RealNetworks, Inc.
Q2 2020 Earnings Call Transcript

Published: 8 Aug 2020

[Operator:]

Welcome to the RealNetworks Inc. Second Quarter 2020 Earnings Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to hand the conference over to Kim Orlando. Please go ahead.

[Kimberly Orlando:]

Thank you and welcome to the RealNetworks' second quarter 2020 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' operating expenses on a consolidated basis and trends affecting its businesses and prospects for future growth and profitability, liquidity and financial conditions. 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 that relate to 84% owned Rhapsody International Inc, which does business as Napster. 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, including risks and implications associated with combining our business and consolidating our financial statements with Napster. We describe these and other risks in our SEC filings, including in the risk factors set forth in our most recent report on Form 10-K and Form 10-Q and another report. 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' expectations as of today, August 5, 2020. 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 today, both of which can be found on our corporate website at investor.realnetworks.com under the Financials tab. With me today are Rob Glaser, Chairman and CEO; and Judd Lee, Senior Vice President and CFO. Rob will discuss the company's strategy and the progress the company made during the second quarter of 2020. Judd, will then provide a more detailed financial review of the second quarter of 2020. After today's prepared remarks, Rob and Judd will be pleased to answer your questions. With that, I will hand the call over to Rob.

[Robert Glaser:]

Thanks Kim. Good afternoon, everyone and thanks for joining us today. I'll begin with a summary of Real's second quarter results and then I'll highlight progress on our primary growth initiatives, which are free to play casual mobile games and our SAFR facial recognition platform. Next, I will discuss how Real is working to address both commercial and societal needs, in a present challenging and complex environment. Finally, I'll discuss some significant organizational changes that we announced yesterday. Beginning with our second quarter results, we delivered solid financial performance and we're very pleased with our strong operational execution in the first full quarter of living and working during the global pandemic. Our consolidated revenue was $40.4 million, when not including Napster, quarter revenue of $17.1 million was up 9% year-over-year, marking our fourth consecutive quarter of year-over-year revenue growth in our core business. Overall, our business has performed in line with our internal expectations going into the quarter. Adjusted EBITDA loss in Q2 narrowed to 2.2 million negative, which is our fourth consecutive quarter of year-over-year improvement in our adjusted EBITDA. We're putting an appropriate amount of fuel into our growth businesses, while also closely managing our overall expenses. So I will go through the financials in more detail in just a few minutes. In addition, the second quarter commemorated the 25th Anniversary of Streaming, since we first introduced RealAudio in 1995, launching the commercial streaming industry. In conjunction with this Anniversary, we are excited to boost two new consumer products in June. RealPlayer 2020 and StarSearch. RealPlayer 2020 provides one click video download and instantly spots and identifies people in videos. The scenes where they appear and organizes media elaborate by people, so you can search, browse and easily find clips and scenes. StarSearch, is a browser extension that enables you to instantly identify celebrities and public figures in any video stream from popular sites such as YouTube and Netflix. These products utilize the power of AI and our safer computer vision platform to make streaming in today's world even better. Initial response to both products has been positive. The rest of our business has performed as expected in the quarter. Judd will provide additional details in a few minutes. I'll now turn to review our progress on our two primary growth initiatives. Beginning with our casual games business, which operates under the GameHouse brand. GameHouse continue to be our strongest performing segment with revenue growing 12% over the prior quarter and 23% over the year ago period. GameHouse's growth continues to be driven by the success of our two main free to play games, Delicious World and Delicious Bed & Breakfast. We continue to realign our resource in investments to focus on our free to play game strategy, which we believe has the strongest growth potential. We estimate today that more than 90% of revenue generated in mobile gaming space comes from free to play games. So now, our business is strongly aligned with these industry