RealNetworks, Inc. (NASDAQ:RNWK) Q4 2015 Earnings Conference Call February 9, 2016 5:00 PM ET
Drew Markham - Vice President and Deputy General Counsel
Robert Glaser - Chairman of the Board and Chief Executive Officer
Marjorie Thomas - Chief Financial Officer
Michael Schechter - Mentor Partners
William Meyers - Miller Asset Management
Austin Hopper - AWH Capital
Welcome to the RealNetworks’ Fourth Quarter 2015 Earnings Call. At this time, all participants are in a listen-only until the question-and-answer session of today's conference. [Operator Instructions] This call is being recorded. If you have any objections you may disconnect at this time.
Now I'd like to introduce the first speaker, Ms. Drew Markham. Please begin.
Thank you, May, and welcome to the RealNetworks’ fourth quarter 2015 conference call.
Before we begin, I’ll remind you that some matters 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 and initiatives, as well as the expected growth, profitability and other benefits from those activities.
All other statements that are other than historical fact 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 website. These forward-looking statements reflect RealNetworks’ expectations as of today, February 9, 2016. 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.
With me today are Rob Glaser, Chairman and CEO; and Marjorie Thomas, our Chief Financial Officer. Rob will discuss Company’s strategy and the progress the Company has made in recent months. Then Marj will provide a financial review of the fourth quarter of 2015 and the outlook for the first quarter of 2016. After their prepared remarks, they will be pleased to answer questions.
Now, I’ll turn the call over to Rob.
Thanks Drew. Good afternoon, everyone, and thanks for joining us today. I’ll review and discuss our results for the fourth quarter of 2015 and for the full year today. As I typically do in the first call after year-end, I plan to step back and look at what we achieved in 2015 and to look forward towards what we hope and expect to achieve in 2016.
2015 was a year of significant progress from RealNetworks in four important ways. First; revitalizing our product portfolio in each of our main businesses; second, opening up new distribution channels and partnerships for our products and services, particularly with mobile carriers; third, stabilizing our revenue; and fourth, cutting our cash burn.
Additionally, we saw significant progress at Rhapsody, which grew a subscriber base 45% in 2015 and we talk about each of these areas in turn. First, revitalize product lines. In 2015, we made a significant strategy in developing new products in each of our three major divisions. Our single biggest new product initiative was launch of RealTimes in mid-2015.
RealTimes enables consumers to easily turn their personal digital photos and videos into compelling storage. After six months in the market, we’re very pleased with the success the RealTimes is achieving in the mobile market, especially through partnerships with mobile carriers. Excluded RealTimes is meaning a significant need in the mobile market both for consumers and also for carries, who want to add value to the consumer cloud offerings.
At the same time, we’re seeing less uptick with the RealTimes PC app. PC consumers like RealTimes the most the migrated the content creating on a mobile devices and a general use to using their PCs less for photo creation and sharing. At the same time, consumers still value RealPlayer as a very popular [ph] harmonized media player that’s also now cloud enabled.
Accordingly, we’ve moved towards reemphasizing our strong RealPlayer brand on the PC and towards creating the RealTimes capability on the PC as an important feature but not the center of our PC RealPlayer.
We made progress on two other major technology products in 2015. First is the RealMedia HD next generation Video Codec which we introduced this past summer. RealMedia HD delivers substantial quality improvements over the current industry standard h.264 are requiring substantially less computing power than they purpose next generation standard h.265. RMHD allows our partners to meet the demands of consumers increasing mobile video consumption on wide range devices while using less device resource and battery life.
In the initial phase of launch, we focused RMHD on the Chinese market, who have very strong market position in media formats. We are just starting to look at other markets for RMHD.
Second, our LISTEN product, you will recall that last year, we decided to reposition LISTEN as a product distributed to our carrier partners. We’re now getting good traction with that initiative. LISTEN is now part of our portfolio of call control products and applications for smart phones, there are being rolled out by Tier 1 carriers around the globe.
