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RealNetworks Inc., (NASDAQ:RNWK)

Q1 2009 Earnings Call

May 7, 2009 05:00 pm ET

Executives

Marj Charlier - VP of Investor Relations

Michael Eggers - CFO

Rob Glaser - Chairman and CEO

Analysts

Justin Patterson - Morgan, Keegan & Company, Inc.

Vasily Karasyov - JP Morgan

Michael Olson - Piper Jaffray

Jennifer Watson - Goldman Sachs

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the RealNetworks' First Quarter 2009 Results Conference Call. During the presentation all participants will be in a listen-only mode. After the presentation you will be invited to participate in a question-and-answer session. (Operator Instructions) As a reminder the conference is being recorded today, Thursday, May 07, 2009.

Your speakers today will be Ms. Marj Charlier, Vice President of Investor Relations; Mr. Michael Eggers, Chief Financial Officer; and Mr. Rob Glaser, Chairman and CEO.

I would now like to turn the conference over to Marj Charlier. Please go ahead Ms. Marj Charlie.

Marj Charlier

Thank you. Some of the matters discussed today are forward-looking including statements regarding RealNetworks' future revenue, the future impact of foreign currency fluctuations, the prospects of growth, profitability, operational stability and market leadership across our businesses. The future success of our product and service offerings, future benefits from our partner relationship, the value of products and services to our consumers, improvement in operating efficiencies, success of our marketing campaigns and projected growth in our network business.

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 Investor Relations section of our website. The forward-looking statements reflect RealNetworks' expectations as of May 7th, 2009. 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.

Here with me today to discuss our first quarter 2009 results are 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. Rob?

Rob Glaser

Thanks Marj and good afternoon, everyone, and thanks for joining us. Today RealNetworks' reported first quarter results for 2009. Revenue for the quarter was $140.8 million down 5% from the first quarter of last year but up 1% from that period on a currency neutral basis.

Adjusted EBITDA was $4.8 million versus $19.9 million. Michael will discuss our financial result in detail in a few minutes. First I would like to comment on our performance both in the absolute and in the context of the current economic environment. Then I want to discuss some of our key initiatives that we believe will set us up for future growth, increase profit, long-term market leadership.

As our revenue results demonstrate, overall our business in Q1 was steady in tough times. While a few parts of our business were hit hard by the recession, most notably North America and advertising revenue, which was down 19% compared with Q1 of '08 from $4.9 million to $4 million.

In general, we managed to maintain a solid core and have even grown some lines of business. The reason for stability are both structural and strategic, where the 80% of our revenue comes from either from large numbers of small payments consumers made directly to us or from payments made by carriers and other partners to us as a function of small payments consumers make to them.

Moreover, we believe that our products and services offer terrific value to consumers, which is always important but exceptionally important during times like these. On the bottom-line, while we exceeded our internal plan, we achieved substantial lower adjusted EBITDA in Q1 '08. This is primarily for three reasons. First, we had about $6 million in RealDVD related expenses mostly litigation in Q1.

Second, we had a decline in SuperPass subscriptions. In Q1 of last year, CBS ran a second Big Brother show during the TV writer strike and that was not repeated this year. And third, last year we are in the middle of a very profitable RealPlayer upgrade cycle. Nonetheless, we ended the quarter with a healthy cash position of about $376 million up from $371 million at the end of last year.

While we are making a few focused investments, such as RealDVD, overall we're operating conservatively working to reduce our operating expenses, improve our efficiency and increase our operating margins. Michael will provide you with additional details in a few minutes.

To be clear, I am not satisfied with these results even considering the circumstances. We want to achieve greater revenue in profit than we did in Q1. We are focusing on and we will continue to see growth opportunities in both the short and mid-term. We are focusing on opportunities that will set us up for success over the long haul after the current economic downturn has run its course.

Now, I would like to discuss specifically where we see opportunities going forward in each our segments. First, Media Software and Services or MSS. As mentioned above in Q1 MSS saw a significant year-over-year revenue decline. Largely because of two specific cyclical factors in Q1 '08, Big Brother and the RealPlayer 11 update cycle.

