Napster's Third Quarter Revenue Grows 151% Year-Over-Year

Napster's Third Quarter Revenue Grows 151% Year-Over-Year

LOS ANGELES, Nov. 2 /PRNewswire-FirstCall/ -- Napster (NASDAQ:NAPS), the biggest brand in digital music, today reported financial results for its fiscal second quarter ended September 30, 2005.

"Napster continued its leadership as one of the industry's fastest growing digital music services, posting 150% year-over-year growth," said Chris Gorog, Napster's chairman and CEO. "We believe our subscriber base will grow substantially in the third quarter and should continue to propel Napster's leading brand position."

Net revenue from continuing operations for the second quarter of fiscal 2006 grew to $23.4 million, 151% over the prior year quarter and an 11% increase from $21.0 million in the first quarter of fiscal 2006. Net loss from continuing operations, after income taxes, was ($13.6) million for the second quarter of fiscal 2006, or ($0.32) per basic and diluted share, compared to net loss from continuing operations, after income taxes, of ($19.9) million or ($0.46) per basic and diluted share in the first quarter of fiscal 2006 and ($16.1) million or ($0.46) per basic and diluted share in the second quarter of fiscal 2005.

For the three month period ended September 30, 2005, the total number of Napster paid subscribers grew to 448,000, representing 146% year-over-year subscriber growth.

Napster ended the second quarter with a total of $127.3 million of cash, cash equivalents, and short term investments, including $13.8 million in net value of shares of Sonic Solutions stock.

Business Outlook

For the third quarter of fiscal 2006, Napster expects subscriber growth to increase significantly but revenue to be approximately flat sequentially, as revenue in the second quarter of fiscal 2006 included a one-time contribution from a hardware promotion with BellSouth. "We expect subscriber growth to accelerate in the December quarter and are looking forward to the launch of XM+Napster as well as the launch of Napster in Germany during the period. Looking forward to calendar 2006, having built a leadership position in the music subscription business led by the most well known music brand on the Internet, we plan to reduce our marketing expenditures going forward, substantially trim our cash burn and accelerate our path to profitability," concluded Gorog.

Corporate Highlights

Napster recently:

* Announced a partnership with Instant Live(TM), a division of Clear
Channel Entertainment's Music Group, for exclusive rights to offer
access to live recordings of artists' concert performances in digital
format.

* Launched a Napster-branded MP3 device which was the first flash-based
Janus-compatible MP3 player in the market. The device is optimized
for fast music transfers and a premier user experience with Napster To
Go. The device is now available with subscription bundling offers on
www.napster.com.

* Announced significant new adoption of its university-based
subscription service initiative. The University of California (UC),
Cal State University (CSU), and the University of North Carolina (UNC)
have each chosen to offer to Napster's award-winning subscription
service across their state-wide systems.

* Added a number of mobile phones to the expanding ecosystem of MP3
players and mobile devices compatible with the groundbreaking Napster
To Go portable subscription music service.

* Announced an agreement with BellSouth to offer digital music solutions
to new BellSouth(R) FastAccess(R) DSL customers. The agreement marks
the first time Napster has aligned itself with a U.S. Internet service
provider for a targeted marketing effort.

Conference Call Information

The Napster second quarter teleconference and webcast is scheduled to begin at 2:00 p.m., Pacific Time, on Wednesday, November 2, 2005. To participate on the live call, analysts and investors should dial 800-218-4007 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 biggest brand in digital music, is a subscription service that enables fans to freely sample the world's largest and most diverse online collection of music and move an unlimited amount of songs to compatible MP3 players. Napster (www.napster.com) members have access to songs from all major labels and hundreds of independents and have more ways to discover, share and acquire new music and old favorites with community features like the ability to email tracks to friends and browse other members' collections. Napster also offers Napster Light, a "lighter" version of the service for those who just want to purchase songs and albums a la carte. Napster is currently available in the United States, Canada and the U.K. and is headquartered in Los Angeles with sales offices in New York, London and Frankfurt.

Safe Harbor Statement

Except for historical information, the matters discussed in this press release, in particular matters related to Napster's future revenue, subscriber growth and earnings, strategic partnerships, international expansion and interoperability with popular hardware devices are forward-looking statements that are subject to certain risks and uncertainties such as decreased demand for our products and services; flaws inherent in our products or services; failure of our products to interoperate with the hardware products of our customers; intense competition; failure to maintain relationships with strategic partners and content providers; failure to successfully develop new products and services; general economic conditions and third party claims, 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 2, 2005, 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 (C) 2005 Napster, LLC. All rights reserved. Napster, the Napster Kitty Logo, Napster To Go and Napster Light are either trademarks or registered trademarks of Napster, LLC in the United States and/or other countries.

