Destiny Media Technologies' CEO Discusses F2Q 2013 Results - Earnings Call Transcript

Apr.16.13 | About: Destiny Media (DSNY)

Destiny Media Technologies, Inc. (OTCQX:DSNY) F2Q 2013 Earnings Call April 16, 2013 1:00 PM ET

Executives

Steve Vestergaard – President & Chief Financial Officer

Fred Vandenberg – Chief Financial Officer

Analysts

Hubert Mak – Cormark Securities

Operator

Good afternoon, ladies and gentlemen, and welcome to the Destiny Media Technologies, Inc. F2Q 2013 Conference Call. (Operator instructions.) I would like to remind everyone that this call is being recorded on Tuesday, April 16th, 2013. I would now like to turn the conference over to Fred Vandenberg. Please go ahead.

Fred Vandenberg

Hi, and thank you to everyone who’s joined the call. I will start off briefly highlighting the results of operations and will not go into too much detail as I think our financial statements are fairly straightforward. Net income for the six-month period was approximately $173,000 versus a loss in the prior year of $274,000.

This six-month period was the first period of time in a number of years where the company didn’t have significant costs associated with litigation and we believe this reflects the cost of running the operations with investments in R&D. The company is very encouraged by being profitable also in this past quarter as it’s the quarter that sees the lowest revenue for the year.

Total operating costs for the six-month period dropped by approximately 25%, again with the vast majority of that arising from the virtual elimination of all of our litigation costs. Play MPE revenue did decline for the six-month period by a little less than 4%. 1.25% of this decline was a result of a reduction in usage by EMI in North America and we feel that it’s likely a temporary decline in light of our recent agreement with UMG and UMG’s acquisition of EMI. 1.00% of that decline was the result of the exchange with the Euro falling relative to the US dollar and we did see some decreased usage in Europe with Warner and UMG just over the Christmas break.

I have received a few questions over the last few days that I will address initially, they seem to be common questions; and then I will also be available to answer questions later on in the call. Accounts receivable did rise a little bit relative to the sales figures but 80% of that, the $496,000 balance – 80% of that was received as of yesterday, and almost all of the remainder is from one customer that has been a good customer for approximately ten years and always pays the bills so we’re not terribly worried about that. The other receivables are all sales tax credits that have since been refunded by the Canadian government, so the vast majority of those receivables have been received currently.

As you all know, we just recently resigned an agreement with Universal Music International. It’s one agreement across the world, and I think there’s been some questions about how this impacts our currency exchange risk. Projected in the future we expect to receive approximately, well sorry, I should say at least 55% of our revenue in Euros. And obviously this depends on where we grow revenue and that sort of thing but based on current results we see that approximately 55% plus will be in Euro, and about 40% rather in United States dollars with the remainder spread with Australia, Canada, and other currencies.

With that I think I’ll leave it there. Again, I’ll be available to answer any questions and I’ll turn it over to Steve who will highlight some results from the quarter.

Steve Vestergaard

Okay, great, thanks Fred. So I know there are a number of new investors on the line so I’m going to start off by just reminding everybody what we do. So we have an existing core business, that’s the Play MPE business, which the record companies use to securely distribute music to radio stations and other trusted recipients. So that business is transaction-based in that we get paid a fee. So each time a recipient is selected, whether they download the content or not, we receive a fee.

Currently almost all our revenue is from this existing Play MPE business. We’re also in the process of launching a highly disruptive streaming media format, Clipstream, which we expect will drive a lot of revenue growth in the future. But that didn’t hit this quarter; it’s not reflected as Clipstream hadn’t launched as of February 28th which was the end of the quarter here.

So I’m not going to delve into the numbers too much other than to reiterate that although there’s a seasonality to the business, if you compare year-over-year revenues are surprisingly predictable as they’re recurring and effectively based on the number of songs that statistically go out in that month.

