RealNetworks, Inc. (NASDAQ:RNWK) Q4 2008 Earnings Call February 12, 2009 5:00 PM ET
Eric Russell – Vice President, Finance
Robert Glaser - Chairman of the Board & Chief Executive Officer
Michael Eggers - Chief Financial Officer, Senior Vice President & Treasurer
Vasily Karasyov - J.P. Morgan
Jennifer Watson – Goldman Sachs
Analyst for Tavis McCourt – Morgan, Keegan & Company, Inc.
Andy Hargreaves – Pacific Crest Securities
Michael Olson – Piper Jaffray
Barbara Coffey – Kaufman Bros.
Welcome the RealNetworks’ fourth quarter and year end 2008 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, February 12, 2009.
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.
Some of the matters discussed today are forward-looking including statements regarding RealNetworks' future revenue, the impact of foreign currency fluctuations, our ability to manage our cash and operating costs, the prospects of growth in our games and TPS businesses, the focus of our games business operations, the extent of the economic downturn, the value of our products and services to consumers, our ability to take advantage of opportunities to expand market presence and to compete effectively, the effect of Real DVD on growth of our media software and services businesses, the future benefits of Real DVD and the investment in litigation related to Real DVD, the outcome of claims and legal proceedings relating to Real DVD, future impact of impairments, the advantage of our balance sheet position in future periods, the stability of our business model, our ability to adapt our plans and strategies during the year, our ability to deliver increased financial leverage and to capitalize on opportunities to use our cash, our ability to deliver against our strategic initiatives, optimize our financial performance and take advantage of market opportunities particularly in light of the economic downturn, future progress in wireless home networking and wireless mobile services, future usage of digital media services and our ability to deliver value and excellence in digital media entertainment.
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 February 12th, 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 fourth quarter 2008 results is Rob Glaser, Chairman and CEO and Michael Eggers, Chief Financial Officer. Rob will provide the overall business review of the quarter and year 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.
Today RealNetworks reported fourth quarter and full year results for 2008. Full year 2008 revenue was $604.8 million up 7% from last year and adjusted EBITDA including some fourth quarter impairment Michael will talk about in more detail a little bit later was $60.7 million up 5% from last year.
Michael will discuss our Q4 and 2008 financial results in detail in just a few minutes. First I’d like to step back and discuss 2008 at a more macro level and then at an equally macro level discuss where we see things going from here. There are two ways to look at our 2008 results. One is to be disappointed because we did not achieve objectives that we set out to achieve at the beginning of the year.
The other is to view these results as demonstrating the relative durability and stability of our core business model at a time of extraordinary turbulence and in recent month’s severe economic contraction. In point of fact we look at these results both ways. As an absolute financial matter we didn’t meet all of our objectives.
At the beginning of 2008 normalizing for acquisitions we projected revenue of $624 million to $644 million which we missed by about 5% from the midpoint of that range. On the EBITDA side we projected $56 million to $68 million also normalizing for acquisitions. Excluding impairments we achieved the lower end of this range but including the impairment costs we missed by a wide margin.
Any time we missed our plan we’re not satisfied. Having said that these are better results relative to plan than many companies experienced in 2008. This is largely because of the resilient nature of our business. 80% of our revenue in 2008 came from either consumer recurring revenue typically subscriptions, b-to-b recurring revenue typically measured per subscriber or per transaction, our large volumes of small consumer purchases typically below $20.
Moreover we believe that our products offer terrific value to consumers which is always important but exceptionally important during times like these. A year ago I identified three strategies that would drive our business in 2008. One, building deep technology, providing unparalleled excellence and meaningful differentiation to our chosen markets and digital entertainment services.
Two, building a direct relationship with as large a consumer audience as we can and leveraging that direct consumer feedback to rapidly innovate and improve our products. Three, creating strong business partnerships with device makers, service providers and other distribution channels and leveraging those partnerships to drive scale and positive network effects.
We perceived these strategies in each of our four main lines of business in 2008. Here is our assessment of what we accomplished in each of our businesses relative to both executing on these strategies and achieving our business goals and where this leaves us going forward. First, music.
