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RealNetworks Announces Record Fourth Quarter And Fiscal 2005 Results

Achieves More Than 1.4 Million Paid Music Subscribers


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

SEATTLE, Washington — February 14, 2006 — RealNetworks®, Inc. (Nasdaq: RNWK), the leading creator of digital media services and software, today announced record results for the fourth quarter and fiscal year ended December 31, 2005.

"2005 was a watershed year for RealNetworks. We achieved record annual revenue, returned the company to profitability, settled our antitrust litigation in a manner that generated significant shareholder value, and dramatically grew our games business through both organic growth and acquisitions. We believe these achievements position us well for long-term growth and market leadership," said Rob Glaser, chairman and CEO of RealNetworks. "Together with our many partners, Real offers a compelling set of best-of-breed digital media software products and digital music, video and games products to consumers wherever and whenever they want them."

Quarterly Highlights

- Record revenue of $83.6 million
- Record net income of $295.6 million
- More than 2.25 million paid subscribers

For the fourth quarter of 2005, revenue grew 15 percent to $83.6 million compared to $72.5 million reported in the fourth quarter of 2004. For the fourth quarter, in the Consumer Products and Services segment, Music revenue was $26.1 million, a 29% increase over the fourth quarter of 2004; Games revenue was $15.7 million, a 52% increase over the fourth quarter of 2004; Video, Consumer Software and Other revenue was $22.6 million, a decrease of 10% over the fourth quarter of 2004; and Media Properties revenue was $9.0 million, a 55% increase over the fourth quarter of 2004. In the Business Products and Services segment, revenue was $10.2 million in the fourth quarter, a decrease of 8% over the same period in 2004.

During the quarter, the Company announced a series of agreements with Microsoft ending its antitrust litigation and establishing digital music and games collaboration relationships resulting in a series of payments of up to $761 million over eighteen months. During the fourth quarter, Real received $478 million in payments related to these agreements. The Company expects to receive up to $283 million in additional payments over the next five quarters. Microsoft can earn credits against its future payments as a result of delivering music users to Real through its promotional efforts.

Net income for the fourth quarter was $295.6 million, or $1.61 per diluted share, compared to a net loss of $1.0 million, or ($0.01) per share, in the fourth quarter of 2004. Included in net income was a benefit of ($434.4) million in income related to the Microsoft agreements, net of contingent legal fees and other litigation costs. Net income also included operating expenses related to the Microsoft agreements of $6.7 million for non-income related taxes and employee bonuses; a $14.8 million donation to the RealNetworks Foundation representing five percent of after tax income in accordance with stated company policy; and an $8.5 million loss on a cancelled purchase agreement related to an element of an ongoing research and development project.

For the fourth quarter of 2005, EBITDA was $406.4 million compared to $1.4 million for the same period in the prior year. EBITDA is an alternative, non-GAAP, measure of operating results that excludes from net income expenses relating to interest, taxes, depreciation and amortization. A reconciliation of GAAP net income to EBITDA is provided in the financial tables that accompany this release.

The Company’s gross margin increased to 71 percent in the fourth quarter of 2005, as compared to 67 percent in the fourth quarter of 2004.

Operating expenses for the fourth quarter of 2005 were a benefit of ($342.8) million compared to $50.7 million for the same period in 2004. The benefit in 2005 was driven primarily by the impact of the Microsoft agreements.

For the fourth quarter, the effective tax rate was approximately 28%, impacted by the use of pre-existing tax credits and net operating loss (NOL) carry forwards.

Full Year Highlights

- Record revenue of $325.1 million
- Record net income of $312.3 million, or $1.70 per diluted share
- Up to $761 million in payments over 18 months from the Microsoft agreements

In 2005, revenue grew 22% to $325.1 million compared to $266.7 million in 2004. In the Consumer Products and Services segment, Music revenue was $97.5 million, a 50% increase over 2004; Games revenue was $56.3 million, a 63% increase over 2004; Video, Consumer Software and Other revenue was $95.0 million, a 2% decrease over 2004; and Media Properties revenue was $31.1 million, a 43% increase over 2004. In the Business Products and Services segment, revenue was $45.1 million, a 7% decrease from 2004.

