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Executives

David Mossberg - Three Part Advisors, IR

Fred Vandenberg - CFO

Steven Vestergaard - CEO

Analysts

Ranjit Narayanan - Global Securities

Hubert Mak - Cormark Securities

Destiny Media Technologies, Inc. (OTCQX:DSNY) F4Q 2013 Earnings Call November 25, 2013 5:00 PM ET

Operator

Good afternoon ladies and gentlemen and welcome to the Destiny Media Technologies, Inc. Fourth Quarter Fiscal 2013 Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue for a question. (Operator Instructions). I would like to remind everyone that this call is being recorded on November 25, 2013.

I would now like to turn the conference over to Mr. David Mossberg, Investor Relations Representative. Please go ahead.

David Mossberg

Thank you, Naomi. Before we begin, we will be referring to today's earnings release, which was sent through the newswire earlier today. I also should remind everyone that this conference call could contain forward-looking statements about Destiny Media Technologies, within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical facts. Such forward-looking statements are based upon the current beliefs and expectations of management, and are subject to risks and uncertainties, which could cause actual results to differ materially from those forward-looking statements. Such risks are more fully discussed in the company's filings with the Securities and Exchange Commission. The information set forth herein should be considered [inaudible] risk. The company does not assume any obligation to update the information contained in this conference call.

Our speakers today will be Fred Vandenberg, CFO; and Steve Vestergaard, CEO. And with that, I will turn it over to Fred.

Fred Vandenberg

Thanks Dave. I will jump right into our results for the year. Play MPE is our system for delivering pre-released music for promotional purposes, our customers are the record labels, and this system, Play MPE, provides little more than 95% of our revenue, I will just comment briefly on the results for the year.

Starting at the beginning of our third quarter, the second year renewal with UMG came into effect. This renewal eliminated some inefficiencies in the existing agreements, which was hindering the expanded use of Play MPE within UMG. This agreement reduced the recovery per transaction by narrowing the scope of what is considered chargeable, and by replacing individual territory minimum spending with one global commitment.

Additionally, with UMG's purchase of EMI, Play MPE saw a reduction in spending with EMI. Thus we’re seeing some shorter term reduction in revenue with -- for a total decline of 7.7%. Throughout the second half of the year, we were at that minimum monthly commitment, and therefore revenue from this agreement can only increase.

Under this renewed agreement, we did see a 13% increase in distribution transactions from Q3 to Q4 of 2013, and a 20% increase over the comparable period in the prior year. Outside of this agreement, Play MPE has grown in every major market, Australia, UK and the United States, and within both major labels and independent record labels in each of those territories.

Operating costs grew by approximately 5%. However, this includes a larger cover in the prior year, which [fused] [ph] the comparison with prior year. Ignoring the litigation result in that year, operating costs actually declined by 5%. There was a shift from certain Play MPE staff in their activity from technical development to business development, but otherwise our operating costs are relatively consistent with the prior year.

I will be available for additional questions, but I will turn it over to Steve, who will talk more about the Clipstream and looking forward.

Steven Vestergaard

Thanks Fred. So I know there are new investors in the line, so I'd like to remind everyone, what we do here. So as Fred said, our Play MPE secure delivery system is used by major record labels, to send their pre-released music through the Internet to trusted industry recipients, such as radio stations. So currently, we are doing mostly radio stations, but that's kind of the tip of the iceberg.

Now this automated system bills them based on transaction usage and monthly and per song minimums, and as Fred said, it represents almost all of our current revenue, I think it’s about 95%.

To our second product line, Clipstream, is a new cross-platform streaming video product that we are about to launch, which disrupts $5 billion in existing business, and which we see as potentially a $3 billion market size, $3 billion annual revenue opportunity.

So it has been an exciting year, as we put in pieces in place for both businesses, we will grow revenue sequentially for the foreseeable future. In both cases, revenues are recurring, and the revenues are sticky. We expect in each case to keep existing business, so that when we layer on new customers, it just rev recs itself to predictable monthly revenues. So each month, we keep what we had the month before, and then we ideally layer on new business.

