RealNetworks, Inc.
Q1 2017 Earnings Call Transcript

Published: 4 May 2017

[Operator:]

Welcome to the RealNetworks' First Quarter 2017 Earnings Call. Your lines have been placed on listen-only until the question-and-answer session. [Operator Instructions] This conference is being recorded. If you have any objections, please disconnect at this time. I would like to turn the call over to, Ms. Mary Bragg [ph]. Mary, you may now begin.

[Unidentified Company Representative:]

Thank you, very much. Thank you, Angie. Welcome to the RealNetworks' first quarter of 2017 conference call. Before we begin, I remind you that some matters discussed today are forward-looking, including statements regarding RealNetworks' future revenue, adjusted EBITDA, and operating expenses and trends affecting its businesses and prospects for future growth and profitability. Other forward-looking statements include the company's plans to implement its strategy and invest in its product and initiatives, as well as the expected growth, profitability and other benefits from those activities. All statements other than statements of historical fact 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. A copy of those filings can be obtained from the SEC or from the Investor Relations' section of our corporate website. These forward-looking statements reflect RealNetworks' expectations as of February 8, 2017. 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. We will present certain financial measures on this call that will be considered non-GAAP under the SEC's Regulation G. For a reconciliation 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 tab Financial Information. With me today are Rob Glaser, Chairman and CEO; and Marjorie Thomas, our Chief Financial Officer. Rob will discuss company's strategy and the progress the company has made in recent months, then Marge will provide a financial review of the first quarter of 2017, and the outlook for the first quarter of 2017, after their prepared remarks, they will be pleased to answer questions. Now, I'll turn the call over to Rob.

[Rob Glaser:]

Thank you, Mary. Good afternoon everyone and thanks for joining us. Today I'll review and discuss our results for the first quarter 2017 and go through three specific topics. First the stability of our core business as demonstrated by this quarter results. Second the progress in developing new products and services that will set us up for growth in 2018 and beyond. And third our ongoing disciplined and managing cost while making judicious and measured investment for the future. First let's discuss the stability of our core business. Our combined revenue for the first quarter was $30.6 million up $2.3 million from the first quarter 2016 and down $900,000 from Q4 2016. For seven quarters in a row we potentially had stable revenue. Having our core business be stable may not sound very glamorous then lays the foundation for us to focus is to get diplomatic efforts new initiatives that we believe will drive growth in 2018 and beyond. Second, I'd like to discuss those growth initiatives. I'll start with games. You recall that our games business consist of two parts legacy pieces subscription business and our new primary mobile studio business. Our primary focus in games is our growing Mobile Studio business. We run the PC Subscription business for operational efficiency and as a source of expertise that can help us grow and evolve our Mobile Games business. Our Mobile Games business grew 19% in the first quarter 2017 compared to a year ago. In Q1 we shipped two GameHouse Original titles Mary le Chef which is a new series and Angela's High School reunion, well it is installment of our fabulous franchise. They're both off to solid starts especially Fabulous. Our game has original story titles all in combined fun and exciting game plays with compelling story telling to create a new genre of entertainment experience. We currently have over 20 GameHouse Original titles in our portfolio. We think we're on a promising path to scale this business up and to unlock additional value in the quarters ahead. In our mobile services segment, our revenue grew by 16% percent year-on-year in the first quarter. This growth comes from us and from some of the carrier design wins we achieve in 2016 both Ringback Tone its real time product lines as well as a strong revenue quarter for our low margin Korean MoD business. While these will continue to be important products for our Mobile Services business, we see a lot of future growth coming to other areas. One is it is with a messaging products will bring to market in 2017, which I mentioned on our last earnings call. The second is the new technology initiative we haven't yet announced that came out of a RealTimes program. And the Consumer Media business you continue to see the ecosystem for RealMedia HD or RMHD our next generation video codec. We continue to move RMHD forward in China which is the products core market today. Most notably the RMHD codec is now shipping in Huawei's Mate 9 and P10 mobile phones which are very popular in China. The most significant development in Q1 associated with the worldwide rollout of RMHD do you included RMHD in coding and decoding are latest to play release. In less than two months, consumers have used the new real player to code over 1 million into the RMHD format. As you discussed before, a codec have gone to the multi-dimensional process and involves developing core technology then deploy in a series above our own products and partner products. And evangelism third parties to start to deploy content in the codex format. While it takes time to successfully build a Kodak ecosystem, we're confident that we are in a good path to do so first in China and then over time in other markets around the world. My third topic is our financial discipline. Even if we invest in our growth initiatives, we've continued to focus on cost management. We reduced our year-over-year operating expenses by $6.5 million and have improved our EBITDA by $3.7 million in Q1 compared to last year. In the second quarter we continue to take cost reduction measures helping to offset increased investment in growth initiatives. Before I pass things to Marge, two quick updates first regarding Rhapsody which is an independent company that Real has a significant stake in and in which I'm co-chairman. As you know Rhapsody entered into a process to review strategic options for the future and has hired the investment bank Rothschild to review the process. The end result of the strategic review process is not yet clear nor is the potential financial impact if any to RealNetworks. Because we're still in the middle of the process, I'm not able to provide a further update today. Finally before passing the call to Marge for the last time, I want to thank Marge for her commitment and terrific work as the CFO over the past two plus years. When Marge told me earlier this year she wanted to pivot in the nonprofit sector, I was very sad for Real but happy for society. As we announced last week, Marge's successor will be Cary Baker who officially started at Real on Monday and he takes over from Marge at the end of the week. I'm delighted to welcome Cary to our team and I'm confident we won't skip a beat in the transition. In summary, we've continued to maintain stability in our core business and be disciplined in how we manage our cost even as we continue to focus on initiatives that we believe will set us up for growth and profit over the mid to long term. And with that, let me turn the call over to Marge to review the financials.

