REALNETWORKS ANNOUNCES FIRST QUARTER 2008 RESULTS
Announces Intention to Spin off Games Business
Board Authorizes Share Repurchase Program
SEATTLE May 8, 2008 Digital entertainment services company RealNetworks®, Inc. (Nasdaq: RNWK) today announced results for the first quarter ended March 31, 2008.
Quarterly Highlights
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Revenue of $147.6 million |
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Net income of $2.4 million or $0.02 per diluted share |
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Adjusted EBITDA of $19.9 million |
"With solid first quarter performance, 2008 is off to a great start," said Rob Glaser, CEO of RealNetworks. "Our results exceeded our expectations across every major business."
In a separate release today, RealNetworks announced that it intends to spin off its games business and distribute shares in the newly created games company to its shareholders. Information on that announcement can be found at investor.realnetworks.com/games.
For the first quarter of 2008, revenue grew 14% to $147.6 million compared with $129.5 million for the first quarter of 2007. Revenue growth in the first quarter of 2008 compared with the first quarter of 2007 was due to: a 33% increase in Games revenue to $31.8 million; a 12% increase in Music revenue to $38.1 million; a 15% increase in Technology Products and Solutions revenue to $51.3 million, due in part to the acquisition of SonyNetServices and Exomi in 2007; and a 2% decline in Media Software and Services revenue to $26.4 million. Foreign currency exchange rate fluctuations positively affected 2008 first quarter revenue by approximately $2.0 million compared with the first quarter of 2007.
Net income for the first quarter of 2008 was $2.4 million or $0.02 per diluted share, compared with $40.0 million or $0.22 per diluted share in the first quarter of 2007. Results for the first quarter of 2007 included the final payment of $61 million related to Real's antitrust settlement and commercial agreements with Microsoft. Further information regarding these payments can be found in Real's SEC filings.
Adjusted EBITDA for the first quarter of 2008 was $19.9 million compared with $11.9 million in the first quarter of 2007. A reconciliation of GAAP net income to adjusted EBITDA is provided in the financial tables that accompany this release.
Gross margin was 62% in the first quarter of 2008 compared with 65% in the first quarter of 2007. Operating expenses for the first quarter of 2008 were $103.7 million, compared with $29.8 million in the first quarter of 2007. Operating expenses in the year-ago quarter were reduced by the $61 million payment related to the Microsoft settlement. Operating expenses in the first quarter of 2008 included $7.3 million of related party advertising in Rhapsody America.
As of March 31, 2008, Real had approximately $539.6 million in unrestricted cash, cash equivalents and short-term investments and $100 million of convertible debt.
Acquisition of Trymedia
In April 2008, Real acquired substantially all of the assets of Trymedia, a pioneer in casual games syndication from Macrovision for a total upfront cash payment of approximately $4 million. The acquisition is part of Real's strategy to build reach through syndicated distribution partnerships. With more than 250 partners including AOL, Yahoo!, Telstra and T-Online, Trymedia provides innovative syndication and commerce solutions that enable portals, online retailers and game developers to securely distribute PC games through physical and digital channels and maximize revenue throughout a game's lifetime.
Additional $50 million Stock Repurchase Program Authorized
In addition, the RealNetworks Board of Directors approved a share repurchase program of up to $50 million. Under the program, Real is authorized to repurchase up to $50 million of outstanding shares of common stock from time to time, depending on market conditions, share price and other factors. Repurchases may be made in the open market or through private transactions, in accordance with SEC requirements. Real may enter into a Rule 10(b)5-1 plan designed to facilitate the repurchase of all or a portion of the repurchase amount. Further, the repurchase program does not require Real to acquire a specific number of shares and may be terminated under certain conditions.
Real completed a previous $100 million stock repurchase program in the fourth quarter of 2007, repurchasing a total of approximately 13.9 million shares. Since the beginning of 2005, Real has repurchased approximately 44.2 million shares through its repurchase programs for $331.9 million.
Business Outlook
The following forward-looking statements reflect Real's expectations as of May 8, 2008. It is not Real's general practice to update these forward-looking statements until its next quarterly results announcement.
For the full year 2008, Real expects revenue in the range of $628 million to $648 million, which includes approximately $12 million as a result of the acquisition of Trymedia. Real expects 2008 GAAP net income per share of $(0.05) to $0.00, and adjusted EBITDA of $62 million to $74 million, which reflects the higher-than-anticipated results of the first quarter offset by an approximate $5 million dilutive impact from the acquisition of Trymedia. Real's earnings per share guidance for 2008 includes tax expense of between $3 million and $6 million, and pretax income is expected to be between a loss of $(5) million and income of $6 million.
For the second quarter of 2008, Real expects revenue in the range of $151 million to $155 million, which includes approximately $4 million as a result of the acquisition of Trymedia. Real expects second quarter GAAP net income per share of $(0.04) to $0.00, and expects adjusted EBITDA of between $14 million and $17 million, which includes an approximate $2 million dilutive impact from the acquisition of Trymedia. Real's earnings per share guidance for the second quarter of 2008 includes tax expense in the range of $2 million to a benefit of $0.5 million, and pretax income is expected to be between a loss of $(3.5) million and a loss of $(0.5) million. For 2008, Real expects that small changes in its pre-tax earnings will result in large changes to its GAAP tax rate, which could significantly impact Real's quarterly GAAP results.
