RealNetworks Management Discusses Q4 2013 Results - Earnings Call Transcript

Feb. 5.14 | About: RealNetworks, Inc. (RNWK)

RealNetworks (NASDAQ:RNWK)

Q4 2013 Earnings Call

February 05, 2014 5:00 pm ET

Executives

Drew Markham

Robert Glaser - Founder, Chairman and Interim Chief Executive Officer

Tim M. Wan - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Treasurer

Operator

Welcome, and thank you for standing by. [Operator Instructions] Today's conference call is being recorded. If you have any objections, you may disconnect at this time. And now, I will turn the meeting over to Ms. Drew Markham. Thank you. You may begin.

Drew Markham

Thank you, Jenny, and welcome to the RealNetworks Fourth Quarter and Full Year 2013 Conference Call. Before we begin, I remind you that some matters discussed today are forward-looking, including statements regarding RealNetworks' future revenue, adjusted EBITDA and operating expenses, and trends affecting its businesses and prospects for future growth and profitability. Other forward-looking statements include the company's plans to implement its strategy and invest in its products, as well as the value creation, market reaction and other benefits from those activities.

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. A copy of those filings can be obtained from the SEC or from the Investor Relations section of our corporate website. These forward-looking statements reflect RealNetworks' expectations as of February 5, 2014. 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.

We will present certain financial measures on this call that will be considered non-GAAP under the SEC's Regulation G. For a reconciliation 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 tab Financial Information.

Here with me today are Rob Glaser, Chairman and interim CEO; and Tim Wan, Chief Financial Officer. Rob will discuss company strategy and the progress the company has made in recent months, and then Tim will provide the financial review of the fourth quarter and full year and the outlook for the first quarter of 2014. After their prepared remarks, they will be pleased to answer questions.

Now I'll turn the call over to Rob.

Robert Glaser

Thanks, Drew. Good afternoon, everyone, and thanks for joining us. Before I start, I wanted to mention that today is an historic day in Seattle, as hundreds of thousands of people are gathering just a few blocks from our office to celebrate the Super Bowl champion, Seattle Seahawks. If you hear noise in the background, that's why.

We at Real are very proud of our hometown heroes. In fact, we're giving everyone who uses RealPlayer Cloud to post celebration videos 12 gigabytes of free storage. This is to honor The 12th Man, which is what Seahawk fans are known as.

Now on to business. I'm going to review the progress we've made in the fourth quarter and throughout the year 2013 on the execution of our transition strategy to put RealNetworks on a path to sustainable growth and profitability.

The transition strategy has involved us overhauling our business strategies and product lines to be more mobile and cloud-centric, and to span all the important devices that consumers use in their digital lives. At the beginning of last year, we said that we intended to ship a major new product in each of our 3 product divisions in 2013. I'm pleased to report today that we did exactly this.

While it's still early, I'm pleased to say that we made excellent progress in leveraging these new products to set up our company for success, especially in our RealPlayer and Mobile Entertainment businesses.

First, our RealPlayer business. Our new RealPlayer Cloud product, which we launched in the third quarter, represents a dramatic step forward. RealPlayer Cloud builds on our 15-plus years of experience in Internet digital video to deliver a truly compelling and unique new service. Using our advanced SurePlay technology, RealPlayer Cloud enables consumers to take videos from a very wide range of devices -- PC, Mac, iPhone, iPad, Android phone, Android tablet or Kindle, and play that video on just about any platform, including Windows, iOS, Android, Chromecast and Roku, as well as saving that video permanently and share it with friends on any device anywhere in the world.

Our business model for RealPlayer Cloud is a freemium model. Everyone gets 2 gigabytes of free storage, about an hour of high-def video, or up to 4 hours of standard def. We then charge for additional storage. This business model has proven to be very successful with scale for document and filing companies such as box.net (sic) [box.com] and Dropbox.

While it's still very early, we were pleased by the initial traction of RealPlayer Cloud, including broad media coverage, positive reviews, solid uptake and positive ratings in the app stores. At the end of the fourth quarter, we have over 500,000 users who have both downloaded RealPlayer Cloud app and set up accounts. They were actively using and enjoying the product, uploading hundreds of terabytes of content.