Our final set of new product initiatives are in our game house, Casual Games business, which launched two new additions of our main game franchise in 2015, Delicious. These additions are up to the fastest starts of any title in the history of the franchise. They are fully transitioned to being mobile center with about three quarters of their coming from mobile. In short, our product portfolio is in a stronger shape it has been for many years.
Second, 2015 was a great year for establishing new and strengthen carrier mobile partnerships. As you know, we’ve been working hard to put together significant partnerships in the U.S., Asia, Europe and Latin America. In the fourth quarter, we announced the partnership for RealTimes product with Verizon, a leading mobile carrier in North America and KDDI one of Japan’s largest mobile carrier. These initiatives make RealTimes accessible to millions of customers dramatically increasing our reach and lowering our cost to customer acquisition.
We’ve strong pipeline of an additional carrier in other part of assignments around the globe and we expect to be sharing news about these partnerships throughout 2016.
Third, we make great progress in stabilizing our revenue and ending a multiyear cycle of revenue decline. This should lay the foundation for returning our networks to revenue growth in 2016.
It’s important to know that we’ve made progress in revenue stability, we are also implementing our fourth accomplishment of 2015 mainly dramatically cut our cash burn. We’ve achieved this to a combination of cost cutting and simplifying a number of aspects of the company, most notably selling our money loosing social casino business for $18 million and moving off of legacy, ecommerce and other systems to more efficient modern platforms. With these changes, we believe we set the company up to return to profitability which we also believe we can achieve in 2016.
Frankly, it’s taken longer to get to this point than I hope when I came back to Real three and a half years ago. I hope it would be a two to three year process rather than the three to four year process that turned out to be. The process also turned out to be more capital consumptive than I’d hoped.
Having said that, I feel confident that we work diligently and made the hard choice to set us up for promising future in each of our main businesses and for the company as a whole.
Finally, we continue to be pleased with the progress of Rhapsody, the online music service company which we earned a significant stake and support through our role on the Board of Directors, including my role as Co-Chairman. Rhapsody grows paid subscriber base by 45% in 2015 and continues to broaden its footprint. The streaming music service market is highly competitive and 2015 is for launch for both Apple Music and Google’s YouTube Red product.
Nevertheless, we continue to see significant opportunity as the entire music industry moves to make streaming the primary model for music consumption around the world.
In summary, while it’s taken longer than I’d hope when I returned to CEO three and a half years ago, we made a very good progress in 2015. I believe we move into 2016 well positioned to return to growth in all of our major business segments.
With that, let me turn the call over to Marj to read the financials. Marj?
Thanks Rob. Let’s go through the results for the fourth quarter of 2015. For the fourth quarter, out total revenue was $29.9 million. This compares with $29.8 million in the previous quarter and $22.7 million in the fourth quarter of 2014 excluding revenue from the social casino games business which was sold during the third quarter of 2015.
We’re pleased to see our revenue levels begin to stabilize. While revenue from some of our legacy products is still declining and you can expect quarter-to-quarter fluctuations, our efforts to rebalance resources, reduce cost and optimize our investments are paying off.
Out total adjusted EBITDA for the fourth quarter of 2015 was a loss of $4.2 million compared to a loss of $10.9 million for the fourth quarter of 2014 excluding the contributions of the social games business in 2014.
EBITDA was better than guidance primarily due to some performance based revenue in Mobile Entertainment and further expense reductions. As expected, our EBITDA benefited from a little over $3 million of non-cash releases of liabilities in the fourth quarter as well. We do not expect this non-cash event to recur in Q1.
As Rob noted, we rebalanced our resources to focus on our best and most leveraged opportunities, while making significant progress in cutting operating expenses. Excluding onetime adjustments, our OpEx improved from Q4 2014 to Q4 2015 by 37%. For the full year, we lowered our operating expenses by 24% excluding restructuring charges. Excluding social casino games business, we have lowered our operating expenses by 22% year-over-year.
Now let’s look at our quarterly results by business unit starting with the RealPlayer Group. For the fourth quarter RealPlayer Group revenue was $7.2 million, up 10% sequentially from the prior quarter. The sequential increase in revenue was primarily due to growth in RealTimes revenue associated with our recent carrier wins and a seasonal increase in the IP business.
