3 reasons why RNWK might be a good buy. And 3 things to keep in mind if you do buy.
I used to work at RealNetworks for 5 years but that was a long time ago and I admit that I have no inside information at all. However, I’m fascinated with the current price of RealNetworks given the fundamentals. Let me point out a few things.
In the Q1 2007 Earnings report they indicated the following:
1) The company is buying its own stock
Quote from the earnings call:
“Now, turning to our balance sheet, unrestricted cash and equivalents at March 31st were approximately $663 million. This amount includes the proceeds from $100 million of convertible debt and also includes the final payment under the terms of theMicrosoft agreements.
As Rob mentioned, during the first quarter we repurchased 9.8 million shares for an aggregate amount of $78.5 million, or an average of $7.99 per share. This completed the remaining amount authorized under our program.
However, we are also announcing today that our Board of Directors has authorized an additional $100 million repurchase program. “
Granted, the new program does not require RealNetworks to acquire a specific number of shares and may be terminated under certain conditions. One could also surmise that RNWK doesn’t have any better ideas has to how they want to deploy the cash and equivalents of approximately $663 million.
2) Core business lines are still growing.
In particular, RealNetworks said revenue from its games unit grew 28% for the quarter to $23.9 million. Music online is a pretty tough business but Rhapsody is the fourth largest site on the web. Perhaps more important is a seeming shift toward DRM-free music. Last month one of the major labels, EMI, announced its move to DRM-free music. This is interesting because Apple has enjoyed a near monopoly on sales of digital music with their iPods, which represented over 70% of the MP3 player sales in the U.S. last year.
If the future is a place where you can play A LOT more music on your iPod…not just stuff purchased on itunes…then Real’s music business shouldn’t erode. It should grow.
RealNetworks said revenue from its games unit grew 28% for the quarter to $23.9 million.
3) In fact, when they buy other companies…they are pretty good at it. And they have cash to do more buys.
Not all purchases were a slam dunk. But by and large, when Glaser makes a “buy bet” on other companies he does well. Consider Rhapsody. It’s become a cash cow since 2003. Remember…they only paid $36 million for Listen.com!! In the Q1 2007 report, the company boosted the number of subscribers to its music service to 2.675 million from 2.5 million at the end of the fourth quarter. Part of this boost came from a co-promotion deal with retailer Best Buy, which sells Sansa digital music players branded with the Rhapsody service.
They have managed to integrate WiderThan successfully into their Technology Products business which in itself is growing. Technology products and solutions, or TPS, had revenue of $44.4 million a 277% growth over Q1 2006 results a year prior. This DID NOT include WiderThan revenue (yet). On their own (for the six months ended June 30, 2006) WiderThan achieved US$61.9 million in revenue, an increase of 39% over the same period in 2005. As part of the WiderThan buy, Real gets more footprint with major operators such as SK Telecom and Verizon Wireless.
Together, ringback tones (RBT) and Music-on-Demand (MoD) constitute key emerging services in a mobile entertainment market, which according to Juniper Research will grow from $15 billion in 2005 to $38 billion in 2009, a compound annual growth rate (CAGR) of 25%. According to industry analyst firm ABI Research, RBT will grow from $65 million in 2005 to $2.5 billion in 2009, a CAGR of 149%. Today, WiderThan and SK Telecom have achieved approximately 43% RBT penetration of SK Telecom’s approximately 20 million subscribers.
Mobile entertainment services is a massive market and Real knows it. MUCH more importantly…these buys show that Real knows how to move into new areas when they need to. When Microsoft started giving away media servers and media players, Real moved into consumer music & games distribution. When Apple’s wildly successful iPod took off (and took 70% of the online music business with them), Real started this move toward mobile. It’s a very good bet. Apple does little to help huge operators like SK Telekom make money. Now, Real also just bought Sony NetServices (for a measly $9 million), which provides European mobile networks with digital music services. Founded in 2000, Sony NetServices’ personalized streaming music platform lets consumers download full songs or stream music to 3G phones and PCs, and has been deployed by carriers including Vodafone and TeliaSonera Finland. Following the transaction, RealNetworks will count 12 mobile partners, with a combined 196 million subscribers in 11 countries.
Criticisms: Having said all of the above I’d like to point out a few observations to the negative as well.
1) Real’s Board of Directors has had MANY chances to approve the sale of Real for billions already. Mr. Glaser clearly didn’t want to sell on those occasions and it cost shareholders a lot of money.
2) Real can blame Apple for their iPod monopoly but the fact is that Real tried to build an MP3 device of their own through at least two internal initiatives and failed both times. In fact, before joining Apple, the Sr. Vice President of the iPod division, Tony Fadell used to work at RealNetworks. Guess what he was hired from Philips to do? Build an MP3 player. Bet you didn’t know that did you? In fact few people do and its even missing from his Apple bio. I assure you that Rob is an extremely smart guy. But not infallible by any means. Real is just as guilty as Sony was when the “Walkman” ceased to become synonomous with portable music.
3) Real’s market cap is $1.29 billion. Bear in mind they have $663 million in cash or equivalent is sitting in the bank! So…the question is…do you know more than the heavy hitters on Wall Street? Is this truly a bargain that the big guys aren’t aware of? Or are smarter people than you and me just not believing that this company can be more than another Netscape story? Is the market telling us that the actual operating components of the stock aren’t actually all that exciting? Perhaps.
Netscape didn’t reinvent themselves. Real has. The stock is trading at mid 2003 levels. I own RNWK and I’m probably going to start buying more on dips over the next few weeks.
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