SEATTLE, Oct. 30 /PRNewswire-FirstCall/ -- Digital entertainment services company RealNetworks(R), Inc. today announced results for the third quarter ended September 30, 2007.
Quarterly Highlights: -- Record revenue of $145.1 million -- Net income of $4.3 million or $0.03 per diluted share -- Adjusted EBITDA of $13.6 million
"In the third quarter we both achieved solid operating results and made great strides strategically," said Rob Glaser, chairman and CEO of Real. "Not only did we achieve record revenue, we also increased our adjusted EBITDA by 78% year over year. On the strategic side, we formed deep alliances with Viacom's MTV Networks and Verizon Wireless, which we believe will drive our Rhapsody music business forward very significantly."
For the third quarter of 2007, revenue grew 55% to $145.1 million compared to $93.7 million for the third quarter of 2006. Revenue growth in the third quarter was attributed to: Games revenue of $28.8 million, a 28% increase over the third quarter of 2006; Music revenue of $37.7 million, a 24% increase over the third quarter of 2006; Technology Products and Solutions revenue of $53.3 million, a 377% increase over the third quarter of 2006, due in large part to the acquisition of WiderThan during the fourth quarter of 2006; and Media Software and Services revenue of $25.3 million, a 14% decrease from the third quarter of 2006. Foreign currency exchange rate fluctuations positively impacted 2007 third quarter revenue by approximately $1.2 million compared to the third quarter of 2006.
Net income for the third quarter of 2007 was $4.3 million or $0.03 per diluted share, compared to $42.2 million or $0.24 per diluted share in the third quarter of 2006. Results for the third quarter of 2006 included payments related to Real's antitrust settlement and commercial agreements with Microsoft. The final payment was received under these agreements during the first quarter of 2007. Further information regarding these payments can be found in Real's SEC filings. Adjusted net income, described below in Real's description of non-GAAP financial measures, was $9.2 million or $0.06 per diluted share for the third quarter of 2007, compared to $9.0 million or $0.05 per diluted share in the third quarter of 2006. Adjusted EBITDA for the third quarter of 2007 was $13.6 million compared to $7.6 million in the third quarter of 2006. A reconciliation of GAAP net income to adjusted net income and adjusted EBITDA is provided in the financial tables that accompany this release.
Gross margin was 61% in the third quarter of 2007 compared to 70% in the third quarter of 2006. Operating expenses for the third quarter of 2007 were $103.8 million, compared to $8.1 million in the third quarter of 2006. Operating expenses in the third quarter of 2006 included benefits related to payments under Real's antitrust settlement and commercial agreements with Microsoft. Adjusted operating expenses in the third quarter of 2007 were $93.9 million compared to $61.9 million in the third quarter of 2006. A reconciliation of GAAP operating expenses to adjusted operating expenses is provided in the financial tables that accompany this release. For the third quarter of 2007, Real's effective tax rate was 32%.
As of September 30, 2007, Real had approximately $590.4 million in unrestricted cash, cash equivalents and short-term investments and $100 million of convertible debt.
Under Real's current stock repurchase program, approximately 4.8 million shares were repurchased for $34.2 million during the third quarter of 2007. As of September 30, 2007, approximately $36.4 million remained available under the existing stock repurchase program.
Formation of Rhapsody America
On August 20, 2007, Real and MTV Networks, a division of Viacom International Inc. ("MTVN"), created Rhapsody America LLC ("Rhapsody America"), to provide consumers with comprehensive music services, including access to an extensive catalog of music through subscriptions, downloads and ad supported services. Rhapsody America is owned 51% by Real and 49% by MTVN. Real consolidated the financial results of Rhapsody America for the period from August 20, 2007 through September 30, 2007, with a 49% minority interest represented by MTVN's equity in Rhapsody America.
Business Outlook
The following forward-looking statements reflect RealNetworks' expectations as of October 30, 2007. It is not the Company's general practice to update these forward-looking statements until its next quarterly results announcement.
For the fourth quarter of 2007, Real expects revenue in the range of $152 million to $157 million, GAAP net income per diluted share of $0.00 to $0.01 and adjusted net income per diluted share of $0.06 to $0.07.
For the full year 2007, Real expects revenue in the range of $563 million to $568 million. Real expects 2007 GAAP net income per diluted share of $0.28 to $0.29 and adjusted net income per diluted share of $0.23 to $0.24. This guidance assumes an effective tax rate of approximately 38%.
See a complete reconciliation of estimated GAAP net income per diluted share to adjusted net income per diluted share, provided in the financial tables that accompany this press release.
