EXHIBIT 99.1
REALNETWORKS REPORTS FOURTH QUARTER AND 2003 RESULTS
Growth in Consumer Digital Media Services Drives Company
to 6th Consecutive Quarter of Revenue Growth
SEATTLE, WA - January 29th, 2004 - RealNetworks(R), Inc. (Nasdaq: RNWK)
today announced results for the quarter ended December 31, 2003. For the fourth
quarter of 2003, revenue was $54.1 million, up 17% from the fourth quarter of
2002. The GAAP net loss was $5.3 million or ($0.03) per share. Included in the
net loss was $1.6 million, or ($0.01) per share, of fourth quarter costs related
to the company's antitrust litigation against Microsoft Corporation. Excluding
these litigation expenses, the net loss was $3.8 million or ($0.02) per share
compared to a GAAP net loss of $2.5 million or ($0.02) per share in the fourth
quarter of 2002. RealNetworks' results are consistent with the guidance provided
in December 2003. For the year, revenue was $202.4 million, an increase of 11%
from 2002 and the net loss was $21.5 million or ($0.13) per share compared to a
net loss from the prior year of $38.4 million or ($0.24) per share.
"2003 was the year when digital media consumer services crossed into the
mainstream," said Rob Glaser, CEO, RealNetworks. "This is particularly true in
the case of digital music, where we now lead the market with over 350,000
subscribers, and the emerging market of downloadable games, where our RealArcade
is the number one service in the market. 2003 was also a significant year for
us in that it demonstrated our return to revenue growth. Adding in our
rock-solid foundation of world-class technology, we believe that we are poised
for continued leadership in the digital media market for years to come."
FINANCIAL DISCUSSION
Fourth quarter revenue from consumer products and services was $41.2
million, which represents a 27% increase from the prior year's fourth quarter
and a 13% increase from the third quarter of 2003. Consumer subscription
revenue, included in consumer products and services, was $30.1 million for the
quarter, a 33% increase from the fourth quarter of 2002 and an 8% increase from
$12.8 million, which represents a decrease of 7% from the prior year and a
decrease of 17% from the third quarter of 2003.
1
The gross margin for the quarter was 62% compared to 64% in the third
quarter of 2003. The change is primarily a result of the changing revenue mix
toward the faster growing consumer business, which has good gross margins that
are lower than RealNetworks' traditional technology business. Consumer revenue
was 76% of fourth quarter revenue compared to 70% of third quarter revenue.
RealNetworks continues to maintain a strong balance sheet with over $373 million
in cash and investments as of December 31st, 2003.
CONTINUED GROWTH OF CONSUMER SERVICES
In 2003 consumer digital media services became RealNetworks' primary
revenue driver, largely through the growth of subscription services. The company
grew its subscriber base to more than 1.3 million paying subscribers by
year-end, up 44% from the end of 2002 and up 13% from the third quarter of 2003.
In 2003, RealNetworks focused its consumer investments most deeply on the two
digital media businesses that were poised for adoption by mainstream users:
music and downloadable games. These investments delivered strong results in
2003.
RealNetworks' music business, including subscriptions, premium radio and
individual song sales, grew 71% to $7.9 million in the fourth quarter, up from
$4.7 million in the third quarter. Paying subscribers to RealNetworks' music
services, including RadioPass(TM) and Rhapsody(R), grew to over 350,000 in the
fourth quarter of 2003, up 40% from the third quarter of 2003. This growth
reflects the transition of digital music into a mainstream consumer market,
continued growth in broadband penetration, the effectiveness of our marketing,
and the success of our partnerships with distributors such as Best Buy and
Comcast.
In addition to music subscription services, in January, RealNetworks
launched an a la carte music download store as part of the new RealPlayer(R) 10.
Offering the highest quality downloads at $.99 cents per song, the RealPlayer
Music Store is the only download store that also enables consumers to play
content purchased at other Internet music stores making RealPlayer 10 the only
universal player for both free and purchased content.
In 2003, RealNetworks also focused on growing the games business and saw
revenue from that business, which includes subscriptions, game sales, and
advertising on RealArcade(R), grow 56% percent to $12.2 million, up from $7.8
million in 2002. Since launching in 2001, RealArcade has sold more than two
million games and now offers more than 190 downloadable games and more than 60
web games. RealNetworks also announced this week a definitive agreement to
acquire the leading downloadable games developer, GameHouse(R), Inc.
2
Gamehouse is RealNetworks' biggest supplier of games for RealArcade, responsible
for about 20% of the game units sold in 2003; RealNetworks was GameHouse's
biggest third party distribution channel, accounting for approximately 30% of
GameHouse's third party units sold in 2003. The acquisition is estimated to be
approximately $0.01 per share accretive to earnings per share in 2004 after
acquisition charges and non-cash amortization of intangibles. With the
acquisition of GameHouse, RealArcade's most successful developer, RealNetworks
is combining two leaders in the market, which we believe will both strengthen
the downloadable games market and strengthen RealNetworks' leadership position
in the market.