So as Fred kind of noted, September to November, which is our F1Q tends to be our busiest quarter because a lot of songs go out heading into Christmas – that’s when the labels are the busiest; and the current quarter, which is December to February, is actually the slowest as the industry shuts down over the holidays.

A lot of labels literally shut down completely from about December 15th to January 15th, so there’s a one-month period when almost no music goes out. So if you compare quarter-to-quarter sequentially, F1Q is our best, F2Q is the worst – so that’s what you’re looking at back-to-back.

So people are wondering why year-to-year has been fairly flat. Well, to grow Play MPE we need to layer on brand new usage, so that means getting more labels to use us in more territories and to send music to more recipients. To date we’ve been very dominant in the US, Northern Europe and Australia and to a lesser extent in the UK, but much of the world is still wide open to us to expand into.

So to date, we’ve been very dominant in radio but really radio is the tip of the iceberg in terms of who gets prerelease music from record labels. So there’s a huge list of potential recipients including journalists, DJs and others that we need to expand into. So in other words we’ve very early in monetizing opportunities and to further do that we need to go into new territories, we need to have each song go to more recipients.

So in the spring of 2009 Universal and Warner each press released they wanted to standardize on our system globally. They actually put the releases out, put them on their own websites, and that’s still the case. We’ve been working with all the majors since 2009 to implement their technical wish lists. So we’re actually on year four of building out requests from that initially proposal.

The problem was for us to be a global system that they could rely on across their operations all over the world, they needed us to redo our infrastructure and software – they needed it to be mission critical. So we needed to redo our coder software to be permission-based and collaborative, and what that means is that staff in one country could work with staff in another country, and they could share releases and do a local sense.

We needed to update the server software for 100% uptime and real-time failover. Even to go down for a minute wasn’t acceptable. We needed to expand from one server facility to four and actually, we’re actually in the process of adding a fifth facility in Australia. And the facilities all talk to each other so you know, a real-time backup, a real-time failover; and the system can’t go down because the one facility takes over for the other.

We needed to redo the player software to support 27 languages and to not be so radio-centric. So for example, journalists don’t care about broadcast-quality music – they just want to access the stream quickly versus the original system was very focused on radio. It was all about exporting it to radio software packages and that kind of thing.

So our R&D expenditures have actually more than doubled since 2009 as we’ve invested really heavily in this new infrastructure and R&D development for Play MPE. And it may sometimes seem like there’s no light at the end of the tunnel because this has all been expenses and no new revenues, but we’re coming to an end of this four-year effort and we expect Play MPE revenue to start growing again and to potentially grow quite rapidly.

The good news is that although there are large fixed costs for infrastructure, R&D, our 24-hour customer support, etc., the variable costs are minor as we expect new revenues to be really high-margin and for the new dollars to directly impact earnings.

So as to some for-instances, we just recently announced our new Daily Play MPE website and we, as Fred mentioned, we just announced our new global agreement with UMG and EMI labels. Combined, they represent almost half of the major label music business worldwide. We also expect a number of further Play MPE development announcements and expect all outstanding Play MPE development projects from 2009 to be rolled out this current fiscal year.

So the music business is a big multi-billion dollar business, and sometimes it can seem like they move really slowly but we think that by working closely with them over the years and insuring that our system meets their workflow requirements we can build a really big business for our shareholders. So our staff have been having weekly calls with the staffs of the major record labels and the major record label staff have been intimately involved in helping design and test what we’ve been building for the last several years.

So we expect this multi-year investment to finally start generating returns for investors again and for patience to be rewarded. So we’re quite excited about what 2013 might hold for Play MPE. Besides our core business we’re experimenting with other Play MPE initiatives which we will announce as soon as we’re able to.

