Profit Jumps at RealNetworks

Updated from 4:39 p.m. EST

RealNetworks (RNWK) beat the Street's targets for its third-quarter earnings and revenue on Monday and offered a rosy sales outlook for the end of the year.

Shares of the Seattle-based digital-media firm pushed higher after hours, adding 52 cents, or 4.8%, to $11.39 in late trading.

Revenue for the quarter totaled $93.7 million, rising from $82.2 million in the same period a year ago. Games posted the biggest jump in sales, soaring 53% to $22.5 million from the year-ago quarter. Music revenue was $30.4 million, up 16%.

Net income rose to $42.2 million, or 24 cents a share for the third quarter, from $11.2 million, or 6 cents a share, in the third quarter of 2005.

Analysts polled by Thomson First Call expected the company to earn 22 cents a share on sales of $92.7 million.

Excluding items like the impact of its agreement with Microsoft (MSFT), equity investment gains, stock-based compensation expenses, and taxes related to these items, Real earned $8.7 million or 5 cents a share, vs. $6.3 million, or 3 cents a share in the year-ago quarter.

In an interview and a later call with analysts, CEO Rob Glaser highlighted several strategic moves in the quarter, including the company's 95% majority stake in Seoul, Korea's WiderThan, which sells ring-back tones and music to cell-phone customers.

"We think it sets us up very well for future growth in music," Glaser said in an interview.

In its partnership with SK Telecom, WiderThan has over 40% of the market for ring-back tones in Korea, Glaser said. WiderThan's penetration in the U.S. market is about 5% for ring-back tones, with plenty of room for growth.

WiderThan also provides "V Cast," the music-on-demand feature for Verizon (VZ).

During the quarter, Real also announced several new partnerships related to its Rhapsody music service, including a deal with SanDisk (SNDK), which integrated the music service into some of its Sansa MP3 players; Real is also working with SanDisk and Best Buy (BBY) on an online music store.

"I can't think of better go-to-market partners than SanDisk and Best Buy," Glaser said.

Rhapsody is also integrated into Sonos, a high-end wireless music system designed to play music anywhere in the home by remote control.

These deals will help the company grow its music business over the long term, Glasner said: "We're not running a sprint, we're running a marathon."

"Our games business continues to rock and roll," he added.

For the fourth quarter, Real expects revenue between $117 million and $123 million, including $22 million to $24 million from two months of WiderThan sales.

Net income will range from 18 cents to 21 cents a share, the company said, and adjusted net income will be flat to three cents.

For the full-year 2006, Real anticipates revenue between $387 million and $393 million, including the WiderThan contribution. The company should post a profit of 77 cents to 80 cents a share and between 9 cents and 12 cents a share when adjusted for items.

Pro forma net income for the final-quarter and full-year's results excludes $2.7 million in charges related to its WiderThan acquisition.

Analysts forecast an EPS of 22 cents for the fourth quarter on $99.5 million in sales. For the full year, the consensus estimate pegs the digital-media firm for 80 cents a share on sales of $368.3 million.

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