Napster says music cell phones will save company
Napster, Inc. (Nasdaq: NAPS), the formerly notorious music-sharing company that now bills itself as “the most popular on-demand music subscription service in the world,” is positioning itself to become the leading content provider for music-enabled cell phones, CEO William Gorog said in a conference call after the close of Wednesday’s trading.
“We have never had greater excitement,” Gorog said on the call. “We believe our base of on-demand music subscribers is greater than all other on-demand subscription services combined.”
In the first quarter of 2008 ending June 30, the company expects revenues of $31 million, from $28.1 million the prior year, on improved gross margins and lowered operational expenses, CFO Nand Gangwani said on the call. The company predicts a net loss between $6 million and $7 million, or $0.14 a share, Gangwani said. This would be an improvement on the first quarter 2007 loss of $9.8 million, or $0.26 a share.
CEO Gorog forecasted an industry shift from standalone MP3 players to music-enabled cell phones.
“In 2008, music-enabled cell phones will easily eclipse sales of MP3 players,” Gorog said. “In the near future, most consumers will own a portable device that is compatible with Napster.”
In two weeks, the company is rolling out its wireless service, Napster To Go, with NTT DoCoMo, Inc. (NYSE: DCM) the largest cell phone provider in the world, Gorog said. Other carriers will launch the Napster service over the year, he said.
Regarding the iPhone, Apple’s high-profile music cell phone launching this June, Gorog believes Napster will benefit from the competition.
“iPhone will be helpful to the industry by showing audiences how hybrid phones work,” Gorog said.
Apple, which is releasing 10 million iPhone units over the first nine months of release, will eventually be overwhelmed by the hundreds of million of non-Apple music cell phones that will be released, he said.
Gorog also predicted that all major music labels will embrace an MP3, non-copy protected format, over the next year. The embrace of this non-proprietary format will increase Napster’s business because it will provide the company access to the iPod install base, he said.
Despite a rise in sales, Napster’s loss deepened in the fourth quarter ended March 31. The company, founded in a Northeastern University dorm room in 1999 as an illegal file sharing service, reported a fourth quarter loss of $8.5 million, or $0.20 a share, compared with a loss of $4.4 million, or $0.10 a share, a year earlier. Fourth-quarter revenue grew 9% to $29.1 million, up from $26.8 million in the prior year.
The company, incorporated in 2000, beat analysts’ revenue guesses, but met loss expectations. Thomson Financial analysts predicted revenues of $27.96 million, and a loss of $0.20 a share.
In an agreement announced Tuesday, Napster will make its music subscription service available in-box with every Motorola, Inc. (NYSE: MOT) phone that is Windows DRM-compatible. In a press release, Napster said an offer of one free month of the Napster To Go subscription service will be heavily marketed. Additionally, European customers will receive five free permanent downloads along with the subscription. Over the next three to five years, Motorola told Napster it will manufacture hundreds of millions of Windows DRM-compatible phones, CEO Gorag said on the conference call.
“We’re excited and believe this deal has great potential to us,” Gorag said.
At the end of the fourth quarter, Napster counted 830,000 paid subscribers. The paid subscriber increase - 47% since the third quarter of 2007 – was attributed to 225,000 AOL Music subscribers, who became Napster customers through an agreement in March. Napster expects most of the subscription growth to occur in the second half of the year, CFO Gangwani said.
Over the last 52 weeks, shares in the company’s stock have fluctuated between a low of $2.55 and a high of $4.92. Before the fourth-quarter earnings release after the closing bell, Napster shares rose 2.2% to close at $4.07 during regular trading hours. In after-hours trading, shares fell 4.6% to $3.88 at 6:20 p.m. ET.
