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conference date: February 8, 2006
for quarter ending: December 31, 2006 (3rd fiscal quarter 2007)
Overview: Napster is back in growth mode, but still well in the red. Guidance for calendar Q1 2007 is down, to be followed by a jump in Q2 when AOL subscribers come aboard.
Basic data:
Revenues were $28.4 million, up 11% sequentially from $25.5 million and up 21% from $23.5 million in the year-earlier quarter.
Net loss was $9.5 million or $0.22 per share. In Fiscal Q2 2007 net loss was $9.0 million, or .21 per share. In fiscal Q3 2006 net loss was $17.0 million or $0.40 per share.
Cash and equivalents ended at $80.9 million.
Guidance:
Revenue in excess of $26 million with a decline in expenses. New AOL subscribers will come in too late in the quarter to have an impact until the June quarter. Expects net loss of $9 million or $0.21 per share. Beyond March quarter expects expenses to continue to decrease.
$60 million in cash at end of fiscal year due to payment to AOL.
Conference Highlights:
Revenues were above management guidance. Did include $2.4 million non-recurring revenue from unused prepaid cards.
16% revenues were from UK and Germany.
Total subscribers increased 48,000 to 566,000.
Reiterated new partnerships with KDDI, NTT DoCoMo, AOL, and Virgin Digital.
Operating expenses totaled $18.0 million. R&D was $2.9 million, sales and marketing was $9.1 million, General and administrative was $5.95 million.
$1.3 million loss was expected to Tower Japan. That completes Napster's commitment to capitalize that effort.
AOL deal should increase subscriber base by over 50% by the end of March 2007 quarter. AOL has 350,000 subscribers. Napster will be deeply integrated into AOL music web site with 20 million visitors per month.
30% gross margin.
157 full time employees.
Windows-based music enabled cell phones are really taking off; all compatible with Napster, none compatible with iTunes. Hundreds of millions of these phones to be shipped over next few years. Stand-alone MP3 players are expected to decline in sales. Carriers are committed to Napster model.
Apple called for ending DRM is because they are suddenly surrounded by Windows-enabled Napster-compatible cell phones. Music labels should refuse licensing to makers of closed systems and standardize on one type of DRM.
Continuing discussions about enhancing shareholder value.
Executed the strategy that some scoffed at three years ago: the only company focused in this space.
Q&A:
Likelihood of labels dropping DRM? Their current position is to keep DRM. It would be best if they would standardize on an "open" DRM system.
DoCoMo and KDDI? Extremely pleased with DoCoMo launch, marketing support was very, very strong. Delighted that KDDI jumped on too, but just beginning with them.
Most successful advertising channel? Think focusing on AOL and strategic deals has shown the best returns. Paid advertisements are no longer the most efficient way to reach the market, but helped get market share in early years.
Are mobile subs in the sub count? Has a minimal number of mobile subs. This quarter will be the first to show substantial mobile subs. Revenue should be similar per subscriber, $15 per month, but gross margins will be lower because of carrier revenue share. Won't have to pay marketing expenses.
AOL average price? Most will be $10 subscribers.
Free Napster concept customer acquisition and ad revenue? Continue to attract top ad clients. Has shown some degree of customer acquisition success.
So conversion rates have not changed? Went up 50% sequentially.
AOL subscribers? We only pay for the subscribers that migrate over. Over last year reduced churn by about 50%.
Wireless subscriber growth slower than expected? Expect to kick into full gear by end of 2007.
March 2007 guidance could be low if AOL transition happens faster than expected. Excluding amortization of acquisition costs, should be accretive going forward. More detail in next call.
Breakage revenue in March guidance? No card breakage revenue in March guidance.
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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
