Analyst Conference Summary


conference date: May 16, 2007 @ 2 PM PT
for quarter ending: March 31, 2007 (4th fiscal quarter 2007)

Forward-looking Statements

Overview: Record, above-guidance revenue following deals with AOL, Motorola. Guidance is to continued net loss in June quarter, but less cash burn.

Basic data:

Revenue was $29.1 million, up 2.5% sequentially from $28.4 million and up 9% from $26.8 million year-earlier.

Net loss was $8.5 million or $0.20 per share, improved from a net loss of $9.5 million in fiscal Q3. Net loss was $1.3 million better than year-earlier excluding a one-time $5.4 million gain in 2006.

Cash ended at $66.5 million.


June quarter revenue to increase to about $31 million. Expects cash burn going forward to be less than $3.3 million per quarter. Gross margin will improve. $6 to $7 million net loss or $0.13 to $0.14 per share.

Conference Highlights:

Total paid subscribers climbed to 830,000. Paid subscribers grew 47% sequentially and 37% year-over-year.

Excluding the one-time payment to AOL for subscriber acquisition the net cash loss from operations was $3.3 million.

Claims market share leadership. Improved strategic position. Cut costs and cash burn. Believes there will be a shakeout in the online music business and Napster is benefitting from it. Former competitors are becoming marketing partners, like AOL. No longer as dependent on paid advertisement. New deals call for paying only when customers are actually acquired. Exclusive relationship with AT&T. Agreement with Motorolla means trials subscriptions with Napster, placed in box with music phones. Majority of cell phones sold by this Christmas season will be music enabled. Believes stand-alone MP3 players will be replaced by music phones; Napster has been chosen to drive this change.

Last quarter had $2.1 million card-breakage one-time gain, so sequential improvement was greater if you exclude that. Quarter results were better than guidance.

FY 2007 revenues of $111 million were 17% higher than full FY 2006. FY 2007 operating expenses were 20% lower than FY 2006.

Migrated 225,000 AOL subscribers. Recapped agreements with AT&T, Circuit City, and Motorola. 44,000 university subscribers, which will decline going forward as they are migrating to free services.

27% gross margin, down sequentially from 30% because no card-breakage income.

$15.9 million operating expenses, down due to reduction of marketing spend. $2.9 million R&D. $6 million marketing. $6.7 million general and administrative. Amortization $271,000, due to AOL deal.

EBITDA negative $5.3 million.

138 full time employees.

$11.1 million was paid for AOL deal.


iPhone impact? Apple expects to ship 10 million units first year. Non-Apple (Windows media) projections are in the 100s of millions.

Mobile music market paid downloads v. subscriptions? Our opportunity is to drive subscription business. Paid downloads are secondary.

AOL new subs, why not a $7 million revenue rise? Did have some AOL base hit March numbers. Another reason is summer downward seasonality. Most of growth will come in seasonally strong second half of year. AOL subs average between $9 and $10 per month.

Wireless carrier monthly fees per user? Napster To Go deals are bounty deals to carriers. So we get the revenues less the bounties, plus they spend the money on marketing, not us.

Motorola promotion in box? Yes, world-wide in box. Motorola said over next 3 to 5 years they will manufacture 100s of millions of subscription enabled, Windows DRM, devices.

Other carriers? Believes some that decided to try to do it themselves are still opportunities for Napster.

Actual results from partnerships? Too early for most to show results. Have seen some halo effect from AT&T television ads. AT&T still is getting in-store materials rolled out.

AOL, why not more revenue? Does not break down revenue by source. Seeing a very attractive rate of new trials through AOL. Churn is stable and similar to existing base.

Operating expense to go down in coming quarter? Yes.

Card breakage revenue in quarter? Ongoing amount is small number, we are not breaking out.

DRM free music effect? Believes labels will embrace MP3, DRM-free music in year going forward. Napster is likely to join in. Will be possitive business. Will give us access to iPod installed base. DRM will still be needed to provide unlimited subscription model. Looks forward to all of this happening as rapidly as possible. Cell music promotion helps them evangelize data services.

Over-the-air subscription model? First deployment happens in Japan next week. Other partners will see this around the world over the next year. Economics for Napster is about monthly subscription fees; no difference in monthly fees. Wireless carriers are willing to bear expense and still pass through Napster's monthly fee because they want to drive adoption of high-speed data plans.

Strategic merger? Still has UBS helping to look, but main thrust is to drive the independent business. Never said they would sell business, but because of inquiries seemed like a prudent thing to do for stockholders. But value as stand alone business has improved greatly over the past few months. But we remain open to opportunities.

Napster enabled handsets? Now in the scores. Can't say how many partner subscribers already have cell phones that will work with Napster.

How do you define $3.3 million cash burn? Mainly we did it by eliminating online marketing expense. Our partners are now doing our advertising for us. We can reduce other expenses further as well.

Napster: Laying Groundwork or Just Shoveling? [May 17, 2007 blog]
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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. Before making or terminating an investment you should always verify any factual basis of your decision.

Copyright 2007 William P. Meyers