RealNetworks Announces Second Quarter 2010 Results

RealNetworks Announces Second Quarter 2010 Results

Dominique Trempont Named to Board of Directors Matt Hulett Named to Head Games Business

SEATTLE, July 29 /PRNewswire-FirstCall/ -- Digital entertainment services company RealNetworks, Inc. (NASDAQ:RNWK) today announced results for the second quarter ended June 30, 2010.

Quarterly Highlights:
-- Revenue of $88.9 million
-- Net loss of $(25.9) million or $(0.19) per share
-- Adjusted EBITDA of $604,000
-- Cash and short term investments of $313.2 million as of June 30, 2010

"We made strong progress transforming RealNetworks during the second quarter," said Bob Kimball, President and CEO of RealNetworks. "Our restructuring efforts are ahead of plan. In the first six months of the year, we cut more than $30 million in annualized operating expenses from our ongoing businesses. Now it is time to focus on growing the business by improving our sales and marketing of existing products and building a strong pipeline of innovative products for the long term."

Second Quarter Results

Beginning in the second quarter of 2010, revenue and other operating results of Real's music business from its Rhapsody joint venture are not consolidated in Real's financial statements as a result of the restructuring of Rhapsody completed on March 31, 2010.

For the second quarter of 2010, revenue from Real's Technology Products and Solutions, Media Software and Services, and Games businesses was $88.9 million compared with $95.3 million for the second quarter of 2009. Total revenue in the second quarter of 2009 was $135.7 million, which included revenue from Real's music business of $40.5 million. Foreign currency exchange rate fluctuations positively affected 2010 second quarter revenue by approximately $800,000 compared with the year-ago quarter. Revenue trends in each of Real's businesses in the second quarter of 2010 compared with the year-earlier quarter were: a 2% increase in Media Software and Services revenue to $19.6 million, a 5% decrease in Games revenue to $28.1 million and an 11% decrease in Technology Products and Solutions revenue to $41.1 million.

Net loss for the second quarter of 2010 was $(25.9) million, or $(0.19) per share, compared with a net loss of $(188.3) million, or $(1.40) per share, in the second quarter of 2009. Net loss for the second quarter of 2010 included restructuring charges of $11.9 million primarily for employee severance costs and loss on excess office facilities, while the net loss in the year-ago quarter included goodwill impairment charges of $175.6 million. Adjusted EBITDA for the second quarter of 2010 was $604,000, compared with $4.4 million for the second quarter of 2009. A reconciliation of GAAP net loss to adjusted EBITDA is provided in the financial tables that accompany this release.

As of June 30, 2010, Real had $313.2 million in unrestricted cash, cash equivalents and short-term investments compared with $335.2 million at March 31, 2010. In addition, Real had $51.8 million in restricted cash and equity investments, including an approximate 47.5% equity interest in its Rhapsody joint venture. A majority of the $22.0 million decrease in cash, cash equivalents and short-term investments from March 31, 2010, was related to working capital changes, including a reduction in accrued liabilities and payables, primarily royalties. During the quarter, total liabilities declined by $22.1 million.

Gross margin in the second quarter rose to 67%, compared with 59% for the second quarter a year earlier, primarily due to the deconsolidation of the lower-margin music business. Income tax expense was $281,000 compared with $1.2 million in the year-earlier period. Interest income in the second quarter of 2010 was $551,000 compared with $754,000 in the year-earlier period.

Reorganization

Towards the end of the second quarter of 2010, RealNetworks announced a significant reorganization of its business and operational structure. The reorganization is a key milestone in Real's execution of its previously announced strategy to simplify, restructure and grow.

As part of the second-quarter reorganization, the company eliminated about 85 positions, including about 25% of its executive ranks. The new organizational structure is designed to reduce the spans and layers of management to create greater efficiency, teamwork and accountability.

In addition, Real today announced that it has named Matt Hulett as the head of the Games business, replacing John Barbour. Mr. Hulett, formerly Chief Revenue Officer of Games, has more than 20 years of experience in digital games and other online businesses, including executive roles at Expedia and online games pioneer Shockwave.com. "Given the urgent need to pivot our Games business to social and online games, we think it is critical to have a leader based here in Seattle," said Mr. Kimball. "Matt has the right combination of leadership skills, online business experience and support from the team to refocus our Games business on the growth markets, including social games."

During the second quarter, Real also reduced its use of office space in Europe and its Seattle headquarters. As a result of the reorganization and reduction in office space, the company recorded restructuring charges of approximately $11.9 million for the quarter. Of these charges, approximately $4.8 million is primarily related to the reduction in force and approximately $7.1 million is related to the loss on excess office facilities.

Beginning with the third quarter, Real consolidated its Technology Products and Solutions and Media Software and Services business units and organized them into functional teams that represent product development, sales and marketing, and service delivery. Therefore, Real's third-quarter financial results will reflect the new corporate reorganization with the following reporting segments: (1) Core products, which will include existing and evolving SaaS services of ringback tones, music on demand, and intercarrier messaging; professional services and systems integration; Helix software; and SuperPass; (2) Emerging products, which will include RealPlayer and new products and services that will be introduced over time for consumers or enterprise customers; and (3) Games. We will present Music results on a historical basis only.

