RealNetworks, Inc.
Q4 2014 Earnings Call Transcript

Published: 5 Feb 2015

[Operator:]

Welcome to RealNetworks' Fourth Quarter 2014 Earnings Call. At this time, all participants are in a listen-only mode. After the presentation, there will be a question-and-answer session. [Operator Instructions]. This conference is being recorded. If you have any objections, please disconnect at this time. I would now like to introduce our first speaker, Drew Markham. You may begin.

[Drew Markham:]

Thank you, Sharon, and welcome to the RealNetworks fourth quarter and year-end 2014 conference call. Before we begin, I remind you that some matters discussed today are forward-looking, including statements regarding RealNetworks' future revenue, adjusted EBITDA and operating expenses and trends affecting its businesses and prospects for future growth and profitability. Other forward-looking statements include the company's plans to implement its strategy and invest in its products and initiatives, as well as the expected growth, profitability and other benefits from those activities. All statements other than statements of historical fact are forward-looking and involve a number of risks and uncertainties that could cause actual results to differ materially from these forward-looking statements. We describe these and other risks in our SEC filings. A copy of those filings can be obtained from the SEC or from the Investor Relations section of our corporate Web site. These forward-looking statements reflect RealNetworks' expectations as of today, February 4, 2015. The company undertakes no duty to update or revise any forward-looking statements made during this call, whether as a result of new information, future events, or any other reason. We will present certain financial measures on this call that will be considered non-GAAP under the SEC's regulation G. For a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure, please refer to the information included in our press release and in our Form 8-K dated and submitted to the SEC today, both of which can be found on our corporate Web site at investor.realnetworks.com, under the tab financial information. With me today are Rob Glaser, Chairman and CEO; and Marjorie Thomas, our new Chief Financial Officer and Tim Wan, our outgoing CFO. Rob will discuss company strategy and the progress the company has made in recent months. Then Marj will provide a financial review of the fourth quarter and full year 2014 and the outlook for the first quarter of 2015. After their prepared remarks, they will be pleased to answer questions. Now, I'll turn the call over to Rob.

[Robert Glaser:]