Webcast and Conference Call Information
The Company will host a webcast and conference call today at 5:00pm (Eastern)/ 2:00pm (Pacific). The live webcast featuring slides and audio, will be available at http://investor.realnetworks.com/. Listeners must use RealPlayer(R) to listen to the conference call, which can be downloaded for free at http://www.real.com/. The on-demand webcast will be available approximately two hours following the conclusion of the live webcast. Participants may access the conference call by dialing 800-857-5305 (773-681-5857 for international callers). The passcode is "Third Quarter Earnings," and the leader is Rob Glaser. A telephonic replay will be available until 8:00pm (Eastern) on November 8, 2007 and may be accessed by dialing 866-421-0439 (203-369-0801 for international callers).
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For More Information Contact
Press: Bill Hankes, (206) 892-6614,
RealNetworks, Inc. delivers digital entertainment services to consumers via PC, portable music player, home entertainment system or mobile phone. Real created the streaming media category in 1995 and has continued to lead the market with pioneering products and services, including: RealPlayer(R), the first mainstream media player to enable one-click downloading and recording of Internet video; the award-winning Rhapsody(R) digital music service, which delivers more than 1 billion songs per year; RealArcade(R), one of the largest casual games destinations on the Web; and a variety of mobile entertainment services, such as ringback tones, offered to consumers through leading wireless carriers around the world. RealNetworks' corporate information is located at http://www.realnetworks.com/company.
About Non-GAAP Financial Measures
To supplement RealNetworks' condensed consolidated financial statements presented in accordance with GAAP, we present investors with certain non-GAAP financial measures, including adjusted net income and adjusted net income per share, adjusted EBITDA, adjusted EBITDA by reporting segment, adjusted cost of revenue and adjusted operating expenses.
-- Adjusted net income consists of net income excluding the impact of the following: stock-based compensation expense; income and expenses including charitable contributions related to the Microsoft agreements; equity investment gains and losses from sales or impairments; acquisition costs, including amortization of intangible assets (net of minority interest effect) and expenses for employee stock options that were converted to cash rights; gain on initial formation of Rhapsody America; an estimate of the income taxes from the aforementioned items; and changes in deferred tax asset valuation allowances. -- Adjusted net income per share is calculated by dividing adjusted net income by GAAP weighted average diluted shares outstanding. -- Adjusted EBITDA and adjusted EBITDA by reporting segment consist of net income excluding the impact of the following: interest income, net; income taxes; depreciation; amortization (net of minority interest effect); stock-based compensation; expenses for employee stock options that were converted to cash rights; equity investment gains and losses from sales or impairments; income and expenses including charitable contributions related to the Microsoft agreements; and gain on initial formation of Rhapsody America. -- Adjusted cost of revenue consists of GAAP cost of revenue excluding stock-based compensation expenses, and acquisition costs including amortization of intangible assets (net of minority interest effect) and expenses for employee stock options that were converted to cash rights. -- Adjusted operating expenses consist of GAAP operating expenses excluding stock-based compensation expenses, antitrust litigation expenses (benefits) and acquisition costs including amortization of intangible assets (net of minority interest effect) and expenses for employee stock options that were converted to cash rights.
RealNetworks believes that the presentation of adjusted net income and adjusted net income per share, adjusted EBITDA, adjusted EBITDA by reporting segment, adjusted cost of revenue and adjusted operating expenses provides important supplemental information to management and investors regarding financial and business trends relating to the company's financial condition and results of operations. Management believes that the use of these non-GAAP financial measures provides consistency and comparability with our past financial reports, and also facilitates comparisons with other companies in our industry, many of which use similar non-GAAP financial measures to supplement their GAAP results. Management has historically used these non-GAAP measures when evaluating operating performance because the inclusion or exclusion of the items described above provides additional useful measures of our operating results and facilitates comparisons of our core operating performance against prior periods and our business model objectives. We have chosen to provide this information to investors in order to enable them to perform additional analyses of past, present and future operating performance, to enable them to compare us to other companies, and as a supplemental means to evaluate our ongoing operations. Externally, we believe that adjusted net income and adjusted EBITDA continue to be useful to investors in their assessment of our operating performance and the valuation of our company.
Internally, adjusted net income and adjusted net income per share, adjusted EBITDA, adjusted EBITDA by reporting segment, adjusted cost of revenue, and adjusted operating expenses are significant measures used by management for purposes of:
-- supplementing the financial results and forecasts reported to our board of directors; -- evaluating the operating performance of our company which includes direct and incrementally controllable revenue and costs of operations, but excludes items considered by management to be either non-cash or non-operating such as interest income and expense, stock-based compensation, tax expense, deferred tax valuation allowance changes, depreciation and amortization; -- managing and comparing performance internally across our businesses and externally against our peers; -- establishing internal operating budgets; and -- evaluating and valuing potential acquisition candidates.
Adjusted net income is used by RealNetworks as a broad measure of financial performance that encompasses our operating performance, cash, capital structure and investment management, and income tax planning effectiveness. Adjusted EBITDA is used by management as a way to isolate our operating performance and to compare it to that of other companies.
