10Q 2013 Q2
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
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ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2013
OR
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-23137
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| | | | |
| RealNetworks, Inc. | |
| (Exact name of registrant as specified in its charter) | |
Washington | | 91-1628146 |
(State of incorporation) | | (I.R.S. Employer Identification Number) |
| | | | |
2601 Elliott Avenue, Suite 1000 Seattle, Washington | | 98121 |
(Address of principal executive offices) | | (Zip Code) |
| (206) 674-2700 | |
| (Registrant’s telephone number, including area code) | |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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| | | | | |
Large accelerated filer | | ¨ | | Accelerated filer | ý |
| | | |
Non-accelerated filer | | ¨ (Do not check if a smaller reporting company) | | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
The number of shares of the registrant’s Common Stock outstanding as of July 31, 2013 was 35,666,571.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
| |
Item 1. | Financial Statements |
REALNETWORKS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data) |
| | | | | | | |
| June 30, 2013 | | December 31, 2012 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 129,210 |
| | $ | 163,198 |
|
Short-term investments | 107,536 |
| | 108,216 |
|
Trade accounts receivable, net of allowances | 25,700 |
| | 30,754 |
|
Deferred costs, current portion | 485 |
| | 825 |
|
Deferred tax assets, current | 3,845 |
| | 2,869 |
|
Prepaid expenses and other current assets | 9,452 |
| | 17,002 |
|
Total current assets | 276,228 |
| | 322,864 |
|
Equipment, software, and leasehold improvements, at cost: | | | |
Equipment and software | 94,231 |
| | 98,041 |
|
Leasehold improvements | 22,740 |
| | 22,767 |
|
Total equipment, software, and leasehold improvements, at cost | 116,971 |
| | 120,808 |
|
Less accumulated depreciation and amortization | 92,342 |
| | 91,492 |
|
Net equipment, software, and leasehold improvements | 24,629 |
| | 29,316 |
|
Restricted cash equivalents and investments | 10,000 |
| | 10,000 |
|
Equity method investment | 15,344 |
| | 19,204 |
|
Available for sale securities | 36,156 |
| | 34,334 |
|
Other assets | 3,262 |
| | 3,153 |
|
Deferred costs, non-current portion | 1,300 |
| | 531 |
|
Deferred tax assets, net, non-current portion | 1,534 |
| | 4,911 |
|
Other intangible assets, net | 9,783 |
| | 3,275 |
|
Goodwill | 15,984 |
| | 6,309 |
|
Total assets | $ | 394,220 |
| | $ | 433,897 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 18,600 |
| | $ | 19,013 |
|
Accrued and other current liabilities | 47,972 |
| | 57,530 |
|
Deferred revenue, current portion | 7,987 |
| | 8,675 |
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Total current liabilities | 74,559 |
| | 85,218 |
|
Deferred revenue, non-current portion | 191 |
| | 169 |
|
Deferred rent | 441 |
| | 2,250 |
|
Deferred tax liabilities, net, non-current portion | 3,194 |
| | 432 |
|
Other long-term liabilities | 492 |
| | 3,100 |
|
Total liabilities | 78,877 |
| | 91,169 |
|
Commitments and contingencies |
| |
|
Shareholders’ equity: | | | |
Preferred stock, $0.001 par value, no shares issued and outstanding: | | | |
Series A: authorized 200 shares | — |
| | — |
|
Undesignated series: authorized 59,800 shares | — |
| | — |
|
Common stock, $0.001 par value authorized 250,000 shares; issued and outstanding 35,658 shares in 2013 and 35,324 shares in 2012 | 36 |
| | 35 |
|
Additional paid-in capital | 607,140 |
| | 603,770 |
|
Accumulated other comprehensive loss | (27,151 | ) | | (26,540 | ) |
Retained deficit | (264,682 | ) | | (234,537 | ) |
Total shareholders’ equity | 315,343 |
| | 342,728 |
|
Total liabilities and shareholders’ equity | $ | 394,220 |
| | $ | 433,897 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
REALNETWORKS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
|
| | | | | | | | | | | | | | | |
| Quarters Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Net revenue (A) | $ | 49,850 |
| | $ | 65,526 |
| | $ | 106,643 |
| | $ | 132,490 |
|
Cost of revenue (B) | 19,519 |
| | 25,962 |
| | 40,025 |
| | 53,389 |
|
Gross profit | 30,331 |
| | 39,564 |
| | 66,618 |
| | 79,101 |
|
Sale of patents and other technology assets, net of costs (See Note 1) | — |
| | 117,933 |
| | — |
| | 116,353 |
|
Operating expenses: | | | | | | | |
Research and development | 14,993 |
| | 16,028 |
| | 30,244 |
| | 33,846 |
|
Sales and marketing | 19,269 |
| | 22,694 |
| | 40,403 |
| | 46,490 |
|
General and administrative | 8,691 |
| | 13,068 |
| | 18,637 |
| | 26,344 |
|
Restructuring and other charges | 816 |
| | 1,539 |
| | 2,198 |
| | 3,148 |
|
Lease exit and related charges | 3,066 |
| | — |
| | 3,066 |
| | — |
|
Total operating expenses | 46,835 |
| | 53,329 |
| | 94,548 |
| | 109,828 |
|
Operating income (loss) | (16,504 | ) | | 104,168 |
| | (27,930 | ) | | 85,626 |
|
Other income (expenses): | | | | | | | |
Interest income, net | 179 |
| | 225 |
| | 826 |
| | 869 |
|
Gain (loss) on sale of equity and other investments, net | — |
| | 3,078 |
| | — |
| | 3,078 |
|
Equity in net loss of Rhapsody investment | (1,347 | ) | | (2,114 | ) | | (3,580 | ) | | (2,482 | ) |
Other income (expense), net | (137 | ) | | (49 | ) | | (28 | ) | | 1,426 |
|
Total other income (expenses), net | (1,305 | ) | | 1,140 |
| | (2,782 | ) | | 2,891 |
|
Income (loss) before income taxes | (17,809 | ) | | 105,308 |
| | (30,712 | ) | | 88,517 |
|
Income tax expense (benefit) | 662 |
| | 24,311 |
| | (567 | ) | | 24,535 |
|
Net income (loss) | $ | (18,471 | ) | | $ | 80,997 |
| | $ | (30,145 | ) | | $ | 63,982 |
|
Basic net income (loss) per share | $ | (0.52 | ) | | $ | 2.33 |
| | $ | (0.85 | ) | | $ | 1.85 |
|
Diluted net income (loss) per share | $ | (0.52 | ) | | $ | 2.32 |
| | $ | (0.85 | ) | | $ | 1.83 |
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Shares used to compute basic net income (loss) per share | 35,455 |
| | 34,752 |
| | 35,399 |
| | 34,620 |
|
Shares used to compute diluted net income (loss) per share | 35,455 |
| | 34,900 |
| | 35,399 |
| | 34,914 |
|
Comprehensive income (loss): | | | | | | | |
Unrealized investment holding gains (losses) | $ | (1,622 | ) | | $ | (12,061 | ) | | $ | 1,015 |
| | $ | (3,567 | ) |
Foreign currency translation adjustments, net of reclassification adjustments | (388 | ) | | (1,852 | ) | | (1,626 | ) | | (2,236 | ) |
Total other comprehensive income (loss) | (2,010 | ) | | (13,913 | ) | | (611 | ) | | (5,803 | ) |
Net income (loss) | (18,471 | ) | | 80,997 |
| | (30,145 | ) | | 63,982 |
|
Comprehensive income (loss) | $ | (20,481 | ) | | $ | 67,084 |
| | $ | (30,756 | ) | | $ | 58,179 |
|
(A) Components of net revenue: | | | | | | | |
License fees | $ | 10,162 |
| | $ | 14,224 |
| | $ | 22,991 |
| | $ | 29,180 |
|
Service revenue | 39,688 |
| | 51,302 |
| | 83,652 |
| | 103,310 |
|
| $ | 49,850 |
| | $ | 65,526 |
| | $ | 106,643 |
| | $ | 132,490 |
|
(B) Components of cost of revenue: | | | | | | | |
License fees | $ | 2,161 |
| | $ | 2,645 |
| | $ | 4,315 |
| | $ | 5,917 |
|
Service revenue | 17,358 |
| | 23,317 |
| | 35,710 |
| | 47,472 |
|
| $ | 19,519 |
| | $ | 25,962 |
| | $ | 40,025 |
| | $ | 53,389 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
REALNETWORKS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
| | | | | | | |
| Six Months Ended June 30, |
| 2013 | | 2012 |
Cash flows from operating activities: | | | |
Net income (loss) | $ | (30,145 | ) | | $ | 63,982 |
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | |
Depreciation and amortization | 9,874 |
| | 8,162 |
|
Stock-based compensation | 4,058 |
| | 4,065 |
|
Equity in net loss of Rhapsody | 3,580 |
| | 2,482 |
|
Deferred income taxes, net | (1,668 | ) | | 22,496 |
|
Gain on sale of patent and other technology assets, net of costs | — |
| | (116,353 | ) |
Gain on sale of equity and other investments, net | — |
| | (3,078 | ) |
Realized translation gain | (35 | ) | | (1,611 | ) |
Other | 51 |
| | (79 | ) |
Net change in certain operating assets and liabilities: | | | |
Trade accounts receivable | 5,355 |
| | 2,691 |
|
Prepaid expenses and other assets | 6,749 |
| | (1,144 | ) |
Accounts payable | (92 | ) | | 4,013 |
|
Accrued and other liabilities | (10,612 | ) | | (3,067 | ) |
Net cash provided by (used in) operating activities | (12,885 | ) | | (17,441 | ) |
Cash flows from investing activities: | | | |
Purchases of equipment, software, and leasehold improvements | (3,181 | ) | | (4,989 | ) |
Proceeds from sale of patents and other technology assets, net of costs | — |
| | 116,353 |
|
Proceeds from sale of equity and other investments | — |
| | 4,165 |
|
Purchases of short-term investments | (70,647 | ) | | (18,637 | ) |
Proceeds from sales and maturities of short-term investments | 71,327 |
| | 13,970 |
|
Decrease (increase) in restricted cash equivalents and investments, net | — |
| | (5 | ) |
Acquisitions of businesses, net of cash acquired | (16,107 | ) | | — |
|
Net cash provided by (used in) investing activities | (18,608 | ) | | 110,857 |
|
Cash flows from financing activities: | | | |
Proceeds from issuance of common stock (stock options and stock purchase plan) | 392 |
| | 1,221 |
|
Tax payments from shares withheld upon vesting of restricted stock | (800 | ) | | (884 | ) |
Payment of contingent consideration | (828 | ) | | — |
|
Net cash provided by (used in) financing activities | (1,236 | ) | | 337 |
|
Effect of exchange rate changes on cash and cash equivalents | (1,259 | ) | | (546 | ) |
Net increase (decrease) in cash and cash equivalents | (33,988 | ) | | 93,207 |
|
Cash and cash equivalents, beginning of period | 163,198 |
| | 106,333 |
|
Cash and cash equivalents, end of period | $ | 129,210 |
| | $ | 199,540 |
|
Supplemental disclosure of cash flow information: | | | |
Cash received from income tax refunds | $ | 8,100 |
| | $ | 149 |
|
Cash paid for income taxes | $ | 2,147 |
| | $ | 1,575 |
|
Non-cash investing activities: | | | |
Increase (decrease) in accrued purchases of equipment, software, and leasehold improvements | $ | 483 |
| | $ | 1,189 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
REALNETWORKS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 2013 and 2012
Note 1. Description of Business and Summary of Significant Accounting Policies
Description of Business. RealNetworks, Inc. and subsidiaries is a leading global provider of network-delivered digital media applications and services that make it easy to manage, play and share digital media. The Company also develops and markets software products and services that enable the creation, distribution and consumption of digital media, including audio and video.
