If you like your music by the pound, you might enjoy RealNetworks' (NASDAQ:RNWK) Rhapsody subscription service. Tonight, that company reports earnings for the 2006 fiscal year, and this Fool put mufflers on his jingly cap long enough to tune into the beat on the street.

What analysts say:

  • Buy, sell, or waffle? Nineteen analysts follow this company, but they don't seem to agree on much. Six of them are buying, five are selling, and the other eight are holding the middle ground.
  • Revenues. The analysts are fairly tightly grouped when it comes to estimating this quarter's results, with a $120.4 million average forecast in the middle of a $7.5 million range -- which is almost identical to company guidance. It's a 44% boost from the year-ago $83.6 million take.
  • Earnings. The Street consensus points to a profit of about $0.21 per share. That's at the top end of management guidance, and down from $1.61 per share last year -- or up from a $0.99 loss per share, excluding legal settlement gains. More on that later.

What management says:
CEO Rob Glaser was very enthusiastic about this quarter at the end of the last one. "By joining forces with WiderThan, Real greatly accelerates our efforts in mobile entertainment, and deepens our relationships with Tier 1 mobile carriers," he said. "And by launching the world's first Rhapsody-optimized MP3 players and home audio systems, we have put the celestial jukebox into the palm of consumers' hands."

The "celestial jukebox"? Wax off, young grasshopper. But teaming up with SanDisk (NASDAQ:SNDK) -- by all accounts the second-biggest player in the portable media field after untouchable Apple (NASDAQ:AAPL) -- to put the Rhapsody brand on store shelves can only be a good thing.

What management does:
Okay, guess when that legal settlement entered the picture, based on the numbers below. Got it? Good.

Microsoft (NASDAQ:MSFT) settled all its antitrust disputes with Real in the fall of 2005, forking over $478 million immediately and promising to dole out another $283 million over the next year or so. You can safely expect Real's net margins to take an immediate nosedive as that first lump sum rolls off the 52-week trailing totals, and Microsoft has paid up $160 million of the remainder to date. That money train stops rolling after the next quarter.

The revenue trend shows a bleaker picture than the earnings. It looks like it's high time to restart the stalling subscriber growth, which is why the company is wheeling and dealing in southeast Asia.

Margins

6/2005

9/2005

12/2005

3/2006

6/2006

9/2006

Gross

67.2%

68.7%

69.8%

70.1%

70.2%

70.1%

Operating

-0.3%

1.9%

-8.0%

-9.8%

-10.8%

-11.3%

Net

-0.8%

5.0%

96.1%

100.4%

108.4%

113.7%


YOY Growth

6/2005

9/2005

12/2005

3/2006

6/2006

9/2006

Revenue

29.5%

26.5%

21.9%

18.4%

13.9%

12.5%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
More than half of the expected revenue gain comes from the recently closed acquisition of WiderThan, a ringtone specialist with plenty of customers in markets like Singapore, Indonesia, and Taiwan. Stateside, the client list includes Verizon Wireless (NYSE:VZ) and Cingular, aka AT&T Mobility (NYSE:T). That deal, combined with some organic growth, is bringing Real into profitable territory, even excluding the Microsoft settlement payments.

Thanks to a fat cash balance, Real is now making about $5 million per quarter in extra interest income, compared to before the settlement. Then again, the company just used $320 million of its $693 million cash balance to buy WiderThan, so nothing lasts forever.

All told, organic growth should tick up to about 17%, if Real can meet its own targets. There will be costs associated with integrating WiderThan's operations, but that company was profitable on its own, and should prove accretive to earnings sooner rather than later. So if Napster (NASDAQ:NAPS) can grow sales by 20.6% and reduce its losses by half (which it just did), there's no reason why an energized Real couldn't outdo expectations, too.

Microsoft is a Motley Fool Inside Value recommendation, and AT&T used to live in the Stock Advisor 'hood. What happened? Find out with a free 30-day trial.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure rocks your socks off.