In the case of Play MPE, we took some short term pain in Q3 and Q4, but that's for some long term gain. The system is growing, but in some ways, the contract we have with Universal, who is our biggest customer, was a little bit unfair. So we entered into a new global agreement with them in May, where there was a contract term change, where we could no longer charge them for certain recipients. In addition, minimums with the various territories, and also with -- in terms with our EMI agreement, we are all replaced with one global minimum, which had an impact.

That's the bad side; well, the good side is, in return, we were guaranteed global minimum revenues going forward. The current revenues from Universal are about as worse as it gets, because they are at the minimum. But we have a clear pricing agreement, which allows them to enter into up to 77 countries, with the distributor encoder software to their staff around the world.

UMG represents 45% of the major label market, so this was a major win for the company, that provides a strong foundation for revenue usage and growth over the next several years.

We also have a global agreement with Warner, and we have agreements with Sony around the world, so we are going to [pick position] [ph] to expand our US monopoly into many new territories.

As most of you know, there is a seasonality to our Play MPE business from one quarter to the next. We expect that going forward, we will only see growth, when comparing quarters to quarter from the prior year, because Christmas is busy and going into Christmas is busy, post-Christmas isn't, and sequential comparison is not really the right one. But if you compare trailing nine months, and you compare to the year before, we keep what -- we generally keep what we had last year, and then we layer on new business, as we are able to.

Today's revenue only represents about 10% of the global opportunity, so we see potential for a lot of growth going forward with Play MPE. So UMG began trials in new territories, and actually that's subsequent to the year end, and they are in the process of training remote staff to use the system. But so far, they have been to a small number of recipients, and even today, they haven't had the big impact on revenue yet; but we expect, going into the New Year, they will. We had staff -- sales staff went out to the UK, to kind of get an eye on what's happening there; last week or, sorry actually the week before, and everything seems to be progressing well.

So investors can actually follow that expansion themselves, you go to our real-time stats page. If you go to dsny.com and go to the bottom right of that page, on our corporate website, there is a little link labeled Play MPE stats, and you could see automated sends as they go out, and generally, these sends are labeled with the name of the country that they are going to.

So the strategy is to work with UMG, that’s the biggest -- to open up new territories, and have Sony and Warner fall in behind, with the majors in place in a new territory, it becomes easy to market to the independents. So the nice thing about the Play MPE business is that the expenses are mostly fixed. So we expect this new incremental revenue to be nearly all-margined.

So we spent much of this year investing in development, to be ready for the expansion. So for example, we launched the new Play MPE Go Play branded website, which allows access from all HTML 5 compliant browsers, without a need for a plugin. So why this is important, it has opened up the network to phones and tablets, and dropped the need for Java plugins.

We also launched a new social media website at daily.plaympe.com. This site is completely automated and for labels that opt-in, their music can be featured in our real time charts, and automatically pushed out to Twitter and Facebook channels. In the process of adding streaming samples to the site, in many cases, these streaming samples will be the only play people can listen to the song, because generally, it's during the pre-release phase.

We launched new players for the iPhone and Android, we are still developing our player software for the BlackBerry, iPad and tablets. We added a fifth server facility in Australia. Our facilities communicate with each other, automatically mirroring and load balancing, using proprietary server code that we developed. Responding to industry demand, we are also in the process of building strip-down, web-based encoder software, so all staff labels can use Play MPE to distribute music casually to destinations other than radio, while protecting it from piracy.

So our encoder software is fairly sophisticated, and it does require some level of training, and currently, it is generally managed by a centralized asset management group. We think the web-based encoder will really help increased usage, because it will let people to -- who are not using the system today, send music from within the label. And again, the system is all transaction based, the more the use, the more we make.