Inherent in our business are various risks and uncertainties, including a limited history of certain of our product and service offerings. RealNetworks' success will depend on the acceptance of our technology, products and services and the ability to generate related revenue.
In this Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 (10-Q or Report), RealNetworks, Inc. and Subsidiaries is referred to as “RealNetworks”, the “Company”, “we”, “us”, or “our”.
Basis of Presentation. The unaudited condensed consolidated financial statements include the accounts of RealNetworks and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.
The unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal, recurring adjustments that, in the opinion of the Company’s management, are necessary for a fair presentation of the results of operations for the periods presented. Operating results for the quarter and six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for any subsequent period or for the year ending December 31, 2013. Certain information and disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).
These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2012 (the 10-K).
Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In addition, current economic conditions may require the use of additional estimates, and certain estimates we make are subject to a greater degree of uncertainty as a result of the current economic conditions.
Reportable Segments. In the first quarter of 2013 we reorganized the management of our businesses and as a result, we changed our reportable segments. See Note 17, Segment Information, for details.
Accumulated Other Comprehensive Income (Loss). The components of accumulated other comprehensive income (loss), net of any applicable tax, were as follows (in thousands):
|
| | | | | | | |
| June 30, 2013 | | December 31, 2012 |
Unrealized gains on investments, net of tax effects of $(129) and $(846) at June 30, 2013 and December 31, 2012, respectively | $ | 27,700 |
| | $ | 26,685 |
|
Foreign currency translation adjustments | (54,851 | ) | | (53,225 | ) |
Accumulated other comprehensive income (loss) | $ | (27,151 | ) | | $ | (26,540 | ) |
In the three months ended March 31, 2012 we liquidated the investment in certain of our foreign entities and recorded a net pre-tax gain of $1.6 million in Other income (expense), net, in the consolidated statement of operations upon the reclassification of the same amount of cumulative foreign exchange translation adjustment from accumulated other comprehensive income (loss) on the balance sheet. The reclassification adjustment had no related income tax expense or benefit. There were no reclassification adjustments or related tax effects related to foreign exchange translation amounts in the three months ended June 30, 2012.
There were no material reclassification adjustments or related tax effects related to foreign exchange translation amounts in the six months ended June 30, 2013.
In the three months ended June 30, 2012 we realized a pre-tax gain of $2.1 million in the consolidated statement of operations, within Gain (loss) on sale of equity and other investments, net, related to the sale of a portion of the equity shares we hold in LoEn Entertainment, Inc., with the same amounts reclassified from accumulated other comprehensive income (loss) on the balance sheet. The reclassification adjustment had no related income tax expense or benefit. There were no reclassification adjustments or related tax effects related to unrealized gains on investments in the three months ended March 31, 2012, or in the six months ended June 30, 2013.
For the three months ended June 30, 2013 we recorded income tax expense of $0.9 million and for the six months ended June 30, 2013 we recorded an income tax benefit of $0.7 million related to unrealized gains (losses) on investment securities, and recognized the corresponding amount as an increase or decrease to accumulated other comprehensive income.
2012 Sale of Patents and Other Technology Assets to Intel Corporation. In the second quarter of 2012, we completed the sale of certain patents, patent applications and related rights held by us, and certain of our assets relating to our next generation video codec technologies to Intel Corporation (Intel). The entire $120.0 million of cash proceeds we received, net of certain direct costs incurred, was recorded as a gain on our statement of operations in the quarter ending June 30, 2012, since the patent assets and other technology had a net book value of zero. The gain recognized of $116.4 million in the six months ended June 30, 2012 was net of related direct costs for the sale transaction totaling $3.6 million incurred in the first and second quarters of 2012.
Note 2. Recent Accounting Pronouncements
There have been no recent accounting pronouncements or changes in accounting pronouncements during the six months ended June 30, 2013 to be implemented that are of significance or potential significance to RealNetworks.
Note 3. Stock-Based Compensation
Total stock-based compensation expense recognized in our consolidated statements of operations includes amounts related to stock options, restricted stock units, and employee stock purchase plans and was as follows (in thousands):
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| | | | | | | | | | | | | | | |
| Quarters Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Total stock-based compensation expense | $ | 2,020 |
| | $ | 1,722 |
| | $ | 4,058 |
| | $ | 4,065 |
|
The fair value of options granted determined using the Black-Scholes model used the following weighted-average assumptions:
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| | | | | | | | | | | |
| Quarters Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Expected dividend yield | 0 | % | | 0 | % | | 0 | % | | 0 | % |
Risk-free interest rate | 0.52 | % | | 0.55 | % | | 0.55 | % | | 0.65 | % |
Expected life (years) | 5.4 |
| | 3.8 |
| | 4.3 |
| | 3.8 |
|
Volatility | 48 | % | | 58 | % | | 48 | % | | 58 | % |
The total stock-based compensation amounts for 2013 and 2012 disclosed above are recorded in their respective line items within operating expenses in the consolidated statement of operations. No stock-based compensation was capitalized as part of the cost of an asset as of June 30, 2013 or December 31, 2012. As of June 30, 2013, we had $7.1 million of total unrecognized compensation cost, net of estimated forfeitures, related to stock awards. The unrecognized compensation cost is expected to be recognized over a weighted-average period of approximately 3 years.
Note 4. Rhapsody Joint Venture
RealNetworks initially formed in 2007 a joint venture with MTV Networks, a division of Viacom International Inc. (MTVN), to own and operate a business-to-consumer digital audio music service known as Rhapsody. Prior to March 31, 2010, we held a 51% interest in Rhapsody and MTVN owned the remaining 49%. On March 31, 2010, restructuring transactions involving Rhapsody were completed, and as a result, effective March 31, 2010 RealNetworks owned approximately 47% of Rhapsody. Subsequent to the restructuring transaction, we account for our investment in Rhapsody using the equity method of accounting for investments.
As of June 30, 2013 we owned approximately 45% of the issued and outstanding stock of Rhapsody.
RealNetworks continues to provide certain operational transition services to Rhapsody. These transition services are expected to be completed in 2013, and are discussed further in Footnote 18, Related Party Transactions.
We recorded our share of losses of Rhapsody of $1.3 million and $3.6 million for the quarter and six months ended June 30, 2013, respectively. Our share of losses of Rhapsody for the quarter and six months ended June 30, 2012 were $2.1 million and $2.5 million, respectively.
The carrying value of our Rhapsody investment was $15.3 million as of June 30, 2013.
Summarized financial information for Rhapsody, which represents 100% of their financial information (in thousands):
|
| | | | | | | | | | | | | | | |
| Quarters Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Net revenue | $ | 34,679 |
| | $ | 37,809 |
| | $ | 68,641 |
| | $ | 72,979 |
|
Gross profit | 8,767 |
| | 9,879 |
| | 16,612 |
| | 19,491 |
|
Net loss | (4,375 | ) | | (4,537 | ) | | (9,191 | ) | | (5,607 | ) |
Note 5. Fair Value Measurements
We measure certain financial assets at fair value on a recurring basis, including cash equivalents, short-term investments, and equity investments of publicly traded companies. The fair value of these financial assets was determined based on three levels of inputs:
| |
• | Level 1: Quoted prices in active markets for identical assets or liabilities |
| |
• | Level 2: Directly or indirectly observed inputs for the asset or liability, including quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active |
| |
• | Level 3: Significant unobservable inputs that reflect our own estimates of assumptions that market participants would use |
Items Measured at Fair Value on a Recurring Basis
The following table presents information about our financial assets that have been measured at fair value on a recurring basis as of June 30, 2013 and December 31, 2012, and indicates the fair value hierarchy of the valuation inputs utilized to determine such fair value (in thousands).
