10-Q
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 September 30, 2015
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) |
| | | | |
1501 First Avenue South, Suite 600 Seattle, Washington | | 98134 |
(Address of principal executive offices) | | (Zip Code) |
| (206) 674-2700 | |
| (Registrant’s telephone number, including area code) | |
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 October 30, 2015 was 36,250,994.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
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Item 1. | Financial Statements |
REALNETWORKS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data) |
| | | | | | | |
| September 30, 2015 | | December 31, 2014 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 61,831 |
| | $ | 103,253 |
|
Short-term investments | 50,412 |
| | 58,453 |
|
Trade accounts receivable, net of allowances | 20,534 |
| | 15,257 |
|
Deferred costs, current portion | 324 |
| | 702 |
|
Deferred tax assets, net, current portion | 640 |
| | 652 |
|
Prepaid expenses and other current assets | 5,953 |
| | 8,980 |
|
Total current assets | 139,694 |
| | 187,297 |
|
Equipment, software, and leasehold improvements, at cost: | | | |
Equipment and software | 69,437 |
| | 74,100 |
|
Leasehold improvements | 3,592 |
| | 3,590 |
|
Total equipment, software, and leasehold improvements, at cost | 73,029 |
| | 77,690 |
|
Less accumulated depreciation and amortization | 62,353 |
| | 61,442 |
|
Net equipment, software, and leasehold improvements | 10,676 |
| | 16,248 |
|
Restricted cash equivalents and investments | 3,000 |
| | 3,000 |
|
Investment in and advances to Rhapsody | — |
| | 10,000 |
|
Available for sale securities | 1,756 |
| | 2,676 |
|
Other assets | 2,520 |
| | 2,299 |
|
Deferred costs, non-current portion | 145 |
| | 316 |
|
Deferred tax assets, net, non-current portion | 1,959 |
| | 999 |
|
Other intangible assets, net | 2,813 |
| | 10,109 |
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Goodwill | 13,101 |
| | 17,355 |
|
Total assets | $ | 175,664 |
| | $ | 250,299 |
|
| | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 15,853 |
| | $ | 18,653 |
|
Accrued and other current liabilities | 23,890 |
| | 25,286 |
|
Deferred tax liabilities, net, current portion | 1,602 |
| | 1,628 |
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Deferred revenue, current portion | 3,638 |
| | 5,301 |
|
Total current liabilities | 44,983 |
| | 50,868 |
|
Deferred revenue, non-current portion | 98 |
| | 235 |
|
Deferred rent | 637 |
| | 1,215 |
|
Deferred tax liabilities, net, non-current portion | 156 |
| | 702 |
|
Other long-term liabilities | 2,228 |
| | 81 |
|
Total liabilities | 48,102 |
| | 53,101 |
|
Commitments and contingencies |
| |
|
Shareholders’ equity: | | | |
Preferred stock, $0.001 par value, no shares issued and outstanding: | | | |
Series A: authorized 200 shares | — |
| | — |
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Undesignated series: authorized 59,800 shares | — |
| | — |
|
Common stock, $0.001 par value authorized 250,000 shares; issued and outstanding 36,251 shares in 2015 and 36,099 shares in 2014 | 36 |
| | 36 |
|
Additional paid-in capital | 625,576 |
| | 617,756 |
|
Accumulated other comprehensive loss | (59,274 | ) | | (55,252 | ) |
Retained deficit | (438,776 | ) | | (365,342 | ) |
Total shareholders’ equity | 127,562 |
| | 197,198 |
|
Total liabilities and shareholders’ equity | $ | 175,664 |
| | $ | 250,299 |
|
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 September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Net revenue (A) | $ | 30,823 |
| | $ | 34,157 |
| | $ | 95,374 |
| | $ | 120,706 |
|
Cost of revenue (B) | 18,090 |
| | 18,928 |
| | 54,469 |
| | 58,500 |
|
Extinguishment of liability | — |
| | — |
| | — |
| | (10,580 | ) |
Gross profit | 12,733 |
| | 15,229 |
| | 40,905 |
| | 72,786 |
|
Operating expenses: | | | | | | | |
Research and development | 10,501 |
| | 12,784 |
| | 34,681 |
| | 40,110 |
|
Sales and marketing | 11,938 |
| | 13,283 |
| | 38,822 |
| | 51,022 |
|
General and administrative | 7,021 |
| | 7,723 |
| | 21,312 |
| | 25,617 |
|
Restructuring and other charges | 3,114 |
| | 2,048 |
| | 5,563 |
| | 3,805 |
|
Lease exit and related charges | 2,121 |
| | 154 |
| | 2,208 |
| | 703 |
|
Total operating expenses | 34,695 |
| | 35,992 |
| | 102,586 |
| | 121,257 |
|
Operating income (loss) | (21,962 | ) | | (20,763 | ) | | (61,681 | ) | | (48,471 | ) |
Other income (expenses): | | | | | | | |
Interest income, net | 147 |
| | 80 |
| | 597 |
| | 396 |
|
Gain (loss) on investments, net | (615 | ) | | — |
| | (222 | ) | | 2,371 |
|
Equity in net loss of Rhapsody | (735 | ) | | (1,530 | ) | | (13,831 | ) | | (4,170 | ) |
Other income (expense), net | 297 |
| | 325 |
| | 628 |
| | 153 |
|
Total other income (expenses), net | (906 | ) | | (1,125 | ) | | (12,828 | ) | | (1,250 | ) |
Income (loss) before income taxes | (22,868 | ) | | (21,888 | ) | | (74,509 | ) | | (49,721 | ) |
Income tax expense (benefit) | (1,684 | ) | | 290 |
| | (1,075 | ) | | 1,256 |
|
Net income (loss) | $ | (21,184 | ) | | $ | (22,178 | ) | | $ | (73,434 | ) | | $ | (50,977 | ) |
| | | | | | | |
Basic net income (loss) per share | $ | (0.59 | ) | | $ | (0.62 | ) | | $ | (2.03 | ) | | $ | (1.42 | ) |
Diluted net income (loss) per share | $ | (0.59 | ) | | $ | (0.62 | ) | | $ | (2.03 | ) | | $ | (1.42 | ) |
Shares used to compute basic net income (loss) per share | 36,191 |
| | 36,003 |
| | 36,134 |
| | 35,912 |
|
Shares used to compute diluted net income (loss) per share | 36,191 |
| | 36,003 |
| | 36,134 |
| | 35,912 |
|
| | | | | | | |
Comprehensive income (loss): | | | | | | | |
Unrealized investment holding gains (losses), net of reclassification adjustments | $ | (596 | ) | | $ | (323 | ) | | $ | (881 | ) | | $ | (3,936 | ) |
Foreign currency translation adjustments, net of reclassification adjustments | (1,144 | ) | | (2,338 | ) | | (3,141 | ) | | (2,147 | ) |
Total other comprehensive income (loss) | (1,740 | ) | | (2,661 | ) | | (4,022 | ) | | (6,083 | ) |
Net income (loss) | (21,184 | ) | | (22,178 | ) | | (73,434 | ) | | (50,977 | ) |
Comprehensive income (loss) | $ | (22,924 | ) | | $ | (24,839 | ) | | $ | (77,456 | ) | | $ | (57,060 | ) |
| | | | | | | |
(A) Components of net revenue: | | | | | | | |
License fees | $ | 7,049 |
| | $ | 5,925 |
| | $ | 21,259 |
| | $ | 21,168 |
|
Service revenue | 23,774 |
| | 28,232 |
| | 74,115 |
| | 99,538 |
|
| $ | 30,823 |
| | $ | 34,157 |
| | $ | 95,374 |
| | $ | 120,706 |
|
(B) Components of cost of revenue: | | | | | | | |
License fees | $ | 1,877 |
| | $ | 2,044 |
| | $ | 5,048 |
| | $ | 6,426 |
|
Service revenue | 16,213 |
| | 16,884 |
| | 49,421 |
| | 52,074 |
|
| $ | 18,090 |
| | $ | 18,928 |
| | $ | 54,469 |
| | $ | 58,500 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
REALNETWORKS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2015 | | 2014 |
Cash flows from operating activities: | | | |
Net income (loss) | $ | (73,434 | ) | | $ | (50,977 | ) |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | |
Depreciation and amortization | 7,952 |
| | 8,876 |
|
Stock-based compensation | 3,761 |
| | 4,158 |
|
Equity in net loss of Rhapsody | 13,831 |
| | 4,170 |
|
Accrued loss (gain) on excess office facilities | 2,208 |
| | 480 |
|
Deferred income taxes, net | (1,531 | ) | | (64 | ) |
Loss (gain) on investments, net
| 222 |
| | (2,371 | ) |
Realized translation gain | (264 | ) | | (48 | ) |
Extinguishment of liability | — |
| | (10,580 | ) |
Fair value of warrants, net of mark to market adjustments | (1,078 | ) | | — |
|
Net change in certain operating assets and liabilities: | | | |
Trade accounts receivable | (6,279 | ) | | 6,553 |
|
Prepaid expenses and other assets | 3,851 |
| | 1,353 |
|
Accounts payable | (1,628 | ) | | (1,606 | ) |
Accrued and other liabilities | (3,580 | ) | | (5,586 | ) |
Net cash provided by (used in) operating activities | (55,969 | ) | | (45,642 | ) |
Cash flows from investing activities: | | | |
Purchases of equipment, software, and leasehold improvements | (1,110 | ) | | (2,054 | ) |
Proceeds from sale of available for sale securities | 459 |
| | 2,754 |
|
Purchases of short-term investments | (52,475 | ) | | (63,574 | ) |
Proceeds from sales and maturities of short-term investments | 60,516 |
| | 74,546 |
|
Acquisitions, net of cash acquired | (161 | ) | | (733 | ) |
Advance to Rhapsody | (5,000 | ) | | — |
|
Repayment from Rhapsody | 5,000 |
| | — |
|
Proceeds from the sale of Slingo and social casino business | 10,000 |
| | — |
|
Other | — |
| | (467 | ) |
Net cash provided by (used in) investing activities | 17,229 |
| | 10,472 |
|
Cash flows from financing activities: | | | |
Proceeds from issuance of common stock (stock options and stock purchase plan) | 297 |
| | 641 |
|
Tax payments from shares withheld upon vesting of restricted stock | (69 | ) | | (403 | ) |
Payment of contingent consideration | — |
| | (696 | ) |
Net cash provided by (used in) financing activities | 228 |
| | (458 | ) |
Effect of exchange rate changes on cash and cash equivalents | (2,910 | ) | | (1,534 | ) |
Net increase (decrease) in cash and cash equivalents | (41,422 | ) | | (37,162 | ) |
Cash and cash equivalents, beginning of period | 103,253 |
| | 151,235 |
|
Cash and cash equivalents, end of period | $ | 61,831 |
| | $ | 114,073 |
|
| | | |
Supplemental disclosure of cash flow information: | | | |
Cash received from income tax refunds | $ | 1,035 |
| | $ | 292 |
|
Cash paid for income taxes | $ | 1,136 |
| | $ | 1,457 |
|
Non-cash investing activities: | | | |
Increase (decrease) in accrued purchases of equipment, software, and leasehold improvements | $ | (124 | ) | | $ | (371 | ) |
Acquisition of intangible assets | $ | 312 |
| | $ | — |
|
See accompanying notes to unaudited condensed consolidated financial statements.
REALNETWORKS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 2015 and 2014
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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 (10-Q or Report), RealNetworks, Inc. and Subsidiaries is referred to as “RealNetworks”, the “Company”, “we”, “us”, or “our”. "RealPlayer" and other trademarks of ours appearing in this report are our property.
Basis of Presentation. The unaudited condensed consolidated financial statements include the accounts of the Company 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 management, are necessary for a fair presentation of the results of operations for the periods presented. Operating results for the quarter and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for any subsequent period or for the year ending December 31, 2015. 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, 2014 (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.
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Note 2 | Recent Accounting Pronouncements |
In August 2014, the Financial Accounting Standards Board (FASB) issued a new standard, "Disclosure of Uncertainties About an Entity's Ability to Continue as a Going Concern". This standard provides guidance around management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. The new guidance is effective for all annual and interim periods ending after December 15, 2016. We are currently evaluating the impact, if any, the adoption of this standard will have on our consolidated financial statements.
In May 2014, the FASB issued new revenue recognition guidance. The guidance will require an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new guidance will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new guidance is effective for us on January 1, 2018; with early adoption permitted beginning January 1, 2017. The guidance permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that the guidance will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor determined the effect of the standard on our ongoing financial reporting.
There have been no other recent accounting pronouncements or changes in accounting pronouncements to be implemented that are of significance or potential significance to RealNetworks.
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Note 3 | Sale of Slingo and Social Casino Business |
On July 24, 2015, we entered into an agreement to sell the Slingo and social casino portion of our games business to Gaming Realms plc for $18.0 million. Of this amount, $10.0 million of the total consideration was paid in cash at closing and the remaining $8.0 million will be payable either all in cash or a mix of cash and Gaming Realms plc stock, at our election, on the first and second anniversaries of the closing. The transaction closed on August 10, 2015.
With the transaction, Gaming Realms plc assumed the operations of our Slingo and social casino businesses, including substantially all of the related assets and liabilities, as well as the stock of Backstage Technologies Incorporated.
The disposed assets and liabilities consisted of intangible assets of $5.7 million, net property, plant and equipment of $0.3 million, and other net assets of $0.4 million, as well as a deferred tax liability of $1.6 million related to the indefinite-lived Slingo trade name, which is included as part of the intangible assets disposed of in the sale. Goodwill totaling $3.6 million was also disposed as part of the transaction based on the relative fair values of the business disposed of and the portion of the games reporting unit retained.
As this sale does not represent a strategic shift in our business and we do not believe it will have a major impact on our operations and financial results, it does not meet the criteria for discontinued operations under GAAP. As such, we have recorded the related foreign currency gain of $0.5 million in “Other income and expense” on the Statement of Operations. In addition, we have recognized an income tax benefit of $1.6 million from the reversal of a Slingo deferred tax liability as described above. Based on several factors, including the timing of the receipt of the remaining $8.0 million consideration, we have deferred the remaining gain of $8.0 million and will recognize that gain upon realization.
