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Friday, January 30, 2004 - Page updated at 12:00 A.M.

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Earnings: RealNetworks' loss widens despite fourth-quarter surge

By Kim Peterson
Seattle Times technology reporter

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RealNetworks reported yesterday that although its fourth-quarter revenue increased by 17 percent, its loss widened because of legal fees from its antitrust lawsuit against Microsoft.

The digital media company, which continues to transform its business model, said sales were $54.1 million for the quarter ended Dec. 31, up from $46.2 million for the same period the year before.

The Seattle company reported a net loss of $5.3 million, or 3 cents a share, compared with a $2.5 million net loss, or 2 cents a share, the year before. The net loss figure included $1.6 million, or a penny a share, related to the Microsoft lawsuit the company filed in December.

Excluding those legal costs, the company's quarterly loss was in line with analysts' estimates. RealNetworks also said it would reach profitability before the end of this year. Still, the company's share price dropped slightly in after-hours trading from its closing price of $6.14.

RealNetworks continued its transition to becoming a consumer software and services company last quarter, and the ratio of its consumer revenue to total revenue hit an all-time high of 76 percent. Much of that revenue was from subscription fees for premium services, such as the Rhapsody music service.

The company's paying subscriber base grew to 1.3 million in the quarter, up from 1.15 million at the end of September and 1 million at the end of June.

Revenue from technology products, such as servers, continued to spiral, dropping to slightly less than 24 percent of total revenue. The company's gross profit margin slipped to 62 percent, its lowest point in years, mainly because the consumer business has lower margins than the technology business.

For the full year, RealNetworks reported $202.4 million in revenue, compared with $182.7 million the year before. Its net loss was $21.5 million, or 13 cents, compared with a net loss the year before of $38.4 million, or 24 cents a share.

For the first time, the company broke out sales figures in its growing music and games categories. In music, which includes Rhapsody and a radio subscription service, revenue grew 71 percent to $7.9 million for the fourth quarter.

The company said it would no longer sell subscriptions to sports, such as Major League Baseball games, as a stand-

alone product. RealNetworks made a name for itself by striking a deal with MLB to offer highlights and audio play-by-play coverage of baseball games, but the relationship has become too expensive, executives said.

Less than 2 percent of RealNetworks' 2003 revenue was from its Major League Baseball sales, and getting out of the stand alone business will save the company at least $5 million this year, said Chief Executive Rob Glaser. The company has not said whether the MLB programming will be included as part of its SuperPass subscription service next season.

Analysts said yesterday that RealNetworks was trying to stay light on its feet in an ever-changing industry.

"They're going through a tough transitionary period," said Heath Terry, an analyst at Credit Suisse First Boston.

"Their business is evolving and they're doing an impressive job trying to stay on this treadmill and continue to evolve with it."

RealNetworks has seemed to transform itself over the past several years, said Scott Kessler, an analyst with Standard & Poor's Equity Research Services.

"It just seems like this company is ever changing, and sometimes that can be a good thing," he said. "But it seems to me like the amount of change and the pace of change is maybe faster than I think a lot of people would have expected."

RealNetworks is a high-risk company and a high-risk stock, said Jacob Kaldenbaugh, a senior analyst with Harvest Equity Research.

"The company's doing a very good job at staying agile, but at some point it needs to latch on to a business model that shows profitability," he said.

Kim Peterson: 206-464-2360 or kpeterson@seattletimes.com

RealNetwork's results
Figures in parentheses are losses
%
4th qtrDec. 31, 20032002Chg
Profit($5,327,000)($2,457,000)-117
Per share(0.03)(0.02)-50
Sales54,056,00046,211,000+17.0
Annual
Profit(21,451,000)(38,353,000)+44.1
Per share(0.13)(0.24)+45.8
Sales202,377,000182,679,000+10.8


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