WS – RNWK's latest 10-Q spells out why I like it. This isn't an E-tailer or a portal, it's a software company with high margins and outstanding growth. Now that is has escaped MSFT's shadow, RNWK is becoming the audio standard for the Web. The future is in streaming software servers and service revenues from the growing installed base.
Put that together with a big pile of cash and I think you have a winner. I am hoping I can buy RNWK on a pullback into the 20's if the Internut market obliges sometime in Q1 1998.
As far the chart, “toppy” is one interpretation, but “base-building” is another. RNWK hasn't had a definite breakout yet (like CMGI, AOL, etc.). I expect one sometime in 1999.
RESULTS OF OPERATIONS
REVENUES
Software License Fees. Software license fees were $12,413,000 for the quarter ended September 30, 1998, an increase of 66% from $7,480,000 in the comparable quarter of the prior year. Software license fees were $32,627,000 for the nine months ended September 30, 1998, an increase of 86% from $17,550,000 in the comparable period of the prior year. The increases were due primarily to a greater volume of products sold as a result of growing market acceptance of the Company's products, the introduction of new products, successful product promotions and increased sales from electronic distribution. In addition, in June 1997, the Company entered into a $30,000,000 license agreement with Microsoft. The agreement requires the Company to provide Microsoft with engineering consultation services, certain error corrections and certain technical support over a defined term. The Company recognizes revenue from the agreement over the three-year term of the Company's ongoing obligations. Included in software license fees for each of the quarters ended September 30, 1998 and 1997 was $2,417,000 related to the Microsoft license agreement. Included in software license fees for the nine months ended September 30, 1998 and 1997 was $7,251,000 and $2,417,000, respectively, related to the Microsoft license agreement.
Service Revenues. Service revenues were $3,988,000 for the quarter ended September 30, 1998, an increase of 256% from $1,121,000 in the comparable quarter of the prior year. Service revenues were $10,105,000 for the nine months ended September 30, 1998, an increase of 205% from $3,310,000 in the comparable period of the prior year. The increases were primarily due to the introduction of support and upgrade contracts for the Company's RealPlayer Plus during the fourth quarter of 1997 and a larger installed base of the Company's products. The larger installed base of the Company's products promotes increases in revenues through the purchase of support and upgrade contracts and other services performed by the Company. Service revenues for the nine months ended September 30, 1997, also included $498,000 related to the Company's RealNetworks Conference.
Advertising Revenues. Advertising revenues were $843,000 for the quarter ended September 30, 1998, an increase of 87% from $450,000 in the comparable quarter of the prior year. Advertising revenues were $2,070,000 for the nine months ended September 30, 1998, an increase of 33% from $1,557,000 in the comparable period of the prior year. The increases in advertising revenues were due to a larger sales force and greater success in attracting advertisers.
COST OF REVENUES
Cost of Software License Fees. Cost of software license fees includes costs of product media, duplication, manuals, packaging materials, royalties paid for licensed technology, and order fulfillment costs. Cost of software license fees was $2,140,000 for the quarter ended September 30, 1998, an increase of 126% from $946,000 in the comparable quarter in the prior year, and increased as a percentage of software license fees to 17% from 13%. Cost of software license fees was $5,526,000 for the nine months ended September 30, 1998, an increase of 166% from $2,080,000 in the comparable period in the prior year, and increased as a percentage of software license fees to 17% from 12%. These increases were due primarily to higher sales volumes and royalties related to new third-party technologies incorporated into the Company's products. The increases in cost of software license fees as a percentage of software license fees were due to changes in the mix of products sold.
Cost of Service Revenues. Cost of service revenues includes the cost of in-house and contract personnel providing support and other services and bandwidth expenses for hosting services. Cost of service revenues was $642,000 for the quarter ended September 30, 1998, an increase of 86% from $345,000 in the comparable quarter in the prior year, but decreased as a percentage of service revenues to 16% from 31%. Cost of service revenues was $1,918,000 for the nine months ended September 30, 1998, a decrease of 2% from $1,957,000 in the comparable period in the prior year, and decreased as a percentage of service revenues to 19% from 59%. Cost of service revenues for the nine months ended September 30, 1997, includes $1,000,000 of costs associated with the Company's RealNetworks Conference. Excluding the impact of the RealNetworks Conference, cost of service revenues was $957,000, or 34% of service revenues, for the nine months ended September 30, 1997. The increases in cost of service revenues excluding the RealNetworks Conference were primarily due to increased staff and contract personnel to provide services to a greater number of customers and increases in bandwidth expenses. The decreases in percentage terms were primarily due to economies of scale in providing support services to a larger customer base.
