Analyst Conference Summary

NAPS
Napster

conference date: August 2, 2006
for quarter ending: June 30, 2006 (1st fiscal quarter 2007)

Overview: A pretty bad quarter for revenue, net loss, and paid customer loss. Countering that are greatly increased nonpaid customer visits to Web site and deals with wireless carriers that management says will lower customer acquisition costs and increase revenues in 2007.

Basic data:

Revenues of $28.1 million were up 5% sequentially and 34% from June 2005, but included a one-time recognition of $1.9 million from unused prepaid cards. So revenues would have been sequentially down without that recognition. Net loss was $9.8 million, or .23 per share.

End of quarter page views per month was 60 million, indicating potential for substantial ad income.

Subscriber base declined 7% due to churn and low conversion rate from free Web site.

Cash ended at $97.8 million which covers most of the current market capitalization of the stock. Cash burn was $6.3 million.

Guidance: Expects conversion rate to increase, and second half of fiscal year is typically strong for subscribers. $25 million in revenues, net loss of $12.5 million or .30 per share.

Conference Highlights:

Ad supported service off to good start: 50% increase of visits. Disney, Toshiba & other world class brands are advertising at the site.

NTT-Docomo alliance confirmed (50 million subscribers). They have a controlling investment in Tower Records Japan; Napster Japan will launch this fall.

SunCom launch of Napster will take place next week.

Another top-tier global wireless carrier deal will be announced this fall.

International revenue was $3.9 million or 14% of total.

Paid subscribers totalled 512,000. Up 25% year-over-year, but down from 6% from prior quarter.

Gross margin was 32%, but excluding pre-paid card breakage revenue was 27% (prior quarter was 28%). $19.4 million in operating expenses. R&D flat at $2.9 million. Marketing was up due to launch of free service and Germany introduction.

146 full time employees.

3 million unique visitors per month at free site. Implementing changes to site to increase conversion rate. New landing page has information about paid service, which older landing page did not.

Real future is in cell-phones. Current installed base of MP3 players is almost insignificant; a year from now music-subscription enabled cell-phones will be ubiquitous.

PowerSynch technology has greatly increased percentage of Napster-to-Go customers.

Microsoft iPod music killer? Battles between closed platforms will not matter; open platforms will ultimately prevail. Microsoft has restated strong support of WMA platform and support for Napster.

Merger possibilities are always examined. Believes opportunity and risk of stand alone company is not currently reflected in share price.

Q&A:

Unlikely that Microsoft will abandon WMA and their DRM; Microsoft has told Napster they will not do that. Napster technology is DRM technology.

Cash burn forward? Committed to reduction, but no specifics.

Page views per unique visitor has been trending up.

Ad revenue to grow sequentially? Yes. Every quarter going forward. Disney was very pleased with results and has repeated business.

Hopefully when people sign up for cell-phone service, they will sign up for Napster at point of sale. Already at SunCom they have point of purchase displays in their stores. Docomo should be similar, but possibly bundled in the box as well.

Software infrastructure for cellular: gravity is now around WMA. Practically all handset makers will roll out all handsets with WMA over coming year.

Hopeful basic industry-wide music royalty rate will be established because will be able to expand their catalog. Hope to move from 2 million to 4 million tracks.

Suncom relationship expectations? Will give more guidance on wireless initiatives once more deals are announced. This year will see some income benefit, but most of benefit will come next year. With Suncom will offer only paid downloads at first, not subscriptions. But other wireless carriers will have both.

Music-enabled cell phones will be the main way to get around IPod dominance; stand-alone MP3 players will become less and less important over 3 to 5 year period. There are really good Napster-compatible devices available now. Synchronization has improved with powerSynch; calls to customer service went down by 50%.

All key metrics are working out, but conversion from visitors to subscribers needs most focus.

XM roadmap can't be revealed, but will enhance Napster attractiveness for XM subscribers, but these will be released in 6 to 12 months.

Cell phone billing? Integrated billing will be important; working with all partners.

DoCoMo relationship has cell phone makers calling Napster asking how they can be compatible with Napster to Go. Docomo is seen as a leading innovator in cell-phone technology.

$1.9 million one time revenue? Related to pre-paid cards that were not redeemed.

Quarterly subscription rate concern? Sure. Knew new Napster.com would not have a hard sell and therefore not as good conversion. Was worse than they thought, so is focussing on conversion. Churn lower, cost per new customer much lower.

Sales and marketing increase over next 2 quarters? No, marketing spend will be down in Sept. quarter, may be up slightly in Dec. quarter.

Why did DoCoMo choose Napster? Brand recognition, desire to differentiate, ease of implementation / dual delivery to PC.

Peer to peer competition driving handheld device purchases? Napster is experimenting with targetting that audience. Cautious because must make conversions from people who believe in free peer-to-peer media.

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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 2006 William P. Meyers