Exhibit 99.1
REALNETWORKS ANNOUNCES FOURTH QUARTER AND FULL YEAR 2008 RESULTS
SEATTLE – February 12, 2009– Digital entertainment services company RealNetworks®, Inc. (Nasdaq: RNWK) today announced results for the fourth quarter and fiscal year ended December 31, 2008.
Quarterly Highlights:
| | • | | Revenue of $152.6 million |
| |
| | • | | Net loss of $(240.5) million or $(1.78) per share |
| |
| | • | | Adjusted EBITDA of $(14.5) million |
| |
| | • | | Adjusted EBITDA, excluding impairments, of $11.3 million |
Full Year Highlights:
| | • | | Record revenue of $604.8 million |
| |
| | • | | Net loss of $(243.9) million or $(1.74) per share |
| |
| | • | | Adjusted EBITDA of $34.2 million |
| |
| | • | | Adjusted EBITDA, excluding impairments, of $60.7 million |
| |
| | • | | Cash and short term investments of $370.7 million as of December 31, 2008 |
“In spite of a difficult and turbulent macro-economic environment, RealNetworks delivered revenue in line with our fourth-quarter expectations,” said Rob Glaser, CEO of RealNetworks. “We believe that the high-value, low-cost digital entertainment products and services we offer consumers are a great fit for these tough financial times.”
Fourth Quarter Results
For the fourth quarter of 2008, revenue declined 3% to $152.6 million compared with $156.9 million for the fourth quarter of 2007. Foreign currency exchange rate fluctuations negatively affected 2008 fourth quarter revenue by approximately $6.3 million compared with the year-ago quarter. Excluding the effects of foreign exchange rate changes, revenue grew 1% year over year. Revenue trends in each of Real’s businesses in the fourth quarter of 2008 compared with the year-earlier quarter were: a 9% increase in Games revenue to $33.7 million, an 8% increase in Music revenue to $43.9 million, an 11% decrease in Media Software and Services revenue to $22.7 million, and a 13% decrease in Technology Products and Solutions revenue to $52.4 million.
Net loss for the fourth quarter of 2008 was $(240.5) million, or $(1.78) per share, compared with net income of $2.7 million, or $0.02 per diluted share, in the fourth quarter of 2007. Included in the fourth quarter 2008 net loss were impairment charges, net of tax benefit, totaling $240.7 million. Of these charges, approximately $5.5 million is expected to result in a use of cash over future quarters.
Adjusted EBITDA for the fourth quarter of 2008 was a loss of $(14.5) million compared with $15.7 million in the fourth quarter of 2007. Adjusted EBITDA for the fourth quarter of 2008 included impairments of $25.8 million. Adjusted EBITDA excluding impairments for the fourth quarter of 2008 was $11.3 million compared with $19.4 million in the fourth quarter of 2007. A reconciliation of GAAP net loss to adjusted EBITDA and adjusted EBITDA
1
excluding impairments is provided in the financial tables that accompany this release.
As of December 31, 2008, Real had approximately $371 million in unrestricted cash, cash equivalents and short-term investments, of which approximately 89% is located in the U.S. In addition, Real has approximately $33 million in restricted cash and equity investments at December 31, 2008. Use of cash in the fourth quarter included approximately $27.1 million for the repurchase of 6.1 million shares of common stock and $9.9 million for an equity investment in a public technology company in conjunction with SK Telecom. The stock repurchases in the fourth quarter completed the repurchase authorization approved by Real’s Board of Directors in April 2008. Since the beginning of 2005, Real has repurchased approximately 54 million shares through its repurchase programs for approximately $382 million.
Gross margin in the fourth quarter, including impairments, was 48%, compared with 61% for the fourth quarter a year earlier. Gross margin was 61% in the fourth quarter of 2008 when excluding the effect of a $19.7 million charge to reflect the impairment of deferred project costs and prepaid royalties.
Income tax provision was $(17.4) million, including a $22.2 million increase in the valuation allowance for deferred tax assets, net of the tax benefit related to fourth quarter impairments, compared with ($47,000) in the year-earlier period. Interest income in the fourth quarter of 2008 was $2.3 million compared with $6.4 million in the year-earlier period.
Impairment Charges
The impairment charges in the fourth quarter of 2008 included:
| | • | | A charge of $192.7 million to reflect the impairment of goodwill and acquired intangible assets. |
| |
| | • | | A charge of $19.7 million to impair certain deferred project costs and pre-paid royalties, which resulted in a reduction to fourth quarter gross margins. |
| |
| | • | | Restructuring and other charges of $6.1 million to reflect a reduction in force in the fourth quarter and the write-off of capitalized transaction-related costs associated with the company’s plan to separate its games business from the parent company. |
| |
| | • | | A charge of $22.2 million to reflect an increase in the valuation allowance for deferred tax assets, net of the tax benefit related to the above mentioned items. |
In addition, the accounting for the quarterly gain on the 2007 sale of 49% of Rhapsody America was not reflected in the income statement in the fourth quarter due to declines in market valuations and, therefore, a decline in the assumed valuation of the Rhapsody America venture. In prior periods, and in accordance with Staff Accounting Bulletin 51, “Accounting for Sales of Stock of a Subsidiary,” the gain was reflected in the income statement as a “gain on sale of interest in Rhapsody America,” but for the fourth quarter of 2008, a $6.6 million gain was recorded directly to shareholders’ equity. Although the accounting has changed, the economic effect of the transaction on the company remains the same. As previously reported, due to a change in the accounting rules relating to minority interests, the company expected to end recording the amount in the income statement and instead to start recording it in shareholders’ equity beginning in the first quarter of 2009.
Full Year Results
2
For 2008, revenue grew 7% to $604.8 million compared with $567.6 million in 2007. Foreign currency exchange rate fluctuations negatively affected 2008 revenue by approximately $3.0 million compared with 2007. Revenue trends in each of Real’s businesses for the full year 2008 compared with 2007 were: a 24% increase in Games revenue to $134.6 million, an 8% increase in Music revenue to $160.7 million, and relatively unchanged revenue in Technology Products and Solutions of $206.6 million and in Media Software and Services of $102.9 million.
Adjusted EBITDA for 2008 was $34.2 million, compared with $53.9 million in 2007. Adjusted EBITDA excluding impairments for 2008 was $60.7 million compared with $57.7 million for 2007. A reconciliation of GAAP net loss to adjusted EBITDA and adjusted EBITDA excluding impairments is provided in the financial tables that accompany this release.
Net loss for the year was $(243.9) million, or $(1.74) per share, compared with net income of $48.3 million, or $0.29 per diluted share, in 2007. Net income in 2007 included a net benefit from the antitrust settlement with Microsoft of $60.7 million in the first quarter.
Gross margin for the year, including fourth-quarter 2008 impairments of $19.7 million for deferred project costs and prepaid royalties, was 58%, compared with 62% a year earlier. Gross margin was 61% in 2008, excluding the aforementioned fourth-quarter impairments.
Income tax provision for 2008 was $(25.8) million compared with $(27.5) million in 2007, and interest income in 2008 was $13.5 million compared with $30.9 million in 2007.
Business Outlook
Due to the high level of uncertainty regarding consumer spending, global economic trends, foreign exchange rate fluctuations, and credit markets, RealNetworks is not providing quantitative guidance. The company expects 2009 to be a challenging year for consumer spending, online advertising and corporate IT spending.