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Note 4 | Stock-Based Compensation |
Total stock-based compensation expense recognized in our unaudited condensed consolidated statements of operations and comprehensive income (loss) 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 September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Total stock-based compensation expense | $ | 1,178 |
| | $ | 1,148 |
| | $ | 3,761 |
| | $ | 4,158 |
|
The fair value of options granted determined using the Black-Scholes model used the following weighted-average assumptions:
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| | | | | | | | | | | |
| Quarters Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Expected dividend yield | 0 | % | | 0 | % | | 0 | % | | 0 | % |
Risk-free interest rate | 1.27 | % | | 1.30 | % | | 1.26 | % | | 1.20 | % |
Expected life (years) | 3.8 |
| | 4.5 |
| | 4.3 |
| | 3.9 |
|
Volatility | 35 | % | | 42 | % | | 37 | % | | 40 | % |
The total stock-based compensation amounts for 2015 and 2014 disclosed above are recorded in their respective line items within operating expenses in the unaudited condensed consolidated statements of operations and comprehensive income (loss). As of September 30, 2015, $11.0 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 2 years.
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Note 5 | Rhapsody Joint Venture |
As of September 30, 2015 we owned approximately 43% of the issued and outstanding stock of Rhapsody and account for our investment using the equity method of accounting.
Rhapsody was initially formed in 2007 as a joint venture between RealNetworks and MTV Networks, a division of Viacom International Inc. (MTVN), to own and operate a business-to-consumer digital audio music service known as Rhapsody.
Following certain restructuring transactions effective March 31, 2010, we began accounting for our investment in Rhapsody using the equity method of accounting. As part of the 2010 restructuring transactions, RealNetworks contributed $18.0 million in cash, the Rhapsody brand and certain other assets, including content licenses, in exchange for shares of convertible preferred stock of Rhapsody, carrying a $10.0 million preference upon certain liquidation events.
We recorded our share of losses of Rhapsody of $0.7 million and $13.8 million for the quarter and nine months ended September 30, 2015, and $1.5 million and $4.2 million for the quarter and nine months ended September 30, 2014. Because of the $10.0 million liquidation preference on the preferred stock we hold in Rhapsody, under the equity method of accounting we did not record any share of Rhapsody losses that would reduce our carrying value of Rhapsody, which is impacted by Rhapsody equity transactions, below $10.0 million, until Rhapsody's book value was reduced below $10.0 million which occurred in the first quarter of 2015. As of December 31, 2014, the carrying value of our Rhapsody equity investment was $10.0 million. As of September 30, 2015, the carrying value of our Rhapsody equity investment is zero, as we do not record any share of Rhapsody losses that would reduce our carrying value of Rhapsody below zero unless we commit to provide financial support for Rhapsody.
In March 2015, RealNetworks extended a $5.0 million loan to Rhapsody, as did the other 43% owner of Rhapsody. The loans had original maturity dates of June 2018, or earlier, if Rhapsody's certain loan to an external strategic partner was repaid in full. The loans to Rhapsody bore interest at the greater of prime plus 5.25% or 9% per annum. During June 2015, Rhapsody's external strategic partner repaid half of its loan to Rhapsody and the maturity date of the second half was extended to August 2015. In August 2015, the second half of the loan to Rhapsody was repaid and Rhapsody then repaid its loan to us and the other 43% owner in full. In addition, Rhapsody paid approximately $0.2 million of accrued interest to us in September 2015.
Summarized financial information for Rhapsody, which represents 100% of their financial information, is as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Quarters Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Net revenue | $ | 52,769 |
| | $ | 44,148 |
| | $ | 149,156 |
| | $ | 128,578 |
|
Gross profit | 9,552 |
| | 7,739 |
| | 25,395 |
| | 24,730 |
|
Net loss | (6,335 | ) | | (7,965 | ) | | (27,320 | ) | | (14,312 | ) |
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Note 6 | Fair Value Measurements |
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 September 30, 2015 and December 31, 2014, and indicates the fair value hierarchy of the valuation inputs utilized to determine such fair value (in thousands).
|
| | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements as of | | Amortized Cost as of |
| September 30, 2015 | | September 30, 2015 |
| Level 1 | | Level 2 | | Level 3 | | Total | | |
Cash and cash equivalents: | | | | | | | | | |
Cash | $ | 36,321 |
| | $ | — |
| | $ | — |
| | $ | 36,321 |
| | $ | 36,321 |
|
Money market funds | 1,064 |
| | — |
| | — |
| | 1,064 |
| | 1,064 |
|
Corporate notes and bonds | — |
| | 24,446 |
| | — |
| | 24,446 |
| | 24,446 |
|
Total cash and cash equivalents | 37,385 |
| | 24,446 |
| | — |
| | 61,831 |
| | 61,831 |
|
Short-term investments: | | | | | | | | | |
Corporate notes and bonds | — |
| | 49,812 |
| | — |
| | 49,812 |
| | 49,822 |
|
U.S. government agency securities | 600 |
| | — |
| | — |
| | 600 |
| | 600 |
|
Total short-term investments | 600 |
| | 49,812 |
| | — |
| | 50,412 |
| | 50,422 |
|
Restricted cash equivalents and investments | — |
| | 3,000 |
| | — |
| | 3,000 |
| | 3,000 |
|
Equity investment in publicly traded securities | 1,756 |
| | — |
| | — |
| | 1,756 |
| | 362 |
|
Warrant issued by Rhapsody (included in Other assets) | — |
| | — |
| | 1,078 |
| | 1,078 |
| | — |
|
Total | $ | 39,741 |
| | $ | 77,258 |
| | $ | 1,078 |
| | $ | 118,077 |
| | $ | 115,615 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements as of | | Amortized Cost as of |
| December 31, 2014 | | December 31, 2014 |
| Level 1 | | Level 2 | | Level 3 | | Total | | |
Cash and cash equivalents: | | | | | | | | | |
Cash | $ | 30,105 |
| | $ | — |
| | $ | — |
| | $ | 30,105 |
| | $ | 30,105 |
|
Money market funds | 11,629 |
| | — |
| | — |
| | 11,629 |
| | 11,630 |
|
Corporate notes and bonds | — |
| | 61,519 |
| | — |
| | 61,519 |
| | 61,520 |
|
Total cash and cash equivalents | 41,734 |
| | 61,519 |
| | — |
| | 103,253 |
| | 103,255 |
|
Short-term investments: | | | | | | | | | |
Corporate notes and bonds | — |
| | 51,453 |
| | — |
| | 51,453 |
| | 51,438 |
|
U.S. government agency securities | 7,000 |
| | — |
| | — |
| | 7,000 |
| | 7,000 |
|
Total short-term investments | 7,000 |
| | 51,453 |
| | — |
| | 58,453 |
| | 58,438 |
|
Restricted cash equivalents and investments | — |
| | 3,000 |
| | — |
| | 3,000 |
| | 3,000 |
|
Equity investment in publicly traded securities | 2,676 |
| | — |
| | — |
| | 2,676 |
| | 428 |
|
Total | $ | 51,410 |
| | $ | 115,972 |
| | $ | — |
| | $ | 167,382 |
| | $ | 165,121 |
|
Restricted cash equivalents and investments amounts as of September 30, 2015, and December 31, 2014 relate to cash pledged as collateral against a letter of credit in connection with a lease agreement.
Realized gains or losses on sales of short-term investment securities for the quarters and nine months ended September 30, 2015 and 2014 were not significant. Gross unrealized gains and gross unrealized losses on short-term investment securities as of September 30, 2015 and December 31, 2014 were also 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 September 30, 2015 (in thousands):
|
| | | |
| Estimated Fair Value |
Within one year | $ | 49,064 |
|
Between one year and five years | 1,348 |
|
Total short-term investments | $ | 50,412 |
|
Our equity investment in a publicly traded company as of September 30, 2015 and December 31, 2014 consisted of J-Stream Inc., a Japanese media services company. This equity investment is accounted for as available for sale.