In 2008 we rolled out a major initiative, music without limits that substantially broadened the value of the digital music services we offer by a, getting rid of digital right management or DRM for song purchases; b, integrating our Rhapsody service directly into over 20 Verizon mobile handsets as well as many home media devices; and c, making full track playback via Rhapsody available directly on a range of partner websites such as Zune TV Networks and Yahoo!
These set of initiatives brought together the three differentiation strategies and led to a significant re-acceleration of our music businesses’ growth in the second half of 2008 and we achieved this growth while also managing costs carefully moving us towards our goal of making our music business self sustaining financially.
While we think we’ve made significant progress in our music business we remain disappointed in a few ways. First while the record labels have made some positive policy changes including dropping DRM for song purchases they continue to be too rigid in other areas that stifle our ability to offer innovative services and hinder our ability to get massive distribution of Rhapsody through our big partners.
We continue to talk with labels about these issues but it’s unclear how much progress we’ll make in the short term. Second while we’ve generated tremendous brand awareness with our MTV network television marketing efforts we haven’t yet come up with a formula that translates that awareness into significant business uplift.
On the positive side we’ve kept much of our powder dry. We still have $144 million left in marketing credits that come out of our Rhapsody America joint venture with Viacom and we will continue to work to find an optimal mix that achieves both branding and revenue benefits. Third as the consumer economy has hit a wall in the US we’ve seen some softening over some new subscriber signups.
This isn’t a cataclysmic issue but rather [inaudible]. Rhapsody offers consumers a phenomenal value, access to millions of songs for the price of a CD per month and we need to redouble our efforts to tell this story to consumers. In sum we remain committed to our music business to putting strategies in place that position for even greater success once the economy comes out of its current doldrums and to managing costs carefully in the interim.
Second, our games business. Our casual games business continued to grow significantly in 2008 achieving record revenue of $134.6 million up 24% from 1997’s $108.5 million. On the other hand we saw some deceleration in the second half of 2008 particularly in the US. We ascribe this to three factors. One, some indigestion associated with the six acquisitions we had made over the past four years especially the most recent one, TriMedia.
Two, cash strapped consumers becoming more price sensitive and selective in their purchases and three, our initial slow response to this changed environment. In order to address these issues and to position ourselves for the future we took two major initiatives. First in late October we brought in John Barbour to serve as President of our Games Division.
John combines outstanding leadership skills, creativity and passion and business acumen. He’s hit the ground running and he’s off to a great start. Second on November 21st we re-launched GameHouse.com as the site offering the best value in premium casual games on the Internet. GamHouse.com features a free game every day and offers the best everyday price on the Internet for premium casual games as low as $5.99 per game.
That’s even lower than Amazon’s lowest price in their just introduced entry into casual games. While it’s early yet we’re pleased with the initial results in terms of audience growth and engagement. As you know we’ve decided to postpone our plan to spin off our games business in light of current conditions.
Accordingly we’re going to use 2009 to simplify our games business to focus on market share growth and to position ourselves for re-accelerated revenue and profit growth in 2010 and beyond. Third let me talk about media software and services or MSS. Our MSS group started the year strong as Real Player upgrades exceeded our goals and demonstrated the power of innovation and the resiliency of our Real Player platform.
We also benefited from the TV writer strike through a partnership with CBS which enabled us to run two Big Brother Internet programs instead of the usual one per year. The second half of the year saw the introduction of an incredible innovative product from our MSS group, Real DVD. Based on initial press and consumer response we believe that Real DVD is poised to be a hit product.
Unfortunately the movie industry didn’t see things our way and persuaded a judge to temporarily sideline Real DVD with a temporary restraining order or TRO pending a preliminary injunction hearing. These hearings usually take place a matter of weeks after TRO. However given how high the stakes are in this case we’ve agreed to have the preliminary injunction hearing delayed to allow both sides to put their best cases forward.
