Q4 2020 RealNetworks Inc Earnings Call
Greetings and welcome to the real networks incorporated fourth quarter and full year 2020 earnings call. At this time all participants are in a listen only mode. A brief 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 are there am I.
This conference is being recorded it is now my pleasure to introduce your host Kim Orlando with auto Investor Relations. Thank you Kim you may begin.
Thank you and welcome to real networks fourth quarter and full year 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 real networks operating expenses on a consolidated basis and trying to affecting its businesses and prosper.
For future growth and profitability liquidity and financial condition.
Other forward looking statements include the company's plans to implement its strategy investing in its product 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 sale of 84% owned Rhapsody International Inc, which does business as napster the melody the our group plc.
Effective as of the third quarter of 'twenty 'twenty 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 fact are forward looking and involve the 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 section of our corporate website.
Forward looking statements made today reflect real networks expectations as of today February 10 2021.
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 day real networks Dot com under the financials tab.
With me today are Rob Glaser, Chairman and CEO, Mike and thing President and COO, and Judd Lee Senior Vice President and CFO.
Rob will discuss the company's strategy and operational performance in 2020, Mike will then discuss our full year 2020 performance and our major priorities moving forward and Judd will conclude with a review of our fourth quarter of 2020 financial results.
After today's prepared remarks, Rob, Mike and Chad will be pleased to answer questions with that I will hand, the call over to Rob.
Thanks, Kim and good afternoon, everyone and thanks for joining us today as I typically do at year end I'll begin with my overall assessment of our 2020 performance well then add a few comments about our go forward strategy and our two most of the different growth initiatives safer and free to play mobile games, then I'll close by commenting on a few personnel matters before passing the baton to my conjecture.
To go into the financials in more detail.
I'd also like to note that the financials presented today focus on our continuing operations, which includes our games consumer media and mobile service segments.
As you know in late December we completed the sale of Napster commodity VR for $70 million of total consideration, which included our 84% interest in napster, while we remain a minority shareholder ability of VR. We no longer include napster on the results from continuing operations.
I consider 2022 of been a very solid year for all of them.
Our overall top line revenue grew modestly up 3% over 2019, but that number of Max three notable achievements.
Our true growth initiatives right, Okay on mobile games and safer grew their revenue by over 110% combined compared to 2019.
Second we substantially improved our bottom line results, our 2020 of adjusted EBITDA loss from continuing operations was negative $8 6 million an improvement of $11 $4 million over 2019 low.
Moreover, as microchip and discussing a few minutes. We finished 2020 strong of had an excellent fourth quarter. This included our sixth consecutive quarter of year over year improvement in our adjusted EBITDA loss.
Third we achieve both of these results in a year when the world was turned upside down by the global COVID-19 pandemic the.
Pandemic affected how we work our customers work, how we communicate with and serve our customers and the level of economic activity in several sectors in which we do business I am deeply appreciative, but the resilience of resourcefulness our team exhibited in the face of the pandemic I'm also grateful for our customers who continue to work closely with us in spite of the disruption that they were experiencing.
The big contributor to our success in 2020 was our progress on simplifying real.
I'm very pleased to have completed the sale of our 84% stake of Napster commodity VR group.
We didn't crater of live virtual reality of music experiences now that the sale of complete melody recently announced its intention to rebrand itself as napster.
We believe the sale of Napster not only helps streamline real but also deepened our focus on our key growth initiatives and will help us create great products sort of our customers well and create long term shareholder value the net.
So also contributed to a meaningful increase of our cash balance from the prior year.
We're very proud of our NAFTA the team's hard work over the past 17 years and deeply appreciate the opportunity to work closely with them and all of the other stake of music industry for all these years, we look forward to being on growing stakeholder humility of the Rx slush Napster success.
Now I'd like to share a few details of at our strategy going forward and our success with safer and free to play mobile games in 2020.
Religion on the middle of the transformation from being of traditional technology based digital media company to being an AI based digital media company.
The last four years, we've gone from being the company with Great days will be the technology to a company that also has deep expertise and talent and machine learning applied to digital media. This has been a conscious multiyear transition that applies in different ways to each of our businesses the.