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements as of |
| June 30, 2013 |
| Total | | Level 1 | | Level 2 | | Level 3 |
Cash equivalents: | | | | | | | |
Money market funds | $ | 12,788 |
| | $ | 2 |
| | $ | 12,786 |
| | $ | — |
|
Corporate notes and bonds | 63,490 |
| | — |
| | 63,490 |
| | — |
|
Short-term investments: | | | | | | | |
Corporate notes and bonds | 73,135 |
| | — |
| | 73,135 |
| | — |
|
U.S. government agency securities | 34,401 |
| | 34,276 |
| | 125 |
| | — |
|
Restricted cash equivalents and investments | 10,000 |
| | — |
| | 10,000 |
| | — |
|
Equity investments in publicly traded securities | 36,156 |
| | 36,156 |
| | — |
| | — |
|
Total | $ | 229,970 |
| | $ | 70,434 |
| | $ | 159,536 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements as of |
| December 31, 2012 |
| Total | | Level 1 | | Level 2 | | Level 3 |
Cash equivalents: | | | | | | | |
Money market funds | $ | 10,680 |
| | $ | — |
| | $ | 10,680 |
| | $ | — |
|
Corporate notes and bonds | 81,235 |
| | — |
| | 81,235 |
| | — |
|
Short-term investments: | | | | | | | |
Corporate notes and bonds | 65,502 |
| | — |
| | 65,502 |
| | — |
|
U.S. government agency securities | 42,714 |
| | 42,113 |
| | 601 |
| | — |
|
Restricted cash equivalents and investments | 10,000 |
| | — |
| | 10,000 |
| | — |
|
Equity investments in publicly traded securities | 34,334 |
| | 34,334 |
| | — |
| | — |
|
Total | $ | 244,465 |
| | $ | 76,447 |
| | $ | 168,018 |
| | $ | — |
|
Our equity investments in publicly traded companies consist of J-Stream Inc., a Japanese media services company, and LoEn Entertainment, Inc., a Korean digital music distribution company. These equity investments are accounted for as available for sale. The aggregate cost basis of these securities totaled $8.6 million as of June 30, 2013 and $8.6 million at December 31, 2012.
Items Measured at Fair Value on a Non-recurring Basis
Certain of our assets and liabilities are measured at estimated fair value on a non-recurring basis, using Level 3 inputs. These instruments are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment). During the six months ended June 30, 2013 and 2012, we did not record any impairments on those assets required to be measured at fair value on a non-recurring basis.
Note 6. Cash, Cash Equivalents, Short-Term Investments, Restricted Cash Equivalents and Investments
Cash and cash equivalents, short-term investments, and restricted cash equivalents and investments as of June 30, 2013, consisted of the following (in thousands):
|
| | | | | | | |
| Amortized Cost | | Estimated Fair Value |
Cash and cash equivalents: | | | |
Cash | $ | 52,932 |
| | $ | 52,932 |
|
Money market mutual funds | 12,788 |
| | 12,788 |
|
Corporate notes and bonds | 63,490 |
| | 63,490 |
|
Total cash and cash equivalents | 129,210 |
| | 129,210 |
|
Short-term investments: | | | |
Corporate notes and bonds | 73,143 |
| | 73,135 |
|
U.S. government agency securities | 34,390 |
| | 34,401 |
|
Total short-term investments | 107,533 |
| | 107,536 |
|
Total cash, cash equivalents and short-term investments | $ | 236,743 |
| | $ | 236,746 |
|
Restricted cash equivalents and investments | $ | 10,000 |
| | $ | 10,000 |
|
Cash and cash equivalents, short-term investments, and restricted cash equivalents and investments as of December 31, 2012 consisted of the following (in thousands):
|
| | | | | | | |
| Amortized Cost | | Estimated Fair Value |
Cash and cash equivalents: | | | |
Cash | $ | 71,283 |
| | $ | 71,283 |
|
Money market mutual funds | 10,680 |
| | 10,680 |
|
Corporate notes and bonds | 81,237 |
| | 81,235 |
|
Total cash and cash equivalents | 163,200 |
| | 163,198 |
|
|
| | | | | | | |
Short-term investments: | | | |
Corporate notes and bonds | 65,426 |
| | 65,502 |
|
U.S. Government agency securities | 42,693 |
| | 42,714 |
|
Total short-term investments | 108,119 |
| | 108,216 |
|
Total cash, cash equivalents, and short-term investments | $ | 271,319 |
| | $ | 271,414 |
|
Restricted cash equivalents and investments | $ | 10,000 |
| | $ | 10,000 |
|
Restricted cash equivalents and investments amounts as of June 30, 2013, and December 31, 2012 relate to cash and investments pledged as collateral against letters of credit in connection with lease agreements.
Realized gains or losses on sales of short-term investment securities for the quarters and six months ended June 30, 2013 and 2012 were not significant. Gross unrealized gains and gross unrealized losses on short-term investment securities as of June 30, 2013 and December 31, 2012 were not significant.
Investments with remaining contractual maturities of five years or less are classified as short-term because the investments are marketable and highly liquid and we have the ability to utilize them for current operations. Contractual maturities of short-term investments as of June 30, 2013 (in thousands):
|
| | | |
| Estimated Fair Value |
Within one year | $ | 82,261 |
|
Between one year and five years | 25,275 |
|
Total short-term investments | $ | 107,536 |
|
Note 7. Allowance for Doubtful Accounts Receivable and Sales Returns
Activity in the allowance for doubtful accounts receivable and sales returns (in thousands):
|
| | | | | | | |
| Allowance For |
| Doubtful Accounts Receivable | | Sales Returns |
Balances, December 31, 2012 | $ | 1,010 |
| | $ | 653 |
|
Addition (reduction) to allowance | 42 |
| | (10 | ) |
Amounts written off | (48 | ) | | (16 | ) |
Foreign currency translation | (17 | ) | | — |
|
Balances, June 30, 2013 | $ | 987 |
| | $ | 627 |
|
One customer accounted for 12% of trade accounts receivable and one other customer accounted for 11% of trade accounts receivable, as of June 30, 2013. No one customer accounted for more than 10% of trade accounts receivable as of December 31, 2012.
One customer accounted for approximately 13%, or $6.5 million, and 14% or $15.1 million, of consolidated revenue during the quarter and six months ended June 30, 2013, respectively. The revenue from this customer is reflected in our RealPlayer Group and Games segments. One customer accounted for approximately 11%, or $5.6 million, of consolidated revenue during the quarter ended June 30, 2013, in our Mobile Entertainment segment. No one customer accounted for more than 10% of consolidated revenue during the quarter and six months ended June 30, 2012.
Note 8. Other Intangible Assets
Other intangible assets (in thousands):
|
| | | | | | | | | | | |
| Gross Amount | | Accumulated Amortization | | Net |
Customer relationships | $ | 30,441 |
| | $ | 27,775 |
| | $ | 2,666 |
|
Developed technology | 25,876 |
| | 23,439 |
| | 2,437 |
|
Patents, trademarks and tradenames | 7,869 |
| | 3,369 |
| | 4,500 |
|
Service contracts and other | 5,500 |
| | 5,320 |
| | 180 |
|
Total other intangible assets, June 30, 2013 | $ | 69,686 |
| | $ | 59,903 |
| | $ | 9,783 |
|
In the quarter ended June 30, 2013, we acquired 100% of the voting interests in Slingo, Inc., a social casino games company based in the U.S., for total cash consideration of $15.6 million. The tangible and intangible assets and liabilities recognized are reported within the Games segment. The identifiable intangible assets associated with the acquisition totaled $8.0 million. Of this total, $4.5 million is related to tradenames and trademarks determined to have indefinite useful lives and will be evaluated annually in our fourth quarter for impairment, or more frequently, if circumstances indicate an impairment may exist. The remaining $3.5 million includes developed game technology and existing customer relationships with finite lives, and will be amortized over their useful lives. We recorded a net deferred tax liability of $2.7 million related to the intangible assets acquired. Goodwill totaling $9.8 million was recorded, representing the intangible assets that do not qualify for separate recognition for accounting purposes, primarily related to the assembled workforce and expected synergies in the rapidly growing social casino games market. The goodwill is not deductible for income tax purposes. For the six months ended June 30, 2013, the amount of revenue and income (loss) before income taxes from this acquired business was not significant.
Note 9. Goodwill
Changes in goodwill (in thousands):
|
| | | |
Balance, December 31, 2012 | $ | 6,309 |
|
Increases due to current year acquisitions | 10,026 |
|
Effects of foreign currency translation | (351 | ) |
Balance, June 30, 2013 | $ | 15,984 |
|
Goodwill by segment (in thousands):
|
| | | |
| June 30, 2013 |
RealPlayer Group | $ | 580 |
|
Mobile Entertainment | 688 |
|
Games | 14,716 |
|
Total goodwill | $ | 15,984 |
|
See Note 8, Other Intangible Assets for details on our acquisition of Slingo, a social casino games business, in the quarter ended June 30, 2013.
Note 10. Accrued and Other Current Liabilities
Accrued and other current liabilities (in thousands):
|
| | | | | | | |
| June 30, 2013 | | December 31, 2012 |
Royalties and other fulfillment costs | $ | 17,697 |
| | $ | 19,435 |
|
Employee compensation, commissions and benefits | 10,379 |
| | 13,368 |
|
Sales, VAT and other taxes payable | 8,353 |
| | 10,959 |
|
Deferred tax liabilities—current | 432 |
| | 3,894 |
|
Accrued lease exit and related charges | 4,209 |
| | 2,463 |
|
Other | 6,902 |
| | 7,411 |
|
Total accrued and other current liabilities | $ | 47,972 |
| | $ | 57,530 |
|
Note 11. Restructuring Charges
Restructuring and other charges in 2013 and 2012 consist of costs associated with the ongoing reorganization of our business operations and focus on aligning our operating expenses with our revenue profile. The expense amounts in both years relate primarily to severance costs due to workforce reductions.
