RealNetworks, Inc.

Good day and welcome to the Real Networks, Inc. First Quarter 2022 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Brian Pernalbo, Investor Relations. Please go ahead, sir.

Thank you, Cody, and welcome to Real Networks' First Quarter 2022 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 and 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-looking statements. Statements that express our belief and expectations in 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 reports on Form 10-K and 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, May 4, 2022. The company undertakes no duty to update or revise any forward-looking statements made during this call, whether as a result of new information, future events, or any other reason. In addition, we will present certain financial measures on this call that will be considered non-GAAP, under the SEC's Regulation G. For reconciliations of each non-GAAP financial measure to the most directly comparable GAAP financial measure, please refer to the information included in our press release and in our Form 8K dated and submitted to the SEC, both of which can be found on our corporate website at investor.realnetworks.com under the Financials tab. With us today are Rob Glazer, Chairman and CEO, Mike Ensign, President and COO, and Christine Chambers, Senior Vice President, Chief Financial Officer, and Treasurer. Rob will discuss the company's strategy and the progress the company made during the first quarter of 2022. Mike will then provide a more detailed update on Rio's AI businesses, and Christine will conclude with a more detailed review of the financial results. After today's prepared remarks, we will open the call to questions. Rob, I'll turn the call over to you.

Thanks, Brian. Good afternoon, everyone, and thanks for joining us. My remarks today will focus on our three main growth initiatives and the steps we've taken to set each of them up for success and long-term profit. After I conclude, Mike Ensign will discuss our context and safer initiatives in more detail. Then after Mike, Christine Chambers will discuss our detailed financial results. Let me first start with a high-level overview of our quarterly results. Our total revenue in the quarter was $13.3 million, down from $15.9 million in the first quarter of 2021, and essentially from flat compared with Q4 of 2021. Our earnings per diluted share was a loss of 11 cents compared to a loss of 27 cents per diluted share in the prior period. First quarter adjusted EBITDA was a loss of $3.8 million compared to an adjusted EBITDA loss of $3 million in the prior year period. We continue to have a solid balance sheet with $22 million of cash available to us and no debt. Next, I want to talk about our AI-based growth initiative, Safer in Context. In the first quarter, revenue in the Safer business increased by 22% compared to the first quarter of 2021. Revenue from the context business increased by 10% compared to last year's first quarter. On a sequential basis, revenue was down 8% for Safer and down 6% for Context. In both cases, we see the need to turbocharge our growth and are taking significant steps to make that happen. The main way we're moving to turbocharge Safer is to sharpen our focus on delivering complete Safer-based products rather than purely relying on licensing the Safer software. The main initiative that embodies this change is Safer Scan, which is the first built-from-scratch combination hardware software product in real history. We announced SaferScan in March at ISC West, which is the U.S. securities industry's biggest trade show. SaferScan is a touchless biometric access control door station targeted at commercial markets. While SaferScan isn't the first door station to use computer vision and facial recognition technology, we think it's the first such product that can bring FR into the mainstream. This is because SaferScan is fast and highly accurate and delivers excellent results at less than half the price of previous products. Our secret sauce that enables us to do this is our Safer technology itself. Because it is fast and compact, Safer can run well on much lower cost hardware than competing FR algorithms. Building SaferScan as a complete hardware software product enables us to deliver a highly differentiated product that we think has excellent prospects. SaferScan begins shipping at the end of May. The initial reception from the industry has been very encouraging. We're in the process of building out the sales channels and partnerships necessary to create successful customer deployments. With SaferScan about to launch, we will be refocusing a lot of our Safer team towards SaferScan and concurrently narrowing our commercial licensing initiatives. We will continue to license the Safer software platform to commercial and federal customers, but we'll focus on that work on the biggest and most leveraged opportunities. Mike Ensign will share additional details on our Safer plan in a few minutes. Let me now turn to our messaging business. Now that we think we have a mature core product, our main focus is to scale up our sales and marketing effort with context. Last month, we announced the appointment of Mike Cooley to the newly created position of President for Context, Messaging, and Telecom. Mike has over 20 years of experience leading and delivering business growth in the mobile market, and I'm confident that he's the right leader to drive a significant scale-up of Context in our messaging business. Mike Ensign will provide additional information and perspective on Context and messaging in a few minutes. In the games business, as you know, about six months ago, we brought in our new leader, Shumanet Toluli. Because the changes that Shumanet is making involve retooling our current games portfolio, the changes will take time to drive significant commercial results. That said, Simonette is off to an excellent start, and I'm highly confident that she's setting up games for significant growth in 2023 and beyond. In sum, we're squarely in the sausage-making phase of these growth initiatives. Our current and short-term financial results reflect this reality. As we go through these transitions, we will manage our resources carefully and wisely and make clear and sometimes hard trade-offs when we need to. While I'm disappointed that this transition will be bumpier than we'd expected, I remain very optimistic about Real's long-term prospects. And with that, let me pass the mic to Mike.

