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Edited Transcript of RNWK earnings conference call or presentation 3-May-17 9:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 RealNetworks Inc Earnings Call

Seattle Aug 12, 2017 (Thomson StreetEvents) -- Edited Transcript of RealNetworks Inc earnings conference call or presentation Wednesday, May 3, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Marjorie O. Thomas

RealNetworks, Inc. - Former CFO, SVP and Treasurer

* Robert Glaser

RealNetworks, Inc. - Founder, Chairman and CEO

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Conference Call Participants

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* William Meyers

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Presentation

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Operator [1]

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Welcome to the RealNetworks First Quarter 2017 Earnings Call. (Operator Instructions) This conference is being recorded. If you have any objections, please disconnect at this time.

I would now like to turn the call over to [Mary Broad]. Mary, you may begin.

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Unidentified Company Representative, [2]

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Thank you very much. Thank you, Anj. And 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 products 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 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. These forward-looking statements reflect RealNetworks' expectations as of May 3, 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 the company's strategy and the progress of -- the company has made in recent months. Then Marj will provide a financial review of the first quarter of 2017 and the outlook for the second quarter of 2017. After their prepared remarks, they will be pleased to answer questions.

Now I'll turn the call over to Rob.

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Robert Glaser, RealNetworks, Inc. - Founder, Chairman and CEO [3]

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Thank you, Mary. Good afternoon, everyone, and thanks for joining us. Today, I'll review and discuss our results for the first quarter of 2017 and go through 3 specific topics: first, the stability of our core business as demonstrated by this quarter's results; second, our progress in developing new products and services that will set us up for growth in 2018 and beyond; and third, our ongoing discipline in managing cost while making judicious and measured investments 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 of 2016 and down $900,000 from Q4 2016.

For 7 quarters in a row, we have essentially had stable revenue. Having our core business be stable may not sound very glamorous, but it lays the foundation for us to focus a significant amount of effort on new initiatives that, we believe, will drive growth in 2018 and beyond.

Second, I would like to discuss those growth initiatives. I'll start with Games. You'll recall that our Games business consists of 2 parts: a legacy PC subscription business and our new, primary in mobile, studio business. Our primary focus in Games is our growing mobile studio business. We run the PC subscription business for operational efficiency and is 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 of 2017 compared to a year ago. In Q1, we shipped 2 new GameHouse original titles, Mary le Chef, which is a new series, and Angela's High School Reunion, the latest installment of Fabulous franchise. They're both off to solid starts, especially Fabulous. Our GameHouse original story titles all in combine fun and exciting gameplay with compelling storytelling to create a new genre of entertainment experience.

We currently have over 20 GameHouse original titles in our portfolio. We think we are 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% year-over-year in the first quarter. This growth comes from us implementing some of the carrier design wins we achieved in 2016 for both Ringback Tone and its RealTimes product lines as well as a strong revenue quarter for our low-margin Korea MOD business. While these will continue to be important products for our Mobile Services business, we see a lot of future growth coming from 2 other areas: one is initially the messaging products we'll bring to market in 2017, which I mentioned in our last earnings call; the second is a new technology initiative we haven't yet announced that came out of a RealTimes program.

In the Consumer Media business, we continue to seed 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 roll-out of RMHD is the including of RMHD encoding and decoding in our latest RealPlayer release. In less than 2 months, consumers have used the new RealPlayer to encode over $1 million files into the RMHD format. As we've discussed before, a codec launch is a multi-dimensional process that evolves developing core technology, then deploying it in a series of both our own products and partner products and evangelizing third parties to start to deploy content in the codec's format. While it takes time to successfully build a codec ecosystem, we're confident that we're on 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 as we invest in our growth initiatives, we've continued to focus on cost management. We have 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 investments in the growth initiatives.

Before I pass things to Marj, 2 quick updates. First, regarding Rhapsody, which is an independent company that Real has a significant stake in, and of which I'm co-Chairman. As you know, Rhapsody entered into a process to review its 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 unable to provide a further update today.

Finally, before passing the call to Marj for the last time, I want to thank Marj for her commitment and terrific work as our CFO over the past 2-plus years. When Marj told me earlier this year she wanted to pivot to the nonprofit sector, I was very sad for Real, but happy for society. As we announced last week, Marj's successor will be Cary Baker, who officially started at Real on Monday and who takes over from Marj 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 have 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 significant growth and profit over the mid- to long-term.