This hearing is now scheduled for early April. To step back for a second this litigation is the second major lawsuit we’ve been involved with in RealNetworks’ 15 years. Of course the first on our antitrust litigation against Microsoft turned out extremely well and resulted in us receiving a $761 million settlement.
The Real DVD litigation has two things in common with the Microsoft antitrust litigation and a number of things that are different. The two commonalities are our rigorously researched and analyzed belief that we have the legally correct position and our total confidence in the world class legal team leading our effort.
The key differences are the duration of the case and the nature of what’s at stake. When we initiated the Microsoft case we knew that the case would likely take several years and that success would mean a large one time payment. In the Real DVD case the outcome will very likely be clear inside of a year and success will open up a set of business opportunities that we believe represent one of the biggest opportunities in aggregate in front of RealNetworks as a company.
To summarize we remain confident in our case and believe that the investments we’re making in this litigation will pay off for us over the mid to long term. One important final point regarding our MSS business, late in 2008 we renewed our very successful Google toolbar distribution agreement.
This means that we expect our core revenue stream from MSS will be stable enabling us to invest in innovations such as Real DVD as well as others and will drive our success into the future. Finally let me now turn to our b-to-b segment technology, products and solutions or TPS.
2008 was not a great year on the top line for TPS in part because we got out of some low margin professional services businesses and in part because about 20% of TPS’ revenue is denominated in the Korean won which on average was 13% lower in 2008 than it was in 2007. On the positive side TPS had a solid year on the bottom line in our recurring ASP and client licensing businesses.
Subscribers under management grew from $47.6 million to $31.5 million, messaging transaction grew from $95 billion to $221 billion and Helix D&A handset licenses grew from $115 million in 2007 to $165 million in 2008.
Most importantly in the fourth quarter of 2008 and the beginning of this year we secured major new design wins and a continuation of our key partnerships with our three biggest tier one carrier customers, SK Telecom in Korea, Verizon in the United States and Vodafone in Europe.
Specifically we and SKT have entered into a three year extension of our relationship covering both ring back tones and music on demand. Details of this arrangement will be announced next week at the Mobile World Congress in Barcelona, Spain. Second we just announced yesterday that we’re powering Verizon’s V Cast video service.
This extends and complements our existing relationship with Verizon that spans music, ring tones and ring back tones. Third, Vodafone has selected us to provide ring back tone service for their operating companies in Germany, Turkey and one other European country. Collectively these carriers serve nearly 70 million mobile customers.
This complements our existing relationship pairing the music on demand service for nine Vodafone operating companies across Europe. Beyond stabilizing our current partnerships we believe that based on our current pipeline of opportunities and new products there are opportunities for us to re-accelerate TPS growth in 2010 and beyond.
Carriers are looking for reliable long term players and we believe we’ve firmly positioned ourselves as a company who will be there for the long haul. So to summarize we’re running our company with a few guiding principles. First maintain an even keel in 2009. This is reflected in our newly completed deal renewals and extensions with Google, SK Telecom, Vodafone and Verizon.
It’s also reflected in our continued focus on recurring revenue in our consumer and carrier businesses while at the same time maintaining a disciplined cost structure. Second make sure that we’re delivering exceptional value to consumers in everything we do both in products we deliver directly to consumers and in products we deliver with and through carrier customers.
Third invest for the mid to long term. We think this will be a nasty recession. I personally think the recession will be worse than 81/82 and thus the worst we’ve seen in 75 years. But even so we believe this recession will end likely either late in 2009 or in 2010. As the economy recovers we think that a great opportunity will emerge for us to open up new markets and to leapfrog competitors who have weaker balance sheets or shorter time horizons.
With that let me turn things over to Michael.
Earlier today we released financial results for the fourth quarter and full year of 2008. We’ll file our 10-K for the year at the end of this month. I encourage you to review the 10-K and other SEC filings for a more thorough discussion and disclosure of our results.
Today I’ll review our fourth quarter and fiscal year financial results, discuss briefly some of the trends and uncertainties in the economy and our businesses, talk a bit about our financial management philosophy for the coming year in light of the economic slowdown and finally provide some directional guidance for the first quarter of 2009.