Okay, so back to the numbers. Our expenses plummeted 24% from the prior year and the bulk of that reduction has been because we settled litigation, which was all-consuming in 2012. Besides the dollar cost, litigation is very distracting and uses up a lot of management and staff time, so we’re really happy that we’ve been able to focus back on building the business again this year. So as Fred mentioned, the current expenses are basically what it costs to run Play MPE and the new Clipstream business and the new Clipstream R&D.

And that brings us to our second product – Clipstream. The R&D at Clipstream has been built off the back of Play MPE. All that development has been expensed, so that’s the disruptive technology that we’re still rolling out. So for new investors that may not be familiar with it, Clipstream is a player-less streaming video format. So with other technologies, if you want an internet video that plays everywhere you have to have different versions of it for the different devices. So that creates immense storage and conversion costs, and the viewers that come to your site need the right software to watch the video.

By comparison, Clipstream is just a simple web object and what that means is you can just drop it into any brand of webserver and it plays on any brand of web browser without installing plug-ins or anything like that. So there’s a lot going on behind the scenes but I’ve had potential customers tell me it’s like magic. It solves a huge problem for them and it just works.

So because it’s so disruptive we’ve been taking our time to get it right, and I know that can be frustrating for investors, waiting for the world to beat a path to our doorstep. But we’ve filed seven patents and a global PCT application which are pending, and we’ve really been under the radar, intentionally putting out minimal news about the technology and not soliciting media coverage. And the reason for that is we want the technology to work really well before telling the world about it.

So our last conference call was Thursday, November 29th, and on the following Monday we released what we hoped was the commercial prototype of Clipstream that we could actually start charging money for. That version had worked really well in all of our testing on well over 100 devices but the only way we could tell for sure was to release it into the real world scenario in a limited launch. And so we released it to our own investors.

The good news is that about 60% of users had a great experience but the bad news is about 40%, especially Internet Explorer and Safari users and users outside of North America received really poor quality. So the reason is that the video automatically downgrades when the bandwidth or CPU are limited, and many ISPs were throttling back the bandwidth below the minimum average that we expected that people would have access to.

So again, I’m really glad we launched it in such a small way to such a limited audience because that gave us time to fix the problem. Our developers worked through Christmas using existing compression algorithms we owned – we already own them – to reduce the required bandwidth while maintaining quality. So the extra math that was required to squish the video farther really strained the CPUs on older equipment, so it created a lot of problems for our developers but they’ve been able to work through it and they’ve been able to get it working.

So on February 27th, right before the end of this quarter we’re announcing, we announced that we were rolling out paid commercial trials to the market research industry as our first vertical. So they’re using our technology currently for video questionnaires and they’re paying for it, and are helping test it for us in a real world environment.

So if I was to kind of sum it up I’d say we’re at about the 95% point with the technology, which means that only about 5% of the sessions are experiencing problems. That’s enough that we can charge money and start building the business, but we do want to get it perfect. To us perfect is YouTube quality or better for 100% of the users using HTML-5 browsers.

So I’m sure there’s going to be a lot of questions about this rollout and I’m sure I’ll get into more detail on the question part of the call, which is probably a perfect segue to open it up for questions. So on that note I’ll turn it back to the Operator. Thanks.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator instructions.) Your first question comes from Hubert Mak with Cormark Securities. Please go ahead.

Hubert Mak – Cormark Securities

Hey guys. I guess maybe I’ll start with Play MPE. I guess obviously you’ve mentioned that you’re expecting rapid growth, and I understand that you guys signed obviously the UMG agreement. But I guess can you just sort of sum up sort of what additional technology you need to do and when you think that in terms of timing, in terms of growth to sort of accelerate or as you mentioned a rapid growth – what’s the timing or timeframe on that?

Steve Vestergaard

Sure, I can take that. So the first thing is the contract itself. Universal purchased EMI. The purchase kind of went through last year, was subject to regulatory approval, but we found ourselves in the position where we had contracts and understandings with both the parent level and the actual sub-labels with both EMI and Universal. So we had lots of understandings and contracts in different currencies with slightly different terms. So for us to really go global with that organization we needed to negotiate a single contract in a single currency with single terms that was worldwide.