In the third quarter of 2012 we announced we would be eliminating approximately 160 positions worldwide. This action has been concluded as of the end of the second quarter of 2013. For the quarter and six months ended June 30, 2013 we recorded $0.8 million and $2.2 million, respectively, of restructuring charges for employee separation costs related to this action and for other actions taken in 2013.
Details of restructuring charges for the six months ended June 30, 2013 and 2012 are in the table below. The amount accrued at June 30, 2013 for employee separation includes costs for those employees who were separated in the quarter ended June 30, 2013 and are expected to be paid out in the quarter ended September 30, 2013. The amount accrued for contract assignment is expected to be paid out by the end of 2013.
For details on costs associated with the termination of our Seattle headquarters lease see Note 12, Lease exit and related charges.
Restructuring charges by type of cost (in thousands):
|
| | | | | | | | |
| | |
| Employee Separation Costs | Asset Disposal Expense and Other | Total |
Costs incurred and charged to expense for the six months ended June 30, 2013 | $ | 1,818 |
| 380 |
| $ | 2,198 |
|
Costs incurred and charged to expense for the six months ended June 30, 2012 | $ | 3,148 |
| — |
| $ | 3,148 |
|
Changes to the accrued restructuring cost liability (in thousands):
|
| | | | | | | | | |
| By Type of Cost | |
| Employee Separation Costs | Contract Assignment Costs | Total |
Accrued liability as of December 31, 2012 | $ | 731 |
| $ | 1,700 |
| $ | 2,431 |
|
Costs incurred and charged to expense for the six months ended June 30, 2013 | 1,818 |
| — |
| 1,818 |
|
Cash payments | (2,348 | ) | — |
| (2,348 | ) |
Accrued liability as of June 30, 2013 | $ | 201 |
| $ | 1,700 |
| $ | 1,901 |
|
Note 12. Lease Exit and Related Charges
As a result of the reduction in use of RealNetworks' office space, primarily in our corporate headquarters in Seattle, Washington, and certain other locations, losses have been recognized representing rent and contractual operating expenses over the remaining life of the leases, and related write-downs of leasehold improvements to their estimated fair value.
In the second quarter of 2013, we entered into a new lease in a new location for our Seattle headquarters and concurrently entered into an amendment to our current headquarters office lease that provides for an early termination of such lease.
The new Seattle building lease is for an initial term of 11 years and is estimated to commence on August 15, 2013. We have the option to extend the lease for two additional five-year terms, with certain increases in base rent.
The amendment to our current headquarters office lease provides for an early termination of such lease effective in three stages, with the termination of a majority of the premises taking place on August 31, 2013, and the final stage being complete by December 31, 2013. Prior to the execution of the amendment, the lease had been scheduled to expire in September 2014. In
connection with the early termination of the lease, we will pay the landlord termination fees totaling approximately $6.6 million in 2013. In the second quarter of 2013, we paid the landlord $3.2 million in termination fees.
Changes to accrued lease exit and related charges (in thousands):
|
| | | |
Accrued loss December 31, 2012 | $ | 4,213 |
|
Additions and adjustments to the lease exit charges accrual, including sublease income estimate revision | 1,275 |
|
Less amounts paid, net of sublease amounts | (1,279 | ) |
Accrued loss June 30, 2013 (included in Accrued and other current liabilities) | $ | 4,209 |
|
Note 13. Income Taxes
As of June 30, 2013, there have been no material changes to RealNetworks’ uncertain tax positions disclosures as provided in Note 14 of the 10-K. We do not anticipate that our total unrecognized tax benefits will significantly change within the next twelve months.
We file numerous consolidated and separate income tax returns in the U.S including federal, state and local, as well as foreign jurisdictions. With few exceptions, we are no longer subject to U.S federal income tax examinations for tax years before 2008 or state, local, or foreign income tax examinations for years before 1993. We are currently under audit by various states and foreign jurisdictions for certain tax years subsequent to 1993.
Note 14. Earnings (Loss) Per Share
Basic net income (loss) per share (EPS) is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income (loss) by the weighted average number of common and dilutive potential common shares outstanding during the period. Basic and diluted EPS (in thousands, except per share amounts):
|
| | | | | | | | | | | | | | | |
| Quarters Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Net income (loss) available to common shareholders | $ | (18,471 | ) | | $ | 80,997 |
| | $ | (30,145 | ) | | $ | 63,982 |
|
Weighted average common shares outstanding used to compute basic EPS | 35,455 |
| | 34,752 |
| | 35,399 |
| | 34,620 |
|
Dilutive effect of stock based awards | — |
| | 148 |
| | — |
| | 294 |
|
Weighted average common shares outstanding used to compute diluted EPS | 35,455 |
| | 34,900 |
|
| 35,399 |
|
| 34,914 |
|
Basic EPS | $ | (0.52 | ) | | $ | 2.33 |
| | $ | (0.85 | ) | | $ | 1.85 |
|
Diluted EPS | $ | (0.52 | ) | | $ | 2.32 |
| | $ | (0.85 | ) | | $ | 1.83 |
|
During the quarter and six months ended June 30, 2013, respectively, 4.3 million and 4.3 million of potentially issuable shares from stock awards were excluded from the calculation of diluted EPS because of their antidilutive effect.
During the quarter and six months ended June 30, 2012, respectively, 5.7 million and 5.8 million of potentially issuable shares from stock awards were excluded from the calculation of diluted EPS because of their antidilutive effect.
Note 15. Commitments and Contingencies
Commitments. See Note 12, Lease exit and related charges, for details on office lease commitments.
Litigation. On July 3, 2012, a lawsuit was filed against us by VoiceAge Corporation in the Supreme Court of the State of New York. VoiceAge asserts that we have breached our payment obligations under the terms of a patent license agreement between us and VoiceAge in respect of distribution of specified codec technology and is seeking a material amount of damages. We have removed the proceedings to New York federal court. Discovery commenced on January 4, 2013 and closed on May 15, 2013. In June 2013, VoiceAge submitted a motion for summary judgment; the Supreme Court of the State of New York denied the motion for summary judgment on August 5, 2013. We dispute VoiceAge's allegations and the magnitude of the claimed damages, and, because we are in the early stages of this litigation and due to the uncertainties inherent in this matter, we are unable to estimate the range of possible loss that could result from this litigation.
On October 28, 2011 and November 1, 2011, respectively, two lawsuits were filed by Callertone Innovations, LLC in the U.S. District Court for the District of Delaware. The first lawsuit was against T-Mobile USA, Inc. and the second lawsuit was against MetroPCS Wireless, Inc. and MetroPCS Communications, Inc., which we collectively refer to as MetroPCS. The lawsuits allege that T-Mobile and MetroPCS, respectively, infringe Callertone's patents by providing ringback tone services. We agreed to indemnify each of T-Mobile and MetroPCS against the claims based on an indemnity that is claimed to be owed by us. The respective complaint was served on T-Mobile on January 16, 2012 and on MetroPCS on January 14, 2012. We filed our answers to each complaint on April 9, 2012. In each matter, we dispute the plaintiff's allegations regarding both the validity of its patents and its claims of infringement against T-Mobile and MetroPCS, respectively. A claims construction hearing is scheduled for September 6, 2013. Because we are in the early stages of this litigation and due to the uncertainties inherent in these matters, we are unable to estimate the range of possible loss that could result from this litigation.
On April 25, 2007, a lawsuit was filed by Greenville Communications, LLC in Greenville, Mississippi against a number of cell phone carriers, including our partners T-Mobile USA, Inc. and Alltel Corporation, alleging that they infringe its patents by providing ringback tone services. We agreed to indemnify T-Mobile and Alltel against the claims based on an indemnity that is claimed to be owed by us. On August 27, 2007, our motion to transfer this matter to the U.S. District Court for the District of New Jersey was granted. The parties briefed claims construction, but the case was subsequently stayed pending reexamination of the patents at issue. On December 10, 2009, the U.S. Patent and Trademark Office issued notice of its intent to issue reexamination certificates for the patents in suit. The District Court lifted the stay on the litigation on January 29, 2010 and discovery resumed. On September 28, 2011, the District Court held a claims construction hearing, and on May 10, 2012, the District Court issued a non-infringement judgment that was favorable to us and the other defendants. On December 4, 2012, Greenville appealed the claims construction order and the judgment, and the defendants filed a reply brief on January 28, 2013. On May 17, 2013, the U.S. Court of Appeals for the Federal Circuit affirmed the judgment of non-infringement of the District Court. Greenville has filed a petition for re-hearing with the U.S. Court of Appeals. Due to the uncertainties inherent in this matter, we are unable to estimate the range of possible loss that could result from this litigation.
From time to time we are, and expect to continue to be, subject to legal proceedings, governmental investigations and claims in the ordinary course of business, including employment claims, contract-related claims, and claims of alleged infringement of third-party patents, trademarks and other intellectual property rights. These claims, including those described above, even if not meritorious, could force us to spend significant financial and managerial resources. We are not aware of any other legal proceedings or claims that we believe will have, individually or taken together, a material adverse effect on our business, prospects, financial condition or results of operations. However, we may incur substantial expenses in defending against third-party claims. In addition, given the broad distribution of some of our consumer products, any individual claim related to those products could give rise to liabilities that may be material to us. In the event of a determination adverse to us, we may incur substantial monetary liability, and/or be required to change our business practices. Either of these could have a material adverse effect on our consolidated financial statements.
Note 16. Guarantees
In the ordinary course of business, RealNetworks is subject to potential obligations for standard indemnification and warranty provisions that are contained within many of our customer license and service agreements, as described below.
