RealNetworks Announces Third Quarter 2005 Results

RealNetworks Announces Third Quarter 2005 Results

Achieves More Than 2.2 Million Paid Subscribers

SEATTLE, Oct. 27 /PRNewswire-FirstCall/ -- RealNetworks(R), Inc. (NASDAQ:RNWK), the leading creator of digital media services and software, today announced results for the third quarter ended September 30, 2005.

Third Quarter Highlights

-- Revenue of $82.2 million, an increase of 20% from the prior year
-- Net income of $11.2 million
-- Increased total paid subscribers to more than 2.2 million

For the third quarter of 2005, Real reported quarterly revenue of $82.2 million, up 20 percent from $68.3 million in the third quarter of 2004. Real reported GAAP net income of $11.2 million, or $0.06 per diluted share, compared to a net loss of $7.0 million, or ($0.04) per share, in the third quarter of 2004. The results for the third quarter of 2005 include an after-tax gain of approximately $8.4 million, or approximately $0.04 per share, associated with the sale of a portion of the Company's equity investment in a Japanese public company. Non-GAAP adjusted net income, excluding antitrust litigation expenses of approximately $3.5 million, or $0.02 per diluted share, for the third quarter was $14.7 million, or $0.08 per diluted share.

EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization) was $16.0 million compared to a loss of $3.9 million in last year's third quarter. Absent antitrust litigation expenses, EBITDA was $19.5 million for the third quarter of 2005, up from a loss of $1.0 million in the comparable period during 2004. A reconciliation of non-GAAP EBITDA and EBITDA less antitrust litigation expense with GAAP net income is provided in the financial tables accompanying this release.

"We continue to make great progress with strong year over year revenue growth, increased profitability and a base of more than 2.2 million paid subscribers, including 1.3 million paid music subscribers," said Rob Glaser, chairman and CEO of RealNetworks. "We continue to expand our growing list of blue chip partners with new relationships with Sprint, Cingular Wireless and, most recently, Microsoft. Together with our partners we're continuing to expand our ability to offer digital music, video and games to consumers wherever and whenever they want them."

Earlier this month, Real announced a series of agreements with Microsoft worth at least $761 million which settled all antitrust disputes worldwide and also include collaboration agreements around digital music and games. Real received $460 million in cash associated with the antitrust settlement and technology assurance agreement and will receive another $301 million in cash scheduled to be paid quarterly over 18 months related to the music and games agreements. Microsoft can earn pre-determined market rate bounties for delivering Rhapsody subscribers to Real, which will be netted against the scheduled quarterly cash payments. The music partnership provides for the integration of Real's leading digital music subscription business, Rhapsody(R), throughout MSN Music, MSN Search, MSN Messenger and Windowsmedia.com properties. Under the games agreement, Real is developing a subscription games service to be promoted throughout MSN Games and also will develop a series of titles for Xbox Live Arcade.

Financial Overview

Real continued to see year over year revenue growth driven by its consumer segment, including Music and Games products and services. Third quarter revenue from the Consumer Products and Services segment grew 28 percent to $71.8 million, up from $56.0 million in the third quarter of 2004. In the third quarter, Music revenue grew 39 percent to $25.0 million, up from $18.0 million in the third quarter of 2004. Games revenue grew 62 percent to $14.7 million, up from $9.1 million in the third quarter of 2004. Media Properties revenue, which includes advertising, increased 59 percent to $8.4 million, up from $5.3 million during the same quarter last year. Video, consumer software and other revenue was $23.6 million, flat in comparison to the same period a year ago.

Real's Business Products and Services generated $10.5 million in revenue in the third quarter of 2005, compared to $12.3 million in the prior year's third quarter. The decline was primarily based on a $1.4 million revenue decrease related to a previously disclosed expiring legacy systems license agreement.

The Company's gross margin improved to 70 percent in the third quarter of 2005, as compared to 64 percent in the third quarter of 2004, due primarily to a shift in revenue mix to higher margin products as well as a reduction in content costs associated with certain products and services.

Operating expenses, including antitrust litigation, were $57.7 million for the quarter compared to $49.7 million in the third quarter of 2004 due to higher marketing costs and headcount. As of September 30, 2005, Real had approximately $347 million in cash, cash equivalents and short-term investments, which includes the proceeds from $100 million of convertible debt. In addition, the Company had approximately $47 million in public equity investments.

