Q3 2019 Earnings Call
Greetings and welcome to Realnetworks third quarter 29, <unk> earnings call.
At this time, all participants I mean listen only mode.
A question and answer session will follow the formal presentation.
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Please note this conference is being recorded.
I would now like to turn the conference over to your host Kimberly Orlando, We didn't that's really shows. Please go ahead.
Thank you and welcome to the real networks third quarter 2019 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 future revenue gross profit adjusted EBITDA and operating expenses on a consolidated basis.
Trends affecting its businesses and prospects for future growth and profitability and financial condition.
Forward looking statements include the company's plants to implement it strategy investing 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 our acquisition of an additional equity stake and Rhapsody International Inc. earlier, this year, 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 state.
Mitch with Napster.
He described these and other risks in our FCC filings, including in the risk factors set forth in our most recent reports on Form 10-K , and Form 10-Q and another reports.
Copy of those filings can be obtained from the FCC from the Investor Relations section of our corporate web site.
Forward looking statements made today reflect realnetworks expectations as of today October Thirtyth 2019.
Company undertakes no duty to update or revise any forward looking statements made during this call whether as a result, with new information future events or any other reason.
In addition, we all present certain financial measures on this call that will be considered non-GAAP under the Fccs regulation G. for 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 our form 8-K dated and submitted to the FCC.
Today, both of which can be found on our corporate web site at Investor Dot Realnetworks dotcom under the financials tab.
With me today, our Rob Glazer, Chairman and CEO and carry Baker CFO .
Rob will discuss the company strategy and the progress the company made during the quarter as well as a preview of what's to come Jerry will then provide a more detailed financial review of the third quarter of 2019 as well as provide the outlook for the fourth quarter of 2019. After today's prepared remarks Robin carry we'll be pleased to answer questions and what.
That I will hand, the call over to Rob Thanks, Kim and good afternoon, everyone.
Thanks for joining us today.
In the third quarter, we continue to receive sheep achieved solid traction with two key growth initiatives are safer based one object recognition platform and free to play casual mobile games.
I'll begin with a detailed discussion on Super then we'll discuss are probably with a free to play games. I'll, then close with a summary of our Q3 results, including our significant <unk> adjusted EBITDA improvement over Q2, which came as a result, this progress plus our ongoing expense management.
We believe it's safer remains our largest long term growth opportunity.
The substantial progress we've made over the past year continues to reinforce our confidence that sabre has the potential become a significant passed from real over time.
Our primary focus today would say for is for specific security related verticals airports public safety retail casinos.
We are primarily reaching these markets through partners and integrate.
We believe that this is the right long term strategy to ensure we have the greatest leverage and reach.
The notable downside is that it typically increase the length of time it takes to get our safer based solutions into the market and deploy ban customers.
Our global network systems integration partners continues to grow and now includes secure and Lake networks in Brazil, Konica Minolta in Europe that one partners and next we're in Japan, <unk> Pacific, It's Kaleo tuck in Indonesia, and 82 caps in Korea.
We've also continued to deepen our technical integration the commercial partnerships with video management solution providers, such as get attack milestones systems and did your four.
Largely because of the school will not recur partners early customers were also quite global and include one of the 10 largest banks in Brazil, SK Telecom in South Korea, NRT, which is a leading U.S. based fintech and gaming service company and law enforcement agency in the city of Calcutta, India.
Another high profile successful Plano Saper also came in India, which safe was deployed to help secure Indian Prime Minister Modi Independence day speech at Red Ford in New Delhi on August 15, 2019.
We continue to enhance the say for technology platform to ensure that its world class testing by the National Institute of standard technology or NIST shows that our core safer facial recognition platform remains one of the world highest performance solutions for life video based on its combinations of accuracy speed and compactness [laughter]. This test recalls.
Also demonstrate the tapers consistently excellent cost variances in skin tone at the city engender several companies several cover our competitors have actually been shown to have significant problems with bias would apply to different ratio Arthur.
We saw in this regard as the newest results demonstrate.
In addition to our technical excellence will close to partnering technologically.
This week, we announced a partnership with video the world's leading GPU manufacturer through our recent collaboration within videos Metropolis Partners program.