So pieces are in place for high margin growth with Play MPE. The incremental margins, I never say 100%, but our incremental costs are just marketing, travel, support, they are pretty negligible. So near 100% margins, and we continue to invest heavily in the system.

Then there is Clipstream. So, of course, we are all familiar with YouTube videos. You know they just work, you go to the site, you click, and they play. What you don't see is behind the scenes headaches that are required to make them play. So currently, there is no standard format, so videos have to be converted into at least three formats to reach all devices, because there is [over siphoning] of streams, huge investments have to be made into server and bandwidth infrastructure. By comparison Clipstream videos also just work, but they don't require all the infrastructure behind the scenes.

So there are multiple reasons why we think Clipstream has the ability to change the way that video is played on the Internet. So first, videos in the Clipstream format just play everywhere, there is no streaming server, and for viewers, no need to install or maintain player plugins. That means, it’s secure. Videos in the Clipstream format can be watched through source websites, recipient computers, and they can also be watermarked.

Third, is longevity. Clipstream videos never need to be upgraded, and the expectation is that the video encoded in the Clipstream format today, will still play on browsers 15 years from now. The reason for that, is that the technology that powers the playback, is part of the HTML standard, and so browsers 15 years from now will be required to be backwards compatible to that standard.

So fourth, is interactivity; so advertisers are telling us that they are excited that Clipstream videos can be interactive, unlike any of the new HTML 5 standards. So as an example, you have a video, and you can make something in the video clickable, or you can make the video change, depending on what you click on. So if you click on one thing, then it goes one way, if you click on another, it goes another. Or, you can give feedback. So from an advertiser, I may want to know, what part of the advertisement I am losing people on, and so the reporting is real time with our interactive technology.

So Clipstream is a huge disruptive technology, and we are taking a disciplined approach to introducing the product, which will build the largest long term shareholder value. We think the revenue opportunity, as I mentioned earlier, we think it’s about $3 billion annually, and it’s important that we do things right. We have only one chance to make a great first impression.

So, we have actually completed our first Clipstream product. We are just polishing it up this week, and [inaudible] those while we are hoping to launch it next week.

Branded as the Clipstream Cloud is going to be another high margin automated business. We are going to sell monthly packages of transfer minutes, similar to a cell phone plan, with packages going anywhere from $5 per month to $5,000 per month. The $5,000, a good way to think of it is, that's actually a minimum that users that are in that package get much better overtrades for making that commitment. So overage minutes will be much cheaper in the higher price plans, with pricing structures to encourage users to upgrade as their usage goes up. So the concept is, we'd like people to get in for $5 that they can try it, but very quickly, they would be bucking up to the $20 and $50 monthly packages, or even higher.

Targeted users of the cloud include advertising agencies, large websites who need to reliably service large volumes of impressions; marketing professionals; distance learning companies; web developers and others. So we expect the initial audience to be very broad. The video they host at best can be embedded elsewhere, such as a website, or marketing newsletter or blog or some third party site, and we are going to allow them to sell or syndicate the content.

We will have a toll-free number on the site. Our sales team will begin actively reaching out to customers that have come to us during all the period. We also expect a lot of sales to be automated, and for the customer to just self-serve, at 3 o'clock, while there is nobody here in the office, we expect foreign users to just come in, put in a credit card, and download the software.

Our tagline is Drag, Drop, Done; and that's literally how easy it is. Like the YouTube for business, this is targeted to make it easy for any non-technical user to create high definition streaming video that plays everywhere. Visitors to the site download our tool, and drag and drop videos for many standard source format into our tool, and those videos automatically convert to our format and upload it to the cloud. That's it, they are done.

All they have to do is, go into their accounts, put the videos online, and to fiddle with the settings that they desire to. They get a link, they can embed it to their website or email, and the cross platform video will show up in that part of the page. So we let them download the software and create the first video for free. Once they have gone through the process and created their first video, and go to put it online, that's the point we first ask for their credit card. So the free version works for them as use of our security, so we can lock it to only play for them. They can make sure it works. But if they want to make it live, and publish it to the world, we ask for their credit card.

