RealNetworks Revenue Grows 29% in First Quarter of 2004
Continuing Revenue Growth Fueled by Consumer Services
|RealNetworks, Inc. and Subsidiaries Condensed Consolidated Statement of Operations (.PDF)|
SEATTLE, WA April 28th, 2004 RealNetworks, Inc. (Nasdaq: RNWK) today announced results for the quarter ended March 31st, 2004. For the first quarter of 2004, revenue was $60.4 million, up 29% from the first quarter of 2003 and up 12% from the fourth quarter of 2003. First quarter results include approximately $2 million of revenue associated with the acquisition of GameHouse, Inc. in January 2004. The GAAP net loss for the first quarter was ($10.4) million or ($0.06) per share compared to a net loss of ($5.3) million or ($0.03) per share in the fourth quarter of 2003 and net loss of ($2.8) million or ($0.02) per share in the first quarter of 2003. Included in the GAAP net loss for the first quarter of 2004 was a $4.9 million expense for costs related to removal of the PGA TOUR content from subscription services and $2.3 million expense related to the Company's antitrust litigation. Excluding these litigation and content expenses, the net loss was ($3.2) million or ($0.02) per share. This compares to a net loss of ($3.8) million or ($0.02) per share, excluding antitrust litigation expense of $1.6 million, in the fourth quarter of 2003.
"Our business accelerated in the first quarter," said Rob Glaser, CEO of RealNetworks. "Driving this acceleration was our growth in consumer services, particularly music and games. We now have more than 450,000 subscribers to our digital music services, which we believe makes us #1 in music subscriptions. Combining our growth on the consumer side with the positive results we saw in our business segment this quarter, we believe we are well on our way to achieving quarterly profitability by the end of 2004, excluding antitrust litigation expenses."
First quarter revenue from consumer products and services was $46.5 million, which represents a 41% increase from the first quarter of 2003 and a 13% increase from the fourth quarter of 2003. Revenue from music grew 55% to $12.3 million from $7.9 million in the fourth quarter of 2003 as more than 100,000 new music subscribers were added and the RealPlayer Music Store was introduced. Similarly, games revenue grew 72% to $6.8 million from $3.9 million in the fourth quarter of 2003. This increase reflects both the acquisition of GameHouse as well as continued growth in the RealArcade business. Revenue from business products and services was $13.9 million, representing an increase of 8% from the fourth quarter of 2003 and a decrease of 1% from the first quarter of 2003.
Total subscribers finished the quarter in excess of 1.3 million. As previously announced, RealNetworks ended its contract with Major League Baseball Advanced Media early in the first quarter, resulting in the removal of 142,000 MLB subscribers. Thus, in the first quarter RealNetworks in effect replaced all of the MLB subscribers with subscribers to other services, most of which are higher revenue and higher margin than the discontinued baseball subscribers. This is reflected in the fact that subscriber revenue grew 5% sequentially from $30.1 million to $31.6 million in the first quarter of 2004.
Due to a previously discussed change in strategic focus in RealNetworks' sports business, the Company agreed with the PGA TOUR to restructure their relationship resulting in a discontinuation of their content in RealNetworks' subscription services. The restructuring resulted in a write-off of the guaranteed fees associated with the PGA TOUR content for the remaining 1 ¾ years of the contract. RealNetworks is now focused on ensuring that Real technology powers the website subscription services of the leading sports brands such as the PGA TOUR.
Gross margin, including the charge for the discontinued use of the PGA TOUR content, was 56% for the first quarter. Absent the PGA related expense, gross margin improved to 64% compared to 62% in the fourth quarter of 2003 due to higher margin in our consumer business as well as increased revenue in our higher margin business products and services segment.
GAAP operating expenses were $43.9 million for the quarter, a slight increase as a percentage of revenue compared to the fourth quarter of 2003. First quarter operating expenses included increased marketing activity for Rhapsody, two months of expenses associated with the GameHouse acquisition, and the effects of increased patent litigation defense costs net of insurance reimbursements. As of March 31st, 2004, RealNetworks had approximately $364 million in cash, cash equivalents and short-term investments and $100 million of convertible debt.
Continued Growth of Consumer Services
In the first quarter of 2004, RealNetworks introduced RealPlayer® 10 and new RealVideo® 10 and RealAudio® 10. RealPlayer 10 is the first media player to feature universal playback enabling consumers to listen/view content in any mainstream format. Also, during the quarter, Google teamed with RealNetworks to improve consumers' experience of the web. Every consumer downloading RealPlayer 10 is offered the opportunity to install the Google Toolbar which offers valuable time saving services such as eliminating unwanted pop-ups, completing forms with one click and highlighting search terms on a web page. In addition, RealNetworks launched the RealPlayer Music Store, which more than half a million tracks of what we believe to be the highest quality audio files (at 192Kbps RealAudio with AAC) available in any Internet music store.
RealNetworks' games business grew as RealNetworks completed the purchase of GameHouse, Inc. during the first quarter of 2004. RealArcade® introduced 27 game titles this quarter including 5 GameHouse Studios titles. Additionally, GameHouse's Super Collapse® II is now available for the Nintendo Game Boy Advance and, through Jamdat, select GameHouse games are now accessible to subscribers to the major US mobile networks.
Business Products and Services
During the quarter, the Helix™ mobile platform continued to gain momentum. More than 26 mobile carriers in Europe and the Middle East announced they have adopted RealNetworks Helix mobile platform. RealNetworks also increased the penetration of the RealPlayer on mobile handsets; Sony Ericsson announced that new multimedia capable phones will ship with the RealPlayer, and QUALCOMM, whose chips power the vast majority of handsets in the CDMA market, announced it licensed the RealPlayer for inclusion on its chip sets. RealPlayer on mobile devices provides the platform for RealNetworks and mobile carriers to offer consumer services powered by the Helix mobile platform.
Forward Looking Guidance
RealNetworks believes the Company will continue to show improved financial results in the second quarter of 2004. Net revenue for the second quarter is expected to be between $63 million and $65 million, representing between 27% and 31% growth over the second quarter of 2003. GAAP quarterly loss, which includes an estimated $3 million expense relating to antitrust litigation, is expected to be between ($0.03) and $(0.04) per share. The quarterly net loss excluding antitrust litigation expenses is expected to be between ($0.01) and ($0.02) per share. The Company expects to reach quarterly profitability, excluding expenses relating to antitrust litigation, by the end of 2004. This guidance excludes any changes related to the Company's ownership interest in MusicNet.
RealNetworks, Inc. is the leading creator of digital media services and software including the award-winning Rhapsody Internet jukebox service and RealPlayer 10. 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' systems and corporate information is located at http://www.realnetworks.com.
This press release contains forward-looking statements that involve risks and uncertainties, including statements relating to: (a) the acceleration of our business and any future effect thereon; (b) our ability to continue to grow and sustain successful consumer subscription and paid content businesses; © the inclusion of our product and technology in mobile handsets and handset technology offered by Sony Ericsson and QUALCOMM; (d) revenue and net loss projections for the second quarter of 2004; and (e) projections of quarterly profitability by the end of 2004. 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; 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; potential adverse responses by GameHouse distributors to the announcement of the acquisition; risks relating to the timely development, production, marketing and acceptance of the products, services and technologies contemplated by the GameHouse acquisition; potential funding decisions by companies in which we have a significant equity position; and RealNetworks' independent decisions, from time to time, based on all factors it deems relevant, whether to repurchase shares under its stock buyback program. 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 year ended December 31, 2003, 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, RealAudio, RealVideo, Helix, Rhapsody, RealArcade, GameHouse 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.
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