RealNetworks, Inc.
Q3 2006 Earnings Call Transcript

Published: 7 Nov 2006

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the RealNetworks third quarter 2006 results conference call. (Operator Instructions) Your speakers today will be Eric Russell, Vice President of Finance; Michael Eggers, Chief Financial Officer; and Rob Glaser, Chairman and CEO. I would now like to turn the conference over to Mr. Eric Russell. Please go ahead, sir.

[Eric Russell:]

Thank you. As a reminder, during the course of this call we will make projections and forward-looking statements regarding future events and the future financial performance of the Company, including

[Rob Glaser:]

Thanks, Eric and good afternoon, everyone. Thanks for joining us today to discuss what was an eventful quarter for RealNetworks. We had another quarter of record revenue, posting $93.7 million in third quarter revenue. Our net income for the third quarter was $42.4 million, or $0.22 per diluted share. Michael will take you through our Q3 financial results in more detail in a few minutes. Today I'd like to focus my comments on three important areas of our business. First, I will talk about the WiderThan acquisition and how it strengthens our company. I'll then turn to our continuing progress and success in the casual games business. Finally, I'll discuss our spate of recent new products and partnerships in the digital music business as well as recent competitor developments. First, WiderThan. On October 31st, we acquired 95% of WiderThan, a Korean-based mobile entertainment services company. Michael will review the financial and logistical details in a few minutes. I'll focus my comments now on the opportunities created by bringing WiderThan into Real. WiderThan is a leading service provider and developer of ringback tones (RBT), music on demand (NYSE

[Michael Eggers:]

