Q1 2020 Earnings Call

Greetings and welcome to the real networks incorporated first quarter 2020 earnings call. At this time on purpose was aren't any listen only mode. A question and answer session will follow the phone presentation.

He should require operating system during the conference. Please press start zero on your telephone keypad. Please note this confrontation being recorded.

Now turned the conference over to your host.

Orlando you could maybe in.

Thank you and welcome to the real networks first quarter 2020 financial results conference call before we begin I'd like to remind you that some matters discuss today are forward looking including statements regarding real networks operating expenses on a consolidated basis and trends affecting its businesses and prospects for future growth and profitability, but.

What did he and financial condition.

Other forward looking statements include the company's plans to implement it 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 does that says napster.

Statements that express our belief and expectations and all statements other than statements of historical facts I forward looking and involve a number of risk and uncertainties I could cause actual results to defer materially from these forward looking statements, including Russ and implications associated with combining our business and consolidating our financial statements with that.

<unk>.

We describe these and other risk in our L.C.C. filings, including in the risk factors set forth in our most recent reports on form 10, K. and form 10, Q. and and other reports.

A copy of those filings can be obtained from the F.C.C. or from the Investor Relations section of our corporate website.

Forward looking statements made today reflect real networks expectations as of today may 6th 2020 their company undertake snow D.D. 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 gap under the S.P.C.'s regulation g. for reconciliations of each nongaap financial measure to the most directly comparable got financial measure. Please refer to the information included in our press release and in our form eight k. dated and submitted to the.

I see see today, both of which can be found on our corporate website at investor Dot real networks Dot com under the financials tab.

With me today are Rob Glazer, Chairman and C.E.O., Chadli, Senior Vice President and C.F.L. and make anything are outgoing enter M.C.F.L. <unk>.

<unk>, we'll discuss the company strategy and the progress the company made during the first quarter of 2020.

Well then provide a more detailed financial review of the first quarter of 2020. After today's prepared remarks fraud jarred M., Mike will be pleased to answer questions with that I will hand, the call over to Rob.

Thank you Kim and good afternoon, everyone.

Extra 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 three months ago, then I'll provide a summary real his first quarter results. Finally, I'll discuss how we're changing real to address the needs an opportunity to the world going forward as well as the changed economic environment, which when they're operating.

The new decade is off to a completely unexpected start as everyone knows we mourn the loss of a quarter of a million people around the world do covert 19.

We're also very mindful that for most of the world, including our home country depend demick continues to be mash, we disruptive toward daily lives.

Safety and well being of our employees their families our customers and our communities is it foundational goals that everything we're doing builds upon.

We're now are operating real in a fundamentally different way than we from the company before.

We've been a global company from the very beginning annotated many development teams around the world for a number of years at the same time, we've 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 or tools businesses.

This now has changed.

Starting in January and Asia, and mid March and 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 to products and services. We offer can be developed marketed and sold at a distributed in digital manner.

Like other companies or a situation we've made the transition very quickly.

I'm pleased to report that we've made the transition successfully and to maintain clarity focus and operational excellence.

Very appreciative to everyone on our global staff, we've stepped up to make this happen.

Now onto her q. and results.

We generate a consolidated revenue or 43.1 million during Q1, which was slightly ahead of the guidance. We provides in January.

Most of our business is performed in line with their expectations going into the quarter, except for minor financial impact some coping 19, largely limit it to safer or computer vision platform.

Are adjusted either Don Q1 was negative $3.3 million, which was in line with their expectations going into the quarter.

Jobs will go through finance was in more detail in a few minutes.

Human financial performance was solid we're fucked into following factors.

One for most of our products and services, we continue to deliver them digitally to enterprises in consumers as we had before the pandemic.

Q were had to change or work flow for instance, it engineering or customer support we've done so quickly and effectively.

Three the most significant worldwide impact within the third month to the first quarter, except in Asia were things started to change beginning in late January.

Go to a large extent Q1 was the transitional quarter into the new world.

For our <unk> businesses were minimally impacted by the Coby 19 crisis.

You want to Mark the lunch with two major new part is for Napster, So ownership sonex radio power by Napster and a top five mobile phone manufacturer began shipping it's napster based music service.

And finally, five our strongest referring business line was are free to play games, but by delicious world and delicious bed and breakfast.

Avenue for games once you get improved your every year by 16% and the first quarter 2020.

Success with free to play games with all throughout the quarter and more than offset the clients and our legacy part of the games business.

Let me now look forward to the future.

Extraordinary uncertainties in the World, we will not people running forward financial gardens, but I do want to explain what we're doing and why.

First to macro changes were making we believe that the world economies headed into a steep recession that will persist for significant period of time.

Quarterly we've tightened are both financially.

Typically we've reduced internal expenses frozen employee salaries laid off about 20 staff members worldwide for a lot about half a dozen more and modified or 2020 executive bonus program.

Also I personally declined to accept the 2019 bonus we could've been payable in 2020.

