RealNetworks, Inc.
Q1 2007 Earnings Call Transcript

Published: 3 May 2007

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the RealNetworks first quarter 2007 results conference call. (Operator Instructions) Your speakers today will be Mr. Eric Russell, Vice President of Finance; Mr. Michael Eggers, Chief Financial Officer; and Mr. Rob Glaser, Chairman and CEO. I would now like to turn the conference over to Eric Russell. Please go ahead, Mr. Russell.

[Eric Russell:]

Thank you, Operator. Some of the matters discussed today are forward-looking, including statements regarding RealNetworks' future revenue projections, net income, the prospects of growth in consumer products and business technologies, future benefit from our retail partnerships, our ability to achieve economies of scale, our expected tax rate, and the potential advancements industry wide. All statements other than statements of historical fact are forward-looking statements. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from those anticipated by these forward-looking statements. These risks and uncertainties include a variety of risk factors that may affect our results. We describe these and other risks and uncertainties in our SEC filings. A copy can be obtained from either the SEC or by visiting the investor relations section of our website. The forward-looking statements reflect RealNetworks' expectations as of May 2, 2007. 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 otherwise. In this call, we will make reference to certain non-GAAP financial measures, including adjusted net income, adjusted net income per share, adjusted EBITDA, adjusted operating expenses, and adjusted cost of revenue. The reconciliation of these non-GAAP measures to the most directly comparable GAAP measure can be found in our earnings release for our first quarter, which was filed on edgar on a Form 8-K and is posted on our website at www.realnetworks.com/company/press. Here with me today to discuss our first quarter 2007 results is Rob Glaser, Chairman and CEO, and Michael Eggers, Chief Financial Officer. Rob will provide the overall business review of the quarter and then turn it over to Michael for the financial details and outlook. To get the call started, I will turn things over to Rob.

[Robert Glaser:]

