RealNetworks, Inc.
Q1 2022 Earnings Call Transcript

Published: 4 May 2022

[Operator:]

Good day and welcome to the RealNetworks, Inc. First Quarter 2022 Earnings Conference Call. Today's conference is being recorded. At this time, I would like turn the conference over to Mr. Brian Prenoveau, Investor Relations. Please go ahead, sir.

[Brian Prenoveau:]

Thank you, Cody. And welcome to RealNetworks first quarter 2022 financial results conference call. Before we begin, I'd like to remind you that some matters discussed today are forward-looking, including statements regarding RealNetworks' future revenue, operating expenses and adjusted EBITDA as well as trends affecting its businesses and prospects for future growth and profitability, liquidity and financial condition. Other forward-looking statements include the company's plans to implement its strategy, invest in its products and initiatives and restructuring efforts as well as the expected growth, profitability and other benefits from these activities. In addition, today's call contains certain forward-looking statements. Statements that express our belief and expectations and all statements other than statements of historical facts are forward-looking and involve a number of risks and uncertainties that could cause actual results to differ materially from these forward-looking statements. We describe these and other risks in our SEC filings, including in the risk factors set forth in our most recent reports on Form 10-K and 10-Q and in other reports. A copy of those filings can be obtained from the SEC or from the Investor Relations section of our corporate website. Forward-looking statements made today reflect RealNetworks expectation as of today, May 4, 2022. The company undertakes no duty to update or revise any forward-looking statements made during this call, whether as a result of new information, future events or any other reason. In addition, we will present certain financial measures on this call that will be considered non-GAAP under the SEC's Regulation G. For reconciliations of each non-GAAP financial measure to the most directly comparable GAAP financial measure, please refer to the information included in our press release and in our Form 8-K dated and submitted to the SEC, both of which can be found on the corporate website at investor.realnetworks.com under the Financials tab. With us today are Rob Glaser, Chairman and CEO; Mike Ensing, President and COO; and Christine Chambers, Senior Vice President, Chief Financial Officer and Treasurer. Rob will discuss the company's strategy and the progress the company made during the first quarter of 2021. Mike will then provide a more detailed update on Real's AI businesses. And Christine will conclude with a more detailed review of the financial results. After today's prepared remarks, we will open the call to questions. Rob, I turn the call over to you.

[Robert Glaser:]

Thanks, Brian. Good afternoon, everyone. Thanks for joining us. My remarks today will focus on our three main growth initiatives and the steps we've taken to set each other up for success and long-term profit. After I conclude, Mike Ensing will discuss our KONTXT and SAFR initiatives in more detail. Then after Mike, Christine Chambers will discuss our detailed financial results. Let me first start with a high level overview of our quarterly results. Our total revenue in the quarter was $13.3 million, down from $15.9 million in the first quarter of 2021 and essentially flat compared with Q4 of 2021. Our earnings per diluted share was a loss of $0.11 compared to a loss of $0.27 per diluted share in the prior period. First quarter adjusted EBITDA was a loss of $2.8 million compared to an adjusted EBITDA loss of $3 million in the prior-year period. We continue to have a solid balance sheet with $22 million of cash available to us and no debt. Next, I want to talk about our AI-based growth initiatives, SAFR and KONTXT. In the first quarter, revenue in the SAFR business increased by 22% compared to the first quarter of 2021. Revenue for the KONTXT business increased by 10% compared to last year's first quarter. On a sequential basis, revenue was down 8% for SAFR and down 6% for KONTXT. In both cases, we see the need to turbocharge our growth and are taking significant steps to make that happen. The main way we're moving to turbocharge SAFR is to sharpen our focus on delivering complete SAFR-based products rather than purely relying on licensing the SAFR software. The main initiative that embodies this change is SAFR SCAN, which is the first built-from-scratch combination hardware software product in Real's history. We announced SAFR SCAN in March at ISC West, which is the US securities industry's biggest trade show. SAFR SCAN is a touchless biometric access control door station targeted at commercial markets. While SAFR SCAN isn't the first door station to use computer vision and facial recognition technology, we think it's the first such product that can bring FR into the mainstream. This is because SAFR SCAN is fast and highly accurate, and delivers excellent results at less than half the price of previous products. Our secret sauce that enables us to do this is our SAFR technology itself. Because it is fast and compact, SAFR can run well on much lower cost hardware than competing FR algorithms. Building SAFR SCAN as a complete hardware/software product enables us to deliver a highly differentiated product that we think has excellent prospects. SAFR SCAN begins shipping at the end of May. The initial reception from the industry has been very encouraging. We're in the process of building out the sales channels and partnerships necessary to create successful customer deployments. With SAFR SCAN about to launch, we will be refocusing a lot of our SAFR team towards SAFR SCAN and concurrently narrowing our commercial licensing initiatives. We will continue to license the SAFR software platform to and federal customers, but we'll focus on that work on the biggest and most leveraged opportunities. Mike Ensing will share additional details on our SAFR plan in a few minutes. Let me now turn to our messaging business. Now that we think we have a mature core product, our main focus is to scale up our sales and marketing effort with KONTXT. Last month, we announced the appointment of Mike Cooley to the newly created position of President for KONTXT, Messaging and Telecom. Mike has over 20 years of experience, leading and delivering business growth in the mobile market and I'm confident that he's the right leader to drive a significant scale up of KONTXT and our messaging business. Mike Ensing will provide additional information and perspective on KONTXT and messaging in a few minutes. In the games business, as you know, about six months ago, we brought in a new leader, Simonetta Lulli. Because of the changes that Simonetta is making involve retooling our current games portfolio, the changes will take time to drive significant commercial results. That said, Simonetta is off to an excellent start and I'm highly confident that she's setting up games for significant growth in 2023 and beyond. In sum, we're squarely in the sausage making phase of these growth initiatives. Our current and short-term financial results reflect this reality. As we go through these transitions, we will manage our resources carefully and wisely and make clear and sometimes hard tradeoffs when we need to. While I'm disappointed that this transition will be bumpier than we'd expected, I remain very optimistic about Real's long-term prospects. And with that, let me pass the mic to Mike.