At the close of the third quarter of 2005, Real had over 2.2 million paid subscribers to its premium digital media services, up from over 1.55 million for the same quarter in 2004. Of the total paid subscribers, Real had more than 1.3 million paid music subscribers at the end of the third quarter of 2005, up from more than 625,000 for the same quarter in 2004. The music subscriber counts include Rhapsody on demand services, premium commercial-free radio services and, in 2005, Rhapsody radio registrations bundled with broadband internet service providers.

Last quarter, the Company announced that the Board of Directors had authorized the repurchase of up to $75 million of its outstanding stock. Real entered into a Rule 10(b)5-1 plan in order to facilitate the repurchase. As of September 30, 2005, Real had spent $29.3 million on the repurchase of approximately 5.5 million shares.

Forward Looking Guidance

For the fourth quarter of 2005, Real expects net revenue to be between $81 million and $85 million. As previously announced, Real does not expect to see any material impact to fourth quarter revenue from its Microsoft relationship due to the timing of the integration work associated with the music and games collaboration agreements. Real expects fourth quarter earnings per diluted share of $1.42 to $1.48 and EBITDA between $398 million and $410 million, which incorporates the assumptions listed below.

During the fourth quarter of 2005, the Company received $478 million in cash related to the previously announced Microsoft agreements. This gain will be offset by an estimated $40 million to $50 million in contingent legal fees and other litigation costs, along with approximately $30 million in other expenses associated with these agreements, including state occupancy taxes and amounts related to our intent to donate five percent of net income after tax to the RealNetworks Foundation.

In addition to the expenses discussed above, the Company's guidance incorporates an income tax provision of approximately 35 percent. However, due to net operating loss (NOL) utilization, the actual cash amounts owed for income taxes are estimated to be less than five percent of net income before taxes. Absent acquisitions or additional share repurchases, Real expects cash, cash equivalents and short-term and public equity investments to be approximately $800 million at the end of the fourth quarter.

For the fiscal year 2005, the Company expects revenue to be between $322.5 million and $326.5 million, with earnings per diluted share between $1.51 and $1.57. Full year EBITDA is expected to be between $423 million and $435 million.

Webcast Information

The Company will host a webcast and conference call today at 5:00 pm (Eastern)/ 2:00 pm (Pacific). The live webcast, featuring slides and audio, will be available at http://www.realnetworks.com/company/investor/earnings.html . Listeners will require RealPlayer(R) to listen to the conference call, which can be downloaded for free at www.real.com. The on-demand webcast will be available approximately two hours following the conclusion of the live webcast. Participants may access the conference call by dialing 800-857-5305 (773-681-5857 for international callers). The passcode is "Third Quarter Earnings," and the leader is Rob Glaser. A telephonic replay will be available until 8 pm (Eastern), November 3rd, and may be accessed by dialing 866-407-9275 (203-369-0620 for international callers).

ABOUT REALNETWORKS

RealNetworks, Inc. is the leading creator of digital media services and software including Rhapsody(R), RealPlayer 10, and casual PC and mobile games. RealNetworks has more than 2.2 million paid subscribers to its premium digital media services. Consumers can access and experience audio/video programming and download RealNetworks' consumer software at http://www.real.com/ . Broadcasters, network operators, media companies and enterprises use RealNetworks' products and services to create and deliver digital media to PCs, mobile phones and consumer electronics devices. RealNetworks' corporate information is located at http://www.realnetworks.com/company .

Forward Looking Statements: This press release contains forward-looking statements that involve risks and uncertainties, including statements relating to: (a) Real's future revenues, expenses, margins, profitability, net income, earnings per share and other measures of results of operation; (b) the growth of Real's music and games businesses; (c) the prospects for future growth; and (d) the future success and impact on Real's operating results and financial position resulting from the Microsoft agreements. Actual results may differ materially from the results predicted. Factors that could cause actual results to differ from the results predicted include: development and consumer acceptance of legal online music distribution services; risks associated with the sustained adoption and use of RealNetworks' services by customers, including the uncertainty of whether consumers will continue to pay for subscription content over the Internet, which is a relatively new and unproven business model; the potential that we will be unable to continue to enter into commercially attractive agreements with third parties for the provision of compelling content for our subscription service offerings; the risk that the costs of our antitrust litigation will be greater than we anticipate; the emergence of new entrants and competition in the market for digital media subscription offerings and on-line music sales; the impact on our gross margins from content costs and from the mix of subscribers to subscription offerings with higher content costs than others; competitive risks, including competing technologies, products and services, and the competitive activities of our larger competitors, some of which have strong ties to streaming media users through other products; risks associated with the introduction of new products and services; risks inherent in strategic relationships, especially with competitors, and technology and service integration efforts such as those contemplated by the Microsoft agreements; and risks relating to the ability of Real's strategic partners to generate subscribers for Real's digital content services. More information about potential risk factors that could affect RealNetworks' business and financial results is included in RealNetworks' annual report on Form 10-K for the most recent year ended December 31, and its quarterly reports on Form 10-Q and from time to time in other reports filed by RealNetworks with the Securities and Exchange Commission.