Thanks, Drew. Good afternoon, everyone, and thanks for joining us. Today, I’ll give you an update on the progress we made both in the fourth quarter and for the year 2014 as a whole in turning around RealNetworks and putting the company on a path to achieve sustainable growth in users, user engagement, revenue and profit. I’ll talk about four topics. First, the progress of our most important initiative, RealPlayer Cloud. Second, the continuing progress at Rhapsody affiliate. Third, the state of Real’s other main businesses, mobile entertainment and games. And fourth, a macro view of where Real is today compared to where we were a year ago and what we see for 2015. First, RealPlayer Cloud. In 2014, we led a very strong foundation with RealPlayer Cloud or RPC for short. As you know, we launched the product in late 2013 and ended 2014 with about 500,000 RPC users. As of today, I’m very pleased to announce that we have over 10 million RealPlayer Cloud registered users. RealPlayer Cloud is truly a global product that’s running on 13 different platforms, including our recent release on Xbox and in 10 different language versions. Now that we have laid the strong foundation with RPC, we are working hard to strengthen our footprint in three ways. One is via product innovation. We are committed to both broadening and deepening the RPC product line very significantly in the months ahead. The second way is via partnerships; building relationships with other technology marketing companies who can deeply benefit from the RPC technology and product and can bring us significant distribution and promotion. The third way is to continue to significantly grow both our free and premium user base for RPC. We have a lot of work ahead of us and expect to be making significant investments in the next few quarters in support of RPC. Having said that, we continue to consider RealPlayer Cloud to be the most promising new product in our portfolio and core to our plans to revitalize RealNetworks. Second, I want to provide an update on Rhapsody, the online music service company that we own a significant stake in, and with several of us on the Real team support through our roles on the Board of Directors including my role as Co-Chairman. Rhapsody achieved very significant progress in 2014, achieving year-over-year subscriber grow of over 60%. A key part of the progress has been globalizing Rhapsody to carrier partnerships. Rhapsody is now available in 32 countries. Fundamentally, we believe that Rhapsody is deeply aligned with trends in media consumption as digital music moves away from individual track sales and towards streaming and subscription services. We think that Rhapsody is on a path to create significant value for RealNetworks shareholders. Third, I want to talk about what we achieved in 2014 and where we are today in Real’s other two main businesses, games and mobile entertainment. In games, we successfully launched two new games that are core franchise products in Q4; Slingo Adventure on the social casino side of the business and Emily's New Beginning on the casual side of the business. Both these games are available on both PC and mobile and have achieved early success since their launch of this past fall. This success bodes well for both the future of those franchises as well as the associated distribution, cross-promotional opportunities in the social casino and casual segments. While we have a lot of work to do, we believe we’re on a path to return our games business to revenue growth in 2015 for the first time since 2008. Our mobile entertainment business continues to be relatively stable and we’re working hard both to gain efficiencies in how we run the business and to revitalize the business through both new carrier relationships and the innovative LISTEN product we introduced in 2014. It’s turning out that LISTEN is more valuable in strengthening current carrier partnerships than originally expected, so we’re focusing it more on that direction while also augmenting those efforts with direct-to-consumer sales in select markets. We think this will be a more efficient way to run the business in 2015. Fourth and finally, I want to share a few macro thoughts on where we are today as a company compared to where we were a year ago. Big picture, I think we’re in a significantly stronger position today than we were a year ago for three reasons. First, I believe we’re close to stabilizing where we’re from a revenue standpoint and we’re optimistic that we’ll resume all of our revenue growth in the second half of 2015. Second, our Rhapsody asset has seen significant subscriber and revenue growth and it’s reacceleration in 2014 puts it at a much stronger position than it was a year ago. And third, our senior leadership team is much stronger than it was a year ago. During the past year, we added Mike Mulica to run Worldwide Business Development and Sales and broaden Max Pellegrini responsibilities to include Worldwide Products and Consumer Marketing. We also brought in Atul Bali to run Worldwide Games and brought back Rutger Peters and Erik Goossens to run our casual games group. In one other area we’re exchanging strength for strength. Effective today, Marj Thomas is our new CFO succeeding Tim Wan, a long-time RealNetworks exec. In a minute, you’ll hear directly from Marj but before you do, let me tell you a bit about her background. Marj has nearly three decades of finance experience in world-class technology companies. Her career includes senior finance roles at Intuit, Sony and Hewlett-Packard. Most recently, she served as VP of Corporate Finance and Treasurer for Intuit, a worldwide leader in financial software. Marj brings a fresh perspective and depth of industry knowledge that will be invaluable to RealNetworks as we move through the next phase of revitalizing our company. As I just mentioned, Marj succeeds Tim Wan, a 14-year RealNetworks veteran who recently relocated to California for family reasons. Tim will continue to assist Marj and me as a strategic advisor to help ensure a smooth transition and to help with special projects. Tim has done a terrific job as CFO, and I’m grateful for his many contributions. With that, let me turn the call over to Marj to review the financials.

[Marjorie O. Thomas:]

