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Edited Transcript of RNWK earnings conference call or presentation 6-May-20 8:30pm GMT

Q1 2020 RealNetworks Inc Earnings Call

Seattle May 14, 2020 (Thomson StreetEvents) -- Edited Transcript of RealNetworks Inc earnings conference call or presentation Wednesday, May 6, 2020 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Judd Charles Lee

RealNetworks, Inc. - Senior VP, CFO & Treasurer

* Robert D. Glaser

RealNetworks, Inc. - Founder, Chairman & CEO

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Conference Call Participants

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* Kimberly Orlando

ADDO Investor Relations - SVP

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Presentation

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Operator [1]

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Greetings, and welcome to the RealNetworks, Inc. First Quarter 2020 Earnings Call. (Operator Instructions). Please note, this conference is being recorded.

I will now turn the conference over to your host. Kim Orlando, you may begin.

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Kimberly Orlando, ADDO Investor Relations - SVP [2]

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Thank you, and welcome to the RealNetworks First 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 condition. 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 beliefs 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 reports on Form 10-K and Form 10-Q and in other reports. 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, May 6, 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; Judd Lee, Senior Vice President and CFO; and Mike Ensing, our outgoing interim CFO. Rob will discuss the company's strategy and the progress the company made during the first quarter of 2020. Judd will then provide a more detailed financial review of the first quarter of 2020. After today's prepared remarks, Rob, Judd and Mike will be pleased to answer questions.

With that, I will hand the call over to Rob.

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

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Thank you, Kim, and good afternoon, everyone, and thanks for joining us today. I hope you and yours are healthy and doing at least okay.

I'll begin with a few comments on how much the world has changed since our last update just 3 months ago. Then I'll provide a summary of Real's first quarter results. Finally, I'll discuss how we're changing Real to address the needs and opportunities of the world going forward as well as the changed economic environment, which we're now operating.

The new decade is off to a completely unexpected start, as everyone knows. We mourn the loss of 0.25 million people around the world due to COVID-19. We're also very mindful that for most of the world, including our home country, the pandemic continues to be massively disruptive to our daily lives. The safety and well-being of our employees, their families, our customers and our communities is a foundational goal that everything we're doing builds upon.

We're now operating Real in a fundamentally different way than we have run the company before. We've been a global company from the very beginning and have had many development teams around the world for a number of years. At the same time, we generally had a core group of people who physically worked out of the same facility and used a combination of digital tools and face-to-face interactions to build our products and run our tools businesses. This now has changed.

Starting in January in Asia and mid-March in the rest of the world, we've moved to an almost purely digital work-from-home operating model. Unlike companies in other industries, we're very fortunate that our business and the vast majority of the products and services we offer can be developed, marketed and sold and distributed in digital manner. Like other companies in our situation, we've made this transition very quickly. I'm pleased to report that we've made the transition successfully, and we maintained clarity, focus and operational excellence. I'm very appreciative to everyone on our global staff who've stepped up to make this happen.

Now on to our Q1 results. We generated consolidated revenue of $43.1 million during Q1, which was slightly ahead of the guidance we provided in January. Most of our businesses performed in line with our expectations going into the quarter, except for minor financial impacts from COVID-19, largely related to SAFR, our computer vision platform. Our adjusted EBITDA in Q1 was negative $3.3 million, which was in line with our expectations going into the quarter. Judd will go through our financials in more detail in a few minutes.

