Q4 2019 Earnings Call
I will follow the formal presentation <unk> operators. This is turn the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I would now like turn the comps or what's your host came on and off but I don't Investor Relations. Thank you you may begin.
Thank you and welcome to the Realnetworks fourth quarter full year 2019 financial results Conference call.
Before I begin I'd like to remind you that some matters discussed today are forward looking including statements regarding realnetworks teacher revenue gross profit adjusted EBITDA and operating expenses on a consolidated basis and trends affecting its businesses and prospects for future growth and profitability in financial condition.
Other forward looking statements include the company's plans.
Strategies, and that's kind of products and initiative and restructuring efforts as well as expected.
<unk> another benefits from these activities.
In addition, today's call contains certain forward looking statements that relate to our acquisition of an additional equity stake Rhapsody internationally.
And your 18th 2019, 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 could differ materially from these forward looking statements, including risks and implications associated with combining our business income consolidating our financials.
No what napster.
We described these and other risks and are actually see filings, including in the risks factors set forth in our most recent reports on form 10-K, and form 10-Q and another report.
Copy of those filings can be obtained from the FCC from the Investor Relations section of our corporate website.
Forward looking statements made today reflect realnetworks expectations as of today, a very said 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 events.
In addition, real precise certain financial measures on this call will be considered non gap.
<unk> regulation G.
A reconciliation of each non-GAAP financial measure 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 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 are broadly, Sir chairman and CEO and carry Baker CFO.
I will discuss the company strategy and the progress of the company made during 2019 as well as a preview of what's to come Trey will then provide a more detailed financial review fourth quarter and full year 2019, I suppose provide the outlook for the first quarter of 2020 after today's prepared remarks Robin Kerry.
Please to answer questions.
I will hand, the call over to Rob. Thanks, Kim Good afternoon, everyone and thanks for joining us today.
As they typically do at year end I'll take a step back and review our 20 knocking performance.
Well then provided detailed progress update on two key growth initiatives free to play a casual mobile games and our supercomputer isn't possible.
Well I'll summarize the results of our business other businesses and will close out with we plan to focus represent 2020.
Strategically I consider 29 team to have been a very successful year.
We achieved significant traction on two of our key growth initiatives free to play casual games and safer revenue for games once again improved year over year by 17, and 18% respectively for the fourth quarter for your point aren't you.
Importantly, coupon merger second consecutive quarter, a positive Opry Africa incur perhaps these results are a direct reflection of early success with free to play games, which has become the dominant economic model in the mobile games sector.
Our game has team has done a terrific job, we're delivering free to play story based games the consumers Love and then monetize very well [noise].
We currently have three free to play titles and market at our primarily focused on our two most recent encourage delicious work release globally in mid 2000, <unk> continues to exceed our expectations. There is our highest revenue generating game to date.
More recently in December we introduced the wishes Brendan breakfast were soft launch in the U.S. The earlier is also began has been encouraging and we've now rolled it out throughout Europe in the Americas.
We're confident are free to play story based games will continue to drive topline growth and at scale should generate very good return on investment and profitability.
The next safer.
Stayed at the beginning of last year safer is a top growth focus for the company.
In 2019, we made significant progress both in terms of deploying with leading edge global customers and building important industry partnerships for instance, we successfully deployed safer into the willingness of holiday you are probably brought a safer replace their previous uncovered face recognition system and immediately <unk> private brand they realize mission critical benefits, including watch list based.
Matching of known threats, we previously Warner reported recognized leading to a rest in some cases, helping keep prior grind is safer we lived up current it [noise].
Another example is our partnership could tie a leader in high resolution printer 60 degree computational camera.
Hi is integrating safer into leading video conferencing systems for a variety of market applications for instance, could tie equipped with safer can now to deliver a next generation of video conferencing experience with compelling new features such as you're tracking accounting order assume automatic framing an order registration.
Another customer delighted to service Wolfcamp, whose licensed our safer SDK to integrate it into their body cameras inclusion of say first expected to both increased situational awareness in the field and provide forensic analysis for archive video and evidence management systems.
On the industry partnership side, we're making excellent progress as well follow are outlined in October 2018 that we're partnering with in video we're optimizing safer for invidious Jetson hardware platform, which are designed for embedded autonomous devices, such as drones robots. The integration of safer into Nvidias Harbor solutions dramatically lowers the total cost of ownership, making.
Say for even more accessible compelling for a wide range of applications [noise].
Our technology leadership continues apace. The January 2020 National Institute of standards and Technology NIST test results. Once again show that safer demonstrate master lease surpasses the competition as much less bias in competing algorithms and is the top ranking algorithm for live video based on a combination of rock your see speed and contacts.
Size.
Along the way we've learned a lot.