During the first half of 2015, we sold a portion of J-Stream shares we held, resulting in cash proceeds of $0.5 million and a pre-tax gain of $0.4 million. In March 2014, we sold a portion of the J-Stream shares we held, resulting in cash proceeds of $2.8 million and a pre-tax gain of $2.4 million. The gains on the sale of these securities are reported in Other income (expense), net, in the unaudited condensed consolidated statements of operations and comprehensive income (loss).
In February 2015, Rhapsody issued warrants to purchase Rhapsody common shares to each of RealNetworks and Rhapsody's one other 43% stockholder. The warrants were issued as compensation for past services provided by RealNetworks and the other 43% stockholder, and both warrants covered the same number of underlying shares. The exercise price of the warrants was equal to the fair value of the underlying shares on the issuance date, and we used the Black-Scholes option-pricing model to calculate the fair value of the warrant, using an expected term of 5 years and expected volatility of 55%. On the date of issuance, we recognized and recorded the $1.2 million fair value of the warrant issued to RealNetworks within Other assets in the unaudited condensed consolidated balance sheets, and as an expense reduction within General and administrative expense in the unaudited condensed consolidated statements of operations and comprehensive income (loss). The warrants are free-standing derivatives and as such their fair value is determined each quarter using updated inputs in the Black-Scholes option-pricing model. During the nine months ended September 30, 2015, the decrease in the fair value of the warrants from that originally recorded was approximately $0.1 million.
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 nine months ended September 30, 2015 and 2014, we did not record any impairments on those assets required to be measured at fair value on a non-recurring basis.
See Note 12, Lease Exit and Related Charges, for a discussion of the losses related to reductions in the use of RealNetworks' office space, which were recorded at the estimated fair value of remaining lease obligations, less expected sub-lease income.
|
| |
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, 2014 | $ | 1,288 |
| | $ | 353 |
|
Addition (reduction) to allowance | 155 |
| | (213 | ) |
Amounts written off | (94 | ) | | (7 | ) |
Foreign currency translation | (194 | ) | | — |
|
Balances, September 30, 2015 | $ | 1,155 |
| | $ | 133 |
|
One customer accounted for 50% and one customer accounted for 13% of trade accounts receivable as of September 30, 2015. At December 31, 2014, one customer accounted for 21% and one other customer accounted for 15% of trade accounts receivable.
One customer accounted for 28% or $8.7 million of consolidated revenue during the quarter ended September 30, 2015, which is reflected in our Mobile Entertainment segment. One customer accounted for 25% of consolidated revenue, or $24.2 million, during the nine months ended September 30, 2015, also reflected in our Mobile Entertainment segment.
One customer accounted for 24% of consolidated revenue, or $8.2 million, during the quarter ended September 30, 2014 and 20%, or $24.6 million, during the nine months ended September 30, 2014 and is reflected in our Mobile Entertainment segment.
|
| |
Note 8 | Other Intangible Assets |
Other intangible assets (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2015 | | December 31, 2014 |
| | | Gross Amount | | Accumulated Amortization | | Net | | Gross Amount | | Accumulated Amortization | | Net |
Amortizing intangible assets: | | | | | | | | | | | | |
| Customer relationships | | $ | 30,074 |
| | $ | 28,971 |
| | $ | 1,103 |
| | $ | 33,853 |
| | $ | 31,643 |
| | $ | 2,210 |
|
| Developed technology | | 23,982 |
| | 23,022 |
| | 960 |
| | 28,261 |
| | 25,699 |
| | 2,562 |
|
| Patents, trademarks and tradenames | | 3,945 |
| | 3,357 |
| | 588 |
| | 3,817 |
| | 3,528 |
| | 289 |
|
| Service contracts | | 5,276 |
| | 5,114 |
| | 162 |
| | 6,312 |
| | 5,764 |
| | 548 |
|
| | | 63,277 |
| | 60,464 |
| | 2,813 |
| | 72,243 |
| | 66,634 |
| | 5,609 |
|
Non-amortizing intangible assets: | | | | | | | | | | | | |
| Trademarks and tradenames | | — |
| | — |
| | — |
| | 4,500 |
| | — |
| | 4,500 |
|
| Total | | $ | 63,277 |
| | $ | 60,464 |
| | $ | 2,813 |
| | $ | 76,743 |
| | $ | 66,634 |
| | $ | 10,109 |
|
An asset purchase relating to our Games business was completed in the first quarter of 2015 and resulted in an intangible asset of $0.5 million being recorded.
As discussed in Note 3 Sale of Slingo and Social Casino Business, $5.7 million worth of intangible assets, net, related to the third quarter of 2015 sale of our Slingo and social casino portion of our games business.
No impairments of other intangible assets were recognized in either of the nine months ended September 30, 2015 or 2014.
Changes in goodwill (in thousands):
|
| | | |
Balance, December 31, 2014 | $ | 17,355 |
|
Decreases due to current year disposals | (3,620 | ) |
Effects of foreign currency translation | (634 | ) |
Balance, September 30, 2015 | $ | 13,101 |
|
Goodwill by segment (in thousands):
|
| | | |
| September 30, 2015 |
RealPlayer Group | $ | 955 |
|
Mobile Entertainment | 1,848 |
|
Games | 10,298 |
|
Total goodwill | $ | 13,101 |
|
No impairment of goodwill was recognized in either of the nine months ended September 30, 2015 or in 2014.
|
| |
Note 10 | Accrued and Other Current Liabilities |
Accrued and other current liabilities (in thousands):
|
| | | | | | | |
| September 30, 2015 | | December 31, 2014 |
Royalties and other fulfillment costs | $ | 3,672 |
| | $ | 4,868 |
|
Employee compensation, commissions and benefits | 8,134 |
| | 7,711 |
|
Sales, VAT and other taxes payable | 5,744 |
| | 5,896 |
|
Other | 6,340 |
| | 6,811 |
|
Total accrued and other current liabilities | $ | 23,890 |
| | $ | 25,286 |
|
|
| |
Note 11 | Restructuring Charges |
Restructuring and other charges in 2015 and 2014 consist of costs associated with the ongoing reorganization of our business operations and our ongoing expense re-alignment efforts. The expense amounts in both years relate primarily to severance costs due to workforce reductions.
On November 4, 2015, we commenced the elimination of approximately 60 positions worldwide and recorded $2.3 million in charges associated with this reduction in force in the quarter ended September 30, 2015.
Restructuring charges are as follows (in thousands):
|
| | | |
| Employee Separation Costs |
Costs incurred and charged to expense for the nine months ended September 30, 2015 | $ | 5,563 |
|
Costs incurred and charged to expense for the nine months ended September 30, 2014 | $ | 3,805 |
|
Changes to the accrued restructuring liability (which is included in Accrued and other current liabilities) for 2015 (in thousands) are as follows:
|
| | | |
| Employee Separation Costs |
Accrued liability at December 31, 2014 | $ | 449 |
|
Costs incurred and charged to expense for the nine months ended September 30, 2015 | 5,563 |
|
Cash payments | (2,840 | ) |
Accrued liability at September 30, 2015 | $ | 3,172 |
|
|
| |
Note 12 | Lease Exit and Related Charges |
As a result of the reduction in use of RealNetworks' office space, lease exit and related charges have been recognized representing rent and contractual operating expenses over the remaining life of the leases. In the quarter ended September 30, 2015, we recorded $2.1 million of losses relating to an approximate 43% reduction of office space at our corporate headquarters in Seattle, Washington. We continue to regularly evaluate the market for office space. If the market for such space changes further in future periods, we may have to revise our estimates which may result in future adjustments to expense for excess office facilities.
