Form 8-K REALNETWORKS INC For: Aug 03
________________________________________________________________________________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________
FORM 8-K
__________________________
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): August 3, 2016
__________________________
RealNetworks, Inc.
(Exact name of registrant as specified in its charter)
__________________________
WASHINGTON | 0-23137 | 91-1628146 | ||
(State or other jurisdiction of incorporation) | (Commission File Number) | (I.R.S. Employer Identification No.) |
1501 First Avenue South, Suite 600
Seattle, Washington 98134
(Address of principal executive offices) (Zip code)
(206) 674-2700
Registrant’s telephone number, including area code
Not Applicable
(Former name or former address if changed since last report)
__________________________
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
___________________________________________________________________________________________________________________
Item 2.02. Results of Operations and Financial Condition.
On August 3, 2016, RealNetworks, Inc. announced its financial results for the second quarter ended June 30, 2016. The full text of the press release is furnished as Exhibit 99.1 hereto.
Furnished as Exhibit 99.2 hereto is additional information regarding non-GAAP financial measures included in certain public disclosures of RealNetworks, including its second quarter 2016 financial results press release.
The information set forth in this Item 2.02 shall not be deemed “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that section, or incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.
Item 5.02. Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.
On August 2, 2016, the Board of Directors accepted notice from Michael T. Galgon that he will not stand for re-election as a director at the company’s upcoming annual meeting of shareholders, which is expected to be held on September 19, 2016. His decision was due to his taking on new professional commitments and not due to any disagreement with the company on any matter relating to RealNetworks’ operations, policies or practices. Mr. Galgon is expected to remain on the Board and as a member of the Audit Committee and the Compensation Committee until the 2016 annual meeting.
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Item 9.01. | Financial Statements and Exhibits. |
(d) Exhibits.
Pursuant to the rules and regulations of the SEC, the attached exhibits are deemed to have been furnished to, but not filed with, the SEC.
Exhibit No. | Description |
99.1 | Earnings Release of RealNetworks, Inc. dated August 3, 2016 |
99.2 | Information Regarding Non-GAAP Financial Measures |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Form 8-K Report to be signed on its behalf by the undersigned hereunto duly authorized.
REALNETWORKS, INC. | ||
By: | / S / Marjorie Thomas | |
Marjorie Thomas | ||
Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) |
Dated: August 3, 2016
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EXHIBIT INDEX
Exhibit Number | Description |
99.1 | Earnings Release of RealNetworks, Inc. dated August 3, 2016 |
99.2 | Information Regarding Non-GAAP Financial Measures |
5
Exhibit 99.1
REALNETWORKS ANNOUNCES SECOND QUARTER 2016 RESULTS
• | Revenue of $29.7 million as GAAP net loss and adjusted EBITDA improve by over 60%; |
• | Stabilizing revenue, significantly reducing losses and making strides toward returning to revenue growth and profitability in 2016; |
• | Expanding in Latin America with two new deals with Telefonica Vivo, Brazil's largest mobile carrier; |
• | Launched two new first party titles in Games and both off to successful starts; |
• | Rebranded Rhapsody as Napster in North America; and |
• | Cash and short-term investments of $78.8 million |
SEATTLE - August 3, 2016 - RealNetworks, Inc. (Nasdaq: RNWK), a leader in personal digital entertainment, today announced results for the second quarter ended June 30, 2016.
For the second quarter of 2016, revenue was $29.7 million, compared to $28.2 million in the previous quarter and $31.8 million in the second quarter of 2015, excluding revenue from the Slingo and social casino games business, which was sold during the third quarter of 2015.
GAAP net loss for the second quarter of 2016 was $(8.3) million or $(0.23) per share, improved by 70% compared to $(27.8) million or $(0.77) per share in the second quarter of 2015. Adjusted EBITDA for the second quarter of 2016 was a loss of $(4.8) million, which improved by 61% compared to $(12.5) million for the second quarter of 2015, excluding the results of the Slingo and social casino games business, which was sold in August 2015. A reconciliation of GAAP net income (loss) to adjusted EBITDA is provided in the financial tables that accompany this release.
