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| RNWK > SEC Filings for RNWK > Form 10-K on 18-Mar-2013 | All Recent SEC Filings |
18-Mar-2013
Annual Report
Overview
We manage our business and report revenue and profit (loss) in three segments:
(1) Core Products, (2) Emerging Products and (3) Games. Within Core Products,
our revenue is derived primarily from the sale of our software as a service
(SaaS) offerings; within Emerging Products, our revenue is derived primarily
from the sale of our RealPlayer media player software and from the associated
distribution of third-party products; and within our Games segment, revenue is
derived primarily from subscriptions and license fees. We report common
corporate overhead expenses, including finance, legal, headquarters facilities
and stock compensation costs, in the aggregate as Corporate results. Our most
significant expenses relate to cost of revenue, compensating employees, and
selling and marketing our products and services.
In 2012 our consolidated revenue declined by $76.8 million compared with 2011.
We experienced declines in revenue in all three of our segments, with the
largest declines occurring in our Core Products and Games segments.
Our SaaS business within Core Products continues to experience competitive
pricing pressure from carriers and the proliferation of smartphone applications
and services, some of which do not depend on our carrier customers for
distribution to consumers. In addition, we are still experiencing pricing
pressure from carriers for our intercarrier messaging services, which prevents
this revenue from rising in spite of increased usage of our services. Our
Emerging Products segment is experiencing declines in revenue as a result of
market saturation related to third-party software products we distribute. In our
Games segment and in the general games market, consumer's game play continues to
shift from downloadable PC games and online game subscriptions, where we
currently generate 85% of overall Games revenues, to social networks and mobile
devices. Since 2011, we have been focusing on developing social games and
monetizing social game play experiences. However, the revenue we currently
generate from social games is not a significant portion of our Games revenue.
In the second quarter of 2012 we completed the sale of certain patents, patent
applications and related rights and assets relating to our Next Generation Video
codec technologies to Intel Corporation. We received gross cash consideration of
$120.0 million from the sale, and reported the sales proceeds, net of related
direct costs, as a gain in the statement of operations. This gain accounts for
the material improvement in our operating income (loss) and net income (loss)
for 2012, compared with 2011.
We continue to focus on aligning our operating expenses with our revenue
profile, and in the third quarter of 2012 we announced we would be eliminating
approximately 160 positions worldwide, with the reductions expected to be
completed by the end of the second quarter of 2013. In the third quarter of 2012
we also assigned two of our existing domestic carrier service contracts for
ringback tone, ring tone, and music on demand services to a third party. These
actions contributed to the recording of restructuring charges totaling $15.2
million in 2012.
Summary of Results
Consolidated results of operations were as follows (dollars in thousands):
2012-2011 % 2011-2010 %
2012 2011 2010 Change Change Change Change
Total revenue $ 258,842 $ 335,686 $ 401,733 $ (76,844 ) (23 )% $ (66,047 ) (16 )%
Cost of revenue 103,731 126,637 144,723 (22,906 ) (18 )% (18,086 ) (12 )%
Impairment of
deferred costs - 19,962 - (19,962 ) (100 )% 19,962 100 %
Gross profit 155,111 189,087 257,010 (33,976 ) (18 )% (67,923 ) (26 )%
Gross margin 60 % 56 % 64 % 4 % (8 )%
Sale of patent
assets and other
technology assets,
net of costs 116,353 - - 116,353 100 %
Total operating
expenses 215,901 226,697 291,537 (10,796 ) (5 )% (64,840 ) (22 )%
Operating income
(loss) $ 55,563 $ (37,610 ) $ (34,527 ) $ 93,173 248 % $ (3,083 ) (9 )%
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2012 compared with 2011
Revenue decreased by $76.8 million, or 23%. The reduction in revenue resulted
from a decline of $42.0 million in our Core Products segment, a decline of $30.8
million in our Games segment, and a decline of $4.0 million in our Emerging
Products segment, due to the factors described above. Cost of revenue decreased
by $22.9 million compared with the year earlier period due primarily to the
decline in revenue, partially offset by a decrease of $5.5 million in royalty
expense in the year prior, due to a change in estimates of our accrued
royalties. Operating expenses improved by $10.8 million due primarily to reduced
personnel and related costs of $20.3 million and reduced marketing expenses of
$6.7 million, due to our ongoing work to align our operating expenses with our
revenue profile. These declines were partially offset by an increase of $10.5
million in restructuring costs and losses on excess office facilities, in
addition to a benefit in 2011 of $6.4 million related to an insurance
reimbursement for previously settled litigation that reduced expenses during the
quarter ended March 31, 2011.