For the first quarter of 2009, Real expects overall revenue to decline sequentially and year over year. Compared with the year-earlier quarter, the company expects first-quarter Music revenue to increase, Games revenue to be flat, and revenue in Media Software and Services and Technology Products and Solutions to decline. Approximately 20% of Real’s revenue is denominated in currencies other than the U.S. dollar, most notably the euro and Korean won. Based on current currency rates, Real expects reported revenues to be negatively affected by foreign currency trends.
The foregoing forward-looking statements reflect Real’s expectations as of Feb. 12, 2009. It is not Real’s general practice to update these forward-looking statements until its next quarterly results announcement.
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® to listen to the conference call, which can be downloaded for free at www.real.com. The on-demand webcast will be available approximately two hours following the conclusion of the live webcast.
Conference Call Details
5:00 p.m. (Eastern) / 2:00 p.m. (Pacific)
3
Dial In:
800-857-5305 Domestic
773-681-5857 International
Passcode: Fourth Quarter Earnings
Leader: Rob Glaser
Telephonic replay will be available until 8:00 p.m. (Eastern), February 26, 2009.
Dial In:
800-819-5743 Domestic
203-369-3828 International
RNWK-F
For More Information Contact
Press:Bill Hankes, (206) 892-6614, bhankes@real.com
Financial:Marj Charlier, (206) 892-6718, mcharlier@real.com
About Real Networks
RealNetworks, Inc. delivers digital entertainment services to consumers via PC, portable music player, home entertainment system and mobile phone. Real created the streaming media category in 1995 and has continued to lead the market with pioneering products and services, including: RealPlayer®, the first mainstream media player to enable one-click downloading and recording of Internet video; the award-winning Rhapsody® digital music service, which delivers more than 1 billion songs per year; RealArcade®, 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://investor.realnetworks.com.
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 revenue, adjusted EBITDA, adjusted EBITDA excluding impairments, adjusted EBITDA excluding impairments by reporting segment, adjusted cost of revenue, gross margin excluding impairments and adjusted operating expenses.
| • | | Adjusted revenue consists of revenue excluding the impact of foreign exchange rate fluctuations experienced in the fourth quarter. |
| |
| • | | Adjusted EBITDA consists 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; impairment of long-lived assets (net of minority interest effect); gain on initial formation of Rhapsody America; and the effect of the fourth quarter change in accounting for the sale of minority interest in Rhapsody America. |
| |
| • | | Adjusted EBITDA excluding impairments and adjusted EBITDA excluding impairments 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; |
4
| | | impairment of long-lived assets (net of minority interest effect); impairment of deferred costs and prepaid royalties; restructuring and other charges; gain on initial formation of Rhapsody America; and the effect of the fourth quarter change in accounting for the sale of minority interest in Rhapsody America. |
| |
| • | | Adjusted cost of revenue consists of GAAP cost of revenue excluding stock-based compensation expenses, acquisition costs including amortization of intangible assets (net of minority interest effect), expenses for employee stock options that were converted to cash rights, and impairments of deferred costs and prepaid royalties. |
| |
| • | | Gross margin excluding impairments consists of GAAP gross margin excluding the effect of impairments of deferred costs and prepaid royalties. |
| |
| • | | Adjusted operating expenses consist of GAAP operating expenses excluding stock-based compensation expenses, antitrust litigation expenses (benefits), acquisition costs including amortization of intangible assets (net of minority interest effect), expenses for employee stock options that were converted to cash rights, impairments of long-lived assets (net of minority interest effect), and restructuring and other charges. |
RealNetworks believes that the presentation of adjusted revenue, adjusted EBITDA, adjusted EBITDA excluding impairments, adjusted EBITDA excluding impairments by reporting segment, adjusted cost of revenue, gross margin excluding impairments and adjusted operating expenses 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 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 with other companies, and as a supplemental means to evaluate our ongoing operations. In addition, RealNetworks believes that providing adjusted revenue allows investors to compare 2008 revenue with 2007 revenue in constant dollars, providing a more consistent view of revenue trends for its ongoing business. Externally, we believe that adjusted EBITDA and adjusted EBITDA excluding impairments are useful to investors in their assessment of our operating performance and the valuation of our company.
Internally, adjusted revenue, adjusted EBITDA, adjusted EBITDA excluding impairments, and adjusted EBITDA excluding impairments by reporting segment, adjusted cost of revenue, gross margin excluding impairments 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 non-cash or non-operating such as interest income and expense, stock-based compensation, tax expense, depreciation and amortization; impairment of long-lived assets; or not within management’s control, such as significant fluctuations in foreign currencies; |
| |
| • | | managing and comparing performance internally across our businesses and externally against our peers; |
| |
| • | | establishing internal operating budgets; and |
5
| • | | evaluating and valuing potential acquisition candidates. |
Adjusted revenue, adjusted EBITDA, adjusted EBITDA excluding impairments, adjusted EBITDA excluding impairments by reporting segment, adjusted cost of revenue, gross margin excluding impairments and adjusted operating expenses are not calculated in accordance with GAAP, and should be considered supplemental to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. Non-GAAP financial measures have limitations in that they do not reflect all of the costs associated with the operations of our business as determined in accordance with GAAP. As a result, you should not consider these measures in isolation or as a substitute for analysis of RealNetworks’ results as reported under GAAP. We expect to continue to incur expenses similar to the non-GAAP adjustments described above, and exclusion of these items from our non-GAAP financial measures should not be construed as an inference that these costs are unusual or infrequent. Some of the limitations in relying on our non-GAAP financial measures are:
| • | | Adjusted EBITDA, adjusted EBITDA excluding impairments and adjusted EBITDA excluding impairments by reporting segment are measures that we have defined for internal and investor purposes and are not in accordance with GAAP. A further limitation associated with these measures is that they do not include all costs and income that impact our net income and net income per share. We compensate for these limitations by prominently disclosing GAAP net income (loss), which we believe is the most directly comparable GAAP measure, and providing investors with reconciliations from GAAP net income (loss) to adjusted EBITDA, adjusted EBITDA excluding impairments and adjusted EBITDA excluding impairments by reporting segment. |
| |
| • | | Adjusted cost of revenue and gross margin excluding impairments are limited in that they do not include stock-based compensation expenses, certain costs associated with our acquisitions and certain impairment costs. Adjusted operating expenses are limited in that they do not include stock-based compensation expenses, antitrust litigation expenses (benefit), certain costs associated with our acquisitions, impairments of long-lived assets and restructuring and other charges. We compensate for these limitations by prominently disclosing the reported GAAP results and providing investors with a reconciliation from GAAP to the adjusted amount. |
In the financial tables of our earnings press release, RealNetworks has included reconciliations of GAAP net income (loss) to adjusted EBITDA and adjusted EBITDA excluding impairments, income before income taxes to adjusted EBITDA excluding impairments by reporting segment, GAAP cost of revenue to adjusted cost of revenue and GAAP operating expenses to adjusted operating expenses for the relevant periods.