[Marjorie Thomas:]

Thanks Rob. Let's go through the results for the first quarter of 2017 starting with our consolidated results. For the first quarter revenue was $30.6 million up from $28.2 million for the first quarter of 2016, down sequentially from $31.5 million in the prior quarter. The year-over-year growth primarily reflects the strong period for Mobile Services with an increase in our low margin Korea on demand music business and improvement in our carrier revenue. The sequential decline is primarily results of a seasonal decline in consumer media IP licensing business where the fourth quarter of the year tends to be that businesses highest quarter. Our essentially stable revenue for the last seven quarters along with our significant cost reduction steps is reflected in the year-over-year improvement and EBITDA. Adjusted EBITDA for the first quarter of 2017 was - $4.4 million compared to $8.1 million for the first quarter of 2016. Our operating expenses for the first quarter of 2017 were down $6.5 million or 23% from the same period last year even as we began to spend on our growth initiative. We took a series of cost reduction actions in Q1 and early Q2 to further reduce headcount and expenses. We've reduced headcount by about 70 over the course of the last 13 months. We expect these latest actions netted against the increase in growth initiative spending to keep operating expenses centrally flat from the first quarter of 2017 to the second quarter. Now let's look at our first quarter of 2017 results by our business segment. Starting with mobile services, for the first quarter of 2017 Mobile Services revenue with $19.1 million up 1% sequentially from the prior quarter and up to 60% from the first quarter of 2016. I've noted earlier the growth reflects an increase in our low margin Korean music on demand business and improvement in our carrier revenue. In the first quarter the segment had a negative contribution margin of -$2.6 million and improvement of $1 million or 27% from the same period in 2016. Our consumer media segment combines the RealPlayer products and the IP codec including our new RMHD Kodak technology. For the first quarter of 2017, our consumer media revenue was $5.7 million down 12% from the prior quarter and down 1% from the first quarter of 2016. The sequential decline is primarily a result of seasonal declines in the consumer media's IP licensing business I spoke of earlier. The segment had a positive contribution margin in the first quarter of $400,000 an improvement of $1.2 million from the same period in 2016. Our games revenue was $5.8 for the first quarter down 6% from the prior quarter and 4% from the first quarter in 2016. The primary reason for the decline was lower legacy PC business. At the same time we're pleased to see the continuing strong shift to mobile games partially offsetting declines in the PC based games. Mobile games grew by 19% in the first quarter of 2017 compared to the same period in 2016 driven by our GameHouse's Original story. We expect new title introductions to drive growth in games revenue in coming periods. For the first quarter of 2017, the game segment had a negative contribution margin of $900,000 flat with the same period in 2016 and reflecting continued investment in this segment to build our capability to produce even more GameHouse Original title. On allocated corporate operating expenses decreased $3.1 million in the first quarter of 2017 compared to a year ago. The year-over-year improvement was driven by reductions and ongoing expense stop compensation and one-time benefit which included a warrant for shares of Rhapsody valued at $500,000 for services rendered between 2015 and 2016. As to our cash balance, we had $66.3 million in unrestricted cash, cash equivalents and short term investments at the end of the first quarter. In the first quarter, our cash consumption was impacted by our EBITDA loss of $4.4 million. The timing of certain customer payments and restructuring charges related to our cost cutting initiative. As Rob said, we can still continue to see relative stability in our top-line moving into 2017. We believe that our efforts to rebalance resources reduced costs and optimize our investments are paying off with smaller losses. We expect to continue to see periodic variability in revenues from our games and our consumer medium businesses and we know that the length and timing of large carrier deployments can be uneven also impacting revenue timing. That said, we do see a path forward that includes both continued cost reductions and investments and initiatives that we expect will allow us to grow the top-line and return to profitability. For Q2 2017, we expect total revenue of $28 million to $31 million with an adjusted EBITDA loss in the range of -$3 million to - $5000000. For the remainder of 2017, each business unit has a clear agenda. Focus on sustainability of our existing businesses and developing their key growth initiatives. I'd like to close by saying it's been my distinct honor to serve as RealNetwork CFO and I also want to welcome Cary and wish him the very best going forward. Those are our prepared remarks today. And we are open now to take investor questions.