Changes to accrued lease exit and related charges (which is included in Accrued and other current liabilities) for 2015 (in thousands) are as follows:
|
| | | |
Accrued loss at December 31, 2014 | $ | 234 |
|
Additions and adjustments to the lease loss accrual, including estimated sublease income | 2,764 |
|
Less amounts paid, net of sublease amounts | (240 | ) |
Accrued loss at September 30, 2015 | 2,758 |
|
Less current portion (included in Accrued and other current liabilities) | (988 | ) |
Accrued loss, non-current portion (included in Other long term liabilities) | $ | 1,770 |
|
|
| |
Note 13 | Shareholders’ Equity |
Accumulated Other Comprehensive Income (Loss)
Changes in components of accumulated other comprehensive income (in thousands):
|
| | | | | | | | | | | | | | | | | |
| | | Quarters Ended September 30, | | Nine Months Ended September 30, |
| | | 2015 | | 2014 | | 2015 | | 2014 |
Investments | | | | | | | | |
| Accumulated other comprehensive income (loss), beginning of period | | $ | 1,967 |
| | $ | 2,784 |
| | $ | 2,252 |
| | $ | 6,397 |
|
| Unrealized gains (losses), net of tax effects of $(56), $0, $0 and $0 | | (596 | ) | | (323 | ) | | (488 | ) | | (1,565 | ) |
| Reclassification adjustments for losses (gains) included in other income (expense), net of tax effects of $0, $0, $(1) and $(4) | | — |
| | — |
| | (393 | ) | | (2,371 | ) |
| Net current period other comprehensive income (loss) | | (596 | ) | | (323 | ) | | (881 | ) | | (3,936 | ) |
| Accumulated other comprehensive income (loss) balance, end of period | | $ | 1,371 |
| | $ | 2,461 |
| | $ | 1,371 |
| | $ | 2,461 |
|
Foreign currency translation | | | | | | | | |
| Accumulated other comprehensive income (loss), beginning of period | | $ | (59,501 | ) | | $ | (53,901 | ) | | $ | (57,504 | ) | | $ | (54,092 | ) |
| Translation adjustments | | (880 | ) | | (2,338 | ) | | (2,877 | ) | | (2,099 | ) |
| Reclassification adjustments for losses (gains) included in other income (expense) | | (264 | ) | | — |
| | (264 | ) | | (48 | ) |
| Net current period other comprehensive income (loss) | | (1,144 | ) | | (2,338 | ) | | (3,141 | ) | | (2,147 | ) |
| Accumulated other comprehensive income (loss) balance, end of period | | $ | (60,645 | ) | | $ | (56,239 | ) | | $ | (60,645 | ) | | $ | (56,239 | ) |
Total accumulated other comprehensive income (loss), end of period | | $ | (59,274 | ) | | $ | (53,778 | ) | | $ | (59,274 | ) | | $ | (53,778 | ) |
As of September 30, 2015, there have been no material changes to RealNetworks’ uncertain tax positions disclosures as provided in Note 14 of the 2014 10-K. However, as a result of the closure of our United States federal audit for the year ended December 31, 2012, we anticipate a decrease in the Company’s total unrecognized tax benefit by an amount up to $3.3 million within the next 12 months, which will have no impact on the financial statements since the Company maintains a valuation allowance on its deferred tax assets.
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 2013 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 15 | 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 September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Net income (loss) | $ | (21,184 | ) | | $ | (22,178 | ) | | $ | (73,434 | ) | | $ | (50,977 | ) |
| | | | | | | |
Weighted average common shares outstanding used to compute basic EPS | 36,191 |
| | 36,003 |
| | 36,134 |
| | 35,912 |
|
Dilutive effect of stock based awards | — |
| | — |
| | — |
| | — |
|
Weighted average common shares outstanding used to compute diluted EPS | 36,191 |
| | 36,003 |
|
| 36,134 |
|
| 35,912 |
|
| | | | | | | |
Basic EPS | $ | (0.59 | ) | | $ | (0.62 | ) | | $ | (2.03 | ) | | $ | (1.42 | ) |
Diluted EPS | $ | (0.59 | ) | | $ | (0.62 | ) | | $ | (2.03 | ) | | $ | (1.42 | ) |
During the quarter and nine months ended September 30, 2015, 5.7 million and 6.0 million shares of common stock, respectively, of potentially issuable shares from stock awards were excluded from the calculation of diluted EPS because of their antidilutive effect.
During the quarter and nine months ended September 30, 2014, 6.3 million and 6.2 million shares of common stock, respectively, of potentially issuable shares from stock awards were excluded from the calculation of diluted EPS because of their antidilutive effect.
|
| |
Note 16 | Commitments and Contingencies |
We may become 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. Such claims, even if not meritorious, could force us to expend significant financial and managerial resources. 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.
In the ordinary course of business, RealNetworks is subject to potential obligations for standard warranty and indemnification provisions that are contained within many of our customer license and service agreements. Our warranty provisions are consistent with those prevalent in our industry, and we do not have a history of incurring losses on warranties; therefore, we do not maintain accruals for warranty-related obligations. With regard to indemnification provisions, nearly all of our carrier contracts obligate us to indemnify our carrier customers for certain liabilities that may be incurred by them. We have received in the past, and may receive in the future, claims for indemnification from carrier customers.
In relation to the patents and other technology assets we sold 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 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 to Intel 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 18 | Segment Information |
We have three reportable segments: (1) RealPlayer Group, which includes our RealTimes and RealPlayer Cloud products, our RealPlayer media player software and related products and our SuperPass service; (2) Mobile Entertainment, which includes our SaaS services, our LISTEN product, and the residual components of our Helix business; and (3) Games, which includes all our games-related businesses, including licenses, online games subscription services, advertising on games sites and social network sites, microtransactions from online and social games, and mobile games. See Note 3, Sale of Slingo and Social Casino Business, for information on the third quarter 2015 sale of this business.
We allocate certain corporate expenses which are directly attributable to supporting the business to our reportable segments. 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 reported as corporate items. Also reported in our corporate segment were restructuring charges as well as lease exit and related charges, and in 2014 the extinguishment of the liability associated with our historical music business.