"In the second quarter of 2016, we continued to make progress in stabilizing revenue, reducing costs and positioning the company for growth and a return to profitability by the end of 2016," said Rob Glaser, Chairman and CEO of RealNetworks. "We are also excited that Telefonica Vivo, Brazil's largest carrier, has chosen to launch products based on both our Ringback Tone and RealTimes platforms. These two new design wins complement other recent progress we've made in our Mobile Services business with carriers such as Vodafone, KDDI, and Verizon."
The Company's GameHouse unit launched two new, first-party titles in the second quarter: Heart's Medicine - Time to Heal, and Fabulous - Angela's Fashion Fever. Both titles are off to strong starts, demonstrating that Real has been able to maintain high games quality while ramping up title production.
In addition to its progress with new product roll-outs, Real also made significant strides in lowering its operating costs. The Company's operating expenses in the second quarter of 2016 were down 25% from the same period in 2015, excluding stock compensation, restructuring charges, and expenses from the Slingo and social casino games business.
As of June 30, 2016, the Company had $78.8 million in unrestricted cash, cash equivalents and short-term investments, compared to $86.8 million as of March 31, 2016.
Business Outlook
For the third quarter of 2016, RealNetworks expects total revenue in the range of $28 million to $30 million and an adjusted EBITDA loss for the third quarter in the range of $(5.0) million to $(7.0) million.
Webcast and Conference Call Information
The company will host a conference call today to review results and discuss the company’s performance at 5 p.m. ET/2 p.m. PT. You may join the conference call by calling 888-790-3440 or +1-517-308-9350 (Passcode: Second Quarter Earnings). A live webcast of the call will be available at http://investor.realnetworks.com/ and an on-demand webcast will be available approximately one hour following the conclusion of the conference call. A telephonic replay will be available until 11:59 p.m. PT, August 24, 2016 by calling 866-441-1045 or +1-203-369-1053 (Passcode: 832016).
For More Information
Investor Relations for RealNetworks
+1-206-729-3625
RNWK-F
About RealNetworks
RealNetworks creates innovative applications and services that make it easy to connect with and enjoy digital media. RealNetworks invented the streaming media category in 1995 and continues to connect consumers with their digital media both directly and through partners, aiming to support every network, device, media type and social network. RealNetworks’ corporate information is located at www.realnetworks.com/about-us.
RealNetworks and RealTimes 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.
About Non-GAAP Financial Measures
To supplement RealNetworks' consolidated financial information presented in accordance with GAAP in this press release, the company also discloses certain non-GAAP financial measures, including adjusted EBITDA and contribution margin by reportable segment, which management believes provide investors with useful information.
In the financial tables of our earnings press release, RealNetworks has included reconciliations of GAAP net income (loss) to adjusted EBITDA and operating income (loss) by reportable segment to contribution margin by reportable segment.
The rationale for management's use of non-GAAP measures is included in the supplementary materials presented with the quarterly earnings materials. Please refer to Exhibit 99.2 (“Information Regarding Non-GAAP Financial Measures”) to the company's report on Form 8-K, which is being submitted today to the SEC.
Forward-Looking Statements
This press release contains forward-looking statements that involve risks and uncertainties, including statements relating to RealNetworks' current expectations regarding future revenue and adjusted EBITDA, our future growth, profitability, and market position, our strategic focus and initiatives, agreements with partners, and the growth and future prospects relating to our Rhapsody affiliate. All statements contained in this press release that do not relate to matters of historical fact should be considered forward-looking statements. These statements
