Napster F3Q06 (Qtr Ending Dec 31, 2005) Earnings Conference Call Transcript (NAPS)

Napster (NAPS)
Q3 2006 Earnings Conference Call
February 8th 2006, 5:00 PM.

Executives:

Alex Wellins, Blue Shirt Group
William Christopher Gorog, Chairman and Chief Executive Officer
Nand Gangwani, Chief Financial Officer, Principal Accounting Officer and VP

Analysts:

Dan Salmon, Harris Nesbitt
Kit Spring, Stifel Nicolaus
Gene Munster, Piper Jeffrey
George Sutton, Craig-Hallum
Christopher Rowen, Suntrust

Presentation

Operator

Good afternoon ladies and gentlemen and welcome to the Napster Incorporated Third Quarter Conference Call. At this time all participants are in a listen-only mode. Following today’s presentation instructions will be given for the question and answer session. Operator Instruction. And as a remainder this conference is being recorded today Wednesday, February 8, 2006. I would now like to turn the conference over to Alex Wellins with the Blue Shirt Group. Please go ahead.

Alex Wellins, Blue Shirt Group

Thanks for joining us on today’s call. With me today are Napster’s Chairman and CEO, Chris Gorog and the Company’s CFO, Nand Gangwani. Today after the market close Napster issued financial results for the third fiscal quarter. The earnings release in this conference call can be accessed from the Investor Relation section of Napster’s website at napster.com. We would like to remind you that during the course of this conference call Napster’s management will make forward-looking statements including predictions and estimates. These statements including any statements regarding expectations for future cash balances, revenue, expenses, net losses, the success of the Napster brand, acceptance of the Napster services including the napster.com initiative in the U.S. and internationally interoperability of our service with popular hardware devices and cell phones; competition in the industry, relationships with content providers and strategic partners, the growth of digital music subscription as a whole and any strategic transactional acquisition involve a number of risks and uncertainties. Actual results may differ materially from any future performance suggested in the company’s forward-looking statements. We refer you the Company’s Form 10-Q for the quarter ended December 31, 2005 on file with the SEC for important risk factors that could cause actual results to differ materially from those contained in any forward-looking statements. We expressly disclaim any obligation to update this forward-looking information. With that said I’ll turn the call over to Chris.

William Christopher Gorog, Chairman and Chief Executive Officer

Good afternoon everyone, thank you for joining us on our call today. Napster posted a strong third quarter, made significant progress growing our subscribers and substantially beat our bottom line guidance. Our revenue of 23.5 million was up 94% over the prior year and music revenue was up sequentially by 1.8 million excluding one time hardware promotions. Our loss of $0.40 per share was significantly ahead of our guidance of $0.60 per share and our ending cash and investment balance of $111 million demonstrates our serious focus on reducing cash burn.

Napster added 66,000 premium paid subscribers during the period to end the quarter with 473,000 premium subscribers excluding university, a sequential increase of 16% and a year-over-year increase of approximately 110%. Additionally we had approximately 53,000 university subscribers at the end of December. We believe the year-over-year premium subscriber growth of 110% clearly validates our strategy to focus on a subscription model. And is even more impressive when considering the device challenges consumers have to sort through during these early days. We remain 100% convinced that the unlimited access model will dominate the future of the music business and that we will continue to benefit as one of its leading pioneers.

In terms of market share Napster remains by far the most well known brand in digital music according to the recent (indiscernible) study, outdistancing every other brand in this space substantially including iTunes. Although there is not yet reliable third party market share data to draw from, our internal date of gathering continues to support that we are number one or a very strong number two in premium subscription and remain a clear number two in download sales.

Operationally our main objectives during the quarter were the delivery of our first phase of development for XM + Napster. On the launch of Napster Germany both projects were launched unscheduled and we are very pleased with the initial response for both initiatives. Nand will now give you report of our financial results for Q3 and give you our guidance for Q4 and then I’ll bring you further up-to-date on operations and briefly address where we are with the development of napster.com. Nand?