Video customers now have access to safer for I based smart cities public safety Irish applications. They make you spaces, both smarter and safer and.
We believe that our work with India will meaningfully help expand sampras reach.
In summary, we believe we have a solid Warner for growth ahead of US and are very encouraged by the robustness of our pipeline. We remain very excited about the long term prospects for safer.
Now I'll turn to a second import growth initiative free to play casual mobile games.
Q2 revenue for games once again improved both sequential and year over year, 18% to 30%, respectively, which was a direct result of our emerging success, you're free to play games.
Our performance was driven primarily by or second free to play title delicious World, which has exceeded our expectations since its global rollout above iOS and Android at the end of Q2.
After less than six months of global release Lisas World is on track.
Just casual game ever both in terms of revenue and in terms of audience size and the latter as measured by daily active users.
We've also continued to benefit for the solid performance of our first free to play game Heart's Medicine for we're close on iOS in Q4, 2018, and an Android Q1 2019.
And then the first week of October or third free to play title delicious bed breakfast was soft launched in the U.S.. We're optimistic that we can sustain our early success the principally casual games and that this would translate both the continued growth and overtime to significant and sustainable profitability.
Before I conclude I'd like to briefly discuss the remainder of our businesses Napster currently our largest business revenue standpoint extended its treat a positive contribution margin to nine consecutive quarters absent the impact of purchase accounting.
We continue to make progress with our PDP strategy first napster or we should highlight the Sony Music Entertainment. Japan's once you have more quality cost. The first high resolution streaming music service powered by Napster, We look forward to sharing additional platform service partnerships in the coming quarters as new customers lost their NAFTA based services.
Consistent with the prior quarter or their businesses delivered results generally inline with expectations. We can dinner last call our IP business and try to remain soft primarily due to factors that are macro and specific to that region, including a significantly longer lower revenue year over year revenue from <unk>.
I must grow legacy businesses have been tracking to our plan.
Overall Q3 revenue was $45 million slightly up from Q2, our adjusted EBITDA loss of 3.2 billion, we substantially improved by over $3 million compared to the prior quarter.
Our growth initiatives continue to gain traction we're continuing to also medical expense within our current cost structure and with a goal of improving our profitability over time.
In summary, we're very pleased with the progress of our two key growth initiatives, while the take a longer scale up than we originally hoped we feel very very good about the path to Dubai.
And with that I'll turn it over to carry to discuss our third quarter results in more detail Gary.
Thanks, Rob and good afternoon, everyone. In my remarks today I will first review our consolidated third quarter results followed by more detailed discussion of our segment business performance I will then review our expectations for the fourth quarter of 2019.
Before diving into the results. 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 consumer media and mobile games within our games business can fluctuate quarter to quarter, but we will continue to update you on these two.
I mean impacts and the implications.
Turning to our results for the third quarter revenue was 45 million compared to 44.2 billion in the prior quarter and 17.6 million in the prior year Napster accounted for 27 point Threemillion, our third quarter revenue compared to 28.6 million in the prior quarter.
Looking at these results in greater detail revenue within the consumer media segment was up 1 million sequentially and down 1.1 billion year over year.
The sequential increase was primarily attributable to increased revenue in our IP coated business due to onetime payments and the timing of revenue recognition, while the year over year decline largely reflects general general underperformance and are trying to IP business.
Mobile services revenue was down slightly on a sequential basis and down 500000 year over year. The decrease on both a sequential and year over year basis was primarily due to a decline in our legacy ringback tones product.
Games revenue for the third quarter was up 1.1 billion sequentially and up 1.7 million year over year, which reflects the success of our free to play mobile games.
We continue to see solid performance from our two free to play games, along with encouraging early results from the soft launch of our third free to play games.
Finally, napster revenue was down 1.3 million sequentially, mainly due to declining subscribers, partially offset by higher platform partner revenue.
Third quarter consolidated gross profit was 18.7 billion compared to 17 billion in the prior quarter and 13.3 million in the prior year period.
As a percentage of revenue gross margin was 42% compared to 38% in the prior quarter and 76% in the prior year.