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 Chief Executive Officer, Chief Financial Officer, our Presidents and General Counsel. The CEOS reviews financial information presented on both a consolidated basis and on a business segment basis. 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 nine months ended September 30, 2015 and 2014 (in thousands):
RealPlayer Group
|
| | | | | | | | | | | | | | | |
| Quarters Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Revenue | $ | 6,565 |
| | $ | 6,565 |
| | $ | 21,922 |
| | $ | 30,336 |
|
Cost of revenue | 3,902 |
| | 3,566 |
| | 12,331 |
| | 10,704 |
|
Gross profit | 2,663 |
| | 2,999 |
| | 9,591 |
| | 19,632 |
|
Operating expenses | 11,492 |
| | 12,392 |
| | 36,868 |
| | 42,668 |
|
Operating income (loss) | $ | (8,829 | ) | | $ | (9,393 | ) | | $ | (27,277 | ) | | $ | (23,036 | ) |
Mobile Entertainment
|
| | | | | | | | | | | | | | | |
| Quarters Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Revenue | $ | 16,414 |
| | $ | 19,190 |
| | $ | 49,409 |
| | $ | 62,285 |
|
Cost of revenue | 11,518 |
| | 12,626 |
| | 34,103 |
| | 38,874 |
|
Gross profit | 4,896 |
| | 6,564 |
| | 15,306 |
| | 23,411 |
|
Operating expenses | 5,219 |
| | 7,086 |
| | 16,153 |
| | 26,126 |
|
Operating income (loss) | $ | (323 | ) | | $ | (522 | ) | | $ | (847 | ) | | $ | (2,715 | ) |
Games
|
| | | | | | | | | | | | | | | |
| Quarters Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Revenue | $ | 7,844 |
| | $ | 8,402 |
| | $ | 24,043 |
| | $ | 28,085 |
|
Cost of revenue | 2,513 |
| | 2,573 |
| | 7,593 |
| | 8,419 |
|
Gross profit | 5,331 |
| | 5,829 |
| | 16,450 |
| | 19,666 |
|
Operating expenses | 6,431 |
| | 8,658 |
| | 23,833 |
| | 27,193 |
|
Operating income (loss) | $ | (1,100 | ) | | $ | (2,829 | ) | | $ | (7,383 | ) | | $ | (7,527 | ) |
Corporate
|
| | | | | | | | | | | | | | | |
| Quarters Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Cost of revenue | $ | 157 |
| | $ | 163 |
| | $ | 442 |
| | $ | 503 |
|
Extinguishment of liability | — |
| | — |
| | — |
| | (10,580 | ) |
Operating expenses | 11,553 |
| | 7,856 |
| | 25,732 |
| | 25,270 |
|
Operating income (loss) | $ | (11,710 | ) | | $ | (8,019 | ) | | $ | (26,174 | ) | | $ | (15,193 | ) |
Our customers consist primarily of consumers and corporations located in the U.S., Europe, Republic of Korea and various foreign countries (Rest of the World). Revenue by geographic region (in thousands):
|
| | | | | | | | | | | | | | | |
| Quarters Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
United States | $ | 11,460 |
| | $ | 12,280 |
| | $ | 36,112 |
| | $ | 47,800 |
|
Europe | 3,670 |
| | 5,749 |
| | 11,561 |
| | 21,129 |
|
Republic of Korea | 9,569 |
| | 9,728 |
| | 28,268 |
| | 31,114 |
|
Rest of the World | 6,124 |
| | 6,400 |
| | 19,433 |
| | 20,663 |
|
Total net revenue | $ | 30,823 |
| | $ | 34,157 |
| | $ | 95,374 |
| | $ | 120,706 |
|
Long-lived assets (which consist of equipment, software, leasehold improvements, other intangible assets, and goodwill) by geographic region (in thousands) are as follows:
|
| | | | | | | |
| September 30, 2015 | | December 31, 2014 |
United States | $ | 18,303 |
| | $ | 33,421 |
|
Europe | 5,617 |
| | 6,696 |
|
Republic of Korea | 324 |
| | 547 |
|
Rest of the World | 2,346 |
| | 3,048 |
|
Total long-lived assets | $ | 26,590 |
| | $ | 43,712 |
|
|
| |
Note 19 | Related Party Transactions |
See Note 5, Rhapsody Joint Venture, and Note 6, Fair Value Measurements, for details on transactions involving Rhapsody.
| |
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:
| |
• | the expected benefits and other consequences of our growth plans, strategic initiatives, and restructurings; |
| |
• | our expected introduction, and related monetization, of new and enhanced products, services and technologies across our businesses; |
| |
• | 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 expected financial position, performance, growth and profitability of, and investment in, our businesses and the availability of resources; |
| |
• | 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; |
| |
• | our involvement in potential claims, legal proceedings and government investigations, and the potential outcomes and effects of such potential claims, legal proceedings and governmental investigations on our business, prospects, financial condition or results of operations; |
| |
• | 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
We manage our business and report revenue and operating income (loss) in three segments: (1) RealPlayer Group, (2) Mobile Entertainment, and (3) Games. Within our RealPlayer Group, we have intensified our focus on leveraging current and prospective partners, especially wireless carriers, to increase distribution of RealTimes, our photo and video sharing technology which we launched in the second quarter of 2015. We continue to develop innovative ways to enable our partners to integrate RealTimes capabilities into their products and services. Although our new RealTimes and RealPlayer Cloud products have begun to generate some revenue, this group's revenue is derived mainly from the sale and license of our RealPlayer software and related products. Our Mobile Entertainment business generates revenue primarily from the sale of its SaaS services, which include ringback tones, music on demand, and intercarrier messaging. Our Games business, through its GameHouse and Zylom brands, derives revenue from sales of games licenses, online games subscription services, advertising on games sites and social networks, and sales of mobile games.
We sold the Slingo and social casino portion of our games business to Gaming Realms plc, a London-based online gaming company, for $18.0 million in August 2015. The purpose of the sale was to derive value from this business and to allow greater focus on our traditional casual games business. This transaction is further described in Note 3, Sale of Slingo and Social Casino Business, to the unaudited condensed consolidated financial statements included in Item 1 of Part I of this Form 10-Q.
We allocate certain corporate expenses which are directly attributable to supporting our businesses, including but not limited to a portion of finance, legal, human resources and headquarters facilities, to our reportable segments. The allocation of these costs to our business units ensures accountability for financial and operational performance within each of our reportable
segments. Our most significant expenses relate to cost of revenue, compensating employees, and selling and marketing our products and services.
For the quarter and nine months ended September 30, 2015, our consolidated revenue declined by $3.3 million and $25.3 million, respectively, compared to the same periods in 2014. Revenue declined by $2.8 million and $12.9 million in Mobile Entertainment and $0.6 million and $4.0 million in Games. In our RealPlayer Group, revenue was $6.6 million, unchanged from the prior year's quarter, and declined by $8.4 million compared to the nine months ended September 30, 2014.
Revenue from our legacy products continues to decline as a result of certain ongoing changes in our businesses and market-driven factors. Our SaaS business within Mobile Entertainment continues to be negatively 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 continue to experience pricing pressure from carriers for our intercarrier messaging services and we ceased investing in our Helix product in the fourth quarter of 2014. Our Games business revenue has declined in recent periods due to lower subscriptions, however, with the recent sale of our Slingo and social casino games business, we expect some growth in our casual games business, which currently has over 100,000 subscribers. In our RealPlayer Group segment, revenue has been negatively impacted as a result of our 2014 transition to a new third party distribution partner at significantly lower rates compared to our previous partner, and lower distribution in our RealPlayer Plus licensing business as we continue to move away from our legacy products.
As of September 30, 2015, we had $112.2 million in unrestricted cash, cash equivalents and short-term investments, compared to $161.7 million as of December 31, 2014. The 2015 decrease of cash, cash equivalents, and short-term investments from December 31, 2014 was due primarily to our ongoing negative cash flows used in operating activities that included significant cash expenditures related to new product launches, which totaled $56.0 million in the first nine months of 2015.
Over the past several quarters, we have developed a plan to embrace cloud and mobile solutions as customer preferences have changed. We have implemented strategic initiatives, and executed certain restructuring efforts, all in an effort to grow our businesses, move towards profitability, and streamline our operations. In line with our growth plan, we have continued to invest in our business units, with a focus on our RealPlayer business. For example, during the first half of 2014, we released RealPlayer Cloud worldwide and in May of 2015, we launched RealTimes, our newest, feature-rich photo and video service. In the third quarter of 2015, we began to intensify our focus on current and prospective partners, especially wireless carriers, to increase distribution of RealTimes. We continue to develop innovative ways to enable our partners to integrate RealTimes capabilities into their products and services. Our investment in RealTimes thus far has negatively impacted our operating results, and we expect to invest further. In our games business, the latest title in our Delicious-branded series of casual games released in the second quarter of 2015 has continued to perform well as our Games Group remains focused on growing and leveraging the Delicious franchise.