reflect RealNetworks’ expectations as of today, and actual results may differ materially from the results predicted. Factors that could cause actual results to differ from the results predicted include: RealNetworks' ability to realize operating efficiencies, growth and other benefits from the implementation of its growth plan, strategic initiatives, and restructuring efforts; 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 RealNetworks' 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; fluctuations in foreign currencies; and changes in RealNetworks' effective 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 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, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Quarters Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
(in thousands, except per share data) | ||||||||||||||||
Net revenue | $ | 29,734 | $ | 33,954 | $ | 57,964 | $ | 64,551 | ||||||||
Cost of revenue | 15,698 | 19,832 | 30,870 | 36,379 | ||||||||||||
Gross profit | 14,036 | 14,122 | 27,094 | 28,172 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 7,167 | 11,801 | 16,486 | 24,180 | ||||||||||||
Sales and marketing | 7,749 | 14,047 | 16,974 | 26,884 | ||||||||||||
General and administrative | 6,217 | 7,008 | 14,294 | 14,291 | ||||||||||||
Restructuring and other charges | 413 | 1,964 | 798 | 2,449 | ||||||||||||
Lease exit and related charges | 127 | 9 | 958 | 87 | ||||||||||||
Total operating expenses | 21,673 | 34,829 | 49,510 | 67,891 | ||||||||||||
Operating income (loss) | (7,637 | ) | (20,707 | ) | (22,416 | ) | (39,719 | ) | ||||||||
Other income (expenses): | ||||||||||||||||
Interest income, net | 80 | 250 | 197 | 450 | ||||||||||||
Gain (loss) on investments, net | (46 | ) | 94 | (43 | ) | 393 | ||||||||||
Equity in net loss of Rhapsody | (396 | ) | (6,916 | ) | (396 | ) | (13,096 | ) | ||||||||
Other income (expense), net | 15 | (112 | ) | (272 | ) | 331 | ||||||||||
Total other income (expense), net | (347 | ) | (6,684 | ) | (514 | ) | (11,922 | ) | ||||||||
Income (loss) before income taxes | (7,984 | ) | (27,391 | ) | (22,930 | ) | (51,641 | ) | ||||||||
Income tax expense (benefit) | 363 | 390 | 588 | 609 | ||||||||||||
Net income (loss) | $ | (8,347 | ) | $ | (27,781 | ) | $ | (23,518 | ) | $ | (52,250 | ) | ||||
Basic net income (loss) per share | $ | (0.23 | ) | $ | (0.77 | ) | $ | (0.64 | ) | $ | (1.45 | ) | ||||
Diluted net income (loss) per share | $ | (0.23 | ) | $ | (0.77 | ) | $ | (0.64 | ) | $ | (1.45 | ) | ||||
Shares used to compute basic net income (loss) per share | 36,755 | 36,106 | 36,637 | 36,105 | ||||||||||||
Shares used to compute diluted net income (loss) per share | 36,755 | 36,106 | 36,637 | 36,105 | ||||||||||||
RealNetworks, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
June 30, 2016 | December 31, 2015 | ||||||
(in thousands) | |||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 36,133 | $ | 47,315 | |||
Short-term investments | 42,656 | 51,814 | |||||
Trade accounts receivable, net | 24,617 | 22,511 | |||||
Deferred costs, current portion | 889 | 460 | |||||
Prepaid expenses and other current assets | 4,716 | 7,140 | |||||
Total current assets | 109,011 | 129,240 | |||||
Equipment and software | 60,383 | 66,702 | |||||
Leasehold improvements | 3,607 | 3,122 | |||||
Total equipment, software, and leasehold improvements | 63,990 | 69,824 | |||||
Less accumulated depreciation and amortization | 56,887 | 61,024 | |||||
Net equipment, software, and leasehold improvements | 7,103 | 8,800 | |||||
Restricted cash equivalents and investments | 3,000 | 2,890 | |||||
Available for sale securities | 1,920 | 1,721 | |||||
Other assets | 2,243 | 2,307 | |||||
Deferred costs, non-current portion | 1,136 | 212 | |||||
Deferred tax assets, net | 1,006 | 957 | |||||
