RealNetworks, Inc. (NASDAQ:RNWK) Q4 2021 Earnings Conference Call February 9, 2022 4:30 PM ET
Company Participants
Brian Prenoveau – Investor Relations
Rob Glaser – Chairman and Chief Executive Officer
Mike Ensing – President and Chief Operating Officer
Christine Chambers – Senior Vice President, Chief Financial Officer and Treasurer
Conference Call Participants
Mark Argento – Lake Street Capital Markets
Operator
Greetings. And welcome to the RealNetworks, Inc. Fourth Quarter 2021 Earnings Conference Call. [Operator Instructions] As a reminder this conference is being recorded.
I would now turn the conference over to your host Mr. Brian Prenoveau, Investor Relations. Thank you, sir. You may begin.
Brian Prenoveau
Thank you, Laura. And welcome to RealNetworks fourth quarter and full year 2021 financial results conference call.
Before we begin, I’d like to remind you that some matters discussed today are forward-looking, including statements regarding RealNetworks’ future revenue, 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 that relate to the December 2020 sale of Rhapsody International Inc., which does business as Napster, to MelodyVR Group plc and certain forward-looking statements that relate to Senior Inc., including its future growth, and profitability and financing activities. Effective in 2020, Napster has been presented as a discontinued operation for accounting and disclosure purposes, and comparable historical periods have been recast to conform to this presentation.
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 RealNetworks expectation as of today, February 9, 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 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 the corporate website at investor.realnetworks.com under the Financials tab.
With us today are Rob Glaser, Chairman and CEO; Mike Ensing, President and COO; and Christine Chambers, Senior Vice President, CFO and Treasurer. Rob will discuss the company’s strategy and the progress the company made during the fourth quarter of 2021. Mike will then provide a more detailed update on Real’s AI businesses. And Christine will conclude with a more detailed review of our financial results. After today’s prepared remarks, we will open the call to questions.
With that, I will hand the call over to Rob.
Rob Glaser
Thanks, Brian. Good afternoon, everyone. And thank you for joining us today. My remarks will center on three topics. First, I’ll discuss our 2021 results. Second, I’ll discuss our Games business, and our plans to revitalize it. And third and finally, I’ll share some overall thoughts about our AI-based initiatives, SAFR and KONTXT. I’ll then pass the baton onto Mike Ensing, who will discuss the AI initiatives in more depth. And then after Mike, Christine Chambers will go through our detailed financials.
First, 2021. As I typically do at the beginning of a new year, I’d like to look back at the previous year. I’ll start by discussing how our 2021 results compare to what we hope to achieve going into the year and then share my perspective on how 2021 set us up for 2022 and beyond.
Our total revenue in 2021 was $58.2 million, down from $68.1 million in 2020. Inside of these results is a tale of three cities. Our 2021 growth city was our AI businesses, which grew meaningfully, SAFR by 44% and KONTXT by 14%. That said, this growth was not as fast as we had hoped, especially for SAFR. We’ll talk about what we’ve learned and how we’re applying those learnings in just a few minutes.
Our reboot city was Games. While Games had grown in 2020 to $28.6 million, which was up 12% over 2019, in 2021, our Games revenue was $24.1 million, down 16% compared to 2020. As 2021 unfolded, I determined that we needed to make a leadership change in Games, which I’ll discussed in a few minutes. Our legacy city is the home of the rest of our businesses, which declined as expected from $33 million to $26 million, but continued to contribute financially on the bottom line.
Our EPS from continuing operations was a loss of $0.48 per diluted share compared to loss of $0.13 per share in the previous year.
2021 adjusted EBIDA was a loss of $13.8 million compared to adjusted EBITDA loss of $8.6 million in the prior year. Christine will explain the bridge between net loss and EBITDA, and will discuss some non-reoccurring elements that should be considered when comparing the two years.
We continued to have a strong balance sheet with $27 million of cash available to us and no debt. We’ll use these resources judiciously to set us up for future growth. Christine will discuss our results in much greater detail in a few minutes, as I mentioned.