After that, the revenues are recurring, and so we expect to keep customers with usage from each customer, number of customers going from month to month. We are not in a position to forecast where the dollars may be, but we would expect quarterly Clipstream revenue growth into the foreseeable future. Can we expect to keep current customers, and to layer on new customers, which would mean sequential growth from month-to-month.

Behind the scenes of operating the high margin and a low risk to us, we are initially going to use Amazon servers rather than our own, to allow us to grow rapidly without investing in our own infrastructure upfront. We will buy the server hosting from Amazon wholesale, when you look up tables in our site, they brand URLs as Clipstream. So our new expenses will be exactly tied to new revenues, there won't be a lot of risk there for us. The entire process will be self-served, and out of the gate, will be offered in a number of popular languages. So global customers will be able to purchase in every time zone.

We expect technical support to be minimal, because everything will be drag and drop. We will be providing the server infrastructure in this first offering. We are expecting minimum margins of 60%, with higher margins in the lower price packages, and on high impression content for the caching recycled [lot]. Every time the video recycles, our wholesale cost drops down near to zero.

We are really excited about our prospects, and we believe we are at the beginning of a big growth stage for the company.

On that note, I would like to open it up to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Your first question comes from Ranjit Narayanan from Global Securities. Please go ahead.

Ranjit Narayanan - Global Securities

Thank you. Good evening. Just a few questions, I will start with the Play MPE. Steve, you have the contract with UMG for a couple of quarters now, obviously, hitting the minimums, what would be some of the catalysts that would see them sort of blow through those minimums and you start seeing expanded usage?

Steven Vestergaard

So the expansion is mostly going to be geographical. To some extent, it will also be a change in recipient type. But you got to remember, the different departments in the label run somewhat independently. So at the parent level, they are ready. They are raring to go. They save a lot of money. They have been wanting to protect the content from security. They have a dictate that - everything that comes out of Universal is supposed to be secure. They are not allowed send out in that unsecured format. But they have to go out, and they have to train and market to their own sub-labels. So in each new territory, and as you can imagine, a lot of the territories are smaller, and you have got the language issue as an issue, they have to literally go in an train and market to those people. They also have to get radio to understand what the system is, and to get on board, and they have to make sure their lists are accurate.

So one of the things that we found, when we went to the UK, is that some of their lists have inaccurate email addresses. So if you try it a trial and you send stuff out, the download rates can be low. So there is a few things we are looking to do to address it, and we kind of talked about some of them, like the new social media site, and things like that, things that make the marketing people and the label want to use it.

But one big one is the web-based encoder. So we are in the process of getting that done. That will let people use the system without training. But by and large, it is just the majors go kind of slowly. So they are doing it, and that's why I encourage people to go look at our stats page, you will see all kinds of new countries popping up, that never used to pop up before. But you will see a recipient list of 10 people or something, and you can imagine that doesn't affect our revenues too much. But going into the New Year, after Christmas, I am expecting to see those numbers bump up.

So what can we do with the catalysts; probably not too much. It's good in a way that we don't have to do a lot of selling and marketing, we just have to support their efforts. But it’s frustrating in another way, in that we just have to kind of sit back and wait for them to do their roll out. They are a big company, and they kind of go at their own speed.

Ranjit Narayanan - Global Securities

Okay. And how should we sort of view this revenue stream, say over the next one to three years, will fiscal 2014 be sort of a gradual ramp up? I realize, you don't provide explicit guidance, but --?

Steven Vestergaard

I could talk to the nature of the business. It’s more of a staircase because it's binary. We either have a market or we don't. Some of the markets we are chasing are pretty significant. If we were able to layer on Germany for example, or even part of Germany, we are able to layer on Berlin or something, or if we are able to layer on Japan. Some of those big markets, will make a big difference kind of overnight. We are a little bit below the minimums. We do have to grow to the minimum before that shows revenue growth. But the growth will still be happening behind the scenes.

