Can Napster Become Profitable? (NAPS)

Napster Inc. (NASDAQ:NAPS) is set to report earnings after the close, and First Call pegs estimates for another loss at -$0.15 EPS and just under $32.5 million in revenues.  If the company offers guidance it is expected to post -$0.15 and $33.3 million revenues next quarter.

Now what is interesting here is that Napster has been deemed not quite on life support or in limbo, but the financial situation is a peculiar one.  The company is expected to post wide losses for fiscal March-2008 and for fiscal March-2009.  The revenues for each year respectively are $140.6 million and $165 million.

As of last quarter the company has $66.4 million in cash and equivalents.  The good news is that its entire liabilities were only $37 million but the company has been bleeding out over $7 million  (last quarter) and over $9 million in each of the two prior quarters.  Its total cash flow from operations was over $3 million last quarter. 

Here is the good news, at the current rate the company can sustain itself for several years without hitting the cash trough.  The bad news is that if it loses any key relationships then it has some serious decisions to make.  There has not been a peep from the 2006 hopes of any merger, and the company has not really been able to capitalize on being potentially the top iTunes competitor out there. 

With the contract agreements already in place there has to be some value to the online music database, but the question is more "what is that price?" than a current answer has shown.  The company has a $128 million market cap, and with shares at $2.76 it is closer to the bottom of its $2.55 to $4.92 trading range over the last 52-weeks.

Jon C. Ogg
August 1, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.