April 25, 2014 - 10:45am EST by
2014 2015
Price: 7.70 EPS $0.00 $0.00
Shares Out. (in M): 36 P/E 0.0x 0.0x
Market Cap (in $M): 276 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 50 TEV/EBIT 0.0x 0.0x

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  • Media
  • Management Ownership
  • Online gaming
  • Turnaround
  • freemium model
  • New Product Launch


Real Network (RNWK) has been written by Bobo on this board before. For the company’s background, you can read Bobo’s post. I think the current stock price presents a good entry point. There are few new development since the last write-up.

RNWK has 3 reporting segments: Real Player, Mobile Entertainment and Gaming. It also owns 45% stake in Rhapsody, a music streaming business. The company has about 226M cash on balance sheet and no debt. At about 275M market cap, the enterprise value is less than 50M. Buying the stock at the current price, we get a cheap, if not free, call option to play on its turnaround.  

Why the stock is cheap.

RNWK’s legacy businesses are in secular decline. It’s revenue has been declining about 20% annually since  2010. The rise of smart phone is killing their traditional ringtone business, while their PC gaming business does not seem to be able to survive the competition from mobile gaming.

The stock is largely ignored by the street. It’s last several conference calls only lasted 15 minutes with almost no participation of any analyst.

Why do I think it is a good investment?

The 45% interest in Rhapsody should worth more than 50M enterprise value. In October, Telefónica Digital and Rhapsody announced a strategic agreement. Telefónica took an undisclosed equity stake in Rhapsody, in exchange, Telefónica transferred its active Sonora customers to Rhapsody’s Napster. The subscriber base has increased 63% to 1.7M through this deal. Rhapsody also gained access to the growing Latin American market, which  jump started its subscriber growth. Although it is still far behind Spotify’s 6M user base, the new Rhapsody still is a valuable asset. It is difficult to value Rhapsody, as it does not disclose the dynamics of its subscriber base. We can roughly guesstimate by comparing it to Spotify. Spotify is valued at 4 billion in its latest equity raising, which values close to $700 per paying active user. Even we conservatively value Rhapsody’s subscriber at one tenth of that.  Rhapsody should worth well above 240M. Although we also don’t know the dilution to the 45% stake, RNWK holds, after the deal. I think there is good margin of safety to value its stake comfortably above the 50M enterprise value of RNWK.

So we are getting paid to own the rest of RNWK’s business. But if the business is losing money, why do we want to own it. I think RNWK is near a reflection point. The company might see its revenue stabilizes even grows this year.

In the third quarter RNWK launched RealPlayer Cloud. It is the first revolutionary product launch since 2008. RealPlayer Cloud enables user to share video across various devices, PC, smart phones, tablets. It also runs on various platforms including google chromecast, iOS, windows and Android. It also allows users to share the video between friends. The business model is freemium. Similar to dropbox in the file storage business, user gets the first 2G free storage and pay for additional storage. Although RealPlayer Cloud was only launched in US and Canada, RNWK added 500k cloud accounts in the first 3 month after launch. If you do a google trend search, you will see it gained significantly more attraction since then. I think most of the 25 million active users of the previous generation of RealPlayer will eventually be converted to the Cloud version, because the only downside of switching to the Cloud is having to sign up an account with email address (it is pretty insignificant compared to the added benefit.) Although how many of the users will be paying for the extra storage is unclear at this point. Last quarter revenue decline 800k vs the previous quarter, it does not need a lot contribution from the Cloud to stabilize its revenue. Given the cost of launching new product, it might take some time before the segment turns into profitability. I think there is decent chance that RNWK can turn the RealPlayer segment around.

The company also entered social casino market, after launching GarmHouse Casino in 2012. It also acquired Slingo last year to enter the mobile gaming for 15.6 M. Slingo. Slingo is a highly popular social casino game that combines bingo and slots. It has good brand recognition in the social casino. At its peak, it had 50M active users across various platforms. The Slingo Supreme ranks the 1st in the casino game category in iTune store. RNWK is expected to release its first new version of slingo soon, which could provid some upside potential. Admittedly, I am less confident that Slingo can help RNWK turn the gaming segment around. But management is very conservative when spending its balance sheet. Given in the small amount of cash invested, even if the turnaround fails, it won’t be financially devastating to RNWK.

Given how cheap the stock is, the only obvious risk is stupid capital allocation by the management. However I think this risk is minimum. Glaser Robert, the founder, returned to CEO position in 2012. He has been very conservative on spending RNWK’s cash on the balance sheet to turnaround the business. His 36% stake in the company also alines his interest with shareholders.
I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.


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