Q1 2021 RealNetworks Inc Earnings Call
[music].
Greetings and welcome to real networks incorporated first quarter 2021 earnings call at this time, all participants on 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 being recorded.
I would now like to turn the conference over to todays host Kim Orlando with Adam on Investor Relations. Please proceed.
Thank you and welcome to real networks first quarter 2021 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 each of revenue operating expenses and adjusted EBITDA as well as trends affecting its businesses and prospects for future growth and profitability liquidity and financial condition.
Forward looking statements include the company's plans to implement its 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 the December 2020 sales.
<unk> City International Inc, which does business does not share so not easy our group plc.
Effective as of the third quarter of 2020, Napster is presented as a discontinued operation for accounting and disclosure purposes on comparable historical periods have been recast to conform to this presentation.
Statements that express our beliefs and expectations on 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 SEC filings, including on the risk factors set forth in our most recent report on form 10-K on form 10-Q and in other reports a.
A copy of those filings can be obtained from the S E C or from the Investor Relations section of our corporate website.
Looking statements made today reflect real networks expectations as of today May 12, 2000 and on he wanted 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 debt will be considered non-GAAP under the SEC's regulation G per.
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 our form 8-K dated and submitted to the S. E. C. Today, both of which can be found on our corporate website at Investor day real networks dotcom on.
On the financials tab.
With me today are Rob Glaser, Chairman and CEO, Mike on Singh, President and C. O L Inc.
Christine <unk> senior Vice President CFO and Treasurer Robert.
Rob will discuss the company's strategy and the progress the company made during the first quarter of 2021.
Mike will then provide a more detailed update on real AI initiatives safer and contacts.
And Christine will conclude with a more detailed review of our financial results.
After today's prepared remarks, Rob, Mike and Christine we'll be pleased to answer questions.
With that I will hand, the call over to Rob.
Thanks, Ken.
Afternoon, everyone and thanks for joining us today on.
I plan to cover three topics first I will discuss the status of real strategic transformation from a digital media technology company to an AI based company next I'll summarize our first quarter results in the context of a transition and third I'll discuss our recent successful fundraising initiative and other activities related to aligning our capital structure with our strategy.
Q1, 2021 was an important quarter in real strategic transformation to an asset into country company. This transformation is centered around our Q AI based products and services safer, which is our computer vision platform, a context, which is our natural language processing or NLP book.
Our traditional our foundation businesses will continue to be important to us in two ways.
First we will provide financial balance will help us fund, our AI initiatives and second they will contribute data it will help us improve and differentiate our AI products.
During the first quarter, we achieved significant growth and safer in context revenue per se for increased approximately 160 per cent year over year in context increased 10% year over year.
From context, together grew to represent 29% of our mobile services segment revenue in Q1 up from 23% in 2020, Mike will provide additional depth on our progress with share for context in a few minutes.
Let me summarize our financial results.
Our first quarter revenue was $15 $9 million, which was down 10% compared to the prior quarter and down 6% compared to the prior year period.
This decline was primarily due to the end of a few carrier contracts related to our ring back tone business as I mentioned earlier, our year over year revenue growth from Q1 was strong.
On the bottom line, our adjusted EBITDA loss was $3 million compared to a loss of $4 $4 million from Q1 2020.
Excluding cedar, which when the price of spinning out adjusted EBITDA was a loss of $2 $4 million and I'll discuss seen or further on a few minutes.
These results reflect continued discipline on how we manage costs and our foundation businesses to enable us to invest in our growth opportunities.
A word about our Kansas.
After excellent growth in free to play games in 2020, we were disappointed with games Q1 results for free to play games, which declined slightly compared to the prior quarter. The team is making some changes in order to reintegrate growth and our pubic. It's free to play titles. We believe that the team will get back onto a growth trajectory, but it will likely take a few quarters.
Finally, before passing on the mic to Mike I'd like to talk about our recent progress on our balance sheet and capital structure.
As you know at the end of 2020, if you sold after the melody B R. For total of approximately $76 million, which included about $15 million of cash $11 6 million dollar or ability of your stock and the assumption of approximately $44 million by the obey them of napster as balance sheet liabilities last month, we closed out the final piece of late.
