Q2 2021 RealNetworks Inc Earnings Call
Yeah.
[music].
Greetings and welcome to real Investor incorporated second quarter 2021 earnings Conference 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 is being recorded average.
Now I'd like to turn the conference over to your host today, Kim Orlando Outerwear Investor Relations. Please proceed.
Thank you and welcome to real networks second 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 growth that looks future revenue operating expenses and adjusted EBITDA as well as 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 on gas and its products on initiative on restructuring effort 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.
Rhapsody International Inc, which does business as Napster commodity VR group plc.
And certain forward looking statements that relate to sooner, inc, including its future growth and profitability and financing activities.
As of the third quarter of 2020, 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 beliefs and expectations and all statements other than statements of historical facts are forward looking and involve a number of risks and uncertainties that could cause actual results to differ materially from any forward looking statements.
We describe these and other risks on our SEC filings, including in the risk factors set forth in our most recent reports on form 10-K on 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 August 4.2021.
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.
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 on 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.
GAAP.
With me today are Rob Glaser, Chairman and CEO.
On saying President and COO.
And Christine Chambers, Senior Vice President CFO and Treasurer.
Rob will discuss the company's strategy and the progress the company made during the second quarter of 2021.
Mike will then provide a more detailed update on real AI businesses, 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 Kim.
Good afternoon, everyone and thanks for joining US my remarks today will center on 3 main topics first I'll highlight our progress and growth is an AI centric company share.
Second I'll discuss how our strengthened balance sheet and continued streamlining of our operations positioning <unk> for future growth and third I'll provide further context on our Q2 results.
In Q2, we continued our progress towards becoming a company a business centered on machine learning based on AI products and services in Q2, we more than doubled our air revenue compared to Q2 of 2020 as a reminder, this transformation is centered on 2 AI based products and services Shafer, our computer vision platform and context, our natural language processing.
[laughter] Schafer continued to be our AI pace car with revenue, increasing 282% year over year context continued its steady progress increasing 15% year over year. This resulted in a blended average of 101% growth Schafer.
<unk> context, together now represent 37% of our tolling over services segment revenue in Q2 up from 29% in Q1.2021 and from.
18% in 2020 Q2.
In a few minutes.
Mike and Tim will go into greater Jeff regarding our progress with both safer and context.
Next I'd like to discuss steps, we've taken in Q2 to focus real and resource growth businesses, and therefore real as a whole for growth as you likely recall in April we raised $20.1 million in net proceeds through a public offering.
Primarily using these proceeds to make targeted investments in our AI based on growth initiatives.
Second step we've taken is to support seniors progression as an independent company in Q2 consumers watched over 100 million minutes per month to video using sooner.
Moreover, <unk> raised a meaningful amount of money independently Israel and is now a self sufficient financially.
As a result as of June 30, senior has moved to a next phase of independents and is no longer part of our consolidated results of operations factoring in upcoming investments into senior we expected going forward real well on approximately 40% of <unk>.
This important step better aligns our balance sheet with the growth opportunities ahead of us well I'll share, providing us channel with the capital it needs to grow and thrive on.
Look forward to continuing to serve on seniors board along with Mike Ensing.
We believe real shareholders have a great opportunity over time to benefit from senior successes independent company.
Now finally, let's go through real so overall Q2 results and put them in context total revenue for the second quarter was $14.6 million, which was down 8% compared to the prior quarter and down 15% compared to the prior year, while our air business grew as I mentioned above our games is Q2 declined both sequentially and year over year as the team is retooling our free to play games.
Future success, while I'm disappointed that our games business has hit an air pocket, we expect this going into the quarter.
In the games team are working hard to address these issues to set game, Jeff to resume growth driven by free to play games.
On the bottom line, we had mixed results in the aggregate our.
Our GAAP EPS was a loss of <unk> <unk> per diluted share compared to a loss of 27 cents per share from the previous quarter and a loss of <unk> <unk> per share on the prior year period on.