Stepping back to the financial details, our strategic focus continues to be our three big growth initiatives, SAFR, KONTXT and games. Concurrently, we will continue to manage the rest of the business for stability and profit.
We remain very bullish on Real’s prospects. Our lineup of current and new AI products is very strong as is our sales pipeline. And our new games leadership team has put together an excellent plan that I believe will set Games up for significant growth in 2023 and beyond. Taken together we believe that in 2022, we will achieve double digit overall growth excluding Games, and we expect games to be approximately flat.
This segues into my second topic, which is Games. As I mentioned, it became clear to me by mid-2021, that the Games leadership team we had had taken the business as far as they could, and that we would need to make a change. We started a rigorous search process and found a fantastic new leader, Simonetta Lulli. We and Simonetta got to know each other through a strategy consulting assignment she did for us in the summer of 2021. Then in October we appointed Simonetta to our new Head of Games. Simonetta has hit the ground running and has put together a great plan that I strongly endorsed. As it unfurls, we’ll discuss it in more detail in months ahead.
The global market for gaming is huge and it’s one where female players are vitally important. According to a recent study by App Annie 64% of players of the top 100 games in the U.S. are women. Similar stats for female gamers are reflected in Canada, France, Germany, and Australia. Compare that to the games themselves where female protagonists are represented less than 5% of games. This data suggests that a significantly untapped market exists, where we can expand gaming options and increase interaction with the differentiated products created for and often by women.
Game has already had a focus on female players before Simonetta had arrived. She is doubling down on that focus while making significant operational business changes that I believe will result in significant growth in 2023 and beyond.
Now, I move on to my final topic. A few words on our AI businesses, SAFR, KONTXT. As mentioned SAFR, our computer vision platform, grew 44% in 2021 over 2020. While this is significant growth, it’s lower than we had hoped for and it was lumpy. We’ve learned a lot about where the SAFR value proposition works well globally, namely in access control, and authentication, and where it’s a more selective fit specifically in the safety and security or S&S market.
We see great S&S opportunity in our U.S Federal business and in select other geographies. Accordingly, we’ve retooled both our product initiatives and our sales focus to focus on the areas with the greatest potential growth and the least friction. In a few minutes Mike will discuss SAFR and more detail.
A few words about KONTXT, our natural language processing business. It’s 14% in growth in 2021 was close to our plan in total dollars. That said, we believe the progress we made in 2021, improving and maturing our KONTXT product line sets us up for accelerated growth in 2022 and beyond which Mike will discuss in more depth in a minute.
Finally, a few closing words, 2021 was a challenging year for the world as a whole, as we’ve all had just logged to the second year of the pandemic. While vaccines are remarkable and have saved millions of lives, they are not yet putting end into the pandemic and to all the ways that’s disrupted our lives. I’m deeply grateful to all of our stakeholders, employees, customers, and partners who have stayed focused and continued to work hard to achieve excellence in spite of the turbulence around us. I foresee brighter days ahead for us all.
And with that, let me pass the mic to Mike.
Mike Ensing
Thank you, Rob. I’d like to briefly discuss progress made in our two AI-based businesses, SAFR and KONTXT. Starting with SAFR sales group by 44% in 2021, although the annual growth will be considered healthy in most businesses, we fell short of internal expectations.
In 2021 we significantly advanced our product, delivered customer and partner successes we will build upon and gained a better understanding of market needs shaping our strategy for 2022. During the year we advanced our product across several dimensions. The SAFR algorithms made significant progress in accuracy while maintaining our size and speed advantages, reinforcing our leadership position for real world, live video applications.
We continue to leverage our ability to easily embed our software on popular chip sets, allowing SAFR product to be easily and cost effectively deployed on edge devices and standalone hardware giving our customers a flexible and high-performance solution. We have added enterprise level features like unlimited face registrations, event archiving and central server administration.
Finally, we have developed two different types of anti-spoofing technologies, RGB liveness and structured light liveness. These new technologies will allow our customers to protect themselves from presentation attacks for an added level of security.