Other intangible assets, net | 1,545 | 2,136 | |||||
Goodwill | 12,973 | 13,080 | |||||
Total assets | $ | 139,937 | $ | 161,343 | |||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 17,442 | $ | 17,050 | |||
Accrued and other current liabilities | 15,566 | 17,320 | |||||
Deferred revenue, current portion | 3,278 | 3,497 | |||||
Total current liabilities | 36,286 | 37,867 | |||||
Deferred revenue, non-current portion | 466 | 105 | |||||
Deferred rent | 665 | 620 | |||||
Deferred tax liabilities, net | 89 | 88 | |||||
Other long-term liabilities | 1,511 | 1,980 | |||||
Total liabilities | 39,017 | 40,660 | |||||
Shareholders' equity | 100,920 | 120,683 | |||||
Total liabilities and shareholders' equity | $ | 139,937 | $ | 161,343 |
RealNetworks, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30, | |||||||
2016 | 2015 | ||||||
(in thousands) | |||||||
Cash flows from operating activities: | |||||||
Net income (loss) | $ | (23,518 | ) | $ | (52,250 | ) | |
Adjustments to reconcile net income (loss) to net cash used in operating activities: | |||||||
Depreciation and amortization | 4,224 | 4,894 | |||||
Stock-based compensation | 3,779 | 2,583 | |||||
Equity in net loss of Rhapsody | 396 | 13,096 | |||||
Deferred income taxes, net | (148 | ) | (23 | ) | |||
Loss (gain) on investments, net | 43 | (393 | ) | ||||
Fair value of warrants granted in 2015, net of subsequent mark to market adjustments in 2016 and 2015 | 82 | (1,128 | ) | ||||
Interest receivable on advance to Rhapsody | — | (121 | ) | ||||
Net change in certain operating assets and liabilities | (3,209 | ) | (10,230 | ) | |||
Net cash provided by (used in) operating activities | (18,351 | ) | (43,572 | ) | |||
Cash flows from investing activities: | |||||||
Purchases of equipment, software, and leasehold improvements | (1,512 | ) | (859 | ) | |||
Proceeds from sale of available for sale securities | — | 459 | |||||
Purchases of short-term investments | (33,359 | ) | (8,514 | ) | |||
Proceeds from sales and maturities of short-term investments | 42,517 | 48,630 | |||||
Decrease (increase) in restricted cash equivalents and investments, net | (110 | ) | — | ||||
Acquisitions | (150 | ) | (161 | ) | |||
Advance to Rhapsody | — | (5,000 | ) | ||||
Net cash provided by (used in) investing activities | 7,386 | 34,555 | |||||
Cash flows from financing activities: | |||||||
Proceeds from issuance of common stock (stock options and stock purchase plan) | 166 | 276 | |||||
Tax payments from shares withheld upon vesting of restricted stock | (808 | ) | (10 | ) | |||
Net cash provided by (used in) financing activities | (642 | ) | 266 | ||||
Effect of exchange rate changes on cash and cash equivalents | 425 | (1,839 | ) | ||||
Net increase (decrease) in cash and cash equivalents | (11,182 | ) | (10,590 | ) | |||
Cash and cash equivalents, beginning of period | 47,315 | 103,253 | |||||
Cash and cash equivalents, end of period | $ | 36,133 | $ | 92,663 |
RealNetworks, Inc. and Subsidiaries
Supplemental Financial Information
(Unaudited)
2016 | 2015 | |||||||||||||||||||||||
Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Net Revenue by Line of Business | ||||||||||||||||||||||||
Consumer Media (A) | $ | 6,400 | $ | 5,726 | $ | 6,848 | $ | 6,495 | $ | 7,281 | $ | 7,989 | ||||||||||||
Mobile Services (B) | 17,297 | 16,465 | 16,369 | 16,484 | 18,578 | 14,504 | ||||||||||||||||||
Games (C) | 6,037 | 6,039 | 6,705 | 7,844 | 8,095 | 8,104 | ||||||||||||||||||
Total net revenue | $ | 29,734 | $ | 28,230 | $ | 29,922 | $ | 30,823 | $ | 33,954 | $ | 30,597 | ||||||||||||
Net Revenue by Product | ||||||||||||||||||||||||
Consumer Media | ||||||||||||||||||||||||
- License (D) | $ | 3,914 | $ | 3,104 | $ | 3,967 | $ | 3,628 | $ | 4,208 | $ | 4,672 | ||||||||||||
- Subscriptions (E) | 1,871 | 1,975 | 2,054 | 2,147 | 2,372 | 2,384 | ||||||||||||||||||
- Media Properties (F) | 615 | 647 | 827 | 720 | 701 | 933 | ||||||||||||||||||
Mobile Services | ||||||||||||||||||||||||
- SaaS (G) | 17,208 | 16,220 | 16,157 | 16,217 | 18,218 | 13,322 | ||||||||||||||||||