Beckon, we've significantly strengthen the company's balance sheet I contributed $10 million in my own personal funds into the business in January because of my belief in the promising future lies ahead real networks.

I did this before the pandemic globally.

Upset knowing what I know now I'm very happy that I did.

In addition, we're grateful to receive $2.87 million in funding under the payroll or the paycheck protection program provision over the cares Act.

Combined with other measures we're undertaking the additional funds from that P.B.P. alone will help ensure that our employees were able to continue supporting our customers and enhancing like digital products and services. Both serve current customers into address newbie important societies.

The P.P. people and we'll all 20 bucks to bring several staff members back from furlough and even sooner than would otherwise.

Separately Napster is just signed the problems for a note for 1.8 $7.7 million wedded to the P.P. program and they expect to receive those funds soon as well.

Third topic, we remain focused on her new human growth initiatives free to play games and safer.

Let me elaborate on them. After I took first talk about our legacy business.

That legacy business, which includes are coming back to business messaging the real player and are trying to I.P. business.

In general these businesses appear to be relatively stable.

Well, let's see different global recession may very well impact these businesses in the medium term they have not generally been negatively impacted by the pandemic in fact in some cases such messaging we've seen volume increases.

Deck in our freedom play casual mobile games continue to represent a very promising growth initiative game House team is that an excellent job.

A low cost form of entertainment through free to play story based casual games that consumers love ended Monetise well this was world and delicious bed and breakfast have contributed to drive our progress in this regard.

As with any business, whether puts and takes associate with any sort of economic downturn. We've we've are free to play games continue to drive top on growth.

Optimistic about their future prospects.

There were pivoting safer.

Pivoting it to focus on the intersection of public health and public safety. We believe there exist in opportunity to continue to serve our customers in the new and different way I think that the safer platform, but can become a significant contributor to public safety in this new error.

Or engineers have been harder work during the pandemic and we're seeing promising early results, we expect to rolling out new enhance safer based products beginning in mid 2020 that will address newly identified needs to the market for public safety.

We can to go back to work in large numbers, we're looking forward to updating your 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.

Proud of our team and particularly the spirit of innovation that it will become visible to the wider world in the weeks and months ahead.

Before I conclude I'd like to extend to warm welcome to juggling, who recently assumed the role of senior Vice President and Chief Financial Officer, It really works.

Jet assumed that role in April.

<unk> very broad set of experiments isn't could work in areas closely Jason to a growth initiatives. It's fresh fruity two perspective will serve real well during this important complex time.

I'd also like to think Mike Ensing ruined M.C.F., though for his leadership in great work throughout this period.

Well now turn the color to just to go through the numbers in detail Judd.

Thanks, Rob.

Good afternoon, everyone, having just joined real and late March I am excited to be a part of the team and draw upon my prior experience in financial strategic leadership positions to help drive longer term growth that real networks.

Also like to think Mike announcing phrase leadership in contributions during this interim period.

My remarks day 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 in sequential comparisons are not always apples to apples due to the periodic variability in our revenues certain of our businesses, including the I.P. licensing pipe.

Of consumer immediate business and more games within our games business can fluctuate quarter to quarter, but we will continue to update you on these tiny in packs and their implications.

No turning to our results.

Revenue for the first quarter was 43.1 million compared to 43.4 million in the prior quarter in 39.5 million. The prior year period Napster accounted for 26.3 million of our first quarter revenue compared to 26.1 million and the prior quarter and 24.3 million and the prior year period.

How'd you may recall the prior year period included just over two months Napster revenue following our acquisition of a majority interest or the company on January 18th 2019, we're not including revenue from naps or the first quarter Mart, our third consecutive quarter of year over year revenue growth.

Looking at these results in greater detail.

Any within the consumer immediate segment was down 900000 sequentially and up 1 million year over year.

Central decline was primarily due to the timing shipments in payments you over here. The increase was primarily driven by the timing of renewal and shipments over I.P. coding business, which were partially offset by continuing declines in our legacy P.C. products.

Mobile services revenue was up 400000 on a sequential basis and down 200000 on a year over year basis. The sequential improvement was primarily driven by higher sales and safer and contacts and was partially offset by declines in our legacy ring tones product.

Year over year, and the decline was primarily due to declines in our legacy products, partially offset by higher sales in context safer.

Games revenue for the first quarter was up 100000 sequentially in up 900000 year over year.

Sequential and year over year basis increase was driven by continued strong performance of free to play a mobile games.

The offset by fewer premium game launches and the decline in our legacy P.C. subscription business.

Finally, napster revenue was up $200000 sequentially in up 2 million year over year.

Potential 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. You every year. The increase is primarily related to the early termination fee. In addition to the inclusion of a full quarter of revenue compared to just over too much.

Rather than you contribution in the prior year period. This is partially offset by declining subscribers. The prior year period also included a 600000 dollar reduction in revenue from purchase accounting.

Consolidating gross profit for the first quarter was 19 million up 300000 compared to the prior quarter and up 4.4 million compared to prior year period.