We are working hard to drive this business forward by innovative products and services. For instance we have a terrific new version of the RealPlayer in the pipeline, which we previewed this week at RIM conference in Florida which we expect to release later this year. Without a doubt, the most significant development in our MSS segment so far this year is the litigation associated with our RealDVD product.

Because we're in the midst of a preliminary objection hearing, essentially a mini trial, we have to be very circumspect about what we say today. Closing arguments are scheduled to take place this week after which we will await the Judge's ruling. Our legal team is working incredibly hard to put on the strongest possible case we can, and I am very proud of their work today.

I will also confirm that in court last week we publicly demonstrated for the first time a version of RealDVD, codename Facet. Facet is a complete hardware design and software stack running on top of Linux that delivers integrated experience designed to be the successor to the standard consumer DVD player. We previously said that we have a multi-pronged strategy associated with RealDVD and Facet is an important part of that strategy. As the situation develops, we will have more to say when the time is right.

Now let's move on to Games. We achieved 3% year-over-year revenue growth to $32.8 million in the first quarter but were down about 3% sequentially. We are focused on revitalizing the Game's business our three key infinitives. Accelerating our systems rationalization from the wave of Games acquisition we did from 2005-2008, delivering exceptional value to consumers. And leveraging excited new growth opportunities associated with both social networks and new smartphone platforms.

Our systems rationalization are not glamorous is proceeding well. We believe we will exit 2009 with significantly improved operating leverage and agility which will translate into increased profit going forward.

Overall, we are very pleased with the re-launch of our GameHouse service, which offers a free ad supported game daily and what we believe is the best value in premium games in the entire industry. Our new FunTicket subscriptions have grown faster than any new subscription games product we've ever offered. Our new value pricing has driven more than 40% year-over-year growth in total GameHouse unit sales and a 14% increase in average monthly unique users on the site. We still have work to do. We haven't yet hit the sweet spot where unit increases outweigh lower unit prices. However, we think we are making progress and positioning ourselves well for both now and after the economic downturn.

During the quarter, our Games business made some significant moves to join the social network revolution and we now have three games live on Facebook. UNO and TextTwist worldwide and Scrabble internationally outside of North America. Already 300,000 people are playing our games each day on Facebook combining to 1.8 million actives users a month.

Since our launch on Facebook our games have been played more than 15 million times. This amounts to four new game plays started every second. The next challenge is to get as good at monetizing this activity as we are in the rest of our Games business. While monetization has been a challenge for almost everybody in the social networking world, we think we have a set of leverage we could use that pure play social games companies don't.

Regarding smartphone offerings, we've scaled up our efforts around the iPhone platform. The iPhone is notable both because it's a powerful platform that enables great game play and because of the App Store a superior merchandizing model compared to the way mobiles has worked in the past.

We've sold more than 800,000 games on iPhone and iPod touch. And five of our games remain the top 20 paid Apps list in the US. We are happy to know that one of our game Tiki Towers recently won the casual game of the year award at Mobile World Congress in Barcelona.

In sum, despite the challenging economic environment and some optimal short-term results, we are making smart targeted investments now. Running our Games divisions more efficiently through the rationalist to back-end systems, delivering superior consumer value in our services and achieving good attraction on two very significant strategic growth opportunities.

While we'll take time to turn the business around. I believe, the steps we are taking now, will pay off in reacceleration of growth and profit in the future.

Now on to Music. Our Music revenue grew 16% in the first quarter over the year earlier quarter, in spite of sharp reduction in advertising and other promotional revenue. This was largely due to a 200,000 year-over-year increase and a sequential increase to 25,000 in Rhapsody Music subscribers. This brings us to a total of 800,000 Rhapsody subscribers at the end of the first quarter. While we continue to make progress in the US, the most exciting development related to our music efforts was in Europe.

In April, our TPS customer Vodafone Spain began offering wireless customers in that country and limited access to music as part of a roughly $16 a month unlimited mobile data plan. This kind of integrated bundling offers tremendous opportunity to deliver value and a great experience to consumers.

