RealNetworks Inc, the digital media company, plans to spin-off its fastest growing unit which makes games for various platforms into a separate company.

It anticipates the separate companies will be more flexible and focused. The company said it may precede the spin off with an initial public offering and sell up to 20 percent of the shares of the new entity.

The unit makes and sells casual games for computers, mobile devices and video game systems. It includes board, word and hidden-object games and puzzles.

Casual games had the fastest sales growth in the company's first quarter, rising 33 percent to $31.8 million. Casual games sales for all of 2007 were $108.5 million in 2007, up 26 percent compared to 2006, the company said.

RealNetworks was a pioneer and has been a leader in the casual games industry since we introduced RealArcade in 2001, said Rob Glaser, the company's chairman and chief executive in a statement. We believe that spinning off our casual games business will give it the best opportunity to continue to flourish and lead.

Real Networks Chief executive officer Michael Eggers says that for investors, the spin off will lower the complexity and tracking of the company's performance.

We also think that the new structure will provide current and potential shareholders with two attractive investment options that may be more closely aligned with their various investment objectives, he said.

The company anticipates the spin off or an IPO and subsequent spin off will be tax-free for shareholders. The move must be approved by the company's Board of Directors and other conditions.

The company says it will determine the specific course of action by the end of the year.

EARNINGS

The company also announced its first quarter earnings, beating analysts' expectations.

Net income for the first three months of 2008 was 2.4 million, or 2 cents per share, compared with $40.0 million, or 22 cents in the year earlier period. The results included a $61 million payment related to the company's antitrust settlement and commercial agreements with Microsoft.

Analysts polled by Thomson Financial had expected a 3 cents per share loss.

Sales were up 14 percent to $147.6 million, compared with $129.5 million in the first quarter a year ago.

The games unit had 33 percent growth to $31.8 million. Music grew 12 percent to $38.1 million. Technology products and solutions grew 15 percent to $51.3 million due in part to acquisitions of SnoyNetServices and Exomi. Media Software and Services revenue was $26.4 million.

The company had about $539.6 million in cash, cash equivalents and short term debt and $100 million in convertible debt.

Shares of Real Networks rose 10 cents today, or 1.57 percent, to end the day at $6.48.

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