Turning to the quarter although our overall fourth quarter results were dampened by the economic recession and a very slow holiday season revenue and business results were in line with the guidance provided at the beginning of the quarter. However we are reporting a large fourth quarter net loss due to impairments we are recording in the fourth quarter.
I’ll discuss the business results excluding the impairments first so that it easier to track the ongoing drivers in the business and then I’ll review the impairments and their impact on our business. Revenue for the full year 2008 was $604.8 million up 7% from last year. Net loss for the year including the fourth quarter impairments was $243.9 million and adjusted EBITDA excluding the impairments was $60.7 million in 2008 versus a comparable $57.7 million in 2007.
For the fourth quarter revenue was $152.6 million down 3% from last year and up slightly sequentially. Foreign currency changes and in particular the decline in the Korean won and the euro negatively affected revenue in the fourth quarter by approximately $6 million when compared to the fourth quarter of last year and approximately $5 million when compared with the third quarter of 2008.
Additionally the fourth quarter was negatively affected by the overall decline in the advertising market and our total media properties revenue declined in the fourth quarter of 2008 as compared with both the fourth quarter of 2007 and the third quarter of 2008. Adjusted EBITDA was a loss $14.5 million reflecting $25.8 million of the impairments and charges described in our press release.
Before the charges adjusted EBITDA for the fourth quarter would be $11.3 million as compared with $19.4 million in the year ago quarter. Turning now to the segment results music revenue for the fourth quarter was $43.9 million an increase of 8% from a year ago. This growth was driven primarily from Rhapsody subscription revenue. I’ll note that we’ve broken out the Rhapsody subscriber counts in the tables that accompany our release.
Total Rhapsody subscribers grew to more than 775,000 in the fourth quarter up from over 600,000 in the year ago quarter. This translated into music subscription revenue of $34.6 million up 14% from the same period of 2007. Subscription revenue in music now accounts for nearly 80% of our total music revenue.
Most of the subscription growth was driven by the migration of Yahoo! subscribers in the third quarter and the success of the Verizon sign ups in both the third and the fourth quarters. Still as Rob mentioned we were disappointed by our overall fourth quarter sign ups across all of our channels. Turning to the advertising front media properties revenue contributed about $3.1 million in the fourth quarter a decline of 30% from last year.
Adjusted EBITDA for the music business excluding impairments was approximately $685,000 for the fourth quarter compared with adjusted EBITDA loss in the fourth quarter of 2007 of about $2.1 million. The improvement in EBITDA was primarily driven by lower operating expenses in 2008 as compared to last year.
Games revenue for the fourth quarter was $33.7 million an increase of 9% from last year. Game purchases which accounted for approximately 47% of our games revenue increased about 10% compared to last year driven by the acquisition of TriMedia early in 2008. Subscription revenue was $10.7 million or 32% of revenue and grew about 10% compared to last year primarily as a result of success in our Fun Pass subscription offering.
Media software and services revenue for the fourth quarter was $22.7 million a decline of 11% from the fourth quarter of last year. Subscription revenue which is primarily Super Pass was $12.6 million a decline of 15% from last year and was due primarily to continued churn in our subscriber base.
Media properties revenue was hit particularly hard this quarter in the online advertising space and was $8 million a decline of 13% from last year. However as Rob mentioned we did recently renew our Google distribution relationship and that high incremental margin revenue remains a bright spot in our revenue model.
Adjusted EBITDA excluding the impairments for the consumer segment which includes both games and media software and services was $2.2 million compared with $12.4 million in the year ago period. The decrease in adjusted EBITDA was due primarily to a reduction in high margin media software services revenue as I previously mentioned, Real DVD litigation defense costs and the diluted results from the acquisition of TriMedia earlier in the year.
Turning to our technology products and solutions segment revenue for the quarter was $52.4 million a decline of 13% from the same period last year. If you recall last year we made the decision to de-emphasize low margin systems integration work which we expected would result in a decline in revenue. Well we did see this effect in the fourth quarter with a decline in systems integration revenue to about $4.7 million compared with $10.5 million in the same period last year.