To this transaction, but paying Columbus, Nova $4.8 million in consideration for their stake, which we bought in 2019.
Disbursement consisted of $2 $5 million of cash and the transfer of $2 $3 million from L. A destock as valued as of December 2020, Napster sale closing day.
Then in April we went out to the public market for the first time in an organized fashion to tell the story of our transition to an asset or company.
As a result, we raised approximately $23 million of net proceeds, which we used to fuel our growth in 2022 and beyond.
Indeed in the context of that program, we told investors that with those investments we expect to achieve double digit revenue growth in both 2022 on 2023.
Our next step in simplifying and aligning our balance sheet for the growth opportunities in front of US is the completion of the spin out sooner.
If you recall seniors a virtual movie theater service, which allows consumers to watch shows virtually with your friends on about a dozen video service, including Netflix Disney plus and HBO Max.
Recently, I stepped down as chairman of sooner and we brought on in the steam check in entertainment industry Executive and entrepreneur Richard Robert can be seen as executive Chairman Daniel stick from remains senior CEO, Richard Daniel on the rest of the senior team are doing an incredible job scaling up sooner sooner has grown its audience by over 100 times not 100%.
<unk> thousand per cent over the past year.
Consumer trial using standard to watch over 100 million minutes of video each month.
Given this rapid growth sooner in the process of raising additional expansion capital I'll continue to serve on seniors board as well, Mike Henderson I believe <unk> is a great opportunity as a shareholder to participate in senior success.
As I said earlier I'm very pleased with and proud of the progress <unk> has made in setting our company up for success and growing our AI business operationally and with that let me now pass the time to Mike to discuss the progress in more detail.
Thank you, Rob I will be discussing both safer and context before I provide updates on these businesses I'd like to briefly outline why we are in these businesses strategically.
Each of these businesses are part of large growing markets, where we have unique competitive advantages in.
In the case of safer our competitive advantage is our extremely compact very fast highly accurate and low bias algorithm that was developed using proprietary data.
In the case of context, the source of our competitive advantage is the approximately 1 billion SMS MMS messages, we processed daily to base our algorithms upon.
This results in highly trained and robust filtering tools.
Each one of these products also utilizes leading computer vision and natural language AI talent residing at real.
Now, let me turn to update on each one of these businesses.
For safer, we delivered yet another strong quarter driven by successes in both the U S federal and global compete.
<unk> businesses. In addition, we made significant progress with our safer product with our latest release and we're rated highly by NIST in their most recent ongoing facial recognition vendor tests.
In the U S. Federal business, we continued to execute on to direct to phase two small business innovation research or similar contracts with the United States Air Force. In addition, we were recently awarded a third cibber with the U S Air Force to support perimeter protection and domestic search and rescue mission.
Work on this will likely start in Q2 with the bulk of the work being done through the remainder of the calendar year.
I'll now turn to a discussion of safer as global commercial business and partnerships.
As a reminder, the safer commercial business focuses on a variety of use cases, including secure access authentication surveillance watch list and embedded applications with our safer inside initiative during.
During the quarter, we made several advancements with key partners.
We recently announced the partnership with Greater book and International provider of proprietary high performance video security and software and hardware.
Safer has been integrated as on AI layer on top of <unk> video management system to provide advanced video analytics for surveillance operations, serving both time and increasing efficiencies.
During the quarter, we furthered our safer inside initiative and expanded our scope with access in addition to being available on the access Q16, 15, Mark three box camera the safer inside technology can be embedded directly on the access P 30 to 55 dome camera.
Safer inside enables network cameras like the access P $32 55 to reduce video processing server overhead and lowers total cost of ownership.
In addition, we also recently signed a partnership agreement with convergent convergent technologies as a U S. Based 1 billion dollar global industry, leading systems integrator <unk>.
Convergent will add the safer computer vision platform to their portfolio of integrated security solutions and allow the two trusted companies to bring computer vision analytics solutions to market.
