8-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): February 14, 2006

RealNetworks, Inc.

(Exact name of registrant as specified in its charter)

WASHINGTON
(State or other jurisdiction
of incorporation) 0-23137
(Commission File
Number) 91-1628146
(I.R.S. Employer
Identification No.)

2601 Elliott Avenue, Suite 1000
Seattle, Washington 98121
(Address of principal executive offices) (Zip code)

(206) 674-2700
Registrant’s telephone number, including area code

Not Applicable
(Former name or former address if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

TABLE OF CONTENTS

	Item 1.01 Entry into a Material Definitive Agreement
	Item 2.02 Results of Operations and Financial Condition
	Item 5.02 Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers.
	Item 9.01. Financial Statements and Exhibits
SIGNATURE
EXHIBIT INDEX
EXHIBIT 99.1

Item 1.01 Entry into a Material Definitive Agreement

To the extent applicable, the information regarding Michael Eggers disclosed under Item 5.02 is incorporated herein by reference.

Item 2.02 Results of Operations and Financial Condition

On February 14, 2006, the Company announced via press release the Company’s results for its fourth quarter and year ended December 31, 2005. A copy of the Company’s press release is attached hereto as Exhibit 99.1. The information in this Item 2.02 and the attached exhibit are furnished to, but not filed with, the Securities and Exchange Commission.

Item 5.02 Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers.

Effective February 14, 2006, Roy Goodman resigned as Senior Vice President, Chief Financial Officer and Treasurer of RealNetworks, Inc. (the “Company”), and Michael Eggers was appointed Senior Vice President, Finance, Chief Financial Officer and Treasurer of the Company. Mr. Goodman remains employed by the Company assisting with Treasury, Investor Relations and other financial functions.

Mr. Eggers, age 34, joined the Company in 1997 and served as Vice President, Finance from September 2003 to February 2006. Mr. Eggers has served in various financial leadership roles at the Company including General Manager, Finance from November 2002 to September 2003, Director of Finance and Controller from 1999 to October 2002, and Manager of Financial Reporting from 1997 to 1999.

Mr. Eggers shall receive an annual base salary of $240,000 and will be eligible to receive an annual bonus of up to 45% of his base salary based on meeting individual performance target goals. Mr. Eggers is also eligible to participate in the Company’s standard benefit plans.

In addition, on February 14, 2006, Mr. Eggers was granted an option under the Company’s 2005 Stock Incentive Plan to purchase 100,000 shares of the Company’s Common Stock having an exercise price equal to the closing price of the Company’s Common Stock on the grant date. The options will vest and become exercisable over four years, with 12.5% vesting on August 14, 2006, and an additional 12.5% vesting upon the completion of each successive six months of employment thereafter.

In the event the Company terminates the employment of Mr. Eggers without cause, if the Company and Mr. Eggers agree to extend his employment with the Company for a period of up to six months to transition his responsibilities, the Company has agreed to pay Mr. Eggers upon completion of such services a severance payment of up to six months of his then-current annual base salary.

Item 9.01. Financial Statements and Exhibits

(c) Exhibits.

Pursuant to the rules and regulations of the Securities and Exchange Commission, the attached exhibit is deemed to have been furnished to, but not filed with, the Securities and Exchange Commission:

Exhibit No.	Description
99.1	Press Release issued by RealNetworks, Inc. dated February 14, 2006.

SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

REALNETWORKS, INC.
By:	/s/ Robert Kimball
	Robert Kimball
	Senior Vice President, Legal and Business Affairs, General Counsel and Corporate Secretary

Dated: February 14, 2006

EXHIBIT INDEX

Exhibit Number	Description
99.1	Press Release issued by RealNetworks, Inc. dated February 14, 2006.

EX-99.1

Exhibit 99.1

REALNETWORKS ANNOUNCES RECORD FOURTH QUARTER

AND FISCAL 2005 RESULTS

Achieves More Than 1.4 Million Paid Music Subscribers

SEATTLE, Washington — February 14, 2006 — RealNetworks^®, Inc. (Nasdaq: RNWK), the leading creator of digital media services and software, today announced record results for the fourth quarter and fiscal year ended December 31, 2005.

