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Edited Transcript of RNWK.OQ earnings conference call or presentation 3-Nov-20 9:30pm GMT

·16 min read

Q3 2020 RealNetworks Inc Earnings Call Seattle Nov 4, 2020 (Thomson StreetEvents) -- Edited Transcript of RealNetworks Inc earnings conference call or presentation Tuesday, November 3, 2020 at 9:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Judd Charles Lee RealNetworks, Inc. - Senior VP, CFO & Treasurer * Kimberly Orlando RealNetworks, Inc. - IR * Robert D. Glaser RealNetworks, Inc. - Founder, Chairman & CEO ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Greetings, and welcome to RealNetworks, Inc. Third Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Ms. Kim Orlando with ADDO Investor Relations. Please begin. -------------------------------------------------------------------------------- Kimberly Orlando, RealNetworks, Inc. - IR [2] -------------------------------------------------------------------------------- Thank you, and welcome to RealNetworks Third 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 conditions. 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 the pending sale of 84% owned Rhapsody International Inc., which does business as Napster to MelodyVR Group PLC. Effective as of the third quarter of 2020, Napster is presented as a discontinued operation for accounting and disclosure purposes and comparable historical periods have been recast to conform to this presentation. Statements that express our belief 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. 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 portion of our corporate website. Forward-looking statements made today reflect RealNetworks' expectations as of today, November 3, 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; and Judd Lee, Senior Vice President and CFO. Rob will discuss the company's strategy and the progress that company made during the third quarter of 2020. Judd will then provide a more detailed financial review of the third quarter of 2020. After today's prepared remarks, Rob and Judd will be pleased to answer questions. With that, I will hand the call over to Rob. -------------------------------------------------------------------------------- Robert D. Glaser, RealNetworks, Inc. - Founder, Chairman & CEO [3] -------------------------------------------------------------------------------- Thanks, Kim. Good afternoon, everyone, and thanks for joining us today. I want to talk about 3 topics: First, I'll summarize our financial results; second, I'll discuss our progress and momentum in our primary growth initiatives, which are free-to-play casual mobile games and SAFR; third, I'll cover our success regarding the interrelated goals of: a, simplifying Real; b, monetizing our strategic assets; and c, bringing capital in to drive these initiatives forward. First, our Q3 results. The following numbers pertain to our continuing operations, which includes our games, Consumer Media and Mobile Services business. Napster also had a very solid quarter, but the Napster in the process of being sold to MelodyVR, Napster's results are now being presented as discontinued operations. I will discuss this pending Napster transaction in more detail shortly, and Judd will go through Napster's financial results a little later. In Q3, our revenue for continuing operations was $16.6 million. The gross margin profile of the continuing operations was 75%, which was in line with the prior quarter and is significantly higher than when the numbers included in that. Our commitment to improving business performance led to our fifth consecutive quarter of year-over-year improvement in our adjusted EBITDA loss from continuing operations this time to negative $1.9 million. These numbers include Scener, which accounted for roughly $400,000 of our adjusted EBITDA loss, in both the current quarter and in the prior year period. In 2021, we will like to be pro forma our Scener, but for consistency, we've included Scener's expenses in our 2020 numbers. Judd will go through our financials in more detail in a few minutes. Next, an update on our 2 core new growth initiatives, free-to-play games and our SAFR computer vision platform. GameHouse revenue increased 2% over the prior quarter and 6% over the year ago period. This understates our progress in free-to-play games, which increased by 60% compared to the third quarter 2019 and now represents about half of our games' revenue. GameHouse's growth continues to be driven by the success of our 2 main free-to-play games, Delicious World and Delicious Bed & Breakfast. We remain confident that free-to-play gains will continue to be our primary growth engine for our games business. Next, I'll turn to SAFR, our computer vision platform. While certain parts of a commercial sector clearly been affected by the pandemic, we're starting to see new opportunities for SAFR emerge. For instance, the Tijuana International Airport's Cross Border Xpress, or CBX, recently chose SAFR to track mass compliant and gather critical operations data within the terminal to optimize operations and improve passenger flow. In addition, we're very pleased with the progress we've been making with SAFR in the federal sector. We continue to execute on 2 directive Phase II Small Business Innovation Research, or SBIR, contract that we were awarded in Q2 with the U.S. Air Force. Q3 is the first quarter in which we generated revenue from these contract, and we look forward to continuing to deliver on these contracts in the quarters to come. Just last week, we launched SAFR version 3.0, which features enhanced COVID-19 response features and a new default