Additionally, Real is changing how it allocates shared corporate costs. Historically, common corporate general and administrative costs, including facilities, were allocated to each business segment. In the future, these costs will be shown in the aggregate and not allocated to segments. Direct business unit costs such as R&D and marketing will continue to be reflected in the business unit results. The changes will ensure that business unit results will be directly attributable to that unit's specific performance and that shared costs will be centrally managed to ensure focus and accountability on the overall corporate cost structure. Starting with the third-quarter earnings release, Real will report historical results that reflect this new presentation to provide comparability across quarters. In advance of Real's third quarter earnings release, the company expects to file with the Securities and Exchange Commission a current report on Form 8-K with a description of the new segments and historical results for these new segments.

Business Outlook

For the third quarter of 2010, Real expects overall revenue to be slightly lower sequentially, primarily due to softness in Games, and to decline year-over-year compared with total revenue for the third quarter of 2009, excluding music. Real expects adjusted EBITDA for the third quarter of 2010 to increase slightly sequentially and to decline year-over-year.

Approximately 35% of Real's revenue is denominated in currencies other than the U.S. dollar, most notably the euro and Korean won. Real expects reported revenues in future periods to be affected by foreign currency trends.

The foregoing forward-looking statements reflect Real's expectations as of July 29, 2010. It is not Real's general practice to update these forward-looking statements until its next quarterly results announcement.

Dominique Trempont joins RealNetworks Board of Directors

RealNetworks also announced that it has named Dominique Trempont, a former CEO and an executive with extensive public-company board experience, to its Board of Directors effective July 23. The addition brings the board composition to eight members, including six independent directors.

"We are excited to have Dominique's extensive experience with software, Internet, mobile applications and SaaS companies to help broaden our board's understanding of these industries and trends," said Kalpana Raina, chairperson of Real's Nominating and Corporate Governance Committee. "His background in both finance and executive leadership makes him especially valuable as RealNetworks has embarked on a transformation that involves major strategic and operational decisions."

"I am pleased to be joining the RealNetworks board at this very important time in the company's history," said Mr. Trempont. "This opportunity allows me to bring my experience in many kinds of organizations - from start-ups to Fortune 500 companies - to assist in the company's strategic transformation."

Mr. Trempont, 56, currently serves on the boards of Finisar Corp. and Energy Recovery, Inc. and on24 (SaaS). He also was a board member of 3Com Corp. prior to its acquisition by Hewlett Packard earlier this year. Over the past 25 years, he has been CEO-in-Residence at Battery Ventures, a venture capital firm; chairman, president and CEO of Kanisa, Inc., a software company (SaaS); CEO of Gemplus Corp., a smart card application company; CFO and head of operations at NeXT Software; and a senior executive at Raychem Corp.

Mr. Trempont earned an undergraduate degree in Economics from College St. Louis (Belgium), a B.A. with high honors in Business Administration and Computer Sciences (LSM) from the University of Louvain (Belgium) and a master's degree in Business Administration from INSEAD (France/Singapore).

Webcast and Conference Call Information

The company will host an audio Webcast conference call to review results and discuss the company's operations for the second quarter at 5:00 p.m. ET on July 29. The Webcast will be available at: http://investor.realnetworks.com/

Webcast participants will need RealPlayer® to hear the webcast, which can be downloaded at www.real.com.

The on-demand Webcast will be available beginning approximately two hours following the conclusion of the live Webcast.

Conference Call Details
5:00 p.m. (Eastern) / 2:00 p.m. (Pacific)
Dial in:
800-857-5305 Domestic
773-681-5857 International
Passcode: Second Quarter Earnings
Leader: Bob Kimball

Telephonic replay will be available until 8:00 p.m. (Eastern), Aug.
12, 2010.
Replay dial in:
800-884-1527 Domestic
203-369-3842 International

RNWK-F

About RealNetworks

RealNetworks, Inc. delivers digital entertainment services to consumers via PC and mobile phone. Real® created the streaming media category in 1995 and continues to offer pioneering products and services, including: RealPlayer®, the first mainstream media player to enable downloading, recording, editing and sharing of digital video; GameHouse®, one of the largest casual games services on the Internet; and a variety of mobile entertainment services, such as ringback tones, music and video, offered to consumers through leading wireless carriers around the world. RealNetworks' corporate information is located at http://investor.realnetworks.com/.

About Non-GAAP Financial Measures

To supplement RealNetworks' condensed consolidated financial statements presented in accordance with GAAP in this press release, the company also discloses certain non-GAAP financial measures, including adjusted EBITDA, adjusted EBITDA by reporting segment, adjusted cost of revenue and adjusted operating expenses, which management believes provide investors with useful information.

In the financial tables of our earnings press release, RealNetworks has included reconciliations of GAAP net income (loss) attributable to common shareholders to adjusted EBITDA and to adjusted EBITDA by reporting segment; GAAP cost of revenue to adjusted cost of revenue; and GAAP operating expenses to adjusted operating expenses for the relevant periods.