Adjusted EBITDA for the RealPlayer Group in the fourth quarter was a loss of $5.8 million versus a loss of $8.2 million in the prior quarter. This quarter-over-quarter improvement is due to increased revenue and expense reductions. Our plan is to continue to win carrier deals, grow our base of subscribers and return to top line growth in this business.
We also have further cost reductions occurring in Q1 which were part of the announcement in November. Between growth and further reductions in costs, we believe this business is well positioned to return to profitability in 2016.
Our Mobile Entertainment revenue was $16 million, down 3% sequentially from the prior quarter due primarily to professional service seasonality. Despite the decrease of revenue, Mobile Entertainment booked adjusted EBITDA in the fourth quarter of $2.6 million, reflecting reductions in marketing, onetime research in development credit oversees and some performance based revenue on a project.
Our Casual Games revenue was $6.7 million, down 2% sequentially from the prior quarter, but up 12% from the second quarter excluding the social casino game’s business in the prior quarters.
Our latest Delicious release which came out in late Q4 is performing well. We are expecting to release more new titles in 2016 which we anticipate will drive growth, although there will quarter-to-quarter fluctuations due to timing of title releases. The adjusted EBITDA for our Casual Games business in the fourth quarter was a loss $25,000.
At the end of the fourth quarter, we had $99.1 million in unrestricted cash, equivalents and short-term investments. This is a decrease of $13.1 million from our position at the end of Q3. As I noted a few minutes ago, during the fourth quarter about $3 million of the quarter-over-quarter improvement in EBITDA was associated with non-cash releases of certain liabilities. We also had approximately $2 million of restricting related payments and a prepayment to a strategic vendor of approximately $2 million. Excluding those items, our cash burn would have been around $9 million.
As discussed earlier in the call, we are taking necessary steps to reduce our cash burn and costs, while still investing judiciously for growth. As Rob underscored, we’re streamlining our business and working to stabilize the company. Based on the notifications to employees in November, we expect that we will have reduced headcount by approximately 180 people by the end of Q1 2016 compared to the start of 2015.
The actions we’ve taken move the last couple of quarters are expected to reduce our total cost run rate by about $6 million per quarter by Q2. This takes into account the sale of the social casino games business, the rebalancing of resources in the RealPlayer Group to align with our new strategy and our continued investment in the Casual Games business.
Taking all these factors into consideration, we expect total revenue of $26 to $29 million in the first quarter of 2016 with an adjusted EBITDA loss in the range of $6 million to $9 million. Note that Q1 will not benefit from the approximately $3 million of non-cash adjustments that reduced our Q4 EBITDA loss.
We remain committed to reducing our cash and our EBITDA loss in the quarters ahead, while also making select investments designed to set us up for both sustainable growth and profit. While, we’ve not yet completed our strategic transition in return to growth and profitability, we make progress during 2015 on executing on our plan to revitalize RealNetwoks.
We’ve revitalized our product line, had significant wins with mobile carrier partnerships, simplified our business operations and reduced expenses in cash burn.
Now Rob and I would be pleased to answer your questions. Operator?
Thank you. We will not begin the question-and-answer session of today’s conference [Operator Instructions]. The first question comes from Mr. Michael Schechter of Mentor Partners. Your line is open.
I was wondering - just going over the three and half years and looking at where we stand today, we’ve got $99 million of cash on the books versus $282 million or a shrink of a little over $5 a share in cash, whereas the stock has dropped about $5.40 a share last three and a half years just give that we’re still not at a breakeven level and there is not forecast of that with hot topics in the books. I was wondering what kind of value maker that you apply to the business at this point?
Well, as I said the process of getting here has been more capital consumption than I hope to would be and then I thought would be. But I have the - I guess advantage in this conversation of knowing a fair amount about what’s in our pipeline from a both the product and a sales and customer opportunity standpoint. And I certainly and try to be balanced and knew these communications and what I thought I guess gone well and I think has gone less well. But when I came back, we had significant new products in the pipeline or under development. We had significant declines in all of our businesses.