Webcast and Conference Call Information
The Company will host a webcast and conference call today at 5:00pm (Eastern)/ 2:00pm (Pacific). The live webcast, featuring slides and audio, will be available at 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. Participants may access the conference call by dialing 800-857-5305 (773-681-5857 for international callers). The passcode is "First Quarter Earnings," and the leader is Rob Glaser. Telephonic replay will be available until 8:00 p.m. (Eastern), May 22, 2008.
Dial In: 866-424-3998 (for domestic callers); and 203-369-0851 (for international callers).
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For More Information Contact
Press: Bill Hankes (206) 892-6614 bhankes@real.com
Financial: Marj Charlier (206) 892-6718 mcharlier@real.com
ABOUT REALNETWORKS
RealNetworks, Inc. delivers digital entertainment services to consumers via PC, portable music player, home entertainment system and mobile phone. Real created the streaming media category in 1995 and has continued to lead the market with pioneering products and services, including: RealPlayer®, 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 www.realnetworks.com/company.
About Non-GAAP Financial Measures
To supplement RealNetworks' condensed consolidated financial statements presented in accordance with GAAP, we present investors with certain non-GAAP financial measures, including adjusted EBITDA, adjusted EBITDA by reporting segment, adjusted cost of revenue and adjusted operating expenses.
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Adjusted EBITDA and adjusted EBITDA by reporting segment consist of net income excluding the impact of the following: interest income, net; income taxes; depreciation; amortization (net of minority interest effect); stock-based compensation; expenses for employee stock options that were converted to cash rights; equity investment gains and losses from sales or impairments; income and expenses including charitable contributions related to the Microsoft agreements; and gain on initial formation of Rhapsody America. |
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Adjusted cost of revenue consists of GAAP cost of revenue excluding stock-based compensation expenses, and acquisition costs including amortization of intangible assets (net of minority interest effect) and expenses for employee stock options that were converted to cash rights. |
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Adjusted operating expenses consist of GAAP operating expenses excluding stock-based compensation expenses, antitrust litigation expenses (benefits) and acquisition costs including amortization of intangible assets (net of minority interest effect) and expenses for employee stock options that were converted to cash rights. |
RealNetworks believes that the presentation of adjusted EBITDA, adjusted EBITDA by reporting segment, adjusted cost of revenue and adjusted operating expenses provides important supplemental information to management and investors regarding financial and business trends relating to the company's financial condition and results of operations. Management believes that the use of these non-GAAP financial measures provides consistency and comparability with our past financial reports, and also facilitates comparisons with other companies in our industry, many of which use similar non-GAAP financial measures to supplement their GAAP results. Management has historically used these non-GAAP measures when evaluating operating performance because the inclusion or exclusion of the items described above provides additional useful measures of our operating results and facilitates comparisons of our core operating performance against prior periods and our business model objectives. We have chosen to provide this information to investors in order to enable them to perform additional analyses of past, present and future operating performance, to enable them to compare us to other companies, and as a supplemental means to evaluate our ongoing operations. Externally, we believe that adjusted EBITDA continues to be useful to investors in their assessment of our operating performance and the valuation of our company.
Internally, adjusted EBITDA, adjusted EBITDA by reporting segment, adjusted cost of revenue, and adjusted operating expenses are significant measures used by management for purposes of:
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supplementing the financial results and forecasts reported to our board of directors; |
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evaluating the operating performance of our company which includes direct and incrementally controllable revenue and costs of operations, but excludes items considered by management to be either non-cash or non-operating such as interest income and expense, stock-based compensation, tax expense, deferred tax valuation allowance changes, depreciation and amortization; |
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managing and comparing performance internally across our businesses and externally against our peers; |
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establishing internal operating budgets; and |
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evaluating and valuing potential acquisition candidates. |
Adjusted EBITDA, adjusted EBITDA by reporting segment, adjusted cost of revenue, and adjusted operating expenses are not calculated in accordance with GAAP, and should be considered supplemental to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. Non-GAAP financial measures have limitations in that they do not reflect all of the costs associated with the operations of our business as determined in accordance with GAAP. As a result, you should not consider these measures in isolation or as a substitute for analysis of RealNetworks' results as reported under GAAP. We expect to continue to incur expenses similar to the non-GAAP adjustments described above, and exclusion of these items from our non-GAAP financial measures should not be construed as an inference that these costs are unusual or infrequent. Some of the limitations in relying on our non-GAAP financial measures are:
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Adjusted EBITDA and adjusted EBITDA by reporting segment are measures which we have defined for internal and investor purposes and are not in accordance with GAAP. A further limitation associated with these measures is that they do not include all costs and income that impact our net income and net income per share. We compensate for these limitations by prominently disclosing GAAP net income, which we believe is the most directly comparable GAAP measure, and providing investors with reconciliations from GAAP net income to adjusted EBITDA and adjusted EBITDA by reporting segment. |
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Adjusted cost of revenue is limited in that it does not include stock-based compensation expenses, and certain costs associated with our acquisitions. Adjusted operating expenses are limited in that they do not include stock-based compensation expenses, antitrust litigation expenses (benefit) and certain costs associated with our acquisitions. We compensate for these limitations by prominently disclosing the reported GAAP results and providing investors with a reconciliation from GAAP to the adjusted amount. |
In the financial tables of our earnings press release, RealNetworks has included reconciliations of GAAP net income to adjusted EBITDA, income before income taxes to adjusted EBITDA by reporting segment, GAAP cost of revenue to adjusted cost of revenue and GAAP operating expenses to adjusted operating expenses for the relevant periods.
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