (loss) from operations (7,040) 6,064 (3,999) (202) (5,177) Other income (expenses): Interest income, net - - - 8,065 8,065 Gain on sale of equity investments, net - - - 132 132 Other income - - - 485 485 Other income, net - - - 8,682 8,682 Income (loss) before income taxes $(7,040) $6,064 $(3,999) $8,480 $3,505
Reconciliation of segment GAAP income (loss) before taxes to segment adjusted EBITDA is as follows:
Income (loss) before income taxes $(7,040) $6,064 $(3,999) $8,480 $3,505 Interest income, net - - - (8,065) (8,065) Stock-based compensation 1,129 2,142 2,351 - 5,622 Conversion of WiderThan stock options to a cash equivalent - - 614 - 614 Acquisitions related intangible asset amortization (D) 22 583 4,706 - 5,311 Gain on sale of equity investments, net - - - (132) (132) Depreciation and amortization (D) 1,214 1,461 2,986 - 5,661 Expenses (benefit) related to antitrust litigation: Income - - - - - Expenses - - - 202 202 Charitable contributions - - - - - Adjusted EBITDA $(4,675) $10,250 $6,658 $485 $12,718 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 June 30, 2008 Acquis- WiderThan itions Options Related Converted 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 $55,645 $(662) $(2,282) $(1) $- $52,700 Operating expenses: Research and development $29,065 $(2,146) $- $- $- $26,919 Sales and marketing 53,054 (1,433) (3,889) (7) - 47,725 Advertising with related party 9,240 - - - - 9,240 General and administrative 18,337 (1,790) - (18) (202) 16,327 Restructuring charge - - - - - - Total adjusted operating expenses, net $109,696 $(5,369) $(3,889) $(25) $(202) $100,211 Quarter Ended June 30, 2007 Acquis- WiderThan itions Options Related Converted 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 $49,199 $(154) $(1,988) $(117) $- $46,940 Operating expenses: Research and development $25,005 $(1,641) $- $(128) $- $23,236 Sales and marketing 50,081 (2,203) (3,323) (299) - 44,256 General and administrative 17,063 (1,624) - (70) (202) 15,167 Antitrust litigation benefit, net - - - - - - Total adjusted operating expenses, net $92,149 $(5,468) $(3,323) $(497) $(202) $82,659 Six Months Ended June 30, 2008 Acquis- WiderThan itions Options Related Converted 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 $111,038 $(896) $(4,597) $(22) $- $105,523 Operating expenses: Research and development $54,071 $(4,059) $- $(46) $- $49,966 Sales and marketing 106,650 (3,341) (7,889) (29) - 95,391 General and administrative 16,580 - - - - 16,580 Antitrust litigation benefit, net 35,421 (3,224) - (18) (404) 31,775 Restructuring charge 686 - - - - 686 Total adjusted operating expenses, net $213,408 $(10,624) $(7,889) $(93) $(404) $194,398 Six Months Ended June 30, 2007 Acquis- WiderThan itions Options Related Converted 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 $95,142 $(313) $(4,132) $(244) $- $90,453 Operating expenses: Research and development $48,484 $(3,413) $- $(279) $- $44,792 Sales and marketing 99,781 (4,590) (6,491) (648) - 88,052 General and administrative 34,417 (2,991) - (288) (2,341) 28,797 Antitrust litigation benefit, net (60,747) - - - 60,747 - Total adjusted operating expenses, net $121,935 $(10,994) $(6,491) $(1,215) $58,406 $161,641 RealNetworks, Inc. and Subsidiaries Supplemental Financial Information (Unaudited)
A reconciliation of GAAP net income (loss) guidance for the quarter ending September 30, 2008 and the full year ending December 31, 2008 to adjusted EBITDA guidance is as follows:
Quarter Ending Year Ending September 30, 2008 December 31, 2008 Low High Low High Net income (loss) in accordance with GAAP $(7.2) $(4.2) $(9.0) $(3.0) Interest income, net & other (2.2) (2.5) (12.7) (13.0) Stock-based compensation and conversion of WiderThan stock options to a cash equivalent 6.8 7.2 24.0 26.0 Depreciation and amortization, including acquisitions related intangible asset amortization (net of minority interest effect) 14.0 13.5 53.7 51.0 Income tax expense (benefit) (1.4) (1.0) 7.0 9.0 Total adjusted EBITDA $10.0 $13.0 $63.0 $70.0
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 of
RealNetworks, Inc.
Web site: http://www.realnetworks.com/
Profile: International Entertainment