Net income was $312.3 million, or $1.70 per diluted share, in 2005 compared to a net loss of $23.0 million, or ($0.14) per share, in 2004. Net income for the year included the same settlement benefit and expenses as discussed in the quarterly overview above.

For the full year, EBITDA was $431.4 million compared to ($11.6) million in 2004. A reconciliation of GAAP net income to EBITDA is provided in the financial tables that accompany this release.

The gross margin in 2005 was 70% as compared to 64% in the prior year.

Operating expenses for 2005 were a benefit of ($170.6) million compared to $192.3 million in 2004. Operating expenses were significantly impacted by the Microsoft settlement and other items as described in the quarterly net income discussion.

For the full year, the effective tax rate was approximately 27%, impacted by the use of pre-existing tax credits and NOL carry forwards. However, actual federal income taxes owed are expected to be less than $10 million due to the utilization of deferred tax assets.

As of December 31, 2005, Real had approximately $781.3 million in unrestricted cash, cash equivalents and short-term investments, which includes the proceeds from $100 million of convertible debt. In addition, the Company holds an equity investment in a public company valued at approximately $43.4 million as of December 31, 2005.

Under the Company’s stock repurchase program, approximately 3.2 million shares were repurchased for $25.0 million during the fourth quarter of 2005. For the full year, 8.6 million shares were repurchased for $54.3 million. As of December 31, 2005, approximately $75.0 million remained available under the existing stock repurchase program.

The number of shares used to compute the diluted earnings per share for the fourth quarter and full year 2005 was 183.7 million and 184.2 million, respectively.

Business Outlook
The following forward-looking statements reflect RealNetworks’ expectations as of February 14, 2006. The Company currently does not intend to update these forward-looking statements until the next quarterly results announcement.

For the first quarter of 2006, Real expects revenue in the range of $82 million to $86 million and earnings of $0.11 to $0.13 per diluted share. Operating expenses are expected to include a benefit of $40 million, or $0.22 per diluted share, in income from our agreements with Microsoft. Projected earnings also include $0.08 to $0.10 per diluted share of expenses primarily related to income from the Microsoft agreements including the following: approximately $0.01 per diluted share for non-income related taxes and employee bonuses; $0.01 per diluted share of charitable contributions representing five percent of net income; and $0.06 to $0.08 per diluted share of income tax expense which represents a tax rate of approximately 37%. In addition, Real expects to incur $0.02 to $0.03 per diluted share of non-cash stock compensation expense.

For 2006, Real expects to report revenue in the range of $365 million to $380 million and earnings of $0.75 to $0.80 per diluted share. Operating expenses are expected to include a benefit of $222 million, or approximately $1.22 per diluted share in income from our agreements with Microsoft. Projected earnings also include $0.51 to $0.55 per diluted share of expenses primarily related to income from the Microsoft agreements including the following: approximately $0.03 to $0.04 per diluted share for non-income related taxes and employee bonuses; $0.04 per diluted share of charitable contributions representing five percent of net income; and $0.44 to $0.47 per diluted share of income tax expense which represents a tax rate of approximately 37%. However, actual federal income taxes owed are expected to be less than $10 million due to the utilization of deferred tax assets. In addition, Real expects to incur $0.08 to $0.10 per diluted share of non-cash stock compensation expense.

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 "Fourth Quarter Earnings," and the leader is Rob Glaser. A telephonic replay will be available until 8 pm (Eastern), February 21st, and may be accessed by dialing 800-677-4302 (402-998-0977 for international callers).

For More Information Contact
Press: Maureen Farley, RealNetworks, (206) 892-6653, mfarley@real.com
Financial: Caroline Hughes, RealNetworks, (206) 892-6718, carolinehughes@real.com

ABOUT REALNETWORKS
RealNetworks, Inc. is a leading creator of digital media services and software including Rhapsody®, RealPlayer® 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 electronics devices. Consumers can access and experience audio/video programming and download RealNetworks' consumer software at http://www.real.com. RealNetworks' systems and 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 revenue, expenses, margins, profitability, net income, taxes, earnings per share and other measures of results of operation; (b) the growth of Real’s music and games businesses; (c) 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 generally and RealNetwork’s content services in particular, in particular because these are relatively new and unproven business models and markets; 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 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; 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 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, 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.

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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