- Technology License & Other (H) | 89 | 245 | 212 | 267 | 360 | 1,182 | ||||||||||||||||||
Games | ||||||||||||||||||||||||
- License (I) | 2,793 | 2,761 | 3,268 | 4,128 | 3,943 | 3,835 | ||||||||||||||||||
- Subscriptions (J) | 3,024 | 3,029 | 3,126 | 3,231 | 3,373 | 3,570 | ||||||||||||||||||
- Media Properties (K) | 220 | 249 | 311 | 485 | 779 | 699 | ||||||||||||||||||
Total net revenue | $ | 29,734 | $ | 28,230 | $ | 29,922 | $ | 30,823 | $ | 33,954 | $ | 30,597 | ||||||||||||
Net Revenue by Geography | ||||||||||||||||||||||||
United States | $ | 10,355 | $ | 10,383 | $ | 10,781 | $ | 11,460 | $ | 12,303 | $ | 12,349 | ||||||||||||
Rest of world | 19,379 | 17,847 | 19,141 | 19,363 | 21,651 | 18,248 | ||||||||||||||||||
Total net revenue | $ | 29,734 | $ | 28,230 | $ | 29,922 | $ | 30,823 | $ | 33,954 | $ | 30,597 | ||||||||||||
Net Revenue by Line of Business | ||||||||||||||||||||||||
(A) The Consumer Media division primarily includes revenue from RealPlayer and related products, such as the distribution of third-party software products, advertising on RealPlayer websites, sales of RealPlayer Plus software licenses to consumers, sales of intellectual property licenses, and consumer subscriptions such as RealPlayer Plus and SuperPass. | ||||||||||||||||||||||||
(B) The Mobile Services division primarily includes revenue from SaaS services and sales of professional services provided to mobile carriers. | ||||||||||||||||||||||||
(C) The Games division primarily includes revenue from sales of games licenses, online games subscription services, advertising on games sites and social network sites, microtransactions from online and social games, and sales of mobile games. | ||||||||||||||||||||||||
Net Revenue by Product | ||||||||||||||||||||||||
(D) Licensing revenue within Consumer Media includes sales of intellectual property licenses and RealPlayer Plus software licenses to consumers. | ||||||||||||||||||||||||
(E) Subscriptions revenue within Consumer Media includes revenue from subscriptions such as our RealPlayer Plus and SuperPass offerings. | ||||||||||||||||||||||||
(F) Media Properties revenue within Consumer Media includes distribution of third-party software products and advertising on RealPlayer websites. | ||||||||||||||||||||||||
(G) SaaS revenue within Mobile Services includes revenue from music on demand, ringback tones, intercarrier messaging services, and RealTimes. | ||||||||||||||||||||||||
(H) Technology licensing and other revenue within Mobile Services includes revenue from professional services provided to mobile carriers. | ||||||||||||||||||||||||
(I) Licensing revenue within Games includes retail games-related revenue and sales of mobile games. | ||||||||||||||||||||||||
(J) Subscriptions revenue within Games includes revenue from online games subscriptions as well as microtransactions from mobile and social games. | ||||||||||||||||||||||||
(K) Media Properties revenue within Games includes advertising on games sites and social network sites. |
RealNetworks, Inc. and Subsidiaries
Segment Results of Operations and Reconciliation to non-GAAP Contribution Margin
(Unaudited)
2016 | 2015 | 2016 | 2015 | |||||||||||||||||
Q2 | Q1 | Q2 | YTD | YTD | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Consumer Media | ||||||||||||||||||||
Net revenue | $ | 6,400 | $ | 5,726 | $ | 7,281 | $ | 12,126 | $ | 15,270 | ||||||||||
Cost of revenue | 1,561 | 2,417 | 3,567 | 3,978 | 7,031 | |||||||||||||||
Gross profit | 4,839 | 3,309 | 3,714 | 8,148 | 8,239 | |||||||||||||||
Gross margin | 76 | % | 58 | % | 51 | % | 67 | % | 54 | % | ||||||||||
Operating expenses | 4,293 | 5,376 | 6,867 | 9,669 | 13,461 | |||||||||||||||
Operating income (loss), a GAAP measure | $ | 546 | $ | (2,067 | ) | $ | (3,153 | ) | $ | (1,521 | ) | $ | (5,222 | ) | ||||||
Depreciation and amortization | 375 | 1,303 | 478 | 1,678 | 989 | |||||||||||||||
Contribution margin, a non-GAAP measure | $ | 921 | $ | (764 | ) | $ | (2,675 | ) | $ | 157 | $ | (4,233 | ) | |||||||
Mobile Services | ||||||||||||||||||||
