RealNetworks Announces Record Fourth Quarter and Fiscal 2005 Results

RealNetworks Announces Record Fourth Quarter and Fiscal 2005 Results

Achieves More Than 1.4 Million Paid Music Subscribers

SEATTLE, Feb. 14 /PRNewswire-FirstCall/ -- RealNetworks(R), Inc. (NASDAQ:RNWK), the leading creator of digital media services and software, today announced record results for the fourth quarter and fiscal year ended December 31, 2005.

"2005 was a watershed year for RealNetworks. We achieved record annual revenue, returned the company to profitability, settled our antitrust litigation in a manner that generated significant shareholder value, and dramatically grew our games business through both organic growth and acquisitions. We believe these achievements position us well for long-term growth and market leadership," said Rob Glaser, chairman and CEO of RealNetworks. "Together with our many partners, Real offers a compelling set of best-of-breed digital media software products and digital music, video and games products to consumers wherever and whenever they want them."

Quarterly Highlights

-- Record revenue of $83.6 million
-- Record net income of $295.6 million
-- More than 2.25 million paid subscribers

For the fourth quarter of 2005, revenue grew 15 percent to $83.6 million compared to $72.5 million reported in the fourth quarter of 2004. For the fourth quarter, in the Consumer Products and Services segment, Music revenue was $26.1 million, a 29% increase over the fourth quarter of 2004; Games revenue was $15.7 million, a 52% increase over the fourth quarter of 2004; Video, Consumer Software and Other revenue was $22.6 million, a decrease of 10% over the fourth quarter of 2004; and Media Properties revenue was $9.0 million, a 55% increase over the fourth quarter of 2004. In the Business Products and Services segment, revenue was $10.2 million in the fourth quarter, a decrease of 8% over the same period in 2004.

During the quarter, the Company announced a series of agreements with Microsoft ending its antitrust litigation and establishing digital music and games collaboration relationships resulting in a series of payments of up to $761 million over eighteen months. During the fourth quarter, Real received $478 million in payments related to these agreements. The Company expects to receive up to $283 million in additional payments over the next five quarters. Microsoft can earn credits against its future payments as a result of delivering music users to Real through its promotional efforts.

Net income for the fourth quarter was $295.6 million, or $1.61 per diluted share, compared to a net loss of $1.0 million, or ($0.01) per share, in the fourth quarter of 2004. Included in net income was a benefit of ($434.4) million in income related to the Microsoft agreements, net of contingent legal fees and other litigation costs. Net income also included operating expenses related to the Microsoft agreements of $6.7 million for non-income related taxes and employee bonuses; a $14.8 million donation to the RealNetworks Foundation representing five percent of after tax income in accordance with stated company policy; and an $8.5 million loss on a cancelled purchase agreement related to an element of an ongoing research and development project.

For the fourth quarter of 2005, EBITDA was $406.4 million compared to $1.4 million for the same period in the prior year. EBITDA is an alternative, non-GAAP, measure of operating results that excludes from net income expenses relating to interest, taxes, depreciation and amortization. A reconciliation of GAAP net income to EBITDA is provided in the financial tables that accompany this release.

The Company's gross margin increased to 71 percent in the fourth quarter of 2005, as compared to 67 percent in the fourth quarter of 2004.

Operating expenses for the fourth quarter of 2005 were a benefit of ($342.8) million compared to $50.7 million for the same period in 2004. The benefit in 2005 was driven primarily by the impact of the Microsoft agreements.

For the fourth quarter, the effective tax rate was approximately 28%, impacted by the use of pre-existing tax credits and net operating loss (NOL) carry forwards.

Full Year Highlights

-- Record revenue of $325.1 million
-- Record net income of $312.3 million, or $1.70 per diluted share
-- Up to $761 million in payments over 18 months from the Microsoft
agreements

In 2005, revenue grew 22% to $325.1 million compared to $266.7 million in 2004. In the Consumer Products and Services segment, Music revenue was $97.5 million, a 50% increase over 2004; Games revenue was $56.3 million, a 63% increase over 2004; Video, Consumer Software and Other revenue was $95.0 million, a 2% decrease over 2004; and Media Properties revenue was $31.1 million, a 43% increase over 2004. In the Business Products and Services segment, revenue was $45.1 million, a 7% decrease from 2004.

Net income was $312.3 million, or $1.70 per diluted share, in 2005 compared to a net loss of $23.0 million, or ($0.14) per share, in 2004. Net income for the year included the same settlement benefit and expenses as discussed in the quarterly overview above.

For the full year, EBITDA was $431.4 million compared to ($11.6) million in 2004. A reconciliation of GAAP net income to EBITDA is provided in the financial tables that accompany this release.

The gross margin in 2005 was 70% as compared to 64% in the prior year.

Operating expenses for 2005 were a benefit of ($170.6) million compared to $192.3 million in 2004. Operating expenses were significantly impacted by the Microsoft settlement and other items as described in the quarterly net income discussion.

For the full year, the effective tax rate was approximately 27%, impacted by the use of pre-existing tax credits and NOL carry forwards. However, actual federal income taxes owed are expected to be less than $10 million due to the utilization of deferred tax assets.

