Q3 2021 RealNetworks Inc Earnings Call
Greetings and welcome to rail networks, Inc. Third quarter 2021 earnings call. At this time 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. Please note. This conference is.
It's being recorded island.
I will now turn the conference over to Brian Pet Delver.
First our relations. Thank you you may begin.
Thank you and welcome to real networks third 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 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 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.
We're looking statements that relates to the December 'twenty 'twenty sale with Rhapsody International Inc, which does business as napster to melody VR group plc, and certain forward looking statements that relate to <unk>, Inc, including its future growth and profitability and financing activities and effective as of the third quarter of 2020 Napster has been.
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 SEC filings, including in the risk factors set.
Fourth 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 expectation as of today November 3rd 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 SEC regulation G. 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 <unk> real networks Dot com under the financials tab.
With me today are Rob Glaser, Chairman and CEO, Mike Ensing, President and C O and Christine Chambers, Senior Vice President CFO and Treasurer, Rob will discuss the company's strategy and the progress the company made during the third quarter of 2020 one.
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, we will open the call to questions with that I will hand, the call over to Rob.
Thanks, Brian and welcome aboard and good afternoon, everyone and thanks for joining us.
Remarks today will first center on three topics that I'll cover our high level financial results first I'll provide an update on our raw strategy second I'll highlight our progress in real strategic transformation to an AI centric company and third I'll discuss our games business and the new leadership that we brought in to address that situation.
First the update on our overall strategy.
Earlier this year, we told the public that it was our plan to pivot real to become an air centric company. We also describe our growth plans and expectations for 2022 in 2023, which included our belief that our games business would again be a significant contributor growth beginning in 2022.
The core of the strategy hasn't changed our AD businesses safer and context are continuing to grow and we believe that they will drive significant growth in the future that said issue with their games business, which I'll discuss shortly now lead us to believe that games will likely not be a significant growth contributor to 2022 as we retool it for future success as a result.
We're still putting our 2022 plan together I think it's fair to say that while we believe we will have significant growth in 2022, you should view our expectations of double digit growth is now excluding games from the calculations.
Now onto our AI businesses, we have two main air products and services safer, which was our computer vision platform and context, which was our natural language processing platform in Q3, we more than doubled safer revenue compared to Q3 of 2022 safer continues to be the biggest driver of growth in our businesses with quarterly revenue increasing 124 hours.
Cent year over year compared to 2020.
Context, compared with continued steady progress increasing 12% year over year shaper in context, together now represent 31% of our total mobile services segment revenue compared to 37% in Q2, 2021, and 19% in Q3 2020.
While our air businesses in aggregate were sequentially down from Q2 2021, we expect short term fluctuations as you're building out our AD businesses, especially safer we remain bullish about the progress we're making.
In April we made 20, we raised $20 $1 million through a public offering and intend to use the proceeds to make targeted investments in our AI based growth businesses. We believe the steps, we're taking with wheels add businesses well positioned for success and long term growth in a few minutes, Mike Ensing will go into greater detail regarding our progress with safer in context.
Next an update on our games business after a promising start in free to play games, we've been disappointed by the stall progress in recent quarters. We came to feel that we needed to make a leadership change and undertook a rigorous assessment and search process. As a result of this process. We brought in an outstanding New leader Simonette Lili Gomez as game has new seat.
We announced this train two the team a few weeks ago and yesterday made the change public.
She has a deep background and track record of success in the games industry and is passionate about game has a mission of creating great games and experiences for female casual gamers. This demographic mix up over 60% of the total players from the top 100 games on the App stores.
We believe theres a lot of opportunity and a lot of growth available to rural networks are continuing to own this business.
<unk> is the right leader at the right time to reinvigorate the business and deluded to significant growth in profit we recognized that leadership changes involve a ramping up period, hence my earlier comments about our expectations for 2022.
Finally, I'll turn briefly to our raw financials total revenue for the third quarter was $43 million, which was down 2% compared to the prior quarter and 13% down compared to the prior year, while our rehab businesses grew our games business declined both sequentially and year over year promising to change that I just discussed.
On the bottom line, we had good results when you look to nonoperating items, our GAAP EPS was a loss of 16% per share compared to <unk> <unk> per share loss in the previous quarter and eight months of share loss in the prior year period, our adjusted EBITDA loss was negative $2 $7 million. This compares to a loss of $4 $7 million Q2, 2021 at a loss.
It's a $1 9 million in Q3 of 2020, Kristina will provide a bridge between the GAAP and EBIT numbers in a few minutes.
To have a strong balance sheet with $29 million of cash available to us, which we will use judiciously to set us up for future growth.
