Realnetworks Announces Second Quarter Results

RealNetworks®, Inc. (Nasdaq: RNWK), the leading creator of digital media services and software, today announced results for the second quarter ended June 30, 2007.

Quarterly Highlights

Record revenue of $136.2 million

Net income of $1.3 million or $0.01 per diluted share

Adjusted net income of $8.9 million or $0.05 per diluted share


“We are pleased to again deliver record revenue and solid financial performance this quarter,” said Rob Glaser, chairman and CEO of RealNetworks. “We also released a new version of our flagship RealPlayer product to widespread acclaim. The new RealPlayer makes it easy for consumers to download and record video from thousands of Web sites.”

For the second quarter of 2007, revenue grew 52% to $136.2 million compared to $89.4 million for the second quarter of 2006. For the second quarter of 2007, revenue in the Consumer Products and Services segment was as follows: Music revenue was $36.8 million, a 22% increase over the second quarter of 2006; Games revenue was $24.9 million, a 17% increase over the second quarter of 2006; and Media Software and Services revenue was $25.4 million, a 3% decrease from the second quarter of 2006. In the Technology Products and Solutions segment, revenue was $49.1 million, a 310% increase over the second quarter of 2006, due to the acquisition of WiderThan. Foreign currency exchange rate fluctuations positively impacted 2007 second quarter revenue by approximately $1.2 million compared to the second quarter of 2006.

Net income for the second quarter of 2007 was $1.3 million or $0.01 per diluted share, compared to $38.9 million or $0.22 per diluted share in the second quarter of 2006. The second quarter of 2006 results 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 measures, was $8.9 million or $0.05 per diluted share for the second quarter of 2007, compared to $5.1 million or $0.03 per diluted share in the second quarter of 2006. Adjusted EBITDA for the second quarter of 2007 was $12.7 million compared to $2.2 million in the second 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 64% in the second quarter of 2007 compared to 70% in the second quarter of 2006. Operating expenses for the second quarter of 2007 were $92.1 million, compared to $13.1 million in the second quarter of 2006. Operating expenses in the second quarter of 2006 included benefits related to payments under Real’s antitrust settlement and commercial agreements with Microsoft. Adjusted operating expenses in the second quarter of 2007 were $82.7 million compared to $64.4 million in the second 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 second quarter of 2007, Real’s effective tax rate was 62%, due in part to foreign tax impacts of acquisitions made during the quarter.

As of June 30, 2007, Real had approximately $614 million in unrestricted cash, cash equivalents and short-term investments which include the proceeds from $100 million of convertible debt.

Under Real’s current stock repurchase program, approximately 3.5 million shares were repurchased for $29.4 million during the second quarter of 2007. As of June 30, 2007, approximately $70.6 million remained available under the existing stock repurchase program.

Acquisition of Exomi
In June 2007, Real acquired Exomi, a provider of mobile software and services for a total upfront cash payment of approximately $11 million, and a commitment to make additional contingent cash payments of up to an aggregate of approximately $5 million if certain financial performance targets are met over the next three-year period. Headquartered in Helsinki, Finland, Exomi provides the messaging and WAP (Wireless Application Protocol) gateways that are necessary for mobile carriers to deliver mobile entertainment services such as Music on Demand, Video on Demand, Ringback Tones, Games and other services to the mobile handset.

This acquisition is part of Real’s strategy to extend its global leadership in digital entertainment services to mobile operators, and follows Real’s recent acquisitions of mobile entertainment providers Sony NetServices in May 2007 and WiderThan in late 2006.

Business Outlook
The following forward-looking statements reflect RealNetworks’ expectations as of July 31, 2007. The Company currently does not intend to update these forward-looking statements until its next quarterly results announcement.

For the third quarter of 2007, Real expects revenue in the range of $141 million to $145 million, GAAP net loss per share of ($0.03) to ($0.01) and adjusted net income per diluted share of $0.02 to $0.04.

For the full year 2007, Real expects revenue in the range of $561 million to $573 million. Real expects 2007 GAAP net income per diluted share of $0.22 to $0.25 and adjusted net income per diluted share of $0.21 to $0.24. This guidance assumes an effective tax rate of approximately 40%.

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.

About Non-GAAP Financial Measures
To supplement RealNetworks’ 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 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 sale or impairments; acquisition costs, including amortization of intangible assets and expenses for employee stock options that were converted to cash rights; 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 consists of net income excluding the impact of the following: interest income, net; income taxes; depreciation; amortization; stock-based compensation; expenses for employee stock options that were converted to cash rights; equity investment gains and losses from sale or impairments; and income and expenses including charitable contributions related to the Microsoft agreements.

Adjusted cost of revenue consists of GAAP cost of revenue excluding stock-based compensation expenses, and acquisition costs including amortization of intangible assets 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 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 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 we believe that the inclusion or exclusion of the items described above provides an additional measure 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 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;

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 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 and adjusted EBITDA 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 and adjusted EBITDA.

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, GAAP cost of revenue to adjusted cost of revenue and GAAP operating expenses to adjusted operating expenses for the relevant periods.

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 will require RealPlayer® to listen to the conference call, which can be downloaded for free at www.real.com. The on-demand webcast will be available approximately two hours following the conclusion of the live webcast. Participants may access the conference call by dialing 800-857-5305 (773-681-5857 for international callers). The passcode is “Second Quarter Earnings,” and the leader is Rob Glaser. A telephonic replay will be available until 8:00pm (Eastern) on August 7, 2007 and may be accessed by dialing 800-469-5439 (203-369-3805 for international callers).