Thanks, Eric. Good afternoon, everyone, and thanks for joining us. Today we reported first quarter revenue of $129.5 million, net income of $40 million, or $0.22 per diluted share, and adjusted net income of $10.4 million or $0.06 per diluted share. We are very pleased with these results, which significantly exceed the guidance we provided three months ago. Michael will review our financial results and outlook in more detail in a few minutes. As usual, I will focus my comments on the business drivers behind our results. Specifically, my comments will focus on three primary areas. First, our technology products and solutions segment, and then two of our main consumer businesses, games and music. Technology products and solutions, or TPS, had a strong first quarter with revenue of $44.4 million. This represents 277% growth over our Q1 2006 results, which of course did not include WiderThan. Q1 was the first quarter full quarter of Real and WiderThan operating as on integrated team. The integration process has gone very smoothly. As a result, we have been able to focus our attention outwardly, both on serving current customers and signing up new ones. In the first quarter, we signed contracts or launched new services with six carriers and service providers, including Rogers in Canada, Helio in the U.S., S Telecom in Vietnam, Telecom TV in the U.K., TDF in France, and DigiTurk in Turkey. Each of these companies is launching one or more of our ASP product offerings, which include ring back tones, music on demand, and video on demand. In Q1, we continued to see strong growth in our subscriber base, mostly due to growth from our existing ASP customers. Our total carrier application service subscribers under management increased to 21.9 million at the end of the first quarter, up from 20.2 million at the end of Q406. Additionally, we saw continued growth in the inter-carrier messaging business with the delivery of 16.5 billion inter-carrier messages in the quarter, up 20% from the fourth quarter of 2006. We believe that the combination of new customers and continued subscriber growth from current customers sets us up over time to benefit from economies of scale. Our success this quarter was not simply limited to carrier services as we also saw a nice increase in intellectual property licensing, especially in the mobile handset segment. Today, customers such as Nokia, Motorola, Samsung, Sony Ericsson, LG and QualComm, all embed elements of our Helix DNA and RealAudio and RealVideo technologies into their handsets and chips. During the fourth quarter of 2006, our licensees together shipped more than 23 million handsets preloaded with our Helix DNA technology, enabling these handsets to play high quality streaming and download audio and video. This growth reflects both the increased adoption of our technology and overall market growth in sales and multimedia-enabled handsets. We are encouraged by our progress in this area and are optimistic that we will see a continued expansion in our IP licensing program in the coming years. While we are pleased with our results, we believe there are additional opportunities for growth for our TPS business. In addition to our IP licensing activities, we are focused on cross-selling our existing service offering across our carrier partners, signing up new carriers, and rolling out new and upgraded products. We are also looking at select M&A opportunities that complement and extend our ASP offerings, especially in Europe, which was not a focus for WiderThan when they were a standalone company. Now on to our consumer business, starting with our game segment. In Q1, games revenue grew to $23.9 million, a 28% increase over the first quarter of 2006. We continue to demonstrate category leadership in PC casual games, exemplified by high margin revenue growth, a strong slate of new game releases and business model innovation. Let me briefly comment on each of these. Our game development and publishing operations continue to ramp up. During the quarter, our in-house studios created and produce six new games and our industry-leading publishing operation brought another seven new titles to market, keeping our selection fresh and giving our customers a continuous stream of new games to enjoy. During the quarter, we launched Monopoly Here and Now, the second PC casual game produced through our multi-year licensing with Hasbro. Additionally, our game house studio launched Little Shop of Treasures, which has generated the highest first month unit sales of any game in the history of our RealArcade service. We believe that our high quality studio operations and strong developer relationships remain a key source of competitive advantage for us. From a business model perspective, if you recall, last year we rolled out two in-game advertising solutions as a complement to our consumer pay model, which was principally try-before-you-buy. These programs are achieving excellent response from consumers, who find the ads contextually appropriate, and from advertisers who love the effectiveness of the media. We deliver advertisements at natural breaks between game levels during game play, which gives us an opportunity to generate revenue on each of the millions of trial downloads we deliver each week. To date, we have delivered nearly 75 million in-game video ad streams with over 5.5 million users downloading over 8 million ad-enabled games. Marquee advertisers have included Proctor & Gamble, Hanes, Honda, and Sony Pictures. The new model is successful not just with consumers and advertisers, but also with game developers, with whom we share ad revenue. Revenue per download from the nearly 20 games that currently feature in-game ads has