Cost of Advertising Revenues. Cost of advertising revenues includes personnel associated with content creation, bandwidth expenses and fees paid to third-parties for content included in the Company's Web sites. Cost of advertising revenues was $469,000 for the quarter ended September 30, 1998, an increase of 78% from $264,000 in the comparable quarter in the prior year, but decreased as a percentage of advertising revenues to 56% from 59%. Cost of advertising revenues was $1,207,000 for the nine months ended September 30, 1998, an increase of 111% from $572,000 in the comparable period in the prior year, and increased as a percentage of advertising revenues to 58% from 37%. These increases were primarily due to increases in the quality and quantity of content available on the Company's Web pages and increased costs associated with the maintenance of newly developed Web sites.
Gross margins may be affected by the mix of distribution channels used, the mix of products sold, licensed third-party technology incorporated into the Company's products, the mix of product versus services revenues and the mix of international versus U.S. revenues. If sales through indirect channels increase as a percentage of total net revenues, or sales of the Company's lower margin products increase as a percentage of total net revenues, the Company's gross margins will be adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $7,722,000 for the nine months ended September 30, 1998. Net cash provided by operating activities was $21,870,000 for the nine months ended September 30, 1997. Cash provided by operating activities for the nine months ended September 30, 1998 was due to a decrease in other receivables, an increase in accrued expenses and non-cash charges associated with depreciation and acquisition related charges, partially offset by the reported net loss. Cash provided by operating activities for the nine months ended September 30, 1997 was primarily due to an increase in deferred revenue, partially offset by the reported net loss.
Net cash used in investing activities was $17,819,000 and $22,785,000 for the nine months ended September 30, 1998 and 1997, respectively. Cash used in investing activities for the nine months ended September 30, 1998 was primarily a result of net purchases of short-term investments and purchases of equipment. Cash used in investing activities for the nine months ended September 30, 1997 was due to net purchases of short-term investments, purchases of equipment, and investment in a joint venture.
Net cash provided by financing activities was $1,345,000 and $30,980,000 for the nine months ended September 30, 1998 and 1997, respectively. Cash provided by financing activities for the nine months ended September 30, 1998 was a result of net proceeds from the sales of common stock and the exercise of stock options and warrants. Cash provided by financing activities for the nine months ended September 30, 1997 was a result of the exercise of stock options, sales of preferred stock and proceeds from a note payable.
At September 30, 1998, the Company had $98,577,000 in cash, cash equivalents and short-term investments. As of September 30, 1998, the Company's principal commitments consisted of obligations under operating leases and $996,000 in notes payable. Since its inception, the Company has experienced a substantial increase in its capital expenditures to support expansion of the Company's operations and information systems. In January 1998, the Company entered into a lease agreement for a new location for its corporate offices. The Company anticipates the new lease will require significant capital expenditures associated with leasehold improvements. In the past, the Company has completed acquisitions of businesses and technologies, and will continue to evaluate acquisitions of, or investments in, businesses, products, joint-ventures, or technologies that are complementary to the operations of the Company. Such acquisitions or investments, which the Company believes have been, and will continue to be, in the best interest of the Company, involve risks and may require additional cash investments by the Company.
Since its inception, the Company has significantly increased its operating expenses. The Company currently anticipates that it will continue to experience significant growth in its operating expenses and that such expenses will be a material use of the Company's cash resources. The Company believes that its current cash, cash equivalents, and short-term investments will be sufficient to meet its anticipated cash needs for working capital and capital expenditures for at least the next 12 months. The Company may, in the future, seek to raise additional funds through public or private equity financing, or through other sources such as credit facilities. The sale of additional equity securities could result in dilution to the Company's shareholders.
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