The two most significant examples of this transition our contact natural language processing platform and are safer computer vision platform.
Context, which is earlier in its transition is leveraging our very high throughput Metcalf intercare of messaging platform to create AI based products and services that help our customers deliver better messaging based services and experiences.
Schaefer, which has been in the market of a two and a half years initial leveraged our globally popular digital media products to create computer vision products and services that are highly accurate super fast and very small.
<unk> sales of having very low bias because of excellent conscious engineering that was built on a large global datasets.
Let me now talk a bit about the papers commercial results in 2020.
<unk> had its best year, so far despite significant headwinds with some of the market segments caused by the pandemic.
We saw particularly strong growth in the U S federal market and also in Japan, and South Korea.
Regarding our U S. Federal business, we've continued to execute on two director of Phase two small business innovation research, we're super contract. The rewarded in Q2, both of the United States Air Force, We began delivering on these deals from Q3 and we'll continue to do so on the first half of 2021.
In Japan, one of our key partners as Docomo safer is now part of the Docomo innovation cloud, which has led to multiple customer engagements the Japan.
In Korea T money of Smart mobility and payment services company is leveraging safer through a pilot program to provide Texas environmental payments of public transportation, improving the speed of payments through facial recognition will help both save passengers time and help reduce the risk of being exposed to illness in public transport centers.
The addition to regular commercial use of safer. We also see of civic opportunity you sabre to help improve safety during the pandemic and to help us all get to the post COVID-19 future.
In December 2020 of increased mass share of free face mask compliance App service and data platform that helps communities and businesses operate every open with greater safety by encouraging and assessing Facemasks compliance, we released mass check in partnership with the COVID-19 International research team, which have been a terrific partner.
Going forward, we expect continue to sharpen our focus with safer and see significant growth opportunities in front of us in 2021 would be on.
Regarding games 2020 was the first full year of our two flagship feel free to play mobile games delicious bed and breakfast and delicious World. These two mobile games two of download and played by $6 7 million users in 2020.
We think both titles have strong future ahead of them. Our gatehouse team has continued to work on enhancing them as well as developing a few additional titles.
Finally, I'd like to touch on two people related matters as announced last week, we appointed Christine Chambers to the position of senior Vice President Chief Financial Officer and Treasurer.
March one Christine will replace Judd Lee will be transitioning out of the company in March.
Christian will be rejoining real after working for the company for over a decade. Most recently as our VP of finance will be reporting to our president and CFO Mike Hansen.
We're very happy that Christine rejoined real she is very bright and brings deep knowledge of our people and the finish of the drivers of our business I also want to thank Judd for his many contributions to drill through the unprecedented pandemic here, we wish Joe well in his future endeavors.
In summary, I'm very pleased with the progress we made in 2020, we have a lot of work ahead of us and a number of challenges, including the uncertainty of not knowing when the pandemic will recede and how the rule change in its wake.
That said I draw a lot of confidence for how our team weathered and in many ways thrived in 2020.
With that I will turn the call over to Mike to discuss our 2020 of <unk> results and to share some thoughts on our key priorities going forward Mike.
Thanks, Rob and good afternoon, everyone today I'd like to discuss our full year 2020 financial results and briefly outline key priorities moving forward.
Please note that sequential and year over year 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 the 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 operation of real net networks, which exclude which exclude napster.
Now, let's review our results revenue from continuing operations for the full year was $68 1 million up 3% or $2 3 million from the prior year and.
In regard to our 2020 segment results.
Consumer media revenue was $12 6 million down 600000, compared to 2019 in general our legacy businesses, including real player in China IP performed in line with our expectations in 2020 as we have also continued to manage costs within these businesses to maximize cash flow and profitability.
Revenue from our mobile services segment was $26 9 million down, 1% or 300000 compared to 2019. The decline was primarily driven by our legacy RVP business offset by growth in safer and context, we remain bullish about the longer term prospects for safer and if we are incredibly.
Pleased with our team's ability to rapidly react to changing market conditions to address newly important societal societal needs as a result of the pandemic.
Revenue in our game segment was $28 6 million up $3 1 million or 12% compared to the prior year.