exceeded what we would have been generating under the try-before-you-buy model just by itself. While the majority of our games revenue continues to be consumer pay in at least the near-term, we think advertising is a great opportunity. A recent study by the Yankee Group projects that the market for in-game advertising across all the games industry, not just casual games, will grow five-fold to over $700 million by 2010. We continue to innovate on the consumer pay side of our games business as well. Late last year, we introduced a new subscription product called Fun Pass, which features an all-you-can-eat business model akin to our Rhapsody music subscription service. Fun Pass is off to a good start and appears to be an excellent complement to our Game Pass service, which uses a book-of-the-month club type of model. In summary, our games business continues to perform well, drives strong organic growth, and lead the industry in business model innovation. We are optimistic we will be able to sustain our leadership momentum in this category. The third and final business I want to discuss is music. Our first quarter revenue was $34.1 million, which represents an 18% increase over the prior year’s quarter. In terms of subscribers, we increased our music subscriber base to more than 2.675 million subscribers, up from over 2.55 million at the end of Q4. The key drivers of the subscriber growth were the success of our Sansa Rhapsody device initiative and our retail partnership with Best Buy. We also saw continued progress on our Rhapsody.com website. Based on early data, people who are buying the Sansa Rhapsody are three times more likely to become paying subscribers than consumers buying other MP3 devices that were not optimized with our technology. This experience supports our strategy of building tight integration with our device partners to create an improved customer experience and thus improved operating performance for our music business going forward. On the distribution side, our retail partnership with Best Buy has continued to expand. Based on the success of the Sansa Rhapsody, we are working with Best Buy to integrate Rhapsody into additional MP3 devices. Our work with Best Buy complements the work we have already announced with device partners such as iRiver, Tivo, Nokia, and Logitech. Each of these partners is expected to launch Rhapsody optimized products in the coming months. Also of significance is the continued growth of our Rhapsody.com site, which has grown into the web’s fourth largest music site in the U.S. based on unique visitors as measured by Nielsen Net Ratings. That is up from number five at the beginning of the year. We believe we have continued to increase the value proposition to music consumers over the past several years through innovative new features and have created a premium service relative to competition. To reflect and harvest this value, we are increasing the price of Rhapsody Unlimited from $9.95 to $12.95 per month. I will note that this is the first price increase we have implemented in this product line in five years and the price of our Rhapsody To Go product remains unchanged at $14.99 a month. Rhapsody subscribers have been notified of the price increase and it goes into effect during the second quarter. Early reaction from consumers indicates that our Rhapsody members see the value of our service and we are pleased with the retention rates. Finally in music, I would like to talk about the recent activity around music companies selling music in a DRM free format. We are big supporters of this change as we believe that it is the only practical way to solve the interoperability problem that has effectively given Apple a monopoly on sales of digital music for us with iPods, which represented over 70% of the MP3 player sales in the U.S. last year. Indeed, I first spoke out about this topic publicly in January at the MIDEM Music Conference in France. We will continue to advocate on behalf of this change as we believe it is good both for consumers and for the entire digital music industry. We were very pleased last month when one of the major labels, EMI, announced its move to DRM-free music. We believe that the industry as a whole will move in this direction within the next year or so. Once this change spans all the major labels, we see a great marketing opportunity to reach more consumers and reintroduce them to the idea of choice and to try new models, including subscription services like Rhapsody. Note that subscriptions, because they offer all-you-can-eat access for a flat monthly fee, will remain DRM based. In sum, we continue to make progress in our music business on several fronts. While there will continue to be some notable structural challenges in the business, we see a clear path to continued growth and bottom line progress. Finally, before I turn things over to Michael, I would like to give a brief update on our balance sheet. As of March 31st, we had $663 million in cash and liquid securities. In the first quarter, we completed our most recent $100 million share buy-back program, repurchasing approximately 9.8 million shares for $78.5 million. Additionally, we are announcing today that our Board has authorized another $100 million share repurchase program. In addition to share buy backs, we also see acquisitions as a great way to use our balance sheet to create value and strengthen our market position. As I’ve said recently and reiterate today, we remain committed to being both active and disciplined with M&A activity and highly focused on excellent integration of any acquisitions we do consummate. With that, I would like to turn things over to Michael to review our financial results. Michael.

