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RealNetworks hits lowered 4Q targets; cuts 2001 outlook

RealNetworks hit analysts’ reduced profit estimates in its fourth quarter Tuesday but slashed its sales and earnings estimates for the first quarter and fiscal 2001.

The provider media streaming software posted a profit of $3.9 million, or 2 cents a share, on sales of $58.2 million.

First Call Corp. consensus pegged RealNetworks for a profit of 2 cents a share on sales of $60.7 million following its profit warning earlier this quarter.

Analysts originally forecast a profit of 4 cents a share in the quarter.

RealNetworks (Nasdaq: RNWK) shares closed off 38 cents to $10.75 ahead of the earnings report.

The $58.2 million in sales represents a 34 percent improvement from the year-ago quarter when it pocketed $6.6 million, or 4 cents a share, on sales of $43.5 million.

For the fiscal year, RealNetworks earned $30.9 million, or 18 cents a share, on sales of $241.5 million compared to a profit of $10.5 million, or 6 cents a share, on sales of $131.2 million in fiscal 1999.

During a conference call with analysts Tuesday, Chief Financial Officer Paul Bialek told analysts to expect total sales of between $240 million and $260 million in fiscal 2001, down from current consensus estimate of $297 million.

“Longer sales cycles for our systems software and weak advertising demand will have an impact on our financial results in the first quarter and in fiscal 2001,” Bialek said. “In light of the current economic environment, we’re taking a conservative stance as far as our outlook and our operating expenses.”

Bialek said RealNetworks will likely earn between 9 cents and 11 cents a share in the fiscal year, below the current estimate of 15 cents a share.

In the first quarter, it now expects sales in the neighborhood of $50 million to $52 million and earnings of around 2 cents a share. Analysts were projecting sales of $60 million and a profit of 3 cents a share.

“This is not a case of us losing design wins,” Bialek said. "We expect to post sequential revenue growth of between 12 percent and 15 percent through fiscal 2001."

Gross profit margins in the quarter came in at 82.1 percent. The company exited the quarter with more than $380 million in cash and short-term investments.

“Bumps in the road not withstanding, we’re very happy about the accomplishments we’ve made in 2000,” Chief Executive Officer Rob Glaser said during the conference call.

RealNetworks shares came under fire last week after Merrill Lynch analyst Henry Blodget downgraded the stock on valuation concerns as well as recent data suggesting the company was losing market share to Microsoft.

Blodget cut RealNetworks from an “accumulate” recommendation to a “hold,” citing the growing popularity of Microsoft’s (Nasdaq: MSFT) Windows Media Player and its pricey valuation, currently around 86 times its projected earnings for 2001.

"We continue to believe there is a significant risk that Microsoft will do to RealNetworks what it did to Netscape -- take over the market by bundling functionality in larger products and giving it away for free,” Blodget wrote in a research note.

According to Media Metrix data, RealNetworks’ share of media streaming software usage fell 10 percent in the second half of 2000 while Microsoft’s Windows Media Player share increased 30 percent.

RealNetworks client software has lost share to Microsoft over the last six months," Blodget said. "This is a major concern -- RealPlayer usage drives about 80 percent of revenue, indirectly and directly."

CS First Boston analyst Heath Terry wasn’t buying Blodget’s Netscape analogy.

“Microsoft’s been doing this for three years and it still hasn’t had any real effect,” Terry said last week. “I’m surprised it still gets brought up. Sure, Microsoft is a competitor but the dynamics of streaming media are significantly different than those of a browser. I think that’s a weak argument.”

Last quarter, RealNetworks met analysts’ estimates when it posted a profit of $7.6 million, or 4 cents a share, on sales of $67.1 million.

Company executives told analysts it expects to add 100 basis point to its operating margins each quarter in 2001.

RealNetworks fell from around $30 a share in October to a 52-week low of $5.19 in December. The stock traded as high as $96 a share in. February.