This decline was partially offset by an increase in our handset licensing revenue and while our total subscribers under management increased to more than $31.5 million in the fourth quarter compared with $27.6 million last year total reported ASP revenue was slightly down which is driven primarily by a 30% decline in the Korean won in the fourth quarter of 2008 as compared with the effects of 2007.
However while revenue declined in TPS we saw an increase in adjusted EBITDA excluding impairments to $10 million for the quarter compared with $8.7 million in the same period a year ago. This increase was driven by tightly managing our operating expenses within this business unit. It’s also important to note that while our revenue was reduced as a result of foreign currency changes there’s a minimal effect on our bottom line because we incur costs in these same foreign currencies.
As we had previously announced last week and confirmed in our press release today we had a number of impairments this quarter. I don’t want to repeat everything that we’ve already covered in our press release but two of the charges warrant some additional color.
First the write down of the transaction costs associated with the games company separation is an accounting treatment that does not reflect our continued interest in creating an independent games company in the future. When we decided to delay the separation in the third quarter we stopped spending money on our external transaction consultants.
While we still intend to separate the games company in the future conditions do not currently support a separation transaction. Because we are not now spending money on external advisors we wrote down a capitalized cost associated with the transaction. Second last quarter we discussed our expectation that due to a change in accounting rules beginning in 2009 we would no longer report the gain on the sale of Rhapsody America on the income statement.
We accelerated that change in accounting to this quarter the fourth quarter following our periodic review of likely market values of all of our assets including the Rhapsody America business. Therefore the $6.6 million fourth quarter gain is recorded through shareholders’ equity directly and not through our operating results.
Although the accounting of the gain has changed the economic effect of the transaction on the company remains the same. In order to maintain comparability to prior quarters our adjusted EBITDA results for the fourth quarter adds back the effect of that gain. While the size of the impairments we took $241 million is large and we’re not pleased that we had to take these steps I’d like to put these impairments in perspective.
First the impairments have no impact on our ability to conduct our business going forward. Second a vast majority of the impairments have no impact on our cash and only about $5.5 million of the impairments will require a future use of cash. So we end the year with a very strong balance sheet $370 million in cash and equivalents and another $33 million in equity investments and restricted cash that we manage.
In these uncertain times the strong balance sheet provides us the ability to weather the current financial storm and emerge a stronger competitor when the economy recovers. Now let me turn to the outlook for 2009.
I’ll be providing some directional guidance for the first quarter revenue and segment results but due to the broad economic uncertainties, the low visibility we have into how consumers will respond to the economic downturn we are not providing quantitative revenue or adjusted EBITDA guidance for the full year.
Instead I’ll discuss some of the trends that we believe will affect the directions of each of our businesses. In general as Rob said many of our products and services have low price points and involve recurring payments. But even these expenditures are discretionary in times of severe economic stress when families are facing unemployment and tightening credit.
Consumers are looking at all the ways they can bring their budgets in line with new income expectations and credit availability. While we believe that our model provides more stability than simply relying on one time sales the effect of this unprecedented economic downturn is extremely difficult to predict.
I will not however that the trends and metrics that we will be watching throughout the year include the following, first trends in consumer behavior in general and on spending for discretionary and entertainment goods and services including subscriptions in particular, second the effect of financial stress on consumers’ willingness and ability to use credit cards which is how they pay primarily for our services, third trends in online advertising spending, fourth currency fluctuations particularly as they affect our revenues for both the euro and Korean won.
Also corporate technology spending which affects primarily our TPS business and finally obviously overall economic trends including interest rates, unemployment rates, stock market and housing values which all affect how people feel rich or poor and these are all our consumers. For the first quarter of 2009 we expect a modest decline in overall revenue sequentially and year-over-year.