Even better, we think these programs can drive up the unit scale of the music subscription business by at least an order of magnitude. Consumers already accustomed to pay monthly subscription fees for telecommunication services. So bundling music in with them seems like a natural fit.

We are an active discussion with both labels and carrier partners in the US and other parts of world to pull together the package with the kit to what we do with Vodafone in Spain. While its very hard to predict, when or if more of these arrangements will come together, we consider them to be very high priorities.

One last music point regards to the major integrated marketing initiatives, we started rolling out a few weeks ago and that accelerates tomorrow. We along with our JV partners at MTV will have the US exclusive of Green Day's new album 21st Century Breakdown, available for streaming starting tomorrow one week before the album is released to the public.

Then in a week when the albums became available for purchase or subscription downloading, our release will include two exclusive bonus tracks. We've already kicked off an impressive viral promotional campaign, using all of our marketing distribution weapons including a free song of the day, special artist's pages, a Verizon promotion, consumer contest, exclusive online editorial content a web newsletter, list to our blog and near constant twittering.

We think this album is going to be huge and that we will benefit from our role in creating its successes. The first single of 21st Century Breakdown, "Know Your Enemy" is already number one on the Modern Rock chart the biggest leap to number one since Nirvana's "All Apologies" in 1994.

I am sharing this much most detail because I think this program is a perfect example of how you can work in partnership with the music industry to provide superior experience for our consumers and to further demonstrate to the music industry the benefits of partnering with us.

Indeed tighter integrated marketing of priority releases and broadbased bundling of services to scale up the subscription business by an order of magnitude are programs that reinforce and benefit each other.

In summary, while our music business still isn't where we wanted to be, we made good progress over last year and feel that are real and significant opportunities ahead, even in these tough economic times.

Finally, turning to our Technology Products and Solutions segments or TPS, revenue declined about 15% to $43.6 million compared to Q1. This decline was largely driven by two factors. Foreign exchange rate changes in the Euro and the Korean won, which Michael will discuss later.

And a deal in Europe that included large minimum guarantees for 2008 that have now ended for which an underlying consumer activity has not yet ramped as quickly as we and our partner had hoped. The good news is that activity with this customer is ramping now, just on delayed trajectory compared with our original plan. Having said that, from an underlying structural standpoint, the core TPS business remains solid. ASP subscriber growth continued through the quarter as we added 2.4 million new subscribers over our fourth quarter which put us at 4.4 million more than we had in the first quarter of 2008.

Our Inter-Carrier Messaging declined nearly double to 82.4 billion messages although revenue increased only 3%. Translating this unit growth numbers to significant revenue growth will be challenging in the short term, because of the current economic environment. Carriers worldwide are tightening their belts and squeezing everything they can under the supply chain.

Having said that, we believe overtime and we will be able to drive both top and bottom line growth of TPS. Our pipeline and potential new relationships to new product offerings is stronger than I can ever remember it being. More than ever, carriers are seeking reliable long term players and we believe firmly position ourselves as a Company that will be a leader and a great partner for the long haul.

On the IP licensing side, we did okay, considering the environment. Our handset shipments were down 7% year-over-year from about $42 million to about $40 million. In the context where worldwide handset shipments are estimated to decline by more than 15% we believe this means we will continue to gain share. Further we are beginning to see the first inklings of a robust business for Real associated with the projected [relative networks].

Analyst are forecasting that worldwide netbook sales more than doubled to about 35 million units in 2009. And unlike the PC or notebook business, the notebook market both Windows and Linux has significant market share. Since we have a great media engine and player solution for both platforms, we are uniquely well positioned we believe compared with the competition.

In sum, unfavorable year-over-year comparison notwithstanding to both this and current quarter. We like our TPS business is positioned for the future and think we will come from this downturn in a very solid shape.

So with that I will turn the microphone over to Michael to discuss the financial results and our guidance in more detail. Michael?

Michael Eggers

Thanks, Rob. Earlier today, we released financial results for the first quarter of 2009. We will file our 10-Q for the quarter tomorrow. I encourage you to review the 10-Q and other SEC filings for more thorough discussion and disclosure of our results.

