RealNetworks Announces Third Quarter Results
Reports Record Revenue of $145.1 million
SEATTLE, Oct. 30 -- Digital entertainment services company RealNetworks(R), Inc. (NASDAQ:RNWK)
today announced results for the third quarter ended September 30, 2007.
Quarterly Highlights:
-- Record revenue of $145.1 million
-- Net income of $4.3 million or $0.03 per diluted share
-- Adjusted EBITDA of $13.6 million
"In the third quarter we both achieved solid operating results and made great strides strategically," said Rob Glaser, chairman and CEO of Real. "Not only did we achieve record revenue, we also increased our adjusted EBITDA by 78% year over year. On the strategic side, we formed deep alliances with Viacom's MTV Networks and Verizon Wireless, which we believe will drive our Rhapsody music business forward very significantly."
For the third quarter of 2007, revenue grew 55% to $145.1 million compared to $93.7 million for the third quarter of 2006. Revenue growth in the third quarter was attributed to: Games revenue of $28.8 million, a 28% increase over the third quarter of 2006; Music revenue of $37.7 million, a 24% increase over the third quarter of 2006; Technology Products and Solutions revenue of $53.3 million, a 377% increase over the third quarter of 2006, due in large part to the acquisition of WiderThan during the fourth quarter of 2006; and Media Software and Services revenue of $25.3 million, a 14% decrease from the third quarter of 2006. Foreign currency exchange rate fluctuations positively impacted 2007 third quarter revenue by approximately $1.2 million compared to the third quarter of 2006.
Net income for the third quarter of 2007 was $4.3 million or $0.03 per diluted share, compared to $42.2 million or $0.24 per diluted share in the third quarter of 2006. Results for the third quarter of 2006 included payments related to Real's antitrust settlement and commercial agreements with Microsoft. The final payment was received under these agreements during the first quarter of 2007. Further information regarding these payments can be found in Real's SEC filings. Adjusted net income, described below in Real's description of non-GAAP financial measures, was $9.2 million or $0.06 per diluted share for the third quarter of 2007, compared to $9.0 million or $0.05 per diluted share in the third quarter of 2006. Adjusted EBITDA for the third quarter of 2007 was $13.6 million compared to $7.6 million in the third quarter of 2006. A reconciliation of GAAP net income to adjusted net income and adjusted EBITDA is provided in the financial tables that accompany this release.
Gross margin was 61% in the third quarter of 2007 compared to 70% in the third quarter of 2006. Operating expenses for the third quarter of 2007 were $103.8 million, compared to $8.1 million in the third quarter of 2006. Operating expenses in the third quarter of 2006 included benefits related to payments under Real's antitrust settlement and commercial agreements with Microsoft. Adjusted operating expenses in the third quarter of 2007 were $93.9 million compared to $61.9 million in the third quarter of 2006. A reconciliation of GAAP operating expenses to adjusted operating expenses is provided in the financial tables that accompany this release. For the third quarter of 2007, Real's effective tax rate was 32%.
As of September 30, 2007, Real had approximately $590.4 million in unrestricted cash, cash equivalents and short-term investments and $100 million of convertible debt.
Under Real's current stock repurchase program, approximately 4.8 million shares were repurchased for $34.2 million during the third quarter of 2007. As of September 30, 2007, approximately $36.4 million remained available under the existing stock repurchase program.
Formation of Rhapsody America
On August 20, 2007, Real and MTV Networks, a division of Viacom International Inc. ("MTVN"), created Rhapsody America LLC ("Rhapsody America"), to provide consumers with comprehensive music services, including access to an extensive catalog of music through subscriptions, downloads and ad supported services. Rhapsody America is owned 51% by Real and 49% by MTVN. Real consolidated the financial results of Rhapsody America for the period from August 20, 2007 through September 30, 2007, with a 49% minority interest represented by MTVN's equity in Rhapsody America.
Business Outlook
The following forward-looking statements reflect RealNetworks' expectations as of October 30, 2007. It is not the Company's general practice to update these forward-looking statements until its next quarterly results announcement.
For the fourth quarter of 2007, Real expects revenue in the range of $152 million to $157 million, GAAP net income per diluted share of $0.00 to $0.01 and adjusted net income per diluted share of $0.06 to $0.07.