RealNetworks, Rhapsody and RealPlayer are trademarks or registered trademarks of RealNetworks, Inc. All other companies or products listed herein are trademarks or registered trademarks of their respective owners.

RealNetworks, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)

Quarters Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
(in thousands, except per share data)

Net revenue $82,233 $68,310 $241,491 $194,173

Cost of revenue 24,695 24,786 74,273 68,282
Loss on content agreement -- -- -- 4,938

Gross profit 57,538 43,524 167,218 120,953

Operating expenses:
Research and development 16,334 13,046 45,296 38,516
Sales and marketing 30,745 24,721 93,809 70,171
General and administrative 7,032 7,968 21,096 23,388
Loss on excess office facilities
(A) -- 866 -- 866
Antitrust litigation (B) 3,531 2,974 11,925 8,051
Stock-based compensation 25 145 109 624
Total operating expenses 57,667 49,720 172,235 141,616

Operating loss (129) (6,196) (5,017) (20,663)

Other income (expense), net:
Interest income, net 2,904 1,190 7,499 2,850
Equity in net loss of MusicNet -- (1,262) (1,068) (3,396)
Impairment of equity
investments (C) -- (450) -- (450)
Gain on sale of equity
investments 11,740 -- 19,330 --
Other, net 124 (109) (276) (9)
Other income (expense), net 14,768 (631) 25,485 (1,005)

Income (loss) before income taxes 14,639 (6,827) 20,468 (21,668)
Income tax provision (D) (3,457) (142) (3,763) (357)

Net income (loss) $11,182 $(6,969) $16,705 $(22,025)

Basic net income (loss) per share $0.07 $(0.04) $0.10 $(0.13)
Diluted net income (loss) per share $0.06 $(0.04) $0.09 $(0.13)

Shares used to compute basic net
income (loss) per share 170,797 169,588 170,761 168,527
Shares used to compute diluted net
income (loss) per share 184,180 169,588 184,276 168,527

(A) The loss on unoccupied excess office facilities represents the loss
from rent payments over the remaining life of the lease related to
the space and amounts related to the write-off of certain leasehold
improvements.

(B) Consists of legal fees, personnel costs, public relations and other
professional service fees incurred related to antitrust complaints
against Microsoft, including proceedings in the European Union.

(C) Relates to other-than-temporary declines in the value of certain
equity investments. These charges were recorded to reflect these
investments at their estimated fair value.

(D) Includes approimately $3.3 million for both the quarter and nine
months ended September 30, 2005 related to the sale of a portion the
Company's equity investments

RealNetworks, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)

September 30, December 31,
2005 2004
(in thousands)
ASSETS
Current assets:
Cash, cash equivalents and
short-term investments $346,654 $363,621
Trade accounts receivable, net
of allowances for doubtful
accounts and sales returns 16,793 14,501
Prepaid expenses and other
current assets 7,477 8,196
Total current assets 370,924 386,318

Equipment and leasehold improvements,
at cost:
Equipment and software 54,464 45,324
Leasehold improvements 27,463 25,015
Total equipment and leasehold
improvements 81,927 70,339
Less accumulated depreciation
and amortization 48,492 41,508
Net equipment and leasehold
improvements 33,435 28,831
Restricted cash equivalents 18,056 20,151
Notes receivable from related parties -- 106
Equity investments 50,387 36,588
Goodwill, net 130,563 119,217
Other intangible assets, net 8,609 8,383
Other 2,543 2,908

Total assets $614,517 $602,502

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable $14,044 $10,219
Accrued and other liabilities 60,107 50,033
Deferred revenue, current
portion 25,598 30,307
Accrued loss on excess office
facilities and content
agreement, current portion 5,641 8,160
Total current liabilities 105,390 98,719