2011 compared with 2010
Revenue decreased by $66.0 million, or 16%. Approximately half, or $35.7 million
of the decline was due to the deconsolidation of Rhapsody on March 31, 2010 in
addition to declines of $35.1 million in our Core Products and Games segments.
The deconsolidation of Rhapsody is described in detail in Note 3, Rhapsody Joint
Venture. Cost of revenue decreased by $18.1 million compared with the year
earlier period due primarily to lower costs of $21.9 million from the
deconsolidation of the Rhapsody joint venture. We recorded impairments of
deferred costs of $20.0 million in the fourth quarter of 2011 related to certain
contracts with carrier customers for which the total estimated costs exceeded
the total estimated revenues expected to be recognized. Operating expenses
improved by $64.8 million due primarily to reduced personnel and related costs
of $31.6 million, $13.9 million resulting from the Rhapsody deconsolidation, and
lower restructuring charges and losses on excess office facilities totaling
$11.8 million.
Segment Reporting
Core Products
The Core Products segment primarily generates revenue and incurs costs from the
sales of SaaS services, such as ringback tones, intercarrier messages, music on
demand and video on demand, professional services and system integration
services to carriers and mobile handset companies, sales of licenses of our
software products such as Helix for handsets, and consumer subscriptions such as
SuperPass and international radio subscriptions.
Core Products segment results of operations were as follows (dollars in
thousands):
2012-2011 % 2011-2010 %
2012 2011 2010 Change Change Change Change
Total revenue $ 149,211 $ 191,240 $ 212,845 $ (42,029 ) (22 )% $ (21,605 ) (10 )%
Cost of revenue 70,796 83,696 83,733 (12,900 ) (15 )% (37 ) - %
Impairment of
deferred costs - 19,329 - (19,329 ) (100 )% 19,329 100 %
Gross profit 78,415 88,215 129,112 (9,800 ) (11 )% (40,897 ) (32 )%
Gross margin 53 % 46 % 61 % 7 % (15 )%
Total operating
expenses 64,960 75,188 86,217 (10,228 ) (14 )% (11,029 ) (13 )%
Operating income
(loss) $ 13,455 $ 13,027 $ 42,895 $ 428 3 % $ (29,868 ) (70 )%
|
2012 compared with 2011
Total Core Products revenue decreased by $42.0 million, or 22%. This decrease
was primarily due to reduced revenue from our SaaS offerings of $29.1 million.
The decline in SaaS revenue was due primarily to a $24.3 million decline in our
ringback tone, intercarrier messaging and video on demand revenues due to both
fewer subscribers and lower contract prices. In addition, subscription revenue,
mainly from our SuperPass product, decreased $8.9 million due to a decline in
subscribers, and revenue from systems integration declined $4.0 million.
Gross margin increased primarily due to the impairments of deferred costs of
$19.3 million within the year ended December 31, 2011, related to certain
contracts with carrier customers for which the total estimated costs exceeded
the total estimated revenues expected to be recognized. Slightly offsetting this
was a decrease in gross margin as a result of higher costs of $1.9 million in
the current year, related to a reduction in royalty expense in the prior year
from a change in estimates of our accrued royalties related to our SuperPass
product. Operating expenses decreased by $10.2 million primarily due to
reductions in personnel and related costs that resulted from our restructuring
efforts.
2011 compared with 2010
Revenue decreased by $21.6 million, or 10%. SaaS revenue decreased by $14.2
million primarily due to lower intercarrier messaging contract prices that
contributed $8.8 million to the decline, and a $5.2 million decline in revenues
from our tone business primarily due to a decline in subscribers. In addition,
subscription revenue, mainly from our SuperPass product, declined by $5.3
million during the year ended December 31, 2011, compared with the same period
in 2010 due primarily to a decline in the number of subscribers.
Gross margin decreased primarily due to the 2011 impairments of deferred costs
as well as lower SaaS intercarrier messaging contract prices, with no
corresponding decreases in cost of revenue. The 2011 impairments of deferred
costs of $19.3 million related to certain contracts with carrier customers for
which the total estimated costs exceeded the total estimated revenues expected
to be recognized. Operating expenses decreased by $11.0 million primarily due to
reductions in personnel and related costs that resulted from our restructuring
efforts.
