Napster Reports 103 Percent Annual Revenue Increase in Fiscal 2006 and Strong Audience Growth for Napster.com

Napster Reports 103 Percent Annual Revenue Increase in Fiscal 2006 and Strong Audience Growth for Napster.com

LOS ANGELES, May 17 /PRNewswire-FirstCall/ -- Napster (NASDAQ:NAPS) today reported financial results for its fourth quarter and fiscal year ended March 31, 2006.

"Napster is very pleased to report sales growth in excess of 100 percent year-over-year for fiscal 2006 as it demonstrates substantial consumer demand for music subscription services and the Napster brand," said Chris Gorog, Napster's chairman and CEO. "Napster has carved out an important strategic position in the industry by offering music fans complete freedom to choose the way they experience music -- from downloads, to both portable and PC-based subscriptions, to a cell phone experience via Napster Mobile. We are also very pleased by the debut of our most recent initiative, a free ad-supported complete music experience at www.napster.com, which in only two weeks has substantially increased its visitation and is expected to introduce millions of fans to the Napster subscription service. The new free music experience at napster.com is generating strong interest from the advertising community, and NapsterLinks, which allows fans to add links to free Napster music in all of their internet communications, is creating a new viral awareness for Napster across the Web."

Net revenue from continuing operations for the fourth quarter of fiscal 2006 grew to $26.8 million, 54 percent over the prior year quarter and an increase of 14 percent from $23.5 million in the third quarter of fiscal 2006. Net loss from continuing operations, before income taxes, was $9.3 million for the fourth quarter of fiscal 2006, compared to a net loss from continuing operations, before income taxes, of $16.7 million in the third quarter of fiscal 2006 and $24.0 million in the fourth quarter of fiscal 2005. Net loss from continuing operations after income tax benefit (provision) for the fourth quarter of fiscal 2006 was $7.3 million, or $0.17 per basic and diluted share. Total net loss, which includes $2.9 million of net income from discontinued operations related to the settlement of purchase price adjustments on the sale of the consumer software division, was $4.4 million, or $0.10 per basic and diluted share.

At the end of March 31, 2006, Napster's total paid subscriber base was 606,000, including 59,000 university subscribers. Excluding university, the number of premium paid subscribers grew 16 percent from the third quarter of fiscal 2006 and 54 percent year-over-year. Subscriber revenue, which consists of monthly subscription fees as well as downloads purchased by both paid and trial subscribers, represented approximately 87 percent of music revenue, compared to 86 percent in the immediately preceding quarter.

Net revenue from continuing operations for the fiscal year ended March 31, 2006 was $94.7 million, as compared to net revenue from continuing operations of $46.7 million for fiscal 2005. Net loss from continuing operations, before income taxes, for fiscal 2006 was $59.0 million compared to a net loss from continuing operations, before income taxes, of $67.0 million for fiscal 2005. Net loss from continuing operations, after income tax benefit, for fiscal 2006 was $57.9 million, or $1.35 per basic and diluted share. Total net loss for fiscal 2006 was $54.9 million, or $1.28 per basic and diluted share.

Napster ended fiscal 2006 with a total of $104.2 million of cash, cash equivalents, foreign currency conversion in-transit and short-term investments.

Business Outlook

"While our visibility is limited given the very recent launch of our ad-supported product and typical June quarter seasonality, we currently anticipate revenue for the first quarter of fiscal 2007 of approximately $25 million to $28 million. Operating expenses are expected to be down substantially year-over-year but to increase in the first fiscal quarter compared to the previous quarter in conjunction with the launch of Napster.com. We are very excited about the potential long-term positive impact of Napster.com to our financial model. We believe that we will continue to see a significant increase in monthly visitation, and correspondingly, a substantial reduction in subscriber acquisition costs," said Nand Gangwani, Napster's chief financial officer.

Corporate Highlights

Napster recently:

* Unveiled the new Napster.com, its interactive, ad-supported, free
online music destination. With the launch, Napster became the first
legal digital music service to offer music fans free, on-demand
listening to over two million major and independent-label tracks five
times each.

* Announced with Ericsson, the world's leading telecommunications
supplier, that Napster Mobile is now available to mobile network
operators in select markets across Europe, North America and Asia.

* Announced that SunCom Wireless, a leading wireless phone service
provider in the Southeast United States, Puerto Rico and the U.S.
Virgin Islands, has agreed to offer the Napster Mobile music service to
all of its subscribers.

Conference Call Information

The Napster fourth-quarter teleconference and webcast is scheduled to begin at 2:00 p.m. PDT on Wednesday, May 17, 2006. To participate on the live call, analysts and investors should dial 800-218-8862 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 (NASDAQ:NAPS) is committed to making great music experiences more accessible to all music fans. Napster.com gives web users the power to legally listen on-demand to a massive catalog of music from major and independent labels, wherever they are on the Web -- for FREE. The Napster music subscription service offers a premium experience that includes unlimited access to CD-quality music and advanced discovery, community and programming features in an advertising-free environment, and Napster To Go subscribers also enjoy unlimited transfer of music to a compatible MP3 player. Napster Light, an a la carte download store, and Napster Mobile, a hosted music service featuring artist images, ring tones and full-length songs, round out the Napster digital music lineup. Napster is headquartered in Los Angeles with offices in Frankfurt and London. For more information, please visit www.napster.com.

