RealNetworks Announces Record Revenue for 2004

RealNetworks Announces Record Revenue for 2004 34% Revenue Growth in Q4 Fuels Return to Profitability (Excluding Antitrust Litigation Expenses) SEATTLE, Jan. 26 /PRNewswire-FirstCall/ -- RealNetworks(R), Inc. (NASDAQ:RNWK), the leading creator of digital media services and software, today announced results for the quarter and year ended December 31st, 2004. Highlights -- Real is reporting record revenues for the fourth quarter and full year for 2004. -- The fourth quarter represents Real's tenth consecutive quarter of revenue growth. -- Real achieved its goal of profitability excluding antitrust litigation expenses for the fourth quarter of 2004. For the fourth quarter of 2004, revenue was $72.5 million, up 34% from $54.1 million in the fourth quarter of 2003. The GAAP net loss for the fourth quarter was $1.0 million, or a loss per share of $0.01, compared to a net loss of $5.3 million, or a loss per share $0.03, in the fourth quarter of 2003. Included in the GAAP net loss for the fourth 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 income for the fourth quarter was $2.0 million, or $0.01 per share. EBITDA, excluding antitrust litigation expenses, was $4.4 million for the fourth quarter of 2004. "We are pleased to report another quarter of record revenue, driven by rapid growth in our Consumer Business, particularly games and music," said Rob Glaser, CEO of RealNetworks. "We also accomplished an important 2004 goal: to achieve profitability in the fourth quarter excluding antitrust litigation expenses. Significantly, the success of our Consumer Business has enabled us to begin to leverage our increased scale. We look forward to producing continued revenue growth and increasing profitability in 2005." For 2004, revenue was $266.7 million, up 32% from $202.4 million in 2003. The GAAP net loss for 2004 was $23.0 million, or a loss per share of $0.14, compared to a net loss of $21.5 million, or a loss per share of $0.13 in 2003. Included in the GAAP net loss for 2004 is $11.0 million, or $0.07 per share, in expenses related to antitrust litigation. Excluding the antitrust litigation expenses, the net loss for 2004 was $11.9 million, or a loss per share of $0.07. EBITDA, excluding antitrust litigation expenses and loss on content agreement, was $4.4 million for 2004. Financial Discussion In 2004, the company focused on expanding its products and services sold directly to consumers over the Internet, such as downloadable games and music subscriptions. Fourth quarter revenue from consumer products and services grew 47% to $60.8 million, from $41.2 million in the fourth quarter of 2003. Music revenue grew 172% to $21.6 million from $7.9 million in the fourth quarter of 2003. Revenue from Games sales and subscriptions grew 156% to $10.1 million from $3.9 million in the fourth quarter of 2003. Video, consumer software and other revenue was down slightly to $29.1 million compared to $29.3 million in the fourth quarter of 2003. Revenue from business products and services was $11.8 million, down 8% from $12.8 million in the fourth quarter of 2003. The gross margin was 67% in the fourth quarter compared to 62% in the fourth quarter of the prior year primarily as a result of lower content costs in Real's consumer business. Operating expenses, including antitrust litigation, were $50.7 million for the fourth quarter compared to $38.6 million in the fourth quarter of 2003. As of December 31, 2004, RealNetworks had approximately $364 million in cash, cash equivalents and short-term investments, which includes the proceeds from $100 million of convertible debt. In the fourth quarter, Real continued to build on its success in consumer services, and at December 31, 2004, had over 1.55 million paying subscribers, up from over 1.3 million at the end of 2003. Paying subscribers to Rhapsody and premium radio services increased to over 700,000 from over 625,000 at the end of the third quarter of 2004. At the beginning of 2004, Real's music services had more than 350,000 paying subscribers. In addition, Real's consumer revenue for 2004 included $19.1 million of revenue from Real's ad-supported web services, up 132% from $8.2 million in 2003. Foreign currency exchange rate fluctuations positively impacted 2004 fourth quarter revenue by approximately $1 million compared to the prior year's fourth quarter revenue. For the full year, foreign currency exchange rate fluctuations positively impacted 2004 revenue by approximately $4 million compared to 2003 revenue. Forward Looking Guidance For the first quarter of 2005, Real expects to report net revenues of $73 million to $74.5 million. On a GAAP basis, which includes an estimated $3.75 million expense relating to antitrust litigation, Real expects a net loss per share of ($0.02) to ($0.01). Excluding the antitrust litigation expenses, earnings per share for the first quarter are expected to be $0.00 to $0.01. Real expects EBITDA before antitrust litigation expenses to be flat to slightly down in the first quarter as compared to the fourth quarter of 2004. For the full year, Real expects 2005 revenue to grow 16% to 20% over 2004 results, which represents expected revenue of $310 million to $320 million for the year. Real estimates that it will spend approximately $15 million on antitrust litigation expenses during the year, which includes expenses for both domestic and international antitrust