Condensed consolidated results of operations were as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarters ended September 30, | | Nine months ended September 30, |
| 2015 | | 2014 | | $ Change | | % Change | | 2015 | | 2014 | | $ Change | | % Change |
Total revenue | $ | 30,823 |
| | $ | 34,157 |
| | $ | (3,334 | ) | | (10 | )% | | $ | 95,374 |
| | $ | 120,706 |
| | $ | (25,332 | ) | | (21 | )% |
Cost of revenue | 18,090 |
| | 18,928 |
| | (838 | ) | | (4 | )% | | 54,469 |
| | 58,500 |
| | (4,031 | ) | | (7 | )% |
Extinguishment of liability | — |
| | — |
| | — |
| | N/A |
| | — |
| | (10,580 | ) | | 10,580 |
| | (100 | )% |
Gross profit | 12,733 |
| | 15,229 |
| | (2,496 | ) | | (16 | )% | | 40,905 |
| | 72,786 |
| | (31,881 | ) | | (44 | )% |
Gross margin | 41 | % | | 45 | % | | | | | | 43 | % | | 60 | % | | | | |
Operating expenses | 34,695 |
| | 35,992 |
| | (1,297 | ) | | (4 | )% | | 102,586 |
| | 121,257 |
| | (18,671 | ) | | (15 | )% |
Operating income (loss) | $ | (21,962 | ) | | $ | (20,763 | ) | | $ | (1,199 | ) | | (6 | )% | | $ | (61,681 | ) | | $ | (48,471 | ) | | $ | (13,210 | ) | | (27 | )% |
In the third quarter of 2015, our total consolidated revenue declined by $3.3 million, compared with the year-earlier period. The reduction in revenue resulted from a decline of $2.8 million in Mobile Entertainment and $0.6 million in Games, due to the factors described above. Gross margin decreased to 41% from 45% during the quarter ended September 30, 2015, in large part due to lower margins realized by our Mobile Entertainment and RealPlayer groups, as described in more detail in Segment Operating Results below. Operating expenses decreased by $1.3 million in the quarter ended September 30, 2015, compared with the prior year, primarily due to reduced personnel and related costs of $5.4 million offset in part by increases in restructuring and lease exit charges of $3.0 million and in other operating expenses compared to the prior year period.
For the nine months ended September 30, 2015, our total consolidated revenue declined by $25.3 million, compared with the year-earlier period. The reduction in revenue primarily resulted from a decline of $12.9 million in our Mobile Entertainment
segment, mostly attributable to a decline in our ringback tone and music on demand businesses. Revenue decreased by $8.4 million in our RealPlayer Group due to the transition to a new third party distribution arrangement in the second quarter of 2014 at significantly lower rates compared to our previous partner. Additionally, Games revenue decreased by $4.0 million, primarily due to a decline in sales of Games subscriptions and download PC games. Gross margin decreased to 43% from 60% for the year-earlier period primarily due to the extinguishment of the liability in the first quarter of 2014 described below and to higher bandwidth costs related to our RealPlayer Cloud and RealTimes products. Operating expenses decreased by $18.7 million in the nine months ended September 30, 2015, compared with the prior year primarily due to reductions in personnel and related costs of $16.1 million and to reduced marketing spend of $4.1 million.
During the quarter ended March 31, 2014 certain accrued royalty liabilities of $10.6 million associated with our historical music business, which had originally been recorded based on statutory rates, were extinguished.
Segment Operating Results
RealPlayer Group
RealPlayer Group segment results of operations were as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarters ended September 30, | | Nine months ended September 30, |
| 2015 | | 2014 | | $ Change | | % Change | | 2015 | | 2014 | | $ Change | | % Change |
Revenue | $ | 6,565 |
| | $ | 6,565 |
| | $ | — |
| | — | % | | $ | 21,922 |
| | $ | 30,336 |
| | $ | (8,414 | ) | | (28 | )% |
Cost of revenue | 3,902 |
| | 3,566 |
| | 336 |
| | 9 | % | | 12,331 |
| | 10,704 |
| | 1,627 |
| | 15 | % |
Gross profit | 2,663 |
| | 2,999 |
| | (336 | ) | | (11 | )% | | 9,591 |
| | 19,632 |
| | (10,041 | ) | | (51 | )% |
Gross margin | 41 | % | | 46 | % | | | | | | 44 | % | | 65 | % | | | | |
Operating expenses | 11,492 |
| | 12,392 |
| | (900 | ) | | (7 | )% | | 36,868 |
| | 42,668 |
| | (5,800 | ) | | (14 | )% |
Operating income (loss) | $ | (8,829 | ) | | $ | (9,393 | ) | | $ | 564 |
| | 6 | % | | $ | (27,277 | ) | | $ | (23,036 | ) | | $ | (4,241 | ) | | (18 | )% |
Total RealPlayer Group revenue for the quarter ended September 30, 2015 remained consistent when compared with the year-earlier period. Declines in our legacy subscription products of $0.8 million were offset by an increase of intellectual property license revenue of $0.5 million and an increase in RealTimes subscription revenue.
Total RealPlayer Group revenue decreased by $8.4 million in the nine months ended September 30, 2015, compared with the year-earlier period. This decrease was primarily a result of our transition to a new third party distribution arrangement at significantly lower rates compared to our previous partner which caused a decrease in our third party distribution revenue of $8.4 million.
Cost of revenue increased by $0.3 million during the quarter ended September 30, 2015, compared with the year-earlier period. This increase was primarily due to higher bandwidth costs related to our RealTimes product of $0.6 million, partially offset by savings in license and subscription royalty expenses.
Cost of revenue increased by $1.6 million during the nine months ended September 30, 2015, compared with the year-earlier period. Bandwidth costs increased by $2.5 million compared with the year-earlier period, partially offset by lower RealPlayer license royalties of $0.9 million.
Gross margin during the quarter and nine months ended September 30, 2015 declined primarily as a result of our transition to a new third party distribution arrangement at significantly lower rates compared to our previous partner and the increase in bandwidth costs to support our RealTimes service.
Operating expenses decreased by $0.9 million in the quarter ended September 30, 2015, compared with the year-earlier period. The decrease was primarily due to reductions in personnel and related costs of $1.1 million, offset in part by an increase in marketing costs.
Operating expenses decreased by $5.8 million in the nine months ended September 30, 2015, compared with the year-earlier period primarily due to decreased marketing spend of $3.4 million related to our transition to a new third party distribution arrangement, along with reductions in personnel and related costs of $2.1 million.