Compared with the year earlier quarter we expect first quarter music revenue to increase, games revenue to be flat and revenue in 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 current currency rates we do expect reported revenues to be negatively affected by foreign currency trends in the first quarter. In light of not giving a full year guidance I think it would be helpful to discuss how we manage RealNetworks over the next several months. As you know we already have taken steps over the past few months to align our cost structure by reducing our workforce by approximately 10%.
While we have a plan and internal goals for 2009 that represent our forecast of consumer and business spending at the same time we are prepared to deal with multiple scenarios so that we can maintain flexibility and adapt our revenue assumptions, spending, investment decisions quickly as the year unfolds.
We’re committed to being extremely rigorous in the use of cash in 2009. While we have made the decision to invest in what we consider to be a breakout opportunity in Real DVD we also intend to be judicious with our use of cash in that pursuit.
There has never been a better time to have cash and the current economic environment and depressed capital markets and tight credit we will be disciplined as we look to use our capital to take advantage of investment and acquisition opportunities again with the same rigor and discipline we use to manage our costs in our ongoing business.
With that I’ll turn it over to Rob to wrap it up.
I’d like to add just two comments before we turn back to questions. First in spite of the turbulent economic times we’re in we remain confident in the fundamental long term trends that drive our business. These include the digitalization of all media and media delivery, the growth in both wired and wireless broadband, the proliferation of IP based digital devices and the global nature of all of these trends.
This month marks the 15th anniversary of the incorporation of RealNetworks in February of 1994. This means we’ve been through multiple economic cycles already. As I mentioned at the beginning of my comments we enter this downturn with a much more resilient set of businesses than we’ve ever had as well as the financial resources that enable us to invest for the long term.
We believe that we’re very well positioned to deliver value and technological excellence in digital media entertainment both through these tough times and in the better times that we’re sure lie ahead. Second I’d like to thank all of our stakeholders, shareholders, partners, customers and employees for your commitment and hard work both in 2008 and going forward in 2009.
While it’s a cliché it’s true. Tough times don’t last but tough people do. With that Operator let’s open up the call for questions.
(Operator Instructions) Our first question comes from Vasily Karasyov - J.P. Morgan.
Vasily Karasyov - J.P. Morgan
I have a question for Rob. On the last call you said that you would see this environment as an opportunity to make acquisitions and all the events that transpired since then did you change your mind? Do you see cash on balance sheet as more valuable now or did your criteria for making acquisitions change since then?
I would say a few things. I think what we would say about the opportunity for acquisitions is true. I’d say that in an environment that we saw in the three months since we last did an earnings call in that kind of environment when there was that much turbulence it was very hard for very large deals let’s say to see things that were not going to be clouded by all of that instability and noise associated with that.
So we have absolutely increased how active we are. I would say the pipeline of opportunities we’re looking at is wider than I can ever recall it being. I’d say we probably have put some criteria in place with regard to our belief in the value creation opportunity transactions that are even a little bit more stringent than the ones that we might have had three months ago.
But I would say that is more of a qualitative change than a draconian change. I think our statements still stand. We do think this is a terrific time for transformational opportunities. We’re going to be very rigorous in what we look at. We’re going to be selective and obviously when we have anything to announce or if we have anything to announce you guys will be tied for the first to know.
Your next question comes from Jennifer Watson – Goldman Sachs.
Jennifer Watson – Goldman Sachs
Two questions, first if you could talk a little bit about the churn rates you are seeing across your subscription businesses and the trend line kind of from the middle of last year to what you’re seeing now and if there’s been any sort of stabilization there? Then also, if you can talk about your view on free cash flow generation in 2009 and what the real swing factors there are for you?
I’ll go ahead and take both of those. In terms of the churn rate you can hopefully read in to some of our comments that we have in fact seen some of the churn in our business step up a little bit. In fact, one thing we’re really paying particular attention to is involuntary credit card churn. So, when you have recurring businesses like ours with a subscription model and credit cards are automatically billed, one of the things that we watch for very closely are credit card declines and usually that’s a result of consumers being over credit limit.
