Q3 2020 RealNetworks Inc Earnings Call
Greetings and welcome to real networks, Inc. third quarter 2020, <unk> earnings Conference call.
All participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded I would now like to turn this conference over to your host Ms., Kim Orlando with Investor Relations. Please begin.
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.
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.
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% Rhapsody International Inc., which does does that says napster and melody VR Group plc.
As of the third quarter of 2020, Napster as 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 FCC filing including in the risk factors set forth in our most recent reports on form 10-K, and form 10-Q and other reports.
Copy of those filings can be obtained from the FCC or from the Investor relations portion of our corporate website.
Forward looking statements made today reflect realnetworks expectations as of today November three 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 Fccs regulation G., a 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 in our form 8-K dated and submitted to the.
Yes, you see today, both of which can be found on our corporate website at investor Dot Realnetworks dotcom under the financials tab.
With me today are rock laser chairman and CEO, and John Lee Senior Vice President and CFO.
Rob will discuss the company's strategy and the progress the company made during the third quarter of 2020.
Jeff will then provide a more detailed financial review of the third quarter of 2020. After todays prepared remarks, Robin juggle be pleased to answer questions with that I will hand, the call over to Rob.
Thanks, Kim good.
Good afternoon, everyone and thanks for joining us today.
I want to talk about three 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 stake.
Sure a couple of our successful bodily injury gold says, hey, simplifying real be monetize nonstrategic assets and see Brean capital into drive these initiatives will.
First our Q2 results.
The following numbers pertain to our continuing operations, which includes our games consumer media and mobile services businesses. After all sort of very solid quarter.
Doctors and the profit being softer melodies Youre Nafta's results are now being presented as discontinued operations I will discuss this pending after transaction in more detail shortly ingevity, both from an absolute financial results a little later.
Q3 revenue from here operations was $16.6 million the gross margin profile to your operations was 75%, which was in line with the prior quarter and is significantly higher than the numbers included.
Our commitment to improving business performance led to our fifth consecutive quarter of your over your improvement.
Adjusted EBITDA loss from continuing operations. This time to negative $1.9 million. These numbers include SEDAR, which accounted for roughly $40000 or adjusted EBITDA loss in both the current quarter and in the prior year.
The 2021, we will not be pro form out sooner, but for consistency we recruited senior its expenses you know 20 cleanup.
You ever go through up in any more detail in a few minutes.
Now an update on the two primary growth initiatives free to play games and are safer computer vision.
Greenhouse revenue increased 2% over the prior quarter and 6% over the year ago period. This understates, our progress and free to play games, which increased by 60% compared to the third quarter 20, Nike network present about half of our game.
Gatehouses growth continues to be driven by the success of our two main free to play games delicious World and delicious breakfast, we remain confident that free to play games will continue to be our customer growth engine working.
Next I'll turn to safer for computer vision.
Well certain ports in Mosul sector who'd been affected by the pandemic, we're starting to see new opportunities for Safe Harbor.
It's in the Q1 International airports Cross border Express, where CBS recently chose several to track map employed and gather critical operation data within the terminal to optimize operations and approve passenger flow.
In addition, we're very pleased with the progress even make let's say for the federal sector.
Execute on to direct to phase two small business innovation research or Super contract. We were awarded a Q2 with the U.S. Your force you to read the first pool to get to the revenues its contracts and we look forward to continuing to deliver on its contract for the quarter was double.
Just last month, we launched safer version 3.0, which features enhanced coordination response features and a new default high sensitivity faced detector.
This improved fixed detector.
That will.
Better face detection and recognition accuracy for both Matt and unmatched faces favorites accuracy improvement. Some of this release will enable customers to deploy face to face contact to secure access without requiring people to Matt.
Favorite report also includes a new mass detection dashboard enables customers when honestly trap mask usage rates.
I'm very pleased with our teams ability to move quickly to address important new customer needs that have emerged during the pandemic.
I'm also very pleased with our efforts to continue to strengthen our favorite team most notably with recent addition, Brett Donaldson as Vice President computer vision, rather will be primarily responsible for leading the strategic product and business development per se.
We're already benefiting brad's execution inside given his extensive experience in the industry.
Sure I'd like to talk about her progress in simplifying unreal monetizing assets that are not core to our future and adding resources by outside capital. They will they will be spent up is to thrive in scale going forward.
We made notable strides in this regard in Q3, both napster and here in.
On August 25th we have to Napster, which was 84% will be acquired by the melodies Yahoo, leading creator of Lightbridge relative <unk>.
The total deal value was 70 million. This comprises about 44 million assumed liabilities and fresh consideration of $26.3 million through a combination of cash and melody VR stuff.
Finally from a transaction drill networks is subject to several factors, including fuel costs. After repaying $3.9 million in debt, that's worth $3 million the mix of caspersen always thought and the market value that stock and payment to Columbus, Nova is tied to our January 2019 acquisition, let's see it's taken after.