[Michael Eggers:]

Thank you, Rob. I would like to add my welcome to everyone as well. Earlier today, the company released financial results for the first quarter of 2007. In February, we filed our 10-K for the year ended December 31, 2006, and we will file our first quarter 10-Q next week. I encourage investors to review the 10-K and our SEC filings for a more comprehensive understanding of our results. Today I will review our first quarter financial results and provide forward guidance for the second quarter and full year of 2007. To start off, we are very pleased with our first quarter financial results. Revenue was a record $129.5 million, an increase of 50% from $86.6 million reported for the first quarter of 2006. Net income for the quarter was $40 million, or $0.22 per diluted share, compared to net income of $24.9 million or $0.14 per diluted share in the same quarter of 2006. Adjusted net income more than doubled to $10.4 million, or $0.06 per diluted share, compared to $3.9 million, or $0.02 per diluted share in the first quarter of 2006. Adjusted EBITDA for the first quarter of 2007 was $11.9 million, compared to $1.7 million in the first quarter of 2006. A full reconciliation of GAAP net income to adjusted net income and adjusted EBITDA is included in the financial tables that accompany our press release. Before I discuss some of the detail financial results, I wanted to give some color around our first quarter results as compared to our guidance. I will note that our revenue of $129.5 million was better than our guidance of $122 million to $126 million. This was due to three primary factors. First, we had stronger than expected results in our music subscriptions coming out of the holiday sales period. Second, we also had higher than expected handset royalties and carrier subscriber growth from our TPS business. And third, we received some one-time royalty and distribution partner revenue in the first quarter. Our GAAP and adjusted earnings per share were also higher than our expectations, due primarily to our better than expected revenue. Additionally, we expected litigation defense costs to be higher in the first quarter. However, most of these costs will now be incurred in the second and third quarters. Finally, our GAAP earnings per share was a beneficiary of a lower than expected tax rate resulting from some tax claim strategies that we designed and deployed in the first quarter of 2007. Now I will cover revenue in more detail. Our consumer segment had revenue of $85 million for the first quarter of 2007, an increase of 14% from a year ago. As I discussed on our call last quarter, the way in which our business is evolving causes a much higher degree of seasonality in certain aspects of our revenue than we have seen in the past. Specifically, we see seasonally strong advertising revenue in the fourth quarter and weaker revenue in the first quarter. The effects of these trends can be illustrated in our first quarter results within our media properties revenue, which grew an impressive 68% from the first quarter of 2006 but declined sequentially from the fourth quarter of 2006 by 15%. The effect of this media properties revenue seasonality had its greatest impact in the first quarter on our games and media software and service businesses. Dissecting the components of our consumer revenue, our games business grew 28% from a year go to $23.9 million. The games business had its strongest year-over-year growth in advertising and subscription revenues. I will note that this growth rate is lower than the previous three quarters due largely to us reaching the anniversary of our acquisition of Zylom, which we acquired in the first quarter of 2006. Music revenue for the first quarter was $34.1 million, an 18% increase from last year. The growth primarily came from increases in revenue from our Rhapsody and Rhapsody To Go subscription services, as well as advertising. Our media software and services business reported $27 million in revenue, essentially flat from last year. Revenue from our technology products and solutions business was $44.4 million, which represents an increase over last year of 277%. Much of this growth is due to the revenues that came through our acquisition of WiderThan, which we did not have in the first quarter of last year. I will note that the first quarter of 2007 includes a full quarter effect from our WiderThan acquisition, while our fourth quarter 2006 results include only two months of activity due to the timing of the acquisition. Additionally, as I mentioned on last quarter’s call, as a result of WiderThan purchase price adjustments, the first quarter 2007 results reflect a $2.3 million reduction in revenue versus what the same business results would have been if WiderThan had not been acquired. Revenue from our largest customer, SK Telecom, represented approximately 12% of our total first quarter revenue. For the first quarter of 2007, our gross margin declined to 65% from 69% in the first quarter of 2006, mostly as a result of our acquisition of WiderThan, which traditionally had lower gross margins than our historical TPS business. Our gross margin has also been impacted by the amortization of certain acquisition related intangible assets that are included in our cost of revenue. The increase in adjusted operating expenses to $79 million in the first quarter of 2007 as compared to $62.2 million in the prior year is primarily due to the inclusion of a full quarter of operating results from WiderThan. Our other income was approximately $9.4 million in the first quarter compared to $8.1 million in the previous year. This increase is due mostly to increased interest income from a higher average cash balance and higher interest rates. For the quarter, our tax rate was approximately 36.8%, resulting in a tax provision of $23.2 million, versus a 37.2% rate in the first quarter of 2006. As I mentioned previously, our tax rate was better than our original estimates, due to the tax plan strategies deployed in the first quarter. We do expect this rate to continue for the remainder of 2007. Now, turning to our balance sheet, unrestricted cash and equivalents at March 31st were approximately $663 million. This amount includes the proceeds from $100 million of convertible debt and also includes the final payment under the terms of the Microsoft agreements. As Rob mentioned, during the first quarter we repurchased 9.8 million shares for an aggregate amount of $78.5 million, or an average of $7.99 per share. This completed the remaining amount authorized under our program. However, we are also announcing today that our Board of Directors has authorized an additional $100 million repurchase program. Before I move on to our forward guidance, I will reiterate that the following forward-looking statements reflect RealNetworks' expectations as of May 2, 2007. The company currently does not intend to update these forward-looking statements until its next quarterly results announcement. In addition, I will note that in the first quarter of 2007, we received the last of our payments under our agreements with Microsoft, and thus our GAAP net income results going forward will not reflect these benefits. Additionally, our second quarter revenue guidance factors in a one-time revenue deferral for a change in our Game Pass offering that gives consumers an extra month to use their free game credit. Our Q2 and full-year guidance also factors in the shift of litigation defense costs from the first quarter to the second and third quarters, as I mentioned earlier. For the second quarter of 2007, Real expects revenue in the range of $130 million to $134 million, GAAP net income per diluted share of negative $0.01 per share to positive $0.01 per share, and adjusted net income per diluted share of $0.04 to $0.06 per share. This guidance assumes an effective tax rate of approximately 37%. For the full year 2007, Real is increasing our guidance to reflect the better than expected results from the first quarter of 2007. Real expects revenue in the range of $547 million to $563 million. We expect 2007 GAAP net income per diluted share of $0.24 to $0.27, and adjusted net income per diluted share of $0.23 to $0.25. A complete reconciliation of estimated GAAP net income per diluted share to adjusted net income per diluted share is provided in the financial tables that accompany our press release. With that, I would now like to turn the call back over to Rob.