Looking forward, on the commercial side of the business, we are placing increased focus on access control and authentication use cases. Regarding access control, there is a large and growing market and strong customer need for touchless biometric access control products. This space provides for a great application of our algorithm that is differentiated by being fast, accurate, and compact, making it especially valuable for customers seeking to embed face recognition, liveness spoofing detection and person-centric analytics directly in devices operating at the edge.
During 2022, we will be launching a suite of products that we think will provide clear differentiation versus other products in the access control market today.
In the authentication space, we plan on building on 2021 customer successes to provide facial recognition solutions to both authentication providers and end customers. As Rob mentioned, we will hone our focus in the safety and security space and continue to pursue opportunities in key geographic commercial markets and the federal side of the business.
Regarding the federal side of the business, we will continue to build upon the successes we had last year. In the fourth quarter of 2021, we were awarded an additional Phase 2 SAFR, a Small Business Innovation Research Award for the U.S. Air Force to explore facial recognition used on unmanned sensors and evaluating safer running on a compact processor. The award is in excess of $500,000 with the work being completed by the end of 2022.
In addition, during Q4 2021, we were awarded two Phase 1 SAFRs that will help us expand our face recognition capabilities, increase our ability to detect and identify faces under more degradated scenarios, introduce new object detection capabilities and provide more comprehensive analytics. While Phase 1s are relatively small monetarily in value, they open up opportunities for further work in 2022.
Now I’ll move to a discussion of KONTXT, our natural language processing platform. We increased revenue 14% year-over-year and believe we have a path to accelerate growth in 2022. As discussed on prior calls, our team is focused on delivering AI-based products and services to help facilitate improved voice and messaging based services for our customers. Our AI-based filtering tools leverage more than 1 billion SMS, MMS messages that are processed daily to deliver the best of filtering tools for our customers.
In 2022, we believe we will see accelerated growth for three reasons: one, increased industry demand due to changing market and federal regulatory conditions; two, a more robust, mature and further differentiated omnichannel product; and three, an expansion of the sales channels that we sell into. Demand for the KONTXT product is only growing. The average number of spam texts a person receives per month is 16.9%, up from 14.7% in 2020, 10.6% in 2019 and 8.5% in 2018. It was estimated that 60 million Americans fell victim to phone scams totaling approximately $30 billion according to Truecaller’s 2021 Spam and Scam report. We believe the environment is right for more regulation, which means telecoms and major enterprises will demand more tools like KONTXT.
On the product front, we have developed and proven out several new capabilities, expanding our product set to a full omnichannel offering while leveraging several key differentiators. Building on our core MMS, SMS fraud and spam prevention capabilities, the offering now includes voice with robo calling blocking, image hashing that’s in-line scanning of text, 10 DLC, 10-digit long code interconnect support and brand missing detection and prevention.
In addition, we have continued to enhance our product differentiation. The KONTXT suite of products are differentiated by our robust data models, leveraging over four years of ground truth, labeling and training for our AI message classification, our ability to examine both content metadata, tremendous platform flexibility with capability to be deployed on the cloud, on-premise or hybrid in both fully managed or self-service environments. And finally, great scalability with the ability to process up to tens of billions of messages per day.
On the selling side, we are continuing our focus on the needs of U.S. and international carriers and broadening our efforts to also include UCaaS, Unified Communications as a Service and CNAM, Caller Name for buyers. We are seeing increased interest by these types of customers. We believe this is driven by changing needs in the market and enhance reputation and trust in our product that has matured through the years.
With that, I will now turn the call over to Christine to discuss financial results in greater detail. Christine?
Christine Chambers
Thanks, Mike, and good afternoon, everyone.
In my remarks today, I will first review our consolidated fourth quarter and full year results, followed by a more detailed discussion of our segment business performance. As a reminder, we completed the deconsolidation of Scener as of June 30, 2021, and as such costs related to Scener not included in our financial results in the second half of 2021.