If I could do 2019 over again, the one thing I think we should run differently with safer is for brought in more security industry expertise sooner, which would have accelerator learning curve.
Fortunately, we've rarely get the situation the past few months, we've hired several industry experts for both our product and field teams.
This is already helping us build <unk> build out we've learned a turnaround team should accelerate efforts in 2020.
In summary, we remain very bullish about the longer term prospects for safer and expect 2020 to be a significant growth year for center.
Next I'd like to briefly discuss the remainder businesses. The rest are a business is largely performed inline with expectations and tornante, but the notable exception of are trying to IP business.
We were negatively impacted by the situation with why way as well as a few other issues specific to our business. The good news that we made the necessary changes to our China business and feel like we have significantly de risked our 2025.
I tried is not expected to represent less than 5% of a revenue.
One final point about China is the potential effects of the current of ours.
This point, we do not see any reason to change our plan our primary focus at the safety and well being of all of our employees and we will continue to moderate situation.
Next if you were doing testing specifically, our metcalf in context products.
Messaging is a stable profitable business for us and we think we will continue it will continue to be through 2020 and beyond.
Next I will turn to Napster and independent company, which we consolidate which is currently our largest business revenue standpoint, Napster continue to focus primarily on B to B and has signed up some notable do partnerships, we expect to announce it with respect to address the rollout the first half of 2020.
In summary, as their growth initiatives continue to ramp we feel very confident about lies ahead for all of.
Our focus a 2020, we continue driving these key initiatives forward well also anywhere operations official.
We will make ongoing investments to support the key growth initiatives, but at the same time, you'll carefully manage cost along the way as we did during the course of core 19.
Progress in this regard can be seen in the $8.3 million were 59% reduction of our adjusted EBITDA loss and the second half, which were 19 as compared to the first Hepatoren I can we expect this trend to continue in 2020.
Finally, a few people matters first we were pleased to welcome to new directors, Tim one and aircraft to the real that was board of directors early December as a former <unk> directors for 15 years, including extend to CFO, Tim brings deep knowledge of the company as well as his strong financial and business experience.
I mean, we decided to have air transport aircraft, great value with over 25 years of executive experience, having successfully led several technology that you're replacing businesses through periods of innovation adoption.
We're already benefited having both timid airborne.
Second and finally as you know carry bakers, leading real later this month to pursue another opportunity I'd like to thank carry for example workers our CFO for the past through year to date will be his last earnings call.
In the content professional carries worked with me in the rest of the team to ensure smooth transition in that context, I was very happy to announced last month. The appointment of my can say as our Arab CFO or you're on a rigorous process to recruit a permit ahead, Mike is a highly accomplished CFO with over 25 years of experience and a do it demonstrated ability to lead financial operational teams degree results.
Mike from carried and working closely together for the past few weeks and I'm confident we'll skip a beat.
So for the final time, let me pass it would have to carry to go through the numbers detail Kerry Thanks, Rob and good afternoon, everyone. In my remarks today I will first review our consolidated fourth quarter results followed by more detailed discussion of our segment business performance I will then review our consolidated full year 2019 results and our expectations for the first quarter of two.
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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 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 and.
Packs and their implications.
Turning to our results for the fourth quarter revenue was 43.4 billion compared to 45 million in the prior quarter and 16.6 million in the prior year Napster accounted for 26.1 billion of our fourth quarter revenue compared to 27.3 million in the prior quarter.
Looking at these results in greater detail revenue within the consumer media segment was up 800000 sequentially and up 400000 year over year.
The sequential and year over year increases were primarily driven by timing of shipments payments and renewals at our IP codec business, which were partially offset by continuing declines in our legacy PC products.
[noise] mobile services revenue was down 600000 on both a sequential and year over year basis, primarily due to declines in our legacy products.
James revenue for the fourth quarter was down 600000 sequentially and up 1 million year over year on a sequential basis. The decline was primarily related to the strategic shift toward free to play games as we launched one fewer premium game title in the fourth quarter compared to the prior quarter.
Year over year. The revenue increase was driven by continued strong performance from our free to play mobile games.
Finally, napster revenue was down 1.2 million sequentially, mainly due to declining subscribers, which was partially offset by increased revenues from our platform partners.
Fourth quarter consolidated gross profit of 18.7 billion was flat compared to the prior quarter and was up 5.9 billion compared to the prior year period.
As a percentage of revenue gross margin was 43% compared to 42% in the prior quarter and 77% in the prior year on a year over year basis. The decline was primarily due to the consolidation of napster with after his gross margin for the fourth quarter of 2019 at 21%, while real networks gross margin without nap.
<unk> was 76%.
As a reminder, at the reduction in our consolidated gross margin primarily reflects napster is label and publisher royalties for its worldwide music services.