Nand Gangwani, Chief Financial Officer, Principal Accounting Officer and VP

Thanks Chris. Thanks to everyone for joining us today. Napster reported revues of 23.5 million inline with our guidance. As Chris mentioned although revenues were roughly flat music revenue was actually up about 1.8 million or 8.5% during the quarter if you exclude one time hardware promotions.

Turning to international, we launched Napster Germany in mid December and our subscription model met an enthusiastic response from this market. The revenues from international including UK and Germany totaled approximately 3 million or 13% of revenue for the quarter. Subscriber revenue this quarter grew to 86% of total revenue excluding one time hardware promotions up compared to 84% last quarter. We define subscriber revenue as revenues from both monthly subscription fees as well as downloads purchase by both paid and product subscribers.

Gross margin for the quarter was 26.8% up versus Q2’s gross margin of 21.8%. The increase in margin was mostly related to our negative margin hardware promotion with BellSouth.

Operating expenses for the quarter totaled 24.6 million up from the prior quarter total of 18.9 million but well below our guidance of 31 million primarily due to the acceleration of our cost reduction plans. On the line item basis compared to the prior quarter, sales and marketing expenses increased to 15.4 million for Q3, this is as expected due to increase marketing over the holiday season and the launch in Germany. R&D spending for the quarter came in at 3.8 million slightly higher than last quarter but inline with expectations. The increase was due to expenses related to the localization of our product for the German market as well as investment in our new web based initiative. Third quarter G&A was 5 million.

Interest in other income for the quarter totaled approximately 1.6 million and was primarily related to a 1.2 million gain recognized upon closing out our hedge position and selling our Sonics Solutions common stock. In December 2004 when Roxio’s assets were sold to Sonic -- Napster received approximately 650,000 shares in Sonic Solutions. Those shares increased in value 1.2 million shortly before replaced a hedge on them. . We have deferred this gain until the share was sold in December ’05. You will now see that on our balance sheet there is no investment in Sonic shares.

Starting this quarter you’ll notice the new line item on our P&L, loss from a consolidated entity. This line item represents our portion of losses from our joint venture with Tower Records. We’re accounting for our investment in Napster Japan under the equity method and those are recognizing 31.5% of their operating results on our P&L. While we will share 31.5% of all profits on the venture our shares of losses will be limited to approximately 3 million value of our investment. This quarter we recognize a loss of $63,000 related to our Napster Japan operations. The net loss from continuing operations after income taxes in the third quarter was 17 million or $0.40 per share. These results are favorable to guidance as a result of controlled expenses. Napster ended the period with 165 full time employees.

Moving to the balance sheet, Napster ended Q3 with over 111 million in liquid cash and short-term investments. The new line item on our balance sheet, investment and unconsolidated entity relates to our Q3 $1.3 million investment in Napster Japan. This is the first trench of our investment commitment we will contribute another 1.3 million during Feb ’06 which is our final obligation to fund this operation. Additionally we are guaranteed back approximately $1.7 million in royalties from the Napster Japan joint-venture over the next two years.

Total cash in short-term investments as defined earlier decrease approximately $15.9 million from last quarter primarily as a result of operating losses, capital expenditures and our $1.3 million investment in Napster Japan.

And now to guidance, Napster estimates fourth quarter fiscal ’06 revenue will increase to approximately $25 million. Turning to operating expenses we expect Q4 ’06 operating expenses to decrease to approximately $20 million to $21 million for the quarter. After having ramped up marketing spend over the holiday period we expect to return to lower marketing spend. We are projecting that the net loss for Q3 will narrow to approximately 15 to 16 million implying a loss per share of approximately $0.35 to $0.37.

To conclude my remarks we ended Q3 with over 111 million in cash and short-term investments. Our focus going forward will be to continue to control expenditures and manage cash flow in downwards. We feel very comfortable that we have sufficient cash to fund on going operations and our investment in the new web base initiative beyond and up calendar ‘07. Thanks for your attention and now back to Chris.