For the full year 2007, Real expects revenue in the range of $563 million to $568 million. Real expects 2007 GAAP net income per diluted share of $0.28 to $0.29 and adjusted net income per diluted share of $0.23 to $0.24. This guidance assumes an effective tax rate of approximately 38%.
See a complete reconciliation of estimated GAAP net income per diluted share to adjusted net income per diluted share, provided in the financial tables that accompany this press release.
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 "Third Quarter Earnings," and the leader is Rob Glaser. A telephonic replay will be available until 8:00pm (Eastern) on November 8, 2007 and may be accessed by dialing 866-421-0439 (203-369-0801 for international callers).
RNWK-F
For More Information Contact
Press: Bill Hankes, (206) 892-6614, bhankes at real.com
Financial: Caroline Hughes, (206) 892-6718, carolinehughes at real.com
ABOUT REALNETWORKS
RealNetworks, Inc. delivers digital entertainment services to consumers via PC, portable music player, home entertainment system or 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 net income and adjusted net income per share, adjusted EBITDA, adjusted EBITDA by reporting segment, adjusted cost of revenue and adjusted operating expenses.
-- Adjusted net income consists of net income excluding the impact of the
following: stock-based compensation expense; income and expenses
including charitable contributions related to the Microsoft agreements;
equity investment gains and losses from sales or impairments;
acquisition costs, including amortization of intangible assets (net of
minority interest effect) and expenses for employee stock options that
were converted to cash rights; gain on initial formation of Rhapsody
America; an estimate of the income taxes from the aforementioned items;
and changes in deferred tax asset valuation allowances.
-- Adjusted net income per share is calculated by dividing adjusted net
income by GAAP weighted average diluted shares outstanding.
-- 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 net income and adjusted net income per share, 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 net income and adjusted EBITDA continue to be useful to investors in their assessment of our operating performance and the valuation of our company.
Internally, adjusted net income and adjusted net income per share, 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 net income is used by RealNetworks as a broad measure of financial performance that encompasses our operating performance, cash, capital structure and investment management, and income tax planning effectiveness. Adjusted EBITDA is used by management as a way to isolate our operating performance and to compare it to that of other companies.
Adjusted net income and adjusted net income per share, 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 net income, adjusted net income per share, 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 net income, 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 net income and 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 the product and service offerings of Rhapsody America and the impact of the Verizon and MTV Networks alliances on the Rhapsody America business, Real's future revenue, GAAP and adjusted net income (loss) per diluted share, amortization of intangible assets, stock-based compensation expense and income tax rate. Actual results may differ materially from the results predicted. Factors that could cause actual results to differ from the results predicted include: 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 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, including the new RealPlayer; 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. 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 and RealPlayer are trademarks or registered trademarks of RealNetworks, Inc. 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 Nine Months Ended
September 30, September 30,
2007 2006 2007 2006
(in thousands, except per share data)
Net revenue $145,095 $93,676 $410,738 $269,687
Cost of revenue 56,644 28,389 151,786 81,788
Gross profit 88,451 65,287 258,952 187,899
Operating expenses:
Research and development 26,528 18,344 75,012 55,127
Sales and marketing 52,812 37,560 152,593 111,604
Advertising with related party (A) 7,747 - 7,747 -
General and administrative 16,750 14,043 51,167 41,586
Loss on excess office facilities (B) - - - 738
Subtotal operating expenses 103,837 69,947 286,519 209,055
Antitrust litigation benefit,
net (C) - (61,861) (60,747) (159,554)
Total operating expenses 103,837 8,086 225,772 49,501
Operating (loss) income (15,386) 57,201 33,180 138,398
Other income (expenses):
Interest and other, net 7,290 10,618 24,457 27,978
Gain on sale of equity investments - - 132 2,286
Equity in net loss of investments - - (132) -
Minority interest in Rhapsody
America (D) 6,466 - 6,466 -
Gain on initial formation of
Rhapsody America (E) 3,866 - 3,866 -
Gain on sale of interest in
Rhapsody America (F) 4,080 - 4,080 -
Other income 38 242 990 432
Other income, net 21,740 10,860 39,859 30,696
Income before income taxes 6,354 68,061 73,039 169,094
Income taxes (2,012) (25,908) (27,409) (63,180)
Net income $4,342 $42,153 $45,630 $105,914
Basic net income per share $0.03 $0.26 $0.30 $0.66
Diluted net income per share $0.03 $0.24 $0.27 $0.59
Shares used to compute basic net
income per share 149,667 160,578 154,670 160,467
Shares used to compute diluted net
income per share 163,094 178,913 169,840 178,551
(A) Consists of advertising purchased by Rhapsody America from MTV
Networks ("MTVN"). MTVN has a 49% ownership interest in Rhapsody
America.
