RealNetworks, Inc.

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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kim Orlando with Addo Investor Relations. Thank you, Kim. You may begin.

Thank you, and welcome to Real Network's 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 Network's operating expenses on a consolidated basis and 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-looking statements that relate to the sale of 84% owned Rhapsody International Inc., which does business as Napster, to Melody VR Group PLC. Effective 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 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 forth in our most recent report 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 Network's expectations as of today, February 21. 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 reasons. 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 8K dated and submitted to the SEC today, both of which can be found on our corporate website at investor.realnetworks.com under the financials tab. With me today are Rob Glazer, Chairman and CEO, Mike Ensign, 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 2020 financial results. After today's prepared remarks, Rob, Mike, and Judd will 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 today. As I typically do at year-end, I'll begin with my overall assessment of our 2020 performance. I'll then add a few comments about our go-forward strategy and our two most significant 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 Mike and Judd 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 to Melody VR for $70 million in total consideration, which included our 84% interest in Napster. While we remain a minority shareholder of Melody VR, we no longer include Napster in our results from continuing operations. I consider 2020 to have been a very solid year for Real Network. Our overall top-line revenue grew modestly, up 3% over 2019. But that number masks three notable achievements. First, our two growth initiatives, Free to Pay Mobile Games and Saper, grew their revenue by over 110% combined compared to 2019. Second, we substantially improved our bottom-line results. Our 2020 adjusted EBITDA loss from continuing operations was negative $8.6 million, an improvement of $11.4 million over 2019. Moreover, as Mike and Judd will discuss in a few minutes, we finished 2020 strong and had an excellent fourth quarter. This included our sixth consecutive quarter of year-over-year improvement and our adjusted EBITDA loss. Third, we achieved 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, how 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'm deeply appreciative of the resilience and resourcefulness our team exhibited in the face of the pandemic. I'm also grateful for our customers who continue to work closer with us in spite of the disruptions that they were experiencing. A big contributor to our success in 2020 was our progress in simplifying Reel. We're very pleased to have completed the sale of our 84% stake in Napster to Melody VR Group, a leading creator of live virtual reality music experiences. Now that the sale is complete, Melody recently announced its intention to rebrand itself as Napster. We believe the sale of Napster not only helps streamline REEL, but also deepens our focus on our key growth initiatives and will help us create great products, serve our customers well, and create long-term shareholder value. The Napster sale also contributed to a meaningful increase in our cash balance from the prior year. We're very proud of our Napster team's hard work over the past 17 years and deeply appreciate the opportunity to work closely with them and all of the other stakeholders in the music industry for all these years. We look forward to being an ongoing stakeholder in Melody VR slash Napster's success. Now I'd like to share a few details about our strategy going forward and our success with Safer and free-to-play mobile games in 2020. Real is in the middle of a transformation from being a traditional technology-based digital media company to being an AI-based digital media company. Over the last four years, we've gone from being a company with great digital media technology to a company that also has deep expertise and talent in machine learning applied to digital media. This has been a conscious multi-year transition that applies in different ways to each of our businesses. The two most significant examples of this transition are our context natural language processing platform and our safer computer vision platform. Context, which is earlier in its transition, is leveraging our very high throughput Metcalfe inter-carrier messaging platform to create AI-based products and services that help our customers deliver better messaging-based services and experiences. Safer, which has been in the market for two and a half years, initially leveraged our globally popular digital media products to create computer vision products and services that are highly accurate, super fast, and very small. Safer also excelled at having very low bias because of excellent and conscious engineering that was built on a large global data set. Let me now talk a bit about Safer's commercial results in 2020. Safer 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 direct-to-Phase II small business innovation research, or CIBR, contracts that were ordered in Q2, both with the United States Air Force. We began delivering on these deals in Q3 and will continue to do so in the first half of 2021. In Japan, one of our key partners is Docomo. SAFER is now part of the Docomo Innovation Cloud, which has led to multiple customer engagements in Japan. In Korea, T-Money, a smart mobility and payment services company, is leveraging Safer through a pilot program to provide touchless biometric payments for 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. In addition to regular commercial uses of Safer, we also see a civic opportunity to use Safer to help improve safety during the pandemic and to help us all get to the post-COVID future. In December 2020, we introduced Mask Check, a free face mask compliance app, service, and data platform that helps communities and businesses operate and reopen with greater safety by encouraging and assessing face mask compliance. We released Mask Check in partnership with the COVID-19 International Research Team, who have been a terrific partner. Going forward, we expect to continue to sharpen our focus with Safer and see significant growth opportunities in front of us in 2021 and beyond. Regarding games, 2020 was the first full year of our two flagship free-to-play mobile games, Delicious Bed and Breakfast and Delicious World. These two mobile games were downloaded and played by 6.7 million users in 2020. We think both titles have strong futures ahead of them. Our GameHouse 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. Effective March 1st, Christine will replace Judd Lee, who will be transitioning out of the company in March. Christine will be rejoining Real after working for the company for over a decade, most recently as our VP of Finance, and will be reporting to our President and COO, Mike Ensign. We're very happy to have Christine rejoin Real. She's very bright and brings deep knowledge of our people and the financial drivers of our business. I also want to thank Judd for his many contributions to Real through the unprecedented pandemic year. We wish Judd 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 world will 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 financial 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 operations of real networks, 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. In regard to our 2020 segment results, consumer media revenue was 12.6 million, down 600,000 compared to 2019. In general, our legacy businesses, including RealPlayer and 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 $300,000 compared to 2019. The decline was primarily driven by our legacy RBT business offset by growth in Safer and Context. We remain bullish about the longer-term prospects for Safer, and we are incredibly pleased with our team's ability to rapidly react to changing market conditions to address newly important societal needs as a result of the pandemic. Revenue in our games 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 forward. Consolidated gross profit was 51.6 million for the full year, up 3.0 million from the prior year. Gross margin for the full year was 76 percent, up from 74 percent in 2019, reflecting higher revenues and continued operating efficiencies. Total operating expenses for the year were 56.6 million, down 19.0 million, or 25 percent from the prior year, primarily due to the net favorable adjustments from the contingent consideration liability related to the sale of NAFSA, as well as our ongoing cost reduction efforts, partially offset by restructuring and other charges. Normalizing for certain one-time and non-cash items, operating expenses were down 10.0 million, or 14% from 2019. Adjusted EBITDA for the year was a 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 continuing operations was $4.8 million for 2020, or minus $0.13 per diluted share, compared to a net loss of $15.1 million, or minus 40%, 40 cents 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 at the closing date on December 30 was 70.6 million, which comprise $15.0 million in cash, $11.6 million in Melody VR stock, and $44.0 million in assumed liabilities. As a result, we'll receive $10.6 million in Melody VR stock, $16.7 million in cash as debt repayment and liquidation preference, plus $3.0 million of cash to be held in escrow. We expect to provide $4.8 million of consideration in MVR equity and or cash to Columbus Nova to fulfill the terms of our January 2019 agreement to acquire their stake in Napster. The sale of Napster significantly improved our balance sheet, which Judd 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 based on the company's strength in 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 Real 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 Judd to go through the fourth quarter financials in detail. Judd.