One of the early success of the RealPlayer Cloud has been its launch for Google's Chromecast TV player. Chromecast allows consumers to use their phones to stream video to their TV, either directly from the phone or over the Internet. RealPlayer Cloud was one of the first dozen apps to support Chromecast, and we're already seeing significant benefits from our being an early adopter of a popular new platform. Indeed, on most days now, consumers download more RealPlayer Cloud clients for mobile than they do for PCs, meaning that we're succeeding in our goal of making RealPlayer Cloud a mobile-centric experience.

To date, we've only released RealPlayer Cloud in the U.S. and Canada, and have not yet reached out to market through our large installed base. We're now preparing to market RealPlayer Cloud to our base of 25 million monthly active RealPlayer users and plan to roll out marketing campaigns in the coming months around the world.

While we've got a lot of work to do to fully capitalize in the enormous market opportunity, we're very encouraged by the initial customer and market reaction to RealPlayer Cloud. While we expect competition in the years to come, we built a market-leading product and expect to continue to invest in RealPlayer Cloud.

Now on to our Mobile Entertainment business. During the fourth quarter, we introduced LISTEN, a new ringback tone experience for smartphone users and began to market it to customers in Europe. Ringback tones, called RBTs for short, are the songs and messages that play when someone calls you. LISTEN makes setting up and managing RBTs easier, more flexible, more fun and more useful. We've already rolled out LISTEN in partnership with top tier carriers in the U.K. LISTEN leverages our large installed base of RBT users, over 18 million subscribers in partnership with 20 mobile carriers. It also builds on our third quarter acquisition of Muzicall, a U.K.-based company that has pioneered a hybrid model in Europe that combines partnership with carriers with direct-to-consumer marketing of ringback tones. The combination of Muzicall and LISTEN continues to build on our pioneering leadership in ringback tones.

Going forward, we plan to continue to partner with top-tier carriers in the U.S. and worldwide to increase our B2B footprint. This will provide us with the foundation to distribute our current and future call pad products via direct consumer model, which we call carrier-enabled, over-the-top services, and which we believe has enormous potential.

Now on to our Games business. In that business, we've tightened our strategic focus to better capitalize on the most promising opportunities. As gameplay continues to move from PC to mobile, we're doubling down our efforts to attract and monetize mobile customers. At the center of our casino game strategy is Slingo, which we acquired in Q2 of 2013. Slingo is one of the most recognized brands in the social casino market and it's a highly differentiated product compared to standard casino games. Slingo gives us proprietary gameplay, brand recognition, millions of Facebook and mobile users and presence in real-world casino and lottery settings. Our team continues to create even more compelling new versions of Slingo for Facebook, iPhone, iPad and Android.

Slingo not only generates revenue, but is an excellent platform for cross-promotion of other games, particularly GameHouse Casino Plus with the Golden Dreams Sweepstakes, which we launched this past August. We're preparing to roll out the next generation of Slingo in the months ahead, and then leverage Slingo to help drive Casino Plus. In turn, we believe GameHouse Casino Plus can play an important role in our continued integration of the Slingo brand and cross-promotion between our games.

Moving into 2014 now. We expect that our new products initiatives will enable us to return RealNetworks to year-over-year revenue growth in the second half of 2014 and lay the foundation for long-term growth and profitability. Our new products, especially RealPlayer Cloud, has entered the market with great promise by delivering exceptional value and meeting important yet previously unmet needs. While the investment required to get these products to scale is exceeding what we originally anticipated, we have the necessary human and financial resources to successfully complete our strategic transition and growth strategy. We believe that the long-term growth opportunities are even bigger than we originally thought, and that the return on investment on these investments should be very favorable.

Because it was a transition year, 2013 was also a challenging year for us. I want to take this opportunity to thank our customers and partners and our dedicated employees for their hard work and significant accomplishments in 2013. While we have much hard work ahead of us, I'm confident that we're on a path to revitalize RealNetworks and we're very excited about our potential.

And now, I'll turn the call over to Tim to review our financials.

Tim M. Wan

Thanks, Rob. Today we released financial results for the fourth quarter and year-end 2013. For the fourth quarter of 2013, total revenue was $50.6 million, compared to $49 million in the previous quarter and $67.3 million in the fourth quarter of 2012. For the full year 2013, total revenue was $206.2 million compared to $258.8 million for 2012.