Forward-Looking Statements: This press release contains forward-looking statements that involve risks and uncertainties, including statements relating to Real’s current expectations for future revenue, future affects of foreign currency exchange rates, future accounting treatment of minority interests and future trends in consumer and corporate IT spending and online advertising. Actual results may differ materially from the results predicted. Factors that could cause actual results to differ from the results predicted include: potentially large changes in Real’s GAAP tax rate that could result from even small changes in Real’s pretax earnings; fluctuations in foreign currencies, particularly changes in the US dollar relative to the euro and the Korean won; 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, Game Trust, Trymedia and Exomi in particular, including the risks of integration, unknown liabilities and operations in new markets and geographies; the potential that we will be
6
unable to continue to enter into commercially attractive agreements with third parties for the provision of compelling content for our subscription service offerings and the distribution of our carrier application services; the emergence of new entrants and competition in the market for digital media subscription offerings and online music sales; 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; the potential outcomes and effects of claims and legal proceedings on our business, prospects, financial condition or results of operations; risks associated with the introduction of new products and services; changes in consumer and advertising spending in response to disruptions in the global financial markets; 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, RealPlayer and RealArcade are trademarks or registered trademarks of RealNetworks, Inc. or its subsidiaries. All other companies or products listed herein are trademarks or registered trademarks of their respective owners.
7
RealNetworks, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
| | | | | | | | | | | | | | | | | |
| | | Quarters Ended | | | Years Ended | |
| | | December 31, | | | December 31, | |
| | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| | | (in thousands, except per share data) | |
| | | | | | | | | | | | | | | | | |
| Net revenue | | $ | 152,644 | | | $ | 156,882 | | | $ | 604,810 | | | $ | 567,620 | |
| | | | | | | | | | | | | | | | | |
| Cost of revenue | | | 60,042 | | | | 61,705 | | | | 233,244 | | | | 213,491 | |
| Impairment of deferred costs and prepaid royalties | | | 19,666 | | | | — | | | | 19,666 | | | | — | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Gross profit | | | 72,936 | | | | 95,177 | | | | 351,900 | | | | 354,129 | |
| | | | | | | | | | | | | |
| |
| Operating expenses: | | | | | | | | | | | | | | | | |
| Research and development | | | 28,533 | | | | 27,719 | | | | 113,680 | | | | 102,731 | |
| Sales and marketing | | | 50,192 | | | | 56,819 | | | | 211,922 | | | | 209,412 | |
| Advertising with related party (A) | | | 12,480 | | | | 16,613 | | | | 44,213 | | | | 24,360 | |
| General and administrative | | | 19,107 | | | | 16,159 | | | | 69,981 | | | | 67,326 | |
| Impairment of long-lived assets | | | 192,676 | | | | — | | | | 192,676 | | | | — | |
| Restructuring and other charges | | | 6,147 | | | | 3,748 | | | | 6,833 | | | | 3,748 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Subtotal operating expenses | | | 309,135 | | | | 121,058 | | | | 639,305 | | | | 407,577 | |
| |
| Antitrust litigation benefit, net (B) | | | — | | | | — | | | | — | | | | (60,747 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Total operating expenses | | | 309,135 | | | | 121,058 | | | | 639,305 | | | | 346,830 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Operating income (loss) | | | (236,199 | ) | | | (25,881 | ) | | | (287,405 | ) | | | 7,299 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Other income (expenses): | | | | | | | | | | | | | | | | |
| Interest income, net | | | 2,255 | | | | 6,417 | | | | 13,453 | | | | 30,874 | |
| Equity in net loss of investments | | | (271 | ) | | | (308 | ) | | | (695 | ) | | | (440 | ) |
| Gain (loss) on sale of equity investment, net | | | (12 | ) | | | (34 | ) | | | 210 | | | | 98 | |
| Minority interest in Rhapsody America (C) | | | 12,426 | | | | 13,318 | | | | 41,555 | | | | 19,784 | |
| Gain on sale of interest in Rhapsody America (D) | | | — | | | | 8,464 | | | | 14,502 | | | | 16,410 | |
| Other income (expense), net | | | (1,306 | ) | | | 756 | | | | 330 | | | | 1,746 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Total other income (expense), net | | | 13,092 | | | | 28,613 | | | | 69,355 | | | | 68,472 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Income (loss) before income taxes | | | (223,107 | ) | | | 2,732 | | | | (218,050 | ) | | | 75,771 | |
| Income taxes | | | (17,392 | ) | | | (47 | ) | | | (25,828 | ) | | | (27,456 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Net income (loss) | | $ | (240,499 | ) | | $ | 2,685 | | | $ | (243,878 | ) | | $ | 48,315 | |
| | | | | | | | | | | | | |
| |
| Basic net income (loss) per share | | $ | (1.78 | ) | | $ | 0.02 | | | $ | (1.74 | ) | | $ | 0.32 | |
| Diluted net income (loss) per share | | $ | (1.78 | ) | | $ | 0.02 | | | $ | (1.74 | ) | | $ | 0.29 | |
| | | | | | | | | | | | | | | | | |
| Shares used to compute basic net income (loss) per share | | | 135,402 | | | | 144,387 | | | | 140,431 | | | | 151,665 | |
| Shares used to compute diluted net income (loss) per share | | | 135,402 | | | | 157,626 | | | | 140,431 | | | | 166,410 | |
| | |
| (A) | | Consists of advertising purchased by Rhapsody America from MTV Networks (MTVN). MTVN has a 49% ownership interest in Rhapsody America. |
| |
| (B) | | Consists of amounts received under the Settlement and Commercial agreements with Microsoft, net of certain legal fees, personnel costs, public relations and other professional service fees incurred related to antitrust complaints against Microsoft, including proceedings in the European Union. |
| |
| (C) | | Minority interest reflects MTVN’s 49% ownership share in the losses of Rhapsody America. |
| |
| (D) | | Consists of gains realized from MTVN’s note payments to Rhapsody America. In accordance with Staff Accounting Bulletin 51, “Accounting for Sales of Stock of a Subsidiary,” (SAB 51) beginning in the fourth quarter of 2008, this gain is recognized as a component of shareholders’ equity. |
RealNetworks, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
| | | | | | | | | |
| | | As of
December 31, | | | As of
December 31, | |
| | | 2008 | | | 2007 | |
| | | (in thousands) | |
ASSETS
|
| Current assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 232,968 | | | $ | 476,697 | |
| Short-term investments | | | 137,766 | | | | 79,932 | |
| Trade accounts receivable, net | | | 70,201 | | | | 84,674 | |
