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Real warns of second-quarter loss

The company blames its revised outlook on weakness in its software systems business, due largely to some companies reducing or delaying their IT spending.

RealNetworks warned Wednesday that lower-than-expected revenue will cause it to post a net loss in the second quarter.

The company blamed its revised outlook on weakness in its software systems business, due largely to some companies reducing or delaying their information technology spending. Through its systems business, RealNetworks licenses servers to companies, allowing them to stream and deliver audio and video files.

RealNetworks expects second-quarter revenue for the period ending June 30 to be between $42.5 million and $45 million, compared with $47.2 million for the first quarter. As a result, the company said it expects to post a net loss of between 1 cent and 2 cents per share for the latest quarter.

"While we are disappointed with the expected results of our systems business, they reflect a trend that several others in the industry are seeing as well," RealNetworks Chief Executive Rob Glaser said in a statement. "On the other hand, our consumer subscription business continues to show strong growth."

RealNetworks said its premium subscription service now has more than 700,000 paying subscribers, compared with 600,000 announced in April.

Chris Kwak, an analyst with investment bank Bear Stearns, said the weakness in RealNetworks' system software business comes as no surprise, given that enterprise software sales in general have been lackluster in the second quarter.

RealNetworks' software business has been on a long decline since the Net's heyday, when it used to generate about $40 million in revenue per quarter, he said. In the fourth quarter of 2001, enterprise revenues declined to $24 million. In the first quarter of 2002, RealNetworks saw sales increase about 1 percent, but the company continues to lose market share to deep-pocketed rival Microsoft.

"Frankly, the enterprise market is a market they can't win...Microsoft always gets to parity with streaming technology, and it's essentially free; that's not a battle that Real is likely to win," Kwak said.

On a conference call with analysts, RealNetworks CFO Brian Turner would not break out the expected loss from the systems business, but he said consumer sales--in terms of advertising--have been on track.

"I can't quantify the systems (business), but the consumer (side) has met its part in terms of advertising. And the rest reflects weakness in software," Turner said.

Glaser also said the company is well-positioned for long-term growth.

Pulling rank
RealNetworks has been fighting shifting perception in the streaming media market that casts Microsoft's Windows Media as the most popular media format with visitors at work. Web measurement company Nielsen/NetRatings in the last week issued a new report on multimedia player formats that shows RealNetworks as the front-runner with at-home audiences and in second place at work--a downgrade from its position under earlier methodology from Nielsen/NetRatings.

But Glaser debunked the latest report.

"We are in a strong position from a share standpoint in the U.S. and most major marketplaces in the world," Glaser said. "You have to look at a lot of this data and drown them in cold water. We look forward to the day where there's good methodology and...less confusion on this."

He went on to say that there is not a direct link between measurement figures and the decline in the systems business. The business, he said, has been hobbled by cautious spending rather than buyers feeling less compelled to stream in RealNetworks.

Bear Stearns' Kwak said that in the short term, investors should be encouraged by the growing media and technology business RealNetworks is carving out for itself. By lining up 100,000 new subscribers in a quarter, bringing its total paying customers to 700,000, the company is looking at a roughly $70 million business this year. He bases this figure on an average expenditure of $8 a month per subscriber.

"Investors have given up on the software component to RealNetworks; they look at consumer subscriptions as the real opportunity--merging with Sony and AOL as a media-technology entity," Kwak said. "If they get a million subscribers this year, which means reoccurring revenue, that's a pretty good business."

Longer term, however, RealNetworks may run into trouble, especially if it loses exclusive contracts with the likes of Major League Baseball to stream live games over broadband. At the moment, RealNetworks has a competitive advantage in offering premium streaming content. But if some of its content partners decide they want greater distribution through Windows Media or Apple Computer's QuickTime, the value of the company's service could become diluted.

RealNetworks will announce second-quarter financial results July 16 after the market closes.

News.com's Jeff Pelline contributed to this report.