Update: RealNetworks Earnings

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 |  About: RealNetworks, Inc. (RNWK)
by: Matthew Dow

Summary

RealNetworks reported earnings last week, and it was for all intents and purposes another disappointing quarter.

Despite some bright news about RealPlayer Cloud, the company's turnaround is definitely slower than anticipated and cash burn is increasing.

At this point the company would be better served to sell off most assets and focus all resources on RealPlayer Cloud.

On July 30th, RealNetworks (NASDAQ:RNWK) reported 2nd quarter earnings of ($0.59) per share, representing a GAAP loss of ($21m) and an adjusted EBITDA loss of ($13.1m). There is no easy way to sugar coat this one, as the company has continued its string of disappointing quarterly reports. The company is in the midst of a multi-year transition plan, as its core business units (Games, RealPlayer, and Mobile Entertainment) have all fallen victim of technological obsolescence. Admittedly the turnaround continues much slower than I had expected a year ago, and the losses are mounting. 3rd quarter guidance is for another EBITDA loss of $18-20m. Although the share price has held up fairly well for over a year, the shareholders' equity is down nearly 20% as the company continues to slowly eat away its cash.

As I covered in two previous detailed articles on the company which you can view here and here, RealPlayer has been releasing new products in all three of its major divisions. Games had fallen on hard times as it focused on casual desktop PC games which were losing ground fast to social games (e.g. Facebook (NASDAQ:FB) ) and smartphone apps. Similarly with mobile entertainment, this division's main products were ring tones for feature phones, which as you can guess have lost big to smartphone apps. Both divisions now have new products focused on smartphones and social. The mobile entertainment division is doing the best, as it has positive EBITDA and seems to have some traction with its new LISTEN product in Asia. However, the Games division is not showing much, where clearly the GameHouse Casino initiative is going up against lots of competition and CEO Glaser even admitted in a roundabout way in the last conference call that it's not going as the company hoped. The Slingo Adventure product is the next big push that it is focusing on. In any case, we sure aren't seeing any sign of real tangible results.

Finally in the RealPlayer division, I was excited last year about the RealPlayer Cloud product, as I thought it was a solid app that had potential to gain share in the niche social video sharing market. While it does seem the product is gaining traction with an impressive 5m users in less than a year, clearly it is monetizing much less than 5% of these with premium accounts, as the RealPlayer division continues to lose big time in revenues. Glaser also hinted that it is taking quite a bit of marketing expense to promote the platform, and reading between the lines I believe the company will need to really ramp up sales and marketing and use more cash than anticipated if it hopes to win with this product.

In conclusion, I am much less bullish on the company than I was last year. I believe the stock is much riskier today than it was then, and the share price is likely to fall in the near term as it catches up to the loss in shareholders' equity. I've decided to sell most of my position, and just hold on to a small token few shares in case RealPlayer Cloud becomes a big hit. Admittedly thought this is a long shot, and the company at this point probably would be best served if the company sold off most of the business, including its 45% stake in Rhapsody. It should then put all remaining resources into its cloud product, which I think has the best chance at sustained monetization due to its rapidly growing user base.

Disclosure: The author is long RNWK. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.