Net revenue | $ | 17,297 | $ | 16,465 | $ | 18,578 | $ | 33,762 | $ | 33,082 | ||||||||||
Cost of revenue | 12,404 | 10,917 | 13,982 | 23,321 | 24,290 | |||||||||||||||
Gross profit | 4,893 | 5,548 | 4,596 | 10,441 | 8,792 | |||||||||||||||
Gross margin | 28 | % | 34 | % | 25 | % | 31 | % | 27 | % | ||||||||||
Operating expenses | 8,784 | 9,794 | 12,099 | 18,578 | 24,060 | |||||||||||||||
Operating income (loss), a GAAP measure | $ | (3,891 | ) | $ | (4,246 | ) | $ | (7,503 | ) | $ | (8,137 | ) | $ | (15,268 | ) | |||||
Acquisitions related intangible asset amortization | 209 | 308 | 384 | 517 | 776 | |||||||||||||||
Depreciation and amortization | 608 | 422 | 579 | 1,030 | 1,159 | |||||||||||||||
Contribution margin, a non-GAAP measure | $ | (3,074 | ) | $ | (3,516 | ) | $ | (6,540 | ) | $ | (6,590 | ) | $ | (13,333 | ) | |||||
Games | ||||||||||||||||||||
Net revenue | $ | 6,037 | $ | 6,039 | $ | 8,095 | $ | 12,076 | $ | 16,199 | ||||||||||
Cost of revenue | 1,817 | 1,845 | 2,286 | 3,662 | 5,080 | |||||||||||||||
Gross profit | 4,220 | 4,194 | 5,809 | 8,414 | 11,119 | |||||||||||||||
Gross margin | 70 | % | 69 | % | 72 | % | 70 | % | 69 | % | ||||||||||
Operating expenses | 4,725 | 5,295 | 8,719 | 10,020 | 17,402 | |||||||||||||||
Operating income (loss), a GAAP measure | $ | (505 | ) | $ | (1,101 | ) | $ | (2,910 | ) | $ | (1,606 | ) | $ | (6,283 | ) | |||||
Acquisitions related intangible asset amortization | 34 | 25 | 312 | 59 | 605 | |||||||||||||||
Depreciation and amortization | 154 | 179 | 244 | 333 | 541 | |||||||||||||||
Contribution margin, a non-GAAP measure | $ | (317 | ) | $ | (897 | ) | $ | (2,354 | ) | $ | (1,214 | ) | $ | (5,137 | ) | |||||
Corporate | ||||||||||||||||||||
Cost of revenue | $ | (84 | ) | $ | (7 | ) | $ | (3 | ) | $ | (91 | ) | $ | (22 | ) | |||||
Gross profit | 84 | 7 | 3 | 91 | 22 | |||||||||||||||
Gross margin | N/A | N/A | N/A | N/A | N/A | |||||||||||||||
Operating expenses | 3,871 | 7,372 | 7,144 | 11,243 | 12,968 | |||||||||||||||
Operating income (loss), a GAAP measure | $ | (3,787 | ) | $ | (7,365 | ) | $ | (7,141 | ) | $ | (11,152 | ) | $ | (12,946 | ) | |||||
Other income (expense), net | 15 | (287 | ) | (112 | ) | (272 | ) | 331 | ||||||||||||
Depreciation and amortization | 246 | 361 | 394 | 607 | 824 | |||||||||||||||
Restructuring and other charges | 413 | 385 | 1,964 | 798 | 2,449 | |||||||||||||||
Stock-based compensation | 608 | 3,171 | 1,254 | 3,779 | 2,583 | |||||||||||||||
Lease exit and related charges | 127 | 831 | 9 | 958 | 87 | |||||||||||||||
Contribution margin, a non-GAAP measure | $ | (2,378 | ) | $ | (2,904 | ) | $ | (3,632 | ) | $ | (5,282 | ) | $ | (6,672 | ) | |||||
RealNetworks, Inc. and Subsidiaries
Reconciliation of Net income (loss) to adjusted EBITDA, a non-GAAP measure
(Unaudited)
2016 | 2015 | 2016 | 2015 | |||||||||||||||||
Q2 | Q1 | Q2 | YTD | YTD | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Net income (loss) | $ | (8,347 | ) | $ | (15,171 | ) | $ | (27,781 | ) | $ | (23,518 | ) | $ | (52,250 | ) | |||||
Income tax expense (benefit) | 363 | 225 | 390 | 588 | 609 | |||||||||||||||
Interest income, net | (80 | ) | (117 | ) | (250 | ) | (197 | ) | (450 | ) | ||||||||||
Gain (loss) on investments, net | 46 | (3 | ) | (94 | ) | 43 | (393 | ) | ||||||||||||
Equity in net loss of Rhapsody | 396 | — | 6,916 | 396 | 13,096 | |||||||||||||||
Acquisitions related intangible asset amortization | 243 | 333 | 696 | 576 | 1,381 | |||||||||||||||
Depreciation and amortization | 1,383 | 2,265 | 1,695 | 3,648 | 3,513 | |||||||||||||||
Restructuring and other charges | 413 | 385 | 1,964 | 798 | 2,449 | |||||||||||||||
Stock-based compensation | 608 | 3,171 | 1,254 | 3,779 | 2,583 | |||||||||||||||
Lease exit and related charges | 127 | 831 | 9 | 958 | 87 | |||||||||||||||
Adjusted EBITDA, a non-GAAP measure | $ | (4,848 | ) | $ | (8,081 | ) | $ | (15,201 | ) | $ | (12,929 | ) | $ | (29,375 | ) |
EXHIBIT 99.2
About Non-GAAP Financial Measures
