RealTime IT News

RealNetworks' Very Real Roll

The stocks of a number of leading Internet companies have gone cold as winter sets in on Wall Street, most notably America Online Inc. (AOL)and CMGI (CMGI), both of whose shares are down about 20 percent since Dec. 31.

RealNetworks (RNWK), in contrast, has been on fire. Shares were trading Wednesday afternoon at 178, up nearly 13 percent from Tuesday's close and 48 percent -- and still climbing -- since the beginning of the year.

The recent surge is being sparked by Tuesday's release of another stellar earnings report, showing that the multimedia streaming multimedia software king earned $6.1 million, or 7 cents per share, in the fourth quarter of 1999, topping consensus street estimates of 5 cents per share. The Seattle-based company also announced a 2-for-1 stock split.

It was the second consecutive profitable quarter for RealNetworks, and it capped off the company's first profitable year since being founded in 1994 as Progressive Networks by CEO and former Microsoft executive Rob Glaser. RealNetworks reported annual net income for 1999 of $8.3 million, or 10 cents a share (excluding a $1.4 million acquisition charge), versus a pro forma net loss in 1998 of $11.2 million, or 17 cents a share.

Tuesday's earnings report was just the latest good news this month for the company and its investors. On Jan. 13, RNWK shares rose after a Deutsche Banc Alex. Brown analyst issued a "strong buy" recommendation and an 18-month price target of $250 per share.

A week earlier, news that RealNetworks had struck partnership deals with Sony and Universal Music Group boosted shares. And two days before that, on Jan. 5, RealNetworks extended its agreement with Yahoo! in which the portal giant would continue to use the company's streaming software.

That last deal effectively lifted the temporary shroud of uncertainty surrounding RealNetworks in December when investors began hearing that Microsoft's rival Windows Media technology was rapidly gaining market share. One specific rumor of great concern was that Yahoo was going to dump RealNetworks as its preferred streaming technology provider when their contract expired on Jan. 1.

But RealNetworks is in no danger of losing its commanding lead in multimedia Internet software any time soon. The company says that more than 85 percent of all Web sites offering audio and video content use RealNetworks' RealPlayer format. And there's a good reason why. Since 1995, RealNetworks has been seeding the market and laying the groundwork for a global Internet multimedia software infrastructure by allowing millions of users to download RealPlayer and RealAudio software for free.

There are two benefits to this strategy. First, companies that want to deliver multimedia over the Internet to the largest possible audience must support the technology used by the most consumers. Second, consumers who like the free software (which ultimately expires) may be willing to pay for a premium version with more features.

Judging from revenue growth, that's exactly what is happening. Q4 sales and licensing fees soared to $43.5 million, a 111 percent jump from the $20.6 million that flowed into company coffers in Q4 '98. For all of 1999, RealNetworks had net revenue of $131.2 million, an increase of 98 percent from 1998 net revenue of $66.4 million.

The only thing that can slow RealNetworks' growth is a continued delay in the adoption of high-bandwidth access in the home. As good as RealPlayer software is, streaming video remains a painful experience on anything but the largest pipe. Many users are