RealNetworks Rises on Results

The digital-entertainment provider spikes on a favorable earnings report.
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Shares of

RealNetworks

(RNWK) - Get Report

jumped Tuesday, a day after the company

beat Wall Street projections for its top and bottom lines.

The Seattle based digital media company recently rose 7.7%, or 84 cents, to $11.71. The stock was changing hands at more than triple the usual volume.

Real posted third-quarter revenue of $93.7 million, up from $82.2 million year over year, and besting the $92.7 million expected by analysts.

Net income was $42.2 million, or 24 cents a share, from $11.2 million, or 6 cents a share, in the year-ago quarter, beating analysts' projections by 2 cents.

In an interview after the results, CEO Rob Glaser touted the quarter's strong strategic wins, and analysts agreed.

"Strategically, the period marked perhaps the most significant events in recent years: the rollout of the integrated

SanDisk

(SNDK)

Sansa-Rhapsody portable player, and the deal for WiderThan with its ringback tones and music-on-demand services for mobile," wrote Leland Westerfield of BMO Capital Markets.

He has an outperform rating on the stock, and his firm makes a market in Real.

Darren Aftahi of ThinkEquity lifted his rating on the company from accumulate to buy, and raised his price target to $13. ThinkEquity makes a market in Real.

"With the acquisition of

WiderThan

basically complete, we believe Real is the best way for investors to play diversified digital and mobile media going forward," Aftahi wrote in a Tuesday note.

"Real is building a high-margin, recurring services business model, that, in our view, is well positioned to capitalize on consumers migrating their digital media consumption habits beyond the PC and MP3 players," he wrote.

In-game advertising and the company's entry into the Chinese gaming market helped the gaming division post a 53% jump in sales, year over year. The consumer software business did well thanks to SuperPass subscribers watching

Big Brother

online, Aftahi wrote.

Westerfield said that the testing of in-game ads has the potential for new revenue from the company's 750,000 daily game downloads.

While music subscriber growth missed his projections, Afthai believes that the company's

relationship with consumer electronics giant

Best Buy

(BBY) - Get Report

will help boost Real's music business starting in the first quarter of 2007.

Analysts said that marketing efforts were focused more on the Best Buy and SanDisk deal during the quarter, rather than targeted toward accumulating Rhapsody subscribers.

Other promising signs for Real's music business include

Apple's

(AAPL) - Get Report

,

Microsoft

(MSFT) - Get Report

choosing to adopt a closed digital rights management system for its new Zune music player.

Aftahi said that handset manufacturers and carriers will be looking for licensing partners for mobile music, and Real has an opportunity to step in with its Rhapsody service.

"We continue to recommend investors buy RealNetworks based on a compelling valuation, a broad suite of digital entertainment offerings, and attractive positioning with cable, telco and cellular service providers, and as an independent software and service partner for CE

consumer electronics device manufacturers," Mark Harding, an analyst with Maxim Group, wrote in a Tuesday note. His firm expects to receive or intends to seek banking compensation from Real in the next three months.

For the fourth quarter, Real said revenue will be 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 breakeven to 3 cents.

That bests the average analyst forecast of an EPS of 22 cents on $99.5 million in sales.

For the full-year 2006, revenue will range from $387 million and $393 million, including WiderThan. The company expects a profit of 77 cents to 80 cents a share and between 9 cents and 12 cents a share when adjusted for items.

The consensus estimate is 80 cents a share on sales of $368.3 million.