Also save a recently signed a collaboration collaboration agreement with <unk> in Europe.
<unk> is a worldwide provider of information technology consulting products and services and a leader in edge computing and digital security.
The collaboration agreement focuses on joint go to market and project timing for solutions, primarily in the access control and authentication spaces.
On the product side. We recently released version 3.4 of safer, which introduces new passive lie liveliness detection and anti spoofing features to enhance security for face biometric authentication solutions within three seconds safer AI powered liveliness detection can verify.
On a real live person is in front of it any standard Rts P. R. U S beats camera vs versus a photo or video clip with over 95% accuracy.
We are also excited about the latest NIST results, which reinforce our competitive differentiators in the industry.
On the top 50, most accurate algorithms for faces in the wild real networks with the fastest and the most lightweight achieve.
Achieving high accuracy quickly with less data is a key capability when dealing with live video as a source for face recognition.
Real net worth consistently ranks among the least biased of all algorithms tested by nest.
We continue to be very excited about our prospects for future growth for this safer business next I'll turn to a discussion of context.
Based on its messaging expertise will build its next generation context platform over the last several years.
Context is focused on creating AI based products and services that help our customers deliver better messaging based services and experiences.
For a context from messaging product, we are focused on increasing scope with current customers and expanding our customer footprint by leveraging our telecom relationships developed through our long history of service in the industry.
Building on our AI capabilities, we announced a new context product during the first quarter context for voice.
Context for voice is an AI back service debt actively blocks fraudulent calls and is deployable for carrier operators.
In summary, we are excited about both the progress we are making in the growth trajectories of our AI based businesses safer in context.
With that I will now turn the call over to Christine to talk about our first quarter 2021 financial results in greater detail Christine.
Thanks, Mike and good afternoon, everyone.
I'm thrilled to rejoin rail to lead the finance organization during this exciting period of growth and opportunity.
In my remarks today I will first review, our consolidated first quarter results.
Led by a more detailed discussion of our segment business performance.
Please note that sequential and year over year comparisons are not always apples to apples as certain of our businesses can fluctuate quarter to quarter.
In addition, napster has been deconsolidation as of December 30 of 2020 and is being treated as a discontinued operation for accounting and disclosure purposes.
Therefore, our results presented today relate to the continuing operations of rail networks, which exclude napster.
Now turning to our results.
Total revenue for the first quarter was $15 9 million compared to $17 6 million in the prior quarter and $16 8 million in the prior year period.
Strong growth in our AI businesses were more than offset by declines in some of our foundation businesses.
Primarily due to a few ringback tone contracts that did not renew in 2021.
Looking at these results in greater detail revenue within the consumer media segment was down 100000 sequentially and down 200000 year over year.
The sequential decrease was primarily due to declines in our PC products when compared to the successful we'll play a 'twenty upgrade campaign in Q2, 2020, which were partially offset by the timing of renewals and shipments of our IP codec business.
Year over year. The decrease was primarily due to the timing of our IP contracts and the result of revenue from multiyear deals booked in the prior year period.
Mobile services revenue was down $1 4 million on a sequential basis and down 700000 on a year over year basis. The.
The sequential decline was primarily due to lower ringback tones and safe a federal revenue compared to the fourth quarter of 2020.
Year over year. The decrease was primarily due to declines in our ringback tone product, partially offset by higher sales in safer and context.
Games revenue for the first quarter was down 300000 sequentially and was essentially flat year over year.
On a sequential basis. The decrease was due to a slight decline in both our free to play and legacy games compared.
Compared to the prior year period gross in a free to play it was offset by lower revenue in our legacy games.
Consolidated gross profit for the first quarter was $12 2 million down $1 4 million compared to the prior quarter and down 500000 compared to the prior year period.
As a percentage of revenue gross margin was 77%, which was flat compared to the prior quarter and up from 76% in the prior year period.
Total operating expenses for the first quarter were $18 4 million, an increase of $10 3 million from the prior quarter and 900000 from the prior year period.
These numbers can fluctuate because they include several non core items when normalizing for non core items, including restructuring costs and gains regimes, resulting from the fair value adjustment on the contingent consideration liability for the Napster transaction.