So, we’re watching that very closely. We’ve seen that uptick a little bit and certainly you’re going to maintain a high focus on that throughout the rest of the year. In terms of your question on the generation of free cash flow, I think as Rob mentioned, not only are we going to be very judicious not only how we think about M&A and use of cash, we’re going to be doing the same in our investments or just how we run the business on a day-to-day basis
Certainly, we have talked about making the investment in Real DVD at the same time making sure that we minimize cash outflow for that. We do have a hearing in front of us and also just as we run the business looking at ways to control costs, looking at things that we can do more effectively and more efficiently and those are the types of things we’re going to be doing to manage our cash flows throughout the year.
The other thing that I’d add and obviously we haven’t given quantitative quarter guidance or year guidance but I think you’re seeing us move to being more and more transparent about our cash. We’ve been more overt about the $370 million that we have in the bank and the $33 million in liquid investments of various kinds or restricted cash.
In addition to that, I think going forward we are looking to be more explicit about free cash flow by various measures because we had so many things to talk about this quarter. We had the impairment charges and like, we decided not to add that as an explicit measure but I do think the fact is that we have a set of businesses that generated over $60 million in EBITDA if you normalize for the one-time charges and so therefore we have a business that generates cash and going forward we obviously hope to maximize for that going forward but aren’t putting numbers out there and guidance out there and we’ll report on that a quarter at a time as the year progresses.
The next question comes from Analyst for Tavis McCourt – Morgan, Keegan & Company, Inc.
Analyst for Tavis McCourt – Morgan, Keegan & Company, Inc.
Just kind of looking at some comp score data that came out a little while ago, it looks like there was a fairly large jump in the number of people playing online games at free sites out there. I’m just kind of curious to know what type of impact that had on trends during the quarter and how you expect to kind of respond to that in the coming year since this is clearly a very discretionary spending environment.
That’s a great question and if you look at the launch of the new GameHouse site that we just put out, that’s an example of our response to that. This is a site we’ve had up now for a little over two months, a new relaunched site. We offer on that site a free game a day so you can go to that site and everyday there will be a game that you can download, play the entire game for free and that’s something that is a response to a number of factors out there. You’ve described this phenomena of free games out there and that’s one of the dimensions.
Our customers definitely know the difference between the fact – I mean, there have been crappy free games on the Internet for a long time and I think that one of the things that has happened in this period is that there’s more free stuff out there than ever before and part of our job is to do a good job of communicating whether they’re offering good free stuff that is ad supported or that has other models associated with it where we get people to the site and then they see the premium content that they’d like to try as well as that.
That’s been our philosophy for our games business. To balance value offerings through free products that are add supported, free 60 minute trials which we’ve had for several years and then when people really get excited about the quality of the entertainment they can go and they can get premium versions with no ads in the them, no limits to game play, etc. We’re committed to what we have with the new GameHouse site is $6 a game. We’ve got the most price aggressive site out there in the business.
We are responding to that. I think our portfolio is well positioned to have a range of different business models. There will always be free stuff out there and our goal is to deliver quality that you don’t get on those free sites. Frankly, I think the same thing happened in the downturn of 2000/2001. There was a lot of free stuff out there. What ended up happening was it shriveled away so that there wasn’t really any good free stuff or much good free stuff, it was just kind of lousy.
My guess is the same thing will happen with a lot of these free sites as this downturn hits hard and we think there will be an opportunity to educate consumers on the difference between great value versus stuff that’s free but not really very entertaining or not really very compelling, or not very good. That’s one of our marketing challenges and opportunities and with the new GameHouse site I think you’re seeing us hitting very hard back at that.
Your next question comes from Andy Hargreaves – Pacific Crest Securities.
Andy Hargreaves – Pacific Crest Securities
Just wondering if you can talk a little bit more about the strategy for Real DVD? What opportunities you guys are seeing outside of just selling boxed software?
That’s a great question and I’m going to disappoint you by being [inaudible] on what I say. Basically, we’ve said it a few different times that we see terrific opportunities associated with Real DVD and the Real DVD software that we have is a great product in its own right and one that we’re very excited about. I think we’ve said things that certainly people have interpreted as meaning we’ve got more in mind beyond the existing announced V1 Real DVD PC software product and we do.
