RealNetworks, Inc.

Welcome to Real Networks, Inc., third quarter 2022 earnings call. At this time, all participants will be in a listen-only mode. I will now turn the call over to your host, Brian Pranovo, Investor Relations. Mr. Pranovo, you may begin.

Thank you, and welcome to Real Networks' third 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 the company's plans to implement its strategy, invest in its products and initiatives, and restructuring efforts. The pending merger agreement has disclosed in the 8K we filed with the SEC on July 28, 2022, and our definitive proxy statement statement filed on November 7, 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. 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, November 8, 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 8-K. 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, Brian McLean, interim CFO. Rob will discuss the company's strategy and the progress the company made during the third quarter of 2022. Brian 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 today. Given where we are in our take private process, my comments will be relatively brief and high level. After I conclude, Brian McClain will discuss our detailed financial results. First, our quarterly results. Our revenue in the third quarter was $11.7 million, down from $14.3 million in the third quarter of 2021, and essentially flat with the second quarter of 2022. Our earnings per diluted share was a loss of $0.14, compared with a loss of $0.16 per diluted share in the prior period. In the third quarter of 2022 adjusted EBITDA was a loss of negative $5.8 million compared to an adjusted loss of negative $2.7 million in the prior year period. The third quarter 2022 results were significantly impacted by legal and other costs of approximately $2.2 million associated with the initiative to potentially take real private. Brian will provide more detail in a few minutes. SAFER had a positive quarter led by a closing of a large commercial deal for SAFER software and the first two revenues from our new SaferScan hardware product. Early feedback on SaferScan from partners and potential customers has been encouraging. That said, we're very early in the product rollout, so there's a lot of work to do to scale up the business. Also, the transition within Safer from a pure software to a software plus hardware focus will change the economics of our Safer business due to lower gross margins. Let me now provide an update on our potential go-private process. The SEC has completed its review of our proxy statement And we've just filed a definitive proxy statement with the SEC. Our next steps are to communicate with our shareholders and prepare for our shareholder meeting, which is scheduled for December 14th, 2022. And with that, I'll turn the call over to Brian to review the third quarter financial results. Brian.

Thanks, Rob. 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. Total revenue for the third quarter was $11.7 million compared to $14.3 million in the prior year period. Safer revenue increased 67% due to commercial and safer scan sales. Context revenue increased 14% 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 third quarter 2022 decreased $1.3 million year-over-year, driven primarily due to timing of contract renewals and shipments to existing customers. Mobile services revenue was $5.2 million, a decrease of $0.5 million compared to the third quarter of 2021, driven primarily by lower ICM and lower RBT subscriptions, partially offset by higher sales of Safer. Games revenue for the third quarter of 2022 was down 0.7 million compared to the third quarter of 2021. The decline in quarterly revenue was primarily driven by a decrease in subscribers and lower in-game purchases. Consolidated gross profit in the third quarter was 8.9 million compared to 11.2 million in the prior year, driven by lower revenue. As a percentage of revenue, gross margin was 76%, down two percentage points compared to the third quarter of last year. Total operating expenses in the third quarter were $15.7 million compared to $17.7 million in the prior year. This decrease was due to lower salaries and other people-related costs, lower restructuring, and lower marketing costs, offset in part by $2.2 million in higher professional service fees associated with the company's engagement of legal and financial advisors who assisted the special committee of our board of directors in evaluating Mr. Glazer's acquisition proposal and pending merger and subsequent legal work associated with drafting the proxy and reviewing it with the FCC. Net loss for the quarter Attributable to real networks was negative $6.7 million, or negative 14 cents per diluted share, compared to a net loss of $7.7 million, or 0.16 cents per diluted share in the prior year period. Third quarter 2022 adjusted EBITDA was a loss of negative 5.8 million, compared to adjusted EBITDA loss of negative 2.7 million in the prior year period. Now turning to our third quarter 2022 segment results in more detail. Consumer media segment contribution margin was a loss of negative $0.3 million compared to a gain of $0.9 million in the prior year period. The decrease was primarily due to the decrease in revenue. Mobile services segment contribution margin was a loss of negative $1.8 million compared to a loss of negative $1.3 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 ICM business, partially offset by revenue growth in Safer and Safer Scan. Gain segment contribution margin was a gain of $0.1 million compared to a loss of negative $0.4 million in the prior year period. The impact of lower revenue was more than offset by larger reduction in expenses related to headcount and marketing. Turning to our balance sheet, at September 30, 2022, we had $9.2 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. We continue to judiciously manage our resources as we move through the process of a merger shareholder vote and potentially going private. Given the upcoming shareholder vote on the merger, we will not be providing forward-looking guidance. I'll now turn the call back to Rob for some closing remarks.

Thanks, Brian. Consistent with last quarter, we will not be conducting a Q&A session on today's call given the potential to take private transaction. Any questions should continue to be addressed to the special committee that is independent in working with shareholders to address any concerns or questions. And with that, I thank you all for joining us today. Take care.

This concludes today's conference. Thank you for attending.