Emerging Products
The Emerging Products segment primarily generates revenue and incurs costs from
sales of RealPlayer and its related products, such as the distribution of
third-party software products, advertising on RealPlayer websites, and sales of
RealPlayer Plus software licenses to consumers. Also included within the
Emerging Products segment is the cost to build and develop new product offerings
for consumers and business customers.
Emerging Products segment results of operations were as follows (dollars in
thousands):
2012-2011 % 2011-2010 %
2012 2011 2010 Change Change Change Change
Total revenue $ 42,576 $ 46,590 $ 41,761 $ (4,014 ) (9 )% $ 4,829 12 %
Cost of revenue 7,965 11,879 7,123 (3,914 ) (33 )% 4,756 67 %
Impairment of
deferred costs - 633 - (633 ) (100 )% 633 100 %
Gross profit 34,611 34,078 34,638 533 2 % (560 ) (2 )%
Gross margin 81 % 73 % 83 % 8 % (10 )%
Total operating
|
2012 compared with 2011
Emerging Products revenue decreased by $4.0 million, or 9%. This decrease was
due in part to the decline of revenue related to the distribution of third-party
software of $2.2 million, due to fewer units distributed. In addition, revenue
related to advertising decreased by $1.9 million. Cost of revenue decreased $3.9
million, primarily due to the elimination in 2012 of certain advertising
agreements that occurred in 2011, in addition to lower revenue. Operating
expenses decreased by $5.2 million, due in part to reductions in personnel and
related costs of $7.5 million, which resulted from our ongoing work to align our
operating expenses with our revenue profile. Partially offsetting these
decreases was increased marketing spend to drive the distribution of our
premium, paid version of RealPlayer of $2.5 million.
2011 compared with 2010
Revenue increased by $4.8 million, or 12%. Higher unit sales of our RealPlayer
Plus software contributed approximately $3.9 million to the increase during the
period, due to increased marketing efforts. Cost of revenue increased $4.8
million mainly due to increases related to certain advertising agreements and
increased support costs for the distribution of RealPlayer and other products.
Operating expenses increased by $8.0 million primarily due to increased
marketing expense to drive the distribution of RealPlayer and related
third-party software.
Games
The Games segment primarily generates revenue and incurs costs from the
creation, distribution and sales of games licenses, online games subscription
services, advertising on game sites and social network sites, games syndication
services and microtransactions from online and social games and sales of mobile
games.
Games segment results of operations were as follows (dollars in thousands):
2012-2011 % 2011-2010 %
2012 2011 2010 Change Change Change Change
Total revenue $ 67,055 $ 97,856 $ 111,394 $ (30,801 ) (31 )% $ (13,538 ) (12 )%
Cost of revenue 21,613 30,646 29,071 (9,033 ) (29 )% 1,575 5 %
Gross profit 45,442 67,210 82,323 (21,768 ) (32 )% (15,113 ) (18 )%
Gross margin 68 % 69 % 74 % (1 )% (5 )%
Total operating expenses 49,804 60,633 78,275 (10,829 ) (18 )% (17,642 ) (23 )%
Operating income (loss) $ (4,362 ) $ 6,577 $ 4,048 $ (10,939 ) (166 )% $ 2,529 62 %
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2012 compared with 2011
Games revenue decreased by $30.8 million, or 31%. Lower revenue from license
sales and our subscription products contributed $13.9 million and $10.2 million,
respectively, to the decline during the period. The decrease in license revenue
included a decrease in the number of games sold through our games syndication
services of $4.9 million, as well as lower sales of mobile games of $4.8
million. Lower subscription revenue was a result of fewer subscribers compared
with the year-earlier period. Further contributing to the decline was lower
revenue from advertising of $4.9 million. Cost of revenue decreased by $9.0
million, or 29%. This decrease was primarily due to the decrease in partner
royalties expense, which has a direct correlation with the decrease in Games
revenue. Operating expenses decreased by $10.8 million, or 18%. The decrease was
primarily due to reductions in marketing expenses of $7.2 million, primarily
related to our non-social games, in addition to reductions in personnel and
related costs of $2.4 million.