Warranty provisions contained within our customer license and service agreements are generally consistent with those prevalent in our industry. The duration of our product warranties generally does not exceed 90 days following delivery of our products. Nearly all of our carrier contracts obligate us to indemnify our carrier customer for certain liabilities that may be incurred by them.
We do not maintain accruals for warranty-related obligations as we do not have a history of incurring such losses. We have, however, received claims for indemnification from certain of our carrier customers. See Note 15, Commitments and Contingencies, for a discussion of these indemnification claims.
As discussed in Note 1, Description of Business and Summary of Significant Accounting Policies, we sold certain patents and other technology assets to Intel in the second quarter of 2012. We have specific obligations to indemnify Intel for breaches of the representations and warranties that we made and covenants that we agreed to in the asset purchase agreement executed in connection with the transaction, and for certain potential future intellectual property infringement claims brought by third parties against Intel. The amount of any potential liabilities related to our indemnification obligations will not be determined until a claim has been made, but we are obligated to indemnify Intel up to the amount of the gross purchase price that we received in the sale.
Note 17. Segment Information
In the first quarter of 2013 we reorganized the management of our businesses and as a result, we now report the following three segments: (1) RealPlayer Group, which includes sales of our RealPlayer media player software and related products, such
as the distribution of third party software products, advertising on RealPlayer websites, and sales of RealPlayer Plus software licenses to consumers, sales of intellectual property licenses, and consumer subscriptions such as SuperPass; (2) Mobile Entertainment, which includes our SaaS services, systems integration, and professional services to mobile carriers, and sales of technology licenses of our software products such as Helix; and (3) Games, which includes all our games-related businesses, including 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.
In addition, we now also allocate certain corporate expenses which are directly attributable to supporting the business to our reportable segments, rather than retaining those expenses in our corporate segment. These corporate expenses include but are not limited to a portion of finance, legal, human resources and headquarters facilities. Remaining expenses, which are not directly attributable to supporting the business, are retained in aggregate in our corporate segment. All restructuring and lease exit and related charges are included in the corporate segment. In 2012, the sale of patent and other technology assets, net of costs, was included in the corporate segment. The historical financial information presented has been recast to reflect the new segments and the new corporate expense presentation.
RealNetworks reports three reportable segments based on factors such as how we manage our operations and how our Chief Operating Decision Maker reviews results. Our Chief Operating Decision Maker is considered to be the CEO Staff (CEOS), which includes the interim Chief Executive Officer, Chief Financial Officer, President, Executive Vice President, General Counsel and certain Senior Vice Presidents. The CEOS reviews financial information presented on both a consolidated basis and on a business segment basis, accompanied by certain disaggregated information about products and services, geographical regions and corporate expenses for purposes of making decisions and assessing financial performance. The accounting policies used to derive segment results are the same as those described in Note 1, Description of Business and Summary of Significant Accounting Policies, in the 10-K.
Segment results for the quarters and six months ended June 30, 2013 and 2012 (in thousands):
RealPlayer Group
|
| | | | | | | | | | | | | | | |
| Quarters Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Revenue | $ | 18,383 |
| | $ | 22,158 |
| | $ | 40,766 |
| | $ | 44,239 |
|
Cost of revenue | 4,409 |
| | 4,727 |
| | 9,720 |
| | 9,291 |
|
Gross profit | 13,974 |
| | 17,431 |
| | 31,046 |
| | 34,948 |
|
Operating expenses | 14,001 |
| | 12,792 |
| | 30,207 |
| | 28,767 |
|
Operating income (loss) | $ | (27 | ) | | $ | 4,639 |
| | $ | 839 |
| | $ | 6,181 |
|
Mobile Entertainment
|
| | | | | | | | | | | | | | | |
| Quarters Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Revenue | $ | 18,592 |
| | $ | 26,005 |
| | $ | 39,087 |
| | $ | 51,780 |
|
Cost of revenue | 11,170 |
| | 14,875 |
| | 22,002 |
| | 30,353 |
|
Gross profit | 7,422 |
| | 11,130 |
| | 17,085 |
| | 21,427 |
|
Operating expenses | 8,412 |
| | 13,851 |
| | 17,523 |
| | 28,655 |
|
Operating income (loss) | $ | (990 | ) | | $ | (2,721 | ) | | $ | (438 | ) | | $ | (7,228 | ) |
Games
|
| | | | | | | | | | | | | | | |
| Quarters Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Revenue | $ | 12,875 |
| | $ | 17,363 |
| | $ | 26,790 |
| | $ | 36,471 |
|
Cost of revenue | 3,381 |
| | 5,630 |
| | 7,181 |
| | 12,343 |
|
Gross profit | 9,494 |
| | 11,733 |
| | 19,609 |
| | 24,128 |
|
Operating expenses | 11,755 |
| | 13,801 |
| | 23,607 |
| | 27,939 |
|
Operating income (loss) | $ | (2,261 | ) | | $ | (2,068 | ) | | $ | (3,998 | ) | | $ | (3,811 | ) |
Corporate
|
| | | | | | | | | | | | | | | |
| Quarters Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Cost of revenue | $ | 559 |
| | $ | 730 |
| | $ | 1,122 |
| | $ | 1,402 |
|
Sale of patents and other technology assets, net of costs | — |
| | 117,933 |
| | — |
| | 116,353 |
|
Operating expenses | 12,667 |
| | 12,885 |
| | 23,211 |
| | 24,467 |
|
Operating income (loss) | $ | (13,226 | ) | | $ | 104,318 |
| | $ | (24,333 | ) | | $ | 90,484 |
|
Our customers consist primarily of consumers and corporations located in the U.S., Europe and various foreign countries. Revenue by geographic region (in thousands):
|
| | | | | | | | | | | | | | | |
| Quarters Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
United States | $ | 21,463 |
| | $ | 28,614 |
| | $ | 49,486 |
| | $ | 60,428 |
|
Europe | 9,272 |
| | 14,339 |
| | 20,528 |
| | 30,551 |
|
Rest of the world | 19,115 |
| | 22,573 |
| | 36,629 |
| | 41,511 |
|
Total net revenue | $ | 49,850 |
| | $ | 65,526 |
| | $ | 106,643 |
| | $ | 132,490 |
|
Long-lived assets, consisting of equipment, software, leasehold improvements, other intangible assets, and goodwill by geographic region (in thousands):
|
| | | | | | | |
| June 30, 2013 | | December 31, 2012 |
United States | $ | 42,264 |
| | $ | 27,915 |
|
Europe | 1,921 |
| | 2,350 |
|
Rest of the world | 6,211 |
| | 8,635 |
|
Total long-lived assets | $ | 50,396 |
| | $ | 38,900 |
|
Note 18. Related Party Transactions
Transactions with Rhapsody. See Note 4, Rhapsody Joint Venture, for details on the 2010 restructuring transaction involving Rhapsody. Subsequent to the restructuring transaction, we are obligated to provide Rhapsody with certain support services. These support services are expected to be completed in 2013. The support services include information technology and limited operational support provided directly to Rhapsody. The amount of these and other support service costs were based on various measures depending on the service provided, including vendor fees, an allocation of fixed costs and time employees spend on providing services to Rhapsody. RealNetworks allocates the cost of providing these support services and records such allocation as a reduction to the related expense in the period for which it was incurred. During the quarter and six months ended June 30, 2013, we charged Rhapsody $0.3 million and $0.4 million, respectively, for the support services. During the quarter and six months ended June 30, 2012, we charged Rhapsody $0.2 million and $0.5 million, respectively, for the support services.
Transactions with LoEn Entertainment, Inc. In 2008 RealNetworks acquired at market prices common shares of LoEn Entertainment, Inc., whose shares are traded on the Korean Securities Dealers Automated Quotations. We currently own
approximately 9% of the outstanding shares of LoEn. Our investment in LoEn is treated as an equity investment of a public company and is marked-to-market each period with resulting unrealized gains or losses recognized in accumulated other comprehensive income/loss. During the quarter and six months ended June 30, 2013, we recorded revenue from LoEn of $5.6 million and $10.5 million, respectively. During the quarter and six months ended June 30, 2012, we recorded revenue from LoEn of $4.1 million and $8.0 million, respectively. Revenue consisted primarily of sales of application service provider services, which include sales of ringback tones, music on demand, video on demand, and inter carrier messaging services. Associated with these transactions, we also recorded accounts receivable of $2.2 million as of June 30, 2013. Accounts payable and cost of revenue associated with LoEn as of and for the periods ended June 30, 2013 and 2012 were nominal.
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
This Quarterly Report on Form 10-Q and the documents incorporated herein by reference contain forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates, and projections about RealNetworks’ industry, products, management’s beliefs, and certain assumptions made by management. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and similar expressions are intended to identify forward-looking statements. All statements contained in this report that do not relate to matters of historical fact should be considered forward-looking statements. Forward-looking statements include statements with respect to:
| |
• | future revenues, operating expenses, income and other taxes, tax benefits, net income (loss) per diluted share available to common shareholders, acquisition costs and related amortization, and other measures of results of operations; |
| |
• | the effects of our past acquisitions and expectations for future acquisitions and divestitures; |
| |
• | plans, strategies and expected opportunities for future growth, increased profitability and innovation; |
| |
• | the prospects for creation and growth of strategic partnerships and the resulting financial benefits from such partnerships; |
| |
• | the expected financial position, performance, growth and profitability of, and investment in, our businesses and the availability of resources; |
| |
• | our involvement in potential claims, legal proceedings and government investigations, the expected course and costs of existing claims, legal proceedings and government investigations, and the potential outcomes and effects of both existing and potential claims, legal proceedings and governmental investigations on our business, prospects, financial condition or results of operations; |
| |
• | the expected benefits and other consequences of our growth plans, strategic initiatives, and restructurings; |
| |
• | our expected introduction of new and enhanced products, services and technologies across our businesses; |
| |
• | the effects of legislation, regulations, administrative proceedings, court rulings, settlement negotiations and other factors that may impact our businesses; |
| |
• | the continuation and expected nature of certain customer relationships; |
| |
• | impacts of competition and certain customer relationships on the future financial performance and growth of our businesses; |
| |
• | the effects of U.S. and foreign income and other taxes on our business, prospects, financial condition or results of operations; and |
| |
• | the effect of economic and market conditions on our business, prospects, financial condition or results of operations. |
These statements are not guarantees of future performance and actual actions or results may differ materially. These statements are subject to certain risks, uncertainties and assumptions that are difficult to predict, including those noted in the documents incorporated herein by reference. Particular attention should also be paid to the cautionary language in Item 1A of Part II entitled “Risk Factors.” RealNetworks undertakes no obligation to update publicly any forward-looking statements as a result of new information, future events or otherwise, unless required by law. Readers should, however, carefully review the risk factors included in other reports or documents filed by RealNetworks from time to time with the Securities and Exchange Commission, particularly the Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.