(B) The loss on unoccupied excess office facilities represents an increase
in the estimate of loss from building operating costs that are not
expected to be recovered.
(C) 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.
(D) Minority interest reflects MTVN's 49% ownership share in the losses of
Rhapsody America.
(E) Consists of gains realized from MTVN's asset contributions to Rhapsody
America.
(F) Consists of gains realized from MTVN's note payments to Rhapsody
America.
RealNetworks, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
2007 2006
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents $197,738 $525,232
Short-term investments 392,625 153,688
Trade accounts receivable, net 80,734 65,751
Deferred costs, current portion 6,280 1,643
Deferred tax assets, net, current portion 224 891
Prepaid expenses and other current assets 27,235 21,990
Total current assets 704,836 769,195
Equipment, software, and leasehold
improvements, at cost:
Equipment and software 102,337 83,587
Leasehold improvements 30,496 29,665
Total equipment, software, and
leasehold improvements 132,833 113,252
Less accumulated depreciation and
amortization 78,676 65,509
Net equipment, software, and
leasehold improvements 54,157 47,743
Restricted cash equivalents 15,500 17,300
Equity investments 7,814 22,649
Other assets 7,967 5,148
Deferred tax assets, net, non-current portion 37,584 27,150
Other intangible assets, net 109,681 105,109
Goodwill 337,406 309,122
Total assets $1,274,945 $1,303,416
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $54,241 $52,097
Accrued and other liabilities 119,128 104,328
Deferred revenue, current portion 38,601 24,137
Related party payable (A) 8,025 -
Accrued loss on excess office
facilities, current portion 3,398 4,508
Total current liabilities 223,393 185,070
Deferred revenue, non-current portion 2,815 3,440
Accrued loss on excess office facilities,
non-current portion 7,563 9,993
Deferred rent 4,503 4,331
Deferred tax liabilities, net,
non-current portion 23,634 27,076
Convertible debt 100,000 100,000
Other long-term liabilities 9,884 3,740
Total liabilities 371,792 333,650
Minority Interest (B) 7,685 -
Shareholders' equity 895,468 969,766
Total liabilities and shareholders'
equity $1,274,945 $1,303,416
(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
Supplemental Financial Information
(Unaudited)
2007
Q3 Q2 Q1
(in thousands)
Net Revenue by Line of Business:
Consumer products and services (A) $91,824 $87,115 $85,040
Technology products and solutions (B) 53,271 49,056 44,432
Total net revenue $145,095 $136,171 $129,472
Consumer Products and Services:
Subscriptions (C) $55,551 $51,091 $51,490
Media properties (D) 16,071 17,748 15,932
E-commerce and other (E) 20,202 18,276 17,618
Total consumer products and services
revenue $91,824 $87,115 $85,040
Consumer Products and Services:
Music (F) $37,658 $36,801 $34,127
Media software and services (G) 25,346 25,419 27,011
Games (H) 28,820 24,895 23,902
Total consumer products and services
revenue $91,824 $87,115 $85,040
Net Revenue by Geography:
United States $91,281 $88,035 $84,554
Rest of world 53,814 48,136 44,918
Total net revenue $145,095 $136,171 $129,472
Subscribers (presented as greater than) *:
Total Subscribers (I) 29,250 26,150 24,550
Technology Products and Solutions
Application Services Subscribers (J) 26,600 23,600 21,900
Total Music Subscribers (K) 2,750 2,700 2,675
2006
Q4 Q3 Q2 Q1
(in thousands)
Net Revenue by Line of Business:
Consumer products and services (A) $88,022 $82,497 $77,442 $74,811
Technology products and solutions (B) 37,552 11,179 11,967 11,791
Total net revenue $125,574 $93,676 $89,409 $86,602
Consumer Products and Services:
Subscriptions (C) $50,835 $50,878 $47,452 $47,832
Media properties (D) 18,815 13,883 11,546 9,484
E-commerce and other (E) 18,372 17,736 18,444 17,495
Total consumer products and services
revenue $88,022 $82,497 $77,442 $74,811
Consumer Products and Services:
Music (F) $33,623 $30,375 $30,118 $28,918
Media software and services (G) 30,513 29,586 26,127 27,277
Games (H) 23,886 22,536 21,197 18,616
Total consumer products and services
revenue $88,022 $82,497 $77,442 $74,811
Net Revenue by Geography:
United States $81,758 $69,433 $66,542 $65,700
Rest of world 43,816 24,243 22,867 20,902
Total net revenue $125,574 $93,676 $89,409 $86,602
Subscribers (presented as greater than) *:
Total Subscribers (I) 22,700 2,450 2,400 2,400
Technology Products and Solutions
Application Services Subscribers (J) 20,200
Total Music Subscribers (K) 2,550 1,650 1,625 1,575
* 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.