The rationale for management's use of non-GAAP measures is included in the supplementary materials presented with the first quarter 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 Real's current expectations for future revenue, operating expenses and adjusted EBITDA, changes in reporting financial results and reporting segments in future periods, the impact of foreign currency rates in future periods and plans to transform the Company as well as to realize future benefits from those plans. All statements contained in this press release that do not relate to matters of historical fact should be considered forward-looking statements. Actual results may differ materially from the results predicted. Factors that could cause actual results to differ from the results predicted include: fluctuations in foreign currencies; risks associated with the ability of Real to realize financial benefits from the restructuring of Rhapsody; Real's ability to realize operating efficiencies, growth and other benefits from the implementation of its strategic initiatives; the emergence of new entrants and competition in the market for digital media products and services; other competitive risks, including the growth of competing technologies, products and services; the potential outcomes and effects of claims and legal proceedings on Real's business, prospects, financial condition or results of operations; risks associated with key customer or strategic relationships, business acquisitions and the introduction of new products and services; changes in consumer and advertising spending in response to disruptions in the global financial markets; and changes in Real's GAAP tax rate. More information about potential risk factors that could affect RealNetworks' business and financial results is included in RealNetworks' annual report on Form 10-K for the most recent year ended December 31, its quarterly reports on Form 10-Q and in other reports and documents filed by RealNetworks from time to time with the Securities and Exchange Commission. The preparation of RealNetworks' financial statements and forward-looking financial guidance requires the company to make estimates and assumptions that affect the reported amount of assets and liabilities and the reported amounts of revenues and expenses during the reported period. Actual results may differ materially from these 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, RealPlayer and GameHouse 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,

2010 2009 2010 2009
---- ---- ---- ----
(in thousands, except per share data)

Net revenue $88,884 $135,725 $217,484 $276,498

Cost of revenue 29,149 55,614 78,308 111,635
------ ------ ------ -------

Gross profit 59,735 80,111 139,176 164,863
------ ------ ------- -------

Operating
expenses:
Research and
development 27,583 28,923 62,258 57,482
Sales and
marketing 27,382 42,273 65,209 85,958
Advertising
with related
party (A) - 6,865 1,065 14,288
General and
administrative 14,590 19,338 29,511 42,169
Impairment of
goodwill - 175,583 - 175,583
Restructuring
and other
charges 4,792 - 10,407 794
Loss on excess
office
facilities 7,082 - 7,082 -
----- --- ----- ---

Total operating
expenses 81,429 272,982 175,532 376,274
------ ------- ------- -------

Operating loss (21,694) (192,871) (36,356) (211,411)
------- -------- ------- --------

Other income
(expenses):
Interest
income, net 551 754 931 1,937
Equity in net
loss of
Rhapsody and
other equity
method
investments
(B) (5,427) (269) (5,427) (924)
Gain (loss) on
sale of equity
investments,
net (50) 68 (50) 205
Gain on
deconsolidation
of Rhapsody - - 10,929 -
Other income
(expense), net 994 (449) 1,093 406
--- ---- ----- ---

Total other
income
(expense), net (3,932) 104 7,476 1,624
------ --- ----- -----

Loss before
income taxes (25,626) 192,767) (28,880) (209,787)
Income tax
benefit
(expense) (281) (1,210) 3,291 (2,759)
---- ------ ----- ------

Net income
(loss) (25,907) (193,977) (25,589) (212,546)
Net loss
attributable
to the
noncontrolling
interest in
Rhapsody (C) - 5,648 2,910 12,081
--- ----- ----- ------
Net income
(loss)
attributable
to common
shareholders $(25,907) $(188,329) $(22,679) $(200,465)
======== ========= ======== =========

Basic net
income (loss)
per share
available to
common
shareholders $(0.19) $(1.40) $(0.14) $(1.51)
Diluted net
income (loss)
per share
available to
common
shareholders $(0.19) $(1.40) $(0.14) $(1.51)

Shares used to
compute basic
net income
(loss) per
share
available to
common
shareholders 135,277 134,420 135,209 134,394
Shares used to
compute
diluted net
income (loss)
per share
available to
common
shareholders 135,277 134,420 135,209 134,394

(A) Consists of advertising purchased by Rhapsody from MTV
Networks (MTVN). MTVN had a 49% ownership interest in
Rhapsody prior to the restructuring transactions that occurred on March
31, 2010. See note (B) for more details regarding the
Restructuring and the related deconsolidation.

(B) On March 31, 2010, we completed the restructuring of
Rhapsody which resulted in our ownership decreasing to
approximately 47.5% of the outstanding equity in Rhapsody and
no longer having operating control. Since the restructuring
was completed on the last day of the quarter ended March 31,
2010, our statement of operations for the first quarter
includes results from Rhapsody's operations. Beginning with the
quarter ended June 30, 2010, Rhapsody's revenue or
other operating results are no longer consolidated within our
financial statements and we are not recording any operating or
other financial results for our Music segment. We now report
our share of Rhapsody's income or losses as "Equity in net
loss of Rhapsody and other equity method investments" in "Other
income."

(C) Noncontrolling interest in Rhapsody reflects MTVN's 49%
ownership share in the losses of Rhapsody prior to
the restructuring transactions that occurred on March 31, 2010.