Thanks, Rob. I'd like to start today's discussion with Context and the appointment of Mike Cooley as president of Context Telecom and Messaging. We are tremendously excited to have Mike on board. Mike spent most of his career at Sprint Nextel, where he has held executive roles leading the digital and new ventures group. He led business development at NuStar and co-founded and led digital and ad tech startups, including Sundial.com and Pinsight Media. Mike brings us great business, sales, and strategy acumen and will be focused on scaling up our business and sales efforts for Context, leveraging the great product suite we have built. Today, Context enables global mobile operators to secure and maximize their messaging capabilities through edge interoperability, AI machine learning, and value-added messaging services. Context is our patented NLP platform, which categorizes and blocks over 20 million fraudulent text messages, images, and voice calls per day. We help carriers build customer loyalty, enhance the customer experience, and drive new revenue through text and voice message classification and anti-spam activity. As I discussed on our last earnings call, our focus remains on the needs of U.S. and international carriers while broadening our efforts to include UCAS, Unified Communications as Service, and CNAM, Caller Name providers. Interest among these types of customers is building, and in fact, it was recently announced that Cloudly Communications, a leading UCAS provider of voice, data, and messaging solutions, launched its new call screener feature powered by Contacts. Context features a unique voice fingerprinting solution that combines audio spectrum analysis and speech patterns with natural language processing to help determine the intent of the caller. It is our goal to bridge the experience we have in anti-spam and anti-fraud machine learning with proactive management of voice and text messages. Now, turning to SAFER. During last quarter's call, we discussed our plan to increase our focus on access control and authentication use cases and that we would be launching a suite of products in the access control space. The announcement of SaferScan is the first step on delivering on that strategy. We believe there is a large and growing market and demonstrated customer need for touchless biometric access control products. This space provides for a great application of real spatial recognition algorithm. Our software is differentiated by being fast, accurate, and super compact, making it especially valuable for customers seeking to embed face recognition, liveness and spoofing detection, and person-centric analytics directly in devices operating at the edge. We believe Safer Scan solves several security problems while being an affordable option for businesses. Currently, badges or key cards are the dominant form of office place security, but do not represent real security. Contrary to badges and key cards, facial recognition can eliminate tailgating, monitor occupancy, is touchless, and can provide a thorough audit trail of usage, all while being an affordable option. We estimate that key cards represent about 76% and fingerprint technology is about 13% of the approximate $1.7 billion physical access control reader market. At an approximate price point of $1,200 and with comparable products in the market today selling for anywhere between $25,000 and $5,000, SaferScan is an attractive and viable alternative to key cards and fingerprint, providing access to a significant customer base. As initial points of validation, we received substantial favorable feedback at our product launch at ISC West. Based on this feedback from PACs, systems integrators, and end customers, we believe there is a strong product market fit for SaferScan. In addition, SaferScan was recently awarded the Platinum 2022 Security Today Govies Governance Security Award in the Biometrics Access Control Division. This award for SaferScan reinforces our confidence in the product. From a strategic perspective, we believe that Safer Scan, being a complete product versus a software technology, provides a path to a scalable, repeatable business for Safer. We are increasing our focus on Safer Scan and access control and will be shifting resources away from the safety and security space with the exception of key markets and the federal space. We are optimistic about this pivot's potential and believe it will lead to substantial growth for Safer. With that, I will now turn the call over to Christine to discuss our financial results in greater detail. Christine.