Thanks, Rob, and welcome, everyone. Earlier today we released financial results for the third quarter of 2006, including financial statements and supplementary financial information. In March, we filed our 10-K for the year ended December 31, 2005 and we will file our third quarter 10-Q in the coming weeks. I encourage investors to review these documents for a more comprehensive understanding of our financial results. Today, I'll review third quarter financial results, provide some details on the results of our tender offer for WiderThan, and then close with guidance for Q4 and the full year. To start off, we're very pleased with our financial results for the third quarter. As Rob previously mentioned, we reported record quarterly revenue of $93.7 million, an increase of 14% from a year ago. Our net income for the third quarter was $42.2 million, or as Rob clarified, $0.24 per diluted share and our adjusted net income was $0.05 per diluted share. Delving into revenue a little bit more, third quarter revenue in our consumer segment grew 15% from a year ago. This was highlighted by 53% growth in games revenue to $22.5 million. We saw growth in each of our major games revenue categories including games sales, subscriptions and advertising. While games advertising is still nascent, we are very pleased with the early results. Music revenue for the third quarter was $30.4 million, up 16% from the prior year, primarily related to increases in our Rhapsody and Rhapsody To Go subscription revenue. Our premium music service subscribers increased to more than 1.65 million paid subscribers, an increase of 27% from a year ago. Finally on the Consumer side, media software and services revenue declined 4% to $29.6 million. This is primarily due to a decrease in SuperPass revenue, partially offset by increases in advertising revenue and revenue related to our distribution agreement with Google. In terms of our subscriber base, paid subscribers to all of our premium consumer services ended the third quarter at more than 2.45 million, up from 2.2 million a year ago, representing an 11% increase. Revenue from technology products and solutions was $11.2 million in the third quarter, an increase of 7% from a year ago. For the third quarter, gross margin was 70%, which was consistent with the prior year's third quarter. Total operating expenses for the third quarter were $8.1 million compared to $57.7 million in the prior year's quarter; however, adjusting for the effects of Microsoft and stock-based compensation expense, adjusted operating expenses were $62.2 million in the third quarter, compared to $54.1 million in the prior year's third quarter. Overall, the increase in adjusted operating expenses is due primarily to increases in personnel-related costs and operating expenses from our Zylom acquisition. Other income in the third quarter was $10.9 million compared to $14.8 million a year ago. Interest income was $10.6 million compared to $2.9 million in the prior year due primarily to significantly higher cash balances resulting from our Microsoft agreements and also higher interest rates. The third quarter of 2005 was positively impacted by the sale of a portion of our equity stake in a Japanese public company. That resulted in a gain of $11.7 million in 2005. Our tax provision rate for the quarter is approximately 38%. We expect our tax rate to fluctuate periodically; however, these rate fluctuations generally have no bearing on how much we end up paying in taxes and, as we previously said, our actual cash taxes expected to paid is closer to 10%. Our net income for the quarter was $42.2 million, or $0.24 per diluted share versus $11.2 million or $0.06 per diluted share in last year's third quarter. Adjusted net income was $8.7 million, or $0.05 per diluted share compared to $6.3 million, or $0.03 per diluted share in the year ago period. I'll note that our third quarter net income was higher than our initial expectations due in part to timing of marketing expenses. We had anticipated spending money in the third quarter on the launch of our latest music offerings; however, due to the ultimate timing of the launch, we delayed those marketing costs until the fourth quarter. I'll note that this time shifting of marketing is reflected in our Q4 guidance, which I'll discuss in a minute. Moving now to the balance sheet. Unrestricted cash, cash equivalents, and short-term investments were approximately $845 million at the end of the quarter. This includes $100 million of proceeds related to our convertible debt offering. In addition to our current cash on hand, we expect to receive up to $122 million in additional payments related to the Microsoft agreements over the next two quarters. Regarding our stock repurchase program, during the quarter we repurchased approximately 200,000 shares for $1.9 million. Now as a quick update on our WiderThan acquisition, we closed the tender offer on October 31, 2006 and I'm pleased to report that we now own approximately 95% of WiderThan. We are also in the midst of a subsequent offering period for the tender of any remaining shares not currently owned by Real. As we previously stated, our goal is to own 100% of WiderThan and we intend to acquire any shares that remain outstanding following the offer. We have paid approximately $320 million for our current ownership interest in WiderThan and as a result of our ownership percentage, WiderThan has become a majority-owned subsidiary of RealNetworks and we will consolidate WiderThan's financial operations. Since this is the first time that we'll have a consolidated, but not wholly-owned, subsidiary I want to just take a minute and describe the accounting and financial statement presentation. Going forward, we will consolidate 100% of the revenue and expenses of WiderThan. However, we will only recognize our share of WiderThan's profits. The percentage of profits related to the minority interest will be an additional expense that will reduce our consolidated operating income. Before I move on to guidance, I would like to reiterate that these forward-looking statements reflect Real's expectations as of today, November 6 2006. The Company currently does not intend to update these forward-looking statements until the next quarterly results announcement. This guidance reflects the acquisition of approximately 95% of WiderThan effective October 31, 2006. It's also based on preliminary purchase price adjustments resulting from the acquisition of WiderThan which are subject to change upon finalization of the purchase price allocation. For the fourth quarter of 2006, Real expects revenue in the range of $117 million to $123 million, including approximately $22 million to $24 million related to two months of WiderThan's results. GAAP net income per diluted share for the fourth quarter is expected to be $0.18 to $0.21 and adjusted net income per diluted share is expected to be zero to $0.03. For the full year 2006, Real expects revenue in the range of $387 million to $393 million, including approximately $22 million to $24 million related to WiderThan. Real expects full year GAAP net income per diluted share of $0.77 to $0.80 and adjusted net income per diluted share of $0.09 to $0.12. The guidance for the fourth quarter and full year 2006 assume an effective tax rate of approximately 37%, which may vary due to fluctuations in certain assets and liabilities, including unrealized gains on equity investments and the valuation of our deferred tax assets. These rate variations generally have no material impact on the amount paid for income taxes. For both the fourth quarter and full year 2006, the impact of the WiderThan acquisition is expected to be slightly dilutive to GAAP net income per share and slightly accretive to adjusted net income per share. Adjusted net income per diluted share for both the fourth quarter and full year 2006 excludes approximately $2.7 million related to amortization of intangible assets from the WiderThan acquisition. The expected fourth quarter 2006 results of WiderThan subsequent to the date of acquisition are not necessarily indicative of the results of WiderThan for the entire fourth quarter. I will also note that we are breaking out the impact of WiderThan on our consolidated guidance in order to provide consistency and transparency as it relates to our previously issued guidance; however, going forward, WiderThan will be integrated and as a result in 2007 we will be providing only consolidated results. A reconciliation of expected GAAP net income per diluted share to expected adjusted net income per diluted share is provided in the financial tables that accompany our earnings release. With that, I'd now like to turn the call back over to Rob.

[Rob Glaser:]

Thanks, Michael. In summary, I'd like to leave you with four key points

[Operator:]

(Operator Instructions)Your first question comes from Ross MacMillan - Jefferies.