Our adjusted EBITDA loss, when excluding senior operating cost of approximately 600000, which negative $3.7 million this compared to loss of negative $1.1 million and <unk> seen are in Q2, 2020 and lots of negative 141 million in Q2.2020.
These results reflect judicious increases and investments in organic growth businesses, which we believe will pay off in the form of continued growth in the quarters ahead.
As a result, we continue to expect that we will achieve not only continued growth in our AD businesses, but also double digit consolidated revenue growth in 2022 and 2023.
And with that I will now turn the call over to Mike to discuss our AI businesses and further detail Mike.
Thank you Rob the focus of my remarks today will be to elaborate on the progress we have made during the quarter in our queue AI based businesses safer and context as.
As Rob highlighted we once again delivered a strong quarter and safer driven by success in both the global commercial and U S federal market, along with several product investment advancements.
On the global commercial front, we grew revenues significantly year over year in.
In addition to this revenue growth, we signed a reseller agreement with NTT Docomo, Japan's leading mobile operator.
NTT Docomo already leverages safer facial recognition platform to enhance safety and security in Japan, NTT Docomo will further utilized safer to expand its nationwide <unk> network to include artificial intelligence.
We are thrilled that NTT docomo chose safer over several competitors as a key partner to implement its strategy.
NTT Docomo expect to dedicate significant sales and engineering resources to drive the safer technology within its <unk> network.
We look forward to both companies benefit benefiting from the partnership.
Similar to the commercial business our U S. Federal revenues also grew significantly year over year.
During the quarter, we executed against 2 previously announced <unk> and built a significant pipeline focused on additional shippers beyond our current customer base larger R&D opportunities and full deployments.
On the product side, we made several key advancements during the quarter.
In April we released version 3 point for a safer, which introduced new passive liveliness detection and anti spoofing features to enhance security for access control applications.
In addition, we released a new post events searching feature which enables users to conduct forensic analysis within our software to enhance our investigative capabilities.
Further we will be enabling the full porting of the safer embedded solution to 2 popular soc's. This advancement will take the safer algorithms to the edge and run our advanced computer vision platform on smart devices.
Testing has shown that our edge solution can attain the same accuracy as our existing server based solution.
This allows safer to run on the edge as a smart Iot device further driving down the cost of hardware and the total cost of ownership for our customers.
Next I'll turn to a discussion of context, our natural language processing platform.
Our team at context has been intently focused on continuing to deliver AI based products and services to help facilitate improved messaging based services for our customers.
By leveraging the $1 billion, plus SMS and MMS messages, we processed daily.
Along with our long term telecom industry relationships, we've been able to develop robust AI based filtering tools to deliver an enhanced experience for our customers.
We continue to innovate in this space working on the next generation of products like context for voice as outlined on the last earnings call.
We look forward to the further development of the context platform to enhance the benefits to both current and new customers.
In summary, we are pleased with the development of the safer business across both the commercial and federal markets and remain optimistic on the future growth prospects for both safer and context. It is evident that our transformation to an AI centric company is largely underway and we look forward to communicated continued execution against our.
Strategy in the quarters to come.
With that I will now turn the call over to Christine discussed our second quarter 2021 financial results in greater detail Christine.
Thanks, Mike and good afternoon, everyone.
In my remarks today I will first review our consolidated second quarter results, followed 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 put it.
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 real networks, which exclude napster.
Further we completed the deconsolidation of seen it as of June 30 is 2021.
And as such costs related to <unk> are included in our second quarter 2021 financial results, but will not continue going forward.
Now turning to our results.
Total revenue for the second quarter was $14.6 million compared to $15.9 million in the prior quarter and $17.1 million in the prior year period.
Similar to last quarter strong growth in our AI businesses was more than offset by declines in our games and foundation businesses.
Looking at these results in greater detail mobile services revenue was up 400000 on a sequential basis and down 100000 year over year.
The sequential increase was primarily driven by higher safer revenue in both the global commercial and U S Federal space.
This was partially offset by lower revenue from our inter carrier messaging business.
Year over year, the decrease was largely due to lower revenues from our ringback tones and into carry on messaging businesses.
