RealNetworks, Inc.

Greetings, and welcome to Real Networks, Inc. Second Quarter 2022 Earnings Call. At this time, all participants are on a listen-only mode. If anyone should require operator assistance during a 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, Brian Pranovo, Investor Relations for Real Networks. Thank you. You may begin.

Thank you, Doug, and welcome to Real Network's second 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 Network's future revenue, operating expenses, and adjusted EBITDA, as well as trends affecting its businesses and prospects for future growth, profitability, liquidity, and financial condition. Other forward-looking statements include include the company's plans to implement its strategy, investments, products, and initiatives, and restructuring efforts, the pending merger agreement as disclosed in the 8K we filed with the SEC on July 28, 2022, 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 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 reports on Form 10-K and Form 10-Q and in other reports. 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 expectations as of today, July 28, 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 today, 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, 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 2022. Christine will conclude with a more detailed review of the financial results. With that, I will hand the call over to Rob.

Thanks, Brian. Good afternoon, everyone, and thanks for joining us. Let me start with a recap of the announcement we made this morning. Then I'll summarize our Q2 business and financial results. Then finally, I'll discuss how we're organizing the company for success going forward. After I conclude, Christine Chambers will discuss our detailed financial results. First, this morning's announcement. Earlier today, we announced that Real Networks and I have entered into a definitive merger agreement whereby my affiliates and I will buy the outstanding shares of the company for 73 cents per share. The company shareholders will be asked to vote upon the adoption of the merger agreement and approval of the merger at a shareholders meeting called for such purpose on a date to be announced. The transaction is expected to close in the fourth quarter of 2022. In our announcement, I explained my thinking in the following way. Quote, I founded Real Networks 28 years ago because I believe that the Internet represented a once-in-a-generation transformational opportunity for digital media. I believe that machine learning-based artificial intelligence represents a similar transformational opportunity today, albeit one that will take time and resources to fully realize. I'm happy that the Real Networks Board and I could reach alignment and agreement on a path to pursue this transformation with focus, efficiency, and speed by turning Real back into a private company and in a way that is fair to all shareholders. Because we're going through a highly structured process, we're limited as to what we can say publicly. Accordingly, we will not be taking questions upon the conclusion of today's call. Next topic is our quarterly results. Revenue in the second quarter was $11.9 million, down from $14.6 million in the second quarter of 2021. Earnings per diluted share was a loss of 11 cents compared to a loss of 3 cents per diluted share in the prior year period. In the second quarter of 2022, adjusted EBITDA was a loss of $4.2 million compared to an adjusted EBITDA loss of $4.3 million in the prior year period. Our results reflect steady progress with Contact, expected results in games, and significant softness with Safer. Regarding Contacts, we're seeing steady progress in adding additional customers and products. In June, we began a pilot program with Vodafone Germany, a company that are testing Vodafone Call Protect, which is based on our Contacts for Voice product. This program will warn Vodafone Germany customers of potential fraudulent scam or spam-type calls. Regarding Safer, we had a disappointing second quarter and overall first half of 2022. We have a clear plan to address Safer's issues, centered on our launch in May of Safer Scan and the hiring of Paul DePeso, who has just joined us as president of Safer. Paul brings a wealth of experience in the physical security space and is a proven leader with a track record of building and growing significant businesses in the access control industry. He was most recently executive vice president and general manager of Phoenix and access controls a service software solutions company, that he co-ran from his founding and was recently acquired by Acre. We believe Paul is the right leader to build a large and successful business based on our excellent Safer platform and the exciting Safer Scan product. In addition to Paul joining us, we've also announced a change in our CFO position. Brian McClain joined us in July, and we officially begin as interim CFO and treasurer on August 1st. Brian most recently served as president and CFO of Pelco Inc., a leading computer security company where we manage customer care, supply chain, purchasing, engineering, development, finance, human resources, IT, and sales. Brian has over 25 years of experience in various finance and leadership roles. Brian has a great skill set and relevant experiences that will help us transition from pure software to a combination of software and ad software-based hardware products. With the addition of Paul Bryan, as well as Mike McCooley, who joined us in April in heads messaging, and Simonetta Louie, who joined us last October and runs GameHouse, We now have a strong set of leaders for our growth businesses. REAL has now transitioned to a decentralized structure with presidents for each of our growth initiatives who report directly to me. We've also consolidated all of our foundation businesses under a longtime REAL executive, Frederick Savoy. We believe this structure will help us focus better and move faster to achieve success. Before moving the call on to Christine, I want to take a moment to thank both Mike Ensign and Christine Chambers for their hard work and dedication to REAL Networks. They helped lead real through and during the heart of the pandemic and have helped set us up for our next chapter. I wish each of them the best in their future endeavors. And with that, I'll turn the phone over to Christine to review the second quarter financial results in detail. Christine?

Thank you, Rob, 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. Total revenue for the second quarter was 11.9 million compared to 14.6 million in the prior year period. Safer revenue decreased 65% due to decreases in commercial sales and federal sales. Context revenue increased 18% year over year, driven primarily by image hashing, a feature introduced in late 2021 and by increased revenue in China. Consumer media revenue in the second quarter 2022 increased 0.4 million year over year, driven primarily by our IP business and the large contract effectuated in the second quarter. Games revenue for the second quarter of 2022 was down $1.2 million compared to the second quarter of 2021. The decline in quarterly revenue was primarily driven by lower in-game purchases and a lower subscription count. Consolidated gross profit in the second quarter was $9.2 million compared to $11 million in the prior year. driven by lower revenue. As a percentage of revenue, gross margin was 77% of two percentage points compared to the second quarter last year. Total operating expenses in the second quarter were 14.1 million compared to 16.7 million in the prior year. The decrease was driven by cost reductions across the board. Net loss for the quarter attributable to real networks was 5.1 million or 11 cents per diluted share compared to a net loss of 1.3 million or 3 cents per diluted share in the prior year period. Second quarter 2022 adjusted EBITDA was a loss of 4.2 million compared to adjusted EBITDA loss of 4.3 million in the prior year period. Now turning to our second quarter 2022 segment results in more detail. Mobile services segment contribution margin was a loss of 2.9 million compared to a loss of 1.4 million in the prior year period. The year-over-year change was driven primarily by decreased revenue in our legacy businesses and lower revenue in our safer business. Consumer median segment contribution margin was a gain of $700 million compared to a loss of $0.8 million in the prior year period. The improvement was primarily due to a 21% increase in revenue and a 40% reduction in operating expenses. GAINS segment contribution margin was a loss of $0.2 million, essentially flat when we compared to the prior year period. Revenue declines were offset by lower costs. Turning to our balance sheet, at June 30, 2022, we had $14.4 million in unrestricted cash and cash equivalents compared to $27.1 million December 31, 2021. We had 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 businesses, we're investing in safer scan and optimizing our geographic footprint. I'll now turn back to Rob for some closing remarks.

Thank you, Christine. I appreciate all the hard work you've put into Rural Networks. And again, I wish you the best in your future endeavors. As I mentioned earlier, we will not be conducting a Q&A session on today's call, given the pending merger. Any shareholder comments regarding the merger should be addressed to REAL's Board's Independent Special Committee. Thanks, and good afternoon.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.