William Christopher Gorog, Chairman and Chief Executive Officer

Thank you, Nand. I am going to briefly review a number of our strategic initiatives and partnerships, talk a bit about the developments and add some color on our outlook.

We launched the first generation of XM + Napster in November as scheduled. The XM + Napster service is the web portal for XM 6 million plus subscribers. Our new service enables XM subscribers to listen to over 75 XM stations live on their PC and then purchase or download the tracks they like. This is a break through for radio and fulfils the dream many have had for decades to be able to instantly purchase a song as soon as you hear it on the radio.

The next step for our partnership is taking this concept to portable devices. At the recent CDR Show, consumers got their first look at a series of the next generation XM devices from Samsung, Pioneer and others. That will allow XM subscribers to tag songs heard live on XM for later purchase when they dock their device to XM + Napster on their PC. These new devices which are receivers for the XM Satellite service are also full featured MP3 players. The power put in the consumer’s hands with these new devices is very exciting and we have plans to delight music fans even further with our long-term roadmap with XM. We have little doubt that these products will be the most complete and exciting portable devices on the market. And I am very excited that Napster is right smack in the middle of this experience. We believe that this partnership with the number one player in satellite radio will prove to be a very cost effective way for us to promote Napster to a highly targeted demographic. And subscriber ads from this partnership will come at a very efficient cost. We believe the synergies between Napster and XM will create an unmatchable experience for power and music fans.

Turning to international, Napster Germany launched in early December and became our fastest growing international launch today. Napster has the first flat rate subscription services in Germany, which is instantly attractive to this sophisticated technology audience. We believe that our immediately successful launch indicates that German music fans quickly grasp the power and the value of the subscription model versus our card downloads. We continued to strategy of launching new territories with premium local partners and an integrated online and offline marketing campaign.

Trekstor, the number one MP3 player in Germany is bundling Napster exclusively. MakroMart one of the largest retailers in Germany is our main retail partner carrying Napster Prepaid Cards and other promotions. And we developed a number of integrated promotions with Sat.1, one of the largest TV networks in Germany. We launched Napster Germany with an exciting television campaign, which was extremely effective. In fact W&V, the most important advertising magazine in Germany called Napster’s Ad campaign the TV spot of the month, based on their independent research on how commercials increase brand awareness and drove consumers to action. We are very pleased with how we’ve launched in Germany and look forward to significant contributions from this very important market going forward.

We had a strong quarter in the U.K as well and significantly height in brand awareness from a very successful Viral marketing campaign that was seen by millions in the U.K. In fact just yesterday it was announced that Napster’s campaign was the second best Viral campaign in the U.K in 2005 in the Future Marketing Awards. As Nand said, international contributed about 13% of revenue during the quarter and we are very pleased to see that our overseas growth has continued.

Our 2006 launch of Napster Japan is on track with our Tower Records Japan partnership. During the quarter NTT DoCoMo, Japan’s leading mobile communications company announced and took a controlling position in Tower records Japan from retail investments. DoCoMo’s choice to partner closely with Tower Records Japan give us even greater confidence that we have chosen our partner well in Japan. We are very excited about the potential for Napster in this very vibrant music and technology market.

Turning to our mobile platform, we are pleased to announce that Napster will participate in 3GSM World Congress 2006 next week in Barcelona with our partner Ericsson the world’s leading telecommunication supplier. This is a major exhibition in the global communications industry that focuses on new cutting-edge technologies, services and products. Stay tuned next week for announcements regarding specific progress on our partnership with Ericsson at 3GSM. We are very excited about our progress in wireless and believe that this initiative holds lot of opportunity for Napster.