And now as I look at our prospects of our business, I see that we have stabilized most of our businesses if not all of our businesses and we are starting to generate revenue growth. In my view, the way to make a business profitable on a sustainable basis is to first stabilize it and then just start to grow it. And then at some point, when you start to grow it, you get to where you get scale economics and the growth of that business generates or should generate in a well positioned business profit.
So we are in the phase now where we are - have line of sight to be very clear on stabilizing and growing each of our businesses and therefore the company as a whole. And then having done that we also have line of sight and I said I believe both these events will happen in ‘16 to grow the top line of a company and start to generate at an aggregate basis as well as on an individual basis EBITDA, positive EBITDA.
We are not staying today since we tend to do quarter-to-quarter form to use, what quarter in 2016 those two events will take place. But we do believe based on the pipeline we have of opportunities that both of those events will happen in 2016. If we had to do over again, there obviously certain things we would do differently, certain things that end up being less beneficial than we thought. But I would say relative to where we were certainly when we enter 2015, I feel much better about the likelihood of revenue growth and trends in our revenue growth and to deposit ever for the company.
If you look at things we’ve already accomplished, we cut the EBITDA loss dramatically Q3 to Q4, while essentially achieving flat revenue. So we’re not at a stage where we are cutting in a way that creates the kind of spiral you often see where you cut, you temporarily maintain profitability and then your business shrinks and you have to cut some more.
So I think we - the way we’ve done it as I said being more capital consumption than I thought would have been - certainly would have liked ended up taking longer than I would have liked and I see now the - be light of the end of the tunnel both in terms of company’s revenue growth and presumably little further out return to the company deposit of EBITDA.
Okay, but I you know over the last number of years, you’ve said that you know more about the product portfolio and the stuff you don’t want to disclose for competitive purposes. Yet, we are still not a positive run rate cash flow; we’re not at a positive run rate earnings wise, operating earnings wise. If you can walk me through and tell me what the valuations are if you don’t want to tell me the subscriber growth we’ve created or the subscribers where they are today versus where they were six months, a year ago, you know what are the values of the new products, what are the market values you know have we created more than $5.40 of value?
Well, the nature of these products are, they are not liquid assets like the publically traded stock. So it’s certainly not the case that we run a process, we say, hey, what would somebody pay for our stack in Rhapsody, what would somebody pay for the RealTimes products, what would somebody stay for a LISTEN or Copart product, what would somebody pay for our Casual Games business. Those are four assets or set of assets that have in transit value, I certainly believe that the share price doesn’t reflect those in transit value today. And as paint was it to take the long view that is the view that I take. So if I ever felt for anyone of those businesses, the exchange price of what we could get for those businesses by selling was worth more than they were worth, we would consider entering into one or more those transactions.
We did one of transactions in 2015 as you know, while we sold our social casino business for $18 million, the tenant which we received either which are coming as future cash inspirations or with alternative and started taking them as cash or taking them as equity in the company gaming, that’s called that I have $80 million cash transaction.
The assets that we put into that transaction included the Slingo asset that we bought for $15 million when I not long after I came back and then some other assets they were here inherited. So that was example of where we saw there was an opportunity to create value through a sale transaction. Are there more such transactions coming? Currently possible, but we tend to focused on running the businesses fundamentally and then if there is more opportunity to get liquidity for some of the assets, we would certainly consider that but that right now are predominant focus as it would typically be is running the business successfully.
I know I would probably still have time for additional questions. Operator, do we have other questions queued up?
Yes. Next on queue is Mr. William Meyers with Miller Asset Management. Your line is open.
Hi. Let me - I think my questions where partially covered by the previous questions, but could you tell me what products you have confidents are going to be increased revenue drivers in 2016 and why each of them you expect to increase in revenue?
Well, I would say we see opportunities for revenue growth in all of our businesses - all of our major businesses, you know we have some pieces of businesses that are legacy pieces but we certainly see revenue growth opportunities RealTimes. We see revenue growth opportunity in our Casual Games business. We see revenue growth opportunities in our ring back tone and Copart [ph] product areas, so those would be the three major ones I mentioned. RMHD, we’re actually very optimistic about it, but it’s much early when its product cycle, nature of that product is, that’s a design when product where gets designed into chipsets are consigning other product. The revenue achievement of that product takes longer, it is associated with the business, the IP business that is a license stream business, so that we have revenue coming from the product, but the revenue associated with the next generation products, there is tends to more relying. But those first three areas are Casual Games, Copart and LISTEN are the sort of the main brand in that Copart area. And RealTimes, we expect to see revenue growth in all three of those areas in 2016.