As Rob said, we've continued to execute on our strategic transition to streamline our company, invest in our 3 main business segments and focus on building a stronger foundation for future growth and profitability.

As we continue to rebuild our businesses, we've done a good job of maintaining our strong gross margins and continue to look for opportunities to reduce our operating expenses, even as we invest in new products in each of our business segments.

Overall, our gross margins in the fourth quarter were 60%, which is in line with our expectations for the company going forward. Adjusting for recent acquisitions, onetime litigation settlement, stock compensation and restructuring charges, our total operating expenses decreased 10% year-over-year as a result of our ongoing expense alignment efforts.

Our bottom line results reflect our ongoing strategic transition and major investment in restructuring our businesses. Our total adjusted EBITDA for the fourth quarter of 2013 was a loss of $6.6 million, compared to an adjusted EBITDA of $3.3 million for the fourth quarter 2012. For the full year 2013, our total adjusted EBITDA was a loss of $23.7 million, compared to a loss of $16.7 million for 2012. The increase in EBITDA loss for the quarter and the year reflected decreased revenue and increased expenses associated with new product launches, partially offset by continued efforts in reducing cost, both in COGS and in our OpEx.

Now let's look at our quarterly results by business unit, starting with the RealPlayer Group. For the fourth quarter, RealPlayer revenue declined 5% sequentially and 35% year-over-year to $16.8 million. The decline in our traditional RealPlayer products was expected, as we focused on rolling out our new RealPlayer Cloud. As Rob mentioned, the business model is freemium up to a certain level of storage capacity, and then has a tier subscription fee. We expect RealPlayer Cloud upsell rates to increase over time, and for this groundbreaking product to be a major driver of our future revenue. Adjusted EBITDA for the RealPlayer Group was a loss of $1.5 million for the fourth quarter and a gain of $1 million for the year.

Our Mobile Entertainment revenue rose 11% sequentially to $22.1 million in the fourth quarter, but fell 14% year-over-year. The sequential increase reflects the seasonal growth in our Asia carrier business. We expect our newly acquired Muzicall and LISTEN products to be important drivers of our future Mobile Entertainment revenue. Adjusted EBITDA for the Mobile Entertainment business was a gain of $1.3 million for the fourth quarter and $5.8 million for the year.

Games revenue for the fourth quarter increased 2% sequentially and declined 26% year-over-year to $11.7 million. The year-over-year decline reflects the ongoing industry-wide transition from traditional PC games to social and mobile games, resulting in lower subscriptions and unit sales. As Rob discussed, we continue to significantly resize and refocus this business unit and expect our new Slingo and GameHouse Casino products to be central to our future Games business. And the adjusted EBITDA for the Games business was a loss of $2.7 million for the fourth quarter and $7.9 million for the year.

We continue to maintain a strong cash position despite the $23 million related to acquisitions, $11.5 million related to litigation settlements, restructuring and relocation of our headquarter and other capital investments. At the end of the year, we had $226.2 million in unrestricted cash, cash equivalents and short-term investments. The sequential increase in our cash position was primarily a result of the proceeds from the sale of our stake in LoEn, which we sold for $29.2 million, partially offset by our litigation settlements from Q3. In addition, our balance sheet is also strengthened by the continued ownership of approximately 45% of Rhapsody, a global leader in online music subscription services.

Looking forward, we expect total revenue of $43 million to $46 million in the first quarter of 2014, with all 3 segments declining sequentially. We continue to focus on being disciplined with our operating expenses, even as we continue making significant investments to support our new products. Taking all these factors into consideration, we expect our total adjusted EBITDA for the first quarter to be a loss of $9 million to $12 million.

In closing, we've made solid progress on executing our plan to revitalize RealNetworks by streamlining our company, making strategic acquisition to reposition and re-energize our business units and introducing 3 new major growth initiatives in the second half of 2013. Our cash position remains very strong. As our new products take hold of the market, we expect to start seeing year-over-year growth in the second half of 2014.

Now Rob and I would be happy to answer some questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions].

Tim M. Wan

Operator, if there are no questions, I want to thank everyone for the call, and Rob and I look forward to talking to some of you over the next couple of weeks. Thank you very much.

Robert Glaser

Thanks, everyone.

Operator

That concludes today's conference call. Thank you for participating. You may now disconnect at this time.

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