But, given the nature of the situation we’re in involving litigation for sure I think we’re going to be careful about what we say certainly on today’s call. I’d like nothing more than to be sitting with you three months from now on our next earnings call where we’ve got a favorable ruling in that court case and I’m sure we’ll have more to say at that time.
Your next question comes from Michael Olson – Piper Jaffray.
Michael Olson – Piper Jaffray
Just a quick question here, can you be more specific about the increased awareness of the music service that you talked about with the MTV partnership? And, is there any way to quantify that? And also, why do you think you’ve had a tougher time having that translate in to increasing customer additions? Is there a way to create a more consistent connection between awareness and customer additions?
We’ve put out some data on awareness and I do not have in front of me the most recent data from those periods so we’ll come up with a venue that’s full disclosure compliant for how to tell that part of the story. But, the data that we put out earlier in 2008 was we basically doubled unaided awareness and we were I think either at or just passing Napster from an awareness standpoint and second behind iTunes or certainly closer to second and faster growing than anybody else in terms of the analysis of Rhapsody.
I think in terms of why we haven’t managed to connect the increased awareness to driven purchase, I think there are a number of factors. First, the nature of the service is it’s not a physical goods that you buy at a story. Rhapsody is a service you get on your phone, on your PC, to your MP3 player in to your home network so you have something else that you have to get in order to get Rhapsody so there’s a level of indirection associated with it.
Second, therefore related to that it’s kind of an abstract thing when you’re selling the benefit of this incredible service and so I would say that while we’ve done a good job of increasing awareness is doubtless helped us in partnership with Verizon where as we mentioned we hit the ground running and got off to a very good start with them, it hasn’t yet translated in to people buying subscriptions at a dramatically increased rate in a way that’s proportionate to that awareness.
I think because of that abstract nature of it. So, some of the things we’re looking at are ways to make that connection more tangible and more palpable to people whether 30 and 60 second media is the best environment for that remains to be seen. We’re looking at some other alternatives and as I said we’ve got over $140 million of powder dry and we’re going to keep plugging away at iterating and finding what we think is an optimal mix.
Don’t get me wrong the branding benefit has certainly been helpful and there are certainly some partnerships that we have that I would directly connect to that branding benefit. But, in terms of the consumer piece of it there’s more work to do. Operator, I think we have time for one last call.
Your final question comes from Barbara Coffey – Kaufman Bros.
Barbara Coffey – Kaufman Bros.
As you’re taking a look at the churn rates are they different by age? So, the people who have for instance are relatively new subscribers and perhaps are newer to the service may drop off more quickly than sort of your old people? Is there sort of a pattern in there?
Here’s what I would say about that and I want to put Michael’s statements in context. What we’re talking about here is rates that we measure, the involuntary churn rates Michael was talking about are varying on the order of 1% with regard to a given cohort and interestingly enough, we’re seeing that with some products rather than others. So, we have some products that skew to somewhat more affluent demographics and we’re not seeing those affected.
I would say it’s the products that’s skewed towards younger demographics and that’s true with both our b-to-b products and our consumer products where we’re seeing slightly higher involuntary churn rate there. We have survey data that we can cross correlate with regard to what that means from a socio economic standpoint and I think it tends to skew towards lower income.
But again, I want to put it in perspective, I call these headwind type things. This isn’t like the car business or something, or this isn’t like the business of trying to sell Steinway Pianos. These are $10, $15 a month products, sometimes less and we’re seeing a little bit of a blip up there and we’re watching it very closely as you would expect us to. The fact that even with that we were in the range of revenue that we forecast even though as Michael said our currency results were several million worse I think gives you a sense that the scope of this is not cataclysmic.
We’re just trying to be extremely thorough first off in how we run the business and second how we’re reporting back to you all. With that I want to thank everybody for joining us on the call. I look forward to talking with you all, hopefully all of you in three months time and until then take care and good luck to everyone.
This concludes the RealNetworks fourth quarter 2008 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.
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