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4-Traders Homepage  >  Equities  >  Nasdaq  >  RealNetworks Inc    RNWK

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REALNETWORKS : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

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02/27/2017 | 09:04pm CET

Overview

RealNetworks creates innovative applications and services that make it easy to
connect with and enjoy digital media. Following a reorganization that took
effect in the first quarter of 2016, we manage our business and report revenue
and operating income (loss) in three segments: (1) Consumer Media (2) Mobile
Services, and (3) Games.
Within our Consumer Media segment, revenue is derived from the sales of our
PC-based RealPlayer® products, including RealPlayer Plus and related products,
and from the licensing of our intellectual property, primarily our codec
technology, including our recently introduced RealMedia High Definition, or
RMHD, technology. These products and services are delivered directly to
consumers and through partners, such as OEM's and mobile device manufacturers.
Our Mobile Services business generates revenue primarily from the sale of its
SaaS services, which include ringback tones, music on demand, and intercarrier
messaging. This business also includes revenue related to RealTimes®, our photo
and video sharing application that is primarily sold through mobile
telecommunication carriers and related partners, which we introduced in May of
2015.
Our Games business, through its GameHouse and Zylom brands, derives revenue from
sales of mobile games, games licenses, online games subscription services, and
advertising on games sites.
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. Acquisitions and Disposals, to the consolidated
financial statements included in Item 8 of Part II of this Form 10-K.
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.
Remaining expenses, which are not directly attributable to supporting the
business, are reported as corporate items. These corporate items include
restructuring charges, lease exit and related charges, as well as stock
compensation expense. Concurrent with the first quarter 2016 segment change
described above, we also changed our expense allocation methodology to increase
accountability, resulting in an increase in corporate costs allocated to the
Consumer Media and Mobile Services businesses. The historical financial
information presented below has been recast to reflect the new corporate expense
allocation.
In 2016 our consolidated revenue declined by $4.8 million compared with 2015,
due to a $5.6 million decrease in Games revenue, of which $4.9 million is
related to the Slingo and social casino business that was sold in August of
2015, and a decrease of $3.6 million in Consumer Media revenue. These decreases
were offset, in part, by an increase of $4.3 million in Mobile Services revenue.
See below for further information regarding fluctuations by segment.
As of December 31, 2016, we had $77.1 million in unrestricted cash, cash
equivalents and short-term investments, compared to $99.1 million as of
December 31, 2015. The 2016 decrease of cash, cash equivalents, and short-term
investments from December 31, 2015 was due primarily to our ongoing cash flows
used in operating activities.
In addition to our revenue growth plans, we have continued to reduce costs and
better align our operating expenses with our revenue profile through various
restructuring actions, as described below in Consolidated Operating Expenses.
These actions drove the $31.5 million decline in our operating expenses during
2016 compared to 2015.
Summary of Results
Consolidated results of operations were as follows (dollars in thousands):
                                                                 2016-2015        %         2015-2014        %
                         2016          2015          2014          Change       Change       Change        Change
Total revenue         $ 120,468     $ 125,296     $ 156,212     $   (4,828 )      (4 )%   $  (30,916 )      (20 )%
Cost of revenue          64,968        70,297        76,381         (5,329 )      (8 )%       (6,084 )       (8 )%
Extinguishment of
liability                     -             -       (10,580 )            -         -  %       10,580        100  %
Gross profit             55,500        54,999        90,411            501         1  %      (35,412 )      (39 )%
Gross margin                 46 %          44 %          58 %            2 %                     (14 )%
Total operating
expenses                 92,674       124,186       159,564        (31,512 )     (25 )%      (35,378 )      (22 )%
Operating income
(loss)                $ (37,174 )   $ (69,187 )   $ (69,153 )   $   32,013        46  %   $      (34 )        -  %



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2016 compared with 2015
Revenue decreased by $4.8 million, or 4%. The reduction in revenue resulted from
a decline of $5.6 million in our Games segment, and a decline of $3.6 million in
our Consumer Media segment. These declines were offset in part by an increase of
$4.3 million in our Mobile Services segment. For further detail regarding the
changes, please see the discussions of segment revenues below. Gross margin
increased to 46% from 44%, driven by margin increases in Consumer Media and
Mobile Services, offset by decreased margin in our games business due to
increased app store fees.
Operating expenses decreased by $31.5 million as compared to the prior year due
to savings of $11.1 million realized from the sale of the Slingo and social
casino games business and from the impact of our continuing cost reduction
efforts. These efforts were the primary reason for reductions to personnel and
related costs of $9.3 million, marketing costs of $7.9 million, restructuring of
$4.1 million and facilities and related depreciation expense, due to the
reduction of our corporate office space, of $2.8 million. These reductions were
offset in part by the benefit recognized in the first quarter of 2015 relating
to warrants received from Rhapsody, an expense benefit received in 2015 for the
release of certain previously accrued sales taxes, and higher stock compensation
expense in 2016 resulting from the first quarter 2016 authorization and grant of
fully vested equity awards as payment for 2015 incentive bonuses.
2015 compared with 2014
Revenue decreased by $30.9 million, or 20%. The reduction in revenue resulted
from a decline of $10.5 million in our Consumer Media segment, a decline of $6.4
million in our Games segment, and a decline of $14.0 million in our Mobile
Services segment. Revenue decreases were due to declining revenue in all three
of our segments; subscriptions for our Games business decreased when compared to
2014, but are now stabilizing, and our Consumer Media segment has been
negatively impacted by the change in our third party distribution arrangements.
Gross margin decreased to 44% from 58%, primarily as a result of our transition
to a new third party distribution arrangement in Q2 2014 at significantly lower
rates compared to our previous partner and to an increase in our bandwidth
expense due to our continued investment in our RealTimes product. Additionally,
a higher proportion of lower margin revenue in our music on demand business in
Korea and the extinguishment of certain accrued royalty liabilities of $10.6
million in Q1 2014 both contributed to the decline in gross margin in 2015 when
compared with 2014.
Operating expenses decreased by $35.4 million primarily due to reductions in
personnel and related costs of $24.4 million, reductions in marketing costs of
$7.4 million, and lower facilities and infrastructure related expenses of $2.0
million.