(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) Music subscribers represent an aggregate of all of our music
services and include both Technology Products and Solutions
application services subscribers and consumer subscription services.
Music subscribers include: Rhapsody, Rhapsody-to-Go, premium radio,
and Music-on-Demand. Revenue from Technology Products and Solutions
application services, including Music-on-Demand, are included in our
Technology Products and Solutions revenue.
RealNetworks, Inc. and Subsidiaries
Supplemental Financial Information
(Unaudited)
Reconciliation of GAAP net income to adjusted net income is as follows:
Quarters Ended
Sept. 30, June 30, March 31,
2007 2007 2007
(in thousands, except per share data)
Net income in accordance with GAAP $4,342 $1,327 $39,961
Stock-based compensation 5,984 5,622 5,685
Loss (gain) on equity investments - (132) -
Conversion of WiderThan stock
options to a cash equivalent 413 614 845
Acquisitions related intangible
asset amortization* (net of
minority interest effect) 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 201 202 471
Charitable contributions - - 1,921
Tax impact of above pro forma items* (3,187) (3,858) 20,051
Change in income tax valuation allowance (255) (143) (2,805)
Adjusted net income $9,215 $8,943 $10,441
GAAP basic net income per share $0.03 $0.01 $0.25
GAAP diluted net income per share $0.03 $0.01 $0.22
Adjusted basic net income per share* $0.06 $0.06 $0.06
Adjusted diluted net income per share* $0.06 $0.05 $0.06
Shares used to compute basic net
income per share 149,667 153,880 161,350
Shares used to compute diluted net
income per share 163,094 169,033 178,053
Quarters Ended
Dec. 31, Sept. 30, June 30, March 31,
2006 2006 2006 2006
Net income in accordance with GAAP $39,302 $42,153 $38,878 $24,883
Stock-based compensation 5,819 5,021 3,673 3,638
Loss (gain) on equity investments 3,116 - (2,286) -
Conversion of WiderThan stock options
to a cash equivalent 641 - - -
Acquisitions related intangible asset
amortization* (net of minority
interest effect) 3,530 569 445 727
Gain on initial formation of Rhapsody
America - - - -
Expenses (benefit) related to
antitrust litigation:
Income (61,000) (62,000) (58,000) (40,000)
Expenses 1,026 1,000 997 971
Charitable contributions 2,009 1,889 1,805 1,225
Tax impact of above pro forma items* 18,428 20,370 19,569 12,446
Change in income tax valuation
allowance (2,662) - - -
Adjusted net income $10,209 $9,002 $5,081 $3,890
GAAP basic net income per share $0.24 $0.26 $0.24 $0.15
GAAP diluted net income per share $0.22 $0.24 $0.22 $0.14
Adjusted basic net income per share* $0.06 $0.06 $0.03 $0.02
Adjusted diluted net income per share* $0.06 $0.05 $0.03 $0.02
Shares used to compute basic net
income per share 162,130 160,578 159,938 160,887
Shares used to compute diluted net
income per share 180,919 178,913 177,337 176,923
Reconciliation of GAAP net income to adjusted EBITDA is as follows:
Quarters Ended
Sept. 30, June 30, March 31,
2007 2007 2007
(in thousands)
Net income in accordance with GAAP $4,342 $1,327 $39,961
Interest income, net (7,290) (8,065) (9,102)
Stock-based compensation 5,984 5,622 5,685
Loss (gain) on equity investments - (132) -
Conversion of WiderThan stock
options to a cash equivalent 413 614 845
Depreciation and amortization 6,210 5,661 4,621
Acquisitions related intangible
asset amortization* (net of
minority interest effect) 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 201 202 471
Charitable contributions - - 1,921
Income taxes 2,012 2,178 23,219
Adjusted EBITDA $13,589 $12,718 $11,933
Quarters Ended
Dec. 31, Sept. 30, June 30, March 31,
2006 2006 2006 2006
Net income in accordance with GAAP $39,302 $42,153 $38,878 $24,883
Interest income, net (9,644) (10,618) (9,381) (7,979)
Stock-based compensation 5,819 5,021 3,673 3,638
Loss (gain) on equity investments 3,116 - (2,286) -
Conversion of WiderThan stock options
to a cash equivalent 641 - - -
Depreciation and amortization 4,970 3,692 3,522 3,525
Acquisitions related intangible asset
amortization* (net of minority
interest effect) 3,530 569 445 727
Gain on initial formation of Rhapsody
America - - -
Expenses (benefit) related to
antitrust litigation:
Income (61,000) (62,000) (58,000) (40,000)
Expenses 1,026 1,000 997 971
Charitable contributions 2,009 1,889 1,805 1,225
Income taxes 19,357 25,908 22,521 14,751
Adjusted EBITDA $9,126 $7,614 $2,174 $1,741
* 2006 results have been restated to include acquisition related
intangible asset amortization and related tax impact to conform to
the pro forma presentation for 2007.
