Press Releases

RealNetworks Reports Record Quarterly Revenue

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SEATTLE — July 27, 2006 — RealNetworks®, Inc. (Nasdaq: RNWK), the leading creator of digital media services and software, today announced results for the second quarter ended June 30, 2006.

"We are pleased to report another quarter of continued growth and record revenue" said Rob Glaser, Chairman and CEO of RealNetworks. "Our casual games business continues to be our fastest growth business, posting a 55 percent increase in revenue over the second quarter of last year."

Quarterly Highlights

  • Record revenue of $89.4 million
  • Net income of $38.9 million
  • Earnings per diluted share of $0.22 and adjusted earnings per diluted share of $0.03

For the second quarter of 2006, revenue grew 8% to $89.4 million compared to $82.7 million reported in the second quarter of 2005. For the second quarter of 2006, revenue in the Consumer Products and Services segment was as follows: Games revenue was $21.2 million, a 55% increase over the second quarter of 2005; Music revenue was $30.1 million, a 21% increase over the second quarter of 2005; and Media Software and Services revenue was $26.1 million, a decrease of 18% from the second quarter of 2005. In the Technology Products and Solutions segment, revenue was $12.0 million in the second quarter, a decrease of 1% from the second quarter of 2005. Foreign currency exchange rate fluctuations negatively impacted 2006 second quarter revenue by approximately $0.5 million compared to the second quarter of 2005.

Net income for the second quarter of 2006 was $38.9 million, or $0.22 per diluted share, compared to $4.7 million, or $0.03 per diluted share, in the second quarter of 2005. Adjusted net income, which excludes the impact of our agreements with Microsoft, equity investment gains, stock-based compensation expenses and estimated income tax related to these items, was $4.8 million, or $0.03 per diluted share, in the second quarter of 2006, compared to $1.8 million, or $0.01 per diluted share, during the same quarter of 2005. A reconciliation of GAAP net income to adjusted net income is provided in the financial tables that accompany this release.

Gross margin was 70% in the second quarter of both 2006 and 2005. Operating expenses for the second quarter of 2006 were $13.1 million compared to $62.9 million in the prior year's quarter. Second quarter 2006 operating expenses include a benefit related to Microsoft's payment under the settlement and commercial agreements signed in the fourth quarter of 2005. Operating expenses also include non-cash, stock-based compensation expense related to Real's adoption of SFAS 123R in 2006. Excluding the impact from the Microsoft agreements and stock-based compensation expense, adjusted operating expenses were $64.7 million compared to $58.2 million in the second quarter of 2005. A reconciliation of GAAP operating expenses to adjusted operating expenses is provided in the financial tables that accompany this release. For the second quarter of 2006, Real's effective tax rate was approximately 37%.

As of June 30, 2006, Real had approximately $769 million in unrestricted cash, cash equivalents and short-term investments, which includes the proceeds from $100 million of convertible debt. Further, the Company expects to receive up to approximately $185 million in additional payments related to the Microsoft agreements over the next three quarters. Microsoft can earn credits against its future payments as a result of delivering music users to Real through its promotional efforts.

In April 2006, Real announced that its Board of Directors approved a $100 million stock repurchase program. Real entered into a 10(b)5-1 plan to facilitate the repurchase. During the second quarter of 2006, Real spent $20.0 million for the repurchase of 2.1 million shares. Since the beginning of 2005, Real has repurchased 20.3 million shares, or approximately 11% of outstanding shares. Total shares outstanding at June 30, 2006 were 160.1 million.

Business Outlook

The following forward-looking statements reflect RealNetworks' expectations as of July 27, 2006. The Company currently does not intend to update these forward-looking statements until the next quarterly results announcement. For the third quarter of 2006, Real expects revenue in the range of $91 million to $94 million, GAAP net income per diluted share of $0.20 to $0.22 and adjusted net income per diluted share of $0.01 to $0.03. This guidance assumes an effective tax rate of approximately 37%.

For the full year of 2006, Real expects revenue in the range of $365 million to $375 million and earnings of $0.75 to $0.80 per diluted share. Additionally, Real expects adjusted net income per diluted share of $0.08 to $0.12 for the full year. This guidance assumes a tax rate of approximately 37%. However, actual federal income taxes paid are expected to be less than 10% due to the utilization of deferred tax assets.

About Non-GAAP Financial Measures

To supplement the Company's consolidated financial results presented in accordance with GAAP, RealNetworks uses non-GAAP measures for certain components of financial performance. These non-GAAP measures include adjusted net income, adjusted net income per basic and diluted share and adjusted operating expenses. Adjusted net income excludes the impact related to non-cash, stock-based compensation expense, income and expenses, including charitable contributions, related to the Microsoft Agreements, equity investment gains and losses and an estimate of the income taxes from the aforementioned items. The presentation of these non-GAAP financial measures is not intended to be considered as a substitute for, or superior to, financial information prepared and presented in accordance with GAAP. These non-GAAP measures are provided to enhance investors' overall understanding of the Company's current and expected future financial performance. The Company believes these non-GAAP measures provide useful information to management and investors by excluding certain income, expenses and gains and losses that may not be indicative of its core operating and financial results. Management uses these measures on an ongoing basis to track and assess the Company's financial performance. The accompanying financial tables provide reconciliations to the nearest GAAP measure of all non-GAAP measures provided in this press release.

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://investor.realnetworks.com. 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 "Second Quarter Earnings," and the leader is Rob Glaser. A telephonic replay will be available until 8 pm (Eastern), August 3rd, and may be accessed by dialing 888-562-4358 (402-530-7649 for international callers).

RNWK-F

For More Information Contact
Press: Bill Hankes, RealNetworks, (206) 892-6614, bhankes@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 electronic devices. Consumers can access and experience audio/video programming and download RealNetworks' consumer software at http://www.real.com. RealNetworks' systems and corporate information are 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, adjusted net income, adjusted net income per diluted share, adjusted operating expenses and other measures of results of operations; (b) Real's repurchase of up to $100 million of outstanding shares of common stock; © Real's ability to capitalize on industry trends; (d) Real's expected payments under its agreements with Microsoft over the next three quarters; and (e) Real's effective tax rate and federal income taxes to be paid. 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 RealNetworks' content services in particular; 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 online 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 deferred 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, 2005 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.

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

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