| Deferred costs, current portion | | | 4,026 | | | | 6,408 | |
| Prepaid expenses and other current assets | | | 34,599 | | | | 33,845 | |
| | | | | | | |
| | | | | | | | | |
| Total current assets | | | 479,560 | | | | 681,556 | |
| | | | | | | |
| |
| Equipment, software, and leasehold improvements, at cost: | | | | | | | | |
| Equipment and software | | | 135,788 | | | | 109,621 | |
| Leasehold improvements | | | 30,719 | | | | 30,632 | |
| | | | | | | |
| Total equipment, software, and leasehold improvements | | | 166,507 | | | | 140,253 | |
| Less accumulated depreciation and amortization | | | 103,500 | | | | 83,756 | |
| | | | | | | |
| Net equipment, software, and leasehold improvements | | | 63,007 | | | | 56,497 | |
| | | | | | | | | |
| Restricted cash equivalents and investments | | | 14,742 | | | | 15,509 | |
| Equity investments | | | 18,582 | | | | 9,976 | |
| Other assets | | | 9,895 | | | | 10,161 | |
| Deferred tax assets, net, non-current portion | | | 9,236 | | | | 40,913 | |
| Other intangible assets, net | | | 18,727 | | | | 107,677 | |
| Goodwill | | | 175,264 | | | | 353,153 | |
| | | | | | | |
| | | | | | | | | |
| Total assets | | $ | 789,013 | | | $ | 1,275,442 | |
| | | | | | | |
| | | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
| | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Accounts payable | | $ | 36,575 | | | $ | 56,160 | |
| Accrued and other liabilities | | | 118,688 | | | | 114,136 | |
| Deferred revenue, current portion | | | 39,835 | | | | 39,564 | |
| Related party payable (A) | | | 13,155 | | | | 17,241 | |
| Convertible debt | | | — | | | | 100,000 | |
| Accrued loss on excess office facilities, current portion | | | 4,317 | | | | 3,389 | |
| | | | | | | |
| | | | | | | | | |
| Total current liabilities | | | 212,570 | | | | 330,490 | |
| |
| Deferred revenue, non-current portion | | | 1,961 | | | | 2,663 | |
| Accrued loss on excess office facilities, non-current portion | | | 2,893 | | | | 7,311 | |
| Deferred rent | | | 4,614 | | | | 4,518 | |
| Deferred tax liabilities, net, non-current portion | | | 1,379 | | | | 22,060 | |
| Other long-term liabilities | | | 11,660 | | | | 13,683 | |
| | | | | | | |
| | | | | | | | | |
| Total liabilities | | | 235,077 | | | | 380,725 | |
| |
| Minority interest (B) | | | 378 | | | | 19,613 | |
| | | | | | | | | |
| Shareholders’ equity (C) | | | 553,558 | | | | 875,104 | |
| | | | | | | |
| | | | | | | | | |
| Total liabilities and shareholders’ equity | | $ | 789,013 | | | $ | 1,275,442 | |
| | | | | | | |
| | |
| (A) | | Related party payable reflects amounts owed to MTVN. |
| |
| (B) | | Minority interest reflects MTVN’s 49% ownership interest in the net assets of Rhapsody America. |
| |
| (C) | | In accordance with SAB 51, beginning in Q4 2008, shareholders’ equity includes gains realized from MTVN’s note payments to Rhapsody America. |
RealNetworks, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| | | | | | | | | |
| | | Years Ended December 31, | |
| | | 2008 | | | 2007 | |
| | | (in thousands) | |
| Cash flows from operating activities: | | | | | | | | |
| Net income (loss) | | $ | (243,878 | ) | | $ | 48,315 | |
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | | | |
| Depreciation and amortization | | | 45,968 | | | | 45,225 | |
| Stock-based compensation | | | 23,531 | | | | 23,918 | |
| Loss on disposal of equipment, software, and leasehold improvements | | | 10 | | | | 302 | |
| Equity in net loss of investments | | | 198 | | | | 440 | |
| Gain on sale of equity investment, net | | | (210 | ) | | | (98 | ) |
| Excess tax benefit from stock option exercises | | | (127 | ) | | | (562 | ) |
| Accrued impairment of deferred costs and prepaid royalties | | | 2,146 | | | | — | |
| Impairment of long-lived assets | | | 192,676 | | | | — | |
| Accrued restructuring and other charges | | | 3,378 | | | | — | |
| Accrued loss on excess office facilities | | | (3,490 | ) | | | (3,801 | ) |
| Proceeds on sale of trading securities | | | — | | | | 270,000 | |
| Purchase of trading securities | | | — | | | | (270,000 | ) |
| Deferred income taxes, net | | | 11,583 | | | | (9,549 | ) |
| Minority interest in Rhapsody America | | | (41,555 | ) | | | (19,784 | ) |
| Gain on sale of interest in Rhapsody America | | | (14,502 | ) | | | (16,410 | ) |
| Other | | | 111 | | | | 95 | |
| Net change in certain assets and liabilities, net of acquisitions | | | (5,622 | ) | | | 318 | |
| | | | | | | |
| | | | | | | | | |
| Net cash provided by (used in) operating activities | | | (29,783 | ) | | | 68,409 | |
| | | | | | | |
| |
| Cash flows from investing activities: | | | | | | | | |
| Purchases of equipment, software, and leasehold improvements | | | (29,530 | ) | | | (26,658 | ) |
| Purchases of short-term investments | | | (251,887 | ) | | | (133,427 | ) |
| Proceeds from sales and maturities of short-term investments | | | 194,052 | | | | 207,183 | |
| Purchases of intangible assets | | | (2,839 | ) | | | (2,796 | ) |
| Proceeds from the sales of equity investments | | | 1,139 | | | | 1,615 | |
| Purchases of equity investments | | | (14,400 | ) | | | (1,656 | ) |
| Payment of acquisition costs, net of cash acquired | | | (10,192 | ) | | | (45,599 | ) |
| Decrease in restricted cash equivalents and investments | | | 768 | | | | 1,805 | |
| | | | | | | |
| | | | | | | | | |
| Net cash provided by (used in) investing activities | | | (112,889 | ) | | | 467 | |
| | | | | | | |
| | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | |
| Net proceeds from sales of common stock under employee stock purchase plan and exercise of stock options | | | 9,570 | | | | 15,894 | |
| Payments of convertible debt obligations | | | (100,000 | ) | | | — | |
| Net proceeds from sales of interest in Rhapsody America | | | 44,640 | | | | 48,716 | |
| Excess tax benefit from stock option exercises | | | 127 | | | | 562 | |
| Repurchases of common stock | | | (50,199 | ) | | | (178,792 | ) |
| | | | | | | |
| | | | | | | | | |
| Net cash used in financing activities | | | (95,862 | ) | | | (113,620 | ) |
| | | | | | | |
| | | | | | | | | |
| Effect of exchange rate changes on cash | | | (5,195 | ) | | | (3,791 | ) |
| | | | | | | |
| | | | | | | | | |
| Net decrease in cash and cash equivalents | | | (243,729 | ) | | | (48,535 | ) |
| | | | | | | | | |
| Cash and cash equivalents, beginning of period | | | 476,697 | | | | 525,232 | |
| | | | | | | |
| | | | | | | | | |
| Cash and cash equivalents, end of period | | $ | 232,968 | | | $ | 476,697 | |
| | | | | | | |
RealNetworks, Inc. and Subsidiaries
Supplemental Financial Information
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2008 | | | 2007 | |
| | | Q4 | | | Q3 | | | Q2 | | | Q1 | | | Q4 | | | Q3 | | | Q2 | | | Q1 | |
| | | (in thousands) | |
Net Revenue by Line of Business: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consumer products and services (A) | | $ | 100,282 | | | $ | 100,322 | | | $ | 101,353 | | | $ | 96,286 | | | $ | 96,998 | | | $ | 91,824 | | | $ | 87,115 | | | $ | 85,040 | |
