Napster More Than Triples Revenue and Ends Fiscal 2005 With 412,000 Subscribers

Napster More Than Triples Revenue and Ends Fiscal 2005 With 412,000 Subscribers

LOS ANGELES, May 11 /PRNewswire-FirstCall/ -- Napster (NASDAQ:NAPS), the biggest brand in digital music, today reported financial results for its fourth quarter and fiscal year ended March 31, 2005.

"Napster maintained its position as the most innovative and fastest growing online music subscription service by ending its first fiscal year with revenue of $46.7 million and 412,000 subscribers," said Chris Gorog, Napster's chairman and CEO. "Fourth quarter revenue grew 188% over the prior year quarter with the very successful launch of Napster To Go, the first portable music subscription service in the world, driving sales performance. We recently delivered on our commitment to expand our service and grow our audience with the availability of our Napstertones mobileproduct, which makes the hottest ringtones and exclusive Napster graphics and wallpaper available to almost 70 million cellphone users in the U.S. We ended fiscal 2005 with a very strong cash and short term investment position and are very excited to execute on our growth plans for fiscal 2006."

Net revenue from continuing operations for the fourth quarter of fiscal 2005 grew to $17.4 million, 188% over the prior year quarter and a 44% increase from $12.1 million in the immediately preceding quarter. Net loss from continuing operations, after income tax benefit (provision), was ($24.1) million for the fourth quarter of fiscal 2005, or ($0.59) per basic and diluted share, compared to a net loss from continuing operations, after income tax benefit (provision), of ($12.2) million or ($0.37) per basic and diluted share in the fourth quarter of fiscal 2004.

Net revenue from continuing operations for the fiscal year ended March 31, 2005 was $46.7 million, as compared to net revenue from continuing operations of $12.0 million for fiscal 2004. Net loss from continuing operations, after income tax benefit (provision), for fiscal 2005 was ($51.4) million, or ($1.43) per basic and diluted share, compared to a net loss from continuing operations, after tax benefit (provision), of ($46.4) million, or ($1.69) per basic and diluted share, in fiscal 2004.

Napster ended fiscal 2005 with $158 million in cash, cash equivalents and short-term investments, plus $14.5 million in value of shares of Sonic Solutions stock, including the associated hedge.

Business Outlook

For the first quarter of fiscal 2006 Napster expects revenue to increase to $19-21 million, which reflects more modest growth due to the start of typical summer seasonality for both Internet usage and music sales and the university summer recess which causes a seasonal cancellation of most university subscriber accounts.

"We believe that the promotion of new subscription services by competitors will expand the market. Based on our discussions with record labels, it is clear that very aggressive introductory pricing for portable subscriptions from competitors will be at negative gross margins and we believe that consumers should expect rapid price increases. We further believe that most consumers will demand that that a paid subscription service should be an ad- free environment and Napster is committed to offering true music fans a safe haven. Napster has, and continues to outsell many significant competitors both in downloads and subscription because of the quality of our experience and the power of the Napster brand. We are in development on a number of new initiatives that could significantly improve the margins of our business by leveraging the Napster brand further into the on-line and physical world with new products and services. With the fastest growing online subscription service in the industry, a subscriber base in excess of 400,000 music fans and a very healthy balance sheet, we believe we will continue to compete very successfully against any new entrants," concluded Mr. Gorog.

Recent Highlights -- Napster recently launched its Napstertones mobile phone service, extending the Napster platform to cell phone users across America. The new consumer service provides ringtones, artist voice "shoutouts," exclusive wallpapers featuring the iconic Napster Kitty and other cool graphics from Napster's library. Napstertones is immediately available to Cingular and T-Mobile subscribers, and consumers of most major carriers will be able to access the Napstertones service during summer 2005. The service will also be rolling out in Canada to consumers on the Rogers Wireless and Fido networks in June. -- The March 2005 Ipsos -- Insight Digital Music report noted that Napster has the highest awareness of online digital music services and websites among downloaders, at 82%. -- There are currently 12 portable devices that support the Napster To Go service, and Napster expects this number to grow substantially throughout calendar 2005 and beyond. These include MP3 players from Creative, Dell, Gateway, iriver and Samsung and cell phones from AudioVox. -- To symbolize the concept of Napster To Go and underscore the value of portability, Napster conducted a Napster To Go cafe tour, converting venues in New York, Austin, Los Angeles and Nashville into Napster To Go Cafes and giving away "free fills & refills" of digital music along with iriver, Creative and Dell MP3 players.

Conference Call Information

The Napster fourth quarter teleconference and webcast is scheduled to begin at 2:00 p.m., Pacific Time, on Wednesday, May 11, 2005. To participate on the live call, analysts and investors should dial 800-218-0713 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 offices in London, New York, San Diego and San Jose.

Safe Harbor Statement

Except for historical information, the matters discussed in this press release, in particular matters related to Napster's future revenue and earnings, international expansion, interoperability with popular hardware devices, ability to compete effectively with new and current competitors, the success of the Napstertones service and availability of popular content 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; 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 February 9, 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.