First quarter operating results were up $1.2 million or 8% compared to the prior quarter and were down one 5 million or eight per cent compared to the prior year period.
Net loss attributed to real networks with $10 4 million on minus 27 cents per diluted share compared to net income of $6 1 million or <unk> 16 cents per diluted share in the prior quarter.
On the net loss of $4 6 million or 12 cents per diluted share in the prior year period.
Please also note that in addition to the non core items discussed earlier net loss in the first quarter of 2021 included a pretax loss of $4 3 million related to the fair value assessment of our interest in melody B stock, which is now trading at snap.
<unk> Group plc.
Adjusted EBITDA for the.
First quarter was a loss of 3 million compared to a loss of 900000 in the prior quarter and a loss of $4 4 million in the prior year period.
As Rob mentioned adjusted EBITDA for the first quarter, including 600000 of cost related to Sina was $2 4 million.
Turning to our first quarter segment results in more detail consumer media segment contribution was 600000 compared to 700000 in the prior quarter from 400000 in the prior year on.
On a sequential basis, the decrease is due to lower revenues.
On a year over year basis, the improvement reflects decreased operating expenses as a result of our ongoing expense management.
Mobile services segment contribution was a loss of $1 6 million compared to a loss of 200000 in the prior quarter and a loss of $2 5 million in the prior year period.
The sequential decrease was primarily due to lower revenue in our win back children's business and safer federal contracts and slightly higher operating expenses, primarily related to our investment in safer in context.
Year over year, the contribution margin improvement was primarily driven by lower operating expenses as a result of our ongoing expense management focused on on foundation businesses, partially offset by higher marketing expenses related to safer.
Games segment contribution margin was a loss of $100000 compared to a gain of 300000 in the prior quarter and a gain of 100000 net prior year period on a sequential and year over year basis. The decrease was due to lower revenue along with our investments in mobile games.
At the corporate level unallocated corporate expenses of 5 million.
Increased by $9 8 million compared to the prior quarter and increased by $2 4 million compared to the prior year period.
Again these numbers can fluctuate because they include several non core items when normalizing for non core items, including restructuring costs and gains resulting from the fair value adjustments on the contingent consideration liability from the Napster transaction.
First quarter unallocated corporate expenses were up 700000 compared to the prior quarter and were flat compared to the prior year period.
Further information on our non core items and other items can be found in the 10-Q.
Now turning to our balance sheet.
At March 31st 2021, we had 17 million in unrestricted cash on cash equivalents compared to $23 9 million at December 31st 2020.
The decrease was primarily due to cash flow is used in operating activity and seasonal working capital timing.
At March 31st 2021, our total debt was $2 9 million and we had no borrowings outstanding on our revolving credit facility.
As Rob highlighted on April 29th we strengthened our balance sheet with the closing of an underwritten public offering that resulted in net proceeds to the company of approximately 23 million.
Now turning to our outlook, we are pleased to be in a position to reinstate financial guidance for our continuing operations today, given our confidence in the long term plan for.
For the second quarter ending June 30 of 2021, we currently expect total revenue to be in the range of 14 million to $15 5 million, which reflects softness in our games business on a sequential decline in the IP licensing part of the foundation business due to timing.
Partially offset by growth in our AI businesses.
Further we expect adjusted EBITDA loss to be in the range of 6 million to $4 5 million, including senior expenses of up to 750000.
On an adjusted EBITDA loss in the range of $5, two 5 million to $3 $75 million excluding seen them.
This includes approximately $1 million of new investment in light of our capital raise in April.
We believe the second quarter will reflect the trough for the year for both revenue and adjusted EBITDA.
For the full year ending December 31st 2021, we currently expect total revenue to be relatively flat with 2020.
2021 will be an investment year with a focus on reigniting overall top line growth in 2022 and beyond.
As such we fully expect our full year 2021 adjusted EBIT loss the loss to be greater than it was in 2020.