RealNetworks, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)

June 30, December 31,
2010 2009
---- ----
(in thousands)
ASSETS

Current assets:
Cash and cash equivalents $156,155 $277,030
Short-term investments 157,065 107,870
Trade accounts receivable,
net 43,805 60,937
Deferred costs, current
portion 4,541 5,192
Prepaid expenses and other
current assets 30,001 30,624
------ ------

Total current assets 391,567 481,653
------- -------

Equipment, software, and leasehold
improvements, at cost:
Equipment and software 142,978 151,951
Leasehold improvements 25,308 31,041
------ ------
Total equipment, software,
and leasehold improvements 168,286 182,992
Less accumulated
depreciation and
amortization 121,616 125,878
------- -------

Net equipment, software,
and leasehold improvements 46,670 57,114

Restricted cash equivalents
and investments 10,000 13,700
Equity investments 41,810 19,553
Other assets 3,746 4,030
Deferred costs, non-
current portion 13,516 10,182
Deferred tax assets, net,
non-current portion 8,822 10,001
Other intangible assets,
net 7,804 10,650
----- ------

Total assets $523,935 $606,883
======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable $27,662 $32,703
Accrued and other
liabilities 88,521 124,934
Deferred revenue, current
portion 20,740 31,374
Related party payable -
Rhapsody (A) 459 -
Related party payable -
MTVN (B) - 11,216
Accrued loss on excess
office facilities, current
portion 762 3,228
--- -----

Total current liabilities 138,144 203,455
------- -------

Deferred revenue, non-
current portion 879 1,933
Accrued loss on excess
office facilities, non-
current portion 4,047 -
Deferred rent 3,768 4,464
Deferred tax liabilities,
net, non-current portion 719 961
Other long-term
liabilities 12,293 13,006
------ ------

Total liabilities 159,850 223,819
------- -------

Noncontrolling interest in
Rhapsody (C) - 7,253

Shareholders' equity 364,085 375,811
------- -------

Total liabilities and
shareholders' equity $523,935 $606,883
======== ========

(A) Related party payable reflects amounts owed to Rhapsody
International, formed on March 31, 2010.

(B) Related party payable reflects amounts owed by Rhapsody to MTVN
in periods prior to the restructuring and related deconsolidation
that was completed on March 31, 2010.

(C) Noncontrolling interest in Rhapsody reflects MTVN's 49% ownership
interest in the net assets of Rhapsody at December 31, 2009. Due to
the restructuring transactions which occurred on March 31, 2010,
Rhapsody's balance sheet is no longer included within RealNetworks
consolidated financial statements.

RealNetworks, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)

Six Months Ended June
30,
2010 2009
---- ----
(in thousands)

Cash flows from operating activities:
Net income (loss) $(25,589) $(212,546)
Adjustments to reconcile net income
(loss) to net cash (used in) provided
by operating activities:
Depreciation and amortization 13,973 15,522
Stock-based compensation 6,692 10,818
Gain on disposal of equipment,
software, and leasehold improvements (3) (34)
Equity in net loss of Rhapsody and
other investments 5,427 924
Loss (gain) on sale of equity
investment, net 50 (205)
Gain on deconsolidation of Rhapsody (10,929) -
Excess tax benefit from stock option
exercises (18) (9)
Impairment of goodwill - 175,583
Accrued restructuring and other charges 3,581 (3,675)
Accrued loss on excess office
facilities 6,470 -
Deferred income taxes, net (1,609) (682)
Other 22 24
Net change in certain operating assets
and liabilities, net of acquisitions
and disposals (54,404) (3,961)
------- ------

Net cash (used in) provided by
operating activities (56,337) (18,241)
------- -------

Cash flows from investing activities:
Purchases of equipment, software, and
leasehold improvements (9,507) (7,608)
Purchases of short-term investments (65,754) (66,192)
Proceeds from sales and maturities of
short-term investments 16,559 38,692
Proceeds from the sales of equity
investments - 205
Purchases of equity investments - (2,000)
Payment of acquisition costs, net of
cash acquired - (3,154)
Payment in connection with the
restructuring of Rhapsody (18,000) -
Repayment of temporary funding on
deconsolidation of Rhapsody 5,869 -
Decrease in restricted cash equivalents
and investments, net 3,700 141
----- ---

Net cash provided by (used in)
investing activities (67,133) (39,916)
------- -------

Cash flows from financing activities:
Net proceeds from sales of common stock
under employee stock purchase
plan and exercise of stock options 1,272 819
Payments received on MTVN note 1,213 14,537
Capital contribution to Rhapsody from
MTVN - 5,000
Excess tax benefit from stock option
exercises 18 9
--- ---

Net cash provided by (used in)
financing activities 2,503 20,365
----- ------

Effect of exchange rate changes on cash
and cash equivalents 92 2,316
--- -----

Net decrease in cash and cash
equivalents (120,875) (35,476)

Cash and cash equivalents, beginning of
period 277,030 232,968
------- -------

Cash and cash equivalents, end of
period $156,155 $197,492
======== ========

RealNetworks, Inc. and Subsidiaries
Supplemental Financial Information
(Unaudited)

2010
----
Q2 Q1
--- ---
(in thousands)
Net Revenue by Line of Business:
Technology products and solutions (A) $41,122 $41,892
Media software and services (B) 19,617 20,739
Games (C) 28,145 30,236
------ ------
Subtotal net revenue 88,884 92,867
Music (D) - 35,733
--- ------
Total net revenue $88,884 $128,600
======= ========

Consumer Products and Services: (D)
Subscriptions (E) $22,000 $49,805
Media properties (F) 13,921 17,168
E-commerce and other (G) 11,841 19,735
------ ------

Total consumer products and services
revenue $47,762 $86,708
======= =======

Net Revenue by Geography:
United States $48,351 $84,550
Rest of world 40,533 44,050
------ ------

Total net revenue $88,884 $128,600
======= ========

Subscribers (presented as greater
than):
Consumer subscribers(H) 600 575
Technology products and solutions
application 37,600 37,950
services subscribers (I)

