October 28, 2003 5:02 PM PST

RealNetworks' loss narrows, sales up

Digital media services company RealNetworks on Tuesday reported revenue that was up by 14 percent from the same period last year on higher demand for its music subscription services.

The Seattle-based company reported a third-quarter net loss of $3.7 million, or 2 cents per share, on revenue of $51.8 million. That compares with a net loss of $35.4 million, or 22 cents per share, on revenue of $45.4 million in the same period a year ago. Third-quarter results were for the period that ended Sept. 30.

Analysts, on average, expected the company to report a loss of 2 cents a share, according to First Call.

"These results demonstrate both our continued momentum in paid content services and how well our model fits when applied to music," RealNetworks CEO Rob Glaser said in a statement.

Trumpeting its success in digital music services, RealNetworks made public for the first time its subscriber numbers for that division, which includes premium radio and newly acquired Rhapsody. It said that the number of total music subscribers grew by more than 46 percent from the second to third quarter. RealNetworks' music subscribers, including Rhapsody members, now total 250,000.

Overall, the number of people who pay RealNetworks to stream news, audio and video content to their PCs went up by 15 percent to more than 1.15 million. Most of those gains came through its Rhapsody and RealOne radio subscription services.

During the company's earnings conference call, analysts questioned whether RealNetworks' total subscriber numbers were flat or down, given the low visibility into how many video or RealOne Superpass subscribers it has versus music services subscribers. As it appears, the total subscriber base has grown little from the 1 million that RealNetworks reported at the start of the year, factoring in the 250,000 subscribers from digital music services. Glaser maintained that the overall number has grown. But he said that music services are the chief driver of growth because of the breadth of content they have to offer consumers.

"The x factor in this is we make choices on which products to emphasize in marketing channels; we drive people to the businesses that have the highest business satisfaction," Glaser said.

As a result, the company plans to spend an unspecified amount of money on marketing its digital music services in the fourth quarter. It will boost advertising at a time when a flurry of rivals are entering the market with digital download and subscription music services. Napster and Apple's iTunes are among a plethora of services that are gaining traction with consumers as legal music alternatives to file-swapping communities rife with pirated material. Glaser added that its game service, RealOne Arcade, has had some success in the quarter through a distribution partnership with Cox.

Glaser also emphasized the company's commitment to subscription services, as opposed to download-to-own music services such as iTunes, as the most viable mode of business for itself and consumers. He said that for consumers to have access to more than 400,000 songs, they need only pay a flat fee of $10 a month with Rhapsody. But with iTunes, consumers would have to pay up to $100 a month to listen to the range of songs that's typical within a month, he said. Long term, the company expects greater margins from subscription sales as well.

On the downside, RealNetworks' technology business continues to struggle. The company reported sales of $15.4 million in its technology business, down 6 percent from the second quarter and roughly even with the third quarter of 2002.

Its consumer business is on the upswing, however. The company reported consumer sales, which includes advertising and subscriptions, of $36.4 million, up 22 percent from the previous year and 10 percent from the second quarter of 2003. Subscription revenue accounted for $27.9 million, up 30 percent from the prior year and 10 percent from the second quarter.

During the conference call, Glaser braced investors for the possibility of the company losing an exclusive contract with Major League Baseball for streaming games, a contract up for renewal soon. Baseball is one of RealOne Superpass' anchor tenants, and MLB is likely being courted by a number of multimedia providers, including Yahoo and AOL. Glaser said that the company hopes to renew its contract, but if not, that could have a negative effect on its subscriber numbers. Though the deal accounts for only 2 percent of the company's revenue, RealNetworks stands to lose 150,000 subscribers, Glaser said.

For the fourth quarter, the company said it expects a net loss in the range of 1 cent to 4 cents per share on revenue between $52 million and $56 million. That's due to slightly higher operating expenses related to the Listen.com acquisition and anticipated added marketing spending on the music business.

RealNetworks is pushing services for wireless companies to make up for weak server sales. Last week, the company signed a deal under which its RealOne Player streaming media software will be incorporated into Linux-based phones built by Motorola. The phones will let people access both audio and video content using RealNetworks applications and will become available sometime during the first half of 2004, according to the companies. Similarly, it has signed deals for RealOne services with Sprint PCS, Nokia and Vodafone.

Summarizing, Glaser said RealNetworks is "cautious about server system sales and bullish about mobile."

 

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