“2005 was a watershed year for RealNetworks. We achieved record annual revenue, returned the company to profitability, settled our antitrust litigation in a manner that generated significant shareholder value, and dramatically grew our games business through both organic growth and acquisitions. We believe these achievements position us well for long-term growth and market leadership,” said Rob Glaser, chairman and CEO of RealNetworks. “Together with our many partners, Real offers a compelling set of best-of-breed digital media software products and digital music, video and games products to consumers wherever and whenever they want them.”

Quarterly Highlights

• Record revenue of $83.6 million

• Record net income of $295.6 million

• More than 2.25 million paid subscribers

For the fourth quarter of 2005, revenue grew 15 percent to $83.6 million compared to $72.5 million reported in the fourth quarter of 2004. For the fourth quarter, in the Consumer Products and Services segment, Music revenue was $26.1 million, a 29% increase over the fourth quarter of 2004; Games revenue was $15.7 million, a 52% increase over the fourth quarter of 2004; Video, Consumer Software and Other revenue was $22.6 million, a decrease of 10% over the fourth quarter of 2004; and Media Properties revenue was $9.0 million, a 55% increase over the fourth quarter of 2004. In the Business Products and Services segment, revenue was $10.2 million in the fourth quarter, a decrease of 8% over the same period in 2004.

During the quarter, the Company announced a series of agreements with Microsoft ending its antitrust litigation and establishing digital music and games collaboration relationships resulting in a series of payments of up to $761 million over eighteen months. During the fourth quarter, Real received $478 million in payments related to these agreements. The Company expects to receive up to $283 million in additional payments over the next five quarters. Microsoft can earn credits against its future payments as a result of delivering music users to Real through its promotional efforts.

Net income for the fourth quarter was $295.6 million, or $1.61 per diluted share, compared to a net loss of $1.0 million, or ($0.01) per share, in the fourth quarter of 2004. Included in net income was a benefit of ($434.4) million in income related to the Microsoft agreements, net of contingent legal fees and other litigation costs. Net income also included operating expenses related to the Microsoft agreements of $6.7 million for non-income related taxes and employee

bonuses; a $14.8 million donation to the RealNetworks Foundation representing five percent of after tax income in accordance with stated company policy; and an $8.5 million loss on a cancelled purchase agreement related to an element of an ongoing research and development project.

For the fourth quarter of 2005, EBITDA was $406.4 million compared to $1.4 million for the same period in the prior year. EBITDA is an alternative, non-GAAP, measure of operating results that excludes from net income expenses relating to interest, taxes, depreciation and amortization. A reconciliation of GAAP net income to EBITDA is provided in the financial tables that accompany this release.

The Company’s gross margin increased to 71 percent in the fourth quarter of 2005, as compared to 67 percent in the fourth quarter of 2004.

Operating expenses for the fourth quarter of 2005 were a benefit of ($342.8) million compared to $50.7 million for the same period in 2004. The benefit in 2005 was driven primarily by the impact of the Microsoft agreements.

For the fourth quarter, the effective tax rate was approximately 28%, impacted by the use of pre-existing tax credits and net operating loss (NOL) carry forwards.

Full Year Highlights

• Record revenue of $325.1 million

• Record net income of $312.3 million, or $1.70 per diluted share

• Up to $761 million in payments over 18 months from the Microsoft agreements

In 2005, revenue grew 22% to $325.1 million compared to $266.7 million in 2004. In the Consumer Products and Services segment, Music revenue was $97.5 million, a 50% increase over 2004; Games revenue was $56.3 million, a 63% increase over 2004; Video, Consumer Software and Other revenue was $95.0 million, a 2% decrease over 2004; and Media Properties revenue was $31.1 million, a 43% increase over 2004. In the Business Products and Services segment, revenue was $45.1 million, a 7% decrease from 2004.

