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RealNetworks falls after warning, downgrades

The maker of Internet media player software plunges after its first profit warning in 12 quarters as a public company.

Stock price from December 1999 to present.  
Source: Prophet Finance
RealNetworks, a maker of Internet media player software, plunged Thursday after its first profit warning in 12 quarters as a public company.

Analysts were mixed in their reviews of the company's fourth-quarter outlook.

RealNetworks shares were down $4.38, or 44 percent, at $5.56 by the 1 p.m. PST close of regular trading. Its stock has seen an 83 percent drop in price since July.

On Wednesday, the company revised its fourth-quarter revenue downward to between $58 million and $60 million and its earnings to 2 cents a share. The company cited a soft advertising market and credit issues among clients but not a decline in demand for its products.

Analysts were mixed on the news, with most finding the company's cash position and leadership in streaming media as positives for the long run.

CIBC Oppenheimer analyst John Corcoran downgraded the stock from "buy" to "hold" and provided the grimmest outlook for RealNetworks.

Among his conclusions, Corcoran found that the effects of the Internet advertising crunch will be felt throughout all of 2001, and RealNetworks' ad revenue will remain under pressure for the next four quarters. He said that the streaming media industry is developing more slowly than anticipated, and few companies have developed sustainable business models based on streaming content.

Corcoran also found that there is further risk to the company's revenue and pro forma earnings-per-share estimates for 2001. He said there are no major catalysts that will move the stock in the next several quarters.

The analyst took issue with the company's statement that demand for streaming content is higher and that RealNetworks is "pumping out more bits" than ever. He said the view is "difficult to reconcile with the fact that the company has effectively lowered guidance twice in the past two months."

"In our view, the problem is that most of the 170 million consumers who comprise the company's user footprint paid nothing for the client software and pay nothing for the streaming content they enjoy," Corcoran said in his research note. The company will need to diversify revenue, reduce its exposure to online advertising, and have a sustainable business model before it sees improvements, he added.

Credit Suisse First Boston analyst Heath Terry also downgraded the stock to "hold."

Terry said the long-term outlook for RealNetworks was unchanged, but "it is clear that the current market environment makes it virtually impossible to project with any certainty the near-term trajectory for revenue and earnings." He added that he "plans to return to a more positive opinion once visibility becomes less of a question."

Another downgrade came from Raymond James analyst Phil Leigh, who lowered the company to "market perform" from "strong buy," based on the profit warning, sluggish software sales, and lack of improvement in its earnings comparisons for the next year.

On a positive note, Leigh said he continues to believe that "the future Internet will be videocentric, and no company is more intensely focused or better positioned to capitalize on the opportunities than is RealNetworks."

Bear Stearns analyst Robert Fagin reiterated an "attractive" rating and said the company's fourth-quarter shortfall was surprising, even though he had anticipated numbers for fiscal 2001 to be below the company's estimates.

Fagin lowered his 2001 revenue targets from $325.3 million to $273.8 million, below management's expectation of $300 million. He also lowered earnings from 23 cents a share to 16 cents a share.

UBS Warburg analyst Michael P. Wallace was more optimistic and reiterated a "buy" rating. He recommended "buying on weakness," considering the company "has $2 (per share) in cash, is profitable, and is a primary beneficiary of broadband."

He also saw the company's "GoldPass" product as a positive, as it is rapidly gaining traction.

He reduced estimates for the fourth quarter and the next four years; he also lowered his price target to $20 from $50.

"This company will grow with broadband, and $6 is too low for a high-quality company like this, in our opinion," Wallace added.