"The Apple iPod iTunes Anti-Trust Litigation"

Filing 751

Administrative Motion to File Under Seal Plaintiffs' Memorandum of Law in Opposition to Defendant's Motion for Summary Judgment and to Exclude Expert Testimony of Roger G. Noll; Plaintiffs' Responsive Separate Statement in Support of Opposition to Defendant's Motion for Summary Judgment and to Exclude Expert Testimony of Roger G. Noll and Exhibits 1-4, 9-17, 20-29, 31-46, 48-54, 56, and 58-62 Under Seal Pursuant to Civil L.R. 7-11 and 79-5(c) filed by Somtai Troy Charoensak, Mariana Rosen, Melanie Tucker. (Attachments: # 1 Declaration in support thereof, # 2 Proposed Order Granting Plaintiffs' Administrative Motion to Seal, # 3 Unredacted Version of Plaintiffs Memorandum of Law in Opposition to Defendants Motion for Summary Judgment and to Exclude Expert Testimony of Roger G. Noll, # 4 Exhibit 1-2, # 5 Exhibit 3, # 6 Exhibit 4, # 7 Exhibit 5-8, # 8 Exhibit 9-17, # 9 Exhibit 18-19, # 10 Exhibit 20-29, # 11 Exhibit 30, # 12 Exhibit 31-35, # 13 Exhibit 36-46, # 14 Exhibit 47, # 15 Exhibit 48-54, # 16 Exhibit 55, # 17 Exhibit 56, # 18 Exhibit 57, # 19 Exhibit 58-62, # 20 Declaration of Bonny E. Sweeney in Support of Plaintiffs Memorandum of Law in Opposition to Defendants Motion for Summary Judgment and to Exclude Expert Testimony of Roger G. Noll, # 21 Unredacted Version of Plaintiffs' Responsive Separate Statement in Support of Opposition to Defendant's Motion for Summary Judgment and to Exclude Expert Testimony of Roger G. Noll, # 22 Proposed Order Denying Defendant's Motion for Summary Judgment and to Exclude Expert Testimony of Roger G. Noll)(Sweeney, Bonny) (Filed on 1/13/2014)

EXHIBIT 57

Quarterly Update

November 7, 2006

RealNetworks, Inc.

NEUTRAL

3Q Results Good, Outlook Less So--Reiterate
Neutral

Summary: We reiterate our Neutral rating on RNWK. The company

RNWK - NASDAQ

$10.87

PRICE TARGET

NA

52-WEEK RANGE

$11.81-$7.20

reported good 3Q results, above our top- and bottom-line estimates by $1mm
and $0.01, respectively. However, sluggish growth in new music subscribers
adds risk to segment estimates, in our view. Games growth continues to show
strength with recent acquisitions. We are decreasing our EPS estimates for
4Q, and raising marginally for 2007 due to the acquisition of WiderThan.

MARKET CAPITALIZATION $1,741.6mm
SHARES OUTSTANDING

160.2mm

FLOAT

117.1mm

BOOK VALUE/SHARE

$5.07

DEBT/TOTAL CAP. (%)

17%

DIVIDEND/YIELD

NA/NM

AVG. DAILY VOLUME

1,852,695

Reports good 3Q results. The company reported revenue of $94mm, above
our estimate of $93mm (guidance: $91mm to $94mm, consensus: $93mm),
and EPS of $0.24 ahead of our estimate of $0.22 (guidance: $0.20 to $0.22,
consensus: $0.22). EPS was helped by certain sales & marketing expenses
that were delayed until 4Q, as well as R&D nearly $1mm lower than we had
projected.