Thanks for that kind introduction, Rob. I’m very excited to join RealNetworks during this time of change and innovation. I look forward to working with this great team to help the company succeed in the years ahead. Now, let’s take a look at the results for the fourth quarter and the full year 2014. For the fourth quarter, our total revenue was $35.5 million compared to $34.2 million in the previous quarter and $50.6 million in the fourth quarter of 2013. For the full year 2014, total revenue was $156.2 million compared to $206.2 million for 2013. As Rob said, we have continued to execute on our strategic transition investing in our core new business initiative and focusing on building a stronger foundation for future growth and profitability. Throughout the process of rebuilding our businesses, we have continued to allocate our resources and capital in a way to maximize long-term growth. During 2014, we reduced our operating expenses in legacy businesses while reinvesting in new product innovation in each of our business segments. Because new initiatives take time to monetize and scale, we will continue to manage expenses tightly in the coming quarters. During the fourth quarter, our combined gross margins were 50%, up from 45% in the previous quarter. This sequential improvement is primarily due to seasonality in the IP licensing business. Adjusting for restructuring charges, our total fourth quarter operating expenses decreased by $6.3 million or down 15% year-over-year as a result of our expense realignment efforts and lower marketing expenses. Our bottom line results reflect the ongoing strategic investments needed to revitalize our businesses. Our total adjusted EBITDA for the fourth quarter of 2014 was a loss of $15.2 million compared to a loss of $6.6 million for the fourth quarter of 2013. The EBITDA loss for the quarter continues to reflect the decreased revenue from our traditional product lines and continued investments in our growth initiatives, partially mitigated by our recent cost reduction efforts. For the full year 2014, adjusted EBITDA was a loss of 56.6 million compared to a loss of 23.7 million for 2013. Now, let’s look at our quarterly results by business unit, starting with the RealPlayer group. For the fourth quarter, RealPlayer revenue was 8.9 million, up 35% sequentially but down 47% for the fourth quarter of 2013. The sequential increase in RealPlayer revenue reflects seasonality in the IP licensing business. As we have discussed previously, the year-over-year decline in the RealPlayer business was primarily due to our focus on building the RealPlayer Cloud subscription service and away from legacy products plus industry-wide changes in our third-party distribution and IP licensing areas. Adjusted EBITDA for the RealPlayer group in the fourth quarter was a loss of $7.3 million. Our mobile, entertainment revenue was $17.6 million, down 8% sequentially and 20% from the fourth quarter of 2013. The sequential and year-over-year decline reflects a one-time revenue in the prior year and the pivot we are making away from our legacy product offerings to new products for mobile carrier. Adjusted EBITDA in the fourth quarter for the mobile, entertainment business was break even. Games revenue was 9 million, up 7% sequentially but down 23% from the fourth quarter of 2013. The sequential increase in games revenue reflects the initial success of our new products and a seasonal pattern in our games business. The year-over-year decline reflects the continued industry-wide transition from PC games to social and mobile games resulting in lower subscriptions and unit sales of our traditional products. The adjusted EBITDA for our games business in the fourth quarter was a loss of $3 million. We continue to maintain a strong cash position, despite our continued restructuring and capital investments. At the end of the fourth quarter, we had $161.7 million in unrestricted cash, cash equivalents and short-term investments. This cash position reflects approximately 1.7 million in severance and other expenses related to our recent cost reduction initiatives. Looking forward, we expect total revenue of $30 million to $33 million for the first quarter of 2015. We continue to focus on being disciplined with our operating expenses even as we make significant investments in support of our new products. Taking all these factors into consideration, we expect our total adjusted EBITDA for the first quarter to be a loss of $18 million to $21 million. While we have not yet completed our strategic transition and return to growth and profitability, we made solid progress during 2014 on executing our plan to revitalize RealNetworks. We have over 10 million users of RealPlayer Cloud. We’re managing our non-core legacy products for efficiency and profitability. We are continuing to invest in our new multi-device cloud-based products and services and our financial investment in Rhapsody continues to look promising. We also have a strong cash position and valuable assets on our balance sheet and we will continue to invest in our business and take advantage of strategic opportunities as they arise. So that ends our prepared remarks. Now, Rob and I would be pleased to answer your questions. Operator?

[Operator:]

Thank you. [Operator Instructions]. Our first question comes from Eric Wold of B. Riley. Go ahead, your line is open.

[Eric Wold:]

Thank you. Good afternoon. A few questions. I guess one, Marj, in the $30 million to $33 million revenue guidance for the first quarter, can you give us a little more detail on how we can see the trends shake out within the three individual business segments?

[Robert Glaser:]

This is Rob since it’s Marj first day in her role, I’ll step on this one. We generally don’t do guidance on particular segments and while Marj will take any feedback on ideas for doing going forward, it wasn’t our plan to make any change in that today.