A couple of notes on the devices front, in early 2005 we projected that there would be about 50 Napster To Go compatible devices in the market. In fact there are currently about 70 Napster To Go compatible MP3 players and cell phones available. There was a very strong wave of new devices at CES and while there is no question that iPod is still ahead of the pack. We are very encouraged by the attach rate we see for Napster on compatible devices and in particular the growth of our portable subscription tier. We believe that is just a matter of time before the WMA devices begun to make their mark in the marketplace. And WMA MP3 player enabled cell phones may ultimately prove to be a very significant threat to iPod’s current dominance. We think we are very well placed to take advantage of this movement from MP3 players to hybrid music enabled cell phones.

Turning to our napster.com development, you will recall in our last conference call we outlined we were embarking on a new strategy to offer a number of free music experiences to consumers at the napster.com URL. The fundamental premise behind the strategy is to better exploit the massive awareness of the napster.com address by creating interactive content available free to fans while taking the advantage of the migration of add dollars to the web which is now happening in historic proportions.

We will be rolling out a series of new products and experiences that we believe will prove to be an important next step in the development of digital music. More importantly if we are successful in our execution, our customer acquisition cost for our paid subscription business should decrease very substantially. And we will have the opportunity to add high margin advertising dollars to our business. We are making good progress on this new initiative and as previously stated we will be rolling out these products during calendar 2006.

A final note before we turn the call over to your questions. There have been a number of rumors and speculation about Napster in the media recently. Anything with the word Napster in it seems to make for fun headline, ‘Live by the Sword, Die by the Sword’ I guess. Perhaps this is the yin and yang of such a powerful brand. However in this new era of instant Internet journalism we have found that the veracity of what is reported is let’s just say not what it used to be. So going forward we would advice our investors to focus carefully on Company’s statements and performance and to be very cautious trading on rumor. Specifically as we reported we have made some nips and tuck to overhead to run our operations more efficiently, nothing more nothing less.

From inception the company has made no attempt to solve the business, although we routinely receive enquires and have and always will evaluate them with seriousness as they come along focusing on the long-term interest of our shareholders. We believe we have and we’ll continue to add very significant value to our business. And that our investors will be rewarded to organic growth deeply integrated strategic partnerships with major global players, innovative development and a serious focus on driving to profitability; or if it make sense at some point drew a strategic alignment that yields an exciting evaluation for the number two player in the sector.

We certainly have no shortage of admires. We are very confident in what we have built, the strategic position we have created and in particular the new initiatives we have in development. With cash on hand to support our growth over the next two years we are very optimistic about Napster’s ongoing role in transforming this $40 billion industry. And with that we would enjoy hearing from now with your questions.

Questions & Answers

Operator

Thank you, sir. Ladies and gentlemen at this time we’ll begin the question and answer session. Operator Instruction. Now first question comes from Leland Westerfield with Harris Nesbitt. Please go ahead.

Q - Dan Salmon

Hey guys, this is Dan Salmon stepping in for Leland. I just one question, it seems like a lot of out performance was is in your sales and marketing line, can you just give us a little bit more color on what happen there versus what your outlook was last quarter. Thanks.

A - Nand Gangwani

Dan, you kept cutting on out, can you repeat the question please.

Q - Dan Salmon

The question was that a lot of outperformance was that seems within the sales and marketing line. Can you just give some color on what the differences there, the actual results were versus your outlook last quarter?

A - Nand Gangwani

Sure Dan. So when we started the quarter as we mentioned in our pervious call we had a pretty ambitious marketing plan going into the Christmas quarter. So we launched with a brand new, very well integrated television, print and online campaign. And midway though the quarter we found that we had achieved kind of the branding awareness aspects of the program and we decided to cut television and print and focus only on online and affiliate and business development partnerships, where we get a much better SAC and as a result we got the best Banker Award for the best ROI in the marketing dollars invested. So the savings that you see are primarily as a result of us discontinuing television and print in the middle of the quarter.

Q - Dan Salmon

Great thank you.

Operator

And our next question comes from Kit Spring with Stifel Nicolaus. Please go ahead.