Adjusted net income and adjusted net income per share, adjusted EBITDA, adjusted EBITDA by reporting segment, adjusted cost of revenue, and adjusted operating expenses are not calculated in accordance with GAAP, and should be considered supplemental to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. Non-GAAP financial measures have limitations in that they do not reflect all of the costs associated with the operations of our business as determined in accordance with GAAP. As a result, you should not consider these measures in isolation or as a substitute for analysis of RealNetworks' results as reported under GAAP. We expect to continue to incur expenses similar to the non-GAAP adjustments described above, and exclusion of these items from our non-GAAP financial measures should not be construed as an inference that these costs are unusual or infrequent. Some of the limitations in relying on our non-GAAP financial measures are:
-- Adjusted net income, adjusted net income per share, adjusted EBITDA and adjusted EBITDA by reporting segment are measures which we have defined for internal and investor purposes and are not in accordance with GAAP. A further limitation associated with these measures is that they do not include all costs and income that impact our net income and net income per share. We compensate for these limitations by prominently disclosing GAAP net income, which we believe is the most directly comparable GAAP measure, and providing investors with reconciliations from GAAP net income to adjusted net income, adjusted EBITDA and adjusted EBITDA by reporting segment. -- Adjusted cost of revenue is limited in that it does not include stock-based compensation expenses, and certain costs associated with our acquisitions. Adjusted operating expenses are limited in that they do not include stock-based compensation expenses, antitrust litigation expenses (benefit) and certain costs associated with our acquisitions.
We compensate for these limitations by prominently disclosing the reported GAAP results and providing investors with a reconciliation from GAAP to the adjusted amount.
In the financial tables of our earnings press release, RealNetworks has included reconciliations of GAAP net income to adjusted net income and adjusted EBITDA, income before income taxes to adjusted EBITDA by reporting segment, GAAP cost of revenue to adjusted cost of revenue and GAAP operating expenses to adjusted operating expenses for the relevant periods.
Forward-Looking Statements: This press release contains forward-looking statements that involve risks and uncertainties, including statements relating to the product and service offerings of Rhapsody America and the impact of the Verizon and MTV Networks alliances on the Rhapsody America business, Real's future revenue, GAAP and adjusted net income (loss) per diluted share, amortization of intangible assets, stock-based compensation expense and income tax rate. Actual results may differ materially from the results predicted. Factors that could cause actual results to differ from the results predicted include: development and consumer acceptance of legal online music distribution services generally and RealNetworks' content services in particular because these are relatively new and unproven business models and markets; risks associated with the creation and operation of Rhapsody America; risks associated with acquisitions generally, and the acquisitions of WiderThan, Sony NetServices and Exomi in particular, including the risks of integration, unknown liabilities and operations in new markets and geographies; the potential that we will be unable to continue to enter into commercially attractive agreements with third parties for the provision of compelling content for our subscription service offerings; the emergence of new entrants and competition in the market for digital media subscription offerings and online music sales; the impact on our gross margins of content costs and from the mix of subscribers to subscription offerings with higher content costs than others; competitive risks, including competing technologies, products and services, and the competitive activities of our larger competitors, some of which have strong ties to streaming media users through other products; risks associated with the introduction of new products and services, including the new RealPlayer; risks inherent in strategic relationships, especially with competitors, and technology and service integration efforts; and risks relating to the ability of Real's strategic partners to generate subscribers for Real's digital content services. More information about potential risk factors that could affect RealNetworks' business and financial results is included in RealNetworks' annual report on Form 10-K for the most recent year ended December 31, and its quarterly reports on Form 10-Q and from time to time in other reports filed by RealNetworks with the Securities and Exchange Commission. The preparation of our financial statements and forward-looking financial guidance requires us to make estimates and assumptions that affect the reported amount of assets and liabilities and the reported amounts of revenues and expenses during the reported period. Actual results may differ materially from these estimates under different assumptions or conditions. The Company assumes no obligation to update any forward-looking statements or information, which are in effect as of their respective dates.
RealNetworks, Rhapsody and RealPlayer are trademarks or registered trademarks of RealNetworks, Inc. All other companies or products listed herein are trademarks or registered trademarks of their respective owners.
