Here’s a deal that makes sense at first blush: RealNetworks (RNWK) is spinning off its game business, and may or may not do an IPO as part of the spin-off. Bonus prize for long-suffering RNWK shareholders: $50 million stock buyback, and an increase in guidance. More details here, once you’ve agreed to a lengthy disclaimer, but here’s the gist:
RealNetworks announced that it intends to spin-off its games business into an independent company and distribute shares of the newly created games company to its shareholders. The company may precede the spin with an initial public offering and sale of up to 20% of the shares of the games company.
The company anticipates that spinning off its casual games business will result in two more flexible and focused companies. In addition, the separation will provide the games business an industry-specific currency for future acquisitions and enhance its ability to attract and retain the best talent in the industry.
For investors, RealNetworks anticipates that the spin-off will create a pure-play casual games business with increased transparency, and that it will result in lower complexity in understanding and tracking RealNetworks’ performance. We also think that the new structure will provide current and potential shareholders with two attractive investment options that are more closely aligned with their various investment objectives.
From the press release:
In the first quarter of 2008, RealNetworks’ games business revenue rose 33% from the first quarter of 2007 to $31.8 million. For 2007, games revenue was $108.5 million, up 26% over 2006.
We’ll cover the call live in a few minutes. In the meantime for background, consult this post from last September, where we noted that Real CEO Rob Glaser had been spending a lot of money on M&A over the past year or so, much of it on the games business.
Who’s next? Bet on more games companies. While Real is best known for its media player and its Rhapsody music service, the growth of both of those businesses seems limited. But casual games have plenty of upside: The industry is only just beginning to tap into the online ad boom, and it’s littered with small players who could be easily be consolidated.
Call Starting: EVP of finance and CFO on call. That should get confusing. Also, Glaser.
While finance guy reads boilerplate, an observation: Just about every corporate investor site allows you a choice of Windows Media or RealPlayer to listen in on the call. Not Real. Guess which one we’re using right now?
Rob explaining rationale behind spin off: Game business a huge success story. Biz grown both organically and w/M&A. Latter started in 2004. Creating and publishing games now a core part of what we do. Last M&A deal was Trymedia, from Macromedia, which they bought for the equivalent of a used futon.
Casual games has huge potential. Better spun off for obvious reasons: Can have own currency for acquisitions, talent acquisition retention. Don’t need synergies we have within RNWK. Haven’t figured out best way to spin off. Using Lehman Bros for advice. Main decision: IPO or not. Plenty of conditions. Read the fine print for those.
Now back to operating results, which most people aren’t interested in anyway, which is why RNWK shares are about 50% below their two-year high.
Rhapsody pickup won’t happen for a while: Need to integrate Rhapsody with Verizon Wireless, Yahoo and AOL, and sell DRM-free music. This has taken longer than we’d think, but we think we’ll have it nailed down by end of summer.
Now on to financials: Revenue up $147.6 million, up 14% (includes MSFT payments), Adjusted Ebitda: $19.9 million, up 66%.
Revenue better than guidance because: Games up, handset royalties, download partner revenue, SuperPass subscriptions from Big Brother 9 (seriously?).
Music revenue up 12%, mostly from price increase in Rhapsody. Sequential decrease because advertising down. Loss improving because of price increases.
Games revenue up 33%. Adjusted EBITDA down due to dev. costs.
Increasing guidance for Q2 and FY.
Please give us colour on sub losses on music. Looks like split between MOD and Rhapsody customers. Why are losses accelerating?
Rob G: I don’t think they are accelerating. But: We knew we’d see sub growth slow after price increase. Also we think we’re getting more subs later in the year, because certain things will kick in. Also Q1 sub numbers tradtionally aren’t great for sub growth. No anxiety about this.
Please give us margin on game business. Higher or lower than consumer margin?
EVP or CFO: We can’t tell you anything about the games business, other than what we’ve already said, because of the spin off. Sorry!
Which of your business lines getting impacted by economy, or which one are you most nervous about.
RobG: We don’t see any effect, basically. Some of our consumer advertising businesses, which are less than 10% of our revenue, we’ve seen some tapping on the brakes activity. But we’re seeing excellent results overall. Our consumer pay or B2B services are steady. We’re not selling high-ticket items. Subscription services that cost $10, $15 a month. That’s a good value proposition for consumers.
Can you break out organic growth for games business? Walk-through spin off vs. IPO spin off business thinking, please:
Unidentified finance guy: Most of our growth is organic. Because Trymedia has had zero impact on Q so far.
RobG: Pros and cons: Not exactly answering that, actually. Just walking through thinking re: breaking company out, period.
Music business: Doesn’t seem to have shown improving profitability. In fact it seems like a better business with lower subs. So how is this business going to scale? And why are more subs better?
RobG: Don’t focus on subscriber count specifically. Our new music business offers multiple ways to monetise music: Ads, downloads ales, sub revenue, etc.
What’s timing on Verizon deal? Also international down. What’s going on there?
All three of our music initiatives are tied together. One will happen in Q2, two more sometime in summer. So it will be sometime in there.
What sort of revenue multiple will games trade at? Also how many games do you build vs. distribute. In other words, what’s your competiitve advantage in your category.
RobG: Competitive advantage is combining content and distribution. We own some titles, that aren’t well-known brands like Monopoly but they’re well-known in casual games market. Like “Collapse”. And then we have distribution platform. So we can maximise for recurring revenue and for margin associated with revenue. Most players are either in content or distribution.
First two questions we can’t answer.
End of call.
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