[Operator:]

[Operator Instructions]

[Rob Glaser:]

Well operator, if we don't have any questions. I think or did we just get one. Okay, great.

[Operator:]

Our first question comes from William Meyers of Miller Asset Management. William you line is now open.

[William Meyers:]

Hi, thanks for taking the question. Could you talk about the, you had a very good year-over-year income increase in mobile services. But could you talk about how you see margins in that business both in the quarter and going forward?

[Rob Glaser:]

I'll start and Marge will speak to it. So we have really two major pieces of our business. We have the Korean MoD business, which is a legacy business we've managed for some time and as that business has evolved that businesses is very low margin associated with it. There are some other relationships associated with it that make it worthwhile. And then we have the rest of our mobile share business, which is substantially higher margin. We don't break after relative percentages of those two, but what you see for the gross margin of that business is a blend of those two.

[Marjorie Thomas:]

Yes, that's right.

[William Meyers:]

Okay. So is there any reason to expect it to improve during the course of the year?

[Rob Glaser:]

I think there is a few aspects of the different businesses have different gross margins. And then the mix of that Korean MoD business versus the rest would certainly influence and we do not do our quarter guidance for particular businesses. Either the top-line or any of the pieces in the middle, so we do our aggregate guidance which we've provided, but we are not providing guidance or even so directional body English on margin structure within businesses but we report the matter every quarter.

[William Meyers:]

Sure. That's fine I understand that was very helpful. Thank you.

[Rob Glaser:]

Operator, any other questions?

[Operator:]

We show no further questions on queue at this time.

[Rob Glaser:]

Well, if that's the case. I think we will close our call then today. I want to thank everybody for joining and look forward to having follow-up conversations with a number of you in the days ahead and look forward to having you all meet Cary in the interim and certainly on this call in three months' time. Thanks again in a particular file thank you to Marge for everything she's done. It's great working with you and glad you're sticking around Seattle and look forward to working together in context of the non-profit you're doing to help make the world a better place.

[Marjorie Thomas:]

Thank you Rob, appreciated.

[Rob Glaser:]

Alright. Take care, everyone. Operator you can sign off now.

[Operator:]

Thank you. That concludes today's conference. Thank you for your participation. You may now disconnect.