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THE DAY AHEAD: RealNetworks looks for &#039catalyst&#039 as investors fret

COMMENTARY -- Wanted: Catalyst to move shares of a profitable Internet company with dominant position in streaming media. Poised to take advantage of broadband technology. If you find such a catalyst contact RealNetworks CEO Rob Glaser immediately.

Glaser and his crew at RealNetworks (Nasdaq: RNWK) haven't floated that mock help wanted ad just yet, but don't be surprised if they do sometime. You may even be seeing shares of RealNetworks on a milk carton somewhere (chart).

So what's ailing RealNetworks, which bounced off a 52-week low Monday?

Analysts have a standard reply: Shares need a catalyst. Don't expect the company's third quarter earnings after the bell Tuesday to do the trick either. Wall Street is expecting revenue of about $67 million and a profit of 4 cents a share. "Modest upside" is likely.

It's not hard to find analysts pushing the catalyst theory. Listen to Friedman Billings Ramsey analyst Rob Martin. "RealNetworks needs a catalyst event," he said. "Converging file formats, a production deal to take streaming to the next level or even the next 'Survivor.'"

Or listen to Adam Holiber, an analyst with Wedbush Morgan Securities. "There's no specific event to move the stock," he said.

Handicapping RealNetworks

Turns out RealNetworks fired all of its buzz bullets early in 2000. The company announced deals with America Online, Nokia and Hewlett-Packard, and shares soared to a high in February. This quarter, however, RealNetworks has been walloped. Since Sept. 1, RealNetworks is down about 40 percent. The Nasdaq is off 21 percent in that same time frame.

Without any concrete news, investors reckoned they'd make up something to talk about.

First, there's the misguided worries about slowing online advertising growth hurting RealNetworks. For the third quarter, Bill Lennan, an analyst at W.R. Hambrecht, is predicting $40 million in software revenue, $14 million in services and $13 million in advertising, 60 percent, 21 percent and 19 percent, respectively. RealNetworks was whacked last Friday after Yahoo! (Nasdaq: YHOO) and DoubleClick (Nasdaq: DCLK) stoked fears about online advertising.

The catch is that only 30 percent of RealNetworks' ad revenue is derived from banners. And that percentage is expected to fall this quarter. Streaming media ads are RealNetworks' game. "Those rates are 10 times that of banners," said Holiber.

Then there were rumors that RealNetworks would talk down expectations for upcoming quarters. Most analysts expect the company to be optimistic about upcoming quarters, but not ebullient.

Using his proprietary research, Lennan said RealNetworks will deliver a good quarter.

"During Friday's large decline in RNWK shares, CFO Paul Bialek returned our calls with usual promptness. While the time it takes a CFO to return phone calls is not a common investor metric, we suggest that such responsiveness is more highly correlated with a company about to report a strong quarter," wrote Lennan in a research note.

Who says those analysts don't dig deep?

Looking long-term

Despite the short-term hiccups in RealNetworks' shares, analysts are bullish that the profitable company will make buy-and-hold investors happy.

Holiber said RealNetworks has been hit by shareholder turnover as the "get rich quick" investors bail on the stock. As these momentum-happy investors jump ship, the alleged smart money is hopping in. Shareholder turnover may be the biggest reason for RealNetworks' dip from $35 to the $20s.

"The company is morphing and developing multiple, sustainable revenue streams," said Holiber, who considers the stock a long-term buy. "Everyone wants the big, fast thing, but RealNetworks is a durable Internet leader."

Nevertheless, RealNetworks has to allay investors' worries.

For starters, RealNetworks needs to give guidance on how the company's deals with AOL, HP and Nokia are going to boost sales. Growth will be a big worry on RealNetworks' conference call.

RealNetworks' third quarter is the first without licensing revenue from Microsoft (Nasdaq: MSFT), which licensed RealNetworks technology for the last three years. Without Microsoft's licensing revenue, RealNetworks' sequential sales growth will be roughly 7 percent. If you back out Microsoft's revenue, sequential growth will be about 12 percent, said Lennan.

Analysts across the board said that the Microsoft revenue slippage "is not news," but investors may be rattled anyway.

The other major topic facing RealNetworks is the same item that's been trailing the company for years -- competition. Some analysts said they expected Microsoft to continue to gain market share in media players and streaming media servers. Apple (Nasdaq: AAPL) is also in the mix and gives away its player. The common fear is that RealNetworks will be Netscaped by Microsoft.

On the portal side, RealNetworks will face competition from Yahoo! (Nasdaq: YHOO), which is increasingly going broadband. And speaking of broadband, RealNetworks is also hostage to the rollout schedule of high-speed services.

The concerns surrounding RealNetworks have been there from day one and the company has delivered. Analysts don't expect that to change. "It's easy to lose sight of things without a specific short-term catalyst," said Holiber.TDAIN