And with that I'll now turn the call over to Mike <unk> to discuss our AI businesses and further detail Mike. Thank you Rob I'd like to briefly discuss progress made in our two AI based businesses safer in context.
Starting with safer we are pleased with the progress that <unk> made in the third quarter year over year, the business increased revenue of 124%.
Year over year revenue increase in both the commercial and federal segments of the business.
Revenue decreased decreased sequentially, largely driven by the APAC region. COVID-19 was a factor in APAC at several countries had lockdown and travel restrictions in the quarter impacting bookings and deployment also is important to realize that revenue recognition in this business can be lumpy.
As discussed on prior calls safer is focused on several use cases, including real time automated surveillance cashless access control digital identity authentication and embedded solutions. We continue to make progress across these use cases and I would like to highlight a couple of 2021 projects within the access control and digital identity.
Authentication spaces.
Within the access control and federal segment safer recognition platform has been chosen by Boulder ponds for an initial phase two enhanced biometric access control solutions for the department of defense.
<unk> is a leading systems integrator focused on federal space with services spending engineering Cyber security program and project management and information technology.
Safer solution is focused on improving access control within the Dod and will enable multi location management.
Our platform includes advanced technologies developed to combat presentation attacks and help keep access control solutions safe from spoofing attempts, both simple and advanced safe.
The <unk> compact solution makes it, especially valuable for customers seeking to embed face recognition liveliness spoofing detection and other face in person centric analytics directly in devices operating at the edge.
Within the authentication space, we recently announced that safer was selected as an authentication facial recognition technology provider to support the Japanese government evolution from paper documents to digital my number I'd cards with a face based authentication infrastructure.
Number of cards represent a new digital identification system designed to streamline and expand access to government services for Japan's citizens and residents.
The initial rollout of my number of cards provides access to Jaffe, Japan, Universal health care system by allowing citizens to confirm their identity and medical information with specialized card readers and facial recognition features.
As part of the new initiatives residents will no longer require multiple I'd cards to access different government services.
The solution will be rolled out to thousands of hospitals clinics and pharmacies over the next several years.
We are pleased with our overall technical and solution.
Solution and benefit to Japan's citizens. However, we note that the deployment has been slowed by factors, including COVID-19 in Japan.
We viewed the mine number of project is a major proof point for safer and the authentication space and we will build upon it in the quarters to come.
Next I'll turn to a discussion on context, our natural language processing platform.
Our team at contacts has been intently focused on continuing to develop AI based products and services to help facilitate improved messaging based services for our customers.
By leveraging more than 1 billion SMS and MMS messages processed daily along with our long term telecom industry relationships, we've been able to develop robust AI based filtering tools to develop to deliver enhanced experience for our customers.
Over the last several months, we have significantly enhanced our core context platform by both expanding functionality and capabilities.
First we have developed new 10, DLC interconnect support, allowing context, the scan 10, DLC routes further preventing spam and fraudulent messages for.
For background 10, DLC stands for 10 digit long code and as a sanction communication method adopted by major telcos used largely for Omnichannel messaging campaigns.
We have also released a new image caching service for NMS, we can now scan and block spam and images sent to end users. In addition, we upgraded our core machine learning method, resulting in greater breadth of spam campaigns caught.
Finally, we have developed brand fishing and submission IP that leverages machine learning to detect whether a brands content <unk> is being used within fraudulent messages.
We continue to innovate in this space further developing our current products and working on the next generation of products to enhance benefits to both current and new customers.
In summary, we continue to be pleased with our progress and growth prospects for both safer and context.
As evidenced that our transformation to an AI centric company is largely underway and we look forward to communicating continued execution against our strategy in the quarters to come.
With that I will now turn the call over to Christine to discuss our third quarter 2021 financial results in greater detail Christine.
Thanks, Mike 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 segment business performance.
As a reminder, we completed the deconsolidation of <unk> as of June 32021, and as such costs related to seen are no longer included in our financial results.
Now turning to our results.
Revenue for the third quarter was $14 3 million compared to $14 6 million in the prior quarter and $16 6 million in the prior year period.
Similar to the trends of this year 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 decreased approximately 600000, both sequentially and year over year.
Year over year safer revenue more than doubled however on a sequential basis safer revenue decreased this is primarily due to decline in international financial sales.
We do want to remind you that sales on a quarter to quarter basis can be lumpy due to the timing of contract Finalization and revenue recognition.
Revenue in the consumer media segment increased 700000 sequentially and 200000 year over year.
The sequential and year over year increases are primarily due to the timing of contract renewals.
Games revenue for the third quarter was down 300000 sequentially and down $1 8 million year over year.
