With software revenue drooping and marketing costs climbing, the company behind the reborn Napster online music service Wednesday reported a quarterly loss that was sharply higher than the previous year but not as deep as analysts expected.
Santa Clara, Calif.-based Roxio Inc. reported a loss of $25.6 million, or 92 cents a share, on $18.8 million in revenue in its fiscal third quarter, which ended Dec. 31. The per-share loss was nearly double that of the same quarter in 2002, yet it was 5 cents better than the analysts polled by Thomson First Call had predicted.
Revenue fell from $26.4 million and the loss widened from $9.2 million in the year-earlier quarter.
Roxio executives said they expected software revenue to rebound this month when the company releases a new version of its flagship disc-recording products for home computers. They also expect increased sales at Napster, although the division is likely to stay so deep in the red that it will wipe out the expected profit from software.
One development that should help Napster is a deal announced Wednesday to supply about 3,700 students at the University of Rochester with a discounted version of the subscription music service. It's the second such deal for Napster, which struck a similar pact last year with Penn State University.
Roxio's software business is cyclical, rising on the release of new versions but falling in later quarters as it discounts products to clear out inventory. The digital music market, by contrast, is a nascent business with thin margins and not enough volume yet to generate profits.
The version of Roxio's disc-burning software due this month is the first to integrate its CD- and DVD-recording products with complete photo- and movie-editing programs. "We believe that this will be a breakthrough product," Chief Executive Chris Gorog said.
As for Napster, Roxio reported about $3.6 million in revenue and $15.1 million in pretax losses from digital music operations, with the revenue split roughly equally between subscription fees and a la carte music downloads.
Chief Financial Officer Nand Gangwani predicted that Napster would generate $5 million in revenue in the fourth quarter but lose nearly $12 million.
Gorog, who predicted last fall that Napster would attract 80,000 subscribers by the end of 2003, declined to say how many people signed up at $10 a month. Judging by the revenue reported, the number of subscribers probably topped Gorog's prediction, although it still pales in comparison to the millions downloading music free from unauthorized file-sharing services.
Roxio shares rose 9 cents to $4.45 on Nasdaq before the earnings announcement. In after-hours trading, the stock dropped as low as $3.87.