We look forward to seeing the benefits of our investments begin to bear fruit in 2022 and 2023, when we expect to see meaningful double digit revenue growth driven by our AI focused products safer and context as well as free to play games.
With that we'll now open the call for questions.
Thank you operator.
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You May press Star two if you would like to remove your question from the queue.
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Our first question comes from Mark Argento with Lake Street Capital. Please proceed.
Hey, Rob margin Christine.
Just a couple of questions wanted to dig into the book.
A little bit more.
Right.
So if our business is growing really nicely up triple digits.
Talk a little bit about.
But youre, having in bad debt.
Yeah highlighted.
<unk> camera deal maybe talk about some of the opportunities you're targeting.
Systems integration deals, where there's big Rfps out there maybe talk a little bit about the pipeline and how you see that business building on the coming quarters.
Okay, Mike do you want to turn them on one.
Yeah, I'll take that so.
First of all from a sort of a use case perspective are worse and this is talking so two segments. We're focused on the federal segment and then the commercial segment.
On the federal segment, I talked a little bit on the call about the most recent silver that we've won that will begin executing work on.
And then there are some other significant opportunities in our pipeline on the commercial side, we're seeing opportunities across several different use cases. So one is access control.
Second as authentication and third is surveillance watch list and then you know as I mentioned.
We're expanding the relationship with access and are now available on one of their most popular dome cameras.
And we're pretty excited about the prospects that that will provide.
We're also excited about just different types of partnerships.
The <unk> relationship.
Could bring significant traction.
In Europe Similarly, the convergent relationship.
So our strategy right now is going significantly after these use cases.
And one of the advantages that we have is our global sales force.
And that actually helps create diversification.
Sort of opportunities and then.
Also going after this very significant partner partner relationships as I described.
Great.
How big do from sales force currently.
Yeah safer product.
It's.
It's approximately well, we probably we don't really hit on Brian.
We don't breakout.
Nation on size of the sales teams.
But it's definitely a leverage model on which our goal is to have partners that bring us opportunities and have our sales team.
On the organized to take advantage of those opportunities primarily through partners. So we're not.
We're not it's not our plan business plan and the German case to build out.
Sales forces that are that are calling on every end customer, but rather to put it together a network of partners and to leverage those partners.
In a scaled way and then that's where the bigger opportunities.
We're the ones, where it's the first of a category first of a kind engage more directly in order to build up a repeatable book of business in that vertical or in that region. So it's sort of a.
Combo strategy of prime the pump and leverage the partners.
So youre using a combination of systems integrators and distributors slashed bars.
Go to market versus the direct sales force.
Yes, and I would say I would say the federal business, a little bit different because in the first phase of the federal business.
<unk> process is one that does has been involved direct engagement because you have to actually directly engage the government on those but similarly in the federal <unk>.
It engagements, we expect over time to be working with with partners primarily.
Got it and then just shifting over to contacts.
So that business did.
Grow quite as robustly as say per day is that more of a kind of a stair step you know what I mean, you're signing I'm, assuming you've got assigned large.
Carrier so when you get one it's going to step up big.
Maybe just kind of educate me a little bit on on how that business could potentially rollout.
Okay.
Rob do you want to take that or you want me to sure have average yes.
Well I would split.
Context.
All different categories, So we announced a partnership with <unk>.
Early on as our first partner extra context you've.
Rolled out some additional partnerships as well and the case of <unk>. They have some large carriers that day.
They've set up and as you say in some cases once you get a carrier going you sure you kind of fill that bucket. Then you go on to the next one so we don't necessarily have to sign up more partners, but our partners have to sign up more customers.
So it's sort of you can kind of win either way and in some of the additional context lines like for instance, when you talked about.
Cottage for voice, there's a similar opportunity of signing up additional partners for those so.
We tend to get paid by volume, but sometimes the volumes will have appears associated with them. So on the general case, the greater volume we do the more.
More money, we make but it's not necessarily one for one so if somebody is.
Using our products that are given band.
It won't necessarily get more money until somebody else comes on line, where that customer kind of graduate to a different band is generally how it works.
Got it Alright, and then just a quick.