Net income was $312.3 million, or $1.70 per diluted share, in 2005 compared to a net loss of $23.0 million, or ($0.14) per share, in 2004. Net income for the year included the same settlement benefit and expenses as discussed in the quarterly overview above.

For the full year, EBITDA was $431.4 million compared to ($11.6) million in 2004. A reconciliation of GAAP net income to EBITDA is provided in the financial tables that accompany this release.

The gross margin in 2005 was 70% as compared to 64% in the prior year.

Operating expenses for 2005 were a benefit of ($170.6) million compared to $192.3 million in 2004. Operating expenses were significantly impacted by the Microsoft settlement and other items as described in the quarterly net income discussion.

For the full year, the effective tax rate was approximately 27%, impacted by the use of pre-existing tax credits and NOL carry forwards. However, actual federal income taxes owed are expected to be less than $10 million due to the utilization of deferred tax assets.

As of December 31, 2005, Real had approximately $781.3 million in unrestricted cash, cash equivalents and short-term investments, which includes the proceeds from $100 million of convertible debt. In addition, the Company holds an equity investment in a public company valued at approximately $43.4 million as of December 31, 2005.

Under the Company’s stock repurchase program, approximately 3.2 million shares were repurchased for $25.0 million during the fourth quarter of 2005. For the full year, 8.6 million shares were repurchased for $54.3 million. As of December 31, 2005, approximately $75.0 million remained available under the existing stock repurchase program.

The number of shares used to compute the diluted earnings per share for the fourth quarter and full year 2005 was 183.7 million and 184.2 million, respectively.

Business Outlook

The following forward-looking statements reflect RealNetworks’ expectations as of February 14, 2006. The Company currently does not intend to update these forward-looking statements until the next quarterly results announcement.

For the first quarter of 2006, Real expects revenue in the range of $82 million to $86 million and earnings of $0.11 to $0.13 per diluted share. Operating expenses are expected to include a benefit of $40 million, or $0.22 per diluted share, in income from our agreements with Microsoft. Projected earnings also include $0.08 to $0.10 per diluted share of expenses primarily related to income from the Microsoft agreements including the following: approximately $0.01 per diluted share for non-income related taxes and employee bonuses; $0.01 per diluted share of charitable contributions representing five percent of net income; and $0.06 to $0.08 per diluted share of income tax expense which represents a tax rate of approximately 37%. In addition, Real expects to incur $0.02 to $0.03 per diluted share of non-cash stock compensation expense.

For 2006, Real expects to report revenue in the range of $365 million to $380 million and earnings of $0.75 to $0.80 per diluted share. Operating expenses are expected to include a benefit of $222 million, or approximately $1.22 per diluted share in income from our agreements with Microsoft. Projected earnings also include $0.51 to $0.55 per diluted share of expenses primarily related to income from the Microsoft agreements including the following: approximately $0.03 to $0.04 per diluted share for non-income related taxes and employee bonuses; $0.04 per diluted share of charitable contributions representing five percent of net income; and $0.44 to $0.47 per diluted share of income tax expense which represents a tax rate of approximately 37%. However, actual federal income taxes owed are expected to be less than $10 million due to the utilization of deferred tax assets. In addition, Real expects to incur $0.08 to $0.10 per diluted share of non-cash stock compensation expense.

The Company will host a webcast and conference call today at 5:00 pm (Eastern)/ 2:00 pm (Pacific). The live webcast, featuring slides and audio, will be available at http://www.realnetworks.com/company/investor/earnings.html. Listeners will require RealPlayer^® to listen to the conference call, which can be downloaded for free at www.real.com. The on-demand webcast will be available approximately two hours following the conclusion of

the live webcast. Participants may access the conference call by dialing 800-857-5305 (773-681-5857 for international callers). The passcode is “Fourth Quarter Earnings,” and the leader is Rob Glaser. A telephonic replay will be available until 8 pm (Eastern), November 9th, and may be accessed by dialing 800-677-4302 (402-998-0977 for international callers).