Our Q1 financial performance was solid, reflecting the following factors. One, for most of our products and services, we continued to deliver them digitally to enterprises and consumers as we had before the pandemic. Two, where we had to change our workflow, for instance, into engineering or customer support, we've done so quickly and effectively. Three, the most significant worldwide impact was in the third month of the first quarter, except in Asia where things started to change beginning in late January. So to a large extent, Q1 was a transitional quarter into the new world. Four, our Napster D2C and carrier businesses were minimally impacted by the COVID-19 crisis. Q1 marked the launch of 2 major new partners for Napster: SONOS ship -- SONOS Radio Powered by Napster and a top 5 mobile phone manufacturer began shipping its Napster-based music service. And finally, five, our strongest performing business line was our free-to-play games led by Delicious World and Delicious Bed & Breakfast. Revenue for Games once again improved year-over-year by 16% in the first quarter 2020. Our success in free-to-play games was solid throughout the quarter and more than offset declines in our legacy part of the Games business.

Let me now look forward to the future. Given the extraordinary uncertainties in the world, we will not be providing forward financial guidance, but I do want to explain what we're doing and why.

First, the macro changes we're making. We believe that the world economy is headed into a steep recession that will persist for a significant period of time. Accordingly, we've tightened our belt financially. Specifically, we've reduced internal expenses, frozen employee salaries, laid off about 20 staff members worldwide, furloughed about half a dozen more and modified our 2020 executive bonus program. Also, I personally declined to accept the 2019 bonus, which would have been payable in 2020.

Second, we've significantly strengthened the company's balance sheet. I contributed $10 million from my own personal funds into the business in January because of my belief in the promising future that lies ahead for RealNetworks. I did this before the pandemic hit globally. That said, knowing what I know now, I'm very happy that I did it. In addition, we are grateful to have received $2.87 million in funding under the payroll -- under the Paycheck Protection Program provision of the CARES Act. Combined with other measures we're undertaking, the additional funds from the PPP loan will help ensure that our employees are able to continue supporting our customers and enhancing our digital products and services, both to serve current customers and to address newly important societal needs. The PPP loan will also enable us to bring several staff members back from furlough and even sooner than we would have otherwise. Separately, Napster has just signed a promissory note for $1.7 million related to the PPP program, and they expect to receive those funds soon as well.

Third topic. We remain focused on our new 2 main growth initiatives, free-to-play games and SAFR. Let me elaborate on them after I first talk about our legacy business. At legacy business, which includes our Ringback Tone business, messaging, the Real player and our China IP business, in general, these businesses appear to be relatively stable. While a significant global recession may very well impact these businesses in the medium term, they have not, in general, been negatively impacted by the pandemic. In fact, in some cases, such as messaging, we've seen volume increases.

Second, our free-to-play casual mobile games continue to represent a very promising growth initiative. Our GameHouse team has done an excellent job of delivering a low-cost form of entertainment through free-to-play, story-based casual games that consumers could love and then monetize well. Delicious World and Delicious Bed & Breakfast have contributed to drive our progress in this regard.

As with any business, while there are puts and takes associated with any sort of economic downturn, we believe our free-to-play games continue to drive top line growth. And we remain optimistic about their future prospects.

Third, we are pivoting SAFR. We're pivoting it to focus on the intersection of public health and public safety. We believe there exists an opportunity to continue to serve our customers in a new and different way and think that the SAFR platform can become a significant contributor to public safety in this new era. Our engineers have been hard at work during the pandemic, and we're seeing promising early results. We expect to be rolling out new and enhanced SAFR-based products beginning in mid-2020 that will address newly identified needs of the market for public safety as people begin to go back to work in larger numbers. We're looking forward to updating you on our progress on this front in the coming quarters.

In summary, I'm grateful to our team members for their continued excellent work under very complicated circumstances. I'm very proud of our team and, in particular, the spirit of innovation that will become visible to the wider world in the weeks and months ahead.

Before I conclude, I'd like to extend a warm welcome to Judd Lee who recently assumed the role of Senior Vice President and Chief Financial Officer of RealNetworks. Judd assumed that role in April. Judd's very broad set of experiences include work in areas closely adjacent to our growth initiatives. His fresh strategic perspective will serve Real well during this important and complex time. I'd also like to thank Mike Ensing, our Interim CFO, for his leadership and great work throughout this period.