Partially offset by higher safer revenue in both the global commercial and U S federal market.
Revenue within the consumer media segment was down $1.2 million sequentially and down $1.1 million year over year the.
The sequential and year over year decreases were primarily due to timing of contract renewals in our IP codec business as a result of revenue from multiyear deals booked in the prior quarter and prior year period, respectively.
Games revenue for the second quarter was down 500000 sequentially and down $1.3 million year over year.
On a sequential and year over year basis. The decrease was due to sales decline in both our legacy and free to play games as the team continues to work towards reinvigorating growth and our 2 biggest free to play titles delicious world and delicious bed and breakfast.
Consolidated gross profit for the second quarter was $11 million down $1.2 million compared to the prior quarter and down $1.8 million compared to the prior year period.
As a percentage of revenue gross margin was 75% compared to 77% in the prior quarter and flat compared to the prior year.
Total operating expenses for the second quarter was $16.7 million a decrease of $1.7 million from the prior quarter and an increase of $1.1 million from the prior year period.
These numbers can fluctuate because they include certain non core items when normalizing for non core items, including restructuring costs and fair value adjustments on the contingent consideration liability from the January 2019 purchase of Napster.
Second quarter operating expenses were down 300, K or 2% compared to the prior quarter and were on.
Up $1.2 million or 8% compared to the prior year period, driven by focused investments as a result of our capital raise in April to drive growth in our AI businesses.
Net loss from continuing operations attributable to real Netflix was $1.3 million or minus <unk> <unk> per diluted share compared to a net loss of $10.4 million or <unk> 27 per diluted share in the prior quarter.
And a net loss of $3.1 million or <unk> <unk> per diluted share in the prior year period.
Included in net net loss attributable to real networks in the second quarter of 2021.
It was a 1 time gain on the forgiveness of debt of $2.9 million from the principal and interest on the Paycheck protection program loan that was approved during the quarter.
And a onetime gain of $2 million related to the deconsolidation of <unk>.
Adjusted EBITDA for the second quarter, including 600000 of operating costs relating to Sina was a loss of $4.3 million compared to a loss of $2.
A $3 million in the prior quarter and a loss of $1.4 million in the prior year period adjust.
Adjusted EBITDA, excluding the 600 K of operating costs related to Sina was a loss of $3.7 million.
Now turning to our second quarter segment results in more detail.
Mobile services segment contribution margin was a loss of $1.4 million compared to a loss of $1.6 million in the prior quarter and a loss of 900000 in the prior year period.
The sequential improvement was driven by higher revenue from us safer business lines.
Partially offset by higher operating expenses, primarily related to our investments in safer in context.
On a year over year basis, the increase was due to investments in our AI growth initiatives safer on context.
Consumer media segment contribution margin was a loss of 800000 compared to a gain of 600000 in the prior quarter.
And 500000 in the prior year period.
On a sequential basis on year over year basis. The decrease was primarily due to the timing of contract renewals in our IP codec business as a result of revenue from multiyear deals booked in the prior quarter on prior year periods, respectively. In addition to expenses related to seen them.
Games segment contribution margin was a loss of 200000 compared to a loss of 100000.
In the prior quarter and a gain of 600000 in the prior year period.
On a sequential and year over year basis. The decrease was mostly due to lower revenue in our legacy and free to play games.
At the corporate level unallocated corporate expenses of $3.2 million decreased by $1.8 million compared to the prior quarter and increased by 400000 compared to the prior year period.
These numbers can fluctuate because they include certain non core items.
When normalizing for non core items, including restructuring costs and fair value adjustments on the contingent consideration liabilities from the January 2009 purchase of Napster.
Second quarter unallocated corporate expenses were down 400000 compared to the prior caution and we're up 500000 compared to the prior year period due to focused investments as a result of our capital raise in April.
Further information can be found in the 10-Q.
Now turning to our balance sheet at June 30 is 2021, we had $29.9 million in unrestricted cash and cash equivalents compared to $17 million at March 31, 2021 from $23.9 million at December 31, 2020.