| Technology products and solutions (B) | | | 52,362 | | | | 51,633 | | | | 51,295 | | | | 51,277 | | | | 59,884 | | | | 53,271 | | | | 49,056 | | | | 44,432 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total net revenue | | $ | 152,644 | | | $ | 151,955 | | | $ | 152,648 | | | $ | 147,563 | | | $ | 156,882 | | | $ | 145,095 | | | $ | 136,171 | | | $ | 129,472 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consumer Products and Services: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Subscriptions (C) | | $ | 57,853 | | | $ | 57,776 | | | $ | 55,658 | | | $ | 55,193 | | | $ | 54,784 | | | $ | 55,551 | | | $ | 51,091 | | | $ | 51,490 | |
| Media properties (D) | | | 18,337 | | | | 19,946 | | | | 23,472 | | | | 18,702 | | | | 20,438 | | | | 16,071 | | | | 17,748 | | | | 15,932 | |
| E-commerce and other (E) | | | 24,092 | | | | 22,600 | | | | 22,223 | | | | 22,391 | | | | 21,776 | | | | 20,202 | | | | 18,276 | | | | 17,618 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total consumer products and services revenue | | $ | 100,282 | | | $ | 100,322 | | | $ | 101,353 | | | $ | 96,286 | | | $ | 96,998 | | | $ | 91,824 | | | $ | 87,115 | | | $ | 85,040 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consumer Products and Services: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Music (F) | | $ | 43,882 | | | $ | 41,591 | | | $ | 37,170 | | | $ | 38,079 | | | $ | 40,540 | | | $ | 37,658 | | | $ | 36,801 | | | $ | 34,127 | |
| Media software and services (G) | | | 22,695 | | | | 24,531 | | | | 29,238 | | | | 26,409 | | | | 25,572 | | | | 25,346 | | | | 25,419 | | | | 27,011 | |
| Games (H) | | | 33,705 | | | | 34,200 | | | | 34,945 | | | | 31,798 | | | | 30,886 | | | | 28,820 | | | | 24,895 | | | | 23,902 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total consumer products and services revenue | | $ | 100,282 | | | $ | 100,322 | | | $ | 101,353 | | | $ | 96,286 | | | $ | 96,998 | | | $ | 91,824 | | | $ | 87,115 | | | $ | 85,040 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Revenue by Geography: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| United States | | $ | 101,369 | | | $ | 102,363 | | | $ | 100,898 | | | $ | 99,169 | | | $ | 96,806 | | | $ | 91,281 | | | $ | 88,035 | | | $ | 84,554 | |
| Rest of world | | | 51,275 | | | | 49,592 | | | | 51,750 | | | | 48,394 | | | | 60,076 | | | | 53,814 | | | | 48,136 | | | | 44,918 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total net revenue | | $ | 152,644 | | | $ | 151,955 | | | $ | 152,648 | | | $ | 147,563 | | | $ | 156,882 | | | $ | 145,095 | | | $ | 136,171 | | | $ | 129,472 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Subscribers (presented as greater than) *: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total subscribers (I) | | | 34,100 | | | | 32,650 | | | | 35,000 | | | | 32,200 | | | | 30,200 | | | | 29,250 | | | | 26,150 | | | | 24,550 | |
| Technology products and solutions application services subscribers (J) | | | 31,500 | | | | 29,950 | | | | 32,450 | | | | 29,500 | | | | 27,600 | | | | 26,600 | | | | 23,600 | | | | 21,900 | |
| Music subscribers: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consumer music subscribers: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Rhapsody subscribers | | | 775 | | | | 750 | | | | 600 | | | | 600 | | | | 600 | | | | 600 | | | | 600 | | | | 600 | |
| Radio subscribers | | | 1,225 | | | | 1,250 | | | | 1,225 | | | | 1,275 | | | | 1,275 | | | | 1,300 | | | | 1,250 | | | | 1,225 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total consumer music subscribers | | | 2,000 | | | | 2,000 | | | | 1,825 | | | | 1,875 | | | | 1,875 | | | | 1,900 | | | | 1,850 | | | | 1,825 | |
| Technology products and solutions application services music subscribers (K) | | | 875 | | | | 850 | | | | 800 | | | | 800 | | | | 825 | | | | 825 | | | | 825 | | | | 800 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Music Subscribers** | | | 2,875 | | | | 2,850 | | | | 2,625 | | | | 2,675 | �� | | | 2,700 | | | | 2,725 | | | | 2,675 | | | | 2,625 | |
| | |
| * | | Total music subscribers includes subscribers from our technology products and solutions application subscription services, such as music-on-demand, as well as our consumer music services, such as Rhapsody and Premium Radio. Although music-on-demand subscribers are included in the technology products and solutions application services subscribers and total music subscribers, these subscribers are only counted once as part of our total subscribers. |
| |
| ** | | Prior periods have been changed to reflect current period presentation. Totals may not equal due to rounding convention. |
| |
| (A) | | Revenue is derived from consumer digital media subscription services, RealPlayer Plus and related products, sales and distribution of third party software products, content such as games and music and advertising. |
| |
| (B) | | Revenue is derived from carrier application services such as ringback tones and music-on-demand, media delivery system software, support and maintenance services, broadcast hosting services and consulting services. |
| |
| (C) | | Revenue is derived from consumer digital media subscription services including: SuperPass, RadioPass, Rhapsody, GamePass and stand-alone subscriptions. |
| |
| (D) | | Revenue is derived from advertising and through the distribution of third party products. |
| |
| (E) | | Revenue is derived from RealPlayer Plus and related products, sales of third party software products, and content such as games and music. |
| |
| (F) | | Revenue is derived from Rhapsody and RadioPass subscription services and sales of music content, advertising generated from our music and music related websites and the distribution of third party products. |
| |
| (G) | | Revenue is derived from SuperPass subscriptions, RealPlayer Plus and related products, stand-alone subscription services, sales and distribution of third-party software products and advertising related to our non-game and non-music related web properties. |
| |
| (H) | | Revenue is derived from GamePass subscription service, sales of games, advertising generated from our games and game-related websites and the distribution of third-party products. |
| |
| (I) | | Total subscribers include technology products and solutions application services and consumer subscription services including: ringback tones, music-on-demand, video-on-demand, Rhapsody, Rhapsody-to-Go, RadioPass, SuperPass, GamePass, and stand-alone subscriptions. |
| |
| (J) | | Technology products and solutions application service subscribers include: ringback tones, music-on-demand and video-on-demand. |
| |
| (K) | | Technology products and solutions application services music subscribers include subscribers from application services including music-on-demand. |
RealNetworks, Inc. and Subsidiaries
Supplemental Financial Information