RealNetworks, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited) Quarters Ended Nine Months Ended September 30, September 30, 2007 2006 2007 2006 (in thousands, except per share data) Net revenue $145,095 $93,676 $410,738 $269,687 Cost of revenue 56,644 28,389 151,786 81,788 Gross profit 88,451 65,287 258,952 187,899 Operating expenses: Research and development 26,528 18,344 75,012 55,127 Sales and marketing 52,812 37,560 152,593 111,604 Advertising with related party (A) 7,747 - 7,747 - General and administrative 16,750 14,043 51,167 41,586 Loss on excess office facilities (B) - - - 738 Subtotal operating expenses 103,837 69,947 286,519 209,055 Antitrust litigation benefit, net (C) - (61,861) (60,747) (159,554) Total operating expenses 103,837 8,086 225,772 49,501 Operating (loss) income (15,386) 57,201 33,180 138,398 Other income (expenses): Interest and other, net 7,290 10,618 24,457 27,978 Gain on sale of equity investments - - 132 2,286 Equity in net loss of investments - - (132) - Minority interest in Rhapsody America (D) 6,466 - 6,466 - Gain on initial formation of Rhapsody America (E) 3,866 - 3,866 - Gain on sale of interest in Rhapsody America (F) 4,080 - 4,080 - Other income 38 242 990 432 Other income, net 21,740 10,860 39,859 30,696 Income before income taxes 6,354 68,061 73,039 169,094 Income taxes (2,012) (25,908) (27,409) (63,180) Net income $4,342 $42,153 $45,630 $105,914 Basic net income per share $0.03 $0.26 $0.30 $0.66 Diluted net income per share $0.03 $0.24 $0.27 $0.59 Shares used to compute basic net income per share 149,667 160,578 154,670 160,467 Shares used to compute diluted net income per share 163,094 178,913 169,840 178,551 (A) Consists of advertising purchased by Rhapsody America from MTV Networks ("MTVN"). MTVN has a 49% ownership interest in Rhapsody America. (B) The loss on unoccupied excess office facilities represents an increase in the estimate of loss from building operating costs that are not expected to be recovered. (C) Consists of amounts received under the Settlement and Commercial agreements with Microsoft, net of certain legal fees, personnel costs, public relations and other professional service fees incurred related to antitrust complaints against Microsoft, including proceedings in the European Union. (D) Minority interest reflects MTVN's 49% ownership share in the losses of Rhapsody America. (E) Consists of gains realized from MTVN's asset contributions to Rhapsody America. (F) Consists of gains realized from MTVN's note payments to Rhapsody America. RealNetworks, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (Unaudited) September 30, December 31, 2007 2006 (in thousands) ASSETS Current assets: Cash and cash equivalents $197,738 $525,232 Short-term investments 392,625 153,688 Trade accounts receivable, net 80,734 65,751 Deferred costs, current portion 6,280 1,643 Deferred tax assets, net, current portion 224 891 Prepaid expenses and other current assets 27,235 21,990 Total current assets 704,836 769,195 Equipment, software, and leasehold improvements, at cost: Equipment and software 102,337 83,587 Leasehold improvements 30,496 29,665 Total equipment, software, and leasehold improvements 132,833 113,252 Less accumulated depreciation and amortization 78,676 65,509 Net equipment, software, and leasehold improvements 54,157 47,743 Restricted cash equivalents 15,500 17,300 Equity investments 7,814 22,649 Other assets 7,967 5,148 Deferred tax assets, net, non-current portion 37,584 27,150 Other intangible assets, net 109,681 105,109 Goodwill 337,406 309,122 Total assets $1,274,945 $1,303,416 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $54,241 $52,097 Accrued and other liabilities 119,128 104,328 Deferred revenue, current portion 38,601 24,137 Related party payable (A) 8,025 - Accrued loss on excess office facilities, current portion 3,398 4,508 Total current liabilities 223,393 185,070 Deferred revenue, non-current portion 2,815 3,440 Accrued loss on excess office facilities, non-current portion 7,563 9,993 Deferred rent 4,503 4,331 Deferred tax liabilities, net, non-current portion 23,634 27,076 Convertible debt 100,000 100,000 Other long-term liabilities 9,884 3,740 Total liabilities 371,792 333,650 Minority Interest (B) 7,685 - Shareholders' equity 895,468 969,766 Total liabilities and shareholders' equity $1,274,945 $1,303,416 (A) Related party payable reflects amounts owed to MTVN. (B) Minority interest reflects MTVN's 49% ownership in the net assets of Rhapsody America. RealNetworks, Inc. and Subsidiaries Supplemental Financial Information (Unaudited) 2007 Q3 Q2 Q1 (in thousands) Net Revenue