As of December 31, 2005, Real had approximately $781.3 million in unrestricted cash, cash equivalents and short-term investments, which includes the proceeds from $100 million of convertible debt. In addition, the Company holds an equity investment in a public company valued at approximately $43.4 million as of December 31, 2005.

Under the Company's stock repurchase program, approximately 3.2 million shares were repurchased for $25.0 million during the fourth quarter of 2005. For the full year, 8.6 million shares were repurchased for $54.3 million. As of December 31, 2005, approximately $75.0 million remained available under the existing stock repurchase program.

The number of shares used to compute the diluted earnings per share for the fourth quarter and full year 2005 was 183.7 million and 184.2 million, respectively.

Business Outlook

The following forward-looking statements reflect RealNetworks' expectations as of February 14, 2006. The Company currently does not intend to update these forward-looking statements until the next quarterly results announcement.

For the first quarter of 2006, Real expects revenue in the range of $82 million to $86 million and earnings of $0.11 to $0.13 per diluted share. Operating expenses are expected to include a benefit of $40 million, or $0.22 per diluted share, in income from our agreements with Microsoft. Projected earnings also include $0.08 to $0.10 per diluted share of expenses primarily related to income from the Microsoft agreements including the following: approximately $0.01 per diluted share for non-income related taxes and employee bonuses; $0.01 per diluted share of charitable contributions representing five percent of net income; and $0.06 to $0.08 per diluted share of income tax expense which represents a tax rate of approximately 37%. In addition, Real expects to incur $0.02 to $0.03 per diluted share of non-cash stock compensation expense.

For 2006, Real expects to report revenue in the range of $365 million to $380 million and earnings of $0.75 to $0.80 per diluted share. Operating expenses are expected to include a benefit of $222 million, or approximately $1.22 per diluted share in income from our agreements with Microsoft. Projected earnings also include $0.51 to $0.55 per diluted share of expenses primarily related to income from the Microsoft agreements including the following: approximately $0.03 to $0.04 per diluted share for non-income related taxes and employee bonuses; $0.04 per diluted share of charitable contributions representing five percent of net income; and $0.44 to $0.47 per diluted share of income tax expense which represents a tax rate of approximately 37%. However, actual federal income taxes owed are expected to be less than $10 million due to the utilization of deferred tax assets. In addition, Real expects to incur $0.08 to $0.10 per diluted share of non-cash stock compensation expense.

The Company will host a webcast and conference call today at 5:00 p.m. (Eastern)/ 2:00 p.m. (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 "Fourth Quarter Earnings," and the leader is Rob Glaser. A telephonic replay will be available until 8 p.m. (Eastern), November 9th, and may be accessed by dialing 800-677-4302 (402-998-0977 for international callers).

ABOUT REALNETWORKS

RealNetworks, Inc. is a leading creator of digital media services and software including Rhapsody(R), RealPlayer(R) 10 and casual PC and mobile games. 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. Consumers can access and experience audio/video programming and download RealNetworks' consumer software at http://www.real.com/ . RealNetworks' systems and corporate information is located at http://www.realnetworks.com/ .

Forward-Looking Statements: This press release contains forward-looking statements that involve risks and uncertainties, including statements relating to: (a) Real's future revenue, expenses, margins, profitability, net income, taxes, 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 generally and RealNetwork's content services in particular, in particular because these are relatively new and unproven business models and markets; 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 collaborative agreements we have with Microsoft will be less successful 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; risks relating to the ability of Real's strategic partners' to generate subscribers for Real's digital content services; and risks related to the Company's ability to fully utilize its tax assets. 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. The preparation of our financial statements and forward looking financial guidance requires us to make estimates and assumptions that affect the reported amount of assets and liabilities and the reported amounts of revenues and expenses during the reported period. Actual results may differ materially from these estimates under different assumptions or conditions. The Company assumes no obligation to update any forward-looking statements or information, which are in effect as of their respective dates.

NOTE: 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 Years Ended
December 31, December 31,
2005 2004 2005 2004
(in thousands, except per share data)

Net revenue $83,568 $72,546 $325,059 $266,719

Cost of revenue 23,976 23,925 98,249 92,207
Loss on content agreement -- -- -- 4,938

Gross profit 59,592 48,621 226,810 169,574

Operating expenses:
Research and development 25,335 13,091 70,631 51,607
Sales and marketing 36,706 26,608 130,515 96,779
General and administrative 29,573 7,914 50,669 31,302
Loss on excess office
facilities (A) -- -- -- 866
Stock-based compensation 19 71 128 695
Subtotal operating expenses 91,633 47,684 251,943 181,249

Antitrust litigation
(settlement) expenses (B) (434,425) 2,997 (422,500) 11,048
Total operating expenses (342,792) 50,681 (170,557) 192,297

Operating income (loss) 402,384 (2,060) 397,367 (22,723)