Segment Operating Results
Consumer Media
Consumer Media segment results of operations were as follows (dollars in
thousands):

                                                                     2016-2015        %        2015-2014        %
                              2016         2015          2014          Change       Change       Change       Change
Total revenue              $ 25,051     $  28,613     $  39,121     $   (3,562 )     (12 )%   $ (10,508 )      (27 )%
Cost of revenue               7,074        13,257        13,466         (6,183 )     (47 )%        (209 )       (2 )%
Gross profit                 17,977        15,356        25,655          2,621        17  %     (10,299 )      (40 )%
Gross margin                     72 %          54 %          66 %           18 %                    (12 )%

Total operating expenses 18,399 26,526 41,950 (8,127 ) (31 )% (15,424 ) (37 )% Operating income (loss) $ (422 ) $ (11,170 ) $ (16,295 ) $ 10,748 96 % $ 5,125 31 %



2016 compared with 2015
Total Consumer Media revenue in 2016 decreased by $3.6 million, or 12% as
compared to the prior year. Of the decrease, $2.2 million is due primarily to
the timing of contracts and contract renewals for intellectual property
licenses. Continuing declines in our subscription products of $1.5 million also
contributed to the decrease in Consumer Media revenue.
Cost of revenue decreased by $6.2 million, resulting in an increase in gross
margin of 18 percentage points. The decrease to cost of revenue was driven by
lower bandwidth costs of $3.8 million, as well as a reduction in salaries and
personnel expenses of $1.0 million and customer support costs of $0.4 million.
Operating expenses decreased by $8.1 million compared to the prior year. The
decrease was primarily due to reductions in salaries and personnel costs of $4.5
million, marketing costs of $2.4 million and professional services of $1.5
million.

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2015 compared with 2014
Total Consumer Media revenue decreased by $10.5 million, or 27%. This decrease
was primarily due to our 2014 transition to a new third party distribution
arrangement at significantly lower rates compared to our previous partner. This
transition caused our third party distribution revenue to decrease by $8.8
million when compared to 2014. Our SuperPass subscription revenue declined by
$2.6 million due to fewer subscribers for this legacy product line and
RealPlayer license revenue decreased by $1.6 million. These declines in revenue
were offset in part by a $2.1 million increase in our IP licensing business.
Gross margin decreased by 12 percentage points, due primarily to our transition
to a new third party distribution arrangement at significantly lower rates
compared to our previous partner and an increase in bandwidth expenses
associated with our cloud-based products.
Operating expenses decreased by $15.4 million primarily due to decreased
personnel and related expenses of $7.1 million and a reduction in marketing
expenses of $7.3 million, mainly related to our third party distribution
arrangements.
Mobile Services
Mobile Services segment results of operations were as follows (dollars in
thousands):
                                                                      2016-2015        %        2015-2014        %
                              2016          2015          2014          Change       Change       Change       Change
Total revenue              $  70,278     $  65,935     $  79,981     $    4,343         7  %   $ (14,046 )      (18 )%
Cost of revenue               50,026        47,834        52,193          2,192         5  %      (4,359 )       (8 )%
Gross profit                  20,252        18,101        27,788          2,151        12  %      (9,687 )      (35 )%
Gross margin                      29 %          27 %          35 %            2 %                     (8 )%

Total operating expenses 34,439 44,311 53,527 (9,872 ) (22 )% (9,216 ) (17 )% Operating income (loss) $ (14,187 ) $ (26,210 ) $ (25,739 ) $ 12,023 46 % $ (471 ) (2 )%




2016 compared with 2015
Mobile Services revenue increased by $4.3 million, or 7%. The increase was
driven by increases of $6.1 million in our low-margin music on demand business
in Korea, as well as an increase of $1.9 million from system implementations for
our carrier partners. These increases were offset in part by a decline in
revenue of $2.2 million in our ringback tones business, as well as $0.8 million
from our Helix product, which we no longer sell.
Gross margin improved by $2.2 million, or 2 percentage points, as compared to
the prior year. The increase is due primarily to savings related to our SaaS
service offerings, such as professional services, third-party customer service,
ringback tones and from our RealTimes mobile services.
Operating expenses decreased by $9.9 million due to a decrease in personnel and
related expenses of $4.7 million and in marketing expense of $4.1 million.

2015 compared with 2014
Mobile Services revenue decreased by $14.0 million, or 18%. This decrease was
due to a decrease of $7.6 million in our Ringback Tone revenue and a decrease in
licensing revenue of $3.8 million due to the cessation of our Helix business in
Q4 2014, as well as declines in our intercarrier messaging business of $1.3
million.
Gross margin declined by 8 percentage points in 2015, due primarily to a higher
proportion of lower margin music on demand revenue, compared to the prior year,
as well as additional customer service costs.
Operating expenses decreased by $9.2 million, due primarily to a reduction in
personnel and related expenses of $8.5 million as well as a decrease in
infrastructure expense of $1.2 million. These decreases were offset in part by
an increase to marketing expense of $1.4 million.
Games
Games segment results of operations were as follows (dollars in thousands):



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                                                                    2016-2015        %        2015-2014        %
                              2016         2015         2014          Change       Change       Change       Change
Total revenue              $ 25,139     $ 30,748     $  37,110     $  (5,609 )      (18 )%   $   (6,362 )     (17 )%
Cost of revenue               7,919        9,291        11,074        (1,372 )      (15 )%       (1,783 )     (16 )%
Gross profit                 17,220       21,457        26,036        (4,237 )      (20 )%       (4,579 )     (18 )%
Gross margin                     68 %         70 %          70 %          (2 )%                       - %
Total operating expenses     19,644       29,086        37,170        (9,442 )      (32 )%       (8,084 )     (22 )%
Operating income (loss)    $ (2,424 )   $ (7,629 )   $ (11,134 )   $   5,205         68  %   $    3,505        31  %