by Line of Business: Consumer products and services (A) $91,824 $87,115 $85,040 Technology products and solutions (B) 53,271 49,056 44,432 Total net revenue $145,095 $136,171 $129,472 Consumer Products and Services: Subscriptions (C) $55,551 $51,091 $51,490 Media properties (D) 16,071 17,748 15,932 E-commerce and other (E) 20,202 18,276 17,618 Total consumer products and services revenue $91,824 $87,115 $85,040 Consumer Products and Services: Music (F) $37,658 $36,801 $34,127 Media software and services (G) 25,346 25,419 27,011 Games (H) 28,820 24,895 23,902 Total consumer products and services revenue $91,824 $87,115 $85,040 Net Revenue by Geography: United States $91,281 $88,035 $84,554 Rest of world 53,814 48,136 44,918 Total net revenue $145,095 $136,171 $129,472 Subscribers (presented as greater than) *: Total Subscribers (I) 29,250 26,150 24,550 Technology Products and Solutions Application Services Subscribers (J) 26,600 23,600 21,900 Total Music Subscribers (K) 2,750 2,700 2,675 2006 Q4 Q3 Q2 Q1 (in thousands) Net Revenue by Line of Business: Consumer products and services (A) $88,022 $82,497 $77,442 $74,811 Technology products and solutions (B) 37,552 11,179 11,967 11,791 Total net revenue $125,574 $93,676 $89,409 $86,602 Consumer Products and Services: Subscriptions (C) $50,835 $50,878 $47,452 $47,832 Media properties (D) 18,815 13,883 11,546 9,484 E-commerce and other (E) 18,372 17,736 18,444 17,495 Total consumer products and services revenue $88,022 $82,497 $77,442 $74,811 Consumer Products and Services: Music (F) $33,623 $30,375 $30,118 $28,918 Media software and services (G) 30,513 29,586 26,127 27,277 Games (H) 23,886 22,536 21,197 18,616 Total consumer products and services revenue $88,022 $82,497 $77,442 $74,811 Net Revenue by Geography: United States $81,758 $69,433 $66,542 $65,700 Rest of world 43,816 24,243 22,867 20,902 Total net revenue $125,574 $93,676 $89,409 $86,602 Subscribers (presented as greater than) *: Total Subscribers (I) 22,700 2,450 2,400 2,400 Technology Products and Solutions Application Services Subscribers (J) 20,200 Total Music Subscribers (K) 2,550 1,650 1,625 1,575 * Beginning the quarter ended December 31, 2006, total subscribers reflect the inclusion of subscribers related to wireless carrier application subscription services. Total Music Subscribers includes subscribers from our Technology Products and Solutions Application Subscription Services, such as music-on-demand, as well as our Consumer Music Services, such as Rhapsody and Premium Radio. Although music-on-demand subscribers are included in the Technology Products and Solutions Application Services subscribers and total music subscribers, these subscribers are only counted once as part of our Total Subscribers. (A) Revenue is derived from consumer digital media subscription services, RealPlayer Plus and related products, sales and distribution of third party software products, content such as games and music and advertising. (B) Revenue is derived from carrier application services such as ringback tones and music-on-demand, media delivery system software, support and maintenance services, broadcast hosting services and consulting services. (C) Revenue is derived from consumer digital media subscription services including: SuperPass, RadioPass, Rhapsody, GamePass and stand-alone subscriptions. (D) Revenue is derived from advertising and through the distribution of third party products. (E) Revenue is derived from RealPlayer Plus and related products, sales of third party software products, and content such as games and music. (F) Revenue is derived from Rhapsody and RadioPass subscription services and sales of music content, advertising generated from our music and music related websites and the distribution of third party products. (G) Revenue is derived from SuperPass subscriptions, RealPlayer Plus and related products, stand-alone subscription services, sales and distribution of third-party software products and advertising related to our non-game and non-music related web properties. (H) Revenue is derived from GamePass subscription service, sales of games, advertising generated from our games and game-related websites and the distribution of third-party products. (I) Total subscribers include Technology Products and Solutions application services and consumer subscription services including: Ringback Tones, Music-on-Demand, Video-on-Demand, Rhapsody, Rhapsody-to-Go, RadioPass, SuperPass, GamePass, and stand-alone subscriptions. (J) Technology Products and Solutions application service subscribers include: Ringback Tones, Music-on-Demand and