2011 compared with 2010
Revenue decreased by $13.5 million, or 12%. The decline was due to lower license
revenue of $4.8 million primarily due to a decrease in the number of games sold
through our games syndication services. Further contributing to the decline was
lower revenue from our subscription products of $4.8 million as a result of
fewer subscribers. In addition, distribution of third party software declined by
$3.7 million due to reduced traffic for our games properties. Cost of revenue
increased by $1.6 million, or 5%. The increase was due primarily to higher costs
associated with distribution of third party games as well as increased delivery
costs for our games products and services. Gross margins decreased due to lower
subscription revenue and lower distribution of third party software, both of
which are higher-margin revenues. Operating expenses decreased by $17.6 million,
or 23%. The decrease was primarily due to reductions in personnel and related
costs of approximately $8.7 million. Further, we reduced our spending on
marketing and related activities by approximately $3.4 million in 2011. In
addition, depreciation expense related to our Games technology platform
decreased by $3.1 million.
Music
We currently own approximately 45% of Rhapsody, which provides products and
services that enable consumers to have unlimited access to digital music content
anytime from a variety of devices. Rhapsody currently generates revenue
primarily in the U.S. through subscriptions to its music services, and sales of
tracks and advertising.
As described in detail in Note 3, Rhapsody Joint Venture, on March 31, 2010, we
completed the restructuring of Rhapsody, which at that time, resulted in our
ownership interest in Rhapsody decreasing to approximately 47% and the loss of
our operating control over Rhapsody. Our revenue and operating results for the
first quarter of 2010 includes results from Rhapsody's operations, as during
that time we owned 100% of Rhapsody and their results were included in our
financial statements. Beginning with the second quarter of 2010, Rhapsody's
revenue and other operating results are no longer consolidated within our
financial statements and we have not been recording any operating or other
financial results for the Music segment. Starting with the second quarter of
2010, we account for our investment in Rhapsody using the equity method of
accounting for investments. Our share of Rhapsody's accounting losses for the
years ended December 31, 2012 and 2011 were $5.7 million and $7.9 million. Our
share of Rhapsody's losses for the nine-month period from April 1, 2010 to
December 31, 2010, was $14.2 million.
For the three month period ending March 31, 2010, during which we owned 100% of
Rhapsody, our Music segment results of operations was as follows (dollars in
thousands):
2010
Total revenue $ 35,733
Cost of revenue 21,864
Gross profit 13,869
Gross margin 39 %
Total operating expenses 13,911
Operating income (loss) $ (42 )
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Corporate
Certain corporate-level activity is not allocated to our segments, including
costs of: human resources, legal, finance, information technology, procurement
activities, litigation, corporate headquarters, legal settlements and
contingencies, stock compensation, restructuring costs and losses on excess
office facilities.
Corporate segment results of operations were as follows (dollars in thousands):
2012-2011 % 2011-2010 %
2012 2011 2010 Change Change Change Change
Cost of revenue $ 3,357 $ 416 $ 2,932 $ 2,941 707 % $ (2,516 ) (86 )%
Gain on sale of
patents and other
technology assets,
net of costs 116,353 - - 116,353 100 % - - %
Total operating
expenses 70,328 54,865 85,081 15,463 28 % (30,216 ) (36 )%
Operating income
(loss) $ 42,668 $ (55,281 ) $ (88,013 ) $ 97,949 177 % $ 32,732 37 %
|
2012 compared with 2011
Cost of revenue increased by $2.9 million. The increase was due primarily to a
reduction in expense in the prior year from a change in estimates of our accrued
royalties on our historical music business of approximately $3.6 million.
The net gain from the sale of patents and other technology assets to Intel
Corporation of $116.4 million in 2012 reflects the cash proceeds of $120.0
million in the second quarter, less $3.6 million of direct transaction expenses
incurred during the first and second quarters.
Operating expenses increased by $15.5 million, or 28%. The increase compared
with the prior period was primarily due to increased restructuring costs and
losses on excess office facilities totaling $10.5 million, and to the impact of
a benefit in 2011 of $6.4 million related to an insurance reimbursement for
previously settled litigation that reduced expense in the prior year. These
increases were partially offset by reductions in personnel and related costs of
$2.4 million in 2012, which resulted from our ongoing work to align our
operating expenses with our revenue profile.
2011 compared with 2010
Cost of revenue declined by $2.5 million, or 86%. The majority of the decline
was the result of a change of estimates in our accrued royalties, which resulted
in a reversal of approximately $3.6 million in royalty expense primarily
associated with our historical music business.
