Same Old Story
Early Wednesday afternoon, shares in RealNetworks -- the company whose technology underlies most audio and video streamed over the Internet -- were trading at $15.13, down $6.56, or 30.3%. The company's shares had been down as much as 51% in the morning. This happened though RealNetworks reported third-quarter earnings of 4 cents a share, matching the
consensus of analysts, on revenue of $67.1 million. The culprit? A weak fourth-quarter revenue forecast.
The violent reaction reflects once again how current, unpleasant realities in the Internet advertising market are obliterating optimism about the future of the Internet. RealNetwork stands to be a huge beneficiary of the expected growth of music and video transmission over the Internet, as well as the widespread adoption of high-speed Internet connections to the home.
But in the meantime, the advertising market is shaky. And though that amounts to only 20% of RealNetworks' revenue stream, that's what investors were fixating on.
In a clear sign of the troubles in the Internet ad market, RealNetworks disclosed that $3 million of advertising revenue that the company had in the third quarter wouldn't show up in the fourth quarter, because sponsorship contracts negotiated a year ago were being renewed at much lower rates. In RealNetworks' postearnings conference call with analysts, Chief Financial Officer Paul Bialek acknowledged that the company, which makes revenue from software licenses and service fees along with ad sales, is noticing the effect of financial problems among dot-coms. Some real and potential customers went out of business, others are in difficult financial situations, and it's taken longer for the company to close sales with some customers than it has in the past, Bialek said.
Because of the sponsorship weakness, Bialek said RealNetworks expects advertising to be sequentially down in the fourth quarter of the year, and he suggested that the impact of the overall downturn for RealNetworks, which has regularly exceeded Wall Streets financial expectations in the past, was to limit the traditional surpassing of analysts' estimates. "The capital markets have taken the upside off the table," Bialek said.
But RealNetworks sought to minimize the damage of the bad news. The company expects growth in revenue and operating income, and an improvement of one percentage point in its operating margin in the fourth quarter. "Overall guidance does not change," Bialek said.
In addition, CEO Rob Glaser pointed out that traditional banner advertising revenue amounted to only 6% of total revenue for the quarter. Some 70% of the $13.5 million in advertising revenue that RealNetworks reported for the quarter, said Glaser, is "rich media advertising" -- essentially, the radio- and TV-like ads that the company can run as part of streamed programming. And that rich media advertising, where RealNetworks and its backers see the future of the firm's ad revenue growth, is frequently selling out, Glaser said. "We feel very good, both in terms of the level of demand, and what it actually delivers for advertising," he said. Ad revenue for the third quarter amounted to 20% of RealNetworks' total revenues -- another sign that Net advertising isn't the company's lifeblood.
The sell-side analysts who follow RealNetworks appeared to be taking the company at its word Wednesday morning; several tweaked their revenue projections for the company, but there was no chorus to abandon ship.
Except, that is, among stockholders.