Okay, great. Now on, if you can comment on Rhapsody, I believe there were some announcements abound changes in licensing charges for Internet radio songs and if anything you can talk about how that might affect Rhapsody, if it did affect Rhapsody would be helpful?
Sure. So there are two kinds of licenses in music products. There are statutory licenses which is in the U.S. are governed by something called the Digital Millennium Copyright Act or DMCA. In every five years I believe that is there is a repricing of that that is set of all places by the media associated with Library of Congress. And that is - that kind of license goes to regular cycle and there was recently an updated pricing set for that and that’s in the U.S. although had some sort of soft pressure for international markets. And then there is also the other kinds of licenses are negotiator licenses where the major labels negotiate individual licenses with individual service providers.
Rhapsody is predominantly uses the negotiator licenses rather than statutory license. So we have few products that use those DMCA radio products for part of their offering, but it’s - the vast majority of the products that come from Rhapsody are in those negotiator areas. So there’s been very little direct impact of those changes of rates on Rhapsody’s business.
There is a little more indirect because there were some substitution effect when a consumer is choosing between products to consumer could use a radio product, could use a product that’s fall on the main product like Rhapsody or Spotify or other competitors. So there are some substitution effect but the commercial arrangements are quite different and we are - the predominant part of Rhapsody’s business is in those negotiator licenses which were not affected directly by the new rates that were set in the fall of last year.
Okay that was actually very helpful. So and finally, this is kind of a general question. How do you see - the PC market, the Internet and cell phone markets, they are all seem to be changing their economics pretty rapidly, how do you see, what you expect to go on in 2016 in relationship to your products?
Well, I am not sure at the question but I would say that for the main parts of our business we see a lot of our growth, I would say most of our growth is happening in the mobile parts of the business, so I mention for incidence that the titles that are studio is created, they are both PC and mobile products but mobile is now about three quarters of the revenue, so the PC is hanging in there, but probably more of the growth on balance is happening on the mobile side. I mention specifically on the call script that the RealTime product has turned to be more of a success on mobile and less of a success on PC. The PC RealPlayer business continues to have a very large footprint and we are making what we think our smart investments to leverage that.
Our view we are seeing on PC volumes is Windows 8 because it was not a very popular operating system, slowdown the PC market won’t say artificially but whatever the natural growth rate of consumer PCs would have been maybe first it would have had a 5% decline organically because at Windows 8 and people holding back on purchases during the Windows 8 period maybe the PC industry decline 10% during that period or maybe even little more. Windows 8 out there which is basically a very solid PC operating system, we’ve seen PC unit volumes in most markets pick back up a little bit and sort of demonstrate the resiliency of the PC.
So we think eventually the world we are living in one where in terms of unit volumes, mobile phones will be by far the dominant unit volume device around the world, but both PCs and tablets will have significant volume. Tablets had actually shown a volume decline and whether that’s because of the so called tablets the big phones like the iPhone 6 plus and the equivalent Samsung products that in that casual tablet user are using their phone more than tablets whether it’s because the products like the convertible laptops that also function as tables whether that’s heating into the growth of tablets, I don’t know. But we think all three form factors are going to matter. As I said more of our growth is coming from the mobile side of our business, but the PC side of the business is still holding up let’s say and when we describe the company is having a growth in all of our businesses that include businesses that have both PC and mobile components.
Thank you. The next question comes from [indiscernible] with AWH Capital. Sir, your line is open.
Hi, it’s Austin Hopper. Rob I am pleased with progress you are making with RealTimes. What metrics if any, can you share with us that kind of demonstrates that progress?