(Unaudited)
Reconciliation of GAAP net income (loss) to adjusted EBITDA and adjusted EBITDA excluding impairments is as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended | | | Quarters Ended | |
| | | December 31, | | | December 31, | | | September 30, | | | June 30, | | | March 31, | |
| | | 2008 | | | 2008 | | | 2008 | | | 2008 | | | 2008 | |
| | | | | | | | | | | (in thousands) | |
| Net income (loss) in accordance with GAAP | | $ | (243,878 | ) | | $ | (240,499 | ) | | $ | (4,500 | ) | | $ | (1,305 | ) | | $ | 2,426 | |
| Interest income, net | | | (13,453 | ) | | | (2,255 | ) | | | (2,865 | ) | | | (3,375 | ) | | | (4,958 | ) |
| Stock-based compensation | | | 23,531 | | | | 6,056 | | | | 5,955 | | | | 6,031 | | | | 5,489 | |
| Loss (gain) on equity investments, net | | | (210 | ) | | | 12 | | | | — | | | | (222 | ) | | | — | |
| Conversion of WiderThan stock options to a cash equivalent | | | 142 | | | | 11 | | | | 16 | | | | 26 | | | | 89 | |
| Depreciation and amortization (net of minority interest effect) | 24,417 | | | | 5,784 | | | | 6,165 | | | | 6,186 | | | | 6,282 | |
| Acquisitions related intangible asset amortization (net of minority interest effect) | | | 20,110 | | | | 1,872 | | | | 5,752 | | | | 6,171 | | | | 6,315 | |
| Impairment of long-lived assets (net of minority interest effect) | | | 190,347 | | | | 190,347 | | | | — | | | | — | | | | — | |
| Gain on initial formation of Rhapsody America | | | — | | | | — | | | | — | | | | — | | | | — | |
| Pro forma gain on sale of interest in Rhapsody America | | | 6,568 | | | | 6,568 | | | | — | | | | — | | | | — | |
| Expenses (benefit) related to antitrust litigation: | | | | | | | | | | | | | | | | | | | | |
| Income | | | — | | | | — | | | | — | | | | — | | | | — | |
| Expenses | | | 757 | | | | 179 | | | | 174 | | | | 202 | | | | 202 | |
| Charitable contributions | | | — | | | | — | | | | — | | | | — | | | | — | |
| Income taxes | | | 25,828 | | | | 17,392 | | | | 728 | | | | 3,700 | | | | 4,008 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Adjusted EBITDA | | $ | 34,159 | | | $ | (14,533 | ) | | $ | 11,425 | | | $ | 17,414 | | | $ | 19,853 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Impairments: | | | | | | | | | | | | | | | | | | | | |
| Impairment of deferred costs and prepaid royalties | | | 19,666 | | | | 19,666 | | | | — | | | | — | | | | — | |
| Restructuring and other charges | | | 6,833 | | | | 6,147 | | | | — | | | | — | | | | 686 | |
| | | | | | | | | | | | | | | | |
| Adjusted EBITDA excluding impairments | | $ | 60,658 | | | $ | 11,280 | | | $ | 11,425 | | | $ | 17,414 | | | $ | 20,539 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended | | | Quarters Ended | |
| | | December 31, | | | December 31, | | | September 30, | | | June 30, | | | March 31, | |
| | | 2007 | | | 2007 | | | 2007 | | | 2007 | | | 2007 | |
| | | | | | | | | | | (in thousands) | |
| Net income (loss) in accordance with GAAP | | $ | 48,315 | | | $ | 2,685 | | | $ | 4,342 | | | $ | 1,327 | | | $ | 39,961 | |
| Interest income, net | | | (30,874 | ) | | | (6,417 | ) | | | (7,290 | ) | | | (8,065 | ) | | | (9,102 | ) |
| Stock-based compensation | | | 23,918 | | | | 6,627 | | | | 5,984 | | | | 5,622 | | | | 5,685 | |
| Loss (gain) on equity investments, net | | | (98 | ) | | | 34 | | | | — | | | | (132 | ) | | | — | |
| Conversion of WiderThan stock options to a cash equivalent | | | 2,062 | | | | 190 | | | | 413 | | | | 614 | | | | 845 | |
| Depreciation and amortization (net of minority interest effect) | | | 22,195 | | | | 5,703 | | | | 6,210 | | | | 5,661 | | | | 4,621 | |
| Acquisitions related intangible asset amortization (net of minority interest effect) | | | 22,845 | | | | 6,639 | | | | 5,583 | | | | 5,311 | | | | 5,312 | |
| Impairment of long-lived assets (net of minority interest effect) | | | — | | | | — | | | | — | | | | — | | | | — | |
| Gain on initial formation of Rhapsody America | | | (3,866 | ) | | | — | | | | (3,866 | ) | | | — | | | | — | |
| Pro forma gain on sale of interest in Rhapsody America | | | — | | | | — | | | | — | | | | — | | | | — | |
| Expenses (benefit) related to antitrust litigation: | | | | | | | | | | | | | | | | | | | | |
| Income | | | (61,000 | ) | | | — | | | | — | | | | — | | | | (61,000 | ) |
| Expenses | | | 1,053 | | | | 179 | | | | 201 | | | | 202 | | | | 471 | |
| Charitable contributions | | | 1,921 | | | | — | | | | — | | | | — | | | | 1,921 | |
| Income taxes | | | 27,456 | | | | 47 | | | | 2,012 | | | | 2,178 | | | | 23,219 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Adjusted EBITDA | | $ | 53,927 | | | $ | 15,687 | | | $ | 13,589 | | | $ | 12,718 | | | $ | 11,933 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Impairments: | | | | | | | | | | | | | | | | | | | | |
| Impairment of deferred costs and prepaid royalties | | | — | | | | — | | | | — | | | | — | | | | — | |
| Restructuring and other charges | | | 3,748 | | | | 3,748 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
| Adjusted EBITDA excluding impairments | | $ | 57,675 | | | $ | 19,435 | | | $ | 13,589 | | | $ | 12,718 | | | $ | 11,933 | |
| | | | | | | | | | | | | | | | |
RealNetworks, Inc. and Subsidiaries
Segment Results of Operations
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | |
| | | Quarter Ended December 31, 2008 | |
| | | Music(A) | | | Consumer(B) | | | TPS(C) | | | Other | | | Grand Total | |
| | | (in thousands) | |
| Net revenue | | $ | 43,882 | | | $ | 56,400 | | | $ | 52,362 | | | $ | — | | | $ | 152,644 | |
| | | | | | | | | | | | | | | | | | | | | |
| Cost of revenue | | | 25,068 | | | | 14,586 | | | | 20,388 | | | | — | | | | 60,042 | |
| Impairment of deferred costs and prepaid royalties | | | 1,000 | | | | 7,829 | | | | 10,837 | | | | — | | | | 19,666 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Gross profit | | | 17,814 | | | | 33,985 | | | | 21,137 | | | | — | | | | 72,936 | |
| | | | | | | | | | | | | | | | |
| Gross margin | | | 41 | % | | | 60 | % | | | 40 | % | | | — | | | | 48 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | | | | | | | | |
| Advertising with related party | | | 12,480 | | | | — | | | | — | | | | — | | | | 12,480 | |
| Impairment of long-lived assets | | | 4,753 | | | | 46,056 | | | | 141,867 | | | | — | | | | 192,676 | |
| Restructuring and other charges | | | — | | | | — | | | | — | | | | 6,147 | | | | 6,147 | |
| Other operating expenses | | | 24,777 | | | | 44,014 | | | | 28,823 | | | | 218 | | | | 97,832 | |
| | | | | | | | | | | | | | | | |
| Total operating expenses | | | 42,010 | | | | 90,070 | | | | 170,690 | | | | 6,365 | | | | 309,135 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Income (loss) from operations | | | (24,196 | ) | | | (56,085 | ) | | | (149,553 | ) | | | (6,365 | ) | | | (236,199 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Other income (expenses): | | | | | | | | | | | | | | | | | | | | |