[Robert Glaser:]

Thanks, Michael. In addition to the overall strong results for Q1, I would like to leave you with the following three key take-aways. First, by integrating WiderThan successfully into our technology solutions business, we believe we have set this business up for continued growth and increasing economies of scale over time. Second, our games business continues to scale well along several fronts and we see great opportunities for continued category leadership, as well as top and bottom line growth. And third, our music business is improving and we see a number of opportunities in front of us to continue to strengthen this business. So with that, let’s open the call up for questions. Operator.

[Operator:]

(Operator Instructions) Our first question today is coming from Mr. Lee Westerfield with BMO Capital Group.

[Lee Westerfield:]

Thank you. Good evening. The one question I guess I would focus on here, you mentioned the Rhapsody optimized products yet to come. I think that list included iRiver and Tivo and some others. I wonder if you could run through the timetable and product launch cycle we are looking at there.

[Robert Glaser:]

Operator, we can’t hear that question. It’s fading off. If you could have the caller repeat the question, please.

[Operator:]

Sir, I do apologize. If you could please press star, one again. Mr. Westerfield, your line is open again. If you could please repeat your question.

[Lee Westerfield:]

Thank you. Is this okay?

[Robert Glaser:]

Yes, that’s fine.

[Lee Westerfield:]

Okay, a quick question, and it relates to upcoming Rhapsody optimized products still to be launched. You ran through a brief list of those to come -- iRiver, Tivo, among others. I wonder if you could give us a little more color as to the timetable we are looking at for those product launches and the geographic scope, U.S. or elsewhere, what the timetable is on those Rhapsody optimized products.

[Robert Glaser:]

I’m happy to do so, and again you are fading a little bit, but I think I got the gist of the question, which was the geographic scope and the timing of those product releases. We have said we think several of those products will be available for the holiday season, which is where the majority of MP3 players are sold, in the second-half of the year and close to half are typically sold in the fourth quarter, so we are gearing up to be ready for that. I think it is fair to say that the lead time in terms of getting those devices both optimized and then in the market means that we will see most of the benefit from those device sales beginning at the end of the year and even going forward. One of the things that has happened to this business is people buy the devices in the fourth quarter and they activate them in the first quarter, or they buy them in the fourth quarter and they have trial subscriptions in the fourth quarter, so you do not get the benefit on the first quarter. I think it is fair to say that we like the pipeline of partners that we see and we feel very good about the trend lines associated with it, but I think there will be a couple of quarters lag between the good news that we got in terms of the Sansa Rhapsody success and translating that into a broader shelf of products in the field. In terms of geographic scope, I think we are looking principally at the U.S. for this class of products this year. We are looking at international rollouts of a variety of services, but our focus has been to do a great job in the U.S. this year and then take it from there. Operator, are you ready for the next caller?

[Operator:]

Our next question is coming from Heath Terry with Credit Suisse.

[Heath Terry:]

Thank you. I was wondering if you could talk specifically about the profitability of your music business and what kind of trends you are seeing there, particularly the Rhapsody subscription service, and also to the extent that you can talk about relationships in pricing with your label partners, if there have been any changes to that over the last few quarters.

[Robert Glaser:]

I suppose we could talk about it but we have a standard policy of not breaking out the bottom line for individual divisions. There are a couple of reasons for that, the first is we always balance giving investors good information and not giving competitors. Second, given that we have shared infrastructure for all of our consumer businesses, and of course shared G&A for our company as a whole, we make a set of internal allocations in all of those that are good enough to manage the business well, but it is not our intent to have those be externally disclosed. You should not expect that we will be doing so. In terms of the labels, I think it is fair to say that we pay on a set of different metrics when we are purchasing music, when we are selling individual tracks, we are a retail business and that is the lowest margin of the three businesses. In our subscription businesses, like Rhapsody Unlimited or Rhapsody To Go, those are negotiated licenses with labels that tend to be a couple of year licenses that come up for renewal cycles. And then on subscriptions, for radio products we typically are working in a statutory licensing mode, and then to further complicate it, in most of our business it is B to C, where we are incurring the cost of the content but we are also increasingly doing B-to-B business, like for instance the way we work with Verizon on V CAST music where we provide the service there and then they in that case carry the licenses with the labels and they pay us a management fee for managing the service as it scales up with users. So we do not disclose those margins. I don’t think we give specific trend information on those, other than clearly one of the benefits you get from scale as you become a more significant provider of services to consumers and manage a large number of subscribers, you have the opportunity to engage in a different set of discussions with your suppliers. Suffice it to say, we have spirited discussions with our music industry suppliers around a range of topics. I mentioned this notion of DRM free, which has been an active discussion. There have been a few others. I think those -- the best thing I would say about those discussions is they are ongoing and we manage the economics of our business in a balanced way across all those different modes of doing business, which is one of the -- the general manager of that business has a particularly interesting job to do in terms of managing across all those different businesses. But I’m sorry, we’re not going to disclose any of those particulars and you guys are on your own in terms of how you model that. Could we move on to the next question, Operator?

