Press Releases

RealNetworks Achieves Record Revenue in Third Quarter of 2004

Revenue Growth of 32% to $68.3 Million Fueled by Music and Games Expansion

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

SEATTLE, October 20, 2004 — RealNetworks®, Inc. (Nasdaq: RNWK) today announced results for the quarter ended September 30th, 2004. For the third quarter of 2004, revenue was $68.3 million, up 32% from the third quarter of 2003. The GAAP net loss for the third quarter was ($7.0) million or ($0.04) per share, compared to a net loss of ($3.7) million or ($0.02) per share in the third quarter of 2003. Included in the GAAP net loss for the third quarter of 2004 is ($3.0) million or ($0.02) per share in expenses related to antitrust litigation. Excluding the antitrust litigation expenses, the net loss for the third quarter of 2004 was ($4.0) million or ($0.02) per share. EBITDA, excluding antitrust litigation expense, was ($1.0) million for the third quarter of 2004.

"We are extremely pleased to achieve the highest revenue quarter in the company's history, highlighted by growth of our music and games revenue," said Rob Glaser, CEO of RealNetworks. "We are the clear leader in music subscriptions and casual games, with more than 625,000 subscribers to our music services and more than 150 million games downloaded. We look forward to growing our way to profitability in the fourth quarter, excluding antitrust litigation expenses."

Financial Discussion

Third quarter revenue from consumer products and services was $55.4 million, which represents a 52% increase from $36.4 million in the third quarter of 2003. Music revenue grew 304% to $18.8 million from $4.7 million in the third quarter of 2003. Games revenue grew 189% to $9.1 million from $3.2 million in the third quarter of 2003. Video, consumer software and other revenue decreased 4% to $27.5 million from $28.6 million in the third quarter of 2003. Revenue from business products and services was $12.9 million, representing a decrease of 16% from $15.4 million in the third quarter of 2003.

Gross margins were 64% in the third quarter of both 2004 and 2003. Operating expenses, including antitrust litigation, were $49.7 million for the quarter compared to $37.0 million in the third quarter of 2003. Both third quarter 2004 gross margins and operating expenses were impacted by marketing and sales associated with the 49 cent Harmony promotion. As of September 30, 2004, Real had approximately $362 million in cash, cash equivalents and short-term investments, which includes the proceeds from $100 million of convertible debt.

In the third quarter, Real continued to build on its success in consumer services. Real now has over 1.55 million paying subscribers, up from over 1.4 million at the end of the second quarter of 2004. Paying subscribers to Rhapsody and premium radio services increased to over 625,000 from over 550,000 at the end of the second quarter of 2004. One year ago, Real's music services had more than 250,000 subscribers.

Real's business products segment revenue was up 4% from the prior quarter. Real sold its Helix digital media delivery technology to several significant mobile carriers during the quarter, including China Unicom, the third largest mobile carrier in the world with over 100 million subscribers. Real also released RealPlayer 10 for Linux in 9 languages.

Forward Looking Guidance
For the fourth quarter of 2004, Real expects net revenue to be between $68 million and $69 million. Fourth quarter projected revenue growth is expected to be slower than recent quarters for two primary reasons: First, Real's Harmony promotion generated approximately $700,000 of incremental revenue in the third quarter which is unlikely to be repeated in the fourth quarter. Second, consistent with its focus on achieving and maintaining profitability, Real does not expect to renew several underperforming video content relationships. This is expected to have a positive impact on profitability in the fourth quarter of 2004 and beyond, but will negatively impact revenue during the fourth quarter. Real also expects its new subscriber additions during the fourth quarter will be offset by lost subscribers related to the expiring video content, resulting in essentially flat overall subscriber count for the quarter.

In the fourth quarter, Real expects to return to profitability excluding antitrust litigation expenses. Specifically, Real expects results, excluding the antitrust litigation expenses, to be between $0.00 and $0.01 per share. On a GAAP basis, Real expects the quarterly loss per share for the fourth quarter of 2004, which includes an estimated $3 million expense relating to antitrust litigation, to be a net loss between ($0.01) and ($0.02) per share. Further, Real also expects to have positive EBITDA (excluding antitrust litigation charges) for the fourth quarter.

Real expects its projected path to profitability in the fourth quarter of 2004, excluding antitrust related expenses, will be assisted by growing revenue, improving gross margins, operating cost savings, and rising interest income. For 2005, Real expects to grow revenues 15% to 20% and to maintain quarterly profitability (excluding antitrust litigation expenses).

This forward looking guidance excludes any major changes in Real's minority investment in MusicNet, any potential acquisitions, real estate activities or significant changes in accounting standards, including the expensing of stock options, which would be included under GAAP but are not currently quantifiable.

For More Information Contact
Press: Matt Graves, RealNetworks, (415) 934-2159, mgraves@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.

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 and net income; (b) the non-renewal of content relationships; and © future subscriber counts and growth. 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 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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