The independents are a bit different. The independents, we can add them one at a time, and that slowly ramps up the revenue. But the problem is, the independents don't get value in the new market, until the majors are actively using the system, and the radio stations are not likely to be active, until there is major label content. So we have to kind of do things in order, and the order seems to be that we take the Universal first. Sony and Warner like to follow Universal's lead, and once we have the three majors, that's the time to market to the independents and kind of get them going to the market.

So some of the little markets, that will grow slowly. If this is a small market, with 20 radio stations or something, won't have a big impact. But some of the big ones, will be like turning a light switch.

Ranjit Narayanan - Global Securities

All right. Okay. Just looking at, so from a growth perspective, would sort of a first milestone be, going to see, $6 million, $7 million, $8 million or are do you sort of you know, expect a faster growth trajectory heading into 2014 and beyond?

Steven Vestergaard

Yeah. So we intentionally don't give forward-looking guidance, just because it is somewhat out of our control. But as a goal to -- if our next goal is to double revenue, that wouldn't be unreasonable. Again, like I said, nothing is 100% margin. But we are expecting the margins to be extremely high, as we do grow the business. Our new expenses again, are mostly travel, support, and marketing, advertising into journals in the new territories, it's a little bit for translation. But then, those expenses are fairly negligible.

Ranjit Narayanan - Global Securities

Okay. Q1 is your seasonally stronger quarter. We’re sort of in last week of the quarter. Any qualitative color on how the quarter shaped up with Play MPE?

Steven Vestergaard

So, take the impact of the new Universal contract into account. Obviously again, that's short term pain for long term gain. I don't want to say publicly, what's happened this quarter. To some extent, I don't totally know. Like I said, the system is completely automated. But if you, compared it year-to-year, we will definitely -- we will keep what we had last year, and we will at least keep, being at the minimums, and hopefully layer on more. But to kind of manage expectations, on the Play MPE side, I am expecting things to happen more after Christmas. I would say, I was fairly optimistic in Q3. It seems like things are taking a couple months longer than I wish they would.

Ranjit Narayanan - Global Securities

Okay. Fair enough. Switching gears to Clipstream. So it’s great, you're launching next week. Steve, you'd mentioned a few vertical markets you will be targeting. Now is your plan to go after the web developers out of the gate, or are you simultaneously going to go after some of the other verticals like advertising and site licenses as well?

Steven Vestergaard

Yeah, we are simultaneously doing three things. So one is proactively -- we can't afford to be at every trade show. So proactively, we are reaching out to the web developer community. So we will be sponsoring the shows that they go to, as people know, we did do a show in September. We are going to try -- once the system is kind of up and running, we are going to try and really inundate them with marketing, make sure they are all aware of our brands, branding is very important. They are the market that can kind of run with it, that go into the tech blogs and they talk about the system.

So that's kind of the first one. The second one was just going to be the meat and potatoes, is search term advertising. So Google is the obvious one, but there are others, there is Microsoft, there is Yahoo!, there is Facebook and Twitter. We find that advertising on search phrases is very effective and very broad, and the customers that come in are ready to buy. They search for that phrase for a reason. If they don't buy it from us, they will buy it from somebody else, but they are kind of in a buying mood.

The third is, we put on a press release, and big companies come to us, and are interested in using the system. So some of the leads have gone cold, because we have intentionally let them go cold, because the products are not being ready. We have a large number of big companies reach out to us, and so our sales team is going to proactively reach back to them. But the short answer is, we are going to kind of follow the money, so to some extent, our marketing strategy is going to be malleable, and as we see where the business is coming from, we are going to kind of chase the low hanging fruit, and try to get some early wins.

Ranjit Narayanan - Global Securities

Okay. Just given the size of the market opportunity ahead of you, is your staffing level adequate to sort of attack your different vertical markets, both on the sales and marketing side, as well as after sales, technical support?