[Operator:]

Our next question is coming from Darren Aftahi with ThinkEquity.

[Darren Aftahi:]

Good afternoon. I just have two quick questions. Could you talk a little bit about your games revenue and why that was flat quarter on quarter? Are you seeing a slowdown in any way? Second, could you talk about take rates of people who are trialing the Best Buy service when they bought the Sansa Rhapsody?

[Michael Eggers:]

Why don’t I go ahead and take the first question? In terms of the games revenue, as I mentioned before and as we talked about a number of times, the games business is starting to become more and more advertising based. While it is still a small portion of the overall revenue, it is becoming a bigger portion of the revenue. As a result, the seasonality effect, we are starting to see some of that in our games business as well. So we are seeing a lot of that from the fourth quarter to the first quarter, some of that seasonality as it relates to the advertising revenue. But we do expect that there is a lot of great things for the games business. As Rob mentioned, we came out with some new products. The ad-enabled games that we are seeing, we are very pleased with those results, and we are also making some changes to our Game Pass product that we think will have great customer benefits and we look forward to seeing that reap those benefits in the future.

[Robert Glaser:]

With regard to the Sansa Rhapsody uptake for the devices, we are providing intentionally a relative, not an absolute index for a few reasons. The first is obviously competitive information and the second is we are only three months in, so we can tell you what the initial subscriber uptake rate is compared to what the generic plays for sure uptake rate is, but what we can’t tell you yet and we are obviously studying the data very closely, is what the lifetime duration of those new subscribers. So we are going to do three times the uptake of subscribers, so if it was X percent, it is now 3X percent, but we do not yet know whether the lifetime duration of that 3X user base is as long as the X, whether it’s longer or whether it’s shorter. So it won’t be until we are further into it that we know what the monetization ratio is, but clearly at 3X the uptake rate, it is sure to be a lot higher per device sold. Next question, Operator.

[Operator:]

Our next question is coming from Derrick Wood with Pacific Growth.

[Derrick Wood:]

Thanks, a couple of questions around music. Sprint lowered their over-the-air download prices to $0.99. Just curious about what your view is on how that impacts the rest of the industry. And then, any sort of color you can give us on how the services with V CAST, the over-the-air downloads and ring-back tones has progressed now that it has been out there for about a year. And then Rob, you mentioned that there continues to be a notable structural challenge in your business. Could you just elaborate on that?

[Robert Glaser:]

I will take the last one first. I think it is fair to say that the subscription category, if you look at the overall category growth, is not as high as we think it could be and there is a whole set of factors for that, and it is fair to say that this interoperability question in general has had a stultifying impact. If you just look at the numbers as reported by the music industry, physical music is down 16%, 18%, 20% in the first quarter year on year. Digital growth, while continuing to happen, is not nearly offsetting that. Our belief is that the music industry, because it did not go for an interoperable method of purchases, and because of some of the concerns about cannibalization that they have had that have led to a more restrictive approach to marketing subscription services than would have been ideal, have slowed the growth of the subscription category compared to what would have been possible with a less restricted view of that. We have told the music industry that privately and in some forums publicly. So on the interoperability front, the music industry is making good progress. EMI in particular has moved the ball forward there on this notion of really moving more flexibly and more creatively to really let subscriptions be something that’s pervasive. I think it is fair to say that there is still work to do to get the industry to worry less about cannibalization and worry more about driving growth. That is what I was saying were the structural elements. In terms of our Verizon relationship, we are very pleased with the relationship. It spans ringtones, ring-back tones and music on demand. They have done a great job with all those services and we are very pleased with their work but it is for them to disclose any of their metrics and their numbers, because of the fact that they are a major player in that business and we are in that context, a B-to-B provider. We do disclose the aggregate growth of our subscriber amounts and as I mentioned in the call, we have gone from 20.2 million subscribers under management on a worldwide basis at the end of Q4 to 21.9% [sic], so we added 1.7 million subscribers under management on a worldwide basis, but we do not break that down to particular carriers because of the nature of these things. Finally, with regard to the OTA numbers, we think having a rationale price so that OTA prices are consistent with download prices is a positive development. We do not think it is as important as the interoperability, but it is a positive step forward. I would say in general, we see the music industry moving forward to be a smarter, more effective partner, but I would say that we think there is even more ground to cover. In the interest of time, should we move on to the next question, Operator?