On a sequential and year over year basis. The decreases were due to sales decline in both our legacy and free to play mobile games.
As Rob discussed earlier in the call. We're excited about new leadership in the games segment and the direction. They can take the business, while recognizing that progress from a revenue growth perspective may state make me still take a few quarters.
Consolidated gross profit for the third quarter was $11 2 million a sequential increase of 200000, but down $1 3 million compared to the prior year period.
As a percentage of revenue gross margin was 78% compared to 75% in the prior quarter and prior year period.
Total operating expenses for the third quarter was $17 7 million, an increase of $1 million from the prior quarter and $2 3 million from the prior year period.
The increase was primarily due to a $2 million one.
One time award modification and stock compensation and to a lesser extent higher restructuring charges both related to the recent leadership changes in games.
Net loss from continuing operations was $7 7 million or <unk> 16 per diluted share compared to a net loss of $1 3 million or <unk> <unk> per diluted share in the prior quarter and a net loss of $3 2 million or <unk> <unk> per diluted share in the prior year period.
Included in net loss in the third quarter of 2021 was a $1 2 million noncash loss, primarily related to our investment in Napster stock <unk>.
2 million, one time stock award modification and 700000 related to restructuring.
The charges associated with the recent leadership changes and games.
All are excluded from adjusted EBITDA, which for the third quarter was a loss of $2 7 million and was compared to a loss of $4 3 million in the prior quarter and a loss of $1 9 million in the prior year period.
Now turning to our third quarter segment results in more detail.
Mobile services segment contribution margin was a loss of $1 3 million compared to losses of $1 4 million in the prior quarter and 600000 in the.
Prior year period the.
The year over year change was driven by lower Ringback tones revenue and higher operating expenses from safer in context.
Consumer media segment contribution margin was a gain of 900000 compared to a loss of 800000 in the prior quarter and 100000 in the prior year period.
On a sequential basis and year over year basis. The increase was primarily due to increased revenue from software licenses and lower expenses due to the deconsolidation of <unk>.
Games contribution margin was a loss of 400000 compared to a loss of 200000 in the prior quarter and a gain of 600000 in the prior year period.
Revenue declines with the.
The primary driver of the year over year decline in games contribution margin.
Now turning to our balance sheet at September 30 of 2021, we had $29 million in unrestricted cash and cash equivalents compared to $29 9 million at June 30 of 2021, and $23 9 million at December 31 2020.
The cash from April's equity offering provides us with the flexibility to make prudent investments in our AI businesses at.
At September 32021, we had no debt and no borrowings outstanding on our revolving credit facility a.
Our balance sheet remains strong and we have ample flexibility to invest in the areas of growth. We are most excited about.
Now turning to our outlook for the fourth quarter ending December 31, 2021. We currently expect total revenue to be in the range of $12 5 million to $15 million and adjusted EBITDA loss to be in the range of $5 5 million to $3 5 million.
The low end of the ranges reflect supply chain issues and chipset shortages that may impact, our IP codec business in China.
This also means that for the full year. We now expect total revenue will be down from 2020 levels.
Rob's comments earlier the decline year over year is in large part due to a decline in games revenue.
2021 continues to be an investment year with a focus on reigniting overall top line growth in 2022 and beyond.
We look forward to seeing the benefits of our investments in our AI focused products begin to manifest in 2022, when we expect to see meaningful double digit revenue growth excluding gains from the calculations.
With that we'll now open the call for questions.
Operator.
Thank you and he would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys our.
First question is from Mark Argento with Lake Street Advisors. Please proceed.
Hi, good afternoon.
Congrats on a decent quarter, just wanted to drill down a little bit.
I mean different things going on with the safer business in particular the deal.
My number I D.
Over in Japan, just a couple of questions there or is that.
Was that.
The deal that you guys sourced through NTT docomo or how did you. How did you end up in that mix and how are you.
The situation was that yes.
It was pretty competitive situation, we actually sourced the deal through another partner of ours called network.
We've had a longstanding relationship with.
And in terms of the competitive aspect of it yes, it was competitive.
Japanese government as I understand it has split the implementation among four different system inverter technology partners. So we won the business with one of the four.
And it's my understanding that we are the only international.
Computer vision technology platform, our facial recognition platform used in the mix. So the others were all domestic Japanese providers. So we are very excited about that we don't know obviously, what the broader competitive dynamics were both within the one we won in terms of the selection process and also within the other ones, but we were.
To get a significant piece of such a large strategic piece of business and as far as I know is the only international there is one internet other than Oh, there was one other okay.
Correct, sorry about that but not not.
