Investors Tune Out of RealNetworks

The digial media outfit issues a tepid forecast, sending the stock down nearly 16%

With cash in hand, RealNetworks Inc. (RNWK) has been able to buy other businesses recently, as the digital media company pushes ahead with its quest to keep growing sales. But now the question is what happens in 2007 as a result. Investors unloaded the stock on Feb. 15 after the Seattle company dashed investor hopes with its sales forecast, sending it down 15.9% to $8.97 on the Nasdaq.

RealNetworks said its revenue grew to $125.6 million during the three months ended Dec. 31, up 50% compared to the same period of 2005, according to a press release Feb. 14. For the full year 2007, RealNetworks expects sales in the range of $540 million to $560 million, which represents around 37% to 42% growth over 2006. But the mean analyst forecast had been for revenue of $572.6 million, according to the San Francisco research firm StarMine, which aggregates data from Thomson Financial.

Wall Street had expected more from RealNetwork's plan announced in September to buy an 85% stake in the Seoul ringtone provider WiderThan Co. for $350 million. Some were betting that the company could grab customers who are beginning to use digital media in devices besides the personal computer (see 11/07/2006, "RealNetworks Profit Plays Well on Street").

While the fourth quarter 2006 does include two months of revenue totaling $26.7 million from the WiderThan acquisition, RealNetworks is now recording about $5 million less in 2007 than if WiderThan had remained a stand-alone company "as a result of purchase price adjustments," the company said in the press release.

For the first quarter of 2007, RealNetworks expects revenue in the range of $122 million to $126 million and earnings per diluted share of 16-18 cents. It forecasts earnings to range between 18-23 cents per share for the entire year 2007.

A few analysts downgraded RealNetworks shares on after the company tempered its growth forecast. Pacific Growth analyst J. Derrick Wood cut his recommendation on the stock to neutral from buy on lower growth expectations, and his belief that company's new partner initiatives could take some time to materialize.

In another example of the response from the market, Standard & Poor's Equity Research analyst Scott Kessler, feeling less optimistic about WiderThan's impact on RealNetworks' earnings for 2007, lowered his 12-month target price on the stock to $11 per share from $13. He kept a hold opinion on the stock (S&P, like, is owned by The McGraw-Hill Companies).

RealNetworks' net income for the fourth quarter amounted to $39.3 million, compared to $295.6 million during the same period of 2005. Both periods' results include one-time items such as the legal settlement of an antitrust spat with Microsoft (MSFT).

On a brighter note, the company still has cash to deploy for future growth. As of Dec. 31, 2006, RealNetworks had about $679 million, including the proceeds from $100 million of convertible debt. The company has managed to build its music subscription and casual and mobile games business with acquisitions in recent years, according to Morningstar. Examples include RealNetworks' $21 million acquisition of the European gaming concern Zylom (see, 02/15/2006, "RealNetworks Is Game for Games").

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