high-sensitivity face detector. This improved face detector enables better face detection and recognition accuracy for both masked and unmasked faces. SAFR's accuracy improvements under this release will enable customers to deploy face-based contactless secure access without requiring removal of mask. SAFR 3.0 also includes a new mask detection dashboard, enabled customers to unanimously track mask usage rates. I'm very pleased with our teams ability to move quickly to address important new customer needs that have emerged in this pandemic -- during the pandemic. I'm also very pleased with our efforts to continue to strengthen our SAFR team. Most notably with recent addition of Brad Donaldson as President of Division. Brad will be primarily responsible for leading the strategic, and product and business development for SAFR. We're already benefiting from Brad's expertise in insights, given his extensive experience in the industry. Third, I'd like to talk about our progress in simplifying Real, monetizing assets that are not core to our future and adding resources by outside capital that will enable these spun-off businesses to drive and scale going forward. We made notable stride in this regard in Q3 with both Napster and Scener. On August 25, we announced that Napster, which we own 84%, will be acquired by the MelodyVR Group, a leading creator of live virtual reality. The total deal value is $70 million. This comprises about $44 million in assumed liabilities and fresh consideration of $26.3 million through a combination of cash and MelodyVR stock. The final value from this transaction to RealNetworks is subject to several factors, including deal cost after repaying $3.9 million in debt, an escrow of $3 million, the mix of cash versus Melody stock and the market value of that stock, and payment to Columbus Nova that's tied to our January 2019 acquisition of CES (inaudible) Napster. We expect the transaction to close during the fourth quarter, at which one we'll discuss further detail. We're proud of our stewardship of the iconic Napster brand and the Rhapsody business over the past 17 years. We're confident that Anthony Matchett and the team at MelodyVR will do a great job of turning the company forward. The second transaction is for our Scener Watch Party service and platform. Scener is a nascent business we incubated for 2 years and are now in the process of spinning out. Scener raised a total of $2.1 million in funding from external investors, led by Seattle Real Estate Investment Clinical and also a significant presentation from launch and its affiliated investment. I also participated as an individual investor. Eventually, we expect that Scener will become an independent operation. Within the short term, Scener will remain consalidated with Reals financial results. As of September 30, 2020, we owned approximately 82% of Sceners outstanding equity because the new proceeds were structured as a note, they will convert into equity at a later date. Before I conclude, I'd like to briefly touch on the pandemic, which is continuing to stress and challenge all of us. The health, safety and well-being of our employees, their families, our customers and our communities remains a paramount priority. Vast majority of our staff continue to work virtually for the foreseeable future through 2020 and into the first part of 2021. I'm extremely pleased that our productivities remain strong throughout this challenging period, and would like to extend my sincerest thanks to all of our team members and business partners who are successfully adopting to this new normal. In closing, I remain optimistic on Reals future prospects, led by our 2 primary growth initiatives, free-to-play games and SAFR. I'm also very pleased with the progress that we've made in monetizing and expanding on other assets. Going forward, we continue to -- we will continue to manage cost effectively and keep focusing on our biggest growth. I will now turn the call over to Judd to go through the numbers in detail. Judd? -------------------------------------------------------------------------------- Judd Charles Lee, RealNetworks, Inc. - Senior VP, CFO & Treasurer [4] -------------------------------------------------------------------------------- Thanks, Rob, and good afternoon, everyone. In my remarks today, I will first review our consolidated third 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. 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 operations of RealNetworks, which exclude Napster. Now turning to our results from continuing operations. Total revenue for the third quarter was $16.6 million as compared to $17.1 million in the prior quarter and $17.7 million in the prior year period. The decreases over both periods were due to declines in our Consumer Media and Mobile Services segments, which were partially offset by growth in our Game segment. Looking at these results in greater detail, revenue within the Consumer Media segment was down $600,000 sequentially and down $1 million year-over-year. The sequential and year-over-year declines were primarily due to the timing of shipments and payments and continuing declines in our legacy PC products. Mobile Services revenue was down slightly on a sequential basis and down $500,000 on a year-over-year basis. The sequential and year-over-year decreases were primarily due to declines in our legacy products. On a year-over-year basis, the decrease was partially offset by higher sales in context. Games revenue for the third quarter was up $100,000 sequentially and up $400,000 year-over-year. On a sequential and year-over-year basis, the increase was driven by the continued strong performance of