Video-on- Demand. (K) Music subscribers represent an aggregate of all of our music services and include both Technology Products and Solutions application services subscribers and consumer subscription services. Music subscribers include: Rhapsody, Rhapsody-to-Go, premium radio, and Music-on-Demand. Revenue from Technology Products and Solutions application services, including Music-on-Demand, are included in our Technology Products and Solutions revenue. RealNetworks, Inc. and Subsidiaries Supplemental Financial Information (Unaudited) Reconciliation of GAAP net income to adjusted net income is as follows: Quarters Ended Sept. 30, June 30, March 31, 2007 2007 2007 (in thousands, except per share data) Net income in accordance with GAAP $4,342 $1,327 $39,961 Stock-based compensation 5,984 5,622 5,685 Loss (gain) on equity investments - (132) - Conversion of WiderThan stock options to a cash equivalent 413 614 845 Acquisitions related intangible asset amortization* (net of minority interest effect) 5,583 5,311 5,312 Gain on initial formation of Rhapsody America (3,866) - - Expenses (benefit) related to antitrust litigation: Income - - (61,000) Expenses 201 202 471 Charitable contributions - - 1,921 Tax impact of above pro forma items* (3,187) (3,858) 20,051 Change in income tax valuation allowance (255) (143) (2,805) Adjusted net income $9,215 $8,943 $10,441 GAAP basic net income per share $0.03 $0.01 $0.25 GAAP diluted net income per share $0.03 $0.01 $0.22 Adjusted basic net income per share* $0.06 $0.06 $0.06 Adjusted diluted net income per share* $0.06 $0.05 $0.06 Shares used to compute basic net income per share 149,667 153,880 161,350 Shares used to compute diluted net income per share 163,094 169,033 178,053 Quarters Ended Dec. 31, Sept. 30, June 30, March 31, 2006 2006 2006 2006 Net income in accordance with GAAP $39,302 $42,153 $38,878 $24,883 Stock-based compensation 5,819 5,021 3,673 3,638 Loss (gain) on equity investments 3,116 - (2,286) - Conversion of WiderThan stock options to a cash equivalent 641 - - - Acquisitions related intangible asset amortization* (net of minority interest effect) 3,530 569 445 727 Gain on initial formation of Rhapsody America - - - - Expenses (benefit) related to antitrust litigation: Income (61,000) (62,000) (58,000) (40,000) Expenses 1,026 1,000 997 971 Charitable contributions 2,009 1,889 1,805 1,225 Tax impact of above pro forma items* 18,428 20,370 19,569 12,446 Change in income tax valuation allowance (2,662) - - - Adjusted net income $10,209 $9,002 $5,081 $3,890 GAAP basic net income per share $0.24 $0.26 $0.24 $0.15 GAAP diluted net income per share $0.22 $0.24 $0.22 $0.14 Adjusted basic net income per share* $0.06 $0.06 $0.03 $0.02 Adjusted diluted net income per share* $0.06 $0.05 $0.03 $0.02 Shares used to compute basic net income per share 162,130 160,578 159,938 160,887 Shares used to compute diluted net income per share 180,919 178,913 177,337 176,923 Reconciliation of GAAP net income to adjusted EBITDA is as follows: Quarters Ended Sept. 30, June 30, March 31, 2007 2007 2007 (in thousands) Net income in accordance with GAAP $4,342 $1,327 $39,961 Interest income, net (7,290) (8,065) (9,102) Stock-based compensation 5,984 5,622 5,685 Loss (gain) on equity investments - (132) - Conversion of WiderThan stock options to a cash equivalent 413 614 845 Depreciation and amortization 6,210 5,661 4,621 Acquisitions related intangible asset amortization* (net of minority interest effect) 5,583 5,311 5,312 Gain on initial formation of Rhapsody America (3,866) - - Expenses (benefit) related to antitrust litigation: Income - - (61,000) Expenses 201 202 471 Charitable contributions - - 1,921 Income taxes 2,012 2,178 23,219 Adjusted EBITDA $13,589 $12,718 $11,933 Quarters Ended Dec. 31, Sept. 30, June 30, March 31, 2006 2006 2006 2006 Net income in accordance with GAAP $39,302 $42,153 $38,878 $24,883 Interest income, net (9,644) (10,618) (9,381) (7,979) Stock-based compensation 5,819 5,021 3,673 3,638 Loss (gain) on equity investments 3,116 - (2,286) - Conversion of WiderThan stock options to a cash equivalent 641 - - - Depreciation and amortization 4,970 3,692 3,522 3,525 Acquisitions related intangible asset amortization* (net of minority interest effect) 3,530 569 445 727 Gain on initial formation of Rhapsody America - - - Expenses (benefit) related to antitrust litigation: Income (61,000) (62,000) (58,000) (40,000) Expenses 1,026 1,000 997 971 Charitable contributions 2,009 1,889 1,805 1,225 Income taxes 19,357 25,908 22,521 14,751 Adjusted EBITDA $9,126 $7,614 $2,174 $1,741 * 2006 results have been restated to include