[Ross MacMillan:]

Thank you. The media software and services revenue this quarter was down year over year but it was up very nicely sequentially. The rate it declined year over year was far less severe than the last couple of quarters. Can you just talk about the contribution from the Google relationship and can you remind us of the timing of that? When you actually started generating revenues from that? Thank you.

[Michael Eggers:]

I'll go ahead and take that question. So that's correct. The media software and services revenue in the third quarter was a beneficiary of our Big Brother deal which is, I believe, the sixth year that we've offered Big Brother content in our SuperPass offering, which has been a good source of subscriber growth for us in driving that revenue stream. And then in terms of your next question on the contribution of Google, we announced that new deal in August and to be clear, we previously had a deal with Google that was contributing revenue; however, we did have a new deal with them in August which also had a contribution of revenue from that line item.

[Rob Glaser:]

But we don't break out the Google revenue specifically under the segment of media software and services.

[Michael Eggers:]

Correct. It's a component of that.

[Operator:]

Our next question is coming from Steven Frankel - Canaccord Adams.

[Steven Frankel:]

Could you give us an update of your ASP progress at Cingular and others? What is the impact of WiderThan on your gross margins that's baked into your Q4 guidance?

[Rob Glaser:]

In terms of our progress with Cingular, I would probably relate that back to anything public Cingular has said about the rate of their roll out of the markets they have their 3G network in. We are certainly seeing, I would say very significant growth in that revenue line, but we don't typically talk about any particular carrier customer. I would say that one of the great things about getting to know WiderThan in the process of first getting to know each other and announcing the acquisition and the integration progress that started in earnest on September 12, I think we have a pretty good understanding from them on how they see the adoption rate of carriers for various kinds of services. What we are seeing with Cingular, for instance, is consistent with the adoption curve they have seen. These things tend to be like snowballs rolling down a hill and the goal, of course, is to get them to become big boulders as they gain momentum, which is the nature of the carriers services business. So I think there are a lot of complementary both in terms of the technology, the customer set. The third, I would just say general know-how. WiderThan has done this, what we've done a couple times on our own, has done it many times on multiple continents and there's some fixed costs that you get to leverage across that activity and just a lot of know-how and expertise. I'm optimistic that the new engagements such as the [Alltel] engagement we just announced as well as future prospects, which we will not be talking about publicly until they choose to announce it. We hope there's good continued momentum in this business. I don't know Michael, what if anything you want to say about the component gross margins?

[Michael Eggers:]

Sure. Well, as you know, we don't break out the components of our guidance, but I will say that over the last couple of quarters the WiderThan gross margin has been running around the 60% range and as we think about the acquisition and the integration, we don't necessarily see that being significantly different.

[Operator:]

Thank you. Our next question comes from Aaron Kessler - Piper Jaffray.

[Aaron Kessler:]

On the Best Buy deal, can you give us any more details on what type of arrangement this is in terms of a revenue arrangement? Also with Microsoft, it seems like they are getting a little more competitive on the music side. What type of marketing have they delivered to you this year and do you see them really as a partner going forward, or are they going to get more competitive again? Thank you.

[Rob Glaser:]

The Best Buy relationship, we're not commenting on the particular economics of that, that's probably not a big surprise to you. We are very happy with it, it's a relationship where the more successful they are, the more successful we both are. I was in a Best Buy this weekend and was pleased to see the Best Buy Digital Music Store or Powered by Rhapsody sticker, depending on whether it was a little sticker or a big sticker, on hundreds of CDs throughout the store. So that's the kind of thing that they can do that has unique leverage, that they can take whatever their share is, their number is some genres like rock and rap, they are the number one sellers of CDs in the U.S. In other genres, they are number two or number three. They can take that kind of marketing, which they have the unique ability to do, and apply it out there for digital music subscription service. So we're very early in terms of seeing what impact that has, but we've worked with Best Buy before, they're very effective on a national basis in the U.S. and we look forward to a very good relationship with them. In terms of Microsoft, I think the relationship is, I'd split out on the music side versus on the games side. On the music side I think we're headed for co-opetition in the following sense

[Operator:]

Your next question comes from Darren Aftahi – ThinkEquity Partners.

[Darren Aftahi:]

Good afternoon. Recently we've seen some competitive wins with the carriers. Are your plans to integrate Rhapsody with a wideband, music on demand platform and when we can expect to hear some more about mobile music in the future?