Q - Kit Spring

Yeah can you talk a little bit about Yahoo’s direct impact on you and what you planned to do with pricing if you ever planned to match them or do expect that they raise their prices, do you still think they are loosing money. And then on XM, sounds interesting but doesn’t XM’s new devices allow them to library songs which might limit the likelihood that they would buy songs on Napster. And then do you view cell phones more as a competition or as a partner, thanks.

A William Christopher Gorog

Okay Kit, lot of questions there. In terms of Yahoo, I think any questions you have about Yahoo’s performance obviously are better best directed to them. I will say that, we just came off a really great quarter with 66,000 ads. I haven’t heard from them, in fact I heard, I think we’ve all heard nothing from them in terms of their performance. As I said last quarter, the industry view was that they had launched quite poorly. We had no indication with that is changed as to their prospects of when they’re going to make money or how they’re loosing money or whatever. All of those issues are better directed to them but I will say in a very general way I think that, the impact of the Yahoo’s launch on our company has been not even measurable as far as I can see.

Number 2, in terms of XM I think that in a general way we view the opportunity here to be quite significant because of their very large install base that seems to, continue to grow, just very dramatically every quarter. And have the opportunity to address this 6 million plus subscriber base, which is growing so fast. Our true and integrated relationship to offer them up, their subscribers opportunities to build libraries on their PC and of course as I mentioned we have really quite a comprehensive roadmap ahead of us. I think it really gives us just a flatter of marketing opportunities to help XM really complete the experience for power music fans. So, I think that relationship for us over the long-term, as you may recall, this is a five year deal and really provides a lot of opportunity for us to acquire subscribers at a great way we do subscriber opposition cost, sure sell a lot of downloads, but most importantly increase our subscriber base through this relationship. So whether people have the opportunity to temporarily store time shift, songs they hear live.

We ultimately are in this to build our subscriber base and not to sell downloads, although I think that, that will and has already made important contribution. Going to your final question about cell phones, we think in general this is a very substantial opportunity for us in the wireless space. As I mentioned in talking about MP3 player ecosystem, on the first hand I would say that we do expect that the hybrid music enabled cell phones really to be the dominant way that people are listening to music going forward in terms of their portable experience. So I think that the standalone MP3 player will be going by the wayside over the next handful of the years. And I think that provides, firstly an enormous opportunity for our company because it gives us finally a method through the device install base to really attack iPod’s dominance at least that in the United States because it’s not as dominant overseas. And in terms of a service space opportunity we do have quite an expensive our product offering with Ericsson and I would encourage you and our other listeners to Pay attention next week to the announcement of 3GSM because I think it will provide some detail in terms of what our current product offering is and a bit of detail about our road map. And this not only gives us a, global a very large, very significant, very powerful global player to help us market this product around the world. But also gives us a technology partner that many really literally countless wireless carriers around the world are dependent on and they are looking at Ericsson to be their solution for music and Napster is Ericsson’s solution for music. So, and interestingly this is a fairly low cost opportunity for us, because what we are really doing in this relationship is leveraging the electronic infrastructure we have already created.

I think most of the wireless carriers quickly determine that having the opportunity to sell downloads wirelessly was at best 50% of the challenge and the other 50% was how to simultaneously deliver songs to peoples PCs so they can maintain their music library. So it is the latter part of the equation that obviously, we’ve already built and which we are finding wireless carriers view as been extremely valuable. And I think its going to be a way that we can demonstrate leveraging the technology platform that we worked so to hard to create.

Operator

Thank you. And our next question comes from Gene Munster with Piper Jeffrey. Please go ahead.

Q - Gene Munster

Hi good afternoon guys and good job on the quarter. Chris, if you could talk about napster.com, just in terms of the number of the unique business that gives per month right now and may be how that’s been trending, might be a good starting point. And second is you’ve been already trying to pre-sale advertisement and my third question is this, this seems like it could be an exciting opportunity for Napster. How bigger an opportunity you think it could be is, is that something that could ultimately 5% of revenue at the end of calendar ’06 or 10% or more?