[Eric Wold:]

Fair enough, but I tried. Let’s move on to on the RealPlayer Cloud, obviously you’ve had a great success going from 0 million to 10 million users over the past year in change. I’m not sure if you’re ready this time to kind of talk about where the paid subscriber number is, but maybe generally how some of the early adopters have tended in terms of their usage of the offering and thoughts around how we could see potential page subscriber conversion as new features come out of beta in the coming months?

[Robert Glaser:]

Well, as I know you know Eric, we are in beta with an upcoming release of the product and obviously we haven’t announced it yet and it’s still in the test phase and we’re working on a lot of interesting capabilities around new products. And as one of the three points I mentioned in my comments is that we see an opportunity to significantly both broaden and deepen the product and by that I mean broaden the set of things that the product does and deepen the relationship that consumers have with it. We like the level of engagement we have today. We love the reviews the product is getting. It’s got very high ratings on all the platforms and we have a lot of positives to build on. But we think we can do even better in terms of, as I said, broadening and deepening the engagement. I think that will have a few positive impacts if we do that well. One is, obviously the more valuable a product is to people and the more they use it, a higher percentage of people consider it valuable enough to pay for it. Second is the more people use it, the more they engage with it, the more they bring their friends and associates and other people into the mix, so you get these nice viral feedback groups that you can unlock associated with that. And then the third, the broader value of the product, the more valuable it is not only directed to consumers but to potential partners. So, this software business which I’ve been in for 30-something years is a lot about getting flywheels to spin in a certain way. You have something that’s good and you build on it. You make it even better and make it even better. And if you do it right, at some point you hit a point where those feedback groups really start building on themselves very powerfully. I’ve been associated with three or four of those in my career and a couple here, a couple of Microsoft and when you get those kind of positive feedback going, it’s pretty magical. And we’re on a good path with RealPlayer Cloud. We’re not yet at a point where I would say, wow, all those positive feedback groups are resulting in like an incredible blockbuster, but in my experience there are very few overnight successes. Most of the time it takes a while for things to build; they build and they build and then you get into these compounding phenomena. And I want to be very careful in my comments today. It’s not shooting fish in a barrel to get there but we very much like the trajectory we’re on.

[Eric Wold:]

Perfect. And then lastly on Rhapsody, you talked about how you’ve grown the subscriber base 60% year-over-year. I think the last official number we got was 1.7 million --

[Robert Glaser:]

Rhapsody was up 2 million.

[Eric Wold:]

Sorry, 2 million in July. Any update on that number? And then kind of on that tangent, what are your thoughts on the value proposition of Rhapsody given potential trend towards windowing and away from kind of maybe three ad supported offerings that are out there?

[Robert Glaser:]

So on the first point, the 60% number we’re putting out today is being put out obviously with the consent and knowledge of the Rhapsody team. The Rhapsody team has not chosen to update their overall number. You can do some inference on the fact that it’s probably more than 2 million. If it was 2 million at that point and we got 60% year-on-year but the Rhapsody team will announce its next milestone when it feels like it’s the right time for them. In terms of the opportunities around windowing and more generally leveraging our position as a fundamentally premium-based subscription service offering, we like the trend line of conversations we’re having with the industry. Certainly, our growth has given us a significant increase in our position at the table. We now have significant market position in the U.S., in Europe and in Latin America, so we are significant in three major regions. We’re seeing a significant impact in our partnerships with carriers in all three regions and that’s very encouraging. So, I would say that that business had a very good 2014 from a macro strategic standpoint and we like how it is positioned in the market. There are other competitors, as you well know and as probably everyone on the call knows, but we are in a very significant position probably in terms of usage, most measures of footprint, the number two global player in the industry, certainly number two of the independent companies and we see a bright future for that business. And how we leverage that and over time monetize that definitely remains to be seen because we own under 50% of the company, we don’t consolidate it and we view it fundamentally first and foremost as financial investment but one that we think is going in the right direction. So, our primary focus is continuing to help support its move into the right direction.

[Eric Wold:]

Thank you, Rob.

[Robert Glaser:]

Those are all great question, Eric.

[Operator:]

Our next question comes from Chip Saye of AWH Capital. Go ahead, your line is open.