The increase from March 30, <unk> 2021.
Primarily driven by the closing of an underwritten public offering on April 29th that resulted in net proceeds to the company of approximately $20.1 million.
Offset in part by cash used in operating activities.
At June 30 of 2021, we had no debt and no borrowings outstanding on our revolving credit facility.
During the quarter. We also used $2.5 million of cash and transferred $47.8 million ordinary shares of Napster valued at the December 2020, Napster sale closing date to settle our contingent consideration liabilities for our January 2009 purchase of Neptune.
In addition, we strengthened our balance sheet through the removal of scene is associated liabilities, which resulted in a noncash gain of approximately $2 million during the second quarter.
Now turning to our outlook.
For the third quarter ending September 32021, we currently expect total revenue to be in the range of $13.5 million to $15.5 million.
And adjusted EBITDA loss in the range of 5 million to $3.5 million, excluding <unk>, which has been deconsolidation as of June 30 is 2021.
For the full year ending December 30, <unk> 2021, we now expect total revenue will be relatively flat to slightly down from 2020 levels.
Due primarily to softness in our games business.
2021, we will continue to be an investment year with a focus on reigniting overall topline growth in 2022 and beyond.
As such we expect our full year 2021, adjusted EBIT loss to be greater than it was in 2020.
We look forward to seeing the benefits are of our investments begin to manifest 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 operator.
Operator.
Thank you at this time, we will conduct a question and answer session.
If you would like to ask a question. Please press star 1 on your telephone Keypad, Inc.
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Once again Thats star 1 to ask a question at this time.
1 moment, while we poll for our first question.
Our first question comes from Mark Argento with Lake Street Capital. Please proceed.
Great.
Hey, good afternoon, guys. Thanks for taking my questions.
On here.
Bart with safer.
Just wondering if you could.
Yeah.
Kind of walk us through the NTT Docomo deal sounds very interesting.
That's right.
Bill.
From a resell on the product into their channel are they deploying it.
Yes.
Yes, primarily through.
Just getting relationships.
Dig into that just trying to better understand the size of opportunity are you able to contract.
Yeah. So.
Thanks for the question Mark so.
So yes, they will sell both within their existing channel and.
Additional customers.
It is a approx.
Approximately 2 year agreement.
And then.
There are established.
Fees license fees to us as part of the agreement.
And is that.
And other affected at a retailer grid source on corporate solutions or solutions to corporations.
Their target on Mark, Yes, yes, yes.
Enterprise focus.
Okay.
Okay.
Helpful and then in terms of how.
Quickly.
Could they get out market start to draw on that you're on a long scale up here in terms of other mode to get the sales force.
No.
I think they can scale up pretty quickly here mark.
Right.
And then.
Churning.
A couple of questions on the on the ESG.
She and her business.
No.
She didn't know that.
Guys are up roughly a 40% ownership or will be shortly that's what.
Precipitated the deconsolidation of the numbers.
Okay.
Well the whole calculation. This is rob for how you do consolidate.
Our business is a multi variant equation as I have learned in paints day can be appeal from a legal and finance teams, but this is something that has been carefully scrutinized by.
By our finance team and our legal team.
Senior has.
Independent leadership team.
Mike and I are on our board on the board, but we are not a majority of the board there's a number of different factors.
In the context of other companies developing independently.
We kind of set sales go on this direction.
Apparently when the boat gets a certain amount on offshore.
To characterize it this way and I always try to understand these things so they can generalize and I've learned some generalizable things but.
I think suffice to say that as of June 30 per boat is for on a from shore for us to consider as an independent company for consolidation purposes.
Right.
So he does is it technology that originally came out of real networks or did you guys look back into the business from a lot. It does give us a little history there.
So the history of the Intrapreneur now entrepreneur, who created the core platform. It became sooner with somebody who works at Rio we'd actually acquired his company. Some years before he is sort of very catalytic thinker and a few other people worked closely with him as he incubated the idea.
Originally he was working with the real player team.
And as the idea develops it became clear to us that the <unk>.