Today, I will review our first quarter financial results, discuss briefly some of the trends in our businesses and finally provide some directional guidance for the second quarter of 2009.

For the first quarter, revenue was $140.8 million down 5% from last year and down 8% sequentially. Foreign currency changes, in particular the decline in the Korean won and Euro negatively affected revenue in the first quarter by approximately $8.7 million, when compared with the first quarter of last year and approximately $600,000 when compared with the fourth quarter of 2008.

Adjusted EBITDA was $4.8 million compared with $19.9 million in the year-ago quarter. Although we believe our overall first quarter results were dampened by the recession. Our businesses demonstrated progress in managing cost and focusing on value oriented consumer products to manage and build our businesses through this economic downturn.

However we are reporting substantially lower adjusted EBITDA and I would like to point out a couple of major reasons for that decline. First, while revenue declined year-over-year much of the decline was concentrated in our higher businesses.

SuperPass subscriptions, online advertising and distribution of third party products. Our SuperPass subscription fell by 24% year-over-year and we also saw a 17% decline in our revenue from media properties, which includes both advertising and download partner revenue across all of our consumer segments.

The decline in business spending on internet advertising contributed to these results. Coupled with lower revenue from a distribution of third party products, I will go in each of these in details in a few moments.

Finally while we made continued progress in reducing marketing expense, headcount and other operational costs, our OpEx was essentially flat year-over-year due to the acquisition of TriMedia in the second quarter of 2008. And cost associated with RealDVD of approximately $6 million, the majority of which includes the litigation costs.

Turning now to segment results, Music revenue for the first quarter was $44.1 million, an increase of 16% from a year-ago and up slightly from the fourth quarter. As we've discussed before, the growth continue to be driven primarily from Rhapsody subscription revenue associated with signs up through Verizon wireless and Yahoo! subscribers who migrated to Rhapsody as Yahoo! discontinued its subscription service in the second half of last year.

Total Rhapsody subscribers grew to more than 800,000 from more than 600,000 in the first quarter of last year. This translated immediate subscription revenue of $35.7 million up 18% from the year-earlier quarter. And now accounts for over 80% of our music revenue.

Sales of music tracks rose 23% to $6.6 million almost 15% of total music revenue. On the advertising front revenue contribute only $1.8 million in the first quarter a decline of 32% from last year, and fell to 4% of revenue from 7% in the year earlier quarter due to a continued decline in demand for online advertising.

Adjusted EBITDA for the music business was a loss of approximately $376 for the first quarter of 2009 compared with adjusted EBITDA loss in the first quarter of 2008 of $1.8 million. The year-over-year improvement was primarily driven by lower operating expenses due to tight cost management.

Games revenue for the first quarter was $32.8 million an increase of 3% from last year. Included in our first quarter results was approximately $3.6 million of revenue from our Trimedia that we completed in the second quarter of last year.

Revenue through game purchases and subscriptions increased 2% from last year, however our units sold have grown faster than our increase in revenue due to our new value pricing programs including FunTicket.

As Rob previously mentioned these programs have lower average selling prices than in the past. Advertising games revenue rose 7% year-over-year to $6.6 million primarily due to strength coming out of Europe.

I would like to also point out that we are separating our consumer segment information in to games and media software and service segment. And as a result showing adjusted EBITDA for each, to give investors greater visibility in to our business divisions. Adjusted EBITDA for games for the first quarter of 2009 were the loss is about $400,000 from a positive adjusted EBITDA of $2.9 million a year earlier. The main cause of lower games adjusted EBITDA was higher people related costs associated with the Trimedia business.

Media Software and Services revenue for the first quarter was $20.3 million a decline of 23% from the first quarter of last year. Subscription revenue which is primarily SuperPass was $11.1 million a decline of 24% from last year. Media properties revenue was $7.1 million a decline of 28% from last year.

There are couple of significant reasons behind these declines. In the year-earlier period our SuperPass revenue benefited from the content associated with CBS's Big Brother series which has historically been a god driver of SuperPass subscribers. CBS did not run Big Brother in the first quarter of 2009 as it is normally run in the summer months.