Now turning to our results. Total revenue for the year was $52.8 million compared to $68.1 million in the prior year. For the full year 2021, growth in our AI businesses was more than offset by declines in our Games and Foundation businesses. In 2021, mobile services revenue decreased approximately $3.1 million year-over-year. SAFR revenue increased 44%, primarily due to increased commercial sales. KONTXT grew 14% year-over-year, driven by the addition of new KONTXT services and growth from the year from our AI businesses, again, was more than offset by declines in our ringback tones business.
Consumer Media revenue in 2021 decreased $2.3 million year-over-year, driven by declines in our legacy PC business and lumpiness in our IP business. Games revenue for the year was down $4.5 million compared to the prior year. The decrease was due to sales declines in both our legacy and free-to-play mobile games. As Rob discussed earlier in the call, we’re excited about new leadership in the game segment and the direction that can take the business while recognizing the progress from a revenue growth perspective may still take a few quarters. Consolidated gross profit in 2021 was $44.4 million compared to $51.6 million in the prior year, the decrease driven by lower revenue. As a percentage of revenue, gross margin was 76% and flat compared to the prior year.
Total operating expenses in 2021 were $65.3 million compared to $56.6 million in the prior year. The increase was primarily due to the $8.6 million favorable fair value adjustment in 2020 related to the contingent consideration from our Napster acquisition compared to the $1 million favorable adjustment in 2021. Operating loss in 2021 was $20.9 million compared to $5 million in 2020. This was due to the $7.2 million decline in gross profit and in 2020, a $7.6 million higher benefit related to the fair value adjustment of the contingent consideration.
Net loss for the full year from continuing operations attributed to RealNetworks was $21.2 million or $0.48 per diluted share compared to a net loss of $4.8 million or $0.13 per diluted share in the prior year. In addition to the items I just mentioned, included in 2021 was a net loss, with a $7 million non-cash fair value adjustment to Napster’s stock, offset by net gains related to Scener of $4.1 million and a net gain on the forgiveness of the PPP loan of $2.9 million. 2021 adjusted EBITDA was a loss of $13.8 million compared to adjusted EBITDA loss of $8.6 million in the prior year.
Turning to the fourth quarter. Total revenue was $13.4 million compared to $17.6 million in the prior year period and $14.3 million in the prior quarter. Mobile services revenue decreased $1.7 million or 23% year-over-year and $100,000 or 2% sequentially. SAFR revenue declined 41% and year-over-year lapping a significant Q4 last year, but grew 23% sequentially. KONTXT grew 19% in Q4 year-over-year and 15% sequentially. Our remaining legacy products within this segment declined year-over-year and sequentially. Consumer Media declined $1.2 million or 36% year-over-year and $600,000 or 22% sequentially, primarily due to lumpiness in our IP business.
Games declined $1.3 million year-over-year or 19% and a sequential decline of $200,000 or 4%. On a year-over-year and sequential basis, the decreases were due to sales declines in both our legacy and free-to-play mobile games. Adjusted EBITDA for the fourth quarter was a loss of $3.7 million compared to a loss of $900,000 in the prior year period and a loss of $2.7 million in the prior quarter. Net loss for the fourth quarter was $1.8 million and was impacted by a $2.1 million net gain related to Scener. A full reconciliation of our net loss to adjusted EBITDA can be found in our fourth quarter press release.
Now turning to our full year 2021 segment results in more detail. Mobile Services segment contribution margin was a loss of $5.9 million compared to a loss of $4.2 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 with a gain of $1.1 million compared to $1.5 million in the prior year. Decrease was primarily due to lower revenues and timing of IP license revenue. And Games segment contribution margin with a loss of $1.3 million compared to a gain of $1.6 million in the prior year. Revenue declines from fewer subscribers and declining traffic with the primary drivers of the year-over-year decline.
Turning to our balance sheet. At December 31, 2021, we had $27.1 million in unrestricted cash and cash equivalents compared to $23.9 million at December 31, 2020. We had no debt and no borrowings outstanding on our revolving credit facility. Our balance sheet remains strong, and we’ll use these resources judiciously to set us up for future growth.
