Press Releases

RealNetworks Announces Third Quarter Results

Reports Record Revenue of $145.1 million

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

SEATTLE — October 30, 2007 — Digital entertainment services company RealNetworks®, Inc. (Nasdaq: RNWK) today announced results for the third quarter ended September 30, 2007.

Quarterly Highlights

- Record revenue of $145.1 million
- Net income of $4.3 million or $0.03 per diluted share
- Adjusted EBITDA of $13.6 million

"In the third quarter we both achieved solid operating results and made great strides strategically," said Rob Glaser, chairman and CEO of Real. "Not only did we achieve record revenue, we also increased our adjusted EBITDA by 78% year over year. On the strategic side, we formed deep alliances with Viacom's MTV Networks and Verizon Wireless, which we believe will drive our Rhapsody music business forward very significantly."

For the third quarter of 2007, revenue grew 55% to $145.1 million compared to $93.7 million for the third quarter of 2006. Revenue growth in the third quarter was attributed to: Games revenue of $28.8 million, a 28% increase over the third quarter of 2006; Music revenue of $37.7 million, a 24% increase over the third quarter of 2006; Technology Products and Solutions revenue of $53.3 million, a 377% increase over the third quarter of 2006, due in large part to the acquisition of WiderThan during the fourth quarter of 2006; and Media Software and Services revenue of $25.3 million, a 14% decrease from the third quarter of 2006. Foreign currency exchange rate fluctuations positively impacted 2007 third quarter revenue by approximately $1.2 million compared to the third quarter of 2006.

Net income for the third quarter of 2007 was $4.3 million or $0.03 per diluted share, compared to $42.2 million or $0.24 per diluted share in the third quarter of 2006. Results for the third quarter of 2006 included payments related to Real's antitrust settlement and commercial agreements with Microsoft. The final payment was received under these agreements during the first quarter of 2007. Further information regarding these payments can be found in Real's SEC filings. Adjusted net income, described below in Real's description of non-GAAP financial measures, was $9.2 million or $0.06 per diluted share for the third quarter of 2007, compared to $9.0 million or $0.05 per diluted share in the third quarter of 2006. Adjusted EBITDA for the third quarter of 2007 was $13.6 million compared to $7.6 million in the third quarter of 2006. A reconciliation of GAAP net income to adjusted net income and adjusted EBITDA is provided in the financial tables that accompany this release.

Gross margin was 61% in the third quarter of 2007 compared to 70% in the third quarter of 2006. Operating expenses for the third quarter of 2007 were $103.8 million, compared to $8.1 million in the third quarter of 2006. Operating expenses in the third quarter of 2006 included benefits related to payments under Real's antitrust settlement and commercial agreements with Microsoft. Adjusted operating expenses in the third quarter of 2007 were $93.9 million compared to $61.9 million in the third quarter of 2006. A reconciliation of GAAP operating expenses to adjusted operating expenses is provided in the financial tables that accompany this release. For the third quarter of 2007, Real's effective tax rate was 32%.

As of September 30, 2007, Real had approximately $590.4 million in unrestricted cash, cash equivalents and short-term investments and $100 million of convertible debt.

Under Real's current stock repurchase program, approximately 4.8 million shares were repurchased for $34.2 million during the third quarter of 2007. As of September 30, 2007, approximately $36.4 million remained available under the existing stock repurchase program.

Formation of Rhapsody America
On August 20, 2007, Real and MTV Networks, a division of Viacom International Inc. ("MTVN"), created Rhapsody America LLC ("Rhapsody America"), to provide consumers with comprehensive music services, including access to an extensive catalog of music through subscriptions, downloads and ad supported services. Rhapsody America is owned 51% by Real and 49% by MTVN. Real consolidated the financial results of Rhapsody America for the period from August 20, 2007 through September 30, 2007, with a 49% minority interest represented by MTVN's equity in Rhapsody America.

Business Outlook
The following forward-looking statements reflect RealNetworks' expectations as of October 30, 2007. It is not the Company's general practice to update these forward-looking statements until its next quarterly results announcement.