acquisition related intangible asset amortization and related tax impact to conform to the pro forma presentation for 2007. RealNetworks, Inc. and Subsidiaries Segment Results of Operations (Unaudited) Quarter Ended September 30, 2007 Music Consumer TPS Grand (A) (B) (C) Other Total (in thousands) Net revenue $37,658 $54,166 $53,271 $- $145,095 Cost of revenue 20,891 10,326 25,427 - 56,644 Gross profit 16,767 43,840 27,844 - 88,451 Gross margin 45% 81% 52% - 61% Operating expenses: Advertising with related party 7,747 - - - 7,747 Other operating expenses 25,679 36,782 33,428 201 96,090 Total operating expenses 33,426 36,782 33,428 201 103,837 Income (loss) from operations (16,659) 7,058 (5,584) (201) (15,386) Other income (expenses): Interest income, net - - - 7,290 7,290 Minority interest 6,466 - - - 6,466 Gain on initial formation of Rhapsody America 3,866 - - - 3,866 Gain on sale of interest in Rhapsody America 4,080 - - - 4,080 Other income - - - 38 38 Other income, net 14,412 - - 7,328 21,740 Income before income taxes $(2,247) $7,058 $(5,584) $7,127 $6,354
Reconciliation of segment GAAP income before taxes to segment adjusted EBITDA is as follows:
Income before income taxes $(2,247) $7,058 $(5,584) $7,127 $6,354 Interest income, net - - - (7,290) (7,290) Stock-based compensation 1,130 2,367 2,487 - 5,984 Conversion of WiderThan stock options to a cash equivalent - - 413 - 413 Acquisition related intangible amortization (D) 173 416 4,994 - 5,583 Gain on initial formation of Rhapsody America (3,866) - - - (3,866) Depreciation and amortization 1,233 1,578 3,399 - 6,210 Expenses (benefit) related to antitrust litigation: Income - - - - - Expenses - - - 201 201 Charitable contributions - - - - - Adjusted EBITDA $(3,577) $11,419 $5,709 $38 $13,589 Quarter Ended June 30, 2007 Music Consumer TPS Grand (A) (B) (C) Other Total (in thousands) Net revenue $36,801 $50,314 $49,056 $- $136,171 Cost of revenue 19,804 9,436 19,959 - 49,199 Gross profit 16,997 40,878 29,097 - 86,972 Gross margin 46% 81% 59% - 64% Operating expenses 24,037 34,814 33,096 202 92,149 Income (loss) from operations (7,040) 6,064 (3,999) (202) (5,177) Other income (expenses): Interest income, net - - - 8,065 8,065 Gain on sale of equity investments - - - 132 132 Other income - - - 485 485 Other income, net - - - 8,682 8,682 Income before income taxes $(7,040) $6,064 $(3,999) $8,480 $3,505
Reconciliation of segment GAAP income before taxes to segment adjusted EBITDA is as follows:
Income before income taxes $(7,040) $6,064 $(3,999) $8,480 $3,505 Interest income, net - - - (8,065) (8,065) Stock-based compensation 1,129 2,142 2,351 - 5,622 Conversion of WiderThan stock options to a cash equivalent - - 614 - 614 Acquisition related intangible amortization (D) 22 583 4,706 - 5,311 Loss (gain) on equity investments - - - (132) (132) Depreciation and amortization 1,214 1,461 2,986 - 5,661 Expenses (benefit) related to antitrust litigation: Income - - - - - Expenses - - - 202 202 Charitable contributions - - - - - Adjusted EBITDA $(4,675) $10,250 $6,658 $485 $12,718 RealNetworks, Inc. and Subsidiaries Segment Results of Operations (Unaudited) Quarter Ended March 31, 2007 Music Consumer TPS Grand (A) (B) (C) Other Total (in thousands) Net revenue $34,127 $50,913 $44,432 $- $129,472 Cost of revenue 18,875 9,128 17,940 - 45,943 Gross profit 15,252 41,785 26,492 - 83,529 Gross margin 45% 82% 60% - 65% Operating expenses 24,949 32,907 30,538 (58,608) 29,786 Income (loss) from operations (9,697) 8,878 (4,046) 58,608 53,743 Other income (expenses): Interest income, net - - - 9,102 9,102 Equity in net loss of investments - - - (132) (132) Other income - - - 467 467 Other income, net - - - 9,437 9,437 Income before income taxes $(9,697) $8,878 $(4,046) $68,045 $63,180
Reconciliation of segment GAAP income before taxes to segment adjusted EBITDA is as follows:
Income before income taxes $(9,697) $8,878 $(4,046) $68,045 $63,180 Interest income, net - - - (9,102) (9,102) Stock-based compensation 1,040 2,256 2,389 - 5,685 Conversion of WiderThan stock options to a cash equivalent - - 845 - 845 Acquisition related intangible amortization (D) 22 723 4,567 - 5,312 Depreciation and amortization 1,260 1,417 1,944 - 4,621 Expenses (benefit) related to antitrust litigation: Income - - - (61,000) (61,000) Expenses - - - 471 471 Charitable contributions - - - 1,921 1,921 Adjusted EBITDA $(7,375) $13,274 $5,699 $335 $11,933
Note: Cost of revenue and operating expenses of the segments shown above include costs directly attributable to those segments and an allocation of general and administrative and other common or shared costs.