2016 compared with 2015
Games revenue decreased by $5.6 million, or 18% as compared to the prior year.
Of the total decline, $4.9 million is related to the sale of our Slingo and
social casino business in August of 2015, as well as a decrease of $1.4 million
in our subscription game business and $1.0 million in retail games. These
declines were offset in part by an increase of $2.1 million due to growth in our
mobile games business.
Cost of revenue decreased by $1.4 million, or 15%, as compared to the prior
year, due to savings of $2.0 million realized following the sale of the Slingo
and social casino games business. This decrease was offset in part by an
increase of $0.7 million in app store fees related to our mobile revenue growth
in the casual games business.
Operating expenses decreased by $9.4 million, or 32%. This reduction in
operating expenses was due to savings of $11.1 million from the 2015 sale of our
Slingo and social casino games business. These decreases were partially offset
by increases of $2.3 million for salaries and related personnel costs from our
continuing casual games business.
2015 compared with 2014
Games revenue decreased by $6.4 million, or 17%. $1.9 million of the total
decline in revenue related to the sale of our Slingo and social casino business
in August of 2015. The remaining decline of $4.5 million was primarily due to a
decrease in subscription revenue. The revenues for PC download games and
advertising also declined compared to the prior year but were almost entirely
offset by an increase in mobile casual games revenue.
Cost of revenue decreased by $1.8 million, or 16%. $0.9 million of the total
decline in cost of revenue is attributed to the sale of our Slingo and social
casino games business. The remaining $0.9 million decrease was due to the
decline in advertising expense and in partner royalties expense for our PC
download and subscription games sales channels.
Operating expenses decreased by $8.1 million, or 22%. These reductions in
operating expenses were driven by the sale of our Slingo and social casino
business in August of 2015.
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):
                                                                  2016-2015        %        2015-2014        %
                          2016          2015          2014          Change       Change       Change       Change
Cost of revenue        $     (51 )   $     (85 )   $    (352 )   $       34       (40 )%   $      267       (76 )%
Extinguishment of              -             -       (10,580 )            -         -
liability                                                                                  $   10,580       100  %
Total operating
expenses                  20,192        24,263        26,917         (4,071 )     (17 )%       (2,654 )     (10 )%
Operating income
(loss)                 $ (20,141 )   $ (24,178 )   $ (15,985 )   $    4,037 

17 % $ (8,193 ) (51 )%



2016 compared with 2015
Operating expenses decreased by $4.1 million, or 17%. The decrease was primarily
due to $4.1 million lower restructuring charges in 2016 compared to 2015, as
well as a reduction of $1.5 million in salary, benefit and professional service
expenses, and lower expenses for facilities and support services as a result of
our reduction of office space at our corporate headquarters and ongoing cost
reduction efforts. These decreases were offset in part by the prior year release
of $2.4 million for previously accrued sales taxes, a benefit of $1.2 million
relating to the warrants received from Rhapsody in the first

                                       24
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quarter of 2015 and an increase in stock compensation expense of $0.8 million in
2016 due in part to the authorization and granting of fully vested equity awards
for our 2015 incentive bonuses in the first quarter of 2016.
2015 compared with 2014
In 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.
Operating expenses decreased by $2.7 million, or 10%. The decrease was due to a
reduction in personnel and related costs of $3.5 million, including the benefit
of $1.2 million relating to warrants received from Rhapsody, as well as a
benefit of $2.4 million for the release of certain previously accrued sales
taxes. These decreases were offset in part by an increase to restructuring
expense of $1.9 million
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):
                                                                 2016-2015  

% 2015-2014 %

                          2016         2015          2014         Change       Change      Change       Change
Research and
development            $ 29,923     $  43,626     $  52,765     $ (13,703 )     (31 )%   $  (9,139 )     (17 )%
Sales and marketing      31,608        48,231        66,926       (16,623 )     (34 )%     (18,695 )     (28 )%
General and
administrative           27,415        24,549        34,001         2,866        12  %      (9,452 )     (28 )%
Restructuring and
other charges             1,489         5,279         4,992        (3,790 )     (72 )%         287         6  %
Lease exit and
related charges           2,239         2,501           880          (262 )     (10 )%       1,621       184  %
Total consolidated
operating expenses     $ 92,674     $ 124,186     $ 159,564     $ (31,512 ) 

(25 )% $ (35,378 ) (22 )%



Research and development expenses decreased by $13.7 million, or 31%, in the
year ended 2016 as compared to 2015. The decrease was primarily due to a $5.1
million reduction from the sale of our Slingo and social casino games business,
a $5.1 million reduction in personnel and related expenses, and a $2.9 million
decrease in infrastructure costs, including reduced expenses for facilities and
support services as a result of reduction of office space at our corporate
headquarters.
Research and development expenses decreased by $9.1 million, or 17%, in the year
ended 2015 as compared to 2014, primarily due to reduced personnel and related
costs savings of $8.4 million, of which $3.4 million was related to our Slingo
and social casino business.
Sales and marketing expenses decreased by $16.6 million, or 34%, in the year
ended 2016, compared with 2015. The decrease was primarily due to a $4.9 million
reduction from the sale of our Slingo and social casino games business, a
decrease of $7.6 million in marketing expenses, a $2.6 million decrease in
personnel and related expenses, as well as decreased facilities and support
services.
Sales and marketing expenses decreased by $18.7 million, or 28%, in the year
ended 2015, compared with 2014. The decrease was primarily due to reductions in
personnel and related expenses of $9.7 million and decreased marketing expenses
of $7.3 million, mainly related to the change in our third party distribution
arrangements. The Slingo and social casino business contributed $1.6 million of
reduced personnel and related expenses, and $1.4 million of reduced marketing
expenses.
General and administrative expenses increased by $2.9 million, or 12%, in the
year ended 2016, compared with 2015. The increased costs year over year are
partially due to the prior year release of $2.4 million for previously accrued
sales taxes, the impact of the benefit received in 2015 relating to warrants
received from Rhapsody of $1.2 million, and accelerated depreciation expense in
2016 due in part to a reduction in space at our corporate headquarters. These
increases were offset in part by further reductions in personnel and related
expenses of $1.6 million and savings recognized from the sale of our Slingo and
social casino games business of $1.2 million.
General and administrative expenses decreased by $9.5 million, or 28%, in the
year ended 2015, compared with 2014. The decrease was primarily related to a
reduction in personnel and related expenses of $6.3 million and an expense
benefit of $2.4 million in 2015 for the release of certain previously accrued
sales taxes.
Restructuring and other charges and Lease exit and related charges consist of
costs associated with the ongoing reorganization of our business operations and
our ongoing expense re-alignment efforts. The restructuring expense amounts in