For the fourth quarter of 2007, Real expects revenue in the range of $152 million to $157 million, GAAP net income per diluted share of $0.00 to $0.01 and adjusted net income per diluted share of $0.06 to $0.07.

For the full year 2007, Real expects revenue in the range of $563 million to $568 million. Real expects 2007 GAAP net income per diluted share of $0.28 to $0.29 and adjusted net income per diluted share of $0.23 to $0.24. This guidance assumes an effective tax rate of approximately 38%.

See a complete reconciliation of estimated GAAP net income per diluted share to adjusted net income per diluted share, provided in the financial tables that accompany this press release.

About Non-GAAP Financial Measures
To supplement RealNetworks' condensed consolidated financial statements presented in accordance with GAAP, we present investors with certain non-GAAP financial measures, including adjusted net income and adjusted net income per share, adjusted EBITDA, adjusted EBITDA by reporting segment, adjusted cost of revenue and adjusted operating expenses.

- Adjusted net income consists of net income excluding the impact of the following: stock-based compensation expense; income and expenses including charitable contributions related to the Microsoft agreements; equity investment gains and losses from sales or impairments; acquisition costs, including amortization of intangible assets (net of minority interest effect) and expenses for employee stock options that were converted to cash rights; gain on initial formation of Rhapsody America; an estimate of the income taxes from the aforementioned items; and changes in deferred tax asset valuation allowances.
- Adjusted net income per share is calculated by dividing adjusted net income by GAAP weighted average diluted shares outstanding.
- Adjusted EBITDA and adjusted EBITDA by reporting segment consist of net income excluding the impact of the following: interest income, net; income taxes; depreciation; amortization (net of minority interest effect); stock-based compensation; expenses for employee stock options that were converted to cash rights; equity investment gains and losses from sales or impairments; income and expenses including charitable contributions related to the Microsoft agreements; and gain on initial formation of Rhapsody America.
- Adjusted cost of revenue consists of GAAP cost of revenue excluding stock-based compensation expenses, and acquisition costs including amortization of intangible assets (net of minority interest effect) and expenses for employee stock options that were converted to cash rights.
- Adjusted operating expenses consist of GAAP operating expenses excluding stock-based compensation expenses, antitrust litigation expenses (benefits) and acquisition costs including amortization of intangible assets (net of minority interest effect) and expenses for employee stock options that were converted to cash rights.

RealNetworks believes that the presentation of adjusted net income and adjusted net income per share, adjusted EBITDA, adjusted EBITDA by reporting segment, adjusted cost of revenue and adjusted operating expenses provides important supplemental information to management and investors regarding financial and business trends relating to the company's financial condition and results of operations. Management believes that the use of these non-GAAP financial measures provides consistency and comparability with our past financial reports, and also facilitates comparisons with other companies in our industry, many of which use similar non-GAAP financial measures to supplement their GAAP results.

Management has historically used these non-GAAP measures when evaluating operating performance because the inclusion or exclusion of the items described above provides additional useful measures of our operating results and facilitates comparisons of our core operating performance against prior periods and our business model objectives. We have chosen to provide this information to investors in order to enable them to perform additional analyses of past, present and future operating performance, to enable them to compare us to other companies, and as a supplemental means to evaluate our ongoing operations. Externally, we believe that adjusted net income and adjusted EBITDA continue to be useful to investors in their assessment of our operating performance and the valuation of our company.

Internally, adjusted net income and adjusted net income per share, adjusted EBITDA, adjusted EBITDA by reporting segment, adjusted cost of revenue, and adjusted operating expenses are significant measures used by management for purposes of:

- supplementing the financial results and forecasts reported to our board of directors;
- evaluating the operating performance of our company which includes direct and incrementally controllable revenue and costs of operations, but excludes items considered by management to be either non-cash or non-operating such as interest income and expense, stock-based compensation, tax expense, deferred tax valuation allowance changes, depreciation and amortization;
- managing and comparing performance internally across our businesses and externally against our peers;
- establishing internal operating budgets; and
- evaluating and valuing potential acquisition candidates.

Adjusted net income is used by RealNetworks as a broad measure of financial performance that encompasses our operating performance, cash, capital structure and investment management, and income tax planning effectiveness. Adjusted EBITDA is used by management as a way to isolate our operating performance and to compare it to that of other companies.