A - William Christopher Gorog

Thank you Gene, in terms of visitation to our current napster.com, I think it is still between 2 million to 3 million monthly. And I think that’s what Neilson is showing, I think that is basically trending in a fairly static way, because we really obviously have not brought out our new products yet. So we do view that as a very interesting foundation to begin presenting new products at the napster.com address. Interestingly when we have been out there in the marketplace, beginning to talk to advertisers, I would say number one, they are frankly, hugely interested in creating a relationship with the Napster brand but number two find that base of 2 million visitors a month is actually a very interesting place to start from as we tried obviously to accelerate hopefully dramatically visitation to the site as we roll our new products out. In terms of pre-sales, now we are not in the process of doing any pre-sales, what we have been doing is building out our ad sales infrastructure. We hired couple of executives, we’ve been putting in place some arrangements with third party firms basically to get all of our ad serving technologies up in running. So basically over the last three months we been both in the process of creating our ad sales infrastructure both human resource and technology and of course simultaneously building out the actual product.

In terms of making any predictions about how substantial this sector could be for us, obviously I’m going to shy away from that with any precision except to say that, we certainly are embarking on this because it is our goal to create products that would very significantly, positively affect our current economic model. And I think that if we are able to gain traction quickly with what we come out with, I think that hopefully there will be quite a viral effect among advertisers and, we could see something substantial, a fairly quickly after launch, we certainly hope so. But I think that at this point we would like to go one foot out of it, get the product out there and obviously report back to our investors as to how we’re doing. But we do have high hopes and I think that the validation we’ve received in to talking to advertiser is very comforting, that they have a great deal of interest in associating themselves with our brand and I think the bottom-line is its now up to us to create some exciting product and we think we are on a path to do that.

Q - Gene Munster

And Chris, can you talk a little about the timing you said ’06 is, when you’ll make the initial launches, it’s going to be in the first half of ’06 or the back half of ’06?

A - William Christopher Gorog

Well, I know its begging people’s patience to be as big as we are with respect to when we are going to launch and I appreciate everyone’s patience. But it really don’t do us any good competitively to pinpoint it any closer than that, so we hope you’ll just bear with us. Obviously we are excited to try a launch as soon as possible and I can assure you that we’re doing everything we can to do that.

Q - Gene Munster

Would you basically have a big event, would be a big splash when it actually comes out?

A - William Christopher Gorog

To be very honest with you Gene, we are in the process of creating our launch plants right now and I think really probably are not prepared to put a lot of detail around that yet.

Q - Gene Munster

Okay, great, thank you.

A - William Christopher Gorog

Thanks Gene.

Operator

Thank you. And our next question comes from George Sutton from Craig-Hallum. Please go ahead.

Q - George Sutton

Hi guys, nice quarter. Two questions for each of you, if I could. Chris, could you discuss what -- little bit more granularly what you mean by immediately successful launch in Germany. And could you also give us an update on your free Napster device strategy. And then for Nand, if you could discuss the in any way the direction of churn rate and also give us a sense of, you saw about 800 basis points are leverage on the content side, I just wondered how much more scaleable that might be? Thanks.

