SOURCE: Napster

November 01, 2007 16:15 ET

Napster Increases Revenue 24% in the Second Quarter and Posts Another Cash Flow Positive Quarter

LOS ANGELES, CA--(Marketwire - November 1, 2007) - Napster (NASDAQ: NAPS) today reported financial results for its fiscal second quarter ended September 30, 2007.

"Napster grew quarterly revenues 24 percent year-over-year and generated a record $1.3 million in positive cash flow in the second quarter while substantially narrowing our net loss year-over-year," said Chris Gorog, Napster's chairman and chief executive officer. "We recently launched Napster 4.0, the web-based version of our flagship product, to strong reviews. Napster Mobile is maintaining its leadership position as the global music solution of choice among the world's leading carriers, and AT&T recently announced over-the-air availability of Napster, providing instant access to music for its wireless customers. We remain focused on our strategy of providing our customers with access to unlimited music anywhere, anytime."

Net revenue for Napster's second quarter of fiscal 2008 grew to $31.6 million, up 24 percent from $25.5 million in the second quarter of fiscal 2007. Net loss for the second quarter of fiscal 2008 narrowed to $5.1 million, or $0.12 per basic and diluted share, compared to a net loss of $9.0 million, or $0.21 per basic and diluted share, in the second quarter of fiscal 2007.

Napster ended the second fiscal quarter with $68.4 million of cash, cash equivalents and short-term investments, an increase of $1.3 million from the prior quarter.

Napster had approximately 750,000 paid subscribers at September 30, 2007, down from approximately 770,000 on June 30, 2007, as anticipated based on historical quarterly patterns.

Business Outlook

"We expect to see third quarter revenues grow to approximately $33 million based on continued uptake of our Napster To Go and mobile-based services. We are also reaffirming our previous guidance that Napster will be cash flow positive for the fiscal year, a first for our company," said Nand Gangwani, Napster's chief financial officer.

Corporate Highlights

Napster recently:

--  Announced over-the-air availability of Napster Mobile on AT&T's mobile
    network beginning in mid-November. The Napster Mobile service will enable
    AT&T wireless customers to easily search a music catalog with more than 5
    million songs, preview samples of each song and conveniently purchase and
    download their favorite music from their wireless handsets in less than a
    minute. Customers will have the ability to download five tracks a month
    with the Napster Mobile Five-Track Pack option for a discounted price of
    $7.49 or purchase songs a la carte for just $1.99. As a special offer,
    customers who select the Napster Mobile Five-Track Pack from their phone
    will receive the first five songs free.
--  Partnered with Sonos, the leading developer of wireless multi-room
    music systems for the digital home, to release new software which lets
    Sonos Digital Music System customers instantly access Napster's music
    discovery tools and play its catalog of over 5 million tracks anywhere in
    the house without turning on a computer or installing an application.
--  Launched Napster 4.0, a feature-rich web-based service that allows
    subscribers to access and play their music on any internet-connected
    computer without downloading any software.
--  Partnered with Maxfield, a leading German consumer electronics
    manufacturer, that will give customers who purchase Maxfield's new flagship
    MP3 player, the MAX Tiburon Grande Deluxe, instant access to the Napster To
    Go digital music service.
--  Announced a marketing partnership with Hewlett-Packard (HP) that
    confirms all HP Pavilion and Compaq Presario desktop and notebook computers
    sold in the UK and Germany will include access to Napster's industry-
    leading music subscription service, straight out of the box, giving
    consumers immediate access to high quality digital content.
--  Announced that Christopher Allen has joined the Company as Chief
    Operating Officer. Mr. Allen will be responsible for product strategy,
    development and marketing.
    

Conference Call Information

The Napster second-quarter teleconference and webcast is scheduled to begin at 2:00 p.m. PDT on Thursday, November 1, 2007. To participate on the live call, analysts and investors should dial 800-366-7449 at least ten minutes prior to the call. Napster will also offer a live and archived webcast of the conference call, accessible from the "Investor Relations" section of the Company's Web site at http://investor.napster.com.

About Napster

Napster, the pioneer of digital music, offers the ultimate in interactive music experiences, creating better ways to discover, share, acquire and enjoy music -- anytime, anywhere. The Company's offerings include "Napster" (www.Napster.com) -- the most popular on-demand music subscription service in the world; "Freenapster" (www.freenapster.com) -- a unique Web experience offering free on demand music legally; and "Napster Mobile" -- one of the industry's fastest growing mobile music platforms. Headquartered in Los Angeles, Napster's services are available in markets across North America, Europe and Japan.

Safe Harbor Statement

Except for historical information, the matters discussed in this press release, including all of the statements under the heading "Business Outlook" above are forward-looking statements that are subject to certain risks and uncertainties such as our limited operating history; failure to develop new products and services; flaws inherent in our products or services; decreased demand for our products and services; failure of our products to interoperate with the hardware products of our customers; the adoption rate of mobile platforms as a method of digital music purchase, including the rate of adoption of music-enabled cell phones compatible with the Company's service offerings; intense and varied competition; failure to maintain relationships with strategic partners and content providers; and general economic conditions; that could cause actual results to differ materially from those projected. Additional information on these and other factors are contained in Napster's reports filed with the Securities and Exchange Commission (SEC), including the Company's Quarterly Report on Form 10-Q as filed with the SEC on November 1, 2007, copies of which are available at the website maintained by the SEC at http://www.sec.gov. Napster assumes no obligation to update the forward-looking statements included in this press release.

