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October 18, 1999 16:20

Liquid Audio Reports 3Q99 Results: Revenues More than Double Sequentially, Grow 78% Annually

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Net Loss Per Share on Operations: $0.28

REDWOOD CITY, Calif., Oct. 18 /PRNewswire/ -- Liquid Audio, Inc. (Nasdaq: LQID), a leading provider of software and services for the digital delivery of music over the Internet, today announced financial results for the third quarter ended September 30, 1999. During the quarter, on July 8, the company completed an initial public offering of 4.8 million shares of common stock at $15 per share.

Third-quarter 1999 net revenues were $1.8 million, up 140 percent from $745,000 for the second quarter of 1999 and up 78 percent from $1.0 million for the third quarter of 1998.

Third-quarter 1999 net loss was $5.8 million, including a $826,000 strategic marketing-equity instruments expense for common stock and warrants issued to strategic partners and a $330,000 employee stock compensation expense. This compared sequentially with a net loss of $6.1 million, including strategic marketing and stock compensation expenses, for the second quarter.

Excluding strategic marketing and stock compensation expenses, third-quarter 1999 net loss on operations was $4.7 million, compared with a net loss on operations of $4.3 million for the preceding quarter and a net loss on operations of $1.5 million for the third quarter of 1998.

Third-quarter 1999 net loss per share was $0.35 (basic and diluted). This compared sequentially with a pro forma net loss of $0.36 per share for the second quarter. Pro forma computations for the three-month periods are based on 16.8 million weighted average shares, reflecting the issuance of common stock for the initial public offering and the conversion of preferred stock to common stock prior to that.

Excluding strategic marketing and stock compensation expenses, net loss per share on operations for the third quarter of 1999 was $0.28. This compared with a pro forma net loss on operations of $0.26 per share for the second quarter of 1999 and a pro forma net loss on operations of $0.09 per share for the third quarter of 1998.

Execution of Strategy, International Expansion

"During the third quarter, we continued building momentum in content aggregation, retail syndication and platform adoption -- three critical areas of digital music distribution," said Gerry Kearby, president and chief executive officer of Liquid Audio. "We measured our progress in terms of strategic alliances with both major and independent record labels, music and retail Web sites and leading technology providers for online music.

"International expansion was a key driver of our third-quarter revenue growth," Kearby continued. "The in-store digital music delivery opportunity in Korea and other countries where consumer market penetration for PCs and Internet access are relatively low has been very encouraging.

"We believe that the rapid music industry adoption of the Liquid Audio platform has positioned us at the forefront of the digital music distribution market. In order to meet the demand created by our industry alliances, we have increased our investments in product development, Internet services and music marketing."

Third-quarter software license revenue was $476,000, up 21 percent from $394,000 for second-quarter 1999 and up 27 percent from $374,000 for third-quarter 1998. Services revenue from maintenance and hosted service fees was $177,000, up 75 percent sequentially from $101,000 and up 70 percent from $104,000 a year ago. Business development revenue from the company's international partners in Asia was $1.1 million, more than quadruple the $250,000 reported for the second quarter and twice the $525,000 recorded a year earlier. Third-quarter gross margin was 75 percent, compared with 70 percent for the second quarter and 87 percent a year ago.

For the nine months ended September 30, net revenues were $3.1 million, up 77 percent from $1.7 million for the same period of 1998.

Nine-month net loss was $16.0 million, including strategic marketing and stock compensation expenses. Excluding these expenses, nine-month net loss on operations was $12.7 million, compared with a net loss on operations of $5.1 million for the year-earlier period.

Net loss per share for the nine months of 1999 was $2.07 (basic and diluted). This compared with a pro forma net loss of $0.77 per share for the nine months of 1998. Pro forma computations for the nine-month periods are based on 7.8 million weighted average shares, reflecting the issuance of common stock for the initial public offering and the conversion of preferred stock to common stock prior to that.

Excluding strategic marketing and stock compensation expenses, nine-month net loss per share on operations was $1.64, compared with a pro forma net loss of $0.65 per share on operations for the same period a year earlier.

Business Highlights

By the end of the third quarter, Liquid Audio's music distribution platform was used by more than 4,700 artists and 750 record labels to promote, syndicate and sell one of the largest commercially available catalogs of secure music online, comprising more than 37,000 songs. At quarter-end, Liquid Audio content was syndicated to more than 300 music and retail Web sites for preview and sale over the Internet.

Third-quarter 1999 highlights for content aggregation included the selection of Liquid Audio by three of the five major record labels-Warner Music Group/Atlantic, EMI Group/Virgin and BMG Entertainment/RCA, respectively-for the first commercially available, secure Internet downloads of a single track by a platinum artist (Tori Amos) and an entire album (David Bowie), both prior to release, and the first exclusive Internet sale, via secure digital download, of live recordings by a superstar artist (the Dave Matthews Band).

In the area of retail syndication, Liquid Audio formed a strategic alliance with Yahoo!, enabling artists to sell and consumers to buy secure digital music downloads on Yahoo! Digital, a new multimedia Web site, while offering online access to the entire Liquid Audio catalog. Liquid Audio also enabled the transformation of traditional "brick & mortar retailers" such as Best Buy, Sam Goody/Musicland, Virgin Megastores, and Wherehouse to "click & mortar retailers" of secure digital music downloads via the Liquid Music Network. In addition, the first digital music kiosk went live on schedule at a retail outlet in Korea, extending the Liquid Music Network from the Web to the store.