2009
----
Q4 Q3 Q2 Q1
--- --- --- ---
(in thousands)
Net Revenue by Line of
Business:
Technology products and
solutions (A) $54,269 $47,428 $46,208 $43,579
Media software and
services (B) 22,899 24,580 19,291 20,318
Games (C) 30,736 29,491 29,774 32,823
------ ------ ------ ------
Subtotal net revenue 107,904 101,499 95,273 96,720
Music (D) 37,598 38,765 40,452 44,053
------ ------ ------ ------
Total net revenue $145,502 $140,264 $135,725 $140,773
======== ======== ======== ========

Consumer Products and
Services: (D)
Subscriptions (E) $50,492 $52,401 $54,446 $59,052
Media properties (F) 20,327 21,001 14,753 15,536
E-commerce and other (G) 20,414 19,434 20,318 22,606
------ ------ ------ ------

Total consumer products
and services revenue $91,233 $92,836 $89,517 $97,194
======= ======= ======= =======

Net Revenue by Geography:
United States $91,175 $95,758 $90,685 $96,666
Rest of world 54,327 44,506 45,040 44,107
------ ------ ------ ------

Total net revenue $145,502 $140,264 $135,725 $140,773
======== ======== ======== ========

Subscribers (presented as
greater than):
Consumer subscribers(H) 625 625 550 575
Technology products and
solutions application 38,850 37,500 36,300 33,850
services subscribers (I)

(A) The Technology Products and Solutions (TPS) segment includes
revenue and related costs from: sales of ringback tones,
music-on-demand, video-on-demand, messaging, and information
services; sales of media delivery system software,
including Helix system software and related authoring and publishing
tools, both directly to customers and indirectly
through original equipment manufacturer channels; support and
maintenance services sold to customers who purchase
software products; broadcast hosting services; and consulting and
professional services that are offered to customers.

(B) The Media Software and Services (MSS) segment primarily includes
revenue and related costs from: the SuperPass
premium subscription service; RealPlayer Plus and related products;
sales and distribution of third-party software products;
and all advertising other than that related directly to our Games and
former Music businesses. We repurchased RadioPass
from Rhapsody as part of the restructuring that occurred on March 31,
2010. We have included RadioPass subscribers
beginning in the quarter ended June 30, 2010, as a result.

(C) The Games segment primarily includes revenue and related costs
from: the sale of individual games on our websites
RealArcade.com, GameHouse.com and Zylom.com; the sales of games
subscription services; advertising through our games
websites; the sale of games through the syndication on partner sites,
and sales of games through wireless carriers.

(D) On March 31, 2010, we completed the restructuring of Rhapsody
which resulted in our ownership decreasing to
approximately 47.5% of the outstanding equity in Rhapsody and no
longer having operating control. Beginning with the
quarter ended June 30, 2010, Rhapsody's revenue or other operating
results are no longer consolidated within our financial
statements and we are not recording any operating or other financial
results for our Music segment. We now report our share
of Rhapsody's income or losses as "Equity in net loss of Rhapsody and
other equity-method investments" in "Other income.
" Prior to March 31, 2010, the Music segment primarily included
revenue and related costs from: Rhapsody'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.

(E) Revenue is derived from consumer digital media subscription
services including: SuperPass, RadioPass, FunPass,
GamePass and Rhapsody. Revenue from Rhapsody no longer appears within
our results in periods after March 31, 2010.

(F) Revenue is derived from advertising and through the distribution
of third party products. Revenue from Rhapsody no
longer appears within our results in periods after March 31, 2010.

(G) Revenue is derived from RealPlayer Plus and related products,
sales of third party software products, and content such
as games and music. Revenue from Rhapsody no longer appears within
our results in periods after March 31, 2010.

(H) Consumer subscribers primarily include: SuperPass, and GamePass.
We repurchased RadioPass from Rhapsody as
part of the restructuring that occurred on March 31, 2010. We have
included RadioPass subscribers beginning in the quarter
ended June 30, 2010, as a result.

(I) Technology products and solutions application service
subscribers include: ringback tones, music-on-demand and
video-on-demand.

RealNetworks, Inc. and Subsidiaries
Supplemental Financial Information
(Unaudited)

Reconciliation of GAAP net income (loss) attributable to common
shareholders to adjusted EBITDA is as follows:

Quarters Ended
--------------
June 30, March 31, December 31,
2010 2010 2009
---- ---- ----
(in thousands)

Net income (loss) attributable to
common shareholders $(25,907) $3,228 $(17,819)
Interest income, net (551) (380) (779)
Income taxes 281 (3,572) (124)
Depreciation and amortization (net
of noncontrolling interest effect) 5,492 6,005 6,355
Acquisitions related intangible
asset amortization (net of
noncontrolling interest effect) 1,167 1,239 1,797
Stock-based compensation 2,771 3,921 5,915
Pro forma gain on sale of interest
in Rhapsody - 598 5,577
Gain on deconsolidation of Rhapsody - (10,929) -
Equity in net loss of Rhapsody and
other equity investments 5,427 - 116
Loss (gain) on sale of equity
investments, net 50 - 121
Impairment of equity investments - - 5,020
Impairment of goodwill and long-
lived assets - - -
Restructuring and other charges 4,792 5,615 2,346
Loss on excess office facilities 7,082 - -
----- --- ---

Adjusted EBITDA $604 $5,725 $8,525
---- ------ ------

Quarters Ended
--------------
September
30, June 30, March 31,
2009 2009 2009
---- ---- ----
(in thousands)