So it’s not so much the contracts [were not] for us to expand but it was required, so we couldn’t easily expand into new territories without getting that figured out. The labels were fairly aggressive with us. When you start to try and merge the agreements there’s a lot of choice that you can make in terms of what minimums should be and what exchange rates should be – exchange rates change over time. And we perceived that the original offers that they were making us would have resulted in us making less revenue for the same volume, so it was a big deal for us to negotiate that and to figure it out, and to get standard terms which we believe are quite favorable to us and our shareholders – to get that in place.

So the contract was one piece, and generally Universal is the first label to go into a new territory and then the other labels tend to follow. So it was important for us to get that in place first. The second thing is in terms of technology, we mentioned the servers, the encoders, the players – that’s all been launched. What’s still pending, I’ve got to watch what I say here but there’s a new web browser access that’s coming so that people can access the content directly from their web browser without player software. There’s also a whole bunch of player apps coming. So we have an iPhone app, Android, Blackberry, tablet and iPad versions coming.

We’re also upgrading infrastructure. I mentioned that we’re adding a new server facility in Australia. We’re doing a bunch of that kind of stuff behind the scenes but in terms of the technology, we expect that to be finished by this fiscal year which is August 31st. In terms of timing, to some extent that’s out of our control because we’re kind of like the phone company – we can’t really control when people make phone calls.

But our expectation is that usage is going to start growing probably in F4Q and what’s going to drive that is going into new territories, so brand new territories where we haven’t done much to date; and also going to new recipient types. So as an example, for every one radio station there’s probably ten journalists.

Hubert Mak – Cormark Securities

Okay. I guess so basically in terms of the new agreement you have with UMG, you commented that you worked closely I guess with them as well as I think you may have alluded to Warner. So have you guys been working with Warner as well and I guess is that sort of thinking where you guys would need to go with them in terms of global agreements well before they start to sort of maybe ramp up their transactions on a global basis?

Steve Vestergaard

So both Warner and Sony are organized a bit differently and we would be more likely to stick with regional agreements. So for example, if we were to work with Warner in the UK we would do a UK agreement. For example, we’ve got agreements with them in Australia, New Zealand, a bunch of the Northern European countries so we intend to do that country-by-country. Sony is probably not even at the parent level. Sony’s got subsidiaries like RCA and [Jive] and Columbia. We would be doing contracts directly with those sub-labels.

Hubert Mak – Cormark Securities

Okay. And then I guess in terms of selling to new territories and new recipient types, is Universal going to help you with that or you guys need to go on your own? Or what’s the strategy there?

Steve Vestergaard

They’ll help us with it. So the idea is mainly they have to market to their own sub-labels. So at the parent level they tell the sub-labels that they want them to use us but we still have to go out and train them, we have to get radio onboard. We have to make sure that lists are accurate, that we meet all the industry requirements. You know, some of the industry requirements vary from country to country; if there’s any incumbents there that we’re compatible and we work with the reporting systems and stuff like that that are in those countries. So it’s not really a sales effort as much as support and training into new territories.

Hubert Mak – Cormark Securities

Okay, I see. And then I guess maybe the last one on Play MPE: I think last quarter you kind of mentioned, or two quarters ago on the conference call you mentioned like helping labels with the direct to consumer. What’s the progress there and I guess do you have a better sense of maybe what the eventual economic model is there and timing I guess?

Steve Vestergaard

Yeah, so I alluded to a product on the last conference call that we haven’t really described publically too much, but there’s a concept for us to go beyond what we’re doing with just radio stations. We’ve built out something that’s at the prototype stage that could be lucrative for us but if and when we make progress with that we’ll announce that separately.