Free to play mobile games continue to represent roughly half of our games revenue and increased by over 100% in 2020 compared to 2019 more than offsetting the decline in our legacy games.
We remain confident that free to play mobile games will continue to be our primary growth driver for our game house business moving towards.
Consolidated gross profit was $51 6 million for the full year up $3 1 million from the prior year.
Gross margin for the full year was 76% up from 74% in 2019, reflecting higher revenues and continued operating efficiencies.
Total operating expenses for the year were 50, $56 6 million down $19.0 million or 25% from the prior year primarily due.
The net favorable adjustments from the contingent consideration liability related to the sale of napster as well as our ongoing cost reduction efforts, partially offset by restructuring and other charges.
Normalizing for certain onetime and noncash items operating expenses were down 10 points of euro million or 14% from 2019.
Adjusted EBITDA for the year with the loss of $8 6 million, an improvement of $11 4 million or 57% compared to a loss of $19 9 million in the prior year.
Net loss attributed to real networks from continue on continuing operations was $4 8 million for 2020 from minus <unk> 13 per diluted share compared to a net loss of $15 1 million from minus 40% 40 per diluted share in 2019.
Please also note that the net loss in 2020 included a pre tax gain of $8 6 million and in 2019 included a pre tax gain of $12 3 million related to the transaction involving our interest in napster.
As mentioned, we closed on the sale of Napster late in the year. The total value of <unk> at the closing date on December 30 was $70 6 million, which comprised $15 zone.
Million in cash $11, 6 million and melody, VR stock and 44.0 million and assumed liabilities.
As a result, we will receive $10 6 million in melody VR stock $16 $7 million in cash is debt repayment and liquidation preference plus $3 $1 million of cash to be held in escrow.
We expect to provide $4 $8 million of consideration and MBR equity <unk> cash to Columbus, Nova to fulfill the turns of our January 2019 agreement to acquire their stake in Napster.
The sale of Napster significantly improved our balance sheet, which Doug will discuss shortly.
Finally, I would like to outline some of our major priorities going forward.
First we will continue the strategic transformation, Rob discussed to an AI based digital media company on the <unk>.
Based on the company's strength and machine learning.
Second we will drive growth in our key initiatives of safer free to play mobile games and context through a continued focus on and delighting the end customer.
Third we will continue to operate the company in a financially disciplined manner by managing our costs in order to invest in growth while improving profitability.
And finally, we will continue to evolve our culture, emphasizing innovation and a growth mindset.
In summary, 2020 was a strong year for <unk> as we delivered improved financial performance with substantial progress against our growth initiatives.
Looking forward, we are keenly focused on our priorities of strategic transformation revenue growth financial discipline and cultural evolution.
I will now turn the call over to John to go through the fourth quarter financials in detail Jud. Thanks.
Thanks, Mike and good afternoon, everyone. In my remarks today I will review our consolidated fourth quarter results followed by a more detailed discussion of our segment business performance now turning to our results from continuing operations total revenue for the fourth quarter was $17 6 million compared to $16 6 million of the prior quarter and 17.
The 3 million of the prior year period, the sequential increase was driven by growth in our consumer media and mobile services segments and the year over year increase was driven by growth in our mobile services and game segments looks.
Looking at these results in greater detail revenue within the consumer media segment was up $800000 sequentially and down $1 million year over year. The sequential increase was primarily due to the timing of shipments coupled with higher installed on our IP business year over year. The decline was primarily due to the timing of shipments and payments along.
With continuing declines in our legacy PC products.
Mobile services revenue increased 900000 on a sequential basis and $1 million on a year over year basis, the sequential and year over year increases were primarily driven by higher sales and safer in context, partially offset by declines in our legacy products.
Games revenue for the fourth quarter was down 700000 sequentially and up 300000 year over year on a sequential basis. The decline was due to lower revenue and free to play mobile games, primarily as a result of both seasonality and decreased monetization due to the Miss calibration of the game change, which we do not expect to be recurring.
Compared to the prior year period, the increase in games revenue was driven by strong performance of free to play of mobile games, partially offset by fewer premium game launches.