Net income (loss) attributable
to common shareholders $1,520 $(188,329) $(12,136)
Interest income, net (1,253) (754) (1,183)
Income taxes 686 1,210 1,549
Depreciation and amortization
(net of noncontrolling
interest effect) 5,432 5,815 5,726
Acquisitions related
intangible asset amortization
(net of noncontrolling
interest effect) 1,784 1,649 1,768
Stock-based compensation 4,727 5,596 5,222
Pro forma gain on sale of
interest in Rhapsody 3,839 3,444 4,010
Gain on deconsolidation of
Rhapsody - - -
Equity in net loss of Rhapsody
and other equity investments 273 269 655
Loss (gain) on sale of equity
investments, net (604) (68) (137)
Impairment of equity
investments - - -
Impairment of goodwill and
long-lived assets - 175,583 -
Restructuring and other
charges 877 - 794
Loss on excess office
facilities - - -
--- --- ---

Adjusted EBITDA $17,281 $4,415 $6,268
======= ====== ======

RealNetworks, Inc. and Subsidiaries
Segment Results of Operations
(Unaudited)

Quarter Ended June 30, 2010
---------------------------
TPS (A) MSS (B) Games(C)
------- ------- --------
(in thousands)

Net revenue $41,122 $19,617 $28,145

Cost of revenue 17,526 4,243 7,380
------ ----- -----

Gross profit 23,596 15,374 20,765
------ ------ ------
Gross margin 57% 78% 74%

Operating expenses:
Loss on excess office
facilities - - -
Restructuring and other
charges - - -
Other operating expenses 25,663 16,132 27,784
------ ------ ------
Total operating expenses 25,663 16,132 27,784
------ ------ ------

Income (loss) from
operations (2,067) (758) (7,019)
------ ---- ------

Other income (expenses):
Interest income, net - - -
Equity in net loss of
Rhapsody and other equity
method investments - - -
Gain (loss) on sale of
equity investments, net - - -
Gain on deconsolidation of
Rhapsody - - -
Other income (expenses), net - - -
--- --- ---

Total other income
(expenses), net - - -
--- --- ---

Income (loss) before income
taxes (2,067) (758) (7,019)
Income taxes - - -
--- --- ---
Net income (loss) (2,067) (758) (7,019)
Net income (loss)
attributable to
noncontrolling interest in
Rhapsody - - -
--- --- ---
Net income (loss)
attributable to common
shareholders $(2,067) $(758) $(7,019)
======= ===== =======

Reconciliation of segment
GAAP net income (loss)
attributable to common
shareholders to segment
adjusted EBITDA is as
follows:

Net income (loss)
attributable to common
shareholders $(2,067) $(758) $(7,019)
Interest income, net - - -
Income taxes - - -
Depreciation and
amortization 2,544 718 2,230
Acquisitions related
intangible asset
amortization 1,106 - 61
Stock-based compensation 1,537 456 778
Equity in net loss of
Rhapsody and other equity
investments - - -
Loss (gain) on sale of
equity investments, net - - -
Restructuring and other
charges - - -
Loss on excess office
facilities - - -
Adjusted EBITDA $3,120 $416 $(3,950)
======================== ====== ==== =======

Quarter Ended June 30, 2009
---------------------------
TPS (A) MSS (B) Games(C)
------- ------- --------
(in thousands)

Net revenue $46,208 $19,291 $29,774

Cost of revenue 19,278 2,590 8,801
------ ----- -----

Gross profit 26,930 16,701 20,973
------ ------ ------
Gross margin 58% 87% 70%

Operating expenses:
Advertising with related
party - - -
Impairment of goodwill 50,531 46,776 41,247
Other operating expenses 25,512 18,417 26,761
------ ------ ------
Total operating expenses 76,043 65,193 68,008
------ ------ ------

Income (loss) from
operations (49,113) (48,492) (47,035)
------- ------- -------

Other income (expenses):
Interest income, net - - -
Equity in net loss of
Rhapsody and other equity
method investments - - -
Gain (loss) on sale of
equity investments, net - - -
Other income (expenses), net - - -
--- --- ---

Total other income
(expenses), net - - -
--- --- ---

Income (loss) before income
taxes (49,113) (48,492) (47,035)
Income taxes - - -
--- --- ---
Net income (loss) (49,113) (48,492) (47,035)
Net income (loss)
attributable to
noncontrolling interest in
Rhapsody - - -
--- --- ---
Net income (loss)
attributable to common
shareholders $(49,113) $(48,492) $(47,035)
======== ======== ========

Reconciliation of segment
GAAP net income (loss)
attributable to common
shareholders to segment
adjusted EBITDA is as
follows:

Net income (loss)
attributable to common
shareholders $(49,113) $(48,492) $(47,035)
Interest income, net - - -
Income taxes - - -
Depreciation and
amortization (E) 2,847 856 1,041
Acquisitions related
intangible asset
amortization (E) 1,270 - 101
Stock-based compensation 2,464 798 1,596
Pro forma gain on sale of
interest in Rhapsody - - -
Equity in net loss of
Rhapsody and other
investments - - -
Loss (gain) on sale of
equity investments, net - - -
Impairment of goodwill 50,531 46,776 41,247
Adjusted EBITDA $7,999 $(62) $(3,050)
------ ---- -------

Quarter Ended June 30, 2010
---------------------------
Grand
Music (D) Other Total
--------- ----- ------
(in thousands)