Deferred revenue, non-current portion 112 548
Accrued loss on excess office
facilities and content
agreement, non-current portion 15,306 19,017
Deferred rent 3,816 3,413
Convertible debt 100,000 100,000
Other long-term liabilities 200 --

Total shareholders' equity 389,693 380,805

Total liabilities and
shareholders' equity $614,517 $602,502

RealNetworks, Inc. and Subsidiaries
Supplemental Financial Information
(Unaudited)

2005
Q3 Q2 Q1
(in thousands)

Net Revenue by Line of Business: *
Consumer products and services (A) $71,750 70,593 64,206
Business products and services (B) 10,483 12,093 12,366
Total net revenue $82,233 82,686 76,572

Consumer Products and Services:
Subscriptions (C) $47,347 47,817 44,400
E-commerce and other (D) 24,403 22,776 19,806
Total consumer products and
services revenue $71,750 70,593 64,206

Consumer Products and Services: *
Music (E) $25,042 24,135 22,243
Video, consumer software and
other (F) 23,642 24,607 24,154
Games (G) 14,699 13,648 12,189
Media Properties (H) 8,367 8,203 5,620
Total consumer products and
services revenue $71,750 70,593 64,206

Net Revenue by Geography:
United States $63,478 63,443 57,757
Rest of world 18,755 19,243 18,815
Total net revenue $82,233 82,686 76,572

Gross Margin by Line of Business: **
Consumer products and services 68% 68% 65%
Business products and services 82% 83% 82%
Total gross margin 70% 70% 68%

Subscribers (presented as greater
than) ***
Total **** 2,200 2,000 1,850
Music 1,300 1,150 975

2004
Q4 Q3 Q2 Q1
(in thousands)

Net Revenue by Line of Business: *
Consumer products and services (A) 61,541 56,034 53,743 47,025
Business products and services (B) 11,005 12,276 11,730 13,365
Total net revenue 72,546 68,310 65,473 60,390

Consumer Products and Services:
Subscriptions (C) 42,722 38,386 35,459 32,073
E-commerce and other (D) 18,819 17,648 18,284 14,952
Total consumer products and
services revenue 61,541 56,034 53,743 47,025

Consumer Products and Services: *
Music (E) 20,252 18,040 14,954 11,940
Video, consumer software and
other (F) 25,169 23,619 23,715 24,289
Games (G) 10,330 9,098 8,352 6,755
Media Properties (H) 5,790 5,277 6,722 4,041
Total consumer products and
services revenue 61,541 56,034 53,743 47,025

Net Revenue by Geography:
United States 55,608 52,054 50,949 43,963
Rest of world 16,938 16,256 14,524 16,427
Total net revenue 72,546 68,310 65,473 60,390

Gross Margin by Line of Business: **
Consumer products and services 64% 59% 63% 58%
Business products and services 82% 83% 83% 83%
Total gross margin 67% 64% 67% 56%

Subscribers (presented as greater
than) ***
Total **** 1,550 1,550 1,400 1,300
Music 700 625 550 450

2003
Q4 Q3 Q2 Q1
(in thousands)

Net Revenue by Line of Business: *
Consumer products and services (A) 41,679 36,377 33,172 32,886
Business products and services (B) 12,377 15,432 16,474 13,980
Total net revenue 54,056 51,809 49,646 46,866

Consumer Products and Services:
Subscriptions (C) 30,540 27,909 25,470 23,639
E-commerce and other (D) 11,139 8,468 7,702 9,247
Total consumer products and
services revenue 41,679 36,377 33,172 32,886

Consumer Products and Services: *
Music (E) 7,937 4,655 1,670 831
Video, consumer software and
other (F) 26,369 26,235 27,555 28,485
Games (G) 3,930 3,150 2,672 2,410
Media Properties (H) 3,443 2,337 1,275 1,160
Total consumer products and
services revenue 41,679 36,377 33,172 32,886

Net Revenue by Geography:
United States 40,175 37,660 36,009 33,769
Rest of world 13,881 14,149 13,637 13,097
Total net revenue 54,056 51,809 49,646 46,866

Gross Margin by Line of Business: **
Consumer products and services 55% 54% 61% 63%
Business products and services 83% 87% 88% 89%
Total gross margin 62% 64% 70% 71%