For More Information Contact
Press: Maureen Farley, RealNetworks, (206) 892-6653, mfarley@real.com
Financial: Caroline Hughes, RealNetworks, (206) 892-6718, carolinehughes@real.com

ABOUT REALNETWORKS

RealNetworks, Inc. is a leading creator of digital media services and software including Rhapsody^®, RealPlayer^® 10 and casual PC and mobile games. Broadcasters, network operators, media companies and enterprises use RealNetworks’ products and services to create and deliver digital media to PCs, mobile phones and consumer electronics devices. Consumers can access and experience audio/video programming and download RealNetworks’ consumer software at http://www.real.com. RealNetworks’ systems and corporate information is located at http://www.realnetworks.com.

Forward Looking Statements: This press release contains forward-looking statements that involve risks and uncertainties, including statements relating to: (a) Real’s future revenue, expenses, margins, profitability, net income, taxes, earnings per share and other measures of results of operation; (b) the growth of Real’s music and games businesses; (c) the prospects for future growth; and (d) the future success and impact on Real’s operating results and financial position resulting from the Microsoft agreements. Actual results may differ materially from the results predicted. Factors that could cause actual results to differ from the results predicted include: development and consumer acceptance of legal online music distribution services generally and RealNetworks’ content services in particular, in particular because these are relatively new and unproven business models and markets; the potential that we will be unable to continue to enter into commercially attractive agreements with third parties for the provision of compelling content for our subscription service offerings; the risk that the collaborative agreements we have with Microsoft will be less successful than we anticipate; the emergence of new entrants and competition in the market for digital media subscription offerings and on-line music sales; the impact on our gross margins from content costs and from the mix of subscribers to subscription offerings with higher content costs than others; competitive risks, including competing technologies, products and services, and the competitive activities of our larger competitors, some of which have strong ties to streaming media users through other products; risks associated with the introduction of new products and services; risks inherent in strategic relationships, especially with competitors, and technology and service integration efforts; risks relating to the ability of Real’s strategic partners’ to generate subscribers for Real’s digital content services; and risks related to the Company’s ability to fully utilize its tax assets. More information about potential risk factors that could affect RealNetworks’ business and financial results is included in RealNetworks’ annual report on Form 10-K for the most recent year ended December 31, and its quarterly reports on Form 10-Q and from time to time in other reports filed by RealNetworks with the Securities and Exchange Commission. The preparation of our financial statements and forward looking financial guidance requires us to make estimates and assumptions that affect the reported amount of assets and liabilities and the reported amounts of revenues and expenses during the reported period. Actual results may differ materially from these estimates under different assumptions or conditions. The Company assumes no obligation to update any forward-looking statements or information, which are in effect as of their respective dates.

RealNetworks, Rhapsody and RealPlayer are trademarks or registered trademarks of RealNetworks, Inc. All other companies or products listed herein are trademarks or registered trademarks of their respective owners.

RealNetworks, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)

	Quarters Ended December 31,						Years Ended December 31,
	2005			2004			2005			2004
				(in thousands, except per share data)
Net revenue	$	83,568		$	72,546		$	325,059		$	266,719
Cost of revenue		23,976			23,925			98,249			92,207
Loss on content agreement		—			—			—			4,938
Gross profit		59,592			48,621			226,810			169,574
Operating expenses:
Research and development		25,335			13,091			70,631			51,607
Sales and marketing		36,706			26,608			130,515			96,779
General and administrative		29,573			7,914			50,669			31,302
Loss on excess office facilities (A)		—			—			—			866
Stock-based compensation		19			71			128			695
Subtotal operating expenses		91,633			47,684			251,943			181,249
Antitrust litigation (settlement) expenses (B)		(434,425	)		2,997			(422,500	)		11,048
Total operating expenses		(342,792	)		50,681			(170,557	)		192,297
Operating income (loss)		402,384			(2,060	)		397,367			(22,723	)
Other income (expense), net:
Interest income, net		7,012			1,602			14,511			4,452
Equity in net loss of MusicNet		—			(955	)		(1,068	)		(4,351	)
Impairment of equity investments (C)		(266	)		—			(266	)		(450	)
Gain on sale of equity investments		—			—			19,330			—
Other, net		(55	)		606			(331	)		597
Other income (expense), net		6,691			1,253			32,176			248
Income (loss) before income taxes		409,075			(807	)		429,543			(22,475	)
Income tax provision		(113,435	)		(165	)		(117,198	)		(522	)
Net income (loss)	$	295,640		$	(972	)	$	312,345		$	(22,997	)
Basic net income (loss) per share	$	1.76		$	(0.01	)	$	1.84		$	(0.14	)
Diluted net income (loss) per share	$	1.61		$	(0.01	)	$	1.70		$	(0.14	)
Shares used to compute basic net income (loss) per share		167,573			170,039			169,986			168,907
Shares used to compute diluted net income (loss) per share		183,728			170,039			184,161			168,907