Also in the year ago quarter, we are in the middle of a campaign to encourage our embedded base of millions of RealPlayer users to upgrade to RealPlayer 11. Each download gave us the opportunity to offer download partners software, the Google toolbar for example and that also contributed to year ago revenue. There is no similar campaign or related revenue uplift in the first quarter of this year.

Adjusted EBITDA for the Media Software and Services segment was a loss of $1.8 million compared with a gain of $9.7 million in the year ago period. The decrease in adjusted EBITDA was due primarily to a reduction of high margin advertising, download partner and subscription revenue as previously mentioned coupled with the $6 million in cost associated with RealDVD.

In our Technology Products and Solutions segment, revenue for the quarter was $43.6 million a decline of 15% from the same period of last year. Rob mentioned the falloff in minimum guarantees we negotiate when introducing new ASP services for some international carriers. Those guarantees give us the financial returns needed to invest in infrastructure related to building new ASP offerings. We retain all that business but for a couple of quarters at least the revenue will be lower than in 2008 due to the loss of those minimum guarantee payments.

ASP revenue accounted for approximately 80% of the technology products and solutions revenue and software license sales and services accounted for approximately 20% of revenue. While our total subscribers under management increased to more than 33.8 million in the first quarter compared with 29.5 million last year. Total ASP revenue is down about 15%. That decrease was driven primarily by reduction in revenue of about $6.8 million due to decline in the Korean won in the first quarter of 2009 compared with first quarter of 2008.

Adjust EBITDA for the Technology Products and Solutions segment declined to $7.3 million for the quarter compared with $8.4 million in the same period a year ago. This decrease was driven largely by the loss of the minimum guarantees. And the decline in high margin license sales, partially offset by a significantly reduction in costs.

It's important to note that while our overall revenue declined as a result of foreign currency changes there is a minimal effect on our bottom line from foreign currency fluctuations, because we incur costs in those same foreign currencies.

Before turning to the outlook I want to point out some changes in our financial statements. We've been talking for a few quarters now about accounting rule changes that take effect in the first quarter and impact how we treat our Rhapsody America venture.

First, you'll notice that the classification and the names of the line items on our income statements have changed. Second, due to the put and call feature of our Rhapsody America venture we are now required to begin [acquiring the] liability for the potential value we may have to pay in 3.5 years when that put-call feature comes due.

While there is no direct impact for this on our income the attrition of that liability does effect the income we calculate for EPS purposes only. We've included a new table on our release that shows a full reconciliation of our EPS.

Finally as we mentioned last quarter the quarterly gain we historically recorded for the sale of Rhapsody America now flows through our shareholders equity directly and not through our operating results.

I will reiterate that while the accounting has changed the economic effects remains are the same. In order to maintain comparability to prior year's quarter our adjusted EBITDA for the first quarter of 2009 add backs the gain.

Moving on to our outlook for 2009 I will be providing some directional guidance for the second quarter revenue and segment results. But due to the continued economic uncertainties and a low visibility we have and how consumers will respond to the economy downturn. We are not providing quantitative revenue or adjusted EBITDA guidance for the quarter or the full year.

For the second quarter of 2009, we expect overall revenues to decline year-over-year and to be flat to slightly down sequentially. Compared with the year earlier quarter, we expect second quarter music revenue to increase and revenue in games, media software and services and technology products and solutions to decline.

Approximately 20% of our revenue is denominated in currencies other than the US dollar most notably the euro and the Korean won. Based on currency trends we expect reported revenues to be negatively effected by foreign currency rates in the second quarter.

With that let me turn it back over to Rob for some closing comments. And then we will take your questions. Rob?

Rob Glaser

Thanks Michael. I would like before closing announce the changing of the guard at our Board. Today we announced that John Chapple, former CEO of Nextel Partners is joining our Board. John succeeds Jeremy Jaech who previously announced his intention not to stand for election after seven year's of service.

I would like to personally thank Jeremy for his excellent service to the RealNetworks and to welcome John to our Board. Over the year's we were fortunate to have an outstanding Board of Directors and I have every confidence that John will continue in that tradition.