Probably the metrics that were most comfortable sharing are the specific design wins with carrier. So we - at the beginning of the fourth quarter, we announced Verizon. Verizon shipped a little bit later in the fourth quarter. Then we announced KDDI and KDDI shipped a very end of the fourth quarter. And because of the nature of these partnerships, they tend to be self respect at what information they are comfortable having our share publically. These deals tend to - there is not like one standard temple for deals. As soon as we get paid by the carrier partner on a sort of - and all in basis, they kind of get the right to use our product up for a certain level and we get paid for that usage, sometimes we get paid based on how many of their customers using the product. So the more people use, the more we get paid.
As soon as we get paid because the carrier puts the product out there and it’s a very low cost for us to do go from premium - complete a premium or paid products out there. And so we have a blend of those three methods where we get paid directly by the carrier you know combination of that not occurring entering fee and a fixed fee. We get paid sometimes based on how much the carrier customers use the product and then we’re get paid sometimes based on how many of those users convert from standalone free users to premium users. And we - obviously when we are doing deals with carriers, we obviously want to get - have the broadest amount of engagement by the consumer, and we want to get paid the most we can in a way that will cause the carrier to feel like they are getting value from it, so they will stay with us and renew with us.
But we’re in the early days of those deals. And how you would measure it? I guess the combination of every quarter. You’ll see what revenue we report out of that business unit and we’ll indentify new carriers that come online. You know frankly the way these carriers to with, they tend to only announce either when the products ships from the carriers or not long before it ships. So we might have a set of design wins that we know about but that wouldn’t get announced until the carriers actually shipping. In the case of KDDI, they are announcing ship current, Verizon announced like a week before they shipped. And I am guessing that that’s going to be the pattern going forward.
Okay. Can you tell us how many paying subs Rhapsody has?
Rhapsody, again we are a large owner that we don’t latterly decide what numbers they put there. They are authorized to say that they had 45% growth 2015 over - end of 2015 or 2014. Their last publically announced number was 3 million, so they have not announced how many more than 3 million sub they have, I would assume that if and when they hit 4 million we’ll announce that, so I think it would to fair to assume that it’s more than 3 and less than 4, but that’s for them to announce specifically.
Okay. And is anything being contemplated in terms of Rhapsody and how that could be monetized is either via selling the business or IPO?
Well, we’ve not really say anything about an IPO and regarding to selling the business, we are fundamentally - well we are - we play an operating role in the business, a fund operating role and my role is Co-Chairmen. We got three board members, who is an independent management of the company and we are a major co-invest to Columbus Nova, strategize regularly on what the right thing to do for the company is between just putting head down and running it between brining additional expense and capital in between potentially selling it and potentially you know bring into the public markets. And we made no decisions that are public in any of those directions. But certainly I think it’s fair to say that we’re out there talking to people and find - looking for opportunities for business partnerships for the business. And we had many partners on the mobile carrier side particularly and those conversations often we mentioned direction, but nothing more specific to announce other than that. Once we said, once we are below 50%, we set up the end of the day, we consider it fundamentally financial asset rather than operating asset that we were just in to operate for the long term.
Okay and then are there plans for any further expense cuts to the business at RealNetworks?
Well, we have said what we - as I said earlier in the call is that we expect to grow the top line of the company, for grow the top line on a sustainable basis and then get the company back to the positive EBITDA in 2016. And the mix of how we do that between getting greater efficiencies and growing growth is not something that we’ve disclosed particularly. We certainly have some cuts that we have set in motion and we will get some additional economics economies of efficiency associated with the Windows for incidence our ecommerce transition is completed in the next couple of months and there will be some cost saving associated with that. And we’re - we’ve got noting good and disciplined about continue to look for waste and looking more efficiently, but we have nothing specifically on the docket you know I see that deal away to turn to profitability is to grow the profitability and we’ve got I would say solid plans for doing that and then we are always being very thoughtful about monitoring those plans and if we needs that corrected actually we’ll do so.
So with that I think that finishes our question, so let me turn it back to operator. Operator and thank you all for the questions and look forward to following-up with some of you individually and certainly everyone pretty much on our next call.
Thank you. And that concludes today’s conference. Thank you for your participation. You may disconnect at this time.
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