[Chip Saye:]

Hello, Rob, and welcome, Marj. I have a couple of questions. One, we don’t have a Rhapsody number of subscribers at the end of 12/31. Can you tell me if it’s up from that July number?

[Robert Glaser:]

I can safely say it is up from the July number. It would have been very hard to grow 60% year-on-year if we were stuck at the 2 million. But in terms of how much Rhapsody is up and what the next new number is Rhapsody will put out, that’s up to them and we certainly – we obviously operate in two modes here. Tim and I are both on the Rhapsody Board. We have a very up-to-date view what’s going on in the business and we understand when and how the business chooses to disclose its specifics on its milestones, but everyone was comfortable with us sharing this comparative since this is our year-end call for RealNetworks, it seemed a sensible way to kind of line things up.

[Chip Saye:]

Okay, I appreciate that. Number two, I have a question on the cash burn. It continues to be a little more maybe than I thought it would have been, looks like – and maybe you can even say concerning. Looks like you have 10 quarters of cash left. Do you have any current plans? I know you made one change last year. Do you have any other plans in place to adjust your cash burn?

[Robert Glaser:]

I’ll let Marj speak to that since she is the new sheriff.

[Marjorie O. Thomas:]

Thanks, Rob, and thanks, Chip. We’ve got adequate cash to cover our operations and we feel comfortable that we obviously have goals to grow and hope to see that by the end of 2015. And our goal is to become profitable as well although we’re not at a point yet where we’ll disclose when that will happen.

[Chip Saye:]

Do you have any target for how low the cash balance has to go in terms of whether you’d have to take more dramatic action in terms of cost cuts?

[Robert Glaser:]

I’ll let Tim speak to that --

[Chip Saye:]

You’re not going to spend it all, right?

[Tim M. Wan:]

Hi, Chip. So obviously we certainly have internal plans in terms of we understand what our capital requirements are for each of our business and the investments we’re making within each of our segments. I think as Marj just mentioned, we’re not prepared right now to provide where our cash balances outlook will be beyond Q1 but you know us and you’ve seen how disciplined we’ve been while we’ve been investing that we’ve had major restructuring over the last two and a half, almost three years. We are optimizing – as we said on the script, optimizing our legacy businesses. We’ll continue to do so and make smart investments for the long term.

[Robert Glaser:]

The last thing I’ll say and add on this is you might imagine in addition to Marj’s responsibility for watching the cash like a hawk. I also am very, very mindful of cash. I feel very good about the priorities we’ve made in terms of where we’re investing and why and the opportunity for hopefully outstanding returns on the investments we’re making which are – even the single largest source of the investments are associated with RealPlayer Cloud from a number of standpoints. Those numbers are kind of self-evident. They come out of the reason we have modest investments in a few other areas but that’s by far the most significant investment area and we’re very encouraged by the opportunity for greater ROI there. And so we’ve said a few times and clearly not said in this script, but it’s true. We can run the business for short-term profitability at the expense of having significant growth engines and we have decided to take something that we feel very good about as a growth engine and invest in it. We’re mindful of the fact that we report our results quarterly, we’re mindful of the fact that you see certain metrics we’ve put out there but we don’t obviously share everything with the public markets that we share with our Board of Directors as you’d imagine or the internal metrics we use to run the business, but we are extremely mindful of the balance sheet of the company and look at our investments in a very rigorous way, look at our operating expense in a very rigorous way, have made significant reductions in operating expenses and we will continue to watch those very rigorously and make additional adjustments as necessary while still investing in the growth opportunities, which is what we’re doing.

[Tim M. Wan:]

Thanks, Chip. Next question, operator.

[Operator:]

Our next question comes from William Meyers of Miller Asset Management. Go ahead, sir, your line is open.

[William Meyers:]

Thank you. Another question about the Q1 guidance. I’d like to understand a little bit better, if possible, whether that is guided down a little bit because of your subscription revenue component, does that fall off typically in the first quarter or is it mainly your traditional and non-subscription revenue that might be down a bit?

[Marjorie O. Thomas:]

Yes, it’s really the legacy business and as we mentioned, the IP licensing we had a bit of a tailwind in Q4, so that is really what it will be in terms of a little bit of a drop off in Q1.