To summarize my other comments I would like to leave with the following three points. First, our Q1 results demonstrated our resiliency and stability in an environment that is the toughest overall economic environment I've ever experienced. Indeed it's the toughest environment anyone I know have ever experienced at least anyone this side of 86 year-old dad. Second we will bring a very high degree of discipline and operational focus to the task at hand. Times like these are precisely the time to simplify and streamline operations. And that's just what we are doing.

Third, I believe we're well positioned to get through this environment and that we are very focused on making sure that we are in the strongest possible position as things stabilize or start to improve.

And with that, I will turn the call over to questions. Operator?

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Please limit your questions to one. (Operator Instructions) The first question comes from Tavis McCourt with Morgan, Keegan. You may ask your question.

Justin Patterson - Morgan, Keegan & Company, Inc.

Thanks guys. This is Justin Patterson on behalf of Tavis. First, thanks for the additional disclosures this quarter. I think we all appreciate that, it provides a lot more granularity. But just looking at OpEx, it looks like it's about $95 million kind of ex advertising this quarter. Assuming this marks at the end of the litigation phase here. As we expect that to kind of stay within that range for the year or perhaps come down a little bit as the year progresses?

Michael Eggers

Hey Justin I'll go ahead and take that. As I said the outset, we aren't giving specific guidance around things but I think I can give you some qualitative aspects around that. So, as we mentioned, the effect in the first quarter was for $6 million associated with RealDVD of which a majority of that was litigation. Obviously the expense associated with that in the future is little bit out of our hands in determining how to win the litigation and rolls out.

But also as Rob said, we're consistently and continually looking at ways to pare back costs and reduce cost and that's going to be a continued focus of ours going forward. So, without giving you any specific guidance just know that's how we're thinking about running the Company and trying to maintain a very disciplined view towards our OpEx. Next question, operator.

Operator

The next question comes from Vasily Karasyov with JP Morgan. Please go ahead.

Vasily Karasyov - JP Morgan

Good afternoon. Thank you for taking my question. Can you please remind us how much flexibility you have with regards to advertising on MTV networks? Do you have to spend money is there a minimum amount or can you stop and come up with a new arrangement with Viacom? Thank you.

Michael Eggers

Hey Vasily, this is Michael. So, we do have as part of the contract with Viacom when we signed the venture our commitment to spend. I believe the aggregate number was about $213 million, and we do have some flexibility with when we can spend those dollars in terms of what quarters and what year. There are some minimums associated with it. But at this point it is a requirement where the funding for the venture is then used for the advertising with MTV. So at this point that is contractual commitment. It has some flexibility within the quarters that's where we are today.

Vasily Karasyov - JP Morgan

All right. Thank you very much.

Michael Eggers

Next question, operator.

Operator

The next question comes from Michael Olson, Piper Jaffray. Please go ahead.

Michael Olson - Piper Jaffray

All right, thanks. The Games business has been a pretty strong point for the Company over the last few quarters it grew only 3% this quarter after growing 24% in the full year '08. It looks like you are expecting it to be down year-over-year in Q2 and some of that might be currency but otherwise what are the kind of the reasons behind the deceleration, what should we look for as far as signs that the Games business is rebounding?

Rob Glaser

Well, this is Rob. I will take a few views of that. One is, I think the overall economic environment in terms of consumer spending, is one of the things where we see sensitivity around in a lot of our businesses, and we decided to play that in our Games businesses. As we decided to say let's make sure that we offer a premium value product. So we went ahead, and we did that which I think was the right thing to do. And as I mentioned we increased on the GameHouse side we increased units by 40% year-on-year. But that didn't translate to revenue increases. And we knew obviously it wasn't going to increase revenue by 40% because we had lower ASPs, but we felt that strategically it was important to do to position ourselves from a unit standpoint.