I'll now turn the call over to Judd to go through the numbers in detail. Judd?

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Judd Charles Lee, RealNetworks, Inc. - Senior VP, CFO & Treasurer [4]

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Thanks, Rob. And good afternoon, everyone. Having just joined Real in late March, I am excited to be a part of the team and draw upon my prior experience in financial and strategic leadership positions to help drive longer-term growth at RealNetworks. I would also like to thank Mike Ensing for his leadership and contributions during this interim period.

In my remarks today, I will first review our consolidated first 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 in 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 these timing impacts and their implications.

Now turning to our results. Total revenue for the first quarter was $43.1 million compared to $43.4 million in the prior quarter and $39.5 million in the prior year period. Napster accounted for $26.3 million of our first quarter revenue compared to $26.1 million in the prior quarter and $24.3 million in the prior year period. As you may recall, the prior year period included just over 2 months of Napster revenue following our acquisition of a majority interest of the company on January 18, 2019. When not including revenue from Napster, the first quarter marked our third consecutive quarter of year-over-year revenue growth.

Looking at these results in greater detail. Revenue within the Consumer Media segment was down $900,000 sequentially and up $1 million year-over-year. The 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 of our IP codec business which were partially offset by continuing declines in our legacy PC products.

Mobile services revenue was up $400,000 on a sequential basis and down $200,000 on a year-over-year basis. The sequential improvement was primarily driven by higher sales in SAFR and Kontxt and was partially offset by declines in our legacy Ringback Tone product. Year-over-year, the decline was primarily due to declines in our legacy products, partially offset by higher sales in Kontxt and SAFR.

Games revenue for the first quarter was up $100,000 sequentially and up $900,000 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 and a decline in our legacy PC subscription business.

Finally, Napster revenue was up $200,000 sequentially and up $2 million year-over-year. The sequential increase was mainly due to an early termination fee of a customer contract and an increase in platform services revenue, partially offset by declining subscribers. Year-over-year, the increase was primarily related to the early termination fee in addition to the inclusion of a full quarter of revenue compared to just over 2 months of revenue contribution in the prior year period. This was partially offset by declining subscribers. The prior year period also included a $600,000 reduction in revenue from purchase accounting.

Consolidated gross profit for the first quarter was $19 million, up $300,000 compared to the prior quarter and up $4.4 million compared to the prior year period.

As a percentage of revenue, gross margin was 44% compared to 43% in the prior quarter and 37% in the prior year period. RealNetworks' gross margin without Napster was 76%, consistent with the prior quarter and an increase from 70% in the prior year period.

Total operating expenses for the first quarter were $24.1 million, a decrease from $24.6 million in the prior quarter and $25.5 million in the prior year period. Total operating expenses in the first quarter of 2020 included $200,000 of transaction costs related to the acquisition of Napster compared to $800,000 in the prior year period.

Adjusted EBITDA for the first quarter was a loss of $3.3 million compared to a loss of $2.7 million in the prior quarter and a loss of $7.9 million in the prior year period. The first quarter reflected our third consecutive quarter of year-over-year improvement in adjusted EBITDA loss.

Net loss attributable to RealNetworks was $4.6 million or $0.12 per diluted share compared to a net loss of $6.4 million or minus $0.17 per diluted share in the prior quarter and net income of $1.5 million or $0.04 per diluted share in the prior year period. Net income in the first quarter of 2019 included a gain of $12.3 million from the acquisition of Napster shares.

Turning to our first quarter segment results in more detail. Consumer Media segment contribution margin was $400,000 compared to $1.3 million in the prior quarter and a loss of $1.4 million in the prior year period. On a sequential basis, the decrease is due to lower revenues. On a year-over-year basis, the improvement reflects higher revenues and decreased operating expenses as a result of our ongoing expense management.

