RealNetworks Announces Third Quarter 2005 Results
Achieves More Than 2.2 Million Paid Subscribers
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|Listen to the earnings call (audio only)|
|RealNetworks, Inc. and Subsidiaries Condensed Consolidated Statement of Operations (.PDF)|
SEATTLE, October 27, 2005 RealNetworks®, Inc. (Nasdaq: RNWK), the leading creator of digital media services and software, today announced results for the third quarter ended September 30, 2005.
Third Quarter Highlights
|Revenue of $82.2 million, an increase of 20% from the prior year|
|Net income of $11.2 million|
|Increased total paid subscribers to more than 2.2 million|
For the third quarter of 2005, Real reported quarterly revenue of $82.2 million, up 20 percent from $68.3 million in the third quarter of 2004. Real reported GAAP net income of $11.2 million, or $0.06 per diluted share, compared to a net loss of $7.0 million, or ($0.04) per share, in the third quarter of 2004. The results for the third quarter of 2005 include an after-tax gain of approximately $8.4 million, or approximately $0.04 per share, associated with the sale of a portion of the Company's equity investment in a Japanese public company. Non-GAAP adjusted net income, excluding antitrust litigation expenses of approximately $3.5 million, or $0.02 per diluted share, for the third quarter was $14.7 million, or $0.08 per diluted share.
EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization) was $16.0 million compared to a loss of $3.9 million in last year's third quarter. Absent antitrust litigation expenses, EBITDA was $19.5 million for the third quarter of 2005, up from a loss of $1.0 million in the comparable period during 2004. A reconciliation of non-GAAP EBITDA and EBITDA less antitrust litigation expense with GAAP net income is provided in the financial tables accompanying this release.
"We continue to make great progress with strong year over year revenue growth, increased profitability and a base of more than 2.2 million paid subscribers, including 1.3 million paid music subscribers," said Rob Glaser, chairman and CEO of RealNetworks. "We continue to expand our growing list of blue chip partners with new relationships with Sprint, Cingular Wireless and, most recently, Microsoft. Together with our partners we're continuing to expand our ability to offer digital music, video and games to consumers wherever and whenever they want them."
Earlier this month, Real announced a series of agreements with Microsoft worth at least $761 million which settled all antitrust disputes worldwide and also include collaboration agreements around digital music and games. Real received $460 million in cash associated with the antitrust settlement and technology assurance agreement and will receive another $301 million in cash scheduled to be paid quarterly over 18 months related to the music and games agreements. Microsoft can earn pre-determined market rate bounties for delivering Rhapsody subscribers to Real, which will be netted against the scheduled quarterly cash payments. The music partnership provides for the integration of Real's leading digital music subscription business, Rhapsody®, throughout MSN Music, MSN Search, MSN Messenger and Windowsmedia.com properties. Under the games agreement, Real is developing a subscription games service to be promoted throughout MSN Games and also will develop a series of titles for Xbox Live Arcade.
Real continued to see year over year revenue growth driven by its consumer segment, including Music and Games products and services. Third quarter revenue from the Consumer Products and Services segment grew 28 percent to $71.8 million, up from $56.0 million in the third quarter of 2004.
In the third quarter, Music revenue grew 39 percent to $25.0 million, up from $18.0 million in the third quarter of 2004. Games revenue grew 62 percent to $14.7 million, up from $9.1 million in the third quarter of 2004. Media Properties revenue, which includes advertising, increased 59 percent to $8.4 million, up from $5.3 million during the same quarter last year. Video, consumer software and other revenue was $23.6 million, flat in comparison to the same period a year ago.
Real's Business Products and Services generated $10.5 million in revenue in the third quarter of 2005, compared to $12.3 million in the prior year's third quarter. The decline was primarily based on a $1.4 million revenue decrease related to a previously disclosed expiring legacy systems license agreement.
The Company's gross margin improved to 70 percent in the third quarter of 2005, as compared to 64 percent in the third quarter of 2004, due primarily to a shift in revenue mix to higher margin products as well as a reduction in content costs associated with certain products and services.
Operating expenses, including antitrust litigation, were $57.7 million for the quarter compared to $49.7 million in the third quarter of 2004 due to higher marketing costs and headcount. As of September 30, 2005, Real had approximately $347 million in cash, cash equivalents and short-term investments, which includes the proceeds from $100 million of convertible debt. In addition, the Company had approximately $47 million in public equity investments.
At the close of the third quarter of 2005, Real had over 2.2 million paid subscribers to its premium digital media services, up from over 1.55 million for the same quarter in 2004. Of the total paid subscribers, Real had more than 1.3 million paid music subscribers at the end of the third quarter of 2005, up from more than 625,000 for the same quarter in 2004. The music subscriber counts include Rhapsody on demand services, premium commercial-free radio services and, in 2005, Rhapsody radio registrations bundled with broadband internet service providers.
Last quarter, the Company announced that the Board of Directors had authorized the repurchase of up to $75 million of its outstanding stock. Real entered into a Rule 10(b)5-1 plan in order to facilitate the repurchase. As of September 30, 2005, Real had spent $29.3 million on the repurchase of approximately 5.5 million shares.
Forward Looking Guidance
For the fourth quarter of 2005, Real expects net revenue to be between $81 million and $85 million. As previously announced, Real does not expect to see any material impact to fourth quarter revenue from its Microsoft relationship due to the timing of the integration work associated with the music and games collaboration agreements. Real expects fourth quarter earnings per diluted share of $1.42 to $1.48 and EBITDA between $398 million and $410 million, which incorporates the assumptions listed below.
During the fourth quarter of 2005, the Company received $478 million in cash related to the previously announced Microsoft agreements. This gain will be offset by an estimated $40 million to $50 million in contingent legal fees and other litigation costs, along with approximately $30 million in other expenses associated with these agreements, including state occupancy taxes and amounts related to our intent to donate five percent of net income after tax to the RealNetworks Foundation.
In addition to the expenses discussed above, the Company's guidance incorporates an income tax provision of approximately 35 percent. However, due to net operating loss (NOL) utilization, the actual cash amounts owed for income taxes are estimated to be less than five percent of net income before taxes. Absent acquisitions or additional share repurchases, Real expects cash, cash equivalents and short-term and public equity investments to be approximately $800 million at the end of the fourth quarter.
For the fiscal year 2005, the Company expects revenue to be between $322.5 million and $326.5 million, with earnings per diluted share between $1.51 and $1.57. Full year EBTIDA is expected to be between $423 million and $435 million.
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® 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 "Third Quarter Earnings," and the leader is Rob Glaser. A telephonic replay will be available until 8 pm (Eastern), November 3rd, and may be accessed by dialing 866-407-9275 (203-369-0620 for international callers).
RealNetworks, Inc. is the leading creator of digital media services and software including Rhapsody®, RealPlayer 10, and casual PC and mobile games. RealNetworks has more than 2.2 million paid subscribers to its premium digital media services. 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/company.
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, net income, earnings per share and other measures of results of operation; (b) the growth of Real's music and games businesses; © 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; 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 associated with the introduction of new products and services; risks inherent in strategic relationships, especially with competitors, and technology and service integration efforts such as those contemplated by the Microsoft agreements; and risks relating to the ability of Real's strategic partners' to generate subscribers for Real's digital content services. 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.
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.
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