Hubert Mak – Cormark Securities

Okay. I guess I’ll just move on to Clipstream. I guess it’s been a little over a month now since you guys started paid trials, and I think you guys talked about going after the existing market research guys. Can you give us some details on sort of the feedback, maybe the (inaudible) trials and what are some pauses and challenges? I guess specifically what challenges are left with the 5% I guess?

Steve Vestergaard

Yeah, I’ll start with the challenges. The main challenge is we’re still running into performance problems on Internet Explorer and Safari. They tend to be the slower browsers for us, just for the techniques that we’re using. And if the CPU can’t keep up the symptoms are that it will lower the quality or else it will stop it and re-buffer. So we’re improving that. We expect to have that improved and the quality improved really shortly, and actually for people that have been testing the showcase they should have seen some tremendous improvements even in the last couple of weeks on those two browsers.

We’re also running into issues with people outside of North America, so if you come in from Germany or South America or something where the ISPs are throttling the bandwidth – so getting worse performance because of that. So we’re doing some things to fix that performance. In terms of the market research companies, the feedback’s actually been surprisingly good. We’re pleasantly surprised with how little the issues are that there were.

The main issues that we ran into were just integration with third-party software, so problems for example with having more than one video on the page at the same time, positioning issues. We had an issue with like Drupal and Wordpress where when the video started it would move over a few pixels. Sometimes if you rotate your smartphone it won’t center properly and it’ll get cut off, but the issues are all pretty minor and they’re not stopping us from making money.

I don’t want to really get into too much detail on the feedback so far because we do plan to do a public announcement kind of updating everybody on that rollout. But the next step for the market research guys is we’re going to be launching our market research website and we’re going to be expanding more generally – so instead of just doing paid trials with a handful of clients we’ll expand into basically a full commercial offering to the market research world.

Hubert Mak – Cormark Securities

Okay, and I think in a press release you kind of commented that working with market research would potentially put you in touch with larger companies. Have you seen any of those additional opportunities or any inbound calls from large customers? What’s your visibility there?

Steve Vestergaard

Yeah, the market research isn’t the hugest business. To put it in perspective, we get about $200 for a video. A typical campaign might have about 10, 15 videos in it so you’re looking at $2000 to $3000 for a survey so it’s not the biggest revenue opportunity. But it’s great in terms of us reaching customers that can use us elsewhere. So as an example, we’ve done market research for YouTube for some of the biggest car companies, pharmaceutical companies. We do movie trailers and what’s ended up happening is we’re meeting people who could use us for advertising. So when we launch our more general product people that could be using us for site licenses, but also people who can give us testimonials and case studies that will help us sell it elsewhere.

When we go to sell this more generally nobody wants to be the first to buy a new technology so it’s important for us to get case studies and testimonials that we can use. So in answer to your question yeah, we’ve actually got a ton of interest from very big players and I don’t think our challenge is going to be sales as much as just getting our offering ready. So we’re in the process of converting from basically a working technology to a bunch of working products, with each product being catered to a particular vertical.

Hubert Mak – Cormark Securities

Okay. And I guess these sales cycles for these bigger guys would be… I was just thinking do you even know how long it would take or could some of these convert very quickly?

Steve Vestergaard

Yeah, some of it’s going to convert quickly. It’s going to depend. So for example, for an advertisement that’s a quick decision. In general we’ll sign up the ad agency and we won’t sell direct to the end customer – the ad agency will make us a line item and just offer it across the board to all their customers. So that can actually happen very quickly because we just become a royalty line item that somebody else’s sales force kind of works with.

Probably the slowest sale would be the site license and it’s just because there’s a certain inertia for a company that’s been doing something the same way for a long time. But you know, in terms of the lead times a long time being three months maybe, so you know, on the order of a quarter.

Hubert Mak – Cormark Securities

Okay. And I guess in terms, just maybe last question here – in terms of the technology, I know obviously you commented about some of the issues. But in terms of hitting some of these, like advertising and also the site licenses, what additional developments do you plan to do? I know that you need like [IAB] approval and a solvent quarter – are these things completed or what’s the time to completion?