Overview
In the first quarter of 2013 we reorganized the management of our businesses and as a result, we now report the following three segments: (1) RealPlayer Group, (2) Mobile Entertainment and (3) Games. Within our RealPlayer Group, revenue is derived from the sale of our RealPlayer media player software and related products, such as the distribution of third party software products, advertising on RealPlayer websites, and sales of RealPlayer Plus software licenses to consumers, sales of intellectual property licenses, and consumer subscriptions such as SuperPass. The Mobile Entertainment business primarily includes revenue from SaaS services, systems integration, and professional services to mobile carriers, and sales of technology licenses of our software products such as Helix. The Games business 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.
In addition, we now also allocate certain corporate expenses which are directly attributable to supporting the business, including but not limited to a portion of finance, legal, human resources and headquarters facilities, to our reportable segments rather than retaining those expenses in our corporate segment. The allocation of these costs to the business units will increase accountability for financial and operational performance within each of our reportable segments. RealNetworks' most significant expenses relate to cost of revenue, compensating employees, and selling and marketing our products and services. The historical financial information presented has been recast to reflect the new segments and the new corporate expense presentation.
In the quarter and six months ended June 30, 2013, our consolidated revenue declined by $15.7 million and $25.8 million, respectively, compared to the same periods in 2012. The decline for the quarter was due to a decline of $7.4 million in Mobile Entertainment revenue, a decline of $4.5 million in Games revenue, and a $3.8 million decline in RealPlayer Group revenue. For the year to date period the decline was primarily due to a decline of $12.7 million in Mobile Entertainment revenue and a decline of $9.7 million in Games revenue.
Our SaaS business within Mobile Entertainment continues to be impacted by the proliferation of smartphone applications and services, some of which do not depend on our carrier customers for distribution to consumers. In addition, we are still experiencing pricing pressure from carriers for our intercarrier messaging services. In our Games segment and in the general games market, consumer game play continues to shift from downloadable PC games to social networks and mobile devices. Since 2011, we have been focusing on developing social and mobile games and monetizing those game play experiences. However, the revenue we currently generate from social games is not a significant portion of our Games revenue.
We are continuing to invest in each of our businesses. For example, in the quarter ended June 30, 2013, we acquired Slingo, a social casino games company based in the U.S., for total cash consideration of $15.6 million. This acquisition is intended to enhance our footprint in the social casino games arena. Associated with this will be incremental costs for investment in new products over the next year, which will directly impact our operating income (loss) before taxes.
We continue to focus on aligning our operating expenses with our revenue profile. The actions we initiated in the third quarter of 2012 to eliminate approximately 160 positions worldwide contributed significantly to the $6.5 million and $15.3 million decline in our total operating expenses for the quarter and six months ended June 30, 2013, respectively, compared to the same periods in 2012. In addition, on May 2, 2013, we entered into a new lease in a new location for our Seattle headquarters and concurrently negotiated an early termination to our current headquarters office lease. This action will meaningfully reduce our future annual facilities cost.
Condensed consolidated results of operations were as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarters Ended June 30, | | Six months ended June 30, |
| 2013 | | 2012 | | $ Change | | % Change | | 2013 | | 2012 | | $ Change | | % Change |
Total revenue | $ | 49,850 |
| | $ | 65,526 |
| | $ | (15,676 | ) | | (24 | )% | | $ | 106,643 |
| | $ | 132,490 |
| | $ | (25,847 | ) | | (20 | )% |
Cost of revenue | 19,519 |
| | 25,962 |
| | (6,443 | ) | | (25 | )% | | 40,025 |
| | 53,389 |
| | (13,364 | ) | | (25 | )% |
Gross profit | 30,331 |
| | 39,564 |
| | (9,233 | ) | | (23 | )% | | 66,618 |
| | 79,101 |
| | (12,483 | ) | | (16 | )% |
Gross margin | 61 | % | | 60 | % | | | | | | 62 | % | | 60 | % | | | | |
Sale of patent assets and other technology assets, net of costs | — |
| | 117,933 |
| | (117,933 | ) | | (100 | )% | | — |
| | 116,353 |
| | (116,353 | ) | | (100 | )% |
Operating expenses | 46,835 |
| | 53,329 |
| | (6,494 | ) | | (12 | )% | | 94,548 |
| | 109,828 |
| | (15,280 | ) | | (14 | )% |
Operating income (loss) | $ | (16,504 | ) | | $ | 104,168 |
| | $ | (120,672 | ) | | (116 | )% | | $ | (27,930 | ) | | $ | 85,626 |
| | $ | (113,556 | ) | | (133 | )% |
In the second quarter of 2013, our total consolidated revenue declined by $15.7 million, compared with the year-earlier period. The reduction in revenue resulted from a decline of $7.4 million in our Mobile Entertainment segment, a decline of $4.5 million in our Games segment, and a $3.8 million decline in RealPlayer Group revenue, due to the factors described above. Gross margin increased to 61% from 60% for the year earlier quarter as a result of a higher proportion of lower margin revenue in the prior year, in addition to lower personnel and related costs in the second quarter of 2013 that resulted from our ongoing expense alignment efforts. Operating expenses decreased by $6.5 million in the quarter ended June 30, 2013, compared with the prior year primarily due to reductions in personnel and related costs that resulted from our ongoing expense alignment efforts. Excluding restructuring and lease exit and related charges, operating expenses decreased by $8.8 million in the quarter ended June 30, 2013, compared to the same period of the prior year.
For the six months ended June 30, 2013, our total consolidated revenue declined by $25.8 million, compared with the year-earlier period. The reduction in revenue primarily resulted from a decline of $12.7 million in our Mobile Entertainment segment and a decline of $9.7 million in our Games segment, due to the factors described above. Gross margin increased to 62% from 60% for the year earlier quarter as a result of a higher proportion of lower margin revenue in the prior year, in addition to lower personnel and related costs in the first half of 2013 that resulted from our ongoing expense alignment efforts. Operating expenses decreased by $15.3 million in the six months ended June 30, 2013, compared with the prior year primarily due to reductions in personnel and related costs that resulted from our ongoing expense alignment efforts. Excluding
restructuring and lease exit and related charges, operating expenses decreased by $17.4 million in the six months ended June 30, 2013, compared to the same period of the prior year.
The 2012 gain from the sale of patents and other technology assets to Intel is net of certain direct expenses incurred for the sale transaction.
See “Segment Operating Results” below for more information and discussion regarding changes in the operating results for each of our reporting segments.
Segment Operating Results
RealPlayer Group
The RealPlayer Group segment primarily generates revenue and incurs costs from sales of RealPlayer and its related products, such as the distribution of third party software products, advertising on RealPlayer websites, and sales of RealPlayer Plus software licenses to consumers, sales of intellectual property licenses, and consumer subscriptions such as SuperPass.
RealPlayer Group segment results of operations were as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarters Ended June 30, | | Six months ended June 30, |
| 2013 | | 2012 | | $ Change | | % Change | | 2013 | | 2012 | | $ Change | | % Change |
Revenue | $ | 18,383 |
| | $ | 22,158 |
| | $ | (3,775 | ) | | (17 | )% | | $ | 40,766 |
| | $ | 44,239 |
| | $ | (3,473 | ) | | (8 | )% |
Cost of revenue | 4,409 |
| | 4,727 |
| | (318 | ) | | (7 | )% | | 9,720 |
| | 9,291 |
| | 429 |
| | 5 | % |
Gross profit | 13,974 |
| | 17,431 |
| | (3,457 | ) | | (20 | )% | | 31,046 |
| | 34,948 |
| | (3,902 | ) | | (11 | )% |
Gross margin | 76 | % | | 79 | % | | | | | | 76 | % | | 79 | % | | | | |
Operating expenses | 14,001 |
| | 12,792 |
| | 1,209 |
| | 9 | % | | 30,207 |
| | 28,767 |
| | 1,440 |
| | 5 | % |
Operating income (loss) | $ | (27 | ) | | $ | 4,639 |
| | $ | (4,666 | ) | | (101 | )% | | $ | 839 |
| | $ | 6,181 |
| | $ | (5,342 | ) | | (86 | )% |
Total RealPlayer Group revenue decreased by $3.8 million in the quarter ended June 30, 2013, compared with the year-earlier period. This decrease was primarily a result of lower subscriptions revenue of $2.6 million due to fewer subscribers, primarily attributable to our SuperPass product. Further contributing to the decrease was lower revenues of $1.3 million in sales of intellectual property licenses.
Total RealPlayer Group revenue decreased by $3.5 million for the six months ended June 30, 2013, compared with the year-earlier period. This decrease was primarily a result of lower subscriptions revenue of $5.3 million due to subscriber attrition, primarily attributable to our SuperPass product. Partially offsetting this decrease was an increase in revenue of $3.1 million from distribution of third party software.
