RealNetworks Reports Record Quarterly Revenue and Announces New $100 Million Stock Buyback Program

RealNetworks Reports Record Quarterly Revenue and Announces New $100 Million Stock Buyback Program

Achieves More Than 2.4 Million Paid Subscribers

SEATTLE, April 27 /PRNewswire-FirstCall/ -- RealNetworks(R), Inc. (NASDAQ:RNWK), the leading creator of digital media services and software, today announced results for the first quarter ended March 31, 2006.

"We are off to a strong start for 2006 with record revenue in the first quarter," said Rob Glaser, chairman and CEO of RealNetworks. "Real's tradition of innovation continues to bear fruit, most recently with the announcement of our Click-to-Stream patent that we believe positions Real's Helix Community at the center of the exploding digital media marketplace."

Quarterly Highlights

-- Record revenue of $86.6 million
-- Net income of $24.9 million
-- More than 2.4 million total paid subscribers

For the first quarter of 2006, revenue grew 13% to $86.6 million compared to $76.6 million reported in the first quarter of 2005. First quarter results include revenue of approximately $2.0 million from the acquisition of Zylom Media Group BV in January 2006. For the first quarter, revenue in the Consumer Products and Services segment was as follows: Games revenue was $18.6 million, a 53% increase over the first quarter of 2005; Music revenue was $28.9 million, a 26% increase over the first quarter of 2005; and RealPlayer, Related Consumer Products and Other was $27.3 million, a decrease of 6% from the first quarter of 2005. In the Technology Products and Solutions segment, revenue was $11.8 million in the first quarter, a decrease of 5% from the first quarter of 2005. Foreign currency exchange rate fluctuations negatively impacted 2006 first quarter revenue by approximately $1.7 million compared to the first quarter of 2005.

Net income for the first quarter of 2006 was $24.9 million, or $0.14 per diluted share, compared to $0.8 million, or $0.00 per diluted share, in the first quarter of 2005. Adjusted net income, which excludes the impact of the Microsoft agreements and stock-based compensation expenses, was $3.4 million, or $0.02 per diluted share in the first quarter of 2006, compared to $4.6 million, or $0.02 per diluted share the same quarter of 2005. A reconciliation of GAAP net income to adjusted net income is provided in the financial tables that accompany this release.

Gross margin was 69% in the first quarter of 2006 compared to 68% in the prior year's quarter. Operating expenses for the first quarter of 2006 were $28.3 million compared to $51.6 million in the prior year's quarter. First quarter operating expenses include a benefit related to Microsoft's payment under the settlement and commercial agreements signed in the fourth quarter of 2005. Operating expenses also include non-cash, stock-based compensation expense related to our adoption of SFAS 123R. Excluding the impact from the Microsoft agreements and stock-based compensation expenses, adjusted operating expenses were $62.5 million compared to $47.9 million in the first quarter of 2005. A reconciliation of GAAP operating expenses to adjusted operating expenses is provided in the financial tables that accompany this release. For the first quarter of 2006, Real's effective tax rate was approximately 37%.

As of March 31, 2006, Real had approximately $701 million in unrestricted cash, cash equivalents and short-term investments, which includes the proceeds from $100 million of convertible debt. Further, the Company expects to receive up to approximately $243 million in additional payments related to the Microsoft agreements over the next four quarters. Microsoft can earn credits against its future payments as a result of delivering music users to Real through its promotional efforts.

The Company completed its $100 million stock repurchase program in the first quarter of 2006, repurchasing approximately 9.5 million shares for $77 million. Since the beginning of 2005, the Company has repurchased approximately 18.2 million shares, or approximately 10% of outstanding shares, through its repurchase programs for $131 million. Total shares outstanding at March 31, 2006 were 157.8 million.

Today, the Company also announced that its Board of Directors has approved an additional $100 million stock repurchase program. Under the program, Real is authorized to repurchase up to $100 million of outstanding shares of common stock from time to time, depending on market conditions, share price and other factors. Repurchases may be made in the open market or through private transactions, in accordance with SEC requirements. Real may enter into a Rule 10(b)5-1 plan designed to facilitate the repurchase of all or a portion of the repurchase amount. Further, the repurchase program does not require RealNetworks to acquire a specific number of shares and may be terminated under certain conditions.

Business Outlook

The following forward-looking statements reflect RealNetworks' expectations as of April 27, 2006. The Company currently does not intend to update these forward-looking statements until the next quarterly results announcement.

For the second quarter of 2006, Real expects revenue in the range of $87 million to $90 million, GAAP net income per diluted share of $0.19 to $0.20 and adjusted net income per diluted share of $0.01 to $0.02. This guidance assumes a tax rate of approximately 37%.