(A)	The loss on unoccupied excess office facilities represents the loss from rent payments over the remaining life of certain leased facilities and amounts related to the write-off of certain leasehold improvements.
(B)	Consists of amounts received under the Settlement and Commercial agreements with Microsoft, net of certain legal fees, personnel costs, public relations and other professional service fees incurred related to antitrust complaints against Microsoft, including proceedings in the European Union.
(C)	Relates to other-than-temporary declines in the value of certain equity investments. These charges were recorded to reflect these investments at their estimated fair value.

RealNetworks, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)

	December 31,		December 31,
	2005		2004
	(in thousands)
ASSETS
Current assets:
Cash, cash equivalents and short-term investments	$	781,327	$	363,621
Trade accounts receivable, net of allowances for doubtful accounts and sales returns		16,721		14,501
Deferred tax assets, net, current portion		54,204		—
Prepaid expenses and other current assets		11,933		8,196
Total current assets		864,185		386,318
Equipment and leasehold improvements, at cost:
Equipment and software		56,402		45,324
Leasehold improvements		27,964		25,015
Total equipment and leasehold improvements		84,366		70,339
Less accumulated depreciation and amortization		51,228		41,508
Net equipment and leasehold improvements		33,138		28,831
Restricted cash equivalents		17,300		20,151
Notes receivable from related parties		—		106
Equity investments		46,163		36,588
Goodwill, net		123,330		119,217
Other intangible assets, net		7,337		8,383
Deferred tax assets, net, non-current portion		19,147		—
Other assets		2,397		2,908
Total assets	$	1,112,997	$	602,502
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	11,397	$	10,219
Accrued and other liabilities		112,340		50,033
Deferred revenue, current portion		25,021		30,307
Accrued loss on excess office facilities and content agreement, current portion		4,623		8,160
Total current liabilities		153,381		98,719
Deferred revenue, non-current portion		276		548
Accrued loss on excess office facilities and content agreement, non-current portion		13,393		19,017
Deferred rent		4,018		3,413
Convertible debt		100,000		100,000
Other long-term liabilities		196		—
Total shareholders’ equity		841,733		380,805
Total liabilities and shareholders’ equity	$	1,112,997	$	602,502

RealNetworks, Inc. and Subsidiaries
Supplemental Financial Information
(Unaudited)