| Interest income, net | | | — | | | | — | | | | — | | | | 2,255 | | | | 2,255 | |
| Minority interest | | | 12,426 | | | | — | | | | — | | | | — | | | | 12,426 | |
| Equity in net loss of investments | | | — | | | | — | | | | — | | | | (271 | ) | | | (271 | ) |
| Gain on sale of equity investments, net | | | — | | | | — | | | | — | | | | (12 | ) | | | (12 | ) |
Gain on sale of interest in Rhapsody America(D) | | | — | | | | — | | | | — | | | | — | | | | — | |
| Other income (expense), net | | | — | | | | — | | | | — | | | | (1,306 | ) | | | (1,306 | ) |
| | | | | | | | | | | | | | | | |
| |
| Total other income (expense), net | | | 12,426 | | | | — | | | | — | | | | 666 | | | | 13,092 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Income (loss) before income taxes | | $ | (11,770 | ) | | $ | (56,085 | ) | | $ | (149,553 | ) | | $ | (5,699 | ) | | $ | (223,107 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Reconciliation of segment GAAP income (loss) before taxes to segment adjusted EBITDA excluding impairments is as follows: |
| | | | | | | | | | | | | | | | | | | | | |
| Income (loss) before income taxes | | $ | (11,770 | ) | | $ | (56,085 | ) | | $ | (149,553 | ) | | $ | (5,699 | ) | | $ | (223,107 | ) |
| Interest income, net | | | — | | | | — | | | | — | | | | (2,255 | ) | | | (2,255 | ) |
| Stock-based compensation | | | 1,058 | | | | 2,397 | | | | 2,601 | | | | — | | | | 6,056 | |
| Conversion of WiderThan stock options to a cash equivalent | | | — | | | | — | | | | 11 | | | | — | | | | 11 | |
Acquisitions related intangible asset amortization(E) | | | 278 | | | | 273 | | | | 1,321 | | | | — | | | | 1,872 | |
Impairment of long-lived assets(E) | | | 2,424 | | | | 46,056 | | | | 141,867 | | | | — | | | | 190,347 | |
| Impairment of deferred costs and prepaid royalties | | | 1,000 | | | | 7,829 | | | | 10,837 | | | | — | | | | 19,666 | |
| Restructuring and other charges | | | — | | | | — | | | | — | | | | 6,147 | | | | 6,147 | |
| Pro forma gain on sale of interest in Rhapsody America | | | 6,568 | | | | — | | | | — | | | | — | | | | 6,568 | |
| Gain on initial formation of Rhapsody America | | | — | | | | — | | | | — | | | | — | | | | — | |
| Gain on sale of equity investments, net | | | — | | | | — | | | | — | | | | 12 | | | | 12 | |
Depreciation and amortization(E) | | | 1,127 | | | | 1,761 | | | | 2,896 | | | | — | | | | 5,784 | |
| Expenses (benefit) related to antitrust litigation: | | | | | | | | | | | | | | | | | | | | |
| Income | | | — | | | | — | | | | — | | | | — | | | | — | |
| Expenses | | | — | | | | — | | | | — | | | | 179 | | | | 179 | |
| Charitable contributions | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
| Adjusted EBITDA excluding impairments | | $ | 685 | | | $ | 2,231 | | | $ | 9,980 | | | $ | (1,616 | ) | | $ | 11,280 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | Quarter Ended December 31, 2007 | |
| | | Music(A) | | | Consumer(B) | | | TPS(C) | | | Other | | | Grand Total | |
| | | (in thousands) | |
| Net revenue | | $ | 40,540 | | | $ | 56,458 | | | $ | 59,884 | | | $ | — | | | $ | 156,882 | |
| | | | | | | | | | | | | | | | | | | | | |
| Cost of revenue | | | 21,892 | | | | 10,950 | | | | 28,863 | | | | — | | | | 61,705 | |
| | | | | | | | | | | | | | | | |
| |
| Gross profit | | | 18,648 | | | | 45,508 | | | | 31,021 | | | | — | | | | 95,177 | |
| | | | | | | | | | | | | | | | |
| Gross margin | | | 46 | % | | | 81 | % | | | 52 | % | | | — | | | | 61 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | | | | | | | | |
| Advertising with related party | | | 16,613 | | | | — | | | | — | | | | — | | | | 16,613 | |
| Restructuring charge | | | — | | | | — | | | | — | | | | 3,748 | | | | 3,748 | |
| Other operating expenses | | | 28,817 | | | | 38,246 | | | | 33,489 | | | | 145 | | | | 100,697 | |
| | | | | | | | | | | | | | | | |
| Total operating expenses | | | 45,430 | | | | 38,246 | | | | 33,489 | | | | 3,893 | | | | 121,058 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Income (loss) from operations | | | (26,782 | ) | | | 7,262 | | | | (2,468 | ) | | | (3,893 | ) | | | (25,881 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Other income (expenses): | | | | | | | | | | | | | | | | | | | | |
| Interest income, net | | | — | | | | — | | | | — | | | | 6,417 | | | | 6,417 | |
| Minority interest | | | 13,318 | | | | — | | | | — | | | | — | | | | 13,318 | |
| Equity in net loss of investments | | | — | | | | — | | | | — | | | | (308 | ) | | | (308 | ) |
| Gain on sale of equity investments, net | | | — | | | | — | | | | — | | | | (34 | ) | | | (34 | ) |
| Gain on sale of interest in Rhapsody America | | | 8,464 | | | | — | | | | — | | | | — | | | | 8,464 | |
| Other income (expense), net | | | — | | | | — | | | | — | | | | 756 | | | | 756 | |
| | | | | | | | | | | | | | | | |
| |
| Total other income (expense), net | | | 21,782 | | | | — | | | | — | | | | 6,831 | | | | 28,613 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Income (loss) before income taxes | | $ | (5,000 | ) | | $ | 7,262 | | | $ | (2,468 | ) | | $ | 2,938 | | | $ | 2,732 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Reconciliation of segment GAAP income (loss) before taxes to segment adjusted EBITDA excluding impairments is as follows: |
| | | | | | | | | | | | | | | | | | | | | |
| Income (loss) before income taxes | | $ | (5,000 | ) | | $ | 7,262 | | | $ | (2,468 | ) | | $ | 2,938 | | | $ | 2,732 | |
| Interest income, net | | | — | | | | — | | | | — | | | | (6,417 | ) | | | (6,417 | ) |
| Stock-based compensation | | | 1,296 | | | | 2,283 | | | | 3,048 | | | | — | | | | 6,627 | |
| Conversion of WiderThan stock options to a cash equivalent | | | — | | | | — | | | | 190 | | | | — | | | | 190 | |
Acquisitions related intangible asset amortization(E) | | | 384 | | | | 911 | | | | 5,344 | | | | — | | | | 6,639 | |
| Restructuring and other charges | | | — | | | | — | | | | — | | | | 3,748 | | | | 3,748 | |
| Gain on intial formation of Rhapsody America | | | — | | | | — | | | | — | | | | — | | | | — | |
| Gain on sale of equity investments, net | | | — | | | | — | | | | — | | | | 34 | | | | 34 | |
Depreciation and amortization(E) | | | 1,187 | | | | 1,928 | | | | 2,588 | | | | — | | | | 5,703 | |
| Expenses (benefit) related to antitrust litigation: | | | | | | | | | | | | | | | | | | | | |
| Income | | | — | | | | — | | | | — | | | | — | | | | — | |
| Expenses | | | — | | | | — | | | | — | | | | 179 | | | | 179 | |
| Charitable contributions | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
| Adjusted EBITDA excluding impairments | | $ | (2,133 | ) | | $ | 12,384 | | | $ | 8,702 | | | $ | 482 | | | $ | 19,435 | |
| | | | | | | | | | | | | | | | |
| | |
| Note: | | Cost of revenue and operating expenses of the segments shown above include costs directly attributable to those segments and an allocation of general and administrative and other common or shared costs. |
| |