[Rob Glaser:]

Well, Darren, , I think we spoke to that a little bit in the call and we probably are not going to speak to it a lot more specifically, because I think we'd be getting ahead of ourselves if we implied any particular dates and times of customer integration. I do think it's fair to say that the strategy that we have in music, which is providing the Jukebox in the Sky and the brand name we use for that in the U.S. is Rhapsody, is very similar to a lot of the strategies for differentiation that mobile carriers have, where they have a permanent connection to the consumer through the ubiquitous network and the mobile handset. So I think philosophically, there's great opportunity for complementarities, how you actually map that into product road maps, how you map it into roll outs, given all the number of steps associated with that payload that has to be put in, in terms of the technology on mobile handsets, upgrades of networks, integration in terms of customer identity information and doing that in secure and appropriate way. There are a lot of moving parts, but I think we could not imagine a finer partner than WiderThan from a technology capability and the nearly 500 staff that WiderThan brings to our team, have great excellence and capabilities in doing that kind of integration work. So it’s not an overnight spin on a dime type thing, but it is something that we believe in and are committed to across both what previously was the independent WiderThan team and the Real team working together. Next question, operator.

[Operator:]

Your next question comes from Anthony Noto - Goldman Sachs.

[Anthony Noto:]

Thank you very much. Rob, I hope all is going well with the twins, congratulations.

[Rob Glaser:]

Coming from you, Anthony, you know what I'm going through, so thanks.

[Anthony Noto:]

Absolutely. A couple of questions. I understand completely the fact that some of the marketing spend got pushed into the fourth quarter because of the timing of the music roll out, but it doesn't necessarily square was fact that you lowered the implied fourth quarter revenue. I was wondering, you will have more marketing in the fourth quarter in the launch of the music, why would the revenue be lower? Tied to that, if you could talk a little bit about your distribution relationships/partnerships, it is my understanding that you're no longer distributing games for Big Fish Games Studio. If you could talk a little bit about that decision; is it a strategic decision, a tactical decision? Could we see other changes, other companies you are distributing for? Thanks.

[Rob Glaser:]

I'll talk about the first piece and maybe Michael can do a reconciliation. The way I do the math, we're still within the guidance range that we provided previously. I think obviously you're throwing two things in there, because you've got the Real revenue and then you've got the previous revenue, the additional 22 to 24, if you break out on top of that and if you subtract, we're still with in the range we provided. It would certainly be logical that if a launch happens a month later than you think it's going to happen, you probably have less revenue from products associated with that launch in a given calendar year, but that means, I think we're still within the range as a whole. I think the year, in terms of the roll forward, is pretty much business as usual with a lot of moving parts in the business. Before I pass it on to Michael to drill in on the numbers, which he can probably add some useful things, in our games business we've got a pretty broad distribution profile in terms of when we distribute games. We work with games companies in a lot of different ways. We will ourselves have our own exclusive titles that we create. We also have titles we have exclusive publishing for, and then we also put these titles into partner distribution. Our goal is to have the biggest reach and as we said earlier, we think with 40 million uniques we have, web customers out there on our distribution network, we have the biggest distribution network. I would say our overall trend has been to be reach more partners directly. So for instance, a year ago, before we did the Microsoft settlement, we reached Microsoft through an aggregator and then after settling Microsoft, part of what we did there is we began to provide games to Microsoft directly. So I'm guessing what you're referring to is there may be certain cases where rather than putting games through aggregators we put the games out directly ourselves through those aggregators end customers, but the goal is to get the biggest reach possible. It's just if you can cut out the middleman who's not adding value, you do that. I think that was the characteristic of that situation. Michael, do you want to talk about the numbers?

[Michael Eggers:]

Sure. As it relates to the fourth quarter guidance, as Rob said, we're still within our original range. One of the reasons we wanted to break out our guidance in addition to showing a consolidated result with the acquisition of WiderThan is that we wanted to be able to compare apples to apples. As you look at that, and I think your question is that as we think about the timing of some of these launches, obviously if they launched in the third quarter, you'd have more fourth quarter revenue associated with that; launching in the fourth quarter, you're going to have less revenue associated with that. Specific to some of the new music announcements we have, some of them have two-month free trials. So as you start to roll that out and you go through the two-month free trial there would be less of an impact in the fourth quarter by launching some of those in October as opposed to had they been in the third quarter. Next question, operator.

[Operator:]

Our next question is coming from Kit Spring - Stifel Nicolaus.