Operating expenses decreased by $30.2 million, or 36%. The decrease was due in
part to lower restructuring charges and loss on excess office facilities of
approximately $11.8 million as well as a reduction in personnel and related
costs and professional services expense of approximately $11.5 million. The
remaining decrease in operating expenses was due in part to a benefit in 2011
from an insurance reimbursement of $6.4 million related to previously settled
litigation, which was accounted for as a reduction to operating expenses.
Operating Expenses
Research and Development
Research and development expenses consist primarily of salaries and related
costs of research and development personnel, expense associated with stock-based
compensation, and consulting fees associated with product development. To date,
all research and development costs have been expensed as incurred because
technological feasibility for software products is generally not established
until substantially all development is complete.
Research and development costs were as follows (dollars in thousands):
2012-2011 % 2011-2010 %
2012 2011 2010 Change Change Change Change
Research and
Development $ 63,194 $ 70,212 $ 100,955 $ (7,018 ) (10 )% $ (30,743 ) (31 )%
As a percent of
revenue 24 % 21 % 25 %
|
2012 compared with 2011
Research and development expenses, including non-cash stock-based compensation,
decreased by $7.0 million, or 10%, primarily due to a decrease in personnel and
related costs of $6.1 million.
2011 compared with 2010
Research and development expenses, including non-cash stock-based compensation,
decreased by $30.7 million, or 31%. The decline was primarily due to a decrease
in personnel and related costs of approximately $18.5 million as well as a
decrease in depreciation expense related to our Games technology platform of
$3.1 million. In addition, the removal of Rhapsody's operating expenses from our
consolidated financial results beginning April 1, 2010, contributed
approximately $3.8 million to the decline. Further contributing to the decline
was the reduction of $5.7 million of professional services costs due primarily
to reduced development work in our SaaS business. The decrease in research and
development expenses as a percentage of total revenue from 25% in 2010 to 21% in
2011 was due primarily to our ongoing cost-containment efforts.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries and related costs for
sales and marketing personnel, sales commissions, amortization of certain
intangible assets capitalized in our acquisitions, credit card fees, subscriber
acquisition costs, consulting fees, trade show expenses, advertising costs and
costs of marketing collateral.
Sales and marketing costs were as follows (dollars in thousands):
2012-2011 % 2011-2010 %
2012 2011 2010 Change Change Change Change
Sales and Marketing $ 90,301 $ 111,300 $ 118,543 $ (20,999 ) (19 )% $ (7,243 ) (6 )%
As a percent of revenue 35 % 33 % 30 %
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2012 compared with 2011
Sales and marketing expenses, including non-cash stock-based compensation,
decreased by $21.0 million, or 19%. The decrease was due primarily to a decrease
in personnel and related costs of $13.4 million. Further contributing to the
decline in sales and marketing costs was reductions in marketing expenses of
$7.1 million, primarily related to our non-social games.
2011 compared with 2010
Sales and marketing expenses, including non-cash stock-based compensation,
decreased by $7.2 million, or 6%. The decrease was due primarily to the removal
of Rhapsody's operating expenses of $8.8 million from our consolidated financial
results beginning April 1, 2010. Also contributing to the overall decrease of
sales and marketing expenses was a decrease in personnel and related costs of
approximately $5.7 million due to our restructuring activities and reduced
third-party sales commissions of $1.6 million. These decreases in sales and
marketing costs were partially offset by an increase in marketing expenses for
RealPlayer of $8.1 million, as well as higher professional services expense of
$2.4 million.
General and Administrative
General and administrative expenses consist primarily of salaries and related
personnel costs, fees for professional and temporary services and contractor
costs, stock-based compensation, and other general corporate costs.
General and administrative costs were as follows (dollars in thousands):
2012-2011 % 2011-2010 %
2012 2011 2010 Change Change Change Change
General and
Administrative $ 43,891 $ 37,181 $ 51,217 $ 6,710 18 % $ (14,036 ) (27 )%
As a percent of
revenue 17 % 11 % 13 %
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2012 compared with 2011
General and administrative expenses, including non-cash stock-based
compensation, increased by $6.7 million, or 18%. This increase was primarily due
to the impact of a benefit in the first quarter of 2011 of $6.4 million related
to an insurance reimbursement for previously settled litigation that reduced
expense in the prior year.
. . .
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