Safe Harbor Statement

Except for historical information, the matters discussed in this press release, in particular matters related to the development and offering of a complete mobile service, the introduction of millions of fans to the Napster subscription service, the Company's future revenues and operating expenses, the long-term positive impact of Napster.com on Napster's financial model, increases in visitation to the Napster Web site and the reduction in subscriber acquisition costs are forward-looking statements that are subject to certain risks and uncertainties such as our limited operating history, particularly that of the advertising-supported Web service, failure to develop new products and services; flaws inherent in our products or services; decreased demand for our products and 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; and general economic conditions; 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 February 8, 2006, 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) 2006 Napster, LLC. All rights reserved. Napster, Napster Mobile, Napster To Go and Napster Light are either trademarks or registered trademarks of Napster, Inc. or its subsidiaries in the United States and/or other countries. All other trademarks are owned by their respective owners.

Media Contact:
Dana M. Harris
Napster
310-281-5000
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)

March 31, March 31,
2006 2005
ASSETS
Current assets:
Cash and cash equivalents $46,812 $135,416
Short-term investments 49,812 22,540
Foreign currency conversion in transit 7,545 --
Investment in Sonic Shares -- 9,840
Accounts receivable, net of allowance
for doubtful accounts of $7 at
March 31, 2006 and $6 at March 31, 2005 1,042 1,545
Investment hedge receivable -- 4,619
Prepaid expenses and other current assets 6,182 5,156
Total current assets 111,393 179,116

Property and equipment, net 7,012 5,337
Goodwill 34,658 34,658
Identifiable intangible assets, net -- 1,349
Investment in unconsolidated entity 2,203 --
Other assets 275 422

Total assets $155,541 $220,882

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $3,279 $6,547
Income taxes payable 4,139 4,125
Accrued liabilities 16,712 11,381
Deferred revenues 12,824 8,345
Deferred gain on divestiture -- 2,073
Short-term debt 33 15,110
Total current liabilities 36,987 47,581

Long-term liabilities:
Deferred income taxes 2,622 1,696
Other long-term liabilities 159 212
Total liabilities 39,768 49,489

Stockholders' equity:
Preferred stock, $0.001 par value;
Authorized: 10,000 shares;
Issued and outstanding: none at
March 31, 2006 and none at March 31, 2005 -- --
Common stock, $0.001 par value;
Authorized: 100,000 shares;
Issued and outstanding: 43,826
shares at March 31, 2006
and 42,961 shares at March 31, 2005 44 43
Additional paid-in capital 260,198 256,586
Deferred stock-based compensation (2,934) (533)
Accumulated deficit (141,368) (86,423)
Accumulated other comprehensive
income (expense) (167) 1,720
Total stockholders' equity 115,773 171,393

Total liabilities and stockholders'
equity $155,541 $220,882

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

Three Months Ended Year Ended
March 31, March 31,
2006 2005 2006 2005

Revenues:
Content $26,231 $17,114 $90,784 $44,724
Hardware and license 548 322 3,907 2,005
Total revenue 26,779 17,436 94,691 46,729

Cost of revenues:
Content 18,588 13,461 64,468 35,499
Hardware and license 701 445 4,740 2,051
Total cost of revenues 19,289 13,906 69,208 37,550

Gross profit 7,490 3,530 25,483 9,179

Content gross profit % 29% 21% 29% 21%
Hardware and license gross profit % (28%) (38%) (21%) (2%)
Gross profit % 28% 20% 27% 20%

Operating expenses:
Research and development 2,923 3,151 13,137 12,112
Sales and marketing 9,629 16,338 51,741 39,249
General and administrative 4,888 7,801 20,881 23,953
Amortization of intangible assets -- 474 1,265 1,936
Total operating expenses 17,440 27,764 87,024 77,250

Loss from continuing operations (9,950) (24,234) (61,541) (68,071)

Loss from unconsolidated entity (226) -- (289) --
Other income, net 863 210 2,811 1,091

Loss before provision for income
taxes (9,313) (24,024) (59,019) (66,980)
Income tax benefit (provision) 1,999 (100) 1,160 15,547

Loss from continuing operations,
after benefit (provision)
for income taxes (7,314) (24,124) (57,859) (51,433)

Income (loss) from discontinued
operations, net of tax effect 2,914 (214) 2,914 21,927

Net loss $(4,400) $(24,338) $(54,945) $(29,506)

Earnings per share:

Net loss per share from continuing
operations
Basic and diluted $(0.17) $(0.59) $(1.35) $(1.43)

Net income (loss) per share from
discontinued operations
Basic and diluted $0.07 $(0.01) $0.07 $0.61

Net loss per share
Basic and diluted $(0.10) $(0.60) $(1.28) $(0.82)

Weighted average shares used in
computing net income (loss)
per share
Basic and diluted 43,026 40,877 42,989 36,065

Source: Napster Inc.

CONTACT: Media, Dana M. Harris of Napster, +1-310-281-5000,
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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