RealNetworks Q2 profit misses expectations

Scott Hillis

SEATTLE: RealNetworks Inc. on Tuesday posted quarterly profits and revenues

that missed Wall Street expectations as the Internet media company

struggled with weak demand for its core systems products and a sluggish

advertising market.

The Seattle-based company also said it expected its third quarter to be

weaker than the second as it waited out the technology spending slump.

That one-two punch sent Real's stock price down as much as 14 per cent in

after-hours trading, where the shares hit $9.3, down $1.48 from the Nasdaq

closing price of $10.78.

Real said pro forma net earnings, which exclude $27.2 million in acquisition,

real estate and investment charges, plunged by 77 per cent to $2.4 million, or 1

cent per diluted share, compared with $10.6 million, or 6 cents a share, a year

earlier.

Revenues fell by nearly 25 per cent, to $47.9 million from $62.7 million a

year earlier.

The company, which makes the RealPlayer software for playing audio and video

on a personal computer, was expected to earn 2 cents a share on revenues of

$49.7 million, according to consensus analyst estimates compiled by Wall Street

tracking firm Thomson Financial/First Call.

"It was roughly what everybody was expecting. The enterprise market has

continued to drag things down. The consumer side is doing well, but it's still

tiny compared with the rest of the business," said CS First Boston analyst

Heath Terry.

"Once companies start loosening the purse strings, they will be in great

shape."

Real also said chief financial officer Paul Bialek was stepping down, but

would stay on part time at the company as a strategic adviser.

Systems, advertising down



Chief executive Rob Glaser said he could not forecast when the market would pick
back up and cautioned that revenues for its current quarter would likely fall

from the second quarter.

"Our best estimate is, due to the macro capital spending market being

weak, which affects our systems business and weakness in the advertising market,

Q3 will be down relative to Q2," Glaser told analysts in a conference call.

"This appears to be in the range of how Q2 was down relative to Q1, but

could be down by a few additional percentage points. The brightest part is that

we expect our consumer business will see modest sequential growth in revenue due

to continued growth in our consumer subscription business," Glaser said.

Real saw slowdowns in sales of its core systems products, which enable Web

sites to transmit audio and video. The software license fees item on its income

statement, which includes such products, fell 26 percent to $29.09 million from

$38.02 million a year earlier.

Advertising revenue plummeted 60 percent to $4.66 million from $11.8 million.

But service revenues grew 18 percent to $15.1 million, up from $12.84 million

a year earlier.

GOLDPASS IS GOLDEN

While declining to forecast when the market would pick up, Glaser said

RealNetworks was positioned for strong future growth, citing new infrastructure

software and its GoldPass subscription service that offers exclusive

entertainment, music and sports content online.

GoldPass, which charges users a monthly fee, grew by 50 percent in the

quarter to 300,000. Revenues from the service grew 32 percent from the previous

quarter, Glaser said.

Glaser also said MusicNet, an online music subscription service Real is

launching along with three major record labels, was on track for a third-quarter

debut.

Analysts were upbeat on the company's prospects, saying it was only a matter

of time until businesses started working all out to sate growing consumer demand

for high-quality video and audio on the Internet.

"They are in the driver's seat for this entire industry. There is

significant growth and demand on the consumer side. There is an appetite for

streaming media out there, it's just a matter of corporations building

out," Terry said.

Real stock has fallen from a year high of $59.50, but has climbed more than

20 per cent in the past three months while chief rival Microsoft Corp. has

gained about 15 per cent and the Standard & Poor's 500 index has stayed

relatively flat.

(C) Reuters Limited 2001.