RealNetworks, Inc.
Q3 2013 Earnings Call Transcript

Published: 31 Oct 2013

[Operator:]

Welcome to the RealNetworks Third Quarter 2013 Earnings Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now, I will turn the meeting over to Ms. Drew Markham, you may begin.

[Drew Markham:]

Thank you, Kelly, and welcome to the RealNetworks third quarter 2013 conference call. Before we begin, I remind you that some matters discussed today are forward-looking, including statements regarding RealNetworks future revenue, adjusted EBITDA, operating expenses, trends affecting its businesses, and its prospects for future growth, cost reductions and profitability. Other forward-looking statements include the company's plans to reduce expenses, implement its strategy and simplify its businesses as well as the new products, value creation 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 described 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. Forward-looking statements reflect RealNetworks expectations as of today, October 30, 2013. 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 SEC 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 this SEC on October 30, 2013, both of which can be found on our corporate website at investor.realnetworks.com under the tab Financial Information. Here with me today are Rob Glaser, Chairman and Interim CEO; and Tim Wan, Chief Financial Officer. Tim will provide a financial review of the third quarter, and the outlook for the fourth quarter. And Rob will discuss company strategy and the progress the company has made in recent months. After their prepared remarks, they will take a few questions. To get things started, I turn to Tim.

[Tim M. Wan:]

Thanks, Drew. Earlier today, we released financial results for the third quarter of 2013. We will file our 10-Q for the quarter soon and I encourage you to review it and other SEC filings for a more thorough discussion and disclosure of our results. Today, I will review our third quarter financial result in detail and give some guidance for the fourth quarter of 2013. Rob will discuss the progress to-date, which will include our recent announcement regarding the RealPlayer Cloud and acquisition of Muzicall. Total third quarter revenue was $49 million, reflecting a sequential decrease of 2% and year-over-year decrease of 17%. Our adjusted EBITDA loss in Q3 was $8.4 million versus a loss of $5.8 million in the prior quarter, and a loss of $6 million in the year-ago quarter. The increase in EBITDA loss for the quarter was primarily due to the reduction in revenue and increased expenses, associated with new products being launched partially offset by continued efforts in reducing cost, both in COGS and in OpEx. Overall gross margins improved 4 percentage points over the year-ago quarter as a result of our ongoing expense alignment efforts. Even including the cost of our new product development effort, our quarterly operating expenses were about $3.6 million lower in the quarter than 1 year ago, adjusting for operating expenses from recent acquisitions of Slingo and Muzicall, one-time litigation settlement and restructuring charges. In Q3, we completed the relocation to our new headquarters. And we will begin to realize the savings starting in Q4 of this year. We expect annualized cash savings of approximately $7 million. We are working very hard on developing new products and services to turn the corner on revenue growth. I'm encouraged with the progress and Rob will talk further about the recently announced RealPlayer Cloud. Until our new products and services take hold in the market and scale up, we expect that our short-term results will continue to be negatively affected by the trends that we have talked about before, specifically rising smartphone use and industry pricing trends affecting our legacy Mobile Entertainment business, increased saturation of download partner software in the market and the decline of PC-based casual games. Now, for more detail on business results of the quarter, let's start with RealPlayer Group. For the third quarter, revenue declined 4% sequentially and 18% year-over-year to $17.6 million. The sequential decline was due to selective marketing efforts by our download partner and the continuing expected decline in SuperPass revenue. But these were offset positive seasonality in the mobile IP business sequentially. The year-over-year decline was mainly due to the decrease in SuperPass revenue. Adjusted EBITDA rose slightly sequentially, but declined year-over-year due to lower revenue and investments in new products. We launched RealPlayer Cloud in September, the service is free up to a certain level of storage capacity, and then has a tiered subscription fee. We do not expect that the RealPlayer Cloud will have a significant impact on our revenue in 2013. Rob will discuss the RealPlayer Cloud more in depth and the opportunity that it represents. For the third quarter, Mobile Entertainment revenue rose 7% sequentially, but fell 13% year-over-year to $19.9 million. The increase from the second quarter relates to an increase in SaaS revenue related to our Music On-Demand business in Asia and the acquisition of Muzicall. The year-over-year decline was due to contract terminations, lower transaction volumes and the transfer of certain contracts to LiveWire in Q3 of 2012. Third quarter adjusted EBITDA for Mobile Entertainment fell slightly sequentially due to increased operating expenses from our recent acquisition of Muzicall, but improved year-over-year as a result of our cost saving efforts. In the third quarter, we acquired Muzicall, a leading hybrid carrier and direct-to-consumer service provider in Europe, known primarily for its ringback tone service. We expect this acquisition to complement our growth initiative in the Mobile Entertainment segment, which is slated to launch in Q4. Games revenue for the third quarter declined 12% sequentially and 24% year-over-year to $11.4 million. The declines were due to overall market shares in consumer game play from traditional PC Games to social and mobile games, resulting in lower subscriptions and unit sales. Adjusted EBITDA in Games also declined sequentially in year-over-year. As you may recall on the last earnings call, we announced the launch of GameHouse Casino Plus with the Golden Dreams Sweepstakes feature and the acquisition of Slingo. Rob will provide more context and an update. Corporate costs adjusted for relocation, restructuring and one-time litigation settlement costs increased sequentially primarily due to one-time tax credit in prior quarter, but improved year-over-year due to our cost alignment efforts. During the third quarter, we recognized $11.5 million related to the settlement of our 2 most significant outstanding litigation matters. We made the $11.5 million payment in October. Based on historical experience, these were unusual cases for us and we do not anticipate this level of litigation expense in the foreseeable future. We ended the quarter with $218.4 million in cash and short-term investments, down $18.3 million from the second quarter of 2013. Uses of cash for the third quarter included $6.7 million for the acquisition of Muzicall, $1 million related to our headquarters relocation and $8.4 million related to our EBITDA loss and other net working capital changes. We have not sold any shares of LoEn since the third quarter of last year. In addition to the cash and short-term investments on our balance sheet, we also have $39.5 million in restricted cash and equity securities in publicly traded companies, so we are in a strong liquidity position. Further, as you may know, we also own approximately 45% of Rhapsody, one of the leading global online music subscription services. Moving on to our Q4 outlook. I will provide some financial guidance for the fourth quarter. We are making progress on our previously articulated plan to revitalize RealNetworks by introducing new products and services during the second half of 2013. But until those new products take hold in the market, our revenue outlook will continue to be challenged. For the fourth quarter of 2013, we expect total revenue of $47 million to $50 million with all segments declining year-over-year, but on a sequential basis we expect a slight increase in Mobile Entertainment, flat revenue in Games and a decrease in RealPlayer. We expect adjusted EBITDA for the quarter to be a loss of $8 million to $11 million. Now, I'd like to turn the call over to Rob. Rob?