[Robert Glaser:]

Our company’s never been massively seasonal, but we have a few things, a few of our advertising lines and the seasonality of them. Sometimes in the IP licensing business there will be some opportunities, companies will have to payout things in the fourth quarter if they have increased volumes associated with the holiday season, especially with their products. We have had a few sides [ph] to our business in the mobile, entertainment, we’ll have some system integration type revenue that tends to be seasonal. There was lots of that this year than there’s been in the past, but it tends to be a few small things rather than any one big thing that affects, which we think of as the seasonality factor.

[William Meyers:]

Okay. And I know you don’t really have typical years, but I’m going to ask it this way. So in a typical year, if it’s just seasonality not these other larger trends, what would be your strong and weak quarters?

[Robert Glaser:]

The word strong and weak are obviously relative terms. If you look historically at the company over the periods when we were growing and in certainly Q4, we’re almost always integrating Q1 and Q1 would typically be the lowest quarter of the year depending on the growth rate of the year. But we had some years where we had 100% growth where Q1 was bigger than Q4 but had slower – if you do the annual comparison, you would have seen a bigger number. So I think it’s fair to say that if you look at Q1 versus Q4, Q4 from a sort of cyclical standpoint historically has tended to be the biggest quarter. It’s not like retail, it’s not like 50% of a revenue or anything like that, but a little bigger in Q1. In a typical year, it might be – it would be 20% of the revenue. Obviously, it’s hard because there’s so many apples and oranges comparisons but it would tend to the case that Q1 is the seasonally tallest quarter and Q1 is the seasonally lowest quarter.

[William Meyers:]

Okay, great. That was helpful. Thank you.

[Tim M. Wan:]

Thank you. Operator, next question.

[Operator:]

Our next question comes from Russell Lynde of Park West. Go ahead, your line is open.

[Russell Lynde:]

Hi. Good afternoon. Can you hear me?

[Robert Glaser:]

Yes.

[Russell Lynde:]

Thanks for taking my call. Two questions. The first, can you just – I assume most of your investment is going towards RealPlayer today. Can you just walk us through kind of what the opportunity is there? Why you made the model change? And just kind of give us the elevator pitch on that?

[Robert Glaser:]

I’ll give you the elevator pitch for the current RealPlayer Cloud and then there’s obviously – anytime you introduce one of these products, you have a multiyear roadmap associated with them. And so it will be more backward looking than forward looking, but still significant. So, people are creating a massive amount of personal digital video in their life. Basically everyone’s walking around with a video camera. There’s a whole bunch of things that don’t work right with that from a consumer standpoint. One is compatibility. You create video in one place, it doesn’t play everywhere, it doesn’t play on a high quality in most places and so we had a bunch of technology that we brought to bear to create a product that in a very innovative way takes video from whatever [indiscernible] video you have, be if from your camera phone, be it things you downloaded on your PC, be it something from a camcorder that you loaded onto your PC and we upload it to the cloud and then we store it in multiple formats where there is super high fidelity version of it. There’s a lower bit rate, a lower fidelity version of it. And then we deliver the best version for your device and for playback. So we built that product and launched it about 15 months ago and that’s RealPlayer Cloud. It levers our legacy of a PC RealPlayer but for the first time it brought the product into a cloud-centric and mobile-centric future and on dozen devices, or I guess I said 13, the most important of which are mobile phones like Android and iOS mobile phones, tablets, Android and iOS tablets as well as of course PCs are still a very important part of the mix there. And then we do playback on TV attached devices and we have a full Web product as well for any device that has a Web browser with one of the above. So that product has again gotten off to a very good start. It has a meaningful role in the market but we saw it as being an initial opportunity to get into a business that we thought was even bigger. The details of that strategy are still forthcoming. We tend now to tell our competitors about what we’re doing on these calls, but suffice it to say we think that is a very strong foundation for us to build on.

[Russell Lynde:]

And when should we expect Phase 2 to be announced or --?

