RealNetworks, Inc.
Q4 2020 Earnings Call Transcript

Published: 10 Feb 2021

[Operator:]

Greetings and welcome to the RealNetworks' Incorporated Fourth Quarter and Full Year 2020 Earnings Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kim Orlando with ADDO Investor Relations. Thank you, Kim. You may begin.

[Kimberly Orlando:]

Thank you and welcome to RealNetworks' Fourth Quarter and Full Year 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 condition.

[Robert Glaser:]

Thanks, Kim. Good afternoon, everyone, and thanks for joining us today. As I typically do at year-end, I'll begin with my overall assessment of our 2020 performance. I'll then add a few comments about our go-forward strategy and our two most significant growth initiatives, SAFR and free-to-play mobile games. Then I'll close by commenting on a few personnel matters before passing the baton to Mike and Judd to go into the financials in more detail.

[Michael Ensing:]

Thanks, Rob, and good afternoon, everyone. Today, I'd like to discuss our full-year 2020 financial results and briefly outline key priorities moving forward. Please note that sequential and year-over-year comparisons are not always apples-to-apples, due to the periodic variability in our revenues. Certain of our businesses including the IP licensing part of the Consumer Media business and mobile games within our Games business can fluctuate quarter-to-quarter, but we will continue to update you on these timing impacts and their implications. In addition, as Rob highlighted, Napster is being treated as discontinued operations for accounting and disclosure purposes. Therefore, unless otherwise noted, our results presented today relate to the continuing operation of RealNetworks which is exclude Napster. Now let's review our results. Revenue from continuing operations for the full year was $68.1 million, up 3% or $2.3 million from the prior year. In regard to our 2020 segment results, Consumer Media revenue was $12.6 million, down $600,000 compared to 2019. In general, our legacy businesses including Real Player in China IP performed in-line with our expectations in 2020 as we have also continued to manage costs within these businesses to maximize cash flow and profitability.

[Judd Lee:]

Thanks, Mike, and good afternoon everyone. In my remarks today, I will review our consolidated fourth quarter results followed by a more detailed discussion of our segment business performance. Now turning to our results from continuing operations. Total revenue for the fourth quarter was $17.6 million compared to $16.6 million in the prior quarter and $17.3 million in the prior year period. The sequential increase was driven by growth in our Consumer Media and Mobile Services segments and the year-over-year increase was driven by growth in our Mobile Services and Games segments. Looking at these results in greater detail, revenue within the Consumer Media segment was up $800,000 sequentially and down $1 million year-over-year. The sequential increase was primarily due to the timing of shipments, coupled with higher installs in our IP business. Year-over-year, the decline was primarily due to the timing of shipments and payments along with continuing declines in our legacy PC products. Mobile Services revenue increased $900,000 on a sequential basis and $1 million and on a year-over-year basis. The sequential and year-over-year increases were primarily driven by higher sales in SAFR and Kontxt partially offset by declines in our legacy products. Games revenue for the fourth quarter was down $700,000 sequentially and up $300,000 year-over-year. On a sequential basis, the decline was due to lower revenue and free-to-play mobile games, primarily as a result of both seasonality and decreased monetization due to in this calibration of a game change which we do not expect to be recurring. Compared to the prior year period, the increase in games revenue was driven by strong performance of free-to-play mobile games, partially offset by fewer premium game launches. Consolidated gross profit for the fourth quarter was $13.6 million, up $1.1 million compared to the prior quarter and up $500,000 compared to the prior year period. The sequential improvement was primarily driven by higher revenue in our Consumer Media and Mobile Services segments, partially offset by lower revenue in our game segment. Compared to the prior year period, the improvement was due to higher revenue in our Mobile Services and Games segments, partially offset by lower revenue from legacy products and our Consumer Media segment. As a percentage of revenue, gross margin was 77% compared to 75% in the prior quarter and 76% in the prior year period. The total operating expenses for the fourth quarter were $8.1 million, a decrease from $15.3 million in the prior quarter and a decrease from $17.4 million in the prior year period. The sequential and year-over-year decreases were primarily related to the net favorable adjustments related to contingent consideration liability related to sell Napster, as well as lower people-related costs, partially offset by restructuring and other charges. Normalizing for certain one-time and non-cash items, operating expenses were relatively flat with the prior quarter and decrease $1.7 million or 10% from the prior year period. Adjusted EBITDA for the fourth quarter improved to a loss of $900,000 compared to a loss of $1.9 million in the prior quarter and a loss of $2.9 million in the prior year period. Net income attributable to RealNetworks from continuing operations was $6.1 million or $0.16 per diluted share compared to a net loss of $3.2 million or minus $0.08 per diluted share in the prior quarter and a net loss of $4.5 million or minus $0.12 per diluted share in the prior year period. Please also note that the net loss in the fourth quarter of 2020 included a pretax gain of $8.4 million related to transaction involving our interest in Napster. Turning to our fourth quarter segment results in more detail. The Consumer Media segment contribution margin was a gain of $700,000 compared to a loss of $100,000 the prior quarter and a gain of $1.3 million in the prior year period. The sequential increase was driven by higher revenue and gross margin. Year over year, the decrease primarily reflects lower revenue, partially offset by decreased operating expenses as a result of our ongoing expense management. The Mobile Services segment contribution margin was a loss of $200,000 compared to a loss of $600,000 in the prior quarter and a loss of $2.7 million in the prior year period. The sequential improvement was primarily related to higher revenue, partially offset by incremental expenses related to SAFR. Year-over-year, the improvement was primarily related to higher revenue and lower people-related costs. The Games segment contribution margin was $300,000 compared to a gain of $600,000 in the prior quarter and a gain of $200,000 in the prior year period. The sequential decrease was due to lower revenue. Year-over-year, the increase was driven by the continued strong performance of the free-to-play mobile games. At the corporate level, unallocated corporate expenses was a gain of $4.8 million, which decreased by $7.4 million compared to the prior quarter and decreased by $7.8 million compared to the prior year period. The sequential and year-over-year decreases were primarily due to the net favorable adjustments related to contingent consideration liability, related to the sale of Napster, partially offset by restructuring and other charges. Now turning to our balance sheet. We ended the year with a significantly higher cash balance with unrestricted cash and cash equivalents of $23.9 million at December 31, compared to $13.2 million at September 30, 2020. The improvement was primarily related to the cash proceeds received from the sale of Napster and the release of restricted cash. At December 31 2020, our total debt was $2.9 million and we had no borrowings outstanding on our revolving credit facility. As has been the case in recent prior quarters, given the uncertainty and 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 first quarter of 2021. In summary, despite the challenges we faced in 2020 due to the effects of COVID-19, we delivered significant progress including traction in all Real's key growth businesses. Further, we strengthened the overall financial position of the company and continued to enhance our profitability as evidenced by the improvements in our fourth quarter and full year 2020 adjusted EBITDA losses. With that, we will now open the call for questions. Operator?

[Operator:]

Thank you. We will now be conducting a question-and-answer session.

[Robert Glaser:]

Operator, I guess we're ready to wrap up here today.

[Operator:]

Yes, sir.

[Robert Glaser:]

I want to thank everybody for joining us today. I want to again thank Judd for his tenure in Real and wish him nothing but the best in his next chapter, and I look forward to seeing you all again in three months' time, if not sooner and hopefully sooner.

[Judd Lee:]

Great, thank you everybody.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful evening.