[Operator:]

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

[Kit Spring:]

Can you give us an update about your strategy for your RealPlayer? And then secondly, give us an update on your patent enforcement strategy. Do you think people are still infringing on your patents and what are you doing to get paid for that? Thanks.

[Robert Glaser:]

With regard to RealPlayer, intentionally, we didn’t update what we said on the last earnings call. The last call, we covered all of our businesses as we annually, and then typically on the quarterly call, throughout the annual cycle we will pick two or three of the businesses and go deeper on them, rather than broaden everything. I will reiterate what we said before which is we have been watching the UGC phenomenon carefully. We think that the RealPlayer is a very vibrant product. We delivered more RealPlayers in 2006 than any year prior, so on a worldwide basis, it continues to be a very, very popular piece of software in the history of the Internet, probably one of the five most popular pieces of software ever created. Even last year, I’m guessing, one of the five most downloaded pieces of software around the world, and we have some really interesting ideas on how to add to its value. But since we did not announce any products on this call, I am going to keep my patter dry on the specifics on that. With regard to patents, probably the most visible manifestation of the success we are seeing is that we now have all the big handset guys on the team, so it used to be we had three or four of the six, then four or five of the six. Now, as I mentioned, all of the major handset guys are involved in licensing either Helix DNA or RealAudio or RealVideo or a combination of those, and our goal is to get them on more and more handsets within their product line. 23 million is the most we have ever had in terms of handsets per quarter. Q4 is obviously a strong seasonal quarter and we get those quarter lag reported, so we will see. There may be some seasonality in it but we think the trends are in a very strong direction there. Do we think that people are infringing on our IP that aren’t licensees? Yes, absolutely we do and we obviously are prepared to litigate, but we prefer to license. So I think the growth of our IP licensing program is the best indicator of the progress we are making there. Obviously if we think we need to use sticks in addition to carrots, I think our track record of being willing to use litigation when people are violating our rights I think is well-established, but I don’t have anything to announce today, nor do I want to set your expectation that that is our primary strategy in that area, because licensing is our primary strategy in that area as we have mentioned, even when we have talked about some of our patents. With that, next question, Operator.

[Operator:]

Our next question is coming from Anthony Noto with Goldman Sachs.

[Joan Watson:]

This is actually Joan Watson in for Anthony. A quick question for you on the subscriber numbers; is there any way that you could provide us a breakout of the music subscribers excluding the music on demand subs, so we can get a better idea of the traction with the Best Buy SanDisk product? Also, if you could just give us an update on your work with access providers as a means for sub acquisition. I know the deal with Comcast and Cox. If you could talk a little bit about how those are tracking and your view on that.

[Robert Glaser:]