Steve Vestergaard

Yeah, so they’re all, all of this is happening in parallel. We’re going to be launching them one at a time, so like I said the market research will be first. I’m guessing that the ads will probably be second but we’re working on everything simultaneously. Besides the technology we need to build out the websites, the documentation, all the help files; we need to train our own support staff.

In terms of the technology itself, on the ads side, obviously you don’t want an advertisement to have to pre-buffer and detect your technology. You don’t want the seek bar at the bottom. You need to be integrated with the ad delivery networks. You need to provide all of the reporting that the ad companies are expecting. You need to work with third parties that audit to make sure that the ad got played properly. And yeah, ideally you get IAB approval so that you’re certified. So all of that’s in process.

In terms of the self-serve encoder, that self-serve encoder’s been built already – we use it internally, but we’re improving it. We’re doing some testing in terms of usability. There’s things that we need to do to improve the user interface. We need to improve the speed that things are encoded at. We’re still building up the security. We don’t want to put out software where we don’t get paid so we need to make sure this software can’t be hacked and that people can’t steal lit.

In terms of site licenses, the same idea: we’re building a server-based encoder and we’re putting in the security so that we can lock the content to a particular website. So on a site license we would lock it so that it plays on one site but not the next. You know, probably my biggest mistake is getting us nailed down in terms of the time of when things are going to get launched. We’re going to launch it when it’s right. We’re going to take the time to make sure it’s working properly but it’s very eminent – definitely all within this current fiscal year which ends August 31st.

Hubert Mak – Cormark Securities

Okay, I guess I’ll just throw in a last question here given your comments. I guess in terms of revenue from Clipstream and as well as maybe getting a meaningful validation of your technology, when do you think that might happen? I know your market research will provide some initial but is there any sort of one single validation you think is key and when do you think that might happen? And maybe when do you think meaningful revenue will be coming through beyond the market research guys?

Steve Vestergaard

Yeah, so the market research is to some extent cannibalizing existing revenue because we had sold our old Clipstream to the market research companies. To some extent all we’re doing is we’re replacing old revenue with new revenue. So on the revenue side things are not going to start hitting until we expand the market research and expand it to new verticals, so I would expect that to really start hitting in F4Q which is June, July, August.

In terms of the second part of your question, the validation – we’re going to get some validation when we talk about our successes to date with the survey companies. I know besides this call we haven’t really given anybody any feedback as to how the trials have been going. We are looking in the near future to kind of update the market on that in more detail.

In terms of bigger validation, like I said, we’re dealing with a lot of big companies that are kind of itching to buy the technology off us. We’ll probably do some trials with them even before some of the products are commercially ready and we will announce that as we’re able to. So it’s not so much that it’s going to be one big announcement as I think you’re going to see a series of announcements. We’re going to kind of phase it in.

People keep asking me when the official launch is going to be but it’s actually kind of already launched. We’ve launched it to the market research companies, we’re making money with it; we’re just going to keep expanding as I said that sales initiative and we’re going to keep expanding into new verticals. And as we do that we’ll inform the market.

Hubert Mak – Cormark Securities

Okay, thanks.

Operator

(Operator instructions.) There are no further questions at this time. Please proceed.

Steve Vestergaard

There’s no more questions?

Operator

Not at this time.

Steve Vestergaard

We’ll give everybody a few seconds and if not we’ll wrap up here.

Okay, well thanks everybody. I appreciate you joining the call. Both Fred and I are very approachable. Feel free to either phone us or email us. We find one of the ways we learn and improve what we’re doing as a company is by talking to investors and I find the feedback is really valuable, so I encourage you if you did have a question and you weren’t able to make it on the call here, I encourage you to reach out to us directly.

Operator

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating and we ask that you please disconnect your lines.

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