Mobile Services segment contribution margin was a loss of $2.5 million compared to a loss of $2.7 million in the prior quarter and a loss of $2.4 million in the prior year period. The sequential contribution margin improvement was due to higher revenues, partially offset by increased operating expenses. Year-over-year, the decline was due to lower revenues primarily in our legacy products, along with slightly higher operating expenses, primarily related to our investments in SAFR.

The Games segment contribution margin was $100,000 compared to $200,000 in the prior quarter and a loss of $900,000 in the prior year period. On a sequential basis, the decrease was due to investments in mobile games. The year-over-year contribution margin improvement was primarily due to continued strong performance of free-to-play mobile games.

Napster's contribution margin was $1.1 million compared to $200,000 in the prior quarter and a loss of $500,000 in the prior year period. The sequential and year-over-year improvements were primarily due to higher revenue.

And at the corporate level, unallocated corporate expenses of $2.6 million decreased by $400,000 compared to the prior quarter and decreased by $1.6 million compared to the prior year period. The sequential and year-over-year decreases were due to reduced operating expenses, primarily from lower people-related costs. Our first quarter operating expenses at the corporate level also included $100,000 of restructuring costs compared to $400,000 in the prior quarter and $200,000 in the prior year period.

Now turning to our balance sheet. At March 31, 2020, we had $19 million in unrestricted cash and cash equivalents compared to $16.8 million at December 31, 2019. The increase was due to the $10 million in cash proceeds we received from our recent sale of Series B preferred stock to our CEO, Rob Glaser. The cash proceeds were partially offset by our net loss and the timing of working capital.

Our total long-term debt at March 31 was $3.9 million, and we had $6.1 million available for borrowing on this revolving credit facility. I'd like to also reiterate that we are highly focused on cash preservation in the current environment given the high level of macroeconomic uncertainty stemming from COVID-19.

As announced last week, RealNetworks received $2.9 million in funding under the Paycheck Protection Program provision of the CARES Act. In addition, Napster has just signed a promissory note of $1.7 million related to the CARES Act and expects to receive the fund soon. As Rob mentioned, we are very grateful to be receiving this assistance which helps ensure we will be able to keep our staff at current levels. It will also enable us to bring several staff numbers back from furlough. The proceeds will be used to cover payroll costs as well as rent and utilities in accordance with the program guidelines. The loan has an interest rate of 1% per annum, a 6-month deferment period and matures on the 2-year anniversary of disbursement.

Looking ahead, given the overall lack of visibility during this unprecedented pandemic and its impact on the company, we will not be providing guidance for the second quarter of 2020.

In summary, we delivered strong first quarter financial results, characterized by our third consecutive quarter of year-over-year revenue growth, excluding Napster; secondly, our strong year-over-year margin expansion with our gross profit margin of 44%; and finally, our third consecutive quarter of year-over-year improvement in our adjusted EBITDA loss due to our commitment to carefully managing costs.

While our first quarter was minimally impacted by COVID-19, the pandemic brings more uncertainty to our second quarter and the balance of 2020. We believe our progress in changing the way we work, manage costs and pivoting our strategy related to SAFR to address current social challenges will make us stronger and better position us for future success.

Thanks to all of our employees for their ongoing commitment to keeping RealNetworks a safe and productive workplace. We wish good health to all.

And with that, we will now open the call for questions. Operator?

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Operator [5]

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(Operator Instructions) And there are no questions at this time. Therefore, I will turn the call back over to Rob Glaser for closing remarks.

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Robert D. Glaser, RealNetworks, Inc. - Founder, Chairman & CEO [6]

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Thanks, everyone, for joining us today. Again, I want to wish everybody a healthy and safe time during this period and to thank, as I said, all of our staff members around the world for their focus on excellent work and wishing for their continued safety and for our customers as well. Look forward to chatting with investors separately after this call and being back with you all again in 3 months for our next quarterly call if we don't talk sooner. Thanks, operator.

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Operator [7]

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This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.