Net revenue $- $- $88,884

Cost of revenue - - 29,149
--- --- ------

Gross profit - - 59,735
--- --- ------
Gross margin - - 67%

Operating expenses:
Loss on excess office
facilities - 7,082 7,082
Restructuring and other
charges - 4,792 4,792
Other operating expenses - (24) 69,555
--- --- ------
Total operating expenses - 11,850 81,429
--- ------ ------

Income (loss) from operations - (11,850) (21,694)
--- ------- -------

Other income (expenses):
Interest income, net - 551 551
Equity in net loss of
Rhapsody and other equity
method investments - (5,427) (5,427)
Gain (loss) on sale of equity
investments, net - (50) (50)
Gain on deconsolidation of
Rhapsody - - -
Other income (expenses), net - 994 994
--- --- ---

Total other income
(expenses), net - (3,932) (3,932)
--- ------ ------

Income (loss) before income
taxes - (15,782) (25,626)
Income taxes - (281) (281)
--- ---- ----
Net income (loss) - (16,063) (25,907)
Net income (loss)
attributable to
noncontrolling interest in
Rhapsody - - -
--- --- ---
Net income (loss)
attributable to common
shareholders $- $(16,063) $(25,907)
=== ======== ========

Reconciliation of segment
GAAP net income (loss)
attributable to common
shareholders to segment
adjusted EBITDA is as
follows:

Net income (loss)
attributable to common
shareholders $- $(16,063) $(25,907)
Interest income, net - (551) (551)
Income taxes - 281 281
Depreciation and amortization - - 5,492
Acquisitions related
intangible asset
amortization - - 1,167
Stock-based compensation - - 2,771
Equity in net loss of
Rhapsody and other equity
investments - 5,427 5,427
Loss (gain) on sale of equity
investments, net - 50 50
Restructuring and other
charges - 4,792 4,792
Loss on excess office
facilities - 7,082 7,082
Adjusted EBITDA $- $1,018 $604
=== ====== ====

Quarter Ended June 30, 2009
---------------------------
Grand
Music (D) Other Total
--------- ----- ------
(in thousands)

Net revenue $40,452 $- $135,725

Cost of revenue 24,945 - 55,614
------ --- ------

Gross profit 15,507 - 80,111
------ --- ------
Gross margin 38% - 59%

Operating expenses:
Advertising with related
party 6,865 - 6,865
Impairment of goodwill 37,029 - 175,583
Other operating expenses 19,808 36 90,534
------ --- ------
Total operating expenses 63,702 36 272,982
------ --- -------

Income (loss) from operations (48,195) (36) (192,871)
------- --- --------

Other income (expenses):
Interest income, net - 754 754
Equity in net loss of
Rhapsody and other equity
method investments - (269) (269)
Gain (loss) on sale of equity
investments, net - 68 68
Other income (expenses), net - (449) (449)
--- ---- ----

Total other income
(expenses), net - 104 104
--- --- ---

Income (loss) before income
taxes (48,195) 68 (192,767)
Income taxes - (1,210) (1,210)
--- ------ ------
Net income (loss) (48,195) (1,142) (193,977)
Net income (loss)
attributable to
noncontrolling interest in
Rhapsody 5,648 - 5,648
----- --- -----
Net income (loss)
attributable to common
shareholders $(42,547) $(1,142) $(188,329)
======== ======= =========

Reconciliation of segment
GAAP net income (loss)
attributable to common
shareholders to segment
adjusted EBITDA is as
follows:

Net income (loss)
attributable to common
shareholders $(42,547) $(1,142) $(188,329)
Interest income, net - (754) (754)
Income taxes - 1,210 1,210
Depreciation and amortization
(E) 1,071 - 5,815
Acquisitions related
intangible asset
amortization (E) 278 - 1,649
Stock-based compensation 738 - 5,596
Pro forma gain on sale of
interest in Rhapsody 3,444 - 3,444
Equity in net loss of
Rhapsody and other
investments - 269 269
Loss (gain) on sale of equity
investments, net - (68) (68)
Impairment of goodwill 37,029 - 175,583
Adjusted EBITDA $13 $(485) $4,415
--- ----- ------

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 Technology Products and Solutions (TPS) segment includes
revenue and related costs from: sales of ringback tones, music-on-
demand, video-on-demand, messaging, and information services;
sales of media delivery system software, including Helix system
software and related authoring and publishing tools, both directly
to customers and indirectly through original equipment manufacturer
channels; support and maintenance services sold to customers who
purchase software products; broadcast hosting services; and
consulting and professional services that are offered to customers.

(B) The Media Software and Services (MSS) segment primarily includes
revenue and related costs from: the SuperPass premium subscription
service; RealPlayer Plus and related products; sales and
distribution of third-party software products; and all advertising
other than that related directly to our Music and Games businesses.
We repurchased RadioPass from Rhapsody as part of the restructuring
that occurred on March 31, 2010. We have included RadioPass
subscribers beginning in the quarter ended June 30, 2010, as a
result.

(C) The Games segment primarily includes revenue and related costs
from: the sale of individual games on our websites RealArcade.com,
GameHouse.com and Zylom.com; the sales of games subscription
services; advertising through our games websites; the sale of games
through the syndication on partner sites, and sales of games through
wireless carriers.