RealNetworks, Inc. and Subsidiaries
Segment Results of Operations
(Unaudited)
Quarter Ended September 30, 2007
Music Consumer TPS Grand
(A) (B) (C) Other Total
(in thousands)
Net revenue $37,658 $54,166 $53,271 $- $145,095
Cost of revenue 20,891 10,326 25,427 - 56,644
Gross profit 16,767 43,840 27,844 - 88,451
Gross margin 45% 81% 52% - 61%
Operating expenses:
Advertising with related
party 7,747 - - - 7,747
Other operating expenses 25,679 36,782 33,428 201 96,090
Total operating expenses 33,426 36,782 33,428 201 103,837
Income (loss) from operations (16,659) 7,058 (5,584) (201) (15,386)
Other income (expenses):
Interest income, net - - - 7,290 7,290
Minority interest 6,466 - - - 6,466
Gain on initial formation of
Rhapsody America 3,866 - - - 3,866
Gain on sale of interest in
Rhapsody America 4,080 - - - 4,080
Other income - - - 38 38
Other income, net 14,412 - - 7,328 21,740
Income before income taxes $(2,247) $7,058 $(5,584) $7,127 $6,354
Reconciliation of segment GAAP income before taxes to segment adjusted EBITDA is as follows:
Income before income taxes $(2,247) $7,058 $(5,584) $7,127 $6,354
Interest income, net - - - (7,290) (7,290)
Stock-based compensation 1,130 2,367 2,487 - 5,984
Conversion of WiderThan stock
options to a cash equivalent - - 413 - 413
Acquisition related intangible
amortization (D) 173 416 4,994 - 5,583
Gain on initial formation of
Rhapsody America (3,866) - - - (3,866)
Depreciation and amortization 1,233 1,578 3,399 - 6,210
Expenses (benefit) related to
antitrust litigation:
Income - - - - -
Expenses - - - 201 201
Charitable contributions - - - - -
Adjusted EBITDA $(3,577) $11,419 $5,709 $38 $13,589
Quarter Ended June 30, 2007
Music Consumer TPS Grand
(A) (B) (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 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 - - - 132 132
Other income - - - 485 485
Other income, net - - - 8,682 8,682
Income before income taxes $(7,040) $6,064 $(3,999) $8,480 $3,505
Reconciliation of segment GAAP income before taxes to segment adjusted EBITDA is as follows:
Income 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
Acquisition related intangible
amortization (D) 22 583 4,706 - 5,311
Loss (gain) on equity
investments - - - (132) (132)
Depreciation and amortization 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
RealNetworks, Inc. and Subsidiaries
Segment Results of Operations
(Unaudited)
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 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 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 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
Acquisition related
intangible amortization (D) 22 723 4,567 - 5,312
Depreciation and amortization 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 including GameHouse, Mr. Goodliving, Zylom
(acquired in January 2006), and Atrativa (acquired in November 2006);
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 Services 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.