Copyright © 2007 Napster, LLC. All rights reserved. Napster is a registered trademark of Napster, Inc. or its subsidiaries in the United States and/or other countries. All other trademarks are owned by their respective owners.

                                 NAPSTER, INC.

                    CONDENSED CONSOLIDATED BALANCE SHEETS
                    (in thousands, except per share data)
                                  (unaudited)

                                                            As of
                                                  ------------------------
                                                   September    March 31,
                                                    30, 2007       2007
                                                  -----------  -----------
ASSETS
Current assets:
   Cash and cash equivalents                      $    43,921  $    30,069
   Short-term investments                              24,445       36,414
   Accounts receivable, net of allowance for
    doubtful accounts of $16 at September 30,
    2007 and $10 at March 31, 2007                      2,083        1,418
   Prepaid expenses and other current assets            3,395        6,547
                                                  -----------  -----------
     Total current assets                              73,844       74,448
Property and equipment, net                             4,316        4,736
Goodwill                                               34,658       34,658
Identifiable Intangible assets, net                     5,103        7,729
Other assets                                              144          158
                                                  -----------  -----------
     Total assets                                 $   118,065  $   121,729
                                                  ===========  ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                               $     4,523  $     2,231
   Accrued liabilities                                 25,161       23,574
   Deferred revenues                                    6,799        7,601
                                                  -----------  -----------
     Total current liabilities                         36,483       33,406
Long-term liabilities
   Deferred income taxes                                4,011        3,548
   Other long-term liabilities                             76           69
                                                  -----------  -----------
     Total liabilities                                 40,570       37,023
                                                  -----------  -----------
Stockholders' equity:
   Common stock, $0.001 par value; Authorized:
    100,000 shares; Issued and Outstanding:
    46,351 shares at September 30, 2007 and
    44,770 shares at March 31, 2007                        46           45
   Additional paid-in capital                         264,463      262,730
   Accumulated deficit                               (187,522)    (178,194)
   Accumulated other comprehensive income                 508          125
                                                  -----------  -----------
     Total stockholders' equity                        77,495       84,706
                                                  -----------  -----------
     Total liabilities and stockholders' equity   $   118,065  $   121,729
                                                  ===========  ===========




                                 NAPSTER, INC.

               CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                    (in thousands, except per share data)
                                 (unaudited)

                              Three Months Ended       Six Months Ended
                                September 30,           September 30,
                            ----------------------  ----------------------
                               2007        2006        2007        2006
                            ----------  ---------   ----------  ---------
Revenues:
   Service                  $   30,862  $  25,359   $   63,055  $  53,406
   Product and license             756        101          817        170
                            ----------  ---------   ----------  ---------
       Total revenues           31,618     25,460       63,872     53,576
                            ----------  ---------   ----------  ---------
Cost of revenues:
   Service                      21,775     18,312       44,996     37,319
   Product and license             398        214          628        329
                            ----------  ---------   ----------  ---------
       Total cost of
        revenues                22,173     18,526       45,624     37,648
                            ----------  ---------   ----------  ---------
Gross margin                     9,445      6,934       18,248     15,928
                            ----------  ---------   ----------  ---------
   Service gross margin %          29 %       28  %        29 %       30  %
   Product and license
    gross margin %                 47 %      (112)%        23 %       (94)%
       Gross margin %              30 %       27  %        29 %       30  %
Operating expenses:
   Research and development      2,264      2,297        4,976      5,234
   Sales and marketing           4,978      8,526        8,969     18,997
   General and
    administrative               6,462      5,712       12,427     11,700
   Amortization of
    intangible assets            1,087          -        2,626          -
                            ----------  ---------   ----------  ---------
       Total operating
        expenses                14,791     16,535       28,998     35,931
                            ----------  ---------   ----------  ---------
Loss from operations            (5,346)    (9,601)     (10,750)   (20,003)
Other income, net                  595      1,227        2,026      2,408
                            ----------  ---------   ----------  ---------
Loss before income tax
 provision                      (4,751)    (8,374)      (8,724)   (17,595)
Income tax provision              (333)      (290)        (604)      (557)
Loss from unconsolidated
 entity                              -       (338)           -       (668)
                            ----------  ---------   ----------  ---------
Net loss                    $   (5,084) $  (9,002)  $   (9,328) $ (18,820)
                            ==========  =========   ==========  =========

Basic and diluted net loss
 per share                  $    (0.12) $   (0.21)  $    (0.21) $   (0.44)
                            ==========  =========   ==========  =========
   Weighted average shares
    used in computing net
    loss per share
      Basic and diluted         43,540     43,197       43,475     43,147
                            ==========  =========   ==========  =========

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