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 in the prior quarter and $17.3 million in 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. Looking at these results in greater detail, revenue within the consumer media segment was up $800,000 sequentially and down $1 million year-over-year. The sequential increase was primarily due to timing of shipments coupled with higher installs in 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 900,000 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 700,000 sequentially and up 300,000 year-over-year. On a sequential basis, the decline was due to lower revenue in free-to-play mobile games primarily as a result of both seasonality and decreased monetization due to a miscalibration of a 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 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 500,000 compared to the prior year period. The sequential improvement was primarily driven by higher revenue in our consumer media and mobile services segments, partially offset by lower revenue in our game segment. Compared 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% in the prior year period. The total operating expenses for the fourth quarter were $8.1 million, a decrease from $15.3 million in the prior quarter and a decrease 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 sale of Napster, as well as lower people-related costs, partially offset by restructuring and other charges. Normalizing for certain one-time and non-cash items, operating expenses were relatively flat with the prior quarter and decreased 1.7 million, or 10 percent, from the prior year period. Adjusted EBITDA for the fourth quarter improved to a loss of 900,000 compared to a loss of 1.9 million in the prior quarter and a loss of 2.9 million in the prior year period. Net income attributable to real networks from continuing operations was $6.1 million, or $0.16 per diluted share, compared to a net loss of $3.2 million, or minus $0.08 per diluted share in the prior quarter, and a net loss of $4.5 million, or minus $0.12 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 $700,000 compared to the loss of $100,000 in the prior quarter and a gain of $1.3 million in the prior year period. The sequential increase was driven by higher revenue and gross margin. Year over year, the decrease primarily reflects lower revenue partially offset by decreased operating expenses as a result of our ongoing expense management. The mobile services segment contribution margin was a loss of $200,000 compared to a loss of $600,000 in the prior quarter and a loss of $2.7 million in the prior year period. The sequential improvement was primarily related to higher revenue, partially offset by incremental expenses related to SAFR. Year over year, the improvement was primarily related to higher revenue and lower people-related costs. The gain segment contribution margin was $300,000 compared to a gain of $600,000 in the prior quarter and a gain of $200,000 in the prior year period. The sequential decrease was due to lower revenue. Year-over-year, the increase was driven by the continued strong performance of the free-to-play mobile games. At the corporate level, unallocated corporate expenses was a gain of $4.8 million, which decreased by $7.4 million compared to the prior quarter and decreased by $7.8 million compared to the prior year period. The sequential and year-over-year decreases were primarily due to the net favorable adjustments related to contingent consideration liability related to the sale of NAPSER, partially offset by restructuring and other charges. Now, turning to our balance sheet. We ended the year with a significantly higher cash balance, with unrestricted cash and cash equivalents of $23.9 million at December 31st, compared to $13.2 million at September 30th, 2020. The improvement was primarily related to the cash proceeds received from the sale of NAPSER and a 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 face in 2020, Due to the effects of COVID-19, we delivered significant progress, including traction in all real key growth businesses. Further, we strengthened the overall financial position of the company and continued to enhance our profitability as evidenced by the improvements in our fourth quarter and full year 2020 adjusted EBITDA losses. With that, we will now open the call for questions. Operator?

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you 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. One moment, please, while we poll for questions.

Well, operator, I guess we're ready to wrap up here today. Yes, sir. I want to thank everybody for joining us today. I want to again thank Judd for his tenure at REAL and wish him nothing but the best in his next chapter. And I look forward to seeing you all again in three months' time, if not sooner, and hopefully in 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. Have a wonderful evening.