(A) The Music segment primarily includes revenue and related costs from: Rhapsody America's Rhapsody and RadioPass subscription services; sales of digital music content through the Rhapsody service and the RealPlayer music store; and advertising from music websites. (B) The Consumer segment primarily includes revenue and related costs from: the sale of individual games through our RealArcade service and our Games related websites including GameHouse, Mr. Goodliving, Zylom (acquired in January 2006), and Atrativa (acquired in November 2006); our GamePass and FunPass subscription service; our SuperPass and stand-alone premium video subscription services; RealPlayer Plus and related products; sales and distribution of third-party software products; and all advertising other than that related directly to our Music businesses. (C) TPS comprises our Technology Products and Services segment which includes revenue and related costs from: sales of ringback tone, music-on-demand, video-on-demand, messaging, and information services; sales of media delivery system software, including Helix system software and related authoring and publishing tools, both directly to customers and indirectly through original equipment manufacturer (OEM) channels; support and maintenance services sold to customers who purchase software products; broadcast hosting services; and consulting and professional services that are offered to customers. (D) Net of minority interest effect. RealNetworks, Inc. and Subsidiaries Supplemental Financial Information (Unaudited) Quarter Ended September 30, 2007 Acquis- WiderThan itions Options Related Conv- Intang- erted Anti- Stock- ible to a trust Based Asset Cash Litig- As Compen- Amorti- Equiv- ation Adju- Reported sation zation (A) alent Related sted (in thousands) Expenses in accordance with GAAP Cost of revenue $56,644 $(208) $(1,961) $(65) $- $54,410 Operating expenses: Research and development $26,528 $(1,740) $- $(78) $- $24,710 Sales and marketing 52,812 (2,395) (3,622) (190) - 46,605 Advertising with related party 7,747 - - - - 7,747 General and administrative 16,750 (1,641) (80) (201) 14,828 Total adjusted operating expenses, net $103,837 $(5,776) $(3,622) $(348) $(201) $93,890 Quarter Ended September 30, 2006 Acquis- itions Related Intang- Anti- Stock- ible trust Based Asset Litig- As Compen- Amorti- ation Adju- Reported sation zation (B) Related sted (in thousands) Expenses in accordance with GAAP Cost of revenue (B) $28,389 $(57) $(234) $- $28,098 Operating expenses: Research and development $18,344 $(1,878) $- $- $16,466 Sales and Marketing (B) 37,560 (1,920) (335) - 35,305 General and administrative 14,043 (1,166) - (2,750) 10,127 Antitrust litigation benefit, net (61,861) - - 61,861 - Total adjusted operating expenses, net (B) $8,086 $(4,964) $(335) $59,111 $61,898 Nine Months Ended September 30, 2007 Acquis- WiderThan itions Options Related Conv- Intang- erted Anti- Stock- ible to a trust Based Asset Cash Litig- As Compen- Amorti- Equiv- ation Adju- Reported sation zation (A) alent Related sted (in thousands) Expenses in accordance with GAAP Cost of revenue $151,786 $(520) $(6,093) $(309) $- $144,864 Operating expenses: Research and development $75,012 $(5,153) $- $(357) $- $69,502 Sales and marketing 152,593 (6,985) (10,113) (838) - 134,657 Advertising with related party 7,747 - - - - 7,747 General and administrative 51,167 (4,633) - (368) (2,542) 43,624 Antitrust litigation benefit, net (60,747) - - - 60,747 - Total adjusted operating expenses, net $225,772 $(16,771) $(10,113) $(1,563) $58,205 $255,530 Nine Months Ended September 30, 2006 Acquis- itions Related Intang- Anti- Stock- ible trust Based Asset Litig- As Compen- Amorti- ation Adju- Reported sation zation (B) Related sted (in thousands) Expenses in accordance with GAAP Cost of revenue (B) $81,788 $(148) $(810) $- $80,830 Operating expenses: Research and development $55,127 $(4,565) $- $- $50,562 Sales and Marketing (B) 111,604 (4,713) (931) - 105,960 General and administrative 41,586 (2,906) - (7,441) 31,239 Loss on excess office facilities 738 - - 738 Antitrust litigation benefit, net (159,554) - - 159,554 - Total adjusted operating expenses, net (B) $49,501 $(12,184) $(931) $152,113 $188,499 (A) - Net of minority interest effect. (B) - 2006 results have been restated to include acquisition related intangible asset amortization to conform to the pro forma presentation for 2007. RealNetworks, Inc. and Subsidiaries Supplemental Financial Information (Unaudited)
A reconciliation of GAAP net income per diluted share guidance for the quarter ending December 31, 2007 and the full year ending December 31, 2007 to adjusted net income per diluted share guidance is as follows:
Quarter Ending Year Ending December 31, 2007 December 31, 2007 Low High Low High Net income per diluted share in accordance with GAAP $0.00 $0.01 $0.28 $0.29 Stock based compensation 0.05 0.05 0.15 0.15 Conversion of WiderThan stock options to a cash equivalent - - 0.01 0.01 Acquisitions related intangible asset amortization 0.04 0.04 0.13 0.13 Net benefit related to antitrust litigation - - (0.35) (0.35) Gain on initial formation of Rhapsody America - - (0.02) (0.02) Tax impact of above pro forma items (0.03) (0.03) 0.05 0.05 Change in income tax valuation allowance - - (0.02) (0.02) Total adjusted net income per diluted share $0.06 $0.07 $0.23 $0.24