(D) On March 31, 2010, we completed the restructuring of Rhapsody
which resulted in our ownership decreasing to approximately 47.5% of
the outstanding equity in Rhapsody and no longer having operating
control. Beginning with the quarter ended June 30, 2010, Rhapsody's
revenue or other operating results are no longer consolidated within
our financial statements and we are
not recording any operating or other financial results for our Music
segment. We now report our share of Rhapsody's income or losses as
"Equity in net loss of Rhapsody and other equity method investments"
in "Other income."

(E) Net of noncontrolling interest effect.

RealNetworks, Inc. and Subsidiaries
Supplemental Financial Information
(Unaudited)

Quarter Ended June 30, 2010
---------------------------

As Stock-Based
Reported Compensation
-------- ------------
(in thousands)

Cost of revenue $29,149 $(228)

Operating expenses:
Research and development $27,583 $(693)
Sales and marketing 27,382 (811)
General and administrative 14,590 (1,039)
------ ------

Adjusted operating expenses, net $69,555 $(2,543)

Quarter Ended June 30, 2009
---------------------------

As Stock-Based
Reported Compensation
-------- ------------
(in thousands)

Cost of revenue $55,614 $(363)

Operating expenses:
Research and development $28,923 $(2,234)
Sales and marketing 42,273 (1,199)
General and administrative 19,338 (1,800)
------ ------

Adjusted operating expenses, net $90,534 $(5,233)

Six Months Ended June 30, 2010
------------------------------

As Stock-Based
Reported Compensation
-------- ------------
(in thousands)

Cost of revenue $78,308 $(459)

Operating expenses:
Research and development $62,258 $(2,290)
Sales and marketing 65,209 (1,807)
General and administrative 29,511 (2,136)
------ ------

Adjusted operating expenses, net $156,978 $(6,233)

Six Months Ended June 30, 2009
------------------------------

As Stock-Based
Reported Compensation
-------- ------------
(in thousands)

Cost of revenue $111,635 $(993)

Operating expenses:
Research and development $57,482 $(4,058)
Sales and marketing 85,958 (2,265)
General and administrative 42,169 (3,502)
------ ------

Adjusted operating expenses, net $185,609 $(9,825)

Quarter Ended June 30, 2010
---------------------------
Acquisitions
Related
Intangible
Asset
Amortization
(A) Adjusted
------------- --------
(in thousands)

Cost of revenue $(525) $28,396

Operating expenses:
Research and development $- $26,890
Sales and marketing (642) 25,929
General and administrative - 13,551
--- ------

Adjusted operating expenses, net $(642) $66,370

Quarter Ended June 30, 2009
---------------------------
Acquisitions
Related
Intangible
Asset
Amortization
(A) Adjusted
------------- --------
(in thousands)

Cost of revenue $(553) $54,698

Operating expenses:
Research and development $- $26,689
Sales and marketing (1,096) 39,978
General and administrative - 17,538
--- ------

Adjusted operating expenses, net $(1,096) $84,205

Six Months Ended June 30, 2010
------------------------------
Acquisitions
Related
Intangible
Asset
Amortization
(A) Adjusted
------------- --------
(in thousands)

Cost of revenue $(1,045) $76,804

Operating expenses:
Research and development $- $59,968
Sales and marketing (1,361) 62,041
General and administrative - 27,375
--- ------

Adjusted operating expenses, net $(1,361) $149,384

Six Months Ended June 30, 2009
------------------------------
Acquisitions
Related
Intangible
Asset
Amortization
(A) Adjusted
------------- --------
(in thousands)

Cost of revenue $(1,099) $109,543

Operating expenses:
Research and development $- $53,424
Sales and marketing (2,318) 81,375
General and administrative - 38,667
--- ------

Adjusted operating expenses, net $(2,318) $173,466

(A) - Net of noncontrolling interest effect.

RealNetworks, Inc. and Subsidiaries
Earnings Per Share Reconciliation
(Unaudited)

Quarters Ended
June 30,
2010 2009
---- ----
(in thousands, except per share data)

Net income (loss)
attributable to common
shareholders $(25,907) $(188,329)
Less accretion of MTVN's
preferred return in
Rhapsody - (416)
--- ----
Net income (loss) available
to common shareholders $(25,907) $(188,745)
======== =========

Shares used to compute
basic net income (loss)
per share available to
common shareholders 135,277 134,420
Dilutive potential common
shares:
Stock options and
restricted stock - -
--- ---
Shares used to compute
diluted net income (loss)
per share available to
common shareholders 135,277 134,420

Basic net income (loss) per
share available to common
shareholders $(0.19) $(1.40)
Diluted net income (loss)
per share available to
common shareholders $(0.19) $(1.40)

Six Months Ended
June 30,
2010 2009
---- ----
(in thousands, except per share data)

Net income (loss) attributable
to common shareholders $(22,679) $(200,465)
Less accretion of MTVN's
preferred return in Rhapsody 3,700 (1,850)
----- ------
Net income (loss) available to
common shareholders $(18,979) $(202,315)
======== =========

Shares used to compute basic
net income (loss) per share
available to common
shareholders 135,209 134,394
Dilutive potential common
shares:
Stock options and restricted
stock - -
--- ---
Shares used to compute diluted
net income (loss) per share
available to common
shareholders 135,209 134,394

Basic net income (loss) per
share available to common
shareholders $(0.14) $(1.51)
Diluted net income (loss) per
share available to common
shareholders $(0.14) $(1.51)

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: intent