1 Year Price History for RNWK
12
11
10
9
8
7
Q1

Q2

Q3

6

2006
Created by BlueMatrix

RealNetworks is a leading distributor of digital
media content on the Internet, including audio,
video, and games. The company also provides a
set of software and services enabling third parties'

Music segment growth slows further. The company added roughly 25,000
music subscribers in 3Q (and only 50,000 in 2Q) vs. an average of 150,000
new subscribers for the previous four quarters (total paid subscriber count was
up 50,000 QoQ). We estimate that ARPU in the music business dropped in the
quarter as well. We believe the slowdown may indicate a lasting market
preference for both music-as-a-download as well as end-to-end systems such
as Apple's (AAPL, $79.71, Not Covered) iPod. Microsoft's (MSFT, $28.84, Not
Covered) Zune is expected to launch November 14.
Rhapsody DNA launched. The technology platform enables the integration of
Rhapsody into other manufacturer's products. While this should help RNWK to
some degree, we are bearish on the music subscription business.

distribution of media over the Internet and to
Internet-connected devices.

A. Sasa Zorovic, Ph.D. 617-428-5667
[e-mail]

On the acquisition of WiderThan, we are adjusting our 4Q and 2007
revenue and EPS estimates, though EPS will likely be up only marginally
next year.
•

•

Fiscal Year
Dec
2005A
2006E
2007E
2008E
GAAP EPS

For 4Q, we are raising our revenue estimate from $99mm to $120mm
(guidance: $117mm to $123mm, prior consensus: $100mm) and lowering
EPS from $0.22 to $0.20 (guidance: $0.18 to $0.21, prior consensus:
$0.23). Removing $2.7mm of charges related to the acquisition would
increase EPS by $0.01. Net-net, we still estimate 2006 at $0.80.
For full-year 2007, we are raising our revenue estimate from $426mm to
$572mm (prior consensus: $427mm) but only increasing EPS from $0.33 to
$0.34 (prior consensus: $0.37).

Earnings Per Share Estimates (US$)
1Q (Mar)
Prior
Current
-0.00
-0.14A
0.25
0.23
---

2Q (Jun)
Prior
Current
-0.03
-0.22A
-0.03
---

3Q (Sep)
Prior
Current
-0.06
0.22
0.24A
0.03
0.04
---

4Q (Dec)
Prior
Current
-1.61
0.22
0.20
0.03
0.05
---

Prior
--0.33
0.23

Year
Current
1.70
0.80
0.34
0.25

P/E
6.4x
13.6x
32.0x
43.5x

See pages 4 - 6 for important disclosures
66

What we find bullish:
• Increasing estimates. Due to the acquisition of WiderThan, we are raising our revenue estimates
significantly. Estimated 4Q revenue goes from $99mm to $120mm (guidance: $117mm to
$123mm, prior consensus: $100mm), while 2007 revenue shoots up from $426mm to $572mm.
• Net growth of overall subscriptions. After pausing in 2Q at 2.4mm, total subscriptions rose in
3Q by 50,000. Total subscriptions are up 11% YoY.
• Greater international footprint. From 23% a year ago, international revenue has grown to 26%
of total revenues. The acquisition of WiderThan will only serve to accelerate this positive trend, in
our view.

What we find bearish:
• Ongoing competition. The digital music business is a fiercely competitive one. Microsoft is a
formidable opponent, and they are likely to grow stronger in this area over time. While not
currently much of a threat to RNWK, we believe that Yahoo! (YHOO, $26.59, Neutral) is likely to
improve its performance in this area as well.
• Decreased numbers of added music subscriptions. Music subscriptions grew only 25,000 in
the quarter. While management seems to consider it to attributable to a temporary focus on other
areas, we see a negative trend developing. Furthermore, we anticipate ARPUs will continue to fall.
• Cautious about RBT (ringback tones) outlook. While the acquired WiderThan will drive
revenues significantly, it will also pull down margins. Gross margins at the acquired company are
approximately 60%, compared to 81% in RNWK's technology segment, where results will be
reported.