Second, I would say one of the specific things that is going on in the casual games business is what I would call a soft indirect substitution effect where consumers have a lot of choices for how they play games and the premium download games that has been our focus continues to be a very important part of the echo system, but the more times games as you people have said on social networks for instance, it's a new phenomenon that has an indirect substitution affect. And to date, nobody has a modernization model on social networks that has the same sort of monetization per hour game play or per game played or how you want to think about it. All these models are much more advertising type models that has a significantly lower units play there.

So we are participating in that business, its not significantly impacting our revenue, we are getting good usage 1.8 million users playing our games with just three games up its a great start. So we are doing fine maybe even better than fine from an activity standpoint. But we are doing certainly no better than the average for industry from the monetization effect. So there is a structural thing going on there.

We think we are going to able to revitalized the growth of this business as I mentioned, we think, it will take some time; some of it will be tuning our parameters for these sort of new realities that are out there, both within the, in sort of premium casual games business intrinsically and some of these other areas. And then the third is obviously with some of the new platforms opportunities to direct sell to consumers 800,000 games over a couple of months period of time, 800,000 units of games is very encouraging. That as you all have read, doubtless the number of games purchased, Apps in general specifically for iPhone blows away anything that happen on any other smartphone platform or phone platform revolve before, the unit prices there are lower again kind of constant theme but the activity level is high as well. So for us, our products have fixed cost of building them and very lower marginal cost of distribution. So tuning our business for sort of the new macro environment from a consumer standpoint and specific environments around how consumers play games and how they can get games with this new class of devices.

It is going to take a little time, I'm confident we'll get there. And this isn't something were, I mean, I think, we haven't seen all the industry numbers come out. But I am thinking that the, you'll see that the overall slow down of dollar growth rate, not unit growth, not time spent playing growth rates, it will also be something that you will see more broadly in the sector. There aren't as many pure plays that report, I guess we are kind of the benchmark pure play. But I think this is something that is reflective of what's going on in the broader industry that we are in.

I guess, we've got time for at least one more question. And see if we have time after that. But operator next question.

Operator

The next question comes from Jennifer Watson, Goldman Sachs. Please go ahead.

Jennifer Watson - Goldman Sachs

Great, thank you. Just as a follow up to the question about the change and the way the people are playing games. Can you talk about how that impacts your cost, if basically selling [lower ASPs] people are spending more time on your site than playing the game, obviously that's going to eventually monetize them, but what kind of impact does that have on your gross margin in that business?

Rob Glaser

I will let Michael speak to the reported gross margin numbers, I would say sort of the following. We have very flexible supply chain of this business. So, unlike some of the other content businesses generally speaking we are not dealing with six per unit minimum. So if we can generate more overall economic activity that translates in to more top line that will translate pretty well. So I think on a gross margin basis we are seeing generally speaking, we are exceptions that the supply chain is flexible. And I think our gross margin numbers support that. Michael can speak to those specifically. Obviously there is if you are asking about gross margin, towards the operating margin. Those are two different numbers. Obviously the bigger the business, the bigger the operating margin, but on the gross margin side I think it's pretty stable with lower ASPs.

Michael Eggers

Yeah year-over-year we actual saw a slight improvement in gross margins, and one of the things Rob mentioned because in this business we not only license content but we also create our own content and as we create the content. That's operating expense to us, so that's in our R&D. Then once we have a gain, if that becomes one of the best selling games for the quarter for instance, there is an incremental cost associated with that game because that game had already been developed. So lot of our margins may vary quarter-over-quarter depending on the hit game in that quarter. Whether it was a third party game that we were licensing or a game that we've developed internally. And then similarly there is also seasonality with our other consumer businesses around advertising in the fourth quarter as well that tends to be a higher margin business.

Rob Glaser

So and with that, operator I think we will move to close up the call here. I want to thank everybody for joining us. And look forward to chatting again in three months. Hopefully we will see or talk to at least some of you soon well before then. Operator?

Operator

This concludes the RealNetworks' first quarter 2009 results conference call. You may access the replay of this conference call on the RealNetworks' website at http://investor.realnetworks.com/. Thank you for your time and we appreciate your interest in RealNetworks.

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Source: RealNetworks Inc., Q1 2009 Earnings Call Transcript.
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