                                       25
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all years primarily related to severance costs due to workforce reductions. For
additional details on these charges see Note 10. Restructuring Charges and
Note 11. Lease Exit and Related Charges.
Other Income (Expenses)
Other income (expenses), net was as follows (dollars in thousands):
                                                                   

2016-2015 % 2015-2014 %

                             2016         2015          2014         Change       Change      Change       Change
Interest income, net       $   449     $     680     $    556     $     (231 )     (34 )%   $     124        22  %
Gain (loss) on
investments, net             8,473          (159 )      2,371          8,632        NM         (2,530 )    (107 )%
Equity in net loss of
Rhapsody                    (6,533 )     (14,521 )     (4,452 )        7,988       (55 )%     (10,069 )     226  %
Other income (expense),
net                           (643 )         506          143         (1,149 )    (227 )%         363       254  %
Total other income
(expense), net             $ 1,746     $ (13,494 )   $ (1,382 )   $   15,240       113  %   $ (12,112 )    (876 )%


Gain (loss) on investments, net, increased $8.6 million as compared to the
prior-year period. The increase was due to the collection and recognition of the
first anniversary payment of $4.0 million from our 2015 sale of the Slingo and
social casino business, the net gain of $2.5 million from the sale of our
remaining J-Stream investment, and a gain of $2.0 million, net of transaction
costs, from the sale of a domain name. For additional details on the J-Stream
transactions see Note 5. Fair Value Measurements.
As described further in Note 4. Rhapsody Joint Venture, we account for our
investment in Rhapsody under the equity method of accounting. The net carrying
value of our investment in Rhapsody is not necessarily indicative of the
underlying fair value of our investment.
Income Taxes
During the years ended December 31, 2016, 2015, and 2014, we recognized income
tax expense of $1.1 million, income tax benefit of $0.8 million, and income tax
expense of $1.3 million, respectively, related to U.S. and foreign income taxes.
The tax expense for the year ended December 31, 2016 was largely the result of
foreign withholding taxes and income taxes in foreign jurisdictions. The tax
benefit for the year ended December 31, 2015 was largely the result of an income
tax benefit related to the sale of the Slingo and social casino games business
in the quarter ended September 30, 2015, offset by foreign withholding taxes and
income taxes in foreign jurisdictions. The tax expense for the year ended
December 31, 2014 was largely the result of foreign withholding taxes and income
taxes in foreign jurisdictions.
We assess the likelihood that our deferred tax assets will be recovered based
upon our consideration of many factors, including the current economic climate,
our expectations of future taxable income, our ability to project such income,
and the appreciation of our investments and other assets. We maintain a partial
valuation allowance of $176.3 million for our deferred tax assets due to
uncertainty regarding their realization as of December 31, 2016. The net
increase in the valuation allowance since December 31, 2015 of $2.4 million was
the result of an increase in current year deferred tax assets for which the
Company maintains a valuation allowance.
We generate income in a number of foreign jurisdictions, some of which have
higher tax rates and some of which have lower tax rates relative to the U.S.
federal statutory rate. Changes to the blend of income between jurisdictions
with higher or lower effective tax rates than the U.S. federal statutory rate
could affect our effective tax rate. For the year ended December 31, 2016,
decreases in tax expense from income generated in foreign jurisdictions with
lower tax rates in comparison to the U.S. federal statutory rate were offset by
increases in tax expense from income generated in foreign jurisdictions having
comparable, or higher tax rates in comparison to the U.S. federal statutory
rate.
As of December 31, 2016 and 2015, we had $0.5 million and $0.3 million of
unrecognized tax benefits, respectively. The increase in unrecognized tax
benefits is due to federal research and development tax credit carryforward
risks. As of December 31, 2016, there are no unrecognized tax benefits remaining
that would affect our effective tax rate if recognized, as the offset would
increase the valuation allowance. We do not anticipate that the total amount of
unrecognized tax benefits will significantly change within the next twelve
months.
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.



                                       26
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Geographic Revenue
Revenue by geographic region was as follows (dollars in thousands):
                                                        2016-2015       %       2015-2014       %
                   2016         2015         2014        Change      Change      Change      Change
United States   $  41,505    $  46,893    $  61,660    $  (5,388 )    (11 )%   $ (14,767 )    (24 )%
Europe             13,700       15,166       26,575       (1,466 )    (10 )%     (11,409 )    (43 )%
Korea              43,236       37,832       39,852        5,404       14  %      (2,020 )     (5 )%
Rest of World      22,027       25,405       28,125       (3,378 )    (13 )%      (2,720 )    (10 )%
Total Revenue   $ 120,468    $ 125,296    $ 156,212    $  (4,828 )     (4 )%   $ (30,916 )    (20 )%