	2005												2004
	Q4			Q3			Q2			Q1			Q4			Q3			Q2			Q1
	(in thousands)
Net Revenue by Line of Business:*
Consumer products and services (A)	$	73,415			71,750			70,593			64,206			61,541			56,034			53,743			47,025
Business products and services (B)		10,153			10,483			12,093			12,366			11,005			12,276			11,730			13,365
Total net revenue	$	83,568			82,233			82,686			76,572			72,546			68,310			65,473			60,390
Consumer Products and Services:
Subscriptions (C)	$	47,508			47,347			47,817			44,400			42,722			38,386			35,459			32,073
E-commerce and other (D)		25,907			24,403			22,776			19,806			18,819			17,648			18,284			14,952
Total consumer products and services revenue	$	73,415			71,750			70,593			64,206			61,541			56,034			53,743			47,025
Consumer Products and Services:*
Music (E)	$	26,104			25,042			24,135			22,243			20,252			18,040			14,954			11,940
Video, consumer software and other (F)		22,616			23,642			24,607			24,154			25,169			23,619			23,715			24,289
Games (G)		15,741			14,699			13,648			12,189			10,330			9,098			8,352			6,755
Media Properties (H)		8,954			8,367			8,203			5,620			5,790			5,277			6,722			4,041
Total consumer products and services revenue	$	73,415			71,750			70,593			64,206			61,541			56,034			53,743			47,025
Net Revenue by Geography:
United States	$	65,177			63,478			63,443			57,757			55,608			52,054			50,949			43,963
Rest of world		18,391			18,755			19,243			18,815			16,938			16,256			14,524			16,427
Total net revenue	$	83,568			82,233			82,686			76,572			72,546			68,310			65,473			60,390
Gross Margin by Line of Business:**
Consumer products and services		70	%		68	%		68	%		65	%		64	%		59	%		63	%		58	%
Business products and services		81	%		82	%		83	%		82	%		82	%		83	%		83	%		83	%
Total gross margin		71	%		70	%		70	%		68	%		67	%		64	%		67	%		56	%
Subscribers (presented as greater than)***
Total****		2,250			2,200			2,000			1,850			1,550			1,550			1,400			1,300
Music		1,425			1,300			1,150			975			700			625			550			450

*Reclassifications were made to the presentation of 2004 data to conform to the presentation for 2005

**For the quarter ended March 31, 2004, total gross margin includes loss on content agreement of $4.9 million

***Beginning the quarter ended March 31, 2005, total and music subscribers reflect the inclusion of subscribers that registered for the Comcast Rhapsody Radio Plus service

****Total subscribers as of March 31, 2004 reflect the removal of approximately 142,000 subscribers resulting from the non-renewal of the MLB contract

(A) Revenue is derived from consumer digital media subscription services, RealPlayer Plus and related products, sales and distribution of third party software products, content such as games and music, and advertising

(B) Revenue is derived from media delivery system software, support and maintenance services, broadcast hosting services and consulting services

(C) Revenue is derived from consumer digital media subscription services including: SuperPass, RadioPass, Rhapsody, GamePass and stand-alone subscriptions

(D) Revenue is derived from RealPlayer Plus and related products, sales and distribution of third party software products, content such as games and music, and advertising

(E) Revenue is derived from RadioPass, Rhapsody subscription services and sales of music content, advertising generated from our music and music related websites and the distribution of third party products

(F) Revenue is derived from SuperPass subscriptions, RealPlayer Plus and related products, stand-alone subscription services and sales of third party software products

(G) Revenue is derived from the GamePass subscription service, sales of games, advertising generated from our games and game-related websites and the distribution of third party products

(H) Revenue is derived from non-game and non-music related advertising and distribution of third party products

RealNetworks, Inc. and Subsidiaries
Supplemental Financial Information
(Unaudited)

A reconciliation of Generally Accepted Accounting Principles (“GAAP”) net income (loss) to income (loss) before interest, taxes, depreciation, amortization and stock compensation (“EBITDA”) and EBITDA excluding antitrust litigation and loss on content agreement is as follows:

	Years Ended						Quarters Ended
	December 31,			December 31,			December 31,			September 30,			June 30,			March 31,			December 31,
	2005			2004			2005			2005			2005			2005			2004
							(in thousands)
Net income (loss) in accordance with GAAP	$	312,345			(22,997	)	$	295,640			11,182			4,709			814			(972	)
Interest income, net		(14,511	)		(4,452	)		(7,012	)		(2,904	)		(2,579	)		(2,016	)		(1,602	)
Taxes		117,198			522			113,435			3,457			162			144			165
Depreciation, amortization and stock compensation		16,331			15,338			4,353			4,220			4,092			3,666			3,791
EBITDA		431,363			(11,589	)		406,416			15,955			6,384			2,608			1,382