As a percentage of revenue gross margin was 44% compared to 43% in the prior quarter and 37 per cent in the prior year period real networks 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, where a 24.1 million a decrease from 24.6 million and the prior quarters and 25.5 million in the prior year period total operating expenses and the first quarter of 2020 included 200000 of transaction costs related to the acquisition of Napster compared to 800000 in the <unk>.

Period.

Adjusted even thought for the first quarter was a lhasa 3.3 million compared to the loss of 2.7 million the prior quarter and a Lhasa 7.9 million in the prior year period.

First quarter reflected our third consecutive quarter of year over year improvement in adjusted either dollar loss.

That last attributable to real networks is 4.6 million or 12 cents per diluted share compared to a net losses 6.4 million or minus 17 cents per diluted share in the prior quarter net income of 1.5 million or four cents per dilute share in the probably your period.

Net income in the first quarter 2019 included again of 12.3 million from the acquisition of Napster shares.

Turning to our first quarter segment result in more detail consumer media segment contribution margin was 400000 compared to 1.3 million in the prior quarter in the last 1.4 million in the prior year period.

Sequential basis to decrease is due to lower revenues on a year over year basis. The improvement reflects higher revenues and decrease operating expenses as a result of our ongoing expense management.

Mobile services segment contribution margin was a lots of 2.5 million compared to Los of 2.7 million to the prior quarter and a loss of 2.4 million and the prior year period.

<unk> contribution margin improvement was due to higher revenues, partially offset by increased operating expenses you over here. The decline was due to lower revenues, primarily in our legacy products, along with slightly higher operating expenses, primarily related to our investments and safer.

The game segment contribution margin was 100000 compared to 200000 in the prior quarter and lots of 900000 in the prior year period.

Honestly crunch of basis. This decrease was due to investments in mobile games the year over your contribution Marge improvement was primarily due to continued strong performance a free to play a mobile games.

<unk> contribution margin was 1.1 million compared to 200000 prior quarter and a lot of 500000. The prior you pay the sequential in year over year improvements were primarily due to higher revenue.

And that the corporate level.

Located corporate expenses of 2.6 million decreased by 400000 compared to the prior quarter and decrease by 1.69 compared to pry year period.

Sequential and you over your decreases were due to reduce operating expenses, primarily from lower people related costs are first quarter operating expenses that the corporate level also included 100000, a restructuring costs compared to 400000 at the priors quarter and 200000 in the prior year period.

Now turning to our balance sheet.

At March 31st 2020, we had 19 million in unrestricted cash and cash equivalents compared to 16.8 million at December 31, 2019 increase was due to the 10 million. It and cast was easily received from our recent so series be preferred stock.

<unk> Rob Glazer.

The cash prophecies are partially offset by a net loss and the timing of working capital.

I total long term debt at March 31st with 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 macro economic uncertainty stemming from coded 19.

Has announced last week real networks receive 2.9 million in funding under the Paycheck protection program provision of the Cares Act. In addition, Napster has just signed a promising go to 1.7 million related to <unk> next next to receive the fun soon.

As Rob mention but 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 members back from fellow.

Proceeds will be used to cover payroll costs as well as rent and utilities in accordance with program guidelines. The loan has an interest rate of one per cent per annum, a six month deferment period and matures on the two year anniversary at this person it.

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 and.

In summary.

We delivered strong first quarter financial results characterized by our third consecutive quarter of year over year revenue growth excluding napster.

Secondly are strong year over year margin expansion with our gross profit margin of 44%.

Finally, our third consecutive quarter of year over year improvement in our adjusted even thought lost due to our commitment to carefully managing costs.

Well at first quarter was mentally impacted by Coby 19, the pandemic brings more uncertainty to our second quarter in the balance of 2020.

We believe our progress in changing the way, we work manji costs and pivoting our strategy related to safer to address current social challenges will make a stronger and better position us for future success.

Thanks to all of our employees for their ongoing commitment to keeping real networks, a safe and productive workplace.

We wish good health to all.

With that we will not open the call for questions operator.

At this time it will be conducting the question and answer session. If you would like to ask the question. Please quit star one on your telephone keypad.

Confirmation code will indicate in mind is in the question cute.

You may quick starting to if you want to move your question from the queue.

We're participant using speaker equipment, it may be necessary to pick up your hands it before pressing the star keys.

One moment, please while people were questions.

[noise].

And again.

If you have a question you may price scar one on your telephone keypad. This will put you into the question cue.

And there I know questions at this time, therefore, I will turn to call back over to Glazer for closing remarks.

Yeah.

Thanks, everyone for joining us today again, I went to wish everybody, a a healthy and safe time during this period and to think as I said all of our staff members around the world for their focusing excellent work and wishing for their continue safety in for our customers as well look for.

Were to chatting with investors separately for this call and being back with you all again in three months for an X. quarterly call. If we don't talk sooner.

Thanks, operator.

Is conclusive. These conferences. He made is going into line at this time. Thank you for your participation.

[noise].