[Kit Spring:]

First for Rob, congratulations. Can you talk a little bit about your patents and if you think there are people infringing on them? If so, do you plan on litigation? Is this a hidden asset, or not really? For Michael, if you could give us the expenses in the quarter related to Microsoft so that I can figure out the EBITDA number. And maybe talk a little bit about why R&D seemed to be a little lower than what I would have thought. Is that sustainable or is that just pushed into 4Q?

[Rob Glaser:]

First, on patents, we continue to do a lot of innovation and get more of our fair share of patents filed, and then over time, issued around that. I think what we have indicated is our preferred approach is to be a licensor of IP rather than a litigator, but we certainly recognize not every licensee comes to the table with checkbook in hand. So we're certainly prepared to make sure that our intellectual property rights are being enforced. Our trend has been good that the more intellectual property we amass, the more that we manifest it in services that really are value adds for carriers, for instance, the more that we are leading in a carrot mode than a stick mode. But I think if you took a long-term view of this, any company that has significant IP assets, you've got to be open to doing a range of things from an enforcement standpoint. I think we have indicated previously a willingness to do that and I think as we've demonstrated previously, we have an excellent legal team when we need to go into a litigation mode on things. That's never our first choice or even our second choice. We look to proceed in a methodical way. Mike, do you want to take the second part of the question?

[Michael Eggers:]

Sure. I think the first part of the second question related to the expenses from Microsoft. So included in our operating results are $62 million related to Microsoft, offset by $2.9 million of expenses. To also factor that in, you want to make sure you take the tax effect of those results, which at our tax rate of approximately 38% for the quarter would be about $22.5 million. The net tax effect of the Microsoft impact in the third quarter is about $36.6 million. Getting back to the second part of the question as it relates to R&D, as we think about R&D expenses, based on the projects that we have in the pipeline and the types of technology that we're developing, R&D tends to lend itself to a little bit more of consultant and contract labor so you can flow up and down as the projects warrant. So I wouldn't necessarily read anything into R&D. That's something that will vary quarter to quarter and I think this quarter is not that unusual as it relates to our previous quarters. Next question, operator.

[Operator:]

Your next question is from Heath Terry - Credit Suisse.

[Heath Terry:]

Thank you. I wonder as you look at the advertising inventory that's available to you within your games business, to what extent is this opportunity being exploited now? How much more aggressively can you start taking advantage of the increasing demand for additional advertising inventory off the major portals?

[Rob Glaser:]

I think it's fair to say that we have a very strong commitment to advertising revenue and we are seeing more opportunity that we think of as durable in nature from advertising revenue than we've ever seen before. The trick in this generation of web experiences is to implement that advertising in a way that has a high level of consumer satisfaction associated with it, as well as advertising satisfaction. So I think we've been very rigorous as we have done this experiment with these 15 games that have in-game advertising to measure both of them. In other words, what's the impact on consumer behavior? In terms of download velocity, repeat downloads? What's the impact on the consumer behavior in addition to are advertisers happy? What we're seeing, and it is early days yet, is we've come up with a synthesis that works great, and the reason is we followed a model that makes sense. When you're watching a baseball game and there's a commercial between innings, you don't mind because you know there's a natural break in the action. So our idea was, let's implement commercials that are the equivalent of that and do them between levels of the game. So there's a natural break in the action rather than trying to take someone's attention away from the game during the game play, we cycled it around that, and it’s working. The specifics are different from the way Google came up with a model, ripping off with things like GoTo had done to actually come up with ads that are additive to the experience and not distracting from the experience. We think we have that in video game advertising. Not the only model, there's product placement and other kinds of methods, but this particular method we found seems to be working and we are in the process of scaling it up and we are optimistic about it, but our philosophy is to prove it and then talk more about it. We probably talked as much about it now as we should.

[Operator:]

Our next question comes from Lee Westerfield - BMO Capital Markets.

[Lee Westerfield:]

Thank you, gentleman. Good afternoon. Turning to the game segment for a second, the 53% growth in the quarter, I wanted to get a better understanding, I guess qualitatively about which revenue streams were the greater and lesser contributors to that growth between paid downloads, Game Pass subscription growth, third-party distribution or otherwise?

[Rob Glaser:]

I think it's fair so say that both you and our competitors would like that information and beyond restating what we've already said publicly about the split, we probably are going to be less than fully satisfying in that regard. Michael, do you want to reiterate anything we've said that might be on point?

