“We made strong progress transforming RealNetworks during the second quarter,” said Bob Kimball, President and CEO of RealNetworks. “Our restructuring efforts are ahead of plan. In the first six months of the year, we cut more than $30 million in annualized operating expenses from our ongoing businesses. Now it is time to focus on growing the business by improving our sales and marketing of existing products and building a strong pipeline of innovative products for the long term.”
Second Quarter Results
Beginning in the second quarter of 2010, revenue and other operating results of Real’s music business from its Rhapsody joint venture are not consolidated in Real’s financial statements as a result of the restructuring of Rhapsody completed on March 31, 2010.
For the second quarter of 2010, revenue from Real’s Technology Products and Solutions, Media Software and Services, and Games businesses was $88.9 million compared with $95.3 million for the second quarter of 2009. Total revenue in the second quarter of 2009 was $135.7 million, which included revenue from Real’s music business of $40.5 million. Foreign currency exchange rate fluctuations positively affected 2010 second quarter revenue by approximately $800,000 compared with the year-ago quarter. Revenue trends in each of Real’s businesses in the second quarter of 2010 compared with the year-earlier quarter were: a 2% increase in Media Software and Services revenue to $19.6 million, a 5% decrease in Games revenue to $28.1 million and an 11% decrease in Technology Products and Solutions revenue to $41.1 million.
Net loss for the second quarter of 2010 was $(25.9) million, or $(0.19) per share, compared with a net loss of $(188.3) million, or $(1.40) per share, in the second quarter of 2009. Net loss for the second quarter of 2010 included restructuring charges of $11.9 million primarily for employee severance costs and loss on excess office facilities, while the net loss in the year-ago quarter included goodwill impairment charges of $175.6 million. Adjusted EBITDA for the second quarter of 2010 was $604,000, compared with $4.4 million for the second quarter of 2009. A reconciliation of GAAP net loss to adjusted EBITDA is provided in the financial tables that accompany this release.
As of June 30, 2010, Real had $313.2 million in unrestricted cash, cash equivalents and short-term investments compared with $335.2 million at March 31, 2010. In addition, Real had $51.8 million in restricted cash and equity investments, including an approximate 47.5% equity interest in its Rhapsody joint venture. A majority of the $22.0 million decrease in cash, cash equivalents and short-term investments from March 31, 2010, was related to working capital changes, including a reduction in accrued liabilities and payables, primarily royalties. During the quarter, total liabilities declined by $22.1 million.
Gross margin in the second quarter rose to 67%, compared with 59% for the second quarter a year earlier, primarily due to the deconsolidation of the lower-margin music business. Income tax expense was $281,000 compared with $1.2 million in the year-earlier period. Interest income in the second quarter of 2010 was $551,000 compared with $754,000 in the year-earlier period.
Towards the end of the second quarter of 2010, RealNetworks announced a significant reorganization of its business and operational structure. The reorganization is a key milestone in Real’s execution of its previously announced strategy to simplify, restructure and grow.
As part of the second-quarter reorganization, the company eliminated about 85 positions, including about 25% of its executive ranks. The new organizational structure is designed to reduce the spans and layers of management to create greater efficiency, teamwork and accountability.
In addition, Real today announced that it has named Matt Hulett as the head of the Games business, replacing John Barbour. Mr. Hulett, formerly Chief Revenue Officer of Games, has more than 20 years of experience in digital games and other online businesses, including executive roles at Expedia and online games pioneer Shockwave.com. “Given the urgent need to pivot our Games business to social and online games, we think it is critical to have a leader based here in Seattle,” said Mr. Kimball. “Matt has the right combination of leadership skills, online business experience and support from the team to refocus our Games business on the growth markets, including social games.”
During the second quarter, Real also reduced its use of office space in Europe and its Seattle headquarters. As a result of the reorganization and reduction in office space, the company recorded restructuring charges of approximately $11.9 million for the quarter. Of these charges, approximately $4.8 million is primarily related to the reduction in force and approximately $7.1 million is related to the loss on excess office facilities.
Beginning with the third quarter, Real consolidated its Technology Products and Solutions and Media Software and Services business units and organized them into functional teams that represent product development, sales and marketing, and service delivery. Therefore, Real’s third-quarter financial results will reflect the new corporate reorganization with the following reporting segments: (1) Core products, which will include existing and evolving SaaS services of ringback tones, music on demand, and intercarrier messaging; professional services and systems integration; Helix software; and SuperPass; (2) Emerging products, which will include RealPlayer and new products and services that will be introduced over time for consumers or enterprise customers; and (3) Games. We will present Music results on a historical basis only.
Additionally, Real is changing how it allocates shared corporate costs. Historically, common corporate general and administrative costs, including facilities, were allocated to each business segment. In the future, these costs will be shown in the aggregate and not allocated to segments. Direct business unit costs such as R&D and marketing will continue to be reflected in the business unit results. The changes will ensure that business unit results will be directly attributable to that unit’s specific performance and that shared costs will be centrally managed to ensure focus and accountability on the overall corporate cost structure. Starting with the third-quarter earnings release, Real will report historical results that reflect this new presentation to provide comparability across quarters. In advance of Real’s third quarter earnings release, the company expects to file with the Securities and Exchange Commission a current report on Form 8-K with a description of the new segments and historical results for these new segments.
For the third quarter of 2010, Real expects overall revenue to be slightly lower sequentially, primarily due to softness in Games, and to decline year-over-year compared with total revenue for the third quarter of 2009, excluding music. Real expects adjusted EBITDA for the third quarter of 2010 to increase slightly sequentially and to decline year-over-year.
Approximately 35% of Real’s revenue is denominated in currencies other than the U.S. dollar, most notably the euro and Korean won. Real expects reported revenues in future periods to be affected by foreign currency trends.
The foregoing forward-looking statements reflect Real’s expectations as of July 29, 2010. It is not Real’s general practice to update these forward-looking statements until its next quarterly results announcement.
Dominique Trempont joins RealNetworks Board of Directors
RealNetworks also announced that it has named Dominique Trempont, a former CEO and an executive with extensive public-company board experience, to its Board of Directors effective July 23. The addition brings the board composition to eight members, including six independent directors.
“We are excited to have Dominique’s extensive experience with software, Internet, mobile applications and SaaS companies to help broaden our board’s understanding of these industries and trends,” said Kalpana Raina, chairperson of Real’s Nominating and Corporate Governance Committee. “His background in both finance and executive leadership makes him especially valuable as RealNetworks has embarked on a transformation that involves major strategic and operational decisions.”
“I am pleased to be joining the RealNetworks board at this very important time in the company’s history,” said Mr. Trempont. “This opportunity allows me to bring my experience in many kinds of organizations – from start-ups to Fortune 500 companies – to assist in the company’s strategic transformation.”
Mr. Trempont, 56, currently serves on the boards of Finisar Corp. and Energy Recovery, Inc. and on24 (SaaS). He also was a board member of 3Com Corp. prior to its acquisition by Hewlett Packard earlier this year. Over the past 25 years, he has been CEO-in-Residence at Battery Ventures, a venture capital firm; chairman, president and CEO of Kanisa, Inc., a software company (SaaS); CEO of Gemplus Corp., a smart card application company; CFO and head of operations at NeXT Software; and a senior executive at Raychem Corp.
Mr. Trempont earned an undergraduate degree in Economics from College St. Louis (Belgium), a B.A. with high honors in Business Administration and Computer Sciences (LSM) from the University of Louvain (Belgium) and a master’s degree in Busi