On a balance sheet slash expense question. So it sounded like the prepared remarks, we think are low spend about on incremental $1 billion in terms of investment.
I think you said Q2.
Is that kind of a good pace moving forward in terms of that incremental spend.
On a juxtaposing that against the EBITDA losses.
So they'd be up.
Yes on a year over year, so kind of a million bucks a quarter. So maybe it'll maybe the incrementals from four 5 million 6 million Bucks this year.
On a pro rata school of thought there.
Yes.
Breaking down any numbers beyond Q2 in terms of giving a Q3 number a Q4 number or were very detailed Q4 number we have said that the EBITDA loss in 2021 is expected to be larger than the 2020 loss.
But we havent subdivided there I would say in terms of the EBITDA loss. We did also say that we expect Q2 to be the trough quarter. Both in terms of revenue and in terms of EBITDA loss and so the question would be if you look at the Q3 and Q4, what the net effect is of growing revenue for instance, yes revenue.
Versus in the margin associated with that versus the incremental investment. We basically you said that when you net those out.
We don't expect to EBITDA losses in Q3, or Q4 to be larger than the Q2 EBITDA loss. It's why we call it a trough quarter, but in terms of dimensionalize, how much of that is because of the revenue growing and how much of that is because the investment is staying about constant we didn't break that down.
I guess the reason for the question is I'm just trying to understand kind of where you think you are in terms of the evolution of getting the AI business scale doesn't need another $40 million worth talking about another $5 million a bus that's why I asked the question, but that's yeah that's fine.
Maybe we could just talk a little bit about.
The you know when you're talking about trough in Q2 on the revenue line as well is that how.
How much visibility do you have into the business and as much as obviously you can see EPS.
From contracts coming off in terms of the.
Ringtones business, but then also can see a ramp up on the other parts of the business do you have pretty good visibility quarter quarter on quarter out in terms of the debt.
Revenues for the business I'll.
I'll, let Mike speak to that Mike.
Yeah. So.
We do from a foundation perspective, we do have long term contracts on very very good visibility.
And then from even in AI component strong visibility to a large portion of the revenues.
Yes, so there's pretty good visibility.
Yeah, and then additional obviously you have a pipeline you have a methodology for business that hasnt closed yet where your visibility on what the closing expectation is for future revenue.
And then.
I would I would say in my view and we Havent broken this out this.
This time, you may or may not on the futures, sometimes the final from a deal takes has a different impact in terms of bookings versus GAAP revenue and there was nothing in this quarter that caused us to flip to talking about that but at some point in the future you.
You might consider talking about bookings, where you would say well we achieved this much in bookings in this much in terms of.
GAAP GAAP income and then revenue and then EBITDA that flow.
On off of that but in this quarter, we didn't break that out and it just really depends on the.
On the nature of those those deals and so it hasn't been there in the pipeline you know what the size of the opportunity is but you don't necessarily know how it's going to fall in terms of what the final deal structure is going to be.
Great well I appreciate the additional color. Thanks.
Okay. Thanks Mark.
So operator, I know, we're running a little bit over time.
Did we wonder if she wrapped for today and then I know, we're almost starting to go to and running a little bit late for that.
Is that does that location or we wrapped closed down for today and then take the other follow up offline.
That's correct, Sir that's fine.
Great all right well I want to thank everybody for joining us today, it's an exciting time for well networks, we very much appreciate everyone's support and want to thank all of our stakeholders, our investors of course, our customers and our employees and staff.
It depends on <unk> has been an extraordinary time for us all and we feel very good about where we are.
As the.
Certain parts of the World grew in the U S coming out of the pandemic, we feel empathy.
For our colleagues and parts of the world such as India that are really right in the middle of it in the teeth of it right now on our wishing the best in trying to be as supportive as we can be.
For our customers as well as our.
Staffing team in places like India, hopefully the world growth.
Continue to conquer this pandemic and we will move to more normal world and more and more.
Of the world in the months ahead, and we look forward to talking to everybody in three months if not sooner.
Thank you. This does concludes today's teleconference. You may disconnect. Your lines at this time and thank you for your participation.