What is otherwise of interest:
• Purchased 200,000 shares for $1.9mm. The company bought back 200,000 shares at an
average price of approximately $9.50. We believe the company has roughly $80mm outstanding in
its share buyback authorization.
Our financial model follows:

See pages 4 - 6 for important disclosures

Page 2

67

See pages 4 - 6 for important disclosures

Page 3

68

Important Disclosures and Certifications
Other companies mentioned in this report: AAPL, MSFT, YHOO

Rating and Price Target History for: Yahoo! Inc. (YHOO) as of 11-06-2006
01/12/06
I:N:NA

48

40

32

24

16

8
2004

2005

2006

Created by BlueMatrix

Rating and Price Target History for: RealNetworks, Inc. (RNWK) as of 11-06-2006
02/26/04
N:$5

04/15/04
N:NA

10/21/05
B:$11

12/14/05
N:NA

12

10

8

6

4

2
2004

2005

2006

Created by BlueMatrix

All price targets displayed in the chart above are for a 12-month period. Prior to March 30, 2004, Oppenheimer & Co. Inc.
used 6-, 12-, 12- to 18-, and 12- to 24-month price targets and ranges. For more information about target price histories,
please write to Oppenheimer & Co. Inc., 125 Broad St., 16th Fl., New York, NY 10004, Attention: Research Disclosure.

Buy - anticipates appreciation of 10% or more within the next 12 months, and/or a total return of 10% including dividend

See pages 4 - 6 for important disclosures

Page 4

69

payments, and/or the ability of the shares to perform better than the leading stock market averages or stocks within its
particular industry sector.
Neutral - anticipates that the shares will trade at or near their current price and generally in line with the leading market
averages due to a perceived absence of strong dynamics that would cause volatility either to the upside or downside,
and/or will perform less well than higher rated companies within its peer group. Our readers should be aware that when a
rating change occurs to Neutral from Buy, aggressive trading accounts might decide to liquidate their positions to employ
the funds elsewhere.
Sell - anticipates that the shares will depreciate 10% or more in price within the next 12 months, due to fundamental
weakness perceived in the company or for valuation reasons, or are expected to perform significantly worse than equities
within the peer group.
Distribution of Ratings/IB Services Firmwide and by Sector
TECHNOLOGY
IB Serv./Past 12 Mos.

Rating

Count

Percent

BUY [B]

167

47.31

28

16.77

HOLD [N]

175

49.58

20

11.43

11

3.12

1

9.09

SELL [S]

Count

Percent

IB Serv./Past 12 Mos.

Rating

Count

Percent

BUY [B]

28

48.28

4

14.29

HOLD [N]

28

48.28

1

3.57

2

3.45

0

0.00

SELL [S]

Count

Percent

Oppenheimer & Co. Inc. makes a market in the securities of AAPL.
Oppenheimer & Co. Inc. makes a market in the securities of RNWK.
Oppenheimer & Co. Inc. makes a market in the securities of YHOO.
Analyst Certification - The author certifies that this research report accurately states his/her personal views about the
subject securities, which are reflected in the ratings as well as in the substance of this report.The author certifies that no
part of his/her compensation was, is, or will be directly or indirectly related to the specific recommendations or views
contained in this research report.

Additional Information Available
Please log on to http://www.opco.com or write to Oppenheimer & Co. Inc., 125 Broad Street, New York, NY 10004,
Attention: Research Disclosure

Other Disclosures
Oppenheimer & Co. Inc. prepared the information and opinions in this report. Oppenheimer & Co. Inc. has no obligation to
inform you when opinions or information in this report change. This report is based on public information. Oppenheimer &
Co. Inc. makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or
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Past performance is not necessarily a guide to future performance. Estimates of future performance are based on
assumptions that may not be realized.
The securities discussed in this report may not be suitable for all investors. This report does not provide individually
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persons who receive it. We recommend that investors independently evaluate particular investments and strategies, and

See pages 4 - 6 for important disclosures

Page 5

70

encourage investors to seek the advice of a financial advisor.
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Copyright © Oppenheimer & Co. Inc. 2006.

See pages 4 - 6 for important disclosures

Page 6

71

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