Subscribers (presented as greater
than) ***
Total **** 1,300 1,150 1,000 1,000
Music 350 250 150 100

*Reclassifications were made to the presentation of 2004 and
2003 data to conform to the presentation for 2005
**For the quarter ended March 31, 2004, total gross margin
includes loss on content agreement of $4.9 million
***Beginning the quarter ended March 31, 2005, total and music
subscribers reflect the inclusion of subscribers that
registered for the Comcast Rhapsody Radio Plus service
****Total subscribers as of March 31, 2004 reflect the removal
of approximately 142,000 subscribers resulting from the
non-renewal of the MLB contract

(A) Revenue is derived from consumer digital media subscription services,
RealPlayer Plus and related products, sales and distribution of third
party software products, content such as games and music, and advertising

(B) Revenue is derived from media delivery system software, support and
maintenance services, broadcast hosting services and consulting services

(C) Revenue is derived from consumer digital media subscription services
including: SuperPass, RadioPass, Rhapsody, GamePass and stand-alone
subscriptions

(D) Revenue is derived from RealPlayer Plus and related products, sales
and distribution of third party software products, content such as games
and music, and advertising

(E) Revenue is derived from RadioPass, Rhapsody subscription services and
sales of music content, advertising generated from our music and
music related websites and the distribution of third party products

(F) Revenue is derived from RealOne SuperPass subscriptions, RealPlayer
Plus and related products, stand-alone subscription services and sales
of third party software products

(G) Revenue is derived from the GamePass subscription service, sales of
games, advertising generated from our games and game-related websites
and the distribution of third party products

(H) Revenue is derived from non-game and non-music related advertising
and distribution of third party products

RealNetworks, Inc. and Subsidiaries
Supplemental Financial Information
(Unaudited)

A reconciliation of Generally Accepted Accounting Principles ("GAAP")
net income (loss) to income (loss) before interest, taxes, depreciation,
amortization and stock compensation ("EBITDA") and EBITDA excluding
antitrust litigation and loss on content agreement is as follows:

Quarters Ended

Sept. 30, June 30, March 31,
2005 2005 2005
(in thousands)

Net income (loss) in accordance with
GAAP $11,182 $4,709 814
Interest income, net (2,904) (2,579) (2,016)
Taxes 3,457 162 144
Depreciation, amortization and
stock compensation 4,220 4,092 3,666
EBITDA 15,955 6,384 2,608

Antitrust litigation 3,531 4,650 3,744
Loss on content agreement -- -- --
EBITDA excluding antitrust
litigation and loss on
content agreement $19,486 $11,034 6,352

Quarters Ended

Dec. 31, Sept. 30, June 30, March 31,
2004 2004 2004 2004
(in thousands)

Net income (loss) in accordance with
GAAP (972) (6,969) (4,618) (10,438)
Interest income, net (1,602) (1,190) (800) (860)
Taxes 165 142 113 102
Depreciation, amortization and
stock compensation 3,791 4,089 3,810 3,648
EBITDA 1,382 (3,928) (1,495) (7,548)

Antitrust litigation 2,997 2,974 2,756 2,321
Loss on content agreement -- -- -- 4,938
EBITDA excluding antitrust
litigation and loss on
content agreement 4,379 (954) 1,261 (289)

This reconciliation has been provided as a performance measure, as the
Company uses EBITDA and EBITDA excluding antitrust litigation expense
on an ongoing basis to track and assess its financial performance. The
Company has calculated EBITDA excluding loss on content agreement
because it believes that the loss on content agreement is an item that
does not reflect the ongoing financial operations of the Company's
business.

Forward Looking Guidance
A reconciliation of GAAP net income guidance for quarter and year ending
December 31, 2005 to EBITDA is as follows:

Ranges for Quarter Ranges for Year
Ending Ending
December 31, 2005 December 31, 2005
(in thousands) (in thousands)

Low High Low High
Net income in accordance with GAAP $263,000 273,000 $280,000 290,000
Interest, taxes, depreciation and
amortization, net 135,000 137,000 143,000 145,000
EBITDA $398,000 410,000 $423,000 435,000

Source: RealNetworks, Inc.

CONTACT: media, Jeremy Pemble, +1-206-892-6614, or jpemble@real.com, or
investors, Caroline Hughes, +1-206-892-6718, or carolinehughes@real.com, both
of RealNetworks

Web site: http://www.realnetworks.com/

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