Now turning to our outlook. For the first quarter ending March 31, 2022, we currently expect total revenue to be in the range of $12 million to $14 million and adjusted EBITDA loss to be in the range of $5.5 million to $4 million. We expect Q1 will be a trough for the year and believe the initiatives we undertook in 2021 will set us up on a path towards growth this year and beyond. We anticipate achieving double-digit revenue growth in 2022, excluding the Games business.
With that, we’ll now open the call for questions. Operator?
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from the line of Mark Argento with Lake Street Capital Markets. You may proceed with your question.
Mark Argento
Hey Rob, Mike and Christine, thanks for taking my question. I just wanted to kind of hit on both segments, starting with AI in particular. It seems like you guys have had some success in terms of getting into the solution set into to have some bigger players working with guys like NTT, DoCoMo and other systems integrators, also in the government channel. But it seems like a lot of the initial touch points have been bigger kind of bigger projects or the front end of bigger projects or bigger initiatives versus kind of more nuts and bolts applications. Any thought in terms of targeting additional markets with the solution, in particular municipality seem to be getting more and more involved, other types of solutions that you could potentially see going from conceptual to actual full deployments with additional revenue behind it?
Rob Glaser
Well, I’d say a few things, Mark. It’s good to talk to you. I hope everything is well within your world. As Mike mentioned and I touched on a little bit, we definitely think that focusing on access control is probably the best path we have for scaling the AI business globally, the SAFR business globally. Security and surveillance which has historically been probably our primary focus is still going to be a focus in – for our federal business and for certain geographies. But I think we’ve come to see based on what we serve with customers in terms of what they’ve been both coming to us to talk about or engaging with us on and then what it actually followed through sale and deployment. Is that access control looks like a fertile market for us in many different geographies around the world and in many segments. So that’s sort of a partial answer to your question.
In terms of deal size, I don’t think we typically comment on deal size, but I think it’s fair to say that the goal would be to have a business where you have a robust pipeline. You got a lot of people doing initial deployments, some of which might be small because they’re in trial phase or because they’re experimenting with, for instance branch offices before they go to the headquarters. I was on a call with a customer this week, they talked about they like doing some of their international work first. They’re primarily U.S.-based, but they find that the international operations work is kind of a laboratory. So we definitely see there’s a multiphase deployment cycle for big customers and we’re good with that.
Sometimes we go straight to large deals. We’ve done that a few times, and we like those, of course. But I think we try to be persistent and focus on what we think are all going to be larger aggregate opportunities, whether its lots of customers buying a medium amount or certain verticals where it’s a small number of customers make placing very big orders, we’re happy to do either one.
Mike, if you want to add anything?
Mike Ensing
No, I think that covers it, Rob.
Rob Glaser
Mark, you had a couple of other subquestions. You said you wanted to…
Mark Argento
Yes. Just pivot over to games and just talk a little bit. I know you said you probably provide more visibility as the year progresses there. But obviously games, there’s a lot going on, a lot of M&A activity in the space. Anything you can kind of give us in terms of just general direction in terms of focusing on doing more mobile, more social, any how to differentiate yourself in a tough a crowded market?
Rob Glaser
Yes. Well, the dominant focus is mobile for sure. So that’s not a change. And between free-to-play and premium I think we’ve come to feel Simonette has come to feel that there is leverage and synergy between being in both segments. So we have some products on the premium side, which we came from that continue to be very popular and get lots of downloads and can operate as kind of a funnel. You monetize the free-to-play products much higher. There are three biggest grossing games, which are all free-to-play games, which is typical. And so I’d say we’re going to probably, over time, make most of most of the dollar growth will come from the free-to-play business. That was up until we hit the air pocket in 2021. That was our fastest-growing part of our games business, and I think Simonetta is highly committed to reinvigorating that growth.
In terms of how she’s doing it, I think she is of our mind and I share this view that it’s better for us to put points on the board and then talk about how we did it in detail rather than be sort of predictive of which of the initiative is going to work. But I will say that I’ve been very, very pleased with the rigor that she is approaching things in. And she has got a lot of experience in a broad set of the disciplines and games.