Revenue in the U.S. decreased by $5.4 million, or 11%, in the year-ended 2016,
compared with 2015. The decrease was primarily due to the sale of the Slingo and
social casino games business in 2015, which contributed $4.9 million to the
decline.
Revenue in the U.S. declined by $14.8 million, or 24%, in the year-ended 2015,
compared with 2014. The decline was mainly due to a reduction in revenue from
the change in our third party software agreements of $7.3 million and from our
Ringback Tones business of $4.6 million. The sale of our Slingo and social
casino business contributed $1.9 million to the decline.
Revenue in Europe decreased by $1.5 million, or 10%, in the year-ended 2016,
compared with 2015, primarily due to lower revenue in our continuing games
business as compared to the prior period.
Revenue in Europe decreased by $11.4 million, or 43%, in the year-ended 2015,
compared with 2014. The decrease was primarily due to lower revenue from our
Games business of $5.0 million and a decline in our SaaS revenue of $4.1
million.
Revenue in Korea increased by $5.4 million, or 14%, in the year-ended 2016,
compared with 2015. The increase was due to a $6.1 million increase in our
low-margin music on demand business, offset in part by other declines in our
Mobile Services business.
Revenue in Korea decreased by $2.0 million, or 5%, in the year-ended 2015,
compared with 2014. The decrease was due to a decline from intellectual property
licensing of $1.5 million.
Revenue in the rest of world decreased by $3.4 million, or 13%, in the
year-ended 2016, compared with 2015. The decrease was due to lower revenues of
$1.6 million in our Consumer Media business and $1.5 million in our Mobile
Services business.
Revenue in the rest of world decreased by $2.7 million, or 10%, in the
year-ended 2015, compared with 2014. The decrease was due to various declines
and the shutdown of our Helix business, offset by an increase in our IP revenue
in China of $2.8 million.
Liquidity and Capital Resources
The following summarizes working capital, cash, cash equivalents, short-term
investments, and restricted cash and investments (in thousands):
                                                         December 31,
                                                       2016        2015
Working capital                                      $ 66,304    $ 91,373

Cash, cash equivalents, and short-term investments 77,052 99,129 Restricted cash and investments

                         2,700       2,890


The decrease in 2016 working capital as compared to December 31, 2015, which
includes cash, cash equivalents, and short term investments, was primarily due
to our ongoing negative cash flow used in our operations of $24.3 million.
The following summarizes cash flow activity (in thousands):
                                                         Years Ended 

December 31,

                                                     2016          2015     

2014

Cash provided by (used in) operating activities $ (24,328 ) $ (68,982 )

   $ (60,244 )
Cash provided by (used in) investing activities      11,552        15,728   

15,561

Cash provided by (used in) financing activities (345 ) 341

       (637 )



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Cash used in operating activities consisted of net income (loss) adjusted for
certain non-cash items such as depreciation and amortization, as well as the
effect of changes in certain operating assets and liabilities.
Cash used in operating activities was $44.7 million less in 2016 as compared to
2015. The decrease in cash used in operating activities was primarily due to the
improvement in our operating loss in 2016 as compared to 2015. Further
contributing to the decrease was the change in operating assets and liabilities
during 2016 compared to 2015. In the current year, we used cash of $1.2 million
from the net change in operating assets and liabilities while in 2015 the net
change in operating assets and liabilities used $16.5 million.
Cash used in operating activities was $8.7 million more in 2015 than in 2014.
This increase in cash used was due mainly to the changes in operating assets and
liabilities. In 2015, we used cash of $16.5 million from the net change, while
in 2014 the net change provided $2.5 million. This increased usage was offset in
part by the improvement in our operating loss in 2015 as compared to 2014 when
excluding the non-cash benefit from the liability extinguishment in 2014.
For the year ended December 31, 2016, cash provided by investing activities of
$11.6 million was due to sales and maturities, net of purchases, of short-term
investments totaling $8.5 million, cash proceeds from the sale of our Slingo and
social casino games business of $4.0 million, cash proceeds of $3.3 million from
the sale of J-Stream, and cash proceeds from the sale of a domain name of $2.1
million. These proceeds were offset in part by the advance paid to Rhapsody of
$3.5 million and purchases of equipment, software and leasehold improvements of
$2.4 million.
For the year ended December 31, 2015, cash provided by investing activities of
$15.7 million was due to sales and maturities, net of purchases, of short-term
investments totaling $6.6 million and the cash proceeds from the sale of our
Slingo and social casino games business of $10.0 million.
For the year ended December 31, 2014, cash provided by investing activities of
$15.6 million was mainly from sales and maturities, net of purchases, of
short-term investments totaling $16.5 million. In addition, cash proceeds from
the sale of available for sale securities of $2.8 million in 2014 mainly offset
purchases of equipment, software and leasehold improvements of $2.5 million.
Financing activities for the year ended December 31, 2016 used cash totaling
$0.3 million which was from $0.9 million for tax payments from shares withheld
upon vesting of restricted stock offset in part by proceeds received from the
issuance of common stock of $0.5 million.
Financing activities for the year ended December 31, 2015 provided cash totaling
$0.3 million which was mainly from proceeds received from the issuance of common
stock of $0.4 million, offset by $0.1 million for tax payments from shares
withheld upon vesting of restricted stock.
Financing activities for the year ended December 31, 2014 used cash totaling
$0.6 million which was mainly due to tax payments from shares withheld upon
vesting of restricted stock and the payment of contingent consideration related
to acquisitions of businesses, partially offset by proceeds received from the
issuance of common stock.
While we currently have no planned significant capital expenditures for 2017
other than those in the ordinary course of business, we do have contractual
commitments for future payments related to office leases.
We believe that our unrestricted current cash, cash equivalents, and short-term
investments will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next 12 months.
In the future, we may seek to raise additional funds through public or private
equity financing, or through other sources such as future credit facilities.
Such sources of funding may or may not be available to us at commercially
reasonable terms. The sale of additional equity securities could result in
dilution to our shareholders. In addition, in the future, we may enter into cash
or stock acquisition transactions or other strategic transactions that could
reduce cash available to fund our operations or result in dilution to
shareholders.
Our cash equivalents and short-term investments consist of investment-grade
securities, as specified in our investment policy guidelines. The policy limits
the amount of credit exposure to any one non-U.S. government or non-U.S. agency
issue or issuer to a maximum of 5% of the total portfolio. These securities are
subject to interest rate risk and will decrease in value if interest rates
increase. Because we have historically had the ability to hold our fixed income
investments until maturity, we do not expect our operating results or cash flows
to be significantly affected by a sudden change in market interest rates in our
securities portfolio.
We conduct our operations primarily in five functional currencies: the U.S.
dollar, the Korean won, the Japanese yen, the British pound and the euro. We
currently do not actively hedge our foreign currency exposures and are therefore
subject to the risk of exchange rate fluctuations. We are exposed to foreign
exchange rate fluctuations as the financial results of foreign subsidiaries are
translated into U.S. dollars in consolidation. Our exposure to foreign exchange
rate fluctuations also arises from intercompany payables and receivables to and
from our foreign subsidiaries.