Thanks, Mike, and good afternoon, everyone. In my remarks today, I will first review our consolidated first quarter results, followed by a more detailed discussion of our segment business performance. Total revenue for the first quarter was $13.3 million compared to $15.9 million in the prior year period. Safer revenue increased 22%, primarily due to safer sales, and context revenue increased 10% year-over-year, driven primarily by image hashing, a feature we introduced in late 2021. Consumer media revenue in the first quarter of 2022 decreased 1.2 million year-over-year, driven primarily by our IP business. Gains revenue for the first quarter of 2022 was down approximately 1.1 million compared to the prior year, but essentially flat compared to the fourth quarter of 2021. The decline in year-over-year revenue was primarily driven by in-game purchases. Consolidated gross profit in the first quarter was $10.5 million compared to $12.2 million the prior year, driven by lower revenue. As a percentage of revenue, gross margin was 79%, up two percentage points compared to the first quarter last year. Total operating expenses in the first quarter were $15.5 million compared to $18.4 million in the prior year. The decrease was primarily attributable to $3.2 million of restructuring charges taken in the first quarter of 2021 compared to $300K in Q1 2022. Net loss for the quarter attributable to real networks was 5.2 million or 11 cents per diluted share compared to a net loss of 10.4 million or 27 cents per diluted share in the prior year period. First quarter 2022 adjusted EBITDA was a loss of 3.8 million compared to adjusted EBITDA loss of 3 million in the prior year period. Sequentially adjusted EBIT loss was essentially flat. Now turning to our first quarter, 2022, segment results in more detail. Mobile services segment contribution margin was a loss of 2 million compared to a loss of 1.6 million in the prior year. The year-over-year change was driven primarily by decreased revenue in our legacy businesses. Consumer media segment contribution margin was a gain of 300,000 compared to approximately 600,000 in the prior year period. The decrease was primarily due to lower revenues and offset by expenses related to SENA that we no longer consolidate in our results. Games segment contribution margin was a gain of $300,000 compared to a loss of $100,000 in the prior year period. Revenue declines were offset by lower costs. Turning to our balance sheet. At March 31, 2022, we had $21.8 million in unrestricted cash and cash equivalents. compared to $27.1 million in December 31, 2021. We had no debt and no borrowings outstanding on our revolving credit facility. As mentioned, we continue to focus our resources on our AI-based growth initiatives and carefully manage our expenses. Within our Safer business, we're intentionally investing in Safer Scan and optimizing our geographic footprint. Now turning to our outlook. For the second quarter ending June 30, 2022, we currently expect total revenue to be in the range of $11 million to $12.5 million and adjusted EBITDA loss to be in the range of $6 million to $4.5 million. Because we expect slower revenue growth and safer in 2022 than we previously expected, we now anticipate achieving single-digit revenue growth in 2022, excluding the games business. With that, we'll now open the call for questions. Operative?

Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again, that is star 1 if you would like to ask a question. And we'll pause for just a moment to allow everyone an opportunity to signal. We'll take our first question from Jacob Steppen through Lake Street Capital Markets. Please go ahead.

Hey, thanks for taking my questions. Solid quarter. Just wanted to dig in more on the safer revenue growth. What are the primary headwinds that you're seeing in that segment?

So the primary headwind we're seeing actually is within the safety and security space. and just a large amount of projects getting delayed into further quarters. And it's something that we have seen, and that's part of the decision to focus more on safer scan and access control.

Okay. Maybe just looking at gross margin next quarter, It was up nicely this quarter, year over year, but given that the revenue outlook is slightly decreased from where we had our numbers, what do you think about margins moving forward?

Hi, this is Christine. We don't guide to gross margins specifically. We did see an improvement, as you heard from my remarks, year over year. And yes, like I said, we don't guide specifically to gross margin for the quarter, but I have given EBITDA our expectations for Q2. Okay.

Maybe just last one. Looking to get a little bit more information on the NTT DOCOMO deal, you know, has that been ramping or where is that?

Yeah, no, that's a great question. So, very significant amount of activity with projects and deployments across a very wide set of use cases. Those use cases include access control, physical security, actually workforce management as well, and then also customer analytics. So we're actually very, very pleased with the progress that we're making with Dilkama.

Okay, great. Thanks for taking my questions.

Thank you. Let's see, let's start one if you'd like to ask a question. And that does conclude today's question and answer session. I'd like to turn the conference back over to management for any additional or closing remarks.

Thanks. This is Rob. I want to thank everyone for joining us this afternoon. I look forward to following up with those of you that would like to do so in the days ahead. And until then, take care. I hope everyone stays well and healthy, and we will look forward to talking to you soon. Thank you, Operator.

Thank you. And that does conclude today's conference. We do thank you all for your participation. You may now disconnect.