And with that, let me turn the call over to Marj to review the financials.

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Marjorie O. Thomas, RealNetworks, Inc. - Former CFO, SVP and Treasurer [4]

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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, so down sequentially from $31.5 million in the prior quarter. The year-over-year growth primarily reflects a 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 a result of a seasonal decline in Consumer Media's IP licensing business, where the fourth quarter of the year tends to be that business's higher -- highest quarter. Our essentially stable revenue for the last 7 quarters, along with our significant cost-reduction steps, is reflected in the year-over-year improvement in EBITDA. Adjusted EBITDA for the first quarter of 2017 was negative $4.4 million compared to negative $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 initiatives. We took a series of cost-reduction actions in Q1 and early Q2 to further reduce headcount and expenses. We have 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 essentially 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 segments. Starting with Mobile Services. For the first quarter of 2017, Mobile Services revenue was $19.1 million, up 1% sequentially from the prior quarter and up 16% from the first quarter of 2016. As noted earlier, the growth reflects an increase in our low-margin carrier Korean Music On Demand business and improvement in our carrier revenue. In the first quarter, this segment had a negative contribution margin of negative $2.6 million, an 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 codec 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 million 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 original stories. We expect new title introductions to drive growth in Games revenue in coming periods. For the first quarter of 2017, the Games 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 titles. Unallocated 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 in ongoing expense, stock compensation and onetime benefits, which included a warrant for shares of Rhapsody valued at $500,000 for services rendered between 2015 and 2016. As our cash balance -- 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 the -- by our EBITDA loss of $4.4 million, the timing of certain customer payments and restructuring charges related to our cost-cutting initiatives.

As Rob said, we continue to see relative stability in our top line, moving into 2017. We believe that our efforts to rebalance resources, reduce 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 Media 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 in 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 negative $3 million to $5 million. 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 RealNetworks' 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.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Robert Glaser, RealNetworks, Inc. - Founder, Chairman and CEO [2]

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

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Operator [3]

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Our first question comes from the William Meyers of Miller Asset Management.

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William Meyers, [4]

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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?

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Robert Glaser, RealNetworks, Inc. - Founder, Chairman and CEO [5]

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I'll start that and Marj can speak to it. So we have really 2 major pieces of that business. We have the Korea MOD business, which is a legacy business we've managed for some time. And as that business has evolved -- that business is -- has very low margin associated with it. There's some other relationships associated with it that make it worthwhile. And then we have the rest of our Mobile Services business, which is substantially higher margin. We don't break out the relative percentages of those 2. But what you see for the gross margin of that business is a blend of those 2.

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Marjorie O. Thomas, RealNetworks, Inc. - Former CFO, SVP and Treasurer [6]

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Yes, that's right, Rob.

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William Meyers, [7]

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

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Robert Glaser, RealNetworks, Inc. - Founder, Chairman and CEO [8]

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Well, I think, there is a few aspects of it. Different businesses have different gross margins. And then the mix of the -- that Korea MOD business versus the rest, which certainly influence it. And we do not do in -- out quarter guidance of particular businesses on either the top line or any of the pieces in the middle. So we do our aggregate guidance, which we have provided, but we are not providing guidance or even sort of directional [biding wish] on margin structure within businesses, but we do report them out every quarter.

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William Meyers, [9]

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Sure. That's fine. I understand. That was very helpful.

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Operator [10]

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We show no further questions on queue at this time.

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Robert Glaser, RealNetworks, Inc. - Founder, Chairman and CEO [11]

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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 3 months' time. Thanks, again, and in particular, a final thank you for -- to Marj for everything she has done. It's been great working with you. And glad you're sticking around Seattle and look forward to working together in the context of the nonprofit and all you're doing to help make the world make a better place.

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Marjorie O. Thomas, RealNetworks, Inc. - Former CFO, SVP and Treasurer [12]

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Thank you, Rob. I appreciate it.

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Robert Glaser, RealNetworks, Inc. - Founder, Chairman and CEO [13]

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Take care, everyone. Operator, we can sign off now.

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Operator [14]

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