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RealNetworks on the mend, posts first profit

After watching its stock skyrocket since February, the Seattle-based company gets further vindication, climbing into the black for the first time.

Less than a year ago, Web audio and video software developer RealNetworks was reeling from a nasty run-in with Microsoft and was written off by almost everyone.

What a difference a year makes.

After watching its stock skyrocket since February, the Seattle-based company received further vindication today, climbing into the black for the first time. RealNetworks reported net income of $4.4 million, or 5 cents a share, excluding an acquisition charge. Including the charge, the company earned $3 million, or 3 cents a share, on revenue of $34.9 million, up from $17.7 million a year earlier.

The company was expected to earn 4 cents a share, according to First Call, which tracks the average of financial analysts' earnings estimates.

The profitability milestone comes nearly a year after RealNetworks engaged Microsoft in a high-profile wrestling match over distribution. RealNetworks' CEO, Robert Glaser, who had left a 10-year Microsoft career to sign on with the start-up in 1994, alleged during a Senate hearing that Microsoft's Windows Media Player "broke" RealNetworks' G2 player. Microsoft attributed the problem to a bug.

A few months later, in November 1998, Microsoft divested its 10 percent stake in RealNetworks, sending RealNetworks' stock into a tailspin. Many predicted doom for the start-up.

But demand for Web media, mainly from Web music files in the popular MP3 format, has opened doors for RealNetworks, according to analysts. In the spring, the company released RealJukebox, its most aggressive play to capture the growing popularity of music downloads.

RealJukebox is an application that converts, or "rips," CDs and translates them into a digital file format. It also automatically enters information such as song title and artist into a manageable database for music downloaded from the Internet or CDs.

"RealNetworks has the best product, and they have an innovative lead," said Greg Vogel, an equity analyst at Banc of America Securities. "I think they've shown that you can compete with Microsoft."

That's an understatement.

Shares of RealNetworks have risen exponentially during the year, reaching as high as 131.87 from a low of 15.81 during the 52-week period.

RealNetworks' stock took off when rumors circulated that Web portal Yahoo was in talks to acquire Broadcast.com, which aggregates streaming audio and video Web sites. On the day Yahoo agreed to acquire Broadcast.com in April for $5.7 billion, RealNetworks jumped 23.06 points to 145.25 on speculation that it had become a much sought-after acquisition target.

Over the course of the year, record companies and technology firms have embraced one another at a rapid clip. As the industries get closer, RealNetworks could be poised for many opportunities, analysts said.

"The music labels are not threatened by RealNetworks," said Martin Pyykkonen, an equity analyst at CIBC World Markets. "[The Record labels] see [RealNetworks] as an ally to help figure out a way to deliver music digitally without cannibalizing their revenues."

Bloomberg contributed to this report.