A - William Christopher Gorog

Thanks George. In terms of German launch, obviously we have in our couple of examples of what a launch looks like, the United States, Canada, the UK and now Germany. And when we say immediately successful we’re just comparing our first few weeks in Germany to our other launches, and I think as we said in our prepared remarks that was our most successful, so comparatively that means more successful than the UK and Canada. I do think that based on our numbers which I won’t be any clear about because I think going forward we are simply going to present an international number again for competitive reasons, not breaking it out territory-by-territory. But it is suffice to say I think there is very obvious evidence that there was no confusion or lack of understanding or lack of excitement about the subscription model. We had a great deal of excitement about launching the first subscription business in Germany because we always not only assumed but our research for now that Germany, which is a very sophisticated technology market, we would really get the value of subscription and we have clear evidence of that, I’ll just say that. And we do expect it to make a very significant contribution going forward which is wonderful from our perspective because I think it really begins to prove well, how leveragable this model is that we built, I mean this is really what it is all about. In terms of device strategy, obviously we’ve had some frustrations with some of the third party device manufacturers. We worked very closely with frankly most of them and some of them are better than others in terms of getting interoperability issues right. And so as I think we mentioned last quarter, we actually kind of took the bull by the horns, and kind of self directed the creation of our other device ourselves, we OEM the device. We did not take inventory risk on it but we put this together for a BellSouth partnership and then made these devices available to our subscribers, primarily marketed on our website. And we’ve done quite well with this, certainly in the many thousands of devices, I won't provide further detail about that. But the great thing about it is that we, because we work very closely with the design and development of these devices. They work basically perfectly and you know that provides us with the opportunity to provide consumers with the bulletproof experience with the portable product, which is very critical. And then secondarily this is usually done in a six to twelve month bundle, also it’s a great way to keep customers in their initial experience with us for at least six to twelve months. So it is a good approach with respect to trying to reduce churn. And in that regard now Nand will jump on the churn.

A - Nand Gangwani

Hey George, so I am glad you asked this question. As we mentioned in our last call, this is definitely one of our top priorities and we were putting a number of initiatives in place to bring the churn down. And I’m extremely pleased to say that we’ve made immense progress on that front, so Q2 over Q3 are churn came down very significantly. And more importantly we’ve been able to keep the churn levels down at the reduced level all through Q3 into Q4. So we are extremely pleased about that, but we’re to continuing to work on that and we are going to put in place many more initiatives over the next three to six months to try to keep bringing that number down, so that’s been really, really pleasing result for us. On the margin side, I think there is a still a lot of leverage, there is still room for improvement as we grow our business. But the bigger improvements will come from the new initiative that Chris outlined as a result of the advertising revenue streams, that will be where you see them, real dramatic improvement in our gross margins.

Q - George Sutton

Nand one of the thing if I could ask, your deferred revenues were up quite a bit, how exactly do you read that?

A - Nand Gangwani

Yes, to you, I may recall on during the Christmas quarter we normally have a very solid activity in the prepaid cards front, which consumers use as gift cards. So, and we cannot recognize revenues on the prepaid cards until consumers redeem those cards. So they sit on our balance sheet as deferred revenues, which is why you see the spike in deferred revenues.

Q - George Sutton

Okay, thanks guys.

Operator

Thank you. And our final question today comes from Christopher Rowen from Suntrust. Please go ahead.

Q - Christopher Rowen

Hi, I think back in the summer when you guys were talking about this new effort. I think you guys were describing a scenario in which the cash burn would dramatically drop after the fourth calendar quarter. And so I guess, what’s the new outlook for cash burn beyond this quarter that you just guided for in general terms.

A - Nand Gangwani

Right, Chris in general terms as I mentioned in my prepared remarks, our overall goal is to continue to manage our expenses, the way we’ve done the last two quarters. I mean we’ve been very successful and managing every dollar that’s goes out and we can show that we get the best of return on the capital invested. So we going to continue to do that, our overall goal is to bring the number down though we won’t guide to the specifics beyond that.

Q - Christopher Rowen

So but its sounds like it’s a, kind of managing it down as suppose to a dramatic change anytime soon.

A - Nand Gangwani

So, initially we’ll definitely be managing it down but the dramatic change will occur once the new initiative kicks in and gets traction.

Q - Christopher Rowen

Okay, thanks a lot.

Operator

Ladies and gentlemen that does conclude today’s question and answer session. I would like to turn the conference back to management for any concluding comments. Please go ahead.

William Christopher Gorog, Chairman and Chief Executive Officer

Well, thanks very much everyone, we’ll see on the next call.

Operator

And ladies and gentlemen that does conclude the Napster, Inc. Third Quarter Conference Call. If like to listen to a replay of today’s conference you may dial 303-590-3000 or 1-800-405-2236, use pass code 11050727# to access the conference. Thank you for time for your participation in today’s conference and you may now disconnect.

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