So, I knew she’d be very strong in monetization-type ideas because she comes from that world, but she also has a background actually in finance, and it turns out a lot of these businesses, you have to really understand the metrics in an incredibly rigorous way because these businesses are almost like many economies, where you’ve got to measure the revenue per daily user, you’ve got to measure the engagement, you got to look at the cost of acquisition across various cohorts and various geographies because it’s not just the difference between the Android platform and the iOS platform as they monetize somewhat differently. But also, the highly variable differences in geographies and even cohorts within geographies. So, it’s a super interesting but also economically and financially complicated business. And then obviously, you’ve got to make games that are fun.
So, at the end of the day, consumers are voting in record numbers with their pocket books in these categories. You’re right there has been a lot of inorganic activity, M&A activity out there. And that certainly, we think that’s positive because it means that across all ends of the food chain, there is interest all the way from Microsoft buying or trying to buy Activision for $70 billion, whatever it is down to acquisitions more at our range of the business.
So, we see a lot of interest in the business. We are believers in it. We’ve described it long term that we think it’s a strategic asset. And it’s sort of stand-alone as a strategic asset and with a leader like Simonetta in there as we revitalize it, there’s a lot of ways we can go with it in terms of how we get shareholder value out of it.
The first thing is first, the primary focus is to revitalize the growth. And I’m guessing that investors will be excited to see that happen. I’m super impatient about it. But also, we’re making the tough decision to bring in a new leader, I want to give her an opportunity to really dig in and make progress before we start talking about everything that’s going on in the ground.
Mark Argento
Great. And then just last question. Just philosophically, obviously, you got a decent balance sheet. In terms of M&A being a buyer of businesses to augment both their AI or maybe even the games, how do you think about your capital on your balance sheet? I know you guys are still in a cash consumption mode, but just maybe talk about, I guess, the third thing I guess you could buy back stock is because the enterprise value is pretty small. But maybe just think about maybe kind of opine on, some thoughts about capital and deploying capital going forward? Thanks.
Rob Glaser
I don’t know. Mike or Christine, do you want to take a cut at that, and then I’ll give on top of that.
Mike Ensing
Sure.
Christine Chambers
Yes. So, we ended the year with just over $27 million in cash. And like I said in my remarks, we are allocating that judiciously as we go into 2022, and we remain a focus of investment around our AI products and as Mike talked about, the investments in SAFR and KONTXT.
Mike Ensing
Yes, Mark, just a little bit more around that. So, with our cash, we are pretty focused on making investments over the next year in the AI-based businesses. And then regarding acquisitions, we’re always open to things. But the first priority is our AI-based businesses.
Rob Glaser
Yes. I don’t know if I can add too much on top of that, Mark. I think it’s fair to say that we see a very strong prospect for return based on investing in our growth initiatives. And we’re going to make those investments carefully, I guess, I would say. But our belief is that having great products, having people that are in the position to sell them and put them in customers’ hands, that those are investments that are to have a pretty good return on them assuming we pick the right people to build the products, the right people to sell and market the products and pick the right products to make. And that’s our job to make good choice on all three of those.
Mark Argento
I appreciate the color. Good luck. Thanks.
Mike Ensing
Thanks Mark.
Christine Chambers
Thank you.
Operator
Ladies and gentlemen, we have reached the end of today’s question-and-answer session. I would like to turn this call back over to Mr. Rob Glaser for closing remarks.
Rob Glaser
Thank you, operator. Well, I hope everybody’s 2022 is off to a safe and healthy start, well, everyone in this table as well. I had my bet with COVID early in January and fully recovered from it. It was more than a sniffles and less than a debilitating thing. So hopefully, those of you that have had to go through it have had similar experiences; I hope everyone stays well and healthy.
Again, I want to thank everybody on our team, all of our stakeholders, partners, et cetera, and customers for everything they have done to help up during this most unusual couple of years. We remain optimistic at the future and have our heads down trying to create value here and working hard every day to make that possible.
So, thanks, everyone. We’ll be talking to you soon.
Operator
This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.
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