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As of December 31, 2016, approximately $18.8 million of the $77.1 million of
cash, cash equivalents, and short-term investments was held by our foreign
subsidiaries. If these funds are needed for our operations in the U.S., we may
be required to accrue and pay U.S. taxes to repatriate these funds. However, our
intent is to permanently reinvest these funds outside of the U.S. and our
current plans do not demonstrate a need to repatriate them to fund our U.S.
operations. Additionally, the Company currently has significant net operating
losses and other tax attributes that could be used to offset potential U.S.
income tax that could result if these amounts were distributed to the U.S. We
utilize a variety of tax planning and financing strategies in an effort to
ensure that our worldwide cash is available in the locations in which it is
needed. We do not expect restrictions or potential taxes on repatriation of
amounts held outside of the U.S to have a material effect on our overall
liquidity, financial condition or results of operations.
As of December 31, 2016, we have not provided for U.S. federal and state income
taxes on approximately $13.1 million of undistributed earnings of our foreign
subsidiaries, since such earnings are considered permanently reinvested outside
the U.S. or may be remitted tax-free to the U.S. If these amounts were
distributed to the U.S, in the future in the form of dividends or otherwise, we
could be subject to additional U.S. income taxes. It is not practicable to
determine the U.S. federal income tax liability or benefit on such earnings due
to the timing of such future distributions, the availability of foreign tax
credits, and the complexity of the computation if such earnings were not deemed
to be permanently reinvested. If future events, including material changes in
estimates of cash, working capital, and long-term investment requirements
necessitate that these earnings be repatriated, an additional provision for U.S.
income and foreign withholding taxes may be necessary.

Contractual Obligations
Please refer to Note 16. Commitments and Contingencies, for details on our
contractual obligations, which consist of operating leases for office
facilities. For income tax liabilities for uncertain tax positions we cannot
make a reasonably reliable estimate of the amount and period of any related
future payments. As of December 31, 2016 we had $0.5 million of gross
unrecognized tax benefits for uncertain tax positions.

Off-Balance Sheet Arrangements
We have operating lease obligations for office facility leases with future cash
commitments that are not required to be recorded on our consolidated balance
sheet. Accordingly, these operating lease obligations constitute off-balance
sheet arrangements. In addition, since we do not maintain accruals associated
with certain guarantees, as discussed in Note 17. Guarantees, those guarantee
obligations also constitute off-balance sheet arrangements.

Critical Accounting Policies and Estimates
The preparation of our financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Our critical accounting policies and estimates are as follows:
• Revenue recognition;


• Estimating music publishing rights and music royalty accruals;

• Estimating recoverability of deferred costs;

• Estimating allowances for doubtful accounts and sales returns;

• Estimating losses on excess office facilities;

• Valuation of equity method investments;

• Valuation of definite-lived assets;

• Valuation of goodwill;

• Stock-based compensation; and

• Accounting for income taxes.



Revenue Recognition. We recognize revenue when persuasive evidence of an
arrangement exists, delivery has occurred, the sales price is fixed or
determinable, and collection is probable. Physical products are considered
delivered to the customer once they have been shipped and title and risk of loss
have been transferred. For online sales, the products or services are considered
delivered at the time the product or services are made available, digitally, to
the end user.
We recognize revenue on a gross or net basis. In most arrangements, we contract
directly with end user customers, and are the primary obligor. In such
arrangements, we recognize revenue on a gross basis. In some cases, we utilize
third-party distributors who are the primary obligor to sell products or
services directly to end user customers. In such instances, we recognize revenue
on a net basis.