Consolidated gross profit for the fourth quarter was $13 6 million up $1 1 million compared to the prior quarter and up 500000 compared to the prior year period. The sequential improvement was primarily driven by higher revenue and a consumer media and mobile services segments, partially offset by lower revenue in our game segment.
<unk> to the prior year period, the improvement was due to higher revenue in our mobile services and game segments, partially offset by lower revenue from legacy products and our consumer media segment.
As a percentage of revenue gross margin was 77% compared to 75% in the prior quarter and 76% from the prior year period.
The total operating expenses for the fourth quarter were $8 1 million of decrease from $15 3 million of the prior quarter and of decreased from $17 4 million in the prior year period.
The sequential and year over year decreases were primarily related to the net favorable adjustments related to contingent consideration liability related to sales of napster as well as lower people related costs, partially offset by restructuring and other charges.
Normalizing for certain onetime and noncash items operating expenses were relatively flat with the prior quarter and decreased $1 7 million or 10% from the prior year period.
Adjusted EBITDA for the fourth quarter improved to a loss of 900000 compared to a loss of $1 9 million of the prior quarter and the loss of $2 9 million of the prior year period.
Net income attributable to real networks from continuing operations was $6 1 million or <unk> 16 per diluted share compared to a net loss of $3 2 million or minus <unk> <unk> per diluted share the prior quarter and a net loss of $4 five day or minus 12 cents per diluted share in the prior year period.
Please also note that the net loss in the fourth quarter of 2020 included a pre tax gain of $8 4 million related to the transaction involving our interest in napster.
Turning to our fourth quarter segment results in more detail. The consumer media segment contribution margin was a gain of 700000 compared to loss of 100000 for the prior quarter net gain of $1 3 million in the prior year period. The sequential increase was driven by higher revenue in gross margin year over year the decreased primarily.
The reflects lower revenue, partially offset by decreased operating expenses as a result of our ongoing expense management.
The mobile services segment contribution margin was the loss of 200000 compared to a loss of 600000 in the prior quarter and the loss of $2 7 million of the prior year period. The sequential improvement was primarily related to higher revenue, partially offset by incremental expenses related to the safer.
Year over year, the improvement was primarily related to higher revenue and lower people related costs.
The games segment contribution margin was 300000 compared to a gain of 600000 in the prior quarter and a gain of 200000 of the prior year period. The sequential decrease was due to lower revenue year.
Year over year, the increase was driven by the continued strong performance of the free to play of mobile games.
At the corporate level unallocated corporate expenses was a gain of $4 8 million, which decreased by $747 4 million compared to the prior quarter and decreased by $7 8 million compared to prior year period, the sequential and year over year decreases were primarily due to the net favorable adjustments related to contingent consideration liability.
The related to sales napster, partially offset by restructuring and other charges.
Now turning to our balance sheet, we ended the year with the significantly higher cash balance with unrestricted cash and cash equivalents of $23 9 million at December 31, compared to $13 2 million at September 30 of 2020. The improvement was primarily related to the cash proceeds received from the sales napster and of.
Release of restricted cash at December 31, 2020, our total debt was $2 9 million and we had no borrowings outstanding on our revolving credit facility.
As has been the case in recent prior quarters, 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 first quarter of 2021.
In summary, despite the challenges we faced in 2020 due to the effects of COVID-19, we delivered significant progress including traction in all of the real key growth businesses.
Further we strengthened the overall financial position of the company and continue to enhance our profitability as evidenced by the improvements in our fourth quarter and full year 2020 of adjusted EBITDA losses.
With that we will now open the call for questions operator.
<unk>.
Thank you we will now be conducting a question and answer session.
We'd like to ask a question. Please press star one on your telephone keypad. The confirmation tone will indicate that your line is on the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star Q.
One moment, please while we pull for questions.
Yeah.
Okay.
Well, operator, I guess, we're ready to wrap up here today.
<unk>.
I want to thank everybody for joining us today, one of the again, thanks Jud for as the tenure of real and wish him nothing but the best in his next chapter and look forward to seeing you all again.
In three months' time, if not sooner and hopefully a lot of cases sooner.
Great. Thank you everybody.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful evening.
Awesome.