Gross margin during the quarter and six months ended June 30, 2013 declined by 3%, due primarily to a change in our estimates of accrued royalties, which resulted in an increase in partner royalties expense as a percentage of revenue during the quarter and six months ended June 30, 2013.
Operating expenses increased by $1.2 million and $1.4 million for the quarter and six months ended June 30, 2013, respectively, compared with the year-earlier periods. Personnel and related costs increased $1.8 million and $2.8 million during the quarter and six months ended June 30, 2013, respectively, due to investment in new product development. Further contributing to the increase during the six months ended was an increase in marketing spend of $0.8 million. Partially offsetting the increases for the six months ended June 30, 2013 was a decrease of $2.4 million, resulting from estimated amounts recorded during the quarter ended March 31, 2012 associated with the then-pending investigation by the Washington State Attorney General's office. As disclosed in the 2012 10-K, this matter was resolved in the third quarter of 2012 in an amount totaling $1.3 million.
Mobile Entertainment
The Mobile Entertainment segment primarily generates revenue and incurs costs from the sales of SaaS services, such as ringback tones, intercarrier messages, music on demand and video on demand; professional services and systems integration services to mobile carriers and mobile handset companies; and Helix software.
Mobile Entertainment segment results of operations were as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarters Ended June 30, | | Six months ended June 30, |
| 2013 | | 2012 | | $ Change | | % Change | | 2013 | | 2012 | | $ Change | | % Change |
Revenue | $ | 18,592 |
| | $ | 26,005 |
| | $ | (7,413 | ) | | (29 | )% | | $ | 39,087 |
| | $ | 51,780 |
| | $ | (12,693 | ) | | (25 | )% |
Cost of revenue | 11,170 |
| | 14,875 |
| | (3,705 | ) | | (25 | )% | | 22,002 |
| | 30,353 |
| | (8,351 | ) | | (28 | )% |
Gross profit | 7,422 |
| | 11,130 |
| | (3,708 | ) | | (33 | )% | | 17,085 |
| | 21,427 |
| | (4,342 | ) | | (20 | )% |
Gross margin | 40 | % | | 43 | % | | | | | | 44 | % | | 41 | % | | | | |
Operating expenses | 8,412 |
| | 13,851 |
| | (5,439 | ) | | (39 | )% | | 17,523 |
| | 28,655 |
| | (11,132 | ) | | (39 | )% |
Operating income (loss) | $ | (990 | ) | | $ | (2,721 | ) | | $ | 1,731 |
| | 64 | % | | $ | (438 | ) | | $ | (7,228 | ) | | $ | 6,790 |
| | 94 | % |
Total Mobile Entertainment revenue decreased by $7.4 million and $12.7 million in the quarter and six months ended June 30, 2013, respectively, compared with the year-earlier periods. The declines during the quarter and six months ended June 30, 2013 were primarily due to reduced revenue from our SaaS offerings of $6.3 million and $11.1 million, respectively. The decline in SaaS revenue was due to $4.5 million and $6.4 million of lost revenue upon the termination of certain SaaS contracts over the last four quarters, and to $2.7 million and $6.1 million lower revenue due to fewer subscribers on existing contracts, and pricing pressures from carriers across our tones business, intercarrier messaging, and other carrier services, during the quarter and six months ended June 30, 2013, respectively.
Cost of revenue decreased by $3.7 million and $8.4 million during the quarter and six months ended June 30, 2013, respectively, compared with the year-earlier periods. Costs related to our SaaS offerings decreased by $3.5 million and $8.0 million during the quarter and six months ended, respectively, due to the lower revenues and to lower personnel and related costs that resulted from our ongoing expense alignment efforts.
Operating expenses declined by $5.4 million and $11.1 million for the quarter and six months ended June 30, 2013, compared with the year-earlier periods, primarily due to reductions in personnel and related costs of $4.9 million and $9.9 million during the quarter and six months ended, respectively, that resulted from our ongoing expense alignment efforts.
Games
The Games segment primarily generates revenue and incurs costs from the creation, distribution and sales of games licenses, online games subscription services, advertising on game sites and social network sites, games syndication services, and microtransactions from online and social games, and sales of mobile games.
Games segment results of operations were as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarters Ended June 30, | | Six months ended June 30, |
| 2013 | | 2012 | | $ Change | | % Change | | 2013 | | 2012 | | $ Change | | % Change |
Revenue | $ | 12,875 |
| | $ | 17,363 |
| | $ | (4,488 | ) | | (26 | )% | | $ | 26,790 |
| | $ | 36,471 |
| | $ | (9,681 | ) | | (27 | )% |
Cost of revenue | 3,381 |
| | 5,630 |
| | (2,249 | ) | | (40 | )% | | 7,181 |
| | 12,343 |
| | (5,162 | ) | | (42 | )% |
Gross profit | 9,494 |
| | 11,733 |
| | (2,239 | ) | | (19 | )% | | 19,609 |
| | 24,128 |
| | (4,519 | ) | | (19 | )% |
Gross margin | 74 | % | | 68 | % | | | | | | 73 | % | | 66 | % | | | | |
Operating expenses | 11,755 |
| | 13,801 |
| | (2,046 | ) | | (15 | )% | | 23,607 |
| | 27,939 |
| | (4,332 | ) | | (16 | )% |
Operating income (loss) | $ | (2,261 | ) | | $ | (2,068 | ) | | $ | (193 | ) | | (9 | )% | | $ | (3,998 | ) | | $ | (3,811 | ) | | $ | (187 | ) | | (5 | )% |
Total Games revenue decreased by $4.5 million in the quarter ended June 30, 2013, compared with the year-earlier period. Lower revenue from license sales, our subscription products, and advertising contributed $2.2 million, $1.6 million, and $1.2 million respectively, to the decline during the period. Slightly offsetting these decreases was an increase of $0.6 million in games revenue as a result of the acquisition of Slingo, a social casino games company, during the quarter.
Total Games revenue decreased by $9.7 million during the six months ended June 30, 2013, compared with the year-earlier period. Lower revenue from license sales, subscription products, and advertising contributed $4.5 million, $3.4 million, and $1.7 million, respectively, to the decline during the period. Slightly offsetting these decreases was an increase of $0.6 million in games revenue as a result of the acquisition of Slingo during the quarter.
Cost of revenue decreased by $2.2 million and $5.2 million during the quarter and six months ended June 30, 2013, respectively, compared with the year-earlier periods. The decreases were due to the decrease in partner royalties expense, which has a direct correlation with the decrease in Games revenue. Gross margins increased during the quarter and six months ended
June 30, 2013 due to lower margin projects that occurred in the year-earlier period, in addition to intangible assets that were fully amortized in 2012, resulting in lower expense in 2013.
Operating expenses declined by $2.0 million and $4.3 million during the quarter and six months ended June 30, 2013, respectively, compared with the year-earlier period. During the quarter-ended June 30, 2013, the decrease was mainly due to reductions in marketing expense of $0.9 million, in addition to reductions in personnel and related costs of $1.1 million, resulting from our ongoing expense alignment efforts. Partially offsetting these declines was an increase in total operating expense of $0.8 million as a result of the acquisition of Slingo during the quarter. During the six months ended June 30, 2013, the decrease was primarily due to reductions in personnel and related costs of $2.8 million, and reductions in marketing expense of $1.9 million. Partially offsetting these declines was an increase in total operating expense of $0.8 million as a result of the acquisition of Slingo during the quarter.
In the quarter ended June 30, 2013, we acquired Slingo, a social casino games company based in the U.S., for total cash consideration of $15.6 million. This acquisition is intended to enhance our footprint in the social casino games arena. Associated with this will be incremental costs for investment in new products over the next year, which will directly impact our operating income (loss) before taxes.
Corporate
We allocate certain corporate expenses which are directly attributable to supporting the business to our reportable segments, rather than retaining those expenses in our corporate segment. These allocated corporate expenses include but are not limited to a portion of finance, legal, human resources and headquarters facilities. Remaining expenses, which are not directly attributable to supporting the business, are retained in aggregate in our corporate segment. All restructuring and lease exit and related charges are included in the corporate segment.
Corporate segment results of operations were as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarters Ended June 30, | | Six months ended June 30, |
| 2013 | | 2012 | | $ Change | | % Change | | 2013 | | 2012 | | $ Change | | % Change |
Cost of revenue | $ | 559 |
| | $ | 730 |
| | $ | (171 | ) | | (23 | )% | | $ | 1,122 |
| | $ | 1,402 |
| | $ | (280 | ) | | (20 | )% |
Sale of patent and other technology assets, net of costs | — |
| | 117,933 |
| | (117,933 | ) | | (100 | )% | | — |
| | 116,353 |
| | (116,353 | ) | | (100 | )% |
Operating expenses | 12,667 |
| | 12,885 |
| | (218 | ) | | (2 | )% | | 23,211 |
| | 24,467 |
| | (1,256 | ) | | (5 | )% |
Operating income (loss) | $ | (13,226 | ) | | $ | 104,318 |
| | $ | (117,544 | ) | | (113 | )% | | $ | (24,333 | ) | | $ | 90,484 |
| | $ | (114,817 | ) | | (127 | )% |
The 2012 gain from the sale of patents and other technology assets to Intel Corporation of $117.9 million reflects the cash proceeds of $120.0 million less $2.1 million of direct transaction expenses incurred in the second quarter. We incurred $1.6 million of direct transaction expenses in the first quarter of 2012, resulting in a gain of $116.4 million for the six months ended June 30, 2012.
Operating expenses declined by $0.2 million and $1.3 million during the quarter and six months ended June 30, 2013, respectively, compared with the year-earlier periods. The decreases during the quarter and six months ended were primarily due to reductions in personnel and related costs of $2.9 million and $3.5 million, respectively, resulting from our ongoing expense alignment efforts, in addition to reduced restructuring charges of $0.7 million and $0.9 million, respectively, primarily related to severance. Partially offsetting these decreases were net lease exit and related charges of $3.1 million in the second quarter of 2013 due to termination fees on our current headquarters office lease. See further discussion on this in Note 12, Lease Exit and Related Charges.