For the full year of 2006, Real is reaffirming guidance of revenue in the range of $365 million to $380 million and earnings of $0.75 to $0.80 per diluted share. Additionally, Real expects adjusted net income per diluted share of $0.08 to $0.12 for the full year. This guidance assumes a tax rate of approximately 37%. However, actual federal income taxes paid are expected to be less than $10 million due to the utilization of deferred tax assets.

About Non-GAAP Financial Measures

To supplement the Company's consolidated financial results presented in accordance with GAAP, RealNetworks uses non-GAAP measures for certain components of financial performance. These non-GAAP measures include adjusted net income, adjusted net income per diluted share and adjusted operating expenses. Adjusted net income excludes the impact related to non-cash, stock- based compensation expense, income and expenses, including charitable contributions, related to the Microsoft Agreements, equity investment gains and losses and an estimate of the income taxes from the aforementioned items. The presentation of these non-GAAP financial measures is not intended to be considered as a substitute for, or superior to, financial information prepared and presented in accordance with GAAP. These non-GAAP measures are provided to enhance investors' overall understanding of the Company's current and expected future financial performance. The Company believes these non-GAAP measures provide useful information to management and investors by excluding certain income, expenses and gains and losses that may not be indicative of its core operating and financial results. Management uses these measures on an ongoing basis to track and assess the Company's financial performance. The accompanying financial tables provide reconciliations to the nearest GAAP measure of all non-GAAP measures provided in this press release.

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 "First Quarter Earnings," and the leader is Rob Glaser. A telephonic replay will be available until 8 pm (Eastern), May 5th, and may be accessed by dialing 800-679-9662 (402-220-0283 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 electronic devices. Consumers can access and experience audio/video programming and download RealNetworks' consumer software at http://www.real.com/. RealNetworks' systems and corporate information are 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, adjusted net income, adjusted net income per diluted share, adjusted operating expenses and other measures of results of operation; (b) Real's repurchase of up to $100 million of outstanding shares of common stock; and (c) Real's ability to capitalize on industry trends. 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 RealNetworks' content services in particular; 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 online 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 deferred 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, 2005 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 March 31,
2006 2005
(in thousands, except per share data)

Net revenue $86,602 $76,572

Cost of revenue 26,753 24,737

Gross profit 59,849 51,835

Operating expenses:
Research and development 18,099 13,706
Sales and marketing 36,083 28,020
General and administrative 13,226 6,166
Loss on excess office facilities
(A) 738 --
Subtotal operating expenses 68,146 47,892

Antitrust litigation expenses
(benefit), net (B) (39,835) 3,744
Total operating expenses 28,311 51,636

Operating income 31,538 199

Other income (expense), net:
Interest income, net 7,979 2,016
Equity in net loss of Musi........ -- (1,066)
Other, net 117 (191)
Other income, net 8,096 759

Income before income taxes 39,634 958
Income tax provision (14,751) (144)

Net income $24,883 $814

Basic net income per share $0.15 $0.00
Diluted net income per share $0.14 $0.00

Shares used to compute basic net
income per share 160,887 170,947
Shares used to compute diluted net
income per share 176,923 184,686

(A) The loss on unoccupied excess office facilities represents an
increase in the estimate of the loss from building operating costs
not expected to be recovered.

(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.

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

March 31, December 31,
2006 2005
(in thousands)
ASSETS

Current assets:
Cash and cash equivalents $568,166 $651,971
Short-term investments 133,004 129,356
Trade accounts receivable, net
of allowances for doubtful
accounts and sales returns 19,793 16,721
Deferred tax assets, net,
current portion 38,476 54,204
Prepaid expenses and other
current assets 12,994 11,933
Total current assets 772,433 864,185

Equipment, software and leasehold
improvements, at cost:
Equipment and software 59,526 56,402
Leasehold improvements 27,809 27,964
Total equipment, software and
leasehold improvements 87,335 84,366
Less accumulated depreciation
and amortization 54,221 51,228
Net equipment, software and
leasehold improvements 33,114 33,138

Restricted cash equivalents 17,300 17,300
Equity investments 33,933 46,163
Goodwill, net 131,674 123,330
Other intangible assets, net 8,937 7,337
Deferred tax assets, net, non-current
portion 25,314 19,147
Other assets 2,708 2,397

Total assets $1,025,413 $1,112,997

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable $12,267 $11,397
Accrued and other liabilities 71,264 112,340
Deferred revenue, current
portion 25,866 25,021
Accrued loss on excess office
facilities, current portion 4,257 4,623
Total current liabilities 113,654 153,381