trends. Next, I'll turn to discussion of SAFR, our computer vision platform. In Q2, we pursued two tracks with SAFR. First, we're continuing to enhance our world-class SAFR platform and service focused primarily on the traditional security and safety markets. Second, we've been creating innovations focused on new needs at the intersection of public health and public safety. One great example of our progress in the first trackers is our June launch of SAFR Inside, a new low-cost component that runs significant parts of SAFR directly inside smart cameras. We're delighted to announce the integration of SAFR Inside with the AXIS Q1615. AXIS is the leading manufacturer of security cameras outside of China and SAFR is the first computer vision platform to run directly inside of their cameras. We see a significant opportunity to bring SAFR directly to edge devices, which simplifies use and lowers total cost significantly. The second great example of our progress is our - in our first SAFR mission, it's one we announced just earlier today. We are honored to announce that in June, we were awarded two direct to Phase II Small Business Innovation Research or SBIR contracts with United States Air Force. The total value of this contracts is almost $2 million. We will work hard to deliver full on these efforts, which will advance the capabilities of our commercial platform for militaries. We're proud that SAFR will support the important mission of our US armed forces, while helping keeping them safer. Regarding our merchant work at the intersection of public health and public safety, we continue to move fast progression an important and highly fluid situation. In June, I had the chance to virtually attend the London based CogX AI conference, where we demonstrated SAFR's face mask detection capability in public for the first time. We expect to bring products to market in the near future, to deliver this and other important emergent needs to help society return to work and other activities, as safely as possible during the ongoing pandemic. Next I want to talk about Real's doing its part to address the complex circumstances, in which we are now living. The safety, health and well-being of our employees, their families, our customers and our communities, remains of the utmost importance. We continue to work virtually through the world in Q2. Even in the locations where the pandemic is relatively under control and new case flow to a low, we continue to support the vast majority of our staff, as we work either primarily or fluidly from home. Our productivity continues to be strong and I'm grateful to all our team members, who have adjusted so effectively to this new way of working. As we said previously in Q2, we are also grateful for the US government's PPP loan program and we use it to bring back several furloughed employees, bring them back to work. We're also dedicated to addressing - to help addressing inequality and systemic racism in the communities which we are now working and living. In service to these goals, we made a special grant of $1 million to our philanthropic arm, RealNetwork's Foundation to help address both the immediate need stemming from racial justice and also the impact of COVID-19. Unfortunately, data showing that these dual challenges have disproportionately impacted communities of color. Accordingly, our grants are particularly targeted the need of these communities. Our goal is to both provide immediately health and also to support efforts to effect real and lasting change. Finally, I'd like to touch on a very significant organizational change that we announced just yesterday. Max Pellegrini, who for seven years has been a key member of our leadership team, most recently as our President and COO, will be leaving around September to move back to Italy and to take on any challenge. Max has been a huge part of our successful effort to reinvent Real going back to just after our return to Real in 2014. I'm truly sorry to see Max go and also grateful for his leadership, partnership and ongoing friendship. Fortunately, we've been able to bring back an excellent person to step into Max's role. I am delighted that Mike Ensing will be returning to Real to serve as our new President and COO. Mike has a deep record in a wide range of business topics. It will serve him and us well. As you know, Mike served as our Interim CFO for four months at the beginning of the year. In a relatively short period of time, Mike built a very strong foundation with the rest of the senior team. Mike will be joining us in mid-April and we're on a path to have a smooth transition between Max and Mike. In closing, I'd like to thank all of our team members for their continued hard work and dedication. This work led to solid financial and operational performance in Q2 and sets us up well for the future. I'll now turn the call over to Judd to go through the numbers in detail. Judd?