activities. Regarding net income for 2005, Real expects that an increasing percentage of its revenue growth will drop to the bottom line. Over the course of 2005, Real expects approximately 35% of each incremental revenue dollar will go to cost of revenue, approximately 35%-40% will go to increased operating expenses and approximately 25-30% will go to operating income. As a result, Real expects to maintain quarterly profitability excluding antitrust litigation expenses in 2005. Real expects full year EBITDA excluding antitrust litigation to be between $20 million and $25 million. Real's forward guidance for 2005 excludes the impact of accounting changes relating to stock compensation, which are currently scheduled to be effective in the third quarter, any gains or losses related to minority investments and any potential future acquisitions. Webcast Information The company will host a web cast and conference call today at 5:00 pm EST/ 2:00 p.m. (PST). The live webcast, featuring slides and audio, will be available at http://www.realnetworks.com/company/investor/earnings.html . Listeners will require RealPlayer(R) 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 1-800-857-5305 (773-681-5857 for international callers). The passcode is "Fourth Quarter" and the leader is Rob Glaser. A telephonic replay will be available until 8 p.m. (Eastern), January 29th, and may be accessed by dialing 1-866-424-7873; (1-203-369-0863 for international callers). About RealNetworks RealNetworks, Inc. is the leading creator of digital media services and software including the award-winning Rhapsody(R) 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: Real's future revenues, expenses, margins, profitability and net income. 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. NOTE: 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. RealNetworks, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited) Quarters Ended Years Ended December 31, December 31, 2004 2003 2004 2003 (in thousands, except per share data) Net revenue $72,546 54,056 266,719 202,377 Cost of revenue 23,925 20,780 92,207 68,343 Loss on content agreement -- -- 4,938 -- Gross profit 48,621 33,276 169,574 134,034 Operating expenses: Research and development 13,091 11,922 51,607 46,763 Sales and marketing 26,608 20,638 96,779 77,335 General and administrative 7,914 4,186 31,302 21,007 Loss on excess office facilities (A) -- -- 866 7,098 Antitrust litigation (B) 2,997 1,574 11,048 1,574 Stock-based compensation 71 260 695 1,120 Total operating expenses 50,681 38,580 192,297 154,897 Operating loss (2,060) (5,304) (22,723) (20,863) Other income (expense), net: Interest income, net 1,602 878 4,452 4,251 Equity in net loss of MusicNet (955) (1,104) (4,351) (5,378) Impairment of equity investments (C) -- -- (450) (424) Other, net 606 219 597 1,107 Other income (expense), net 1,253 (7) 248 (444) Loss before income taxes (807) (5,311) (22,475) (21,307) Income tax provision (165) (16) (522) (144) Net loss $(972) (5,327) (22,997) (21,451) Basic and diluted net loss per share $(0.01) (0.03) (0.14) (0.13) Shares used to compute basic and diluted net loss per share 170,039 163,755 168,907 160,309 (A) The loss on unoccupied excess office facilities represents the loss from rent payments, net of sublease income, over the remaining life of the lease and amounts related to the write-off of certain leasehold improvements. (B) Consists of legal fees, personnel costs, public relations and other professional service fees incurred related to antitrust complaints against Microsoft, including proceedings in the European Union. (C) Relates to other-than-temporary declines in the value of certain equity investments. These charges were recorded to reflect these investments at their estimated fair value. RealNetworks, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (Unaudited) December 31, December 31, 2004 2003 (in thousands) ASSETS Current assets: Cash, cash equivalents and short-term investments $363,621 373,593 Trade accounts receivable, net of allowances for doubtful accounts and sales returns 14,501 10,618 Prepaid expenses and other current assets 8,196 8,879 Total current assets 386,318 393,090 Equipment and leasehold improvements, at cost: Equipment and software 45,324 37,110 Leasehold improvements 25,015 26,085 Total equipment and leasehold improvements 70,339 63,195 Less accumulated depreciation and amortization 41,508 33,258 Net equipment and leasehold improvements 28,831 29,937 Restricted cash equivalents 20,151 19,953 Investments 36,588 34,577 Goodwill, net 119,217 97,477 Other intangible assets, net 8,383 1,065 Other 3,014 4,840 Total assets $602,502 580,939 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $10,219 6,865 Accrued and other liabilities 50,033 39,400 Deferred revenue, excluding non- current portion 30,307 31,186 Accrued loss on excess office facilities and content agreement, excluding non- current portion 8,160 4,960 Total current liabilities 98,719 82,411 Deferred revenue, excluding current portion 548 4,561 Accrued loss on excess office facilities and content agreement, excluding current portion 19,017 24,099 Deferred rent 3,413 3,382 Convertible debt 100,000 100,000 Total shareholders' equity 380,805 366,486 Total liabilities and shareholders' equity $602,502 580,939 RealNetworks, Inc. and Subsidiaries Supplemental Financial Information (Unaudited) 2004 Q4 Q3 Q2 Q1 (in thousands) Net Revenue by Line