[Mike Ensing:]

Thanks, Rob. I'd like to start today's discussion with KONTXT and the appointment of Mike Cooley as President of KONTXT, Telecom and Messaging. We are tremendously excited to have Mike on board. Mike spent most of his career at Sprint Nextel, where he has held executive roles leading the digital and new ventures group. He led business development in Neustar and cofounded and led digital and ad tech startups including Sundial.com and Pinsight Media. Mike brings us great business, sales and strategy acumen, and will be focused on scaling up our business and sales efforts for KONTXT, leveraging the great product suite we have built. Today, KONTXT enables global mobile operators to secure and maximize their messaging capabilities through edge up interoperability, AI machine learning and value-added messaging services. KONTXT is our patented NLP platform which categorizes and blocks over 20 million fraudulent text messages, images and voice calls per day. We help carriers build customer loyalty, enhance the customer experience and drive new revenue through text and voice message classification and anti-spam activity. As I discussed on our last earnings call, our focus remains on the needs of US and international carriers while broadening our efforts to include UCaaS, unified communication as service, and CNM, caller name providers. Interest among these types of customers is building and, in fact, it was recently announced that Cloudli Communications, a leading UCaaS provider of voice, data and messaging solutions, launched its new call screener feature powered by KONTXT. KONTXT features a unique voice fingerprinting solution that combines audio spectrum analysis and speech patterns with natural language processing to help determine the intent of the caller. It is our goal to bridge the experience we have in antispam and antifraud machine learning with proactive management of voice and text messages. Now turning to SAFR. During last quarter's call, we discussed our plan to increase our focus on access control and authentication use cases and that we would be launching a suite of products in the access control space. The announcement of SAFR SCAN is the first step on delivering on that strategy. We believe there's a large and growing market and demonstrated customer need for touchless biometric access control products. This space provides for a great application of Real's facial recognition algorithm. Our software is differentiated by being fast, accurate and super compact, making it especially valuable for customers seeking to embed face recognition, liveness and spoofing detection and person centric analytics directly in devices operating at the edge. We believe SAFR SCAN solves several security problems while being an affordable option for businesses. Currently, badges or key cards are the dominant form of office place security, but do not represent real security. Contrary to badges and key cards, facial recognition can eliminate tailgating, monitor occupancy, is touchless and can provide a thorough audit trail of usage, all while being an affordable option. We estimate that key cards represent about 76% and fingerprint technology is about 13% of the approximate $1.7 billion physical access control reader market. At an approximate price point of $1,200 and with comparable products in the market today selling for anywhere between $25 and $5,000, SAFR SCAN is an attractive and viable alternative to key cards and fingerprint, providing access to a significant customer base. As initial points of validation, we received substantial favorable feedback at our product launch at ISC West. Based on this feedback from PACs, systems integrators and end customers, we believe there is a strong product market fit for SAFR SCAN. In addition, SAFR SCAN was recently awarded the Platinum 2022 Security Today Govies Government Security Award in the biometrics access control division. This award for SAFR SCAN reinforces our confidence in the product. From a strategic perspective, we believe that SAFR SCAN being a complete product versus a software technology provides a path to a scalable, repeatable business for SAFR. We are increasing our focus on SAFR SCAN in access control and will be shifting resources away from the safety and security space with the exception of key markets and the federal space. We are optimistic about this pivot's potential and believe it will lead to substantial growth for SAFR. With that, I will now turn the call over to Christine to discuss our financial results in greater detail. Christine?