To supplement RealNetworks’ condensed consolidated financial statements presented in accordance with GAAP, the Company presents investors with certain non-GAAP financial measures, including adjusted EBITDA and contribution margin by reportable segment. Contribution margin by reportable segment consists of operating income (loss) and includes other income (expense) net, but excludes the impact of the following: depreciation and amortization; acquisitions related intangible asset amortization; stock-based compensation; restructuring and other charges; lease exit and related charges. Adjusted EBITDA consists of GAAP net income (loss) and excludes the impact of the following: interest income (loss), income tax expense, gain on investments, equity in net loss of Rhapsody, depreciation and amortization; acquisitions related intangible asset amortization; stock-based compensation; restructuring and other charges and lease exit and related charges.
RealNetworks believes that the presentation of adjusted EBITDA and contribution margin by reportable segment provide 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 RealNetworks’ past financial reports, and also facilitates comparisons with other companies in the Company’s 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 the Company’s operating results and facilitates comparisons of the Company’s core operating performance against prior periods and its business model objectives. The Company has 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 RealNetworks with other companies, and as a supplemental means to evaluate the Company’s ongoing operations. Externally, the Company believes that adjusted EBITDA is useful to investors in their assessment of RealNetworks’ operating performance and the valuation of the Company.
Internally, adjusted EBITDA and contribution margin by reportable segment are significant measures used by management for purposes of:
• | supplementing the financial results and forecasts reported to the Company’s board of directors; |
• | evaluating the operating performance of RealNetworks, which includes direct and incrementally controllable revenue and costs of operations but excludes items considered by management to be non-cash or non-operating such as interest income and expense, stock-based compensation, tax expense, depreciation and amortization, impairment of deferred costs and long-lived assets, and other items that are not within management’s control; |
• | managing and comparing performance internally across the Company’s businesses and externally against the Company’s peers; |
• | establishing internal operating budgets; and |
• | evaluating and valuing potential acquisition candidates. |
Adjusted EBITDA and contribution margin by reportable segment 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 RealNetworks’ 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. The Company expects to continue to incur expenses similar to the non-GAAP adjustments described above, and exclusion of these items from its 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 the Company’s non-GAAP financial measures are that adjusted EBITDA and contribution margin by reportable segment are measures that the Company has 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 the Company’s net income (loss) or operating income (loss) at the segment level. The Company compensates for these limitations by prominently disclosing GAAP net income (loss) and operating income (loss) by reportable segment, which the Company believes are the most directly comparable GAAP measures, and providing investors with reconciliations from GAAP net income (loss) to adjusted EBITDA and operating income (loss) to contribution margin by reportable segment.
RealNetworks has included reconciliations of GAAP net income (loss) to adjusted EBITDA and GAAP operating income (loss) by reportable segment to contribution margin by reportable segment for the relevant periods in the financial tables of its earnings press release, which is included as Exhibit 99.1 to this report.
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