We expect the transaction to close during the fourth quarter, which Paul will discuss further details.
We're proud of our stewardship of the Arconic Napster brand Iraqi business over the past 17 years, we're confident that any match it and the team in reality VR will do a great job of care in the company fourth.
The second transaction is foreseen or watch party servicing platform. He was a nascent business week EBITDA for two years I don't know the profit spitting out generates a total of $2.1 million and funding Brooks draw investors led by C. I will restate investment trickled Seachange and also a significant position for watch and its affiliated today.
I also participated.
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Actually we expect the Juno will become an independent operation, but in the short term CD <unk> consolidated financial results as of September 32020, we owned approximately 82% of shooters are getting equity because the new procedure structured as a note that was converted to equity at a later date.
Before I conclude I'd like to briefly touch on the pandemic, which should continue to stress and trumps all of us to health safety and well being of our employees their families our customers and our communities remains a paramount clarity.
Vast majority West African need work virtually for the foreseeable future to 2020 and into the first quarter 2021.
I'm extremely pleased that our productivity should remain strong throughout this challenging period I would like to extend my sincere. Thanks to all of our team members and business partners, who successfully adopted this new normal.
In closing I remain optimistic on real future prospects, but bear to prime or growth initiatives free to play games and safer most very pleased with the progress that we've made in monetizing spitting out other assets going forward. We continue we will continue to manage cost effectively and keep focusing on or before.
I will now turn the call over to Judd to go through the numbers in detail Jeff.
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 segments business performance.
Please note that year over year and sequential comparisons are not always apples to apples due to 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 real networks, 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.
17.7 million in the prior year period, the decreases over both periods were due to declines in our consumer media and mobile services segment, which were partially offset by growth in our games segment.
Looking at these results in greater detail revenue within the consumer media segment was down 600000 sequentially and down 1 million year over year.
The catch the sequential and year over year declines were primarily due to timing of shipments and payments and continuing declines in our legacy PC products.
[noise] mobile services revenue was down slightly on a sequential basis and down 500000 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 100000 sequentially and up 400000 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 300000 compared to the prior quarter and down 900000 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 game 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.
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.
Net loss attributable to real networks from continuing operations was 3.2 million or minus eight cents per diluted share compared to a net loss of $3.1 million or minus eight cents per diluted share in the prior quarter and a net loss of 5.2 million or minus 14 cents per diluted share in the prior.
A year period.
Turning to our third quarter segment results in more detail.
Consumer media segment contribution margin was a loss of 100000 compared to a gain of 500000 in the prior quarter and a gain of 300000 in the prior year period disagree.
The sequential and year over year decrease primarily reflects lower revenue.
Year over year 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 $600000 compared to a loss of 900000 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.
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Game segment contribution margin was 600000 in line with the prior quarter compared to 200000 in the prior year period, driven by continued strong performance of free to play mobile games.
At the corporate level [laughter] unallocated corporate expenses of 2.5 billion decreased by 200000 compared to the prior quarter and decreased by 1 million compared to the prior year period.
Central and year over year decreases were primarily due to lower restructuring costs and other charges and stock based compensation.
Our third quarter operating expenses at the corporate level included 300000 of restructuring costs compared to 700000 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 as result, which are being presented as discontinued operations.
Masters 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 as net loss added approximately 1000 was essentially breakeven.
Now turning to our balance sheet that's.
At September Thirtyth 2020, we had 13.2 million in unrestricted cash and cash equivalents compared to 8.5 million at December 31st 2019.
The increase was primarily related to the cash proceeds we receive 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 operations.
Our cash balance declined slightly compared to 14.4 million at June Thirtyth 2020, primarily due to cash used to fund operations, partially offset by 2.1 million in funding from investors for center.
Our total debt at September Thirtyth 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 the growth lays the foundation to make us stronger and better position for future success.
Thanks to all of our employees for their ongoing commitment to keeping real networks, a safe productive and rewarding place to work.
With that we will now open the call for questions operator.
At this time well be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
Hey, confirmation called <unk> and they keep your line is in the question queue.
Maybe I'll start John do you want your loved your question from the Q.
That's using speaker equipment, it may be necessary for you to pick up a handset before passing the Saar keep one moment, while we poll for questions.
Ladies and gentlemen, I would like to turn the call back over to our CEO.
Bob You May conclude this call.
Well, we thank everybody for joining us either live or on demand of course, given the today's election day look forward to being in touch with each of you either during these calls or afterwards, as we customarily maker sounds reasonable and with that I want to thank everybody in the company for a working hard to continuing to focus very effectively during this pandemic I want to thank all of our partner.
As is typical for the same and look forward to seeing everybody virtually in the short term and physically over the longer term.
Yes.
Thank you for joining US today. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.
Okay.
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