I will talk about the first one to the extent we can. When we added WiderThan to the family, we decided to add the MOD subscribers that they have, which is principally one customer, SK Telecom and the MelOn service in the mix, and we did not decide to break it out further, so we essentially added that in. I will say that of the increase from 2.55 to 2.675 in the quarter, the bulk of those, the vast majority of those came from the Rhapsody side of the business, and in particular the growth there was very heavily influenced by Best Buy and SanDisk, but I don’t think we will be breaking it down further than that. We will take it under advisement but there is no plan to do so. With regard to our access provider relationships, we certainly see them as good opportunities for a couple of different models of business for providing white label or co-branded services, for providing free radio offerings, as we have done, for instance, with Comcast, which has been a successful multi-year relationship we have had with them, and with other carriers. I think this year we will try some billing integrated experiments, and it will be interesting to see whether if you have billing integration, if you have a nice offer, whether you are going to be able to get significant up-sell rates. We decided the biggest thing we wanted to try in the Christmas season for ’06 and over the last six months was deep device integration, and the success of the Sansa Rhapsody is very encouraging in that regard. I think it is fair to say that these ideas are not mutually exclusive in any way. You can do both that kind of integration and you can do service billing integration, and we look to do that as well. And then the last thing is, if you’ve got services that span multiple modes, the PC and the mobile phone, or the PC and the television, that is a model that really integrated billing really pays off because it already makes sense to the consumer because you are tying in with a service provider they already use. I think billing integration, offer integration is a great future opportunity for the music business, but we are not announcing any specific deals that fit that framework here today and didn’t in the recent weeks. Next question, Operator. I guess we have time for a couple more.

[Operator:]

Our next question is coming from Ross MacMillian with Jeffries.

[Ross MacMillian:]

Thank you. Maybe just a quick one for Michael. If I look at the music numbers, you had about a 5% increase in subscribers sequentially, but the revenues were up 1%. Is there anything in the mix that might be implying a lower ARPU, or lower revenue per net new sub?

[Michael Eggers:]

Well, I think there are a couple of things that are factored in there. The first is that we have, again I will get back to some of the seasonality effect where in the fourth quarter, advertising was a much bigger percentage of our music business than it was in the first quarter. Again, that is evidenced by looking at our media properties revenue, which decreased 15% from Q4 to Q1, which includes that advertising. Additionally, in the fourth quarter we began selling MP3 devices directly. Again, that is a very seasonal business, much greater sales in the fourth quarter than in the first quarter, and then as at relates to some of our up-tick in our subscribers, we do see a lag in that based on the subscribers that we acquire through the holiday season. They tend to have 30 to 60 day trial periods. We start to see those show up in the back-half of the quarter, so of course in that case, we would see the subscribers at the end of the quarter, but the revenue tends to be more focused towards the back-half of the quarter because we start to see those subscribers become paying in the last month of the quarter.

[Robert Glaser:]

Operator, we have time for one more question.

[Operator:]

Our last question is coming from Ingrid Ebeling with JMP Securities.

[Ingrid Ebeling:]

Can you please clarify when the date of the music subscription price change will take effect, and why you don’t think you will get more of a churn, given the pricing of some of your competitors?

[Michael Eggers:]

Sure. I’ll go ahead and take that question. We expect the price increase will start to take effect mid second quarter, and we are offering to existing subscribers the ability to lock in their price for one full year, so that we are looking to upsell subscribers to a full-year subscription. Of course, that has many benefits because while we might get a lower monthly subscription, we have those consumers for a one-year subscription as opposed to a monthly subscription. In terms of the churn, as Rob mentioned, we think that we have a differentiated product offering that provides the value to consumers, and we feel that based on one of the benefits of being a company that markets on the Internet is we have the ability to do some real time price testing to see those results. Similar when we have had other prices that have been different from the market, we have held to our guns on those and I think those are the right decisions and we believe that going forward with this price change that we think consumers do see the value and that it will be a long-term benefit to our financials.

[Robert Glaser:]

Lastly, because we have added so much functionality the way that our Rhapsody Direct and our Rhapsody DNA technologies work, we really have a differentiated service from a technical standpoint where the differentiation is much deeper, so we think that there is a set of value we offer that where there aren’t -- there are only partial substitutes, there aren’t complete substitutes for in the marketplace. Again, we are only -- we did the notification for this increase a month or so ago and we have done a few pricing actions in the past. We had a sense of what the curve is of when people make any changes that they are going to make, so between given the option of going to the annual plan at no price increase and the date of the notification, we feel very good about where we are ending up here and think it’s positive for our business and represents appropriate value proposition offer for consumers. With that, I would like to thank everyone for joining us today. I want to thank the team here at Real for an excellent first quarter. Look forward to talking to you all in three months time and imagine we will talk to at least some of you before then. Until then, take care, everyone and thanks a lot for being on the call today.

[Operator:]

This concludes the RealNetworks first quarter 2007 results conference call. You may access the replay of this conference call on the RealNetworks website at http