TECHNOLOGY PRODUCTS AND SERVICES
In 2003 RealNetworks created several important new partnerships and services to
invest in its core technology foundation. For example, RealNetworks entered into
agreements with mobile market leaders such as Nokia, Ericsson, Motorola,
Vodafone, Sprint and AT&T Wireless. These agreements position RealNetworks to
continue growing its mobile business and enabling digital media services on
mobile devices. In early 2004, RealNetworks forged a relationship with IBM to
jointly offer an on-demand media system for content providers which decreases
cost to deploy, increases time to market and offers flexible media services.
RealNetworks recently released groundbreaking new products, including RealPlayer
10, RealAudio(R) 10, RealVideo(R) 10 and Helix(TM) DRM 10, with support from
more than 50 industry companies. These initiatives create a solid foundation for
our technology business for 2004.
FORWARD LOOKING GUIDANCE
For the first quarter of 2004, RealNetworks expects net revenues to be between
$56 million and $59 million or between 19% and 26% over the first quarter of
2003. The GAAP quarterly loss per share, which includes an estimated $3 million
expense relating to antitrust litigation, is expected to be between ($0.04) and
($0.05) per share. The quarterly loss per share without the antitrust litigation
expenses is expected to be between ($0.02) and ($0.03) per share. Excluding the
antitrust litigation expenses, RealNetworks expects to return to profitability
by the end of 2004. Additionally, RealNetworks expects margins to stabilize in
future quarters.
3
The above guidance may be impacted by two potential first quarter events. First,
RealNetworks continues to hold an ownership interest in MusicNet, which is
carried on RealNetworks' financial statements at a value of $6.5 million. The
carrying value of our investment may be impacted by the capital requirements or
results of operations of MusicNet in the first quarter. The second potential
event relates to the possible cost of restructuring RealNetworks' relationship
with a content provider whose content as of the first quarter is not being used
in RealNetworks' primary video subscription services. Those negotiations could
result in a one-time charge of up to $6 million; if this happens, RealNetworks'
future content costs would be lower as a result of this potential transaction.
ABOUT REALNETWORKS, INC.
RealNetworks, Inc. is the leading creator of digital media services and software
including the award-winning Rhapsody Internet jukebox service and RealPlayer 10.
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' systems and corporate information is located
at http://www.realnetworks.com.
###
Press Inquiries-Erika Shaffer, RealNetworks, (206) 892-6191, eshaffer@real.com
Financial Inquiries-Roy Goodman, RealNetworks, (206) 892-6841, rgoodman@real.com
This press release contains forward-looking statements that involve risks and
uncertainties, including statements relating to: (a) continued growth and
acceptance of media subscription services and RealNetworks' continued leadership
position in this market; (b) RealNetworks' ability to continue to grow and
sustain a successful consumer subscription and paid content businesses, and
increase revenue; (c) revenue, expense, margin and net loss projections for the
first quarter of 2004,and projection of future stabilization of margins and
profitability by the end of 2004 and (d) the impact on our operating results of
our anticipated acquisition of GameHouse. 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; 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; potential adverse responses by
GameHouse distributors to the announcement of the acquisition; the risk that
RealNetworks may not be able to successfully integrate GameHouse's business
following the closing of the acquisition, especially in light of RealNetworks'
relative inexperience in managing a media creation business; the potential
inability of the
4
combined company to retain key employees of GameHouse following the acquisition;
and risks relating to the timely development, production, marketing and
acceptance of the products, services and technologies contemplated by the
proposed acquisition; potential funding decisions by companies in which we have
a significant equity position; potential costs of restructuring an agreements
with a content provider; 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, 2002,
and its quarterly report on Form 10-Q for the prior quarter and from time to
time in other reports filed by RealNetworks with the Securities and Exchange
Commission.
RealNetworks, RealAudio, RealVideo, Helix, 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.