[Michael Eggers:]

Yes. I think that an important point is that we actually performed well in each of those categories and saw a growth coming out of each of those. As Rob has mentioned in the past, we have a number of different ways to monetize our revenue and in each quarter, we look for what is that optimal shift and what's that mix? So that may vary over different periods, but certainly as we relate to Q3 of last year, it was growth across all that segments. Operator, we have time for probably two more questions.

[Operator:]

Our next question is coming from Derek Woods - Pacific Growth Equities.

[Derek Woods:]

I just wanted to hit on the WiderThan contribution in terms of the margins. The gross margins were a little bit lower than you guys historically, but the EBITDA margins were in the mid 20% range. WiderThan is going to be operated as a subsidiary, I just wanted to make sure there was no reason to believe those margins would change going forward? Second, on the video business, obviously the revenue had a pretty nice uptick sequentially for the first time in a while. Is there anything you guys are doing to, as we look going forward, to slow down that decline and actually get it growing a little bit? I know that you do have some strong seasonality from Big Brother in Q3. Is there any way that you can keep those subscribers that tend to go away after the episodes and give us an update on what you're doing there? Thanks.

[Michael Eggers:]

This is Michael. I'll go ahead and take the first question. As it relates to the WiderThan contribution, a couple things I want to point out that after the acquisition there will be some additional charges resulting from the acquisition, such as amortization of intangible assets. There's going to be some adjustments for deferred revenues, some of the normal purchase price accounting. But if you take out those effects, as we've said in the past that they're a very successful company, they have great financial results and as we look to integrate them, we're really looking to figure out how we maximize the assets that we bring to the table and the assets that they bring to the table. So we're not looking to do any major changes as it relates to that. Of course we'll be giving our 2007 guidance in the fourth quarter earnings call.

[Rob Glaser:]

With regard to the second question about the media software and services business, it really is two sub businesses in there and we don't break the numbers out on this. What you see is the composite of them. One is a premium subscription business where we have SuperPass; and then a second product that we introduced earlier this year called Broadband Essentials which is a secondary part of that. And then we have the free to consumer revenue streams that are ad supported or distribution partnership supported and I think it's fair to say that we see growth prospects for both of those. The second one probably has the most straightforward growth prospects associated with it in the short to middle term. When you're looking at the results of that area, while we don't do specific guidance on specific areas, I think you have to subdivide it into the two elements of it. That probably doesn't give you the fully satisfactory answer you want, but again, we don't do forward guidance on a unit basis. I'm not going to be able to give you any more specific guidance than that. Operator, should we take the last question?

[Operator:]

Our final question is coming from Sasa Zorovic - Oppenheimer.

[Sasa Zorovic:]

Thank you. My question would be regarding in terms of the number of music subscribers increasing here from last quarter to this quarter. We've seen somewhat of a sequential slowdown in number of adds. If you could comment on that, if you think as to why this is happening and also how do you think it compares to the rest of the music subscription industry in terms of your share? Are you continuing to gain share, or a little bit more color behind that?

[Rob Glaser:]

I would say two things. The first is that this was a quarter where we were preparing for a launch that was from a technology standpoint, our most significant launch maybe ever and certainly in two or three years. So while we continued to do the blocking and tackling basics marketing we typically do, I think it's fair to say that we were preparing more of our marketing activities than would typically be the case in a period for the launch and for the rolling out of the new relationship. So I think in a period like that, which I would include both Q3 and Q4 in that launch period, you might expect to see a transition. The second I would say is if you look at Napster as a standalone and what they're showing in terms of their subscriber decreases, I think you'd look at our position in the category and you feel very good about our position in the category. I think we feel good about our position in the category with regard to taking the category to the next level. We think approaches like what we've taken with Sansa Rhapsody, the Rhapsody integrated, it's that whole generation of how you take these subscription products and deliver the music to people whenever and wherever they want it. We did very well with the whenever part in terms of having this Jukebox in the Sky that you can get 24/7 on your PC. We're now focusing a lot of effort on the wherever part of it. I think as we scale that up, the results will follow. So I guess that's our last question and I want to thank you all for joining us today and we look forward to talking to you again in about three months time. And of course, most of you we'll be talking to a lot sooner than that. Thanks a lot.

[Operator:]

This concludes the RealNetworks third quarter 2006 results conference call.