                                       29
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In our direct to consumer operations, we derive revenue primarily through
(1) subscriptions sold by our Games segment and subscriptions of SuperPass
within our Consumer Media segment (2) sales of content downloads, software and
licenses offered by our Consumer Media, Mobile Services, and Games segments and
(3) the sale of advertising and the distribution of third-party products on our
websites and in our games.
Consumer subscription products are paid in advance, typically for monthly,
quarterly or annual duration. Subscription revenue is recognized ratably over
the related subscription time period. Revenue from sales of content downloads,
software and licenses is recognized at the time the product is made available,
digitally, to the end user. Revenue generated from advertising on our websites
and from advertising and the distribution of third-party products included in
our products is recognized as revenue at the time of delivery.
We also generate revenue through business-to-business channels by providing
services within our Mobile Services segment enabling mobile carriers to deliver
audio and video content to their customers and by selling software licenses and
products and related support and other services. Revenue generated from services
provided to mobile carriers that enable the delivery of audio and video content
to their customers is recognized as the services are provided. Setup fees to
build these services are recognized ratably upon launch of the service over the
remaining expected term of the service.
Non-software revenue arrangements containing multiple elements are divided into
separate units of accounting, after being evaluated for specific criteria. If
the criteria for separation are met, revenue is allocated to the individual
units using the relative price method. If the criteria are not met, the elements
are treated as one unit of accounting and revenue recognition is delayed until
all elements have been delivered. In the case of revenue arrangements containing
software, elements are divided into separate units of accounting only when
vendor-specific objective evidence has been established. In cases where
vendor-specific objective evidence has not been established, undelivered
elements are combined into one unit of accounting and are not recognized in
revenue until all elements have been delivered.
Estimating Music Publishing Rights and Music Royalty Accruals. We have made
estimates of amounts that may be owed related to music royalties for our
historical domestic and international music services. Material differences may
impact the amount and timing of our expense for any period if management made
different judgments or utilized different estimates. Under copyright law, we may
be required to pay licensing fees for digital sound recordings and compositions
we have delivered. Copyright law generally does not specify the rate and terms
of the licenses, which are determined by voluntary negotiations among the
parties or, for certain compulsory licenses where voluntary negotiations are
unsuccessful, by arbitration. Our estimates are based on contracted or statutory
rates, when established, or management's best estimates based on facts and
circumstances regarding the specific music services and agreements in similar
geographies or with similar agencies. While we have based our estimates on
historical experience and on various other assumptions that management believes
to be reasonable under the circumstances, actual results may differ materially
from these estimates under different assumptions or conditions.
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.
Estimating Recoverability of Deferred Costs. We defer costs on projects for
service revenue and system sales. Deferred costs consist primarily of direct and
incremental costs to customize and install systems, as defined in individual
customer contracts, including costs to acquire hardware and software from third
parties and payroll costs for our employees and other third parties. We
recognize such costs as a component of cost of revenue, the timing of which is
dependent upon the revenue recognition policy by contract. For revenue
recognized under the completed contract method, costs are deferred until the
products are delivered, or upon completion of services or, where applicable,
customer acceptance. For revenue recognized under the percentage of completion
method, costs are recognized as products are delivered or services are provided
in accordance with the percentage of completion calculation. For revenue
recognized ratably over the term of the contract, costs are recognized ratably
over the term of the contract, commencing on the date of revenue recognition. At
each balance sheet date, we review deferred costs to ensure they are ultimately
recoverable. Any anticipated losses on uncompleted contracts are recognized when
evidence indicates the estimated total cost of a contract exceeds its estimated
total revenue.
Assessing the recoverability of deferred project costs is based on significant
assumptions and estimates, including future revenue and cost of sales.
Significant or sustained decreases in revenue or increases in cost of sales in
future periods could result in impairments of deferred project costs. We cannot
accurately predict the amount and timing of any such impairments. Should the
value of deferred project costs become impaired, we would record the appropriate
charge, which could have a material adverse effect on our financial condition or
results of operations.
Estimating Allowances for Doubtful Accounts and Sales Returns. We make estimates
of the uncollectible portion of our accounts receivable. We specifically analyze
the age of accounts receivable and historical bad debts, customer
credit-worthiness and current economic trends when evaluating the adequacy of
the allowance for doubtful accounts. Similarly, we make estimates of potential
future product returns related to current period revenue. We analyze historical
returns, current economic trends, and changes in customer demand and acceptance
of our products when evaluating the adequacy of the sales returns

                                       30
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allowance. Significant judgments and estimates are made and used in connection
with establishing allowances for doubtful accounts and sales returns. Material
differences may result in the amount and timing of our revenue for any period if
we were to make different judgments or utilize different estimates or actual
future experience was different from the judgments and estimates.
Estimating losses on excess office facilities. We make significant estimates in
determining the appropriate amount of accrued loss on excess office facilities,
including estimates of sublease income expected to be received. If we make
different estimates, our loss on excess office facilities could be significantly
different from that recorded, which could have a material impact on our
operating results.
Valuation of Equity Method Investments. We use the equity method of accounting
for investments in circumstances where we have the ability to exert significant
influence, but not control, over an investee or joint venture. We record our
percentage interest in the investee's recorded income or loss and changes in the
investee's capital under this method, which will increase or decrease the
reported value of our investment. See Note 4. Rhapsody Joint Venture, for
additional information. We initially record our investment based on a fair value
analysis of the investment.
We evaluate impairment of an investment valued under the equity method if events
and circumstances warrant. An impairment charge would be recorded if a decline
in value of an equity investment below its carrying amount were determined to be
other than temporary. In determining if a decline is other than temporary, we
consider factors such as the length of time and extent to which the fair value
of the investment has been less than the carrying amount of the investee or
joint venture, the near-term and longer-term operating and financial prospects
of the investee or joint venture and our intent and ability to hold the
investment for a period of time sufficient to allow for any anticipated
recovery.
Valuation of Definite-Lived Assets. Definite-lived assets consist primarily of
property, plant and equipment, as well as amortizable intangible assets acquired
in business combinations. Definite-lived assets are amortized on a straight line
basis over their estimated useful lives. We review definite-lived assets for
impairment whenever events or changes in circumstances indicate the carrying
amount of such assets may not be recoverable. Recoverability of these assets is
measured by comparison of their carrying amount to future undiscounted cash
flows the assets are expected to generate. If definite-lived assets are
considered to be impaired, the impairment to be recognized equals the amount by
which the carrying value of the assets exceeds their fair market value.
The impairment analysis of definite-lived assets is based upon estimates and
assumptions relating to our future revenue, cash flows, operating expenses,
costs of capital and capital purchases. These estimates and assumptions are
complex and subject to a significant degree of judgment with respect to certain
factors including, but not limited to, the cash flows of our long-term operating
plans, market and interest rate risk, and risk-commensurate discount rates and
cost of capital. Significant or sustained declines in future revenue or cash
flows, or adverse changes in our business climate, among other factors, and
their resulting impact on the estimates and assumptions relating to the value of
our definite-lived assets could result in the need to perform an impairment
analysis in future periods which could result in a significant impairment. While
we believe our estimates and assumptions are reasonable, due to their complexity
and subjectivity, these estimates and assumptions could vary from period to
period. Changes in these estimates and assumptions could materially affect the
estimate of future undiscounted cash flows and related fair market values of
these assets and result in significant impairments, which could have a material
adverse effect on our financial condition or results of operations. For further
discussion, please see the risk factor entitled, "Any impairment to our goodwill
and definite-lived assets could result in a significant charge to our earnings"
under Item 1A Risk Factors.
Valuation of Goodwill.  We test goodwill for impairment on an annual basis, in
our fourth quarter, or more frequently if circumstances indicate reporting unit
carrying values may exceed their fair values. Circumstances that may indicate a
reporting unit's carrying value exceeds its fair value include, but are not
limited to: poor economic performance relative to historical or projected future
operating results; significant negative industry, economic or company specific
trends; changes in the manner of our use of the assets or the plans for our
business; and loss of key personnel.
When evaluating goodwill for impairment, based upon our annual test or due to
changes in circumstances described above, we first perform a qualitative
assessment to determine if the fair value of a reporting unit is more likely
than not less than the reporting unit's carrying amount including goodwill. If
this assessment indicates it is more likely than not, we then compare the
carrying value of the reporting unit to the estimated fair value of the
reporting unit. If the carrying value of the reporting unit exceeds the
estimated fair value, we then calculate the implied estimated fair value of
goodwill for the reporting unit and compare it to the carrying amount of
goodwill for the reporting unit. If the carrying amount of goodwill exceeds the
implied estimated fair value, an impairment charge to current operations is
recorded to reduce the carrying value to implied estimated value.
Significant judgments and estimates are required in determining the reporting
units and assessing the fair value of the reporting units. These estimates and
assumptions are complex and subject to a significant degree of judgment with
respect to