[Judd Lee:]

Thanks Rob and good afternoon everyone. In my remarks today, I will first review our consolidated second quarter results, followed by a more detailed discussion of our segment business performance. Please note that year-over-year and sequential comparisons are not always apples-to-apples, due to the periodic variability of our revenues. Certain of our businesses, including the IP licensing part of our consumer media business and mobile games within our Games business, can fluctuate quarter-to-quarter. But we will continue to update you on the timing impacts and their implications. Now turning to our results. Total revenue for the second quarter was $40.4 million compared to $43.1 million in the prior quarter and $44.2 million in the prior year period. Napster accounted for $23.3 million of our second quarter revenue compared to $26.3 million in the prior quarter and $28.6 million in the prior year period. When not including revenue from Napster, second quarter revenue of $17.1 million improved 9% year-over-year. Looking at these results in greater detail, revenue within the Consumer Media segment was down $300,000 sequentially and up $500,000 year-over-year. This sequential decline was primarily due to the timing of shipments and payments, year-over-year, the increase was primarily driven by the timing of renewals and shipments in our IP codec business, which were partially offset by continuing declines in our legacy PC products. Mobile Services revenue was down $200,000 on a sequential basis and down $500,000 on a year-over-year basis. The sequential decrease was primarily due to declines in our legacy products, particularly offset by higher sales and SAFR and Kontxt. Year-over-year, the decrease was primarily due to declines in our legacy products, partially offset by higher sales in Kontxt. Games revenue for the second quarter was up $800,000 sequentially and up $1.4 million year-over-year. On a sequential and year-over-year basis, the increase was driven by continued strong performance of free to play mobile games, partially offset by fewer premium game launches. Finally Napster revenue was down $3 million sequentially and down $5.2 million year-over-year. Both the sequential and year-over-year decreases were mainly due to declining subscribers. Consolidated gross profit for the second quarter was $17.4 million, down $1.6 million compared to the prior quarter and up $400,000 compared to the prior year period. The sequential decline is primarily due to lower revenue from Napster from an early termination fee received in the prior quarter. Year-over-year, the improvement is primarily related to higher revenue in the Games and Consumer Media segments, along with reduced head count, which was partially offset by lower revenue from Napster. As a percentage of revenue, gross margin was 43% compared to 44% in the prior quarter and 38% in the prior year period. Our core gross profit margin without Napster was 75%, down from 76% in the prior quarter and up from 73% in the prior year period. Total operating expenses for the second quarter were $22.3 million, a decrease from $24.1 million in the prior quarter and $26.4 million in the prior year period. The sequential and year-over-year decreases were primarily related to lower people-related costs. Adjusted EBITDA for the second quarter was a loss of $2.2 million compared to a loss of $3.3 million in the prior quarter and a loss of $6.3 million in the prior year period. Net loss attributable to RealNetwork's was $5.1 million or minus $0.13 per diluted share compared to a net loss of $4.6 million or minus $0.12 per diluted share in the prior quarter and a net loss of $9.2 million or minus $0.24 per diluted share in the prior year period. Turning to our second quarter segment results in more detail. Consumer Media segment contribution margin was $500,000, relatively flat compared to the prior quarter and a loss of $1 million in the prior year period. The year-over-year improvement primarily reflects decreased operating expenses, as a result of our ongoing expense management. Mobile Services segment contribution margin was a loss of $900,000 compared to a loss of $2.5 million in the prior quarter and a loss of $2.2 million in the prior year period. The sequential and year-over-year contribution margin improvements were primarily related to lower people-related costs and lower marketing expenses. Games segment contribution margin was $600,000 compared to $100,000 in the prior quarter and a loss of $800,000 in the prior year period. The sequential and year-over-year contribution margin improvements were primarily due to continued strong performance of free to play mobile games. Napster's contribution margin was a loss of $700,000 compared to $1.1 million of gain in the prior quarter and $100,000 of gain in the prior year period. The sequential and year-over-year declines are primarily due to lower revenue. At the corporate level, unallocated corporate expenses of $2.8 million increased by $200,000 compared to the prior quarter and decreased by $1.3 million compared to the prior year period. This sequential increase was primarily due to restructuring costs. Year-over-year, the decrease was primarily due to lower people costs. Our second quarter operating expenses at the corporate level include $700,000 of restructuring costs compared to $100,000 in the prior quarter and $700,000 in the prior year period. Now turning to our balance sheet. At June 30 2020, we had $19.7 million in unrestricted cash and cash equivalents compared to $19 million at March 31 2020. The slight decrease was primarily related to the funding received pursuant to the Paycheck Protection Program, which was partially offset by cash used to fund our operations. Our total long-term debt at June 30 was $8.5 million. Looking ahead, given the broader lack of visibility, resulting from the COVID-19 pandemic, its impact on the economy and its potential impact on our operations, we will not be providing guidance for the third quarter of 2020. In summary, we've continued to press forward with our strategy, which resulted in strong traction on our key growth initiatives and solid second quarter financial results, including. One, our fourth quarter - our fourth consecutive quarter of year-over-year revenue growth in our core business without Napster. Two, our strong year-over-year margin expansion in our gross profit margin to 43% and 75% without Napster. And three, our fourth consecutive quarter of year-over-year improvement in our adjusted EBITDA loss, due to our ongoing commitment to expense management. We believe our progress in changing the way we work, managing costs and pivoting our strategy with SAFR to address newly important societal needs, will make us stronger and better positioned for future success. Thanks to all of our employees for their ongoing commitment to keeping RealNetworks' a safe, productive and exciting place to work. We wish great health to all. And with that, we will now open the call for questions. Operator?

[Robert Glaser:]

Well, thank you all for joining us today. I hope that everyone is staying healthy and safe during the pandemic. And I hope you all continue to do so and look forward to talking to you in three months' time, if not sooner. Thanks again.

[Operator:]

That does conclude our conference for today. Thank you for participating. You may now disconnect.