With our integrated and how different are the greater correct.
And the solutions you guys you're providing.
Shafer.
Oh, the rhythm or what are you actually doing for the system integrator for the.
Providing that you guys provided.
Yeah. Good question. So we are providing.
The algorithm that actually gets embedded on these reader devices.
Got it.
And then is there a I mean, obviously I'm guessing there's a licensing component to it and then is there any kind of.
Maintenance that goes along with that as you as you continue to fine tune the <unk>.
Joe or Jeff.
Geoffrey just at a high level look from a structure, we generally don't comment on individual deal structures I would say that our goal.
Where we can do it is to get businesses business relationships that are scalable, which is to say where the more of our product is used.
The more customers pay us that can be manifested based on.
<unk>.
The device based camera deals based on the number of cameras that are were deployed on.
For identity based solutions.
We like deals where we can get paid based on the number of identities associated with the platform.
And Thats, obviously, sometimes we can get that from the aspirational, but we sort of take the long view, which is if we can get deeply integrated into large scale operations, there's plenty of opportunities to scale up. So we love we love attached with something that has.
Scalability with usage associated with it.
And then and that's it.
It's David I'd say for the case of context, because it's SaaS based.
It tends to be.
Monthly services revenue associated with volumes, but on the on the safer side.
It's a more diverse set of ways of doing business.
At least today.
Got it and the integration work Youre doing.
Youre working with one of our integration partner and your systems integrator.
We are integrating the technology.
The hardware.
That is the.
Name brand hardware provider or are you already kind of scalability or any kind of leverage that you get from that.
That relationship like you have with like access on the camera side, where they can take you in other areas.
Just trying to figure out any kind of leverage points.
<unk> relationship.
So next where is a very.
Pretty scalable system integrator.
And I.
I think.
Working with them will allow us to drive scale.
Alright.
And then.
And over you had mentioned Youre working with I think it was OLED.
Solar ponds.
Granted a lot of Vod.
On the access control side there.
Maybe talk a little bit about your expectations.
That rolls out.
Pasadena.
Is there a specific.
Rfps, where the government gets a little of Rfps that you guys have been responding to with.
Trying to gauge kind of how that could rollout or scale up yeah. So.
This is <unk>.
12 month POC that we expect that will go very very well and then there would be significant rollout potential beyond that.
But I would say in general again.
I appreciate you want to ask that specific deals that we have talked about a few of them bowler ponson by number of cards being two of them.
Generally what we see is that customers start with.
Deployment that is a subset of their intended scale deployment in part because of the newness of the technology in part because of the number of pieces to be integrated with and there is sort of a.
Prove out period, San Jose, a formulary or call POC centers they are phased rollouts.
And then in success there is opportunity to scale up further soon is the <unk>.
<unk> opportunities are very much larger 10 X with initial coupon would be not always that ratio, but it depends on what they're trying to do so so we think what we're doing is we're <unk>.
Do you seed corn, if you will.
And hoping that a high percentage of it fertilizes and grows and scales, but that's the nature of these businesses in the early days.
That's helpful.
One on the contract business, it's been kind of.
And I get along.
And that kind of low double.
Digit growth.
So in the quarter was a 12% number it serves me well.
What's the opportunity to start to feed maybe.
The growth rate there accelerators, there you got to sign more carriers.
Deeper into existing cares, what's the dynamics there.
Matson growth.
Well, it's hard to talk about that without going into deals that are in process products that are under development.
Let me just say that I very much share the goal describing that are accelerating the growth of that business.
It's it's always a tradeoff between.
The servicing your current customers, well and growing with them and developing derivative products that go into new market segments.
That might have.
Additional customers or our broader portfolio of customers. So I would say the big difference today between safer and contact is safe.
Safer.
As an opportunity the technology gets deployed can.
Can be deployed in.
In multiple use cases in.
In many different scenarios and what we're doing with context today is focusing on the messaging business SMS and MMS today.
Mike talked about with the image hashing is actually a significant broadening of the appeal of the product and the utility of the product because there's a lot of image spam that wasn't getting caught because the the spam content was being embedded in an image and so being able to do a set of tricks to actually.
Extract that.
That span from the image and do it in a scalable way because the volumes are pretty high.
And figure out how to efficiently do that and add that to our mix.
I think there is increase the viability and use and value of our product and Chris created new opportunities for us associated with it and we'll just we'll keep we'll continue to grow the business with the current portfolio of customers. We have with the current portfolio of markets. We serve and then we're going to look at additional markets, where our really really great natural language processing technology.
Is applicable.
Conference you may disconnect your lines at this time and thank you for your participation.
[music].