                                       31
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certain factors including, but not limited to, the cash flows of long-term
operating plans, market and interest rate risk, and risk-commensurate discount
rates and cost of capital.
Stock-Based Compensation. Stock-based compensation cost is estimated at the
grant date based on the award's fair value and is recognized as expense over the
requisite service period, which is the vesting period. For stock options, the
fair value is calculated using the Black-Scholes option-pricing model or other
appropriate valuation models such as Monte Carlo simulation. The valuation
models require various highly judgmental assumptions including volatility in our
common stock price and expected option life. If any of the assumptions used in
the valuation models change significantly, stock-based compensation expense for
new awards may differ materially in the future from the amounts recorded in our
consolidated statement of operations. For all awards, we are required to
estimate forfeitures at the time of grant and revise those estimates in
subsequent periods if actual forfeitures differ from those estimates. We use
historical data to estimate pre-vesting forfeitures.
Accounting for Income Taxes. We use the asset and liability method of accounting
for income taxes. Under this method, income tax expense is recognized for the
amount of taxes payable or refundable for the current year. In addition,
deferred income tax expense and deferred tax assets and liabilities are
recognized for the expected future tax consequences of temporary differences
between the financial reporting and tax basis of assets and liabilities and for
operating losses and tax credit carryforwards. Deferred tax assets and
liabilities and operating loss and tax credit carryforwards are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences and operating loss and tax credit carryforwards are
expected to be recovered or settled. We must make assumptions, judgments and
estimates to determine the current and deferred provision for income taxes,
deferred tax assets and liabilities and any valuation allowance to be recorded
against deferred tax assets. Our judgments, assumptions, and estimates relative
to the current provision for income tax take into account current tax laws, our
interpretation of current tax laws and possible outcomes of future audits
conducted by foreign and domestic tax authorities. Changes in tax law or our
interpretation of tax laws and future tax audits could significantly impact the
amounts provided for income taxes in our consolidated financial statements.
Each reporting period we must periodically assess the likelihood that our
deferred tax assets will be recovered from future sources of taxable income, and
to the extent that recovery is not more likely than not, a valuation allowance
must be established. The establishment of a valuation allowance and increases to
such an allowance result in either increases to income tax expense or reduction
of income tax benefit in the statement of operations and comprehensive income.
In certain instances, changes in the valuation allowance may be allocated
directly to the related components of shareholders' equity on the consolidated
balance sheet. Factors we consider in making such an assessment include, but are
not limited to, past performance and our expectation of future taxable income,
macroeconomic conditions and issues facing our industry, existing contracts, our
ability to project future results and any appreciation of our investments and
other assets.
As of December 31, 2016, $18.8 million of the $77.1 million of cash, cash
equivalents, and short-term investments was held by our foreign subsidiaries.
As of December 31, 2016, we have not provided for U.S. federal and state income
taxes on certain undistributed earnings of our foreign subsidiaries, since such
earnings are considered indefinitely reinvested outside the U.S. or may be
remitted tax-free to the U.S. If these amounts were distributed to the U.S., in
the form of dividends or otherwise, RealNetworks could be subject to additional
U.S. income and foreign withholding taxes. It is not practicable to determine
the foreign withholding and U.S. federal income tax liability or benefit on such
earnings due to the timing of such future distributions, the availability of
foreign tax credits, and the complexity of the computation if such earnings were
not deemed to be permanently reinvested. If future events, including material
changes in estimates of cash, working capital, and long-term investment
requirements necessitate that these earnings be distributed, an additional
provision for U.S. income and foreign withholding taxes may be necessary.
Recently Issued Accounting Standards
See Note 2. Recent Accounting Pronouncements.



                                       32

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Financials ($)
Sales 2017 128 M
EBIT 2017 -20,6 M
Net income 2017 -
Debt 2017 -
Yield 2017 -
P/E ratio 2017 -
P/E ratio 2018
Capi. / Sales 2017 1,42x
Capi. / Sales 2018 1,28x
Capitalization 181 M
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Spread / Average Target 33%
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Managers
NameTitle
Robert Glaser Chairman & Chief Executive Officer
Marjorie O. Thomas Chief Financial Officer & Treasurer
Dominique Trempont Lead Independent Director
Janice M. Roberts Independent Director
Mike B. Slade Director
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