of Business: Consumer products and services (A) $60,782 55,382 53,061 46,514 Business products and services (B) 11,764 12,928 12,412 13,876 Total net revenue $72,546 68,310 65,473 60,390 Consumer Products and Services: Subscriptions (C) $41,963 37,734 34,777 31,562 E-commerce and other (D) 18,819 17,648 18,284 14,952 Total consumer products and services revenue $60,782 55,382 53,061 46,514 Consumer Products and Services: Video, consumer software and other (E) $29,147 27,497 29,129 27,494 Music (F) 21,558 18,787 15,580 12,265 Games (G) 10,077 9,098 8,352 6,755 Total consumer products and services revenue $60,782 55,382 53,061 46,514 Net Revenue by Geography: United States $55,608 52,054 50,949 43,963 Rest of world 16,938 16,256 14,524 16,427 Total net revenue $72,546 68,310 65,473 60,390 Gross Margin by Line of Business: * Consumer products and services 64% 59% 63% 58% Business products and services 83% 84% 84% 84% Total gross margin 67% 64% 67% 64% Subscribers (presented as greater than) Total ** 1,550 1,550 1,400 1,300 Music 700 625 550 450 2003 Q4 Q3 Q2 Q1 Net Revenue by Line of Business: Consumer products and services (A) 41,214 36,377 33,172 32,886 Business products and services (B) 12,842 15,432 16,474 13,980 Total net revenue 54,056 51,809 49,646 46,866 Consumer Products and Services: Subscriptions (C) 30,075 27,909 25,470 23,639 E-commerce and other (D) 11,139 8,468 7,702 9,247 Total consumer products and services revenue 41,214 36,377 33,172 32,886 Consumer Products and Services: Video, consumer software and other (E) 29,347 28,572 28,830 29,645 Music (F) 7,937 4,655 1,670 831 Games (G) 3,930 3,150 2,672 2,410 Total consumer products and services revenue 41,214 36,377 33,172 32,886 Net Revenue by Geography: United States 40,175 37,660 36,009 33,769 Rest of world 13,881 14,149 13,637 13,097 Total net revenue 54,056 51,809 49,646 46,866 Gross Margin by Line of Business: * Consumer products and services 55% 54% 61% 63% Business products and services 83% 87% 88% 89% Total gross margin 62% 64% 70% 71% Subscribers (presented as greater than) Total ** 1,300 1,150 1,000 1,000 Music 350 250 150 100 *For the quarter ended March 31, 2004, total gross margin excludes loss on content agreement of $4.9 million. Including the loss on content agreement, total gross margin is 56% **Total subscribers as of March 31, 2004 reflect the removal of approximately 142,000 subscribers resulting from the non-renewal of the MLB contract (A) Revenue is derived from consumer digital media subscription services, RealPlayer Plus and related products, sales and distribution of third party software products, content such as games and music, and advertising (B) Revenue is derived from media delivery system software, support and maintenance services, broadcast hosting services and consulting services (C) Revenue is derived from consumer digital media subscription services including: SuperPass, RadioPass, Rhapsody, GamePass and stand-alone subscriptions (D) Revenue is derived from RealPlayer Plus and related products, sales and distribution of third party software products, content such as games and music, and advertising (E) Revenue is derived from RealOne SuperPass subscriptions, RealPlayer Plus and related products, stand-alone subscription services and sales and distribution of third party software products and non-game and non-music related advertising (F) Revenue is derived from RadioPass and Rhapsody subscription services, sales of music content and advertising from our music-related Web sites (G) Revenue is derived from the GamePass subscription service, sales of games and advertising generated from our games and game-related Web sites RealNetworks, Inc. and Subsidiaries Supplemental Financial Information (Unaudited) A reconciliation of Generally Accepted Accounting Principles ("GAAP") net loss to income (loss) before interest, taxes, depreciation, amortization and stock compensation ("EBITDA") and EBITDA excluding antitrust litigation and loss on content agreement is as follows: Quarters Ended Years Ended Dec. Sept. June March Dec. Dec. 31, 30, 30, 31, 31, 31, 2004 2004 2004 2004 2004 2003 (in thousands) Net loss in accordance with GAAP $(972) (6,969) (4,618) (10,438) (22,997) (21,451) Interest income, net (1,602) (1,190) (800) (860) (4,452) (4,251) Taxes 165 142 113 102 522 144 Depreciation, amortization and stock compensation 3,791 4,089 3,810 3,648 15,338 12,370 EBITDA 1,382 (3,928) (1,495) (7,548) (11,589) (13,188) Antitrust litigation 2,997 2,974 2,756 2,321 11,048 1,574 Loss on content agreement -- -- -- 4,938 4,938 -- EBITDA excluding antitrust litigation and loss on content agreement $4,379 (954) 1,261 (289) 4,397 (11,614) This reconciliation has been provided as a performance measure, as the Company uses EBITDA and EBITDA excluding antitrust litigation expense on an ongoing basis to track and assess its financial performance. The Company has calculated EBITDA excluding loss on content agreement because it believes that the loss on content agreement is an item that does not reflect the ongoing financial operations of the Company's business. Source: RealNetworks, Inc. CONTACT: media, Scott Sutherland of SutherlandGold Communications, +1-866-262-7373, ext. 101, or scott@sutherlandgold.com, for RealNetworks, Inc.; or financial, Roy Goodman of RealNetworks, Inc., +1-206-892-6841, or rgoodman@real.com Web site: http://www.realnetworks.com/ ------- Profile: International Entertainment