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

March 31, March 31, 2005 2004 ASSETS Current assets: Cash and cash equivalents $135,416 $36,911 Restricted cash -- 1,735 Short-term investments 22,540 28,490 Investment in Sonic Shares 9,840 -- Accounts receivable, net of allowance for doubtful accounts of $6 at March 31, 2005 and none at March 31, 2004 1,545 16,279 Investment hedge receivable 4,619 -- Prepaid expenses and other current assets 5,156 8,476 Total current assets 179,116 91,891

Long-term investments 3,000 Property and equipment, net 5,337 9,933 Goodwill 34,658 89,516 Identifiable intangible assets, net 1,349 5,899 Other assets 422 1,748

Total assets $220,882 $201,987

LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $6,547 $6,610 Income taxes payable 4,125 2,841 Accrued liabilities 11,137 30,102 Deferred revenues and other deferred expense benefits 8,589 1,545 Prepaid purchase price adjustment on divestiture 2,073 -- Current portion of long-term debt 15,110 15,420 Total current liabilities 47,581 56,518

Long term liabilities: Long-term capital lease obligations 30 68 Deferred income taxes 1,696 -- Other long term liabilities 182 2,381 Total liabilities 49,489 58,967

Stockholders' equity: Preferred stock, $0.001 par value; Authorized: 10,000 shares; Issued and outstanding: none at December 31, 2004 and none at March 31, 2004 -- -- Common stock, $0.001 par value; Authorized: 100,000 shares; Issued and outstanding: 42,961 shares at March 31, 2005 and 33,543 shares at March 31, 2004 43 34 Additional paid-in capital 256,585 195,970 Deferred stock-based compensation (533) (1,386) Accumulated deficit (86,422) (56,916) Accumulated other comprehensive income 1,720 5,318 Total stockholders' equity 171,393 143,020

Total liabilities and stockholders' equity $220,882 $201,987

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

Three Months Ended Year Ended March 31, March 31, 2005 2004 2005 2004

Revenues: Content $17,114 $6,061 $44,724 $11,964 Hardware and license 322 -- 2,005 -- Total revenue 17,436 6,061 46,729 11,964

Cost of revenues: Content 13,430 5,162 35,373 10,422 Hardware and license 445 -- 2,053 -- Amortization of purchased technologies 31 31 124 108 Total cost of revenues 13,906 5,193 37,550 10,530

Gross profit 3,530 868 9,179 1,434

Content gross profit% 21.3% 14.3% 20.6% 12.0% Hardware and license gross profit % -38.2% -- -2.4% -- Gross profit % 20.2% 14.3% 19.6% 12.0%

Operating expenses: Research and development 3,150 3,099 12,107 11,940 Sales and marketing 16,304 3,440 39,215 15,647 General and administrative 7,729 5,573 23,316 21,217 Restructuring charges -- 1,119 -- 1,119 Amortization of intangible assets 474 549 1,936 2,172 Stock-based compensation charges 107 245 676 904 Total operating expenses 27,764 14,025 77,250 52,999

Loss from continuing operations (24,234) (13,157) (68,071) (51,565)

Other income, net 210 138 1,091 634

Loss before provision for income taxes (24,024) (13,019) (66,980) (50,931) Income tax benefit (provision) (100) 854 15,547 4,515

Loss from continuing operations, after benefit (provision) for income taxes (24,124) (12,165) (51,433) (46,416)

Income (loss) from discontinued operations, net of tax effect (214) 5,600 21,927 2,003

Net Loss $(24,338) $(6,565) $(29,506) $(44,413)

Earnings per share:

Net loss per share from continuing operations Basic and diluted $(0.59) $(0.37) $(1.43) $(1.69)

Net income (loss) per share from discontinued operations Basic and diluted $(0.01) $0.17 $0.61 $0.07

Net (loss) per share Basic and diluted $(0.60) $(0.20) $(0.82) $(1.62)

Weighted average shares used in computing net income (loss) per share Basic and diluted 40,877 32,961 36,065 27,496

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

Three Months Ended March 31, December 31, September 30, June 30, 2005 2004 2004 2004

Revenues: Content $17,114 $11,990 $8,912 $6,708 Hardware and license 322 121 403 1,159 Total revenue 17,436 12,111 9,315 7,867

Cost of revenues: Content 13,430 9,573 7,055 5,315 Hardware and license 445 85 422 1,101 Amortization of purchased technologies 31 31 31 31 Total cost of revenues 13,906 9,689 7,508 6,447

Gross profit 3,530 2,422 1,807 1,420

Content gross profit% 21.3% 19.9% 20.5% 20.3% Hardware and license gross profit % -38.2% 29.8% -4.7% 5.0% Gross profit % 20.2% 20.0% 19.4% 18.1%

Operating expenses: Research and development 3,150 2,885 3,187 2,885 Sales and marketing 16,304 9,169 9,447 4,295 General and administrative 7,729 5,467 5,501 4,619 Amortization of intangible assets 474 474 474 514 Stock-based compensation charges 107 118 205 246 Total operating expenses 27,764 18,113 18,814 12,559

Loss from continuing operations (24,234) (15,691) (17,007) (11,139)

Other income (loss), net 210 806 106 (31)

Loss before provision for income taxes (24,024) (14,885) (16,901) (11,170) Income tax benefit (provision) (100) 11,232 828 3,587

Loss from continuing operations, after provision for income taxes (24,124) (3,653) (16,073) (7,583)

Income (loss) from discontinued operations, net of tax effect (214) 16,438 760 4,943

Net income (loss) $(24,338) $12,785 $(15,313) $(2,640)

Earnings per share:

Net loss per share from continuing operations Basic and diluted $(0.59) $(0.10) $(0.46) $(0.22)

Net income (loss) per share from discontinued operations Basic and diluted $(0.01) $0.47 $0.02 $0.15

Net income (loss) per share Basic and diluted $(0.60) $0.36 $(0.44) $(0.08)

Weighted average shares used in computing net income (loss) per share Basic and diluted 40,877 35,097 34,729 33,726

Source: Napster Inc.

CONTACT: Media: Dana M. Harris of Napster, +1-310-281-5073 or 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, Inc.

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

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