Deferred revenue, non-current portion 191 276
Accrued loss on excess office
facilities, non-current portion 13,057 13,393
Deferred rent 4,117 4,018
Convertible debt 100,000 100,000
Other long-term liabilities 1,024 196
Total liabilities 232,043 271,264

Total shareholders' equity 793,370 841,733

Total liabilities and
shareholders' equity $1,025,413 $1,112,997

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

Quarters Ended March 31,
2006 2005
(in thousands)

Cash flows from operating activities:
Net income $24,883 $814
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 4,252 3,630
Stock-based compensation 3,638 36
Equity in net losses of MusicNet -- 1,066
Changes in accrued loss on excess
office facilities and content
agreement (702) (1,861)
Loss on disposal of equipment 77 139
Deferred income taxes 12,882 --
Other 29 17
Net change in certain operating
assets and liabilities, net of
balances from businesses
acquired during the quarter (47,088) 4,073
Net cash provided by (used in)
operating activities (2,029) 7,914

Cash flows from investing activities:
Purchases of equipment, software and
leasehold improvements (2,568) (2,087)
Purchases of intangible assets -- (1,000)
Purchases of short-term investments (58,884) (46,338)
Proceeds from sales and maturities of
short-term investments 55,180 50,497
Decrease in restricted cash
equivalents -- 582
Purchases of cost based investments -- (647)
Payment of acquisition costs, net of
cash acquired (6,799) --
Net cash provided by (used in)
investing activities (13,071) 1,007

Cash flows from financing activities:
Net proceeds from sale of common
stock under employee purchase plan
and exercise of stock options 7,614 1,514
Repurchase of common stock (76,988) --
Net cash provided by (used in)
financing activities (69,374) 1,514

Effect of exchange rate changes on
cash and cash equivalents 669 (147)
Net increase (decrease) in cash and
cash equivalents (83,805) 10,288
Cash and cash equivalents at
beginning of period 651,971 219,426
Cash and cash equivalents at end of
period 568,166 229,714
Short-term investments at end of
period 133,004 139,988
Total cash, cash equivalents and
short-term investments at end of
period $701,170 $369,702

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

2006 2005
Q1 Q4 Q3 Q2 Q1
(in thousands)

Net Revenue by Line of
Business: *
Consumer products and
services (A) $74,811 $73,415 $71,750 $70,593 $64,206
Technology products and
solutions (B) 11,791 10,153 10,483 12,093 12,366
Total net revenue $86,602 $83,568 $82,233 $82,686 $76,572

Consumer Products and
Services: *
Subscriptions (C) $47,832 $47,508 $47,347 $47,821 $44,400
Media properties (D) 9,484 10,224 9,606 8,986 6,033
E-commerce and other (E) 17,495 15,683 14,797 13,786 13,773
Total consumer
products and
services revenue $74,811 $73,415 $71,750 $70,593 $64,206

Consumer Products and
Services: *
Music (F) $28,918 $27,760 $26,193 $24,933 $22,883
RealPlayer, related
consumer products and
other (G) 27,277 29,914 30,858 32,012 29,134
Games (H) 18,616 15,741 14,699 13,648 12,189
Total consumer
products and
services revenue $74,811 $73,415 $71,750 $70,593 $64,206

Net Revenue by Geography:
United States $65,700 $65,177 $63,478 $63,443 $57,757
Rest of world 20,902 18,391 18,755 19,243 18,815
Total net revenue $86,602 $83,568 $82,233 $82,686 $76,572

Gross Margin by Line of
Business: **
Consumer products and
services 67% 70% 68% 68% 65%
Technology products and
solutions 83% 81% 82% 83% 82%
Total gross margin 69% 71% 70% 70% 68%

Subscribers (presented as
greater than) ***
Total 2,400 2,250 2,200 2,000 1,850
Music 1,575 1,425 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
Technology products and solutions
(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 $38,395 $35,459 $32,073
Media properties (D) 6,345 5,575 7,109 4,420
E-commerce and other (E) 12,474 12,064 11,175 10,532
Total consumer products and
services revenue $61,541 $56,034 $53,743 $47,025

Consumer Products and Services: *
Music (F) $21,558 $18,787 $15,580 $12,265
RealPlayer, related consumer
products and other (G) 29,653 28,149 29,811 28,005
Games (H) 10,330 9,098 8,352 6,755
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%
Technology products and solutions 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 2005 and
2004 data to conform to the presentation for 2006
**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