RealNetworks, Inc. and Subsidiaries
Supplemental Financial Information
(Unaudited)
Quarter Ended September 30, 2007
Acquis- WiderThan
itions Options
Related Conv-
Intang- erted Anti-
Stock- ible to a trust
Based Asset Cash Litig-
As Compen- Amorti- Equiv- ation Adju-
Reported sation zation (A) alent Related sted
(in thousands)
Expenses in accordance
with GAAP
Cost of revenue $56,644 $(208) $(1,961) $(65) $- $54,410
Operating expenses:
Research and
development $26,528 $(1,740) $- $(78) $- $24,710
Sales and marketing 52,812 (2,395) (3,622) (190) - 46,605
Advertising with
related party 7,747 - - - - 7,747
General and
administrative 16,750 (1,641) (80) (201) 14,828
Total adjusted
operating expenses,
net $103,837 $(5,776) $(3,622) $(348) $(201) $93,890
Quarter Ended September 30, 2006
Acquis-
itions
Related
Intang- Anti-
Stock- ible trust
Based Asset Litig-
As Compen- Amorti- ation Adju-
Reported sation zation (B) Related sted
(in thousands)
Expenses in accordance with
GAAP
Cost of revenue (B) $28,389 $(57) $(234) $- $28,098
Operating expenses:
Research and development $18,344 $(1,878) $- $- $16,466
Sales and Marketing (B) 37,560 (1,920) (335) - 35,305
General and administrative 14,043 (1,166) - (2,750) 10,127
Antitrust litigation benefit,
net (61,861) - - 61,861 -
Total adjusted operating
expenses, net (B) $8,086 $(4,964) $(335) $59,111 $61,898
Nine Months Ended September 30, 2007
Acquis- WiderThan
itions Options
Related Conv-
Intang- erted Anti-
Stock- ible to a trust
Based Asset Cash Litig-
As Compen- Amorti- Equiv- ation Adju-
Reported sation zation (A) alent Related sted
(in thousands)
Expenses in accordance with GAAP
Cost of
revenue $151,786 $(520) $(6,093) $(309) $- $144,864
Operating expenses:
Research and
development $75,012 $(5,153) $- $(357) $- $69,502
Sales and
marketing 152,593 (6,985) (10,113) (838) - 134,657
Advertising
with
related party 7,747 - - - - 7,747
General and
administrative 51,167 (4,633) - (368) (2,542) 43,624
Antitrust
litigation
benefit, net (60,747) - - - 60,747 -
Total adjusted
operating
expenses,
net $225,772 $(16,771) $(10,113) $(1,563) $58,205 $255,530
Nine Months Ended September 30, 2006
Acquis-
itions
Related
Intang- Anti-
Stock- ible trust
Based Asset Litig-
As Compen- Amorti- ation Adju-
Reported sation zation (B) Related sted
(in thousands)
Expenses in accordance
with GAAP
Cost of revenue (B) $81,788 $(148) $(810) $- $80,830
Operating expenses:
Research and development $55,127 $(4,565) $- $- $50,562
Sales and Marketing (B) 111,604 (4,713) (931) - 105,960
General and administrative 41,586 (2,906) - (7,441) 31,239
Loss on excess office
facilities 738 - - 738
Antitrust litigation
benefit, net (159,554) - - 159,554 -
Total adjusted operating
expenses, net (B) $49,501 $(12,184) $(931) $152,113 $188,499
(A) - Net of minority interest effect.
(B) - 2006 results have been restated to include acquisition related
intangible asset amortization to conform to the pro forma
presentation for 2007.
RealNetworks, Inc. and Subsidiaries
Supplemental Financial Information
(Unaudited)
A reconciliation of GAAP net income per diluted share guidance for the quarter ending December 31, 2007 and the full year ending December 31, 2007 to adjusted net income per diluted share guidance is as follows:
Quarter Ending Year Ending
December 31, 2007 December 31, 2007
Low High Low High
Net income per diluted share in
accordance with GAAP $0.00 $0.01 $0.28 $0.29
Stock based compensation 0.05 0.05 0.15 0.15
Conversion of WiderThan stock
options to a cash equivalent - - 0.01 0.01
Acquisitions related intangible
asset amortization 0.04 0.04 0.13 0.13
Net benefit related to antitrust
litigation - - (0.35) (0.35)
Gain on initial formation of
Rhapsody America - - (0.02) (0.02)
Tax impact of above pro forma items (0.03) (0.03) 0.05 0.05
Change in income tax valuation
allowance - - (0.02) (0.02)
Total adjusted net income per
diluted share $0.06 $0.07 $0.23 $0.24