The sequential increase was primarily due to higher revenue and cost reduction measures and our consumer media segment on a year over year basis. The decline was primarily due to the consolidation of napster.
Napster is gross margin for the third quarter of 2018 or 19%, while real networks gross margin without napster was 76%.
As a reminder reduction in our consolidated gross margin primary were primarily reflects napster is label and publisher royalties for its worldwide music services.
These costs can vary materially from period to period due to significant judgments assumptions and estimates of the amounts to be paid.
Operating expenses for the quarter decreased to 25 billion from 26.4 million in the prior quarter and increased from 18.3 billion in the prior year Napster operating expenses were 6.5 million for the third quarter 2018.
Adjusted EBITDA for the third quarter substantially improved to a loss of 3.2 million compared to a loss of 6.3 billion in the prior quarter and a loss of 3.3 million in the prior year period.
Net loss attributable to real networks was 6 million or 16 cents per share compared to a net loss of 9.2 million or 24 cents per share in the prior quarter and a net loss of 6 million or 16 cents per share in the prior period.
Turning to our third quarter segment results in more detail.
Consumer media segment contribution margin was 300000 compared to a loss of 1 million in the prior quarter and a contribution a 400000 than the prior year period.
On a sequential basis the improvement reflects higher revenue decreased operating expenses as a result of our ongoing expense management.
Compared to the prior year period, the decline reflects lower revenue, partially offset by lower operating expenses.
Mobile services segment contribution margin was a loss of 1.9 million compared to a loss of 2.2 billion in the prior quarter and a loss of 1.3 billion in the prior year period.
The sequential improvement is due to lower operating expenses compared to the prior year period. The decline was due to lower revenue and increased operating expenses, primarily related to investments and safer.
James segment contribution margin was 200000 compared to a loss of 800000 in the prior quarter and the loss of 1.1 billion in the prior year period, the sequential and year over year contribution margin improvements were primarily a result of our transition to free to play mobile games, which generated higher revenue.
Napster his contribution margin not only declined from the prior year period over the prior quarter don't remain positive.
At the corporate level unallocated corporate expenses of 3.5 million decreased by 600000 compared to the prior quarter and increased by 1 million compared to the prior year period. The sequential decline was primarily due to lower professional fees related to the acquisition of napster as well as lower facilities expense.
Compared to the prior year period, the increase was primarily due to the Napster acquisition.
Our third quarter operating expenses at the corporate level also included 700000 of restructuring costs.
Now turning to our balance sheet at September 32019, we had 18.1 million, an unrestricted cash and cash equivalents compared to 26.3 million at June 32019.
The sequential decrease was primarily driven by the net loss.
In addition, we entered into a new loan agreement August for a 10 million revolving credit facility to be used for working capital and general corporate purposes.
As of September 32019, we had 6.1 billion available for borrowing on the revolver.
I'll now turn to our outlook for the fourth quarter.
Please note that beginning in the first quarter of 2019, we included Napster as an additional business segment in our consolidated financial statements from the acquisition date of January 18th 2019.
As such we've accounted for napster, including the non controlling interest and deal related expenses and our guidance, which is as follows.
Total fourth quarter revenue is expected to be in the range, a 40 million to 43 million and adjusted EBITDA loss is expected to be in the range of minus 2 million minus 5 million.
Lastly, while we do not guide the cash with our new products starting to deliver revenue and the majority of the napster transaction costs behind US we continue to expect our operations will use less cash going forward.
In summary, we are encouraged by the momentum of our key initiatives, specifically safer and free to play mobile games to drive topline growth and scale revenue across our organization.
We also remain intently focused and committed to managing our cost we look forward to updating you on our continued progress in the quarters to come with that we will now open the call for questions operator.
Thank you at this time, we will be conducting the question and answer session.
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One moment, please why we poll for questions.
[noise].
There are no questions Register at this time and I would like to turn the conference back over to Rob Blazer for any closing remarks.
Thank you operator.
We look forward to having a follow up conversations with investors as investors reach out to US and also wanted to thank everyone for joining us today and we'll be back with you at our next earnings call. If we don't.
The intensity before thanks again, everyone.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.