5
REALNETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<Table>
<Caption>
Quarter Ended December 31, Year Ended December 31,
-------------------------- -----------------------
2003 2002 2003 2002
----------- ------------- ----------- ----------
(in thousands, except per share data)
NET REVENUE:
Software license fees $13,560 15,590 $61,970 72,753
Service revenue 38,612 28,695 134,058 103,161
Advertising 1,884 1,926 6,349 6,765
------- ------- -------- --------
Total net revenue 54,056 46,211 202,377 182,679
------- ------- -------- --------
COST OF REVENUE:
Software license fees 3,673 1,560 9,917 6,865
Service revenue 16,709 11,267 56,690 41,259
Advertising 398 548 1,736 2,145
------- ------- -------- --------
Total cost of revenue 20,780 13,375 68,343 50,269
------- ------- -------- --------
Gross profit 33,276 32,836 134,034 132,410
------- ------- -------- --------
OPERATING EXPENSES:
Research and development 11,922 11,340 46,763 48,186
Sales and marketing 20,638 18,427 77,335 73,928
General and administrative 4,186 5,263 21,007 19,820
Antitrust litigation 1,574 -- 1,574 --
Loss on excess office facilities (A) -- -- 7,098 17,207
Personnel reduction, restructuring, and related charges -- -- -- 3,595
Stock based compensation 260 398 1,120 1,328
------- ------- -------- --------
Total operating expenses 38,580 35,428 154,897 164,064
------- ------- -------- --------
Operating loss (5,304) (2,592) (20,863) (31,654)
OTHER INCOME (EXPENSE):
Interest income 878 1,508 4,251 7,483
Equity in net loss of MusicNet (1,104) (1,192) (5,378) (6,324)
Impairment of equity investments (B) -- -- (424) (5,103)
Other, net 219 (164) 1,107 3,217
------- ------- -------- --------
Other income (expense), net (7) 152 (444) (727)
Loss before income taxes (5,311) (2,440) (21,307) (32,381)
Income tax expense (16) (17) (144) (5,972)
------- ------- -------- --------
Net loss $(5,327) (2,457) $(21,451) (38,353)
======= ======= ======== ========
Basic and diluted net loss per share $(0.03) (0.02) $(0.13) (0.24)
======= ======= ======== ========
Shares used to compute basic and diluted net loss 163,755 157,528 160,309 159,365
per share
NET CASH USED IN OPERATING ACTIVITIES $(5,235) (1,599) $(9,509) (788)
</Table>
(A) The estimated loss on unoccupied excess office facilities represents the
loss from rent payments, net of sublease income, over the remaining life of
the lease.
(B) 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)
<Table>
<Caption>
December 31, December 31,
2003 2002
------------ ------------
(in thousands)
ASSETS
Current assets:
Cash, cash equivalents and short-term investments $373,593 $309,071
Trade accounts receivable, net of allowances for doubtful
accounts and sales returns 10,618 6,560
Prepaid expenses and other current assets 8,879 7,278
----------- -------
Total current assets 393,090 322,909
Equipment and leasehold improvements, at cost:
Equipment and software 37,110 27,536
Leasehold improvements 26,085 25,227
----------- -------
Total equipment and leasehold improvements 63,195 52,763
Less accumulated depreciation and amortization 33,258 22,718
----------- -------
Net equipment and leasehold improvements 29,937 30,045
----------- -------
Restricted cash equivalents 19,953 17,300
Investments 34,577 29,196
Goodwill, net 97,477 60,077
Other intangible assets, net 1,065 848
Other 4,840 1,726
----------- -------
Total assets $580,939 $462,101
=========== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $6,865 $7,830
Accrued and other liabilities 39,400 31,083
Deferred revenue, excluding non-current portion 31,186 31,771
Accrued loss on excess office facilities, excluding
non-current portion 4,960 3,825
----------- -------
Total current liabilities 82,411 74,509
----------- -------
Deferred revenue, excluding current portion 4,561 12,446
Accrued loss on excess office facilities, excluding
current portion 24,099 22,110
Deferred rent 3,382 3,271
Convertible debt 100,000 --
Total shareholders' equity 366,486 349,765
----------- -------
Total liabilities and shareholders' equity $580,939 $462,101
=========== =======
</Table>
REALNETWORKS, INC. AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL INFORMATION
(UNAUDITED)
<Table>
<Caption>
Quarter Ended Quarter Ended Quarter Ended
December 31, September 30, December 31, Year Ended December 31,
------------- -------------- -------------- -----------------------
2003 2003 2002 2003 2002
------------- -------------- -------------- ---------- -----------
(in thousands)
NET REVENUE BY TYPE:
Consumer products and services (A) $ 41,214 36,377 32,379 $143,649 113,538
Technology products and services (B) 12,842 15,432 13,832 58,728 69,141
------------- -------------- -------------- ---------- -----------
Total net revenue $54,056 51,809 46,211 $202,377 182,679
============= ============== ============== ========== ===========
NET REVENUE OF CONSUMER PRODUCTS AND SERVICES:
Subscriptions (C) $30,075 27,909 22,677 $107,093 75,497
E-commerce and other (D) 11,139 8,468 9,702 36,556 38,041
------------- -------------- -------------- ---------- -----------
Total consumer products
and services revenue $41,214 36,377 32,379 $143,649 113,538
============= ============== ============== ========== ===========
NET REVENUE FOR SELECTED CONSUMER PRODUCTS AND SERVICES
Music (E) $7,937 4,655 416 $15,093 960
Games (F) 3,930 3,150 1,998 12,162 7,794
NET REVENUE BY GEOGRAPHY:
United States $40,175 37,660 33,699 $147,613 132,009
Europe 8,492 8,710 6,706 32,106 27,019
Rest of world 5,389 5,439 5,806 22,658 23,651
------------- -------------- -------------- ---------- -----------
Total net revenue $54,056 51,809 46,211 $202,377 182,679
============= ============== ============== ========== ===========
SUBSCRIBERS (PRESENTED AS GREATER THAN)
Total 1,300 1,150 900
Music 350 250 75
</Table>
(A) Revenue is derived from consumer digital media subscription services, Real
Player 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 Real Player 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 RadioPass and Rhapsody subscription services and
sales of music content
(F) Revenue is derived from the GamePass subscription service, sales of games
and advertising generated from our games and game related Web sites