(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 all advertising and through the distribution
of third party products

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

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

(G) Revenue is derived from SuperPass subscriptions, RealPlayer Plus and
related products, stand-alone subscription services, sales and
distribution of third party software products and advertising related to
our non-game and non-music related web properties

(H) 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

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

A reconciliation of Generally Accepted Accounting Principles ("GAAP") net
income to adjusted net income (loss) is as follows:

Quarters Ended
March 31, Dec. 31, Sept 30, June 30, March 31,
2006 2005 2005 2005 2005
(in thousands, except per share data)

Net income in accordance
with GAAP $24,883 $295,640 $11,182 $4,709 $814
Stock-based
compensation 3,638 19 25 48 36
Loss (gain) on equity
investments -- 266 (11,740) (7,590) --
Expenses (benefit)
related to antitrust
litigation:
Income (40,000) (478,571) -- -- --
Expenses 971 50,850 3,531 4,650 3,744
Charitable
contributions due to
antitrust litigation
benefit 1,225 14,786 -- -- --
Tax impact of proforma
items 12,717 113,325 3,324 -- --
Total adjusted net
income (loss) $3,434 $(3,685) $6,322 $1,817 $4,594

GAAP basic net income per
share $0.15 $1.76 $0.07 $0.03 $0.00
GAAP diluted net income per
share $0.14 $1.61 $0.06 $0.03 $0.00

Adjusted basic net income
per share $0.02 $(0.02) $0.04 $0.01 $0.03
Adjusted diluted net income
per share $0.02 n/a $0.03 $0.01 $0.02

Shares used to compute basic
net income per share 160,887 167,573 170,797 171,393 170,947
Shares used to compute
diluted net income per
share 176,923 183,728 184,180 184,816 184,686

A reconciliation of GAAP cost of revenue and operating expenses for the
quarters ended March 31, 2006, December 31, 2005 and March 31, 2005 to
adjusted cost of revenue and adjusted operating expenses is as follows:

Quarter Ended March 31, 2006
Stock- Antitrust
Based Liti-
As Compen- gation
Reported sation Related Adjusted
(in thousands)
Expenses in accordance with GAAP

Cost of revenue $26,753 $(50) $-- $26,703

Operating expenses:
Research and development $18,099 $(1,369) $-- $16,730
Sales and marketing 36,083 (1,359) -- 34,724
General and administrative 13,226 (860) (2,031) 10,335
Antitrust litigation expenses
(benefit) (39,835) -- 39,835 --
Loss on excess office facilities 738 -- -- 738
Total adjusted operating
expenses $28,311 $(3,588) $37,804 $62,527

Quarter Ended December 31, 2005
Stock- Antitrust
Based Liti-
As Compen- gation
Reported sation Related Adjusted
(in thousands)
Operating expenses in accordance with
GAAP
Research and development (A) $25,351 $(16) $-- $25,335
Sales and marketing 36,706 -- -- 36,706
General and administrative 29,576 (3) (21,490) 8,083
Antitrust litigation expenses
(benefit) (434,425) -- 434,425 --
Total adjusted operating
expenses (benefit) $(342,792) $(19) $412,935 $70,124

Quarter Ended March 31, 2005
Stock- Antitrust
Based Liti-
As Compen- gation
Reported sation Related Adjusted
(in thousands)
Operating expenses in accordance with
GAAP
Research and development $13,706 $(36) $-- $13,670
Sales and marketing 28,020 -- -- 28,020
General and administrative 6,166 -- -- 6,166
Antitrust litigation expenses 3,744 -- (3,744) --
Total adjusted operating
expenses $51,636 $(36) $(3,744) $47,856

(A) Includes approximately $8.5 million related to a loss on a cancelled
purchase agreement for an element of an on-going research and development
project

Forward Looking Guidance

A reconciliation of GAAP net income per diluted share guidance for the
quarter ending June 30, 2006 and the full year 2006 to
adjusted net income per diluted share is as follows:

Quarter Ending Year Ending
June 30, 2006 December 31, 2006
Low High Low High
(in thousands)

Net Income per diluted share in
accordance with GAAP $0.19 $0.20 $0.75 $0.80
Antitrust litigation related
benefit, net (0.30) (0.30) (1.15) (1.16)
Stock-based compensation 0.02 0.02 0.10 0.08
Gains on sales of equity
investments (0.01) (0.01) (0.01) (0.01)
Tax effect of above proforma
items 0.11 0.11 0.39 0.41
Total adjusted net income
per diluted share $0.01 $0.02 $0.08 $0.12

Source: RealNetworks, Inc.

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

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

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