Other income (expense), net:
Interest income, net 7,012 1,602 14,511 4,452
Equity in net loss of MusicNet -- (955) (1,068) (4,351)
Impairment of equity
investments (C) (266) -- (266) (450)
Gain on sale of equity
investments -- -- 19,330 --
Other, net (55) 606 (331) 597
Other income (expense), net 6,691 1,253 32,176 248

Income (loss) before income taxes 409,075 (807) 429,543 (22,475)
Income tax provision (113,435) (165) (117,198) (522)

Net income (loss) $295,640 $(972) $312,345 $(22,997)

Basic net income (loss) per share $1.76 $(0.01) $1.84 $(0.14)
Diluted net income (loss) per share $1.61 $(0.01) $1.70 $(0.14)

Shares used to compute basic net
income (loss) per share 167,573 170,039 169,986 168,907
Shares used to compute diluted net
income (loss) per share 183,728 170,039 184,161 168,907

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

(B) Consists of amounts received under the Settlement and Commercial
agreements with Microsoft, net of certain 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.

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

December 31, December 31,
2005 2004
(in thousands)
ASSETS

Current assets:
Cash, cash equivalents and
short-term investments $781,327 $363,621
Trade accounts receivable, net
of allowances for doubtful
accounts and sales returns 16,721 14,501
Deferred tax assets, net,
current portion 54,204 --
11,933 8,196
Total current assets 864,185 386,318

Equipment and leasehold improvements,
at cost:
Equipment and software 56,402 45,324
Leasehold improvements 27,964 25,015
Total equipment and leasehold
improvements 84,366 70,339
Less accumulated depreciation
and amortization 51,228 41,508
Net equipment and leasehold
improvements 33,138 28,831

Restricted cash equivalents 17,300 20,151
Notes receivable from related parties -- 106
Equity investments 46,163 36,588
Goodwill, net 123,330 119,217
Other intangible assets, net 7,337 8,383
Deferred tax assets, net, non-current
portion 19,147 --
Other assets 2,397 2,908

Total assets $1,112,997 $602,502

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable $11,397 $10,219
Accrued and other liabilities 112,340 50,033
Deferred revenue, current portion 25,021 30,307
Accrued loss on excess office
facilities and content
agreement, current portion 4,623 8,160
Total current liabilities 153,381 98,719

Deferred revenue, non-current portion 276 548
Accrued loss on excess office
facilities and content
agreement, non-current portion 13,393 19,017
Deferred rent 4,018 3,413
Convertible debt 100,000 100,000
Other long-term liabilities 196 --

Total shareholders' equity 841,733 380,805

Total liabilities and
shareholders' equity $1,112,997 $602,502

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

2005
Q4 Q3 Q2 Q1
(in thousands)

Net Revenue by Line of Business: *
Consumer products and services (A) $73,415 71,750 70,593 64,206
Business products and services (B) 10,153 10,483 12,093 12,366
Total net revenue $83,568 82,233 82,686 76,572

Consumer Products and Services:
Subscriptions (C) $47,508 47,347 47,817 44,400
E-commerce and other (D) 25,907 24,403 22,776 19,806
Total consumer products and
services revenue $73,415 71,750 70,593 64,206

Consumer Products and Services: *
Music (E) $26,104 25,042 24,135 22,243
Video, consumer software and
other (F) 22,616 23,642 24,607 24,154
Games (G) 15,741 14,699 13,648 12,189
Media Properties (H) 8,954 8,367 8,203 5,620
Total consumer products and
services revenue $73,415 71,750 70,593 64,206

Net Revenue by Geography:
United States $65,177 63,478 63,443 57,757
Rest of world 18,391 18,755 19,243 18,815
Total net revenue $83,568 82,233 82,686 76,572

Gross Margin by Line of Business: **
Consumer products and services 70% 68% 68% 65%
Business products and services 81% 82% 83% 82%
Total gross margin 71% 70% 70% 68%

Subscribers (presented as greater
than) ***
Total **** 2,250 2,200 2,000 1,850
Music 1,425 1,300 1,150 975

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

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

*Reclassifications were made to the presentation of 2004 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 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:

Years Ended
December 31, December 31,
2005 2004
(in thousands)

Net income (loss) in accordance with
GAAP $312,345 (22,997)
Interest income, net (14,511) (4,452)
Taxes 117,198 522
Depreciation, amortization and
stock compensation 16,331 15,338
EBITDA 431,363 (11,589)

Quarters Ended
December 31, September 30, June 30, March 31, December 31,
2005 2005 2005 2005 2004
(in thousands)
Net income
(loss)
in accordance
with GAAP $295,640 11,182 4,709 814 (972)
Interest
income, net (7,012) (2,904) (2,579) (2,016) (1,602)
Taxes 113,435 3,457 162 144 165
Depreciation,
amortization
and stock
compensation 4,353 4,220 4,092 3,666 3,791
EBITDA 406,416 15,955 6,384 2,608 1,382

Source: RealNetworks, Inc.

CONTACT: media, Maureen Farley, +1-206-892-6653, or mfarley@real.com, or
investors, Caroline Hughes, +1-206-892-6718, or carolinehughes@real.com, both
of RealNetworks, Inc.

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

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