These costs can vary meaningfully from period to period due to significant judgments assumptions and estimates of amounts to be paid.
Total operating expenses for the fourth quarter were 24.6 million.
Decreased from 25 million in the prior quarter and an increased from 18.4 million in the prior year.
Included in fourth quarter total operating expenses were Napster is operating expenses of 7.1 million.
Adjusted EBITDA for the fourth quarter improved to a loss of 2.7 billion compared to a loss of 3.2 million in the prior quarter and the loss of 4.1 billion in the prior year period.
Net loss attributable to real networks was 6.4 million or 17 cents per diluted share compared to a net loss of 6 million or 16 cents per diluted share in the prior quarter and a net loss of 6.9 billion or 18 cents per diluted share in the prior year period.
Turning to our fourth quarter segment results in more detail.
Consumer media segment contribution margin was 1.3 million compared to 300000 in the prior quarter and a loss of 400000 in the prior year period.
On both a sequential basis and year over year basis, the improvement reflects higher revenue and decreased operating expenses as a result of our ongoing expense management.
Mobile services segment contribution margin was a loss of 2.7 million compared to a loss of 1.9 billion in the prior quarter and a loss of 1.9 million in the prior year period, the sequential and year over year decline is due to lower revenues, primarily in our legacy products along with increased operating expenses primarily related to our.
Investments and safer.
Game segment contribution margin was 200000, which was roughly flat compared to the prior quarter and compared to a loss of 800000 in the prior year period.
The year over year contribution margin improvement was primarily a result of our transition to free to play mobile games.
Napster his contribution was 200000 compared to 40000, the prior quarter, primarily due to revenue mix.
At the corporate level unallocated corporate expenses of 3 million decreased by 500000 compared to the prior quarter and were flat compared to the prior year period. The sequential decrease was due to reduced operating expenses, primarily from lower people related costs.
Our fourth quarter operating expenses at the corporate level also included 400000 of restructuring cost compared to 700000 in the prior quarter and 600000 in the prior year period.
Now, let's look at our full year 2019 results revenue for the full year was 172.1 billion compared to 69.5 million in the prior year Napster accounted for 106.3 million of our 2019 revenue.
Consumer media revenue was 13.2 million down 5 million compared to 2018 mobile services revenue was 27.1 billion down 2.5 million compared to the prior year.
And games revenue was 25.5 million up 3.8 million compared to the prior year.
Gross profit was 69 million for the full year compared to 51.8 million it in the prior year.
Napster accounted for 20.4 million of our gross profit in 2019.
Gross margin for the full year was 40% compared to 74% last year. The decline was primarily due to the consolidation of Napster with NAFTA is gross margin for the full year of 2019 at 19%, while real networks gross margin without napster was 74%.
Operating expenses for the year were 101.4 million compared to 74.1 billion in 2018 Napster accounted for 25.8 million of our 2019 operating expenses.
Adjusted EBITDA for the year was a loss of 20.1 million compared to a loss of 16.2 million in the prior year.
Net loss attributable to real networks was 20 million for 2019 or 53 cents per diluted share compared to a net loss of 25 million or 66 cents per diluted share in 2018.
Now turning to our balance sheet.
Decemberthirty one 2019, we had 16.8 million an unrestricted cash and cash equivalents compared to 18.1 million at September 32019, the sequential decrease was primarily driven by the net loss.
At December 31, 2019, our total long term debt was 3.9 million and we had 6.1 billion available for borrowing on our revolving credit facility.
Now that our new products are starting to deliver revenue and the napster transaction costs are behind US. We continue to expect our operations will use less cash going forward.
I'll now turn to our outlook for the first quarter ending March 31 2020.
Total 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 4 million to minus 1 million.
In summary, the progress we have made over the course of 2019 helped lay the groundwork for a productive 2020.
We expect the momentum of our key initiatives, specifically free to play mobile games and safer well continue to drive incremental revenue for many years to come.
With that we will now open the call for questions operator.
Thank you at this time, we will be conducting a question answer session. If you look that's question. Please press star one on your telephone keypad a confirmation to indicate your line is in the question Q. You May proceed to fuel the term of your question from the Q for participants using speaker equipment and may be necessary to pick up you had said before Christmas Sarkies one moment. Please as we.
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Once again, if you looked as question. Please press star one on your telephone keypad.
Since there are no further questions left in the queue I'd like turn the floor back over to Mr. Rob loser for any closing remarks.
Thank you operator, again and thank everyone for joining us want to think carry one last time for his excellent work over these past three years I look forward to staying in touch there and look forward to is being in touch with all of you in the days and weeks ahead and certainly three months from now.
This concludes todays teleconference. You may now disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
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