Press Releases

RealNetworks Revenue Grows 32% in Second Quarter of 2004

Revenue Growth Fueled by Consumer Services

document RealNetworks, Inc. and Subsidiaries Condensed Consolidated Statement of Operations (.PDF)

SEATTLE, July 28, 2004 — RealNetworks®, Inc. (Nasdaq: RNWK) today announced results for the quarter ended June 30th, 2004. For the second quarter of 2004, revenue was $65.5 million, up 32% from the second quarter of 2003 and up 8% from the first quarter of 2004. The GAAP net loss for the second quarter was ($4.6) million or ($0.03) per share, compared to a net loss of ($9.6) million or ($0.06) per share in the second quarter of 2003 and ($10.4) million or ($0.06) per share in the first quarter of 2004. Included in the GAAP net loss for the second quarter of 2004 was $2.8 million of expense related to the Company's antitrust litigation.

Excluding the antitrust litigation expense, the net loss for the second quarter of 2004 was ($1.9) million or ($0.01) per share compared to a net loss of ($3.2) million or ($0.02) per share for the first quarter of 2004, which also excludes a $4.9 million loss on a content agreement in the first quarter. EBITDA, excluding antitrust litigation expense, improved to $1.3 million for the second quarter of 2004 compared to ($0.3) million for the first quarter of 2004. The EBITDA calculation for the first quarter of 2004 excludes both the antitrust litigation expense of $2.3 million and $4.9 million from the loss on a content agreement.

"In the second quarter we achieved strong revenue growth in our core consumer businesses. Driving our revenue growth was continued momentum of our music and games products and services," said Rob Glaser, CEO of RealNetworks. "We now have more than 550,000 subscribers to our digital music services, which we believe makes us #1 in music subscriptions. We continue to make progress on the bottom line as well, as evidenced by our return to positive EBITDA for the second quarter, excluding antitrust litigation costs."

Financial Discussion

Second quarter revenue from consumer products and services was $53.1 million, which represents a 60% increase from the second quarter of 2003 and a 14% increase from the first quarter of 2004. Revenue from music grew 27% to $15.6 million from $12.3 million in the first quarter of 2004. Similarly, games revenue grew 24% to $8.4 million from $6.8 million in the first quarter of 2004. This growth reflects three months of GameHouse revenue compared to two months of GameHouse revenue in the first quarter of 2004. Revenue from business products and services was $12.4 million, representing a decrease of 11% from the first quarter of 2004 and a decrease of 25% from the second quarter of 2003.

Gross margin improved to 67% from 56% in the first quarter of 2004. Gross margin for the first quarter included the effect of a $4.9 million loss on a content agreement. Excluding that loss, first quarter gross margin was 64%. The improvement in the second quarter reflects the positive influence of the restructuring of content relationships and a shift in product mix to higher margin consumer products and services. Gross margin for the second quarter of 2004 was in the high end of the Company's expected range.

Operating expenses were $48.0 million for the quarter compared to $43.9 million in the first quarter of 2004. The increase is due primarily to marketing, personnel related, and litigation costs. As of June 30th, 2004, RealNetworks had approximately $363 million in cash, cash equivalents and short-term investments and $100 million of convertible debt, both of which are essentially flat from the first quarter of 2004.

Continued Growth of Consumer Services

In the second quarter, Real continued to build on its success in consumer services. Real now has over 1.4 million paying subscribers, up from 1.3 million at the end of the first quarter of 2004. Subscription revenue grew 10% sequentially from $31.6 million to $34.8 million. Paying subscribers to Rhapsody and premium radio services increased to over 550,000 from over 450,000 during the first quarter of 2004.

Forward Looking Guidance
For the third quarter of 2004, Real expects net revenue to be between $66 million and $68 million or an increase of between 27% and 31% compared to the third quarter of 2003. Based on expected shifts in revenue mix and increased marketing spending, the GAAP quarterly loss per share, which includes an estimated $3 million expense relating to antitrust litigation, is expected to be a net loss between ($0.03) and ($0.04) per share. The quarterly net loss excluding the antitrust litigation expenses is expected to be between ($0.01) and ($0.02) per share.

Real expects sequential revenue growth in the third quarter to moderate due principally to two timing-related factors: First, Real had a full quarter of revenue from GameHouse during the second quarter compared to only a partial quarter of revenue during the first quarter of 2004 because of the timing of the GameHouse acquisition. This resulted in approximately $1 million of sequential revenue growth in the second quarter of 2004. Second, during the second quarter both Real's original Google distribution contract and a more recent Google contract were in effect for the entire quarter. This caused a temporary increase in revenue for the second quarter of 2004 that will end early in the third quarter of 2004, when the original Google agreement expires.

Real expects to reach quarterly profitability, excluding expenses relating to antitrust litigation, by the end of 2004.

For More Information:
Press: Erika Shaffer, RealNetworks, (206) 892-6191, eshaffer@real.com
Financial: Roy Goodman, RealNetworks, (206) 892-6841, rgoodman@real.com

ABOUT REALNETWORKS
RealNetworks, Inc. is the leading creator of digital media services and software including the award-winning Rhapsody® Internet jukebox service and RealPlayer 10, the first product to integrate finding, organizing, buying, playing and managing digital audio and video in a single product. 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.

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; © revenue and net loss projections for the third quarter of 2004; and (d) 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; 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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