Third-quarter platform adoption highlights included the release of Liquid System 5.0 software, a major upgrade to Liquid Audio's end-to-end solution for digital music distribution that provides access to the widest selection of Internet downloads from a single integrated music player. Liquid System 5.0 supports all leading digital music standards, including mp3 and Secure Digital Music Initiative (SDMI). The company also released Liquid Plug-ins for RealNetworks, which enables users of RealPlayer G2 and RealJukebox to preview and purchase Liquid Tracks.

The Company

Liquid Audio is a leading provider of software and services for the digital delivery of music over the Internet. The Liquid Audio solution gives musicians, record labels, Web sites, and music retailers the ability to publish, syndicate and securely sell recorded music online with copy protection and copyright management. Using the Liquid Player software, available for free download at www.liquidaudio.com, music fans can preview and purchase downloadable music from the more than 300 affiliate Web sites in the Liquid Music Network. Traded on Nasdaq under the symbol LQID, Liquid Audio is located in Redwood City, California.

This news release contains forward-looking statements relating to future performance, technology and product development that may impact future results and the future viability of the company. Actual results could be affected or differ materially from those anticipated in the forward-looking statements as a result of new contracts or relationships that may not produce significant revenue or net income. Other risk factors that could cause results to vary include: future products and results; technological shifts; potential technical difficulties that could delay new products; competition; general economic conditions in the markets in which the company operates; the ability of the company, its customers and its suppliers to become Year 2000-compliant; pricing pressures; and the uncertainty of market acceptance of new products by OEM and end-user customers. Readers should refer to the "Risk Factors" section of the company's initial public offering prospectus, dated July 8, 1999, and other filings with the Securities and Exchange Commission.

NOTE: Liquid; Liquid Audio; Liquid Audio, Inc.; the Liquid Audio logo; Liquid Music; Liquid Plug-ins; and Liquid Tracks are trademarks of Liquid Audio, Inc. All other trademarks are the property of their respective owners. For more information about Liquid Audio software and services, call 888-Liquid-0 or visit http://www.liquidaudio.com .

                                Liquid Audio, Inc.
                        Condensed Statements of Operations
               (in thousands, except per-share amounts; unaudited)

                                        Three months ended  Nine months ended
                                            September 30        September 30
                                          1999      1998       1999      1998

    Net revenues:
      License revenue                     $476      $374     $1,129     $808
      Service revenue                      177       104        367      169
      Business development revenue       1,132       525      1,565      750
        Total net revenues               1,785     1,003      3,061    1,727

    Cost of revenues:
      Cost of license revenue               58        63        156      175
      Cost of service revenue              324        70        649      170
      Cost of business development
       revenue                              66        --         68       --
        Total cost of revenues             448       133        873      345
    Gross profit                         1,337       870      2,188    1,382

    Operating expenses:
      Sales and marketing                2,533       887      6,449    2,676
      Research and development           3,449     1,028      7,710    2,666
      General and administrative           741       548      1,741    1,155
      Strategic marketing
       -- equity instruments               826        --      2,190       --
      Stock compensation expense           330       339      1,119      882
        Total operating expenses         7,879     2,802     19,209    7,379
    Loss from operations               (6,542)   (1,932)   (17,021)   (5,997)

Interest and other income, net 722 104 986 51 Net loss $(5,820) $(1,828) $ (16,035) $(5,946)

Net loss per share: Basic and diluted $(0.35) $(0.74) $(2.07) $(2.67)

Weighted average shares 16,821 2,457 7,755 2,227

                              Liquid Audio, Inc.
                           Condensed Balance Sheets
                          (in thousands; unaudited)

                                                     September 30  December 31
                                                          1999         1998
    Assets
    Current assets:
      Cash, cash equivalents and
       short-term investments                          $70,516      $17,144
      Accounts receivable, net                             183          376
      Receivables from strategic partners                  942          615
      Other current assets                                 917          314
        Total current assets                            72,558       18,449

    Property and equipment, net                          4,320        1,507
    Other assets                                           117           70

          Total assets                                 $76,995      $20,026

    Liabilities, mandatorily redeemable
     convertible preferred stock and warrants
     and stockholders' equity (deficit)
    Current liabilities:
      Accounts payable                                  $2,177        $ 802
      Accrued expenses and other current
       liabilities                                       2,361          932
      Deferred revenue                                   1,191        1,177
      Capital lease obligations, current portion           185          197
      Equipment loan, current portion                      589          281
        Total current liabilities                        6,503        3,389
    Capital lease obligations,
     non-current portion                                   231          330
    Equipment loan, current portion                        879          639
    Note payable to strategic partner                      425           --
        Total liabilities                                8,038        4,358

    Mandatorily redeemable convertible
      preferred stock and warrants                          --       29,801
    Stockholders' equity (deficit)                      68,957     (14,133)

        Total liabilities, mandatorily
          redeemable convertible preferred
          stock and warrants and stockholders'
          equity (deficit)                             $76,995      $20,026

SOURCE Liquid Audio, Inc.

/CONTACT: investors, Gary Iwatani, 650-549-2038, or gary@liquidaudio.com,
or media, Andrea Fleming, 650-549-2065, or andrea@liquidaudio.com, both of
Liquid Audio, Inc./

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

(LQID)

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