[Christine Chambers:]

Thanks, Mike. And good afternoon, everyone. In my remarks today, I will first review our consolidated first quarter results, followed by a more detailed discussion of our segment business performance. Total revenue for the first quarter was $13.3 million compared to $15.9 million in the prior-year period. SAFR revenue increased 22%, primarily due to SAFR sales, and KONTXT revenue increased 10% year-over-year, driven primarily by image hashing, a feature we introduced in late 2021. Consumer Media revenue in the first quarter of 2022 decreased $1.2 million year-over-year, driven primarily by our IP business. Games revenue for the first quarter of 2022 was down approximately $1.1 million compared to the prior year, essentially flat compared to the fourth quarter of 2021. The decline in year-over-year revenue was primarily driven by in-games purchases. Consolidated gross profit in the first quarter was $10.5 million compared to $12.2 million the prior year, driven by lower revenue. As a percentage of revenue, gross margin was 79%, up 2 percentage points compared to the first quarter last year. Total operating expenses in the first quarter were $15.5 million compared to $18.4 million in the prior year. The decrease was primarily attributable to $3.2 million of restructuring charges taken in the first quarter of 2021 compared to $300,000 in Q1 2022. Net loss for the quarter attributable to RealNetworks was $5.2 million or $0.11 per diluted share compared to a net loss of $10.4 million or $0.27 per diluted share in the prior-year period. First quarter 2022 adjusted EBITDA was a loss of $3.8 million compared to adjusted EBITDA loss of $3 million in the prior-year period. Sequentially, adjusted EBIT loss was essentially flat. Now turning to our first quarter 2022 segment results in more detail. Mobile Services segment contribution margin was a loss of $2 million compared to a loss of $1.6 million in the prior year. The year-over-year change was driven primarily by decreased revenue in our legacy businesses. Consumer Media segment contribution margin was a gain of $300,000 compared to approximately $600,000 in the prior-year period. The decrease was primarily due to lower revenues and offset by expenses related to Ciena that we no longer consolidate in our results. Games segment contribution margin was a gain of $300,000 compared to a loss of $100,000 in the prior-year period. Revenue declines were offset by lower costs. Turning to our balance sheet. At March 31, 2022, we had $21.8 million in unrestricted cash and cash equivalents compared to $27.1 million on December 31, 2021. We had no debt and no borrowings outstanding on our revolving credit facility. As mentioned, we continue to focus our resources on our AI-based growth initiatives and carefully manage our expenses. Within our SAFR business, we're intentionally investing in SAFR SCAN and optimizing our geographic footprint. Now turning to our outlook. For the second quarter ending June 30, 2022, we currently expect total revenue to be in the range of $11 million to $12.5 million and adjusted EBITDA loss to be in the range of $6 million to $4.5 million. Because we expect slower revenue growth from SAFR in 2022 than we previously expected, we now anticipate achieving single-digit revenue growth in 2022, excluding the Games business. With that, we'll now open the call for questions. Operator?

[Operator:]

. We'll take our first question from Jacob Stephan through Lake Street Capital Markets.

[Jacob Stephan:]

Solid quarter. Just wanted to dig in more on the SAFR revenue growth. What are the primary headwinds that you're seeing in that segment?

[Robert Glaser:]

So, the primary headwind we're seeing actually is within the safety and security space, and just a large amount of projects getting delayed into further quarters. And it's something that we have seen and that's part of the decision to focus more on SAFR SCAN and access control.

[Jacob Stephan:]

Maybe just looking at gross margin next quarter. It was up nicely this quarter year-over-year. But given that the revenue outlook is slightly decreased from where we had our numbers, what do you think about margins moving forward?

[Christine Chambers:]

So, we don't guide to gross margins specifically. We did see an improvement, as you saw from my remarks, year-over-year. And, yes, like I said, we don't guide specifically to gross margin for the quarter. But I have given EBITDA expectations for Q2.

[Jacob Stephan:]

Maybe just last one. So, looking to get a little bit more information on the NTT Docomo deal, has that been ramping? Or where's that?

[Mike Ensing:]

So, very significant amount of activity, with projects and deployments across a very wide set of use cases. Those use cases include access controls, such as physical security, actually workforce management as well, and then also custom analytics. So, we're actually very, very pleased with the progress that we're making with Docomo.

[Operator:]

. And that does conclude today's question-and-answer session. I'd like to turn the conference back over to management for any additional closing remarks.

[Robert Glaser:]

Thanks. This is Rob. I want to thank everyone for joining us this afternoon. Look forward to following up with those of you that would like to do so in the days ahead. And until then, take care. I hope everyone stays well and healthy and we will look forward to talking to you soon. Thank you, operator.

[Operator:]

Thank you. And that does conclude today's conference. We do thank you all for your participation. You may now disconnect.