Consolidated Operating Expenses
Our operating expenses consist primarily of salaries and related personnel costs including stock based compensation, consulting fees associated with product development, sales commissions, amortization of certain intangible assets capitalized in our acquisitions, professional service fees, advertising costs, and restructuring charges. Operating expenses were as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarters Ended June 30, | | Six months ended June 30, |
| 2013 | | 2012 | | $ Change | | % Change | | 2013 | | 2012 | | $ Change | | % Change |
Research and development | $ | 14,993 |
| | $ | 16,028 |
| | $ | (1,035 | ) | | (6 | )% | | $ | 30,244 |
| | $ | 33,846 |
| | $ | (3,602 | ) | | (11 | )% |
Sales and marketing | 19,269 |
| | 22,694 |
| | (3,425 | ) | | (15 | )% | | 40,403 |
| | 46,490 |
| | (6,087 | ) | | (13 | )% |
General and administrative | 8,691 |
| | 13,068 |
| | (4,377 | ) | | (33 | )% | | 18,637 |
| | 26,344 |
| | (7,707 | ) | | (29 | )% |
Restructuring and other charges | 816 |
| | 1,539 |
| | (723 | ) | | (47 | )% | | 2,198 |
| | 3,148 |
| | (950 | ) | | (30 | )% |
Lease exit and related charges | 3,066 |
| | — |
| | 3,066 |
| | 100 | % | | 3,066 |
| | — |
| | 3,066 |
| | 100 | % |
Total consolidated operating expenses | $ | 46,835 |
| | $ | 53,329 |
| | $ | (6,494 | ) | | (12 | )% | | $ | 94,548 |
| | $ | 109,828 |
| | $ | (15,280 | ) | | (14 | )% |
Research and development expenses decreased by $1.0 million in the quarter ended June 30, 2013, compared with the year-earlier period. The decline was primarily due to a decrease in personnel and related costs of $0.9 million resulting from our ongoing expense alignment efforts.
Research and development expenses decreased by $3.6 million in the six months ended June 30, 2013, compared with the year-earlier period. The decline was primarily due to a decrease in personnel and related costs of $3.8 million resulting from our ongoing expense alignment efforts.
Sales and marketing expenses decreased by $3.4 million in the quarter ended June 30, 2013, compared with the year-earlier period. The decline was primarily due to a decrease in personnel and related costs of $2.1 million resulting from our ongoing expense alignment efforts, and to lower marketing expense of $1.6 million.
Sales and marketing expenses decreased by $6.1 million in the six months ended June 30, 2013, compared with the year-earlier period. The decline was primarily due to a decrease in personnel and related costs of $4.9 million resulting from our ongoing expense alignment efforts.
General and administrative expenses decreased by $4.4 million in the quarter ended June 30, 2013, compared with the year-earlier period. The decrease was primarily due to a decrease in personnel and related costs of $3.2 million.
General and administrative expenses decreased by $7.7 million in the six months ended June 30, 2013, compared with the year-earlier period. Contributing to the decrease for the quarter was a decrease in personnel and related costs of $4.3 million. The decrease was also due in part to the first quarter of 2012 expense accrual of $2.4 million for estimated amounts associated with the then-pending investigation by the Washington State Attorney General's office. As disclosed in the 2012 10-K, this matter was resolved in the third quarter of 2012 at an amount totaling $1.3 million.
Restructuring and other charges and Lease exit and related charges consist of costs associated with the ongoing reorganization of our business operations and our ongoing expense alignment efforts. The restructuring expense amounts in both years primarily relate to severance costs due to workforce reductions. Lease exit and related charges include a lease exit charge of $3.2 million in the second quarter of 2013 due to termination fees on our current headquarters office lease. For additional details on these charges see Note 11, Restructuring Charges and Note 12, Lease Exit and Related Charges.
Other Income (Expenses)
Other income (expenses), net was as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarters Ended June 30, | | Six months ended June 30, |
| 2013 | | 2012 | | $ Change | | % Change | | 2013 | | 2012 | | $ Change | | % Change |
Interest income, net | $ | 179 |
| | $ | 225 |
| | $ | (46 | ) | | (20 | )% | | $ | 826 |
| | $ | 869 |
| | $ | (43 | ) | | (5 | )% |
Gain (loss) on sale of equity investments, net | — |
| | 3,078 |
| | (3,078 | ) | | (100 | )% | | — |
| | 3,078 |
| | (3,078 | ) | | (100 | )% |
Equity in net loss of Rhapsody | (1,347 | ) | | (2,114 | ) | | 767 |
| | 36 | % | | (3,580 | ) | | (2,482 | ) | | (1,098 | ) | | (44 | )% |
Other income (expense), net | (137 | ) | | (49 | ) | | (88 | ) | | (180 | )% | | (28 | ) | | 1,426 |
| | (1,454 | ) | | (102 | )% |
Total other income (expense), net | $ | (1,305 | ) | | $ | 1,140 |
| | $ | (2,445 | ) | | (214 | )% | | $ | (2,782 | ) | | $ | 2,891 |
| | $ | (5,673 | ) | | (196 | )% |
The decrease in Other income (expense), net, of $2.4 million for the quarter ended June 30, 2013 was primarily due to the gain on sale of certain equity and other investments of $3.1 million in the prior year.
The decrease in Other income (expense), net, of $5.7 million for the six months ended June 30, 2013 was primarily due to the gain on sale of certain equity and other investments of $3.1 million in the prior year and to a non-cash gain in the first quarter of 2012, due to the release of a $1.6 million cumulative foreign exchange translation gain from accumulated other comprehensive loss on the balance sheet related to the liquidation of an investment in our of our foreign entities.
We account for our investment in Rhapsody under the equity method of accounting for investments. The net carrying value of our investment in Rhapsody is not necessarily indicative of the underlying fair value of our investment.
Income Taxes
During the quarters ended June 30, 2013 and 2012, we recognized income tax expense of $0.7 million and $24.3 million, respectively, related to U.S. and foreign income taxes. During the six months ended June 30, 2013 and 2012, we recognized an income tax benefit of $0.6 million and income tax expense of $24.5 million, respectively, related to U.S. and foreign income taxes. The decrease in income tax expense and the change in income tax expense as a percentage of pre-tax loss during the quarter and six months ended June 30, 2013, was largely the result of the gain on sale of patents and other assets to Intel Corporation recognized in the quarter ending June 30, 2012 and changes in our jurisdictional income mix.
As of June 30, 2013, there have been no material changes to RealNetworks’ uncertain tax positions as provided in Note 14 of the 10-K. We do not anticipate that our total unrecognized tax benefits will significantly change within the next twelve months.
The majority of our tax expense is recognized due to income in our foreign jurisdictions as we have not benefitted from the losses in the U.S in the second quarter of 2013.We generate income in a number of foreign jurisdictions, some of which have higher tax rates and some of which have lower tax rates relative to the U.S. federal statutory rate. Our tax expense could fluctuate significantly on a quarterly basis to the extent income is lower than anticipated in countries where we have lower statutory tax rates and higher than anticipated in countries where we have higher statutory tax rates. For the quarter ended June 30, 2013, decreases in tax expense from income generated in foreign jurisdictions with lower tax rates in comparison to the U.S. federal statutory rate was offset by increases in tax expense from income generated in foreign jurisdictions having comparable, or higher tax rates in comparison to the U.S. federal statutory rate. As such, the effect of differences in foreign tax rates on the Company's tax expense for the second quarter of 2013 was minimal.
As of June 30, 2013, we have not provided for U.S. federal and state income taxes on certain undistributed earnings of our foreign subsidiaries, since such earnings are considered indefinitely reinvested outside the U.S. If these amounts were distributed to the U.S. in the future, in the form of dividends or otherwise, we could be subject to additional U.S. income taxes. It is not practicable to determine the U.S. federal income tax liability or benefit on such earnings due to the timing of such future distributions, the availability of foreign tax credits, other tax attributes, and the complexity of the computation if such earnings were not deemed to be permanently reinvested. If future events, including material changes in estimates of cash, working capital, and long-term investment requirements necessitate that these earnings be distributed, an additional provision for U.S. income and foreign withholding taxes, net of foreign tax credits, may be necessary.
We file numerous consolidated and separate income tax returns in the U.S., including federal, state and local returns, as well as in foreign jurisdictions. With few exceptions, we are no longer subject to United States federal income tax examinations for tax years prior to 2008 or state, local or foreign income tax examinations for years prior to 1993. We are currently under audit by various states and foreign jurisdictions for certain tax years subsequent to 1993.
Geographic Revenue
Revenue by geographic region was as follows (dollars in thousands):
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarters Ended June 30, | | Six months ended June 30, |
| 2013 | | 2012 | | $ Change | | % Change | | 2013 | | 2012 | | $ Change | | % Change |
United States | $ | 21,463 |
| | $ | 28,614 |
| | $ | (7,151 | ) | | (25 | )% | | $ | 49,486 |
| | $ | 60,428 |
| | $ | (10,942 | ) | | (18 | )% |
Europe | 9,272 |
| | 14,339 |
| | (5,067 | ) | | (35 | )% | | 20,528 |
| | 30,551 |
| | (10,023 | ) | | (33 | )% |
Rest of world | 19,115 |
| | 22,573 |
| | (3,458 | ) | | (15 | )% | | 36,629 |
| | 41,511 |
| | (4,882 | ) | | (12 | )% |
Total net revenue | $ | 49,850 |
| | $ | 65,526 |
| | $ | (15,676 | ) | | |