Mobile Entertainment
Mobile Entertainment segment results of operations were as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarters ended September 30, | | Nine months ended September 30, |
| 2015 | | 2014 | | $ Change | | % Change | | 2015 | | 2014 | | $ Change | | % Change |
Revenue | $ | 16,414 |
| | $ | 19,190 |
| | $ | (2,776 | ) | | (14 | )% | | $ | 49,409 |
| | $ | 62,285 |
| | $ | (12,876 | ) | | (21 | )% |
Cost of revenue | 11,518 |
| | 12,626 |
| | (1,108 | ) | | (9 | )% | | 34,103 |
| | 38,874 |
| | (4,771 | ) | | (12 | )% |
Gross profit | 4,896 |
| | 6,564 |
| | (1,668 | ) | | (25 | )% | | 15,306 |
| | 23,411 |
| | (8,105 | ) | | (35 | )% |
Gross margin | 30 | % | | 34 | % | | | | | | 31 | % | | 38 | % | | | | |
Operating expenses | 5,219 |
| | 7,086 |
| | (1,867 | ) | | (26 | )% | | 16,153 |
| | 26,126 |
| | (9,973 | ) | | (38 | )% |
Operating income (loss) | $ | (323 | ) | | $ | (522 | ) | | $ | 199 |
| | 38 | % | | $ | (847 | ) | | $ | (2,715 | ) | | $ | 1,868 |
| | 69 | % |
Total Mobile Entertainment revenue decreased by $2.8 million in the quarter ended September 30, 2015, compared with the year-earlier period. This decrease was due to a decrease of $1.6 million in our ringback tones and intercarrier messaging businesses, and to a decrease in Helix licensing revenue of $1.1 million as we ceased investing in this business in the fourth quarter of 2014.
Total Mobile Entertainment revenue decreased by $12.9 million in the nine months ended September 30, 2015, compared with the year-earlier period. The decline was primarily due to a decrease in our SaaS business of $9.0 million, where ringback tone revenue declined by $6.0 million and music on demand revenue declined by $2.1 million. Further, our Helix licensing revenue declined by $3.1 million as we ceased investing in this business in the fourth quarter of 2014.
Cost of revenue decreased by $1.1 million and $4.8 million in the quarter and nine months ended September 30, 2015, compared with the year-earlier period, primarily related to reductions in personnel and related costs.
Gross margin declined for the quarter and nine months ended September 30, 2015, due to a decline in higher margin revenues such as in our ringback tones business.
Operating expenses decreased by $1.9 million and $10.0 million for the quarter and nine months ended September 30, 2015, compared with the year-earlier period, primarily due to reductions in personnel and related costs of $1.7 million and $6.9 million respectively. Additionally, our marketing spend decreased by $1.0 million for the nine months ended September 30, 2015.
Games
Games segment results of operations were as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarters ended September 30, | | Nine months ended September 30, |
| 2015 | | 2014 | | $ Change | | % Change | | 2015 | | 2014 | | $ Change | | % Change |
Revenue | $ | 7,844 |
| | $ | 8,402 |
| | $ | (558 | ) | | (7 | )% | | $ | 24,043 |
| | $ | 28,085 |
| | $ | (4,042 | ) | | (14 | )% |
Cost of revenue | 2,513 |
| | 2,573 |
| | (60 | ) | | (2 | )% | | 7,593 |
| | 8,419 |
| | (826 | ) | | (10 | )% |
Gross profit | 5,331 |
| | 5,829 |
| | (498 | ) | | (9 | )% | | 16,450 |
| | 19,666 |
| | (3,216 | ) | | (16 | )% |
Gross margin | 68 | % | | 69 | % | | | | | | 68 | % | | 70 | % | | | | |
Operating expenses | 6,431 |
| | 8,658 |
| | (2,227 | ) | | (26 | )% | | 23,833 |
| | 27,193 |
| | (3,360 | ) | | (12 | )% |
Operating income (loss) | $ | (1,100 | ) | | $ | (2,829 | ) | | $ | 1,729 |
| | 61 | % | | $ | (7,383 | ) | | $ | (7,527 | ) | | $ | 144 |
| | 2 | % |
Total Games revenue decreased by $0.6 million in the quarter ended September 30, 2015, compared with the year-earlier period primarily due to lower revenue from our PC games business, including our subscription products and advertising of $1.1 million and $0.6 million, respectively, which were offset by an increase in our mobile games revenue of $1.5 million.
Total Games revenue decreased by $4.0 million in the nine months ended September 30, 2015, compared with the year-earlier period. The decline was primarily related to a decrease of subscription revenue of $3.8 million.
Cost of revenue remained constant in the quarter ended September 30, 2015, compared with the year-earlier period.
Cost of revenue decreased by $0.8 million in the nine months ended September 30, 2015, compared with the year-earlier period. The decreases were due primarily to declines in advertising costs of $0.6 million, royalties related to our downloadable PC games of $0.6 million, and bandwidth costs. These decreases were offset in part by an increase in mobile license royalties of $0.8 million, as a result of our higher mobile games revenue.
Gross margin showed little fluctuation during the quarter and nine months ended September 30, 2015.
Operating expenses declined by $2.2 million and $3.4 million in the quarter and nine months ended September 30, 2015, respectively, compared with the year-earlier period. The decreases were primarily due to reductions in personnel and related costs of $1.8 million and $2.8 million, respectively, largely due to the sale of our social and casino games business.
Corporate
We allocate certain corporate expenses which are directly attributable to supporting the business to our reportable segments. 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 reported as corporate items. All restructuring, extinguishment of liability, 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 September 30, | | Nine months ended September 30, |
| 2015 | | 2014 | | $ Change | | % Change | | 2015 | | 2014 | | $ Change | | % Change |
Cost of revenue | $ | 157 |
| | $ | 163 |
| | $ | (6 | ) | | (4 | )% | | $ | 442 |
| | $ | 503 |
| | $ | (61 | ) | | (12 | )% |
Extinguishment of liability | — |
| | — |
| | — |
| | N/A | | — |
| | (10,580 | ) | | 10,580 |
| | (100 | )% |
Operating expenses | 11,553 |
| | 7,856 |
| | 3,697 |
| | 47 | % | | 25,732 |
| | 25,270 |
| | 462 |
| | 2 | % |
Operating income (loss) | $ | (11,710 | ) | | $ | (8,019 | ) | | $ | (3,691 | ) | | (46 | )% | | $ | (26,174 | ) | | $ | (15,193 | ) | | $ | (10,981 | ) | | (72 | )% |
Operating expenses increased by $3.7 million in the quarter ended September 30, 2015 compared with the year-earlier period. The increase was primarily due to an increase in restructuring and lease exit charges of $3.0 million and depreciation related to the reduced office space at our Seattle headquarters of $0.7 million.
Operating expenses increased by $0.5 million in the nine months ended September 30, 2015, compared with the year-earlier period. The increase was primarily due to an increase in restructuring and lease exit charges of $3.3 million, offset by reduced personnel and related costs.
During the quarter ended March 31, 2014 certain accrued royalty liabilities of $10.6 million associated with our historical music business, which had originally been recorded based on statutory rates, were extinguished.
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 September 30, | | Nine months ended September 30, |
| 2015 | | 2014 | | $ Change | | % Change | | 2015 | | 2014 | | $ Change | | % Change |
Research and development | $ | 10,501 |
| | $ | 12,784 |
| | $ | (2,283 | ) | | (18 | )% | | $ | 34,681 |
| | $ | 40,110 |
| | $ | (5,429 | ) | | (14 | )% |
Sales and marketing | 11,938 |
| | 13,283 |
| | (1,345 | ) | | (10 | )% | | 38,822 |
| | 51,022 |
| | (12,200 | ) | | (24 | )% |
General and administrative | 7,021 |
| | 7,723 |
| | (702 | ) | | (9 | )% | | 21,312 |
| | 25,617 |
| | (4,305 | ) | | (17 | )% |
|