Best opportunity for this idea was as an independent on independent path it was doing pretty well.
On it sort of started independent has joined the incubator co launch.
Which was helpful to the team to kind of learn how to be more independent and entrepreneurial and their not just their technology, but sort of how they set where on the business and then the pandemic hit.
It exploded blew up in terms of usage I think at 1 point.
At a growth usage grew 100 ex over the previous couple of quarters. It was just great product right place right time, everyone was at home Lockdown, but still wanted to stay connected to their friends, So senior which allowed people to do a watch parties on a wide range of service start with Netflix announced supports over a dozen was well positioned to.
Take advantage of that wave.
1 of the exciting things about it is it's continued it hasnt.
Any thought that.
1 might have had that this was going to be something that would be a temporary phenomenon on people would go back to that.
We are doing things or other things like it's like a lot of other things on the pandemic pandemic.
As change patterns.
<unk> new methods of communicating I think just to for instance, like think about zoom calls yes.
Phase III, assuming this will come back, but it's on like people are going to stop doing meetings zoom and the like and similarly people will go over to their franchise to watch shows or they'll go to movie theaters, but this is a new modality of how people can.
Can watch shows with their friends.
And the senior team is really well positioned for that fundamental trend. So.
We're glad we incubated it.
We're glad we spun it out we like the team very much we believe in the opportunity. It has an independent capital needs basically this sort of model. If you think of any of these free consumer services.
The big ones like the Facebooks of the world or the Twitter, who world Instagram et cetera, you're in investment mode for several years as your scale on the audience and then once you're on it gets to a certain size, there's a bunch of ways to monetize it. So it has a different investment profile.
The kinds of businesses that we build and run within real so it made sense to spin it out.
I believe it will it will serve both us and senior well for us to have done that.
Well it'll be interesting to watch the progress there and also maybe.
It became valuable asset economically for you guys as well so.
Just getting back to a safer.
In general.
Mike could you talk a little bit about your go to market strategy, maybe just what's going on.
On the sales team there I think you gave you made some hires.
On where you are sitting in terms of.
We go to market team right now.
Yeah, Mark So we have actually made some contract hires to strengthen leadership in that space. We are still very focused.
Globally, leveraging our global sales team.
As you see on the results.
We talk about strength in APAC and Japan.
And.
Very good strength there.
And then.
Were actually continued to build our sales force and our resources within the federal segment.
Alright.
Alright that does it from me I appreciate it thanks guys.
Thank you thanks Mark.
Once again, ladies and gentlemen to ask a question at this time. Please press star 1 on your telephone keypad.
Once again Thats star 1 on your telephone keypad at this time.
And this is Christina chambers I would like.
I would like reduce correctly, 1 statement that we made earlier and just that our adjusted EBITDA loss when excluding Sina operating cost of approximately 600000 with $3.7 million and this compares to a loss of $2.4 million, excluding excluding seen in Q1.2.
21, and a loss of $1.1 million in Q2.2020.
Okay.
Thank you at this time I would like to turn the call back over to Mr. Robert Glaser for closing comments.
Thank you operator, well. Thank you all for joining us today I hope everyone's summer is growing well on that everyone is staying healthy 1 thing we did not comment on in this call and some of those come from question is.
Our business is progressing in the context of the phase we're in and the pandemic. We're all trying to be safe and careful and were absorbing all of the necessary health and safety precautions, while still running the business as you know from earlier the pandemic, we've been able to move things forward in many parts of our business.
Even in spite of the uncertainty and will continue to do so.
We didnt see if youll need to call on any specific aspects of the business.
I'll, let you know in future quarters, if there are any other glitches or other things changes associated with that but we are moving forward with plans that are predicated on.
The current complex world continuing to be complex for a while.
Hopefully everyone is able to stay safe and healthy during this period, we all get vaccinated.
Get our world back on a healthy path, so with that I want to thank everybody for joining us today.
Thank the team that are real for everything the team is doing to move our business forward. Thank our partners and the audience listening today, and we will be in touch soon.
Thank you ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time and thank you for your participation and have a great day.