Adjusted net income and adjusted net income per share, adjusted EBITDA, adjusted EBITDA by reporting segment, adjusted cost of revenue, and adjusted operating expenses are not calculated in accordance with GAAP, and should be considered supplemental to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. Non-GAAP financial measures have limitations in that they do not reflect all of the costs associated with the operations of our business as determined in accordance with GAAP. As a result, you should not consider these measures in isolation or as a substitute for analysis of RealNetworks' results as reported under GAAP. We expect to continue to incur expenses similar to the non-GAAP adjustments described above, and exclusion of these items from our non-GAAP financial measures should not be construed as an inference that these costs are unusual or infrequent. Some of the limitations in relying on our non-GAAP financial measures are:

- Adjusted net income, adjusted net income per share, adjusted EBITDA and adjusted EBITDA by reporting segment are measures which we have defined for internal and investor purposes and are not in accordance with GAAP. A further limitation associated with these measures is that they do not include all costs and income that impact our net income and net income per share. We compensate for these limitations by prominently disclosing GAAP net income, which we believe is the most directly comparable GAAP measure, and providing investors with reconciliations from GAAP net income to adjusted net income, adjusted EBITDA and adjusted EBITDA by reporting segment.
- Adjusted cost of revenue is limited in that it does not include stock-based compensation expenses, and certain costs associated with our acquisitions. Adjusted operating expenses are limited in that they do not include stock-based compensation expenses, antitrust litigation expenses (benefit) and certain costs associated with our acquisitions. We compensate for these limitations by prominently disclosing the reported GAAP results and providing investors with a reconciliation from GAAP to the adjusted amount.

In the financial tables of our earnings press release, RealNetworks has included reconciliations of GAAP net income to adjusted net income and adjusted EBITDA, income before income taxes to adjusted EBITDA by reporting segment, GAAP cost of revenue to adjusted cost of revenue and GAAP operating expenses to adjusted operating expenses for the relevant periods.

Webcast and Conference Call Information
The Company will host a webcast and conference call today at 5:00pm (Eastern)/ 2:00pm (Pacific). The live webcast featuring slides and audio, will be available at http://investor.realnetworks.com. Listeners must use 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 8:00pm (Eastern) on November 8, 2007 and may be accessed by dialing 866-421-0439 (203-369-0801 for international callers).

For More Information Contact
Press: Bill Hankes, (206) 892-6614,
bhankes@real.com

Financial: Caroline Hughes, (206) 674-2330,
carolinehughes@real.com

ABOUT REALNETWORKS
RealNetworks, Inc. delivers digital entertainment services to consumers via PC, portable music player, home entertainment system or mobile phone. Real created the streaming media category in 1995 and has continued to lead the market with pioneering products and services, including: RealPlayer®, the first mainstream media player to enable one-click downloading and recording of Internet video; the award-winning Rhapsody® digital music service, which delivers more than 1 billion songs per year; RealArcade®, one of the largest casual games destinations on the Web; and a variety of mobile entertainment services, such as ringback tones, offered to consumers through leading wireless carriers around the world. RealNetworks' corporate information is located at www.realnetworks.com/company.

Forward Looking Statements: : This press release contains forward-looking statements that involve risks and uncertainties, including statements relating to the product and service offerings of Rhapsody America and the impact of the Verizon and MTV Networks alliances on the Rhapsody America business, Real's future revenue, GAAP and adjusted net income (loss) per diluted share, amortization of intangible assets, stock-based compensation expense and income tax rate. 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 because these are relatively new and unproven business models and markets; risks associated with the creation and operation of Rhapsody America; risks associated with acquisitions generally, and the acquisitions of WiderThan, Sony NetServices and Exomi in particular, including the risks of integration, unknown liabilities and operations in new markets and geographies; 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 emergence of new entrants and competition in the market for digital media subscription offerings and online music sales; the impact on our gross margins of 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, including the new RealPlayer; risks inherent in strategic relationships, especially with competitors, and technology and service integration efforts; 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. 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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