[Robert Glaser:]

That is an excellent question and I can certainly understand why you would ask it, and I think you can certainly understand why I would not give you a specific answer beyond what I said in my comment about innovation that we think we’ll to market in the months ahead.

[Russell Lynde:]

In the months ahead.

[Robert Glaser:]

Yes.

[Russell Lynde:]

Okay. And then on Rhapsody, can you just talk about how the model is different and I think Eric was kind of into this, but how it’s different from Pandora and Spotify? Are you paying on a variable cost model per sub and that means there’s no leverage at the gross margin level or is there an ability to leverage additional --?

[Robert Glaser:]

Those are excellent questions, so I’ll split it out. So Spotify and Rhapsody operate under a similar licensing scheme although there’s one big difference that I’ll come to in a second. Pandora operates under a rights regimen that exists in the U.S. called DMCA or Digital Millennium Copyright Act where the amount of money they pay per song is established by Congress and then there’s a copyright office that every few years revives that rate that sets a published rate and there’s various categories of how you can qualify for different revenue splits and different rates per play. So Pandora does not in the general case, as far as I know, have direct licenses with the music labels. They’re playing the statutory rate. Their business is principally an ad supported business with some premium product. The Rhapsody product – that’s all true for Spotify is a much better consumer product because we support radio playback, we also support a much richer experience where you can listen to whatever songs you want, whenever you want them. You can create your own custom playlist. You can download them and listen to them when you’re on an airplane or otherwise when you’re online. So you have a much more flexible way of experiencing the music. Those licenses are negotiated licenses directly with the labels and with the publishers. Rhapsody in addition having relationships with three major labels, has relationships with a couple hundred independent labels and then all of the various publishing entities that can control the song writing publishing rights associated with those tracks. Spotify is a similar model. The [indiscernible] Spotify is Spotify has a very significant part of their user basis are free users where they try to make back some of the money with advertising but their idea was that they would use them to acquire paying customers on the premium side. That has turned out to be a very capital consumptive model for Spotify. You probably read that they’re trying to raise several hundred million dollars more. So far they’ve managed to convince investors that their capital consumptive nature of that business still was not something to fret about, so they’ve been able to raise a significant amount of money. Obviously attractive valuations from the standpoint of their current shareholders and if they can keep doing that, obviously more power to them. Our model is more conservative or preserving with regard to capital. In terms of your question about scale economics, we get scale economics in this business from a few standpoints. One is you’re leveraging the fixed cost of your technology which is significant and we have to keep innovating and updating and improving it across a larger base of users. The gross margin of that business it gets published at various points, so I won’t try to second guess what Rhapsody has described, but you have different gross margins depending on whether you’re doing business with a retail product where you have customer acquisition cost, you have to subtract from that or if you’re doing business on a wholesale base, like with the mobile carrier, where you don’t have a high stack cost. So the business has sort of two profiles. It has the direct consumer acquisition piece of it and it has the carrier or other big distribution channels that drives much of the customer acquisition. That business is on that we believe adds scale, has significantly positive economics. We also think it’s a business that has very deep strategic value because music has played such a deep emotional role in people’s lives. It’s – people call it the soundtrack of your life. And so being the place that millions of users go to get and pick their digital music and connect with other things they do, we think is a very strategic position to be in for the industry. And whether we end up monetizing it through the profitable cash flows at scale or through relationships of various kinds with people who would really value the leverage opportunity we have as an on-ramp to that many consumers is still to be determined. But we think we’re in the process of building a valuable asset. How much value is it worth [ph] Spotify, a company that has in round numbers six times the number of paying subscribers that we do, but it’s consumed way more than six times the amount of capital we have is out there raising money, it’s being quoted a saying in the paper that a $6 billion evaluation, I wouldn’t extrapolate narrowly what that means for us other than that we think it bodes well for the fact that people think there’s a lot of value in this space.

[Russell Lynde:]

Very helpful, thank you.

[Tim M. Wan:]

Next question, operator.

[Operator:]

Our next question comes from Dan Weston of WestCap Management. Go ahead, sir, your line is open.