free-to-play mobile games, partially offset by fewer premium game launches. Consolidated gross profit for the third quarter was $12.5 million, down $300,000 compared to the prior quarter and down $900,000 compared to the prior year period. The sequential and year-over-year decline is primarily due to lower revenue from legacy products in our Consumer Media and Mobile Services segments, partially offset by higher revenue in the games segment. As a percentage of revenue, gross margin was 75% compared to the 75% in the prior quarter and 76% in the prior year period. Total operating expenses for the third quarter were $15.3 million, a decrease from $15.6 million in the prior quarter and $18.5 million in the prior year period. The sequential decrease was primarily related to lower people-related costs. The year-over-year decline was due to lower people-related costs and professional service fees. Adjusted EBITDA for the third quarter was a loss of $1.9 million compared to a loss of $1.4 million in the prior quarter and a loss of $3.2 million in the prior year period. Net loss attributable to RealNetworks from continuing operations was $3.2 million or minus $0.08 per diluted share compared to a net loss of $3.1 million or minus $0.08 per diluted share in the prior quarter and a net loss of $5.2 million or minus $0.14 per diluted share in the prior year period. Turning to our third quarter segment results in more detail. Consumer Media segment contribution margin was a loss of $100,000 compared to a gain of $500,000 in the prior quarter and a gain of $300,000 in the prior year period. The sequential and year-over-year decrease primarily reflects lower revenue. Year-over-year, the decrease was partially offset by decreased operating expenses as a result of our ongoing expense management. Mobile Services segment contribution margin was a loss of $600,000 compared to a loss of $900,000 in the prior quarter and a loss of $1.9 million in the prior year period. The sequential and year-over-year contribution margin improvements were primarily related to lower people-related costs, marketing expenses, professional service fees and facilities expenses. Games segment contribution margin was $600,000, in line with the prior quarter compared to $200,000 in the prior year period, driven by the continued strong performance of free-to-play mobile games. At the corporate level, unallocated corporate expenses of $2.5 million decreased by $200,000 compared to the prior quarter and decreased by $1 million compared to the prior year period. The sequential and year-over-year decreases were primarily due to lower restructuring cost and other charges and stock-based compensation. Our third quarter operating expenses at the corporate level included $300,000 of restructuring costs compared to $700,000 in both the prior quarter and prior year periods. Before I turn to a discussion on our financial condition, I'd like to briefly touch on Napster's results, which are being presented as discontinued operations. Napsters revenue of $23.6 million was up slightly compared to $23.3 million in the prior quarter and was down compared to $27.3 million in the prior year period. Napster's net loss at approximately $1,000 was essentially breakeven. Now turning to our balance sheet. At September 30, 2020, we had $13.2 million in unrestricted cash and cash equivalents compared to $8.5 million at December 31, 2019. The increase was primarily related to the cash proceeds we received from our sales of Series B preferred stock to our CEO, Rob Glaser, in the first quarter of 2020, and funding received pursuant to the Paycheck Protection Program in the second quarter of 2020, which was partially offset by cash used to fund our operation. Our cash balance declined slightly compared to $14.4 million at June 30, 2020, primarily due to cash used to fund operations, partially offset by $2.1 million in funding from investors for Scener. Our total debt at September 30 was $6.8 million. Looking ahead, 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 fourth quarter of 2020. In summary, our progress with our key initiatives, combined with our commitment to diligent expense management to help fuel their growth, lays the foundation to make a stronger and better positioned for future success. Thanks to all of our employees for their ongoing commitment to keeping RealNetworks a safe, productive and rewarding place to work. With that, we will now open the call for questions. Operator? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Ladies and gentlemen, I would like to turn this call back over to our CEO. Rob, you may conclude this call. -------------------------------------------------------------------------------- Robert D. Glaser, RealNetworks, Inc. - Founder, Chairman & CEO [2] -------------------------------------------------------------------------------- I want to thank everybody for joining us, either live or on-demand, of course, given that today's Election Day. I look forward to being in touch with each and all of you either during these calls or afterwards as we customarily make ourselves available. And with that, I want to thank everybody in the company for working hard and continuing to focus very effectively during this pandemic. I want to thank all of our partners and stakeholders for the same and look forward to seeing everybody virtually in the short-term and physically over the longer term. Thanks. -------------------------------------------------------------------------------- Operator [3] -------------------------------------------------------------------------------- Thank you for joining us today. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.