[Robert Glaser:]

Thanks, Tim. Good afternoon, everyone, and thanks for joining us. Since Tim just went through the numbers in great detail, I'm going to focus on providing context around our recent product announcements. As I've mentioned in each of the earnings calls I've been on since returning as Interim CEO, our focus is on completing the implementation of 4 objectives

[Operator:]

[Operator Instructions] Barbara Coffey from S&P Capital.

[Barbara Coffey:]

Actually 2 quick questions. Would you go into a bit on the litigation, what was it about, is there anything still out outstanding because I didn't -- that was a bit of a surprise to me. And then I understand the absence of marketing, but is there a time when that will -- when you expect to ramp that up and could you give us some timetable around that?

[Tim M. Wan:]

I think for a more thorough discussion around the recent litigation settlement, we will be filing our 10-Q very shortly. I think that's where you will get most of that information. But there are no outstanding issues related to the settlement. Bobby?

[Robert Glaser:]

This is Rob. I'll take the second half of that. So we are not specifically announcing the timetable for the ramp up other than to say that we feel very good about the performance of the product in the field right now. So we are tracking our rollout plans. And I think I would say 2 other things that will helpfully hope (sic) [hopefully help] connect the dots. One is, the nature of these freemium products is you build up a user base, and then you monetize them as they become more and more active users. So if you look that the historical conversion rates of a Dropbox or Drop.net -- I mean a box.net (sic) [box.com] rather -- who have different offerings, but a conceptually similar model, you see that you got to get the product out there and you kind of grow it from there. And so for us, we have the special opportunity unlike those companies which are starting from scratch to apply a working model to a large base. So for us, it's much more important in the very sort of short-term, for us to make sure we have it right, so that when we roll the product out to 10s of millions of users, they're going to have a delightful experience. Now one other thing I can say is that, that's going to be a geographically phased roll out. In this next phase, we'll be scaling it up in the U.S. and Canada. And then in a subsequent phase, we will be scaling it out internationally because we really want to make sure that the performance of the product is very good, and in particular, that our other Cloud infrastructure that we're using in those other markets is local to those markets and is tuned for the specific network characteristics of those markets. So, we are moving very quickly, very energetically, but we're also trying to be very methodical about how we do this. We have a lot of experience in services as you know from our Mobile Entertainment business, and we're applying that expertise in phased rollouts to the rollout of RealPlayer Cloud.

[Barbara Coffey:]

As an associated question to that, is there a way that you are reaching out to influential end users to make sure that they are exposed to the product and working with them that way?

[Robert Glaser:]

That seems like a great idea. It sounds like a terrific idea. If you have any influence with end users that you particularly are influential with, please send them our way. And more generally -- yes I mentioned someone like Walt Mossberg who obviously is hugely influential and other reviewers who have reviewed and given positive feedbacks on the product and more generally in addition to the major media influencers. We do definitely think influencers across the board are very important.

[Operator:]

[Operator Instructions] There are no further questions at this time.

[Tim M. Wan:]

Thank you, everyone for joining the call. We look forward to talking to you after this call or hearing from you later this quarter.

[Robert Glaser:]

Thanks everyone. Bye-bye.