| (A) | | The Music segment primarily includes revenue and related costs from: Rhapsody America’s Rhapsody and Radiopass subscription services; sales of digital music content through the Rhapsody service and the RealPlayer music store; and advertising from music websites. |
| |
| (B) | | The Consumer segment primarily includes revenue and related costs from: the sale of individual games through our RealArcade service and our Games related websites; our GamePass and FunPass subscription service; our SuperPass and stand-alone premium video subscription services; RealPlayer Plus and related products; sales and distribution of third-party software products; and all advertising other than that related directly to our Music businesses. |
| |
| (C) | | TPS comprises our Technology Products and Solutions segment which includes revenue and related costs from: sales of ringback tone, music-on-demand, video-on-demand, messaging, and information services; sales of media delivery system software, including Helix system software and related authoring and publishing tools, both directly to customers and indirectly through original equipment manufacturer (OEM) channels; support and maintenance services sold to customers who purchase software products; broadcast hosting services; and consulting and professional services that are offered to customers. |
| |
| (D) | | Comprises gains realized from MTVN’s note payment to Rhapsody America. In accordance with SAB 51, beginning in Q4 2008, this gain was recognized as a component of shareholders’ equity. |
| |
| (E) | | Net of minority interest effect within our Music segment. |
RealNetworks, Inc. and Subsidiaries
Supplemental Financial Information
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Quarter Ended December 31, 2008 | |
| | | | | | | | | | | Acquisitions | | | WiderThan | | | | | | | |
| | | | | | | | | | | Related | | | Options | | | | | | | |
| | | | | | | | | | | Intangible | | | Converted | | | Antitrust | | | | |
| | | As | | | Stock-Based | | | Asset | | | to a Cash | | | Litigation | | | | |
| | | Reported | | | Compensation | | | Amortization(A) | | | Equivalent | | | Related | | | Adjusted | |
| | | | | | | | | | | (in thousands) | | | | | | |
Expenses in accordance with GAAP | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of revenue | | $ | 60,042 | | | $ | (607 | ) | | $ | (596 | ) | | $ | (2 | ) | | $ | — | | | $ | 58,837 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
| Research and development | | $ | 28,533 | | | $ | (2,103 | ) | | $ | — | | | $ | — | | | $ | — | | | $ | 26,430 | |
| Sales and marketing | | | 50,192 | | | | (1,433 | ) | | | (1,276 | ) | | | (5 | ) | | | — | | | | 47,478 | |
| General and administrative | | | 19,107 | | | | (1,913 | ) | | | — | | | | (4 | ) | | | (179 | ) | | | 17,011 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total adjusted operating expenses, net | | $ | 97,832 | | | $ | (5,449 | ) | | $ | (1,276 | ) | | $ | (9 | ) | | $ | (179 | ) | | $ | 90,919 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Quarter Ended December 31, 2007 | |
| | | | | | | | | | | Acquisitions | | | WiderThan | | | | | | | |
| | | | | | | | | | | Related | | | Options | | | | | | | |
| | | | | | | | | | | Intangible | | | Converted | | | Antitrust | | | | |
| | | As | | | Stock-Based | | | Asset | | | to a Cash | | | Litigation | | | | |
| | | Reported | | | Compensation | | | Amortization(A) | | | Equivalent | | | Related | | | Adjusted | |
| | | | | | | | | | | (in thousands) | | | | | | |
Expenses in accordance with GAAP | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of revenue | | $ | 61,705 | | | $ | (249 | ) | | $ | (2,479 | ) | | $ | (15 | ) | | $ | — | | | $ | 58,962 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
| Research and development | | $ | 27,719 | | | $ | (2,161 | ) | | $ | — | | | $ | (40 | ) | | $ | — | | | $ | 25,518 | |
| Sales and marketing | | | 56,819 | | | | (2,388 | ) | | | (4,160 | ) | | | (135 | ) | | | — | | | | 50,136 | |
| General and administrative | | | 16,159 | | | | (1,829 | ) | | | — | | | | — | | | | (179 | ) | | | 14,151 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total adjusted operating expenses, net | | $ | 100,697 | | | $ | (6,378 | ) | | $ | (4,160 | ) | | $ | (175 | ) | | $ | (179 | ) | | $ | 89,805 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2008 | |
| | | | | | | | | | | Acquisitions | | | WiderThan | | | | | | | |
| | | | | | | | | | | Related | | | Options | | | | | | | |
| | | | | | | | | | | Intangible | | | Converted | | | Antitrust | | | | |
| | | As | | | Stock-Based | | | Asset | | | to a Cash | | | Litigation | | | | |
| | | Reported | | | Compensation | | | Amortization(A) | | | Equivalent | | | Related | | | Adjusted | |
| | | | | | | | | | | (in thousands) | | | | | | |
Expenses in accordance with GAAP | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of revenue | | $ | 233,244 | | | $ | (2,570 | ) | | $ | (7,188 | ) | | $ | (26 | ) | | $ | — | | | $ | 223,460 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
| Research and development | | $ | 113,680 | | | $ | (8,410 | ) | | $ | — | | | $ | (9 | ) | | $ | — | | | $ | 105,261 | |
| Sales and marketing | | | 211,922 | | | | (5,860 | ) | | | (12,922 | ) | | | (36 | ) | | | — | | | | 193,104 | |
| General and administrative | | | 69,981 | | | | (6,691 | ) | | | — | | | | (71 | ) | | | (757 | ) | | | 62,462 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total adjusted operating expenses, net | | $ | 395,583 | | | $ | (20,961 | ) | | $ | (12,922 | ) | | $ | (116 | ) | | $ | (757 | ) | | $ | 360,827 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2007 | |
| | | | | | | | | | | Acquisitions | | | WiderThan | | | | | | | |
| | | | | | | | | | | Related | | | Options | | | | | | | |
| | | | | | | | | | | Intangible | | | Converted | | | Antitrust | | | | |
| | | As | | | Stock-Based | | | Asset | | | to a Cash | | | Litigation | | | | |
| | | Reported | | | Compensation | | | Amortization(A) | | | Equivalent | | | Related | | | Adjusted | |
| | | | | | | | | | | (in thousands) | | | | | | |
Expenses in accordance with GAAP | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of revenue | | $ | 213,491 | | | $ | (769 | ) | | $ | (8,572 | ) | | $ | (324 | ) | | $ | — | | | $ | 203,826 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
| Research and development | | $ | 102,731 | | | $ | (7,314 | ) | | $ | — | | | $ | (398 | ) | | $ | — | | | $ | 95,019 | |
| Sales and marketing | | | 209,412 | | | | (9,373 | ) | | | (14,273 | ) | | | (973 | ) | | | — | | | | 184,793 | |
| General and administrative | | | 67,326 | | | | (6,462 | ) | | | — | | | | (368 | ) | | | (2,542 | ) | | | 57,954 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total adjusted operating expenses, net | | $ | 379,469 | | | $ | (23,149 | ) | | $ | (14,273 | ) | | $ | (1,739 | ) | | $ | (2,542 | ) | | $ | 337,766 | |
| | | | | | | | | | | | | | | | | | | |
| | |
| (A) | - Net of minority interest effect. |