[Dan Weston:]

Hi. Good afternoon. Thanks for taking the questions. Guys, I got on a little late. Congrats on the 10 million users on the RealPlayer Cloud. Did you quantify how many have migrated to the paying subscriber base yet?

[Robert Glaser:]

No, we did not and you are not the first person to ask that question. What we did say is, with my other comment, we see opportunities in broadening and deepening our relationship with our consumers from a standpoint of the new feature and capability we’ve added new partnerships we’re in the process of putting together and as we do that, we feel very good about the long-term opportunity in front of us but we still have a lot of work to do.

[Dan Weston:]

Fine, I can respect that. Next, in the games division, you had two launches in the Q4 with the Slingo Adventure and the New Beginning. I think you mentioned on your prepared comments that the early results or metrics look promising, look like it was off to a good start. Is there anything that you can share with us in terms of what metrics you’re seeing internally there that would confirm that statement?

[Robert Glaser:]

I break it down because there are two different business models. The Emily's New Beginning is a sequel, it’s the 10th in a franchise that we built internally actually with our games studio in Europe and for each of them, our total revenue for each game has exceeded the revenue of the previous games. We haven’t broken them out but it seems like we have done a good job of continuing to create content that our current users find valuable and that we are able to attract more revenue on. Particularly the last few, we’ve done a very good job of getting significant mobile revenue and those are games that are basically – there’s a free version and there’s a paid version. So they are not in the micro transaction type business for that game and one of the learnings is when you have business games that work well on that model, it tends to be best to not to try to artificially switch them to a different model because consumers get used to paying for a certain kind of game a certain way and leveraging that in support of our casual game subscription business works well for us, leveraging it for distribution for other casual games. That’s sort of our legacy core business, which we see as I mentioned the comment that we think that '15 will be our first aggregate growth year for games revenue really in six, seven years. So that foundation we feel good about. On the social casino side, which is what we consider Slingo a part of, those games are measured by the fundamental [indiscernible] we call ARPDAU, average revenue per daily active user, and then on top of that you want to look at what the frequent usage and how often you have users in there, how many times a month do they come back, how long do they stay with you. Do they progress with the game? And then there’s also what’s the virility [ph]. How much of those users sign up other people or encourage other people to play? And so those are the three metrics we look at for that game. I don’t think we’re publicly commenting on which of those metrics we’re thrilled with, which of them were just okay, but the aggregate of it means that one track to make that a good business and levers the Slingo acquisition we did I guess a little bit over a year and a half ago.

[Dan Weston:]

Very good. And then lastly in the mobile entertainment division, I guess if my numbers if I wrote them down properly was down 20% year-over-year. Is that correct?

[Marjorie O. Thomas:]

Yes.

[Dan Weston:]

Okay. And then I think you mentioned that you had some one-time revenue benefit in last year. Can you quantify that?

[Robert Glaser:]

Tim, do you remember what we said last year about what the one-time benefits in mobile in Q4 were, so I guess the question --

[Tim M. Wan:]

Yes, we had some PS work and we generally see some seasonality related particularly in our carrier business with our relationship with SK Telecom. That was the majority of it. Dan, I hope that answered your question. If you need a follow up, more than happy to connect with you – Marj and I will connect with you after. Operator, I believe that was our last question. Thank you everyone for joining the call.

[Robert Glaser:]

A last thing since this will be the last time that you hear Tim’s voice on the call. I look forward to working closely with Marj in the months and years ahead. I did comment earlier on Tim, I just want to thank him once more and embarrass him one last time. He’s done an amazing job as our CFO and he’s made this transition smooth as Marj and I would have hoped and we’re all grateful for that. Tim is continuing to help us on a number of projects. I’m going to try and string him along on that as long as I can, but however it all plays out, Tim is a personal business friend for life and I couldn’t be happier to have had the opportunity to work with him as closely as I have.

[Tim M. Wan:]

Thank you, Rob. Thank you, everyone.

[Robert Glaser:]

Take care, everyone.

[Operator:]

This concludes today’s conference. Thank you for your participation. You may now disconnect.