Update: Earnings: Napster Revenues Increase 24 Percent in Q2; Subscribers Up 44 Percent; 10-Q

Music subscription service Napster booked revenues of $31.6 million in its Q2, up 24 percent from last year’s $25.4 million. Net income was 43 percent narrower, as it lost $5 million ($.12 per share) up from a loss of $9 million ($.21 per share). It did say, however, that it had $1.3 million in positive cash flow and that it expected this year to be its first full year of generating positive cash. After hours, the stock is down about 7.5 percent after gaining 3.3 percent during the day.

— The subscriber base is now 750,000, up 44 percent from 518,000 in the year ago period, but down from 770,000 last quarter. It said the sequential decline is consistent with seasonal patterns.

Release | Webcast (5:00 PM est)

Conference Call: CEO Chris Gorog and CFO Nand Gagwani spent much of the call spelling out the company’s current strategy, which relies on a combination of its new browser-enabled Napster (NSDQ: NAPS) 4.0 platform, as well as its wireless initiatives, such as the recently announced partnership with AT&T (NYSE: T). The plan is to position Napster as the much talked about music “cloud”, enabling users to access it from anywhere over more devices. Gorog said that it’s the company’s belief that all major music labels will go DRM-free in the next year, adding that “we will be well prepared for this likely transition”. He declined to give any details out on this, or explain how to understand a subscription music service in the DRM-free context. On future results, the view is that success depends on how rapidly wireless partners push the service.

Competition: Management refused to speculate on what impact, if any, it would see from Yahoo’s (NSDQ: YHOO) changing stance towards subscription services. As for the rumored Total Music service from Universal and SonyBMG, Gorog insisted that the company “rates the threat level of that quite low”, conveying the sentiment that it’s a rumor without much substance.

Update: In addition to the release, the company also filed a 10-Q this evening, which goes into more detail on its subscriber numbers and cash flow. Much of the year-over-year subscriber gain has to do with the transition of AOL (NYSE: TWX) Music Now subscribers to its service, earlier this year. A summertime decrease in subscribers had been expected, although the sequential decline of 2.6 percent was narrower than last year’s 4.1 percent dip.

Cash Flow: “For the remainder of fiscal 2008, provided that the music publishing fee rates are not finalized and presuming that we have no other large unusual cash payments, we expect to reflect cash flows near or above breakeven. However, once music publishing fee rates are established, we will be obliged to make a significant one-time payment for historical musical publishing fees, and we will likely be required to make full regular payments. At that time, our cash flows from operations may become negative.”