Analyst Conference Summary


Partial Summary will be updated during conference

conference date: November 8, 2006
for quarter ending: September 30, 2006 (2nd fiscal quarter 2007)

Overview: Revenues down sharply, but still above guidance. Claims Napster-To-Go on cellular phones is seen as a "killer ap." Would not talk about possible mergers, but has had inquiries.

Basic data:

Revenues were $25.5 million, down 9% sequentially from $28.1 million but up 9% over Q2 2006 revenues of $23.4 million. Excluding non-recurring items, non-GAAP revenue was $24.9 million, up 17% annually.

Net loss was $9.0 million, or .21 per share, an improvement from the loss of $13.6 million, or .32 per share in the prior quarter.

Cash and equivalents ended at $90.3 million, down from $97.8 million in the prior quarter.


December quarter revenues expected at $27 million, but expenses will increase with the usual seasonal increase in marketing expense. $2 million will be non-recurring revenue due to pre-paid carge breakage. Net loss of about $13 million or .30 per share.

Fiscal 2007 will end with double digit year-over-year revenue growth.

Conference Highlights:

Unique visitation grew 42% in the quarter. Ad revenue represents a substantial opportunity. 3.5 million unique visitors per month. Helped drive down subscriber acquisition costs and churn. Still working out some of the kinks.

Reminded of recent announcements of launches with of Napster Japan, and Napster mobile with Cingular and DoCoMo. Good press coverage. First music subscription service in Japan. Big promotion by Tower Records Japan.

Total paid subscriber base was 518,000, including 31,000 university subscribers. 20% growth year over year, but declined sequentially.

Cash burn reduced during quarter. R&D $3.2 million. S&M $8.5 million. G&A $5.7 million.

19% of revenue was international, primarily U.K. and German.

27% gross revenue.

154 full time employees.

Mobile (cell-phone) potential is substantial. Can help propel Napster-To-Go. Believed to be killer-ap by some cellular carriers. Cingular expects 50% of units shipped will soon be music enabled. Believes near tipping point.

DoCoMo has 54 million subscribers. Multiple handsets are Napster compatible. Very aggressive campaign for Napster. "DoCoMo's music strategy equals Napster" per DoCoMo executive.

Cingular featuring Napster, only one promoted in box, though compatible with others. Only one integrated to music ID service.

Napster controls its own back-end technology, so can move faster than competitors. That has resulted in wins like DoCoMo.

UBS engagement: cannot address merger questions or valuations. Has been approached by third parties. Board will decide with goal of enhancing shareholder value. No timetable is set and there is no time table for a decision, and nothing is guaranteed.


When will mobile services start generating serious revenues? Does not make projections, but does expect material additions to revenues in 2007.

How much are you spending on selling your own player as a promo? Has experience with bundles, won't be socked with inventory risk. Creates a lot of value for new subscribers and is an effective marketing tool. Helps reduce churn. Does not expect it to cost too much.

Churn? Churn is highest in first 3 months, after that it goes down. That is why the player promo comes with 3 months of pre-paid service.

Cingular readiness for holidays? This week Samsung model comes out at $49. Additional handsets will be in-store for holiday season, cannot give specifics. Over-the-air download service handsets were already in place.

New carriers? Will be viewed as exciting.

Non-recurring revenue is mostly from pre-paid card breakage (failure to use after a point in time).

Margins on cellular mobile? They hope it will be an improvement, but will not really know until they have a few quarters of experience.

Germany growing very well.

Thinks very significant traction in next couple of months in wireless and are not slowing down. Have big ambitions and strong interest. Hopes to make further announcements before the end of the year.

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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