Media Contact:
Dana M. Harris
Napster
310-281-5073
dana.harris@napster.com

Investor Contacts:
Alex Wellins or Jennifer Jarman
The Blueshirt Group, for Napster
(415) 217-7722
alex@blueshirtgroup.com; jennifer@blueshirtgroup.com

NAPSTER INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(unaudited)

September 30, March 31,
2005 2005
ASSETS
Current assets:
Cash and cash equivalents $68,049 $135,416
Short-term investments 45,493 22,540
Investment in Sonic Shares 14,057 9,840
Accounts receivable, net of allowance for
doubtful accounts of $11 at
September 30, 2005 and $6 at March 31, 2005 1,553 1,545
Investment hedge receivable -- 4,619
Prepaid expenses and other current assets 3,672 5,156
Total current assets 132,824 179,116

Property and equipment, net 5,287 5,337
Goodwill 34,658 34,658
Identifiable intangible assets, net 337 1,349
Other assets 445 422

Total assets $173,551 $220,882

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $5,224 $6,547
Income taxes payable 3,708 4,125
Investment hedge payable 297 --
Accrued liabilities 13,195 11,381
Deferred revenues 8,322 8,345
Deferred gain on divestiture 2,123 2,073
Short-term debt 89 15,110
Total current liabilities 32,958 47,581

Long-term liabilities:
Deferred income taxes 2,160 1,696
Other long-term liabilities 188 212

Total liabilities 35,306 49,489

Stockholders' equity:
Preferred stock, $0.001 par value;
Authorized: 10,000 shares;
Issued and outstanding:
none at September 30, 2005 and
none at March 31, 2005 -- --
Common stock, $0.001 par value;
Authorized: 100,000 shares;
Issued and outstanding:
43,887 shares at September 30, 2005
and 42,961 shares at March 31, 2005 44 43
Additional paid-in capital 260,475 256,586
Deferred stock-based compensation (3,898) (533)
Accumulated deficit (119,961) (86,423)
Accumulated other comprehensive income 1,585 1,720
Total stockholders' equity 138,245 171,393

Total liabilities and stockholders' equity $173,551 $220,882

NAPSTER INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

Three Months Ended Six Months Ended
September 30, September 30,
2005 2004 2005 2004

Revenues:
Content $21,036 $8,912 $41,787 $15,620
Hardware and license 2,343 403 2,593 1,562
Total revenue 23,379 9,315 44,380 17,182

Cost of revenues:
Content 15,309 7,056 29,565 12,372
Hardware and license 2,947 421 3,065 1,521
Amortization of
purchased technologies 31 31 62 62
Total cost of revenues 18,287 7,508 32,692 13,955

Gross profit 5,092 1,807 11,688 3,227

Content gross profit % 27% 20% 29% 20%
Hardware and license
gross profit % (26%) (4%) (18%) 3%
Gross profit % 22% 19% 26% 19%

Operating expenses:
Research and development 3,216 3,189 6,411 6,076
Sales and marketing 10,391 9,447 26,663 13,742
General and
administrative 4,791 5,704 10,987 10,567
Amortization of
intangible assets 474 474 948 988
Total operating
expenses 18,872 18,814 45,009 31,373

Loss from continuing
operations (13,780) (17,007) (33,321) (28,146)

Other income, net 451 106 331 75

Loss before provision
for income taxes (13,329) (16,901) (32,990) (28,071)
Income tax benefit
(provision) (283) 828 (548) 4,415

Loss from continuing
operations, after
benefit (provision)
for income taxes (13,612) (16,073) (33,538) (23,656)

Income from discontinued
operations, net of
tax effect -- 760 -- 5,703

Net loss $(13,612) $(15,313) $(33,538) $(17,953)

Earnings per share:

Net loss per share
from continuing
operations
Basic and diluted $(0.32) $(0.46) $(0.78) $(0.69)

Net income per share
from discontinued
operations
Basic and diluted $-- $0.02 $-- $ 0.17

Net loss per share
Basic and diluted $(0.32) $(0.44) $(0.78) $(0.52)

Weighted average shares
used in computing net
income (loss) per share
Basic and diluted 42,977 34,729 42,969 34,230

Source: Napster

CONTACT: Media, Dana M. Harris of Napster, +1-310-281-5073,
dana.harris@napster.com; or Investors, Alex Wellins, alex@blueshirtgroup.com,
or Jennifer Jarman, jennifer@blueshirtgroup.com, both of The Blueshirt Group,
+1-415-217-7722, for Napster

Web site: http://www.napster.com/
http://investor.napster.com/

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