Steven Vestergaard

That's one of the reasons we automated the system as our old staffing is an issue. For this first product that we are launching, we have been outsourcing some of our marketing issues, we have been contracting some of that out. But going forward, our next big product is going to be the site license. We are looking at going into that for spring. That's going to take at sales team. We haven't completely made decisions there, but we are contemplating the idea of setting up a sales office in Silicon Valley. One of our directors, who actually lives in Silicon Valley, could help manage that process for us.

Ranjit Narayanan - Global Securities

Okay. So how many dedicated staffing resources do you have for Clipstream as we speak now?

Steven Vestergaard

We kind of use staff for both products. We don't do a good job breaking it out. Give or take, I actually don't have the recent count, but give or take, we are around approximately 30.

Ranjit Narayanan - Global Securities

All right. One more question, and I will pass the line. From a macro standpoint Steve, still considerable confusion out of the marketplace in the video codec space, so to say. Whereabouts do you see, you have considerable challenges reconciling between proponents of VP8 and H.264. Do you see this as an opportunity for Clipstream to exploit the big technology stakeholders, Google, Microsofts and Ciscos of the world, able to reconcile very conflicting positions?

Steven Vestergaard

What I think is, we don't seem to have any competition. So the market is very fragmented. There is lots of people chasing their own little piece of the world. But in terms of their player base, if I am offering H.264, I need to get that on the phone ahead of time, before the customer buys it. And the market is very-very fragmented, and it’s getting worse still. There is always new codec coming down the line. H.264 is being replaced by H.265. So we are in a very good position, because if somebody chooses us as the standard today, that video that they encode today, ideally, should still play 15 years from now. And so for a big company with a lot of valuable content that they want to protect and secure, we are an obvious solution. And we are still a small company today, but that's not how people decide. Publishers decide date and the technology, and the technology is best of the breed, there is nothing better out there.

Ranjit Narayanan - Global Securities

Okay. One last one, Fred, on the R&D, was there a dip in R&D expenses in Q4? I am looking at the nine month number of $1.193 million, it feels there was a sequential drop. Could you just give a little bit of color on what happened there?

Fred Vandenberg

Yeah. The Play MPE staff -- we had several Play MPE staff that shifted focus from developing the version 5 of our player, that's the recipient side of our Play MPE system; they shifted from developing that, and a few other items that primarily the V5 player, to more development, business development type activity, so sales related activities, like traveling to London, LA, Seattle, that sort of thing.

Ranjit Narayanan - Global Securities

Yeah got it. I see the spike in sales and marketing from Q3.

Fred Vandenberg

It's really just a shifting of allocating internal resources.

Ranjit Narayanan - Global Securities

Got it. Okay. Thank you, gentlemen.

Operator

Thank you. Our next question comes from Hubert Mak from Cormark Securities. Please go ahead.

Hubert Mak - Cormark Securities

Hey guys. Just first on the Play MPE, just want to follow-up on that question. So if we are looking three years out, and I know your market you just talked to, $40 million or so, what sort of penetration or the market that you think you will capture in three years out, given the [inaudible] in the quarters. Like if you are looking that longer term timeframe, like where you think you would be at?

Steven Vestergaard

I actually think the market is bigger than $40 million. So $40 million is kind of our target. It gets complicated though. For example, DJs are a very big market. But it seems like the labels are willing to send them free music, but they don't want to pay for the transport. So for the DJs, there is a possibility that we might have to flip the model around and charge the recipient, instead of the sender. So there is lot of things like that, that we are still figuring out, that make it really hard for us to build the model and to figure out what the numbers are going to look like.

To some extent, we are reacting to the business. The business changes a lot over time. We do have a challenge on the low end. People that are sending out MP3 files, uploading to services like YouSendIt, especially independents do that kind of thing. But we still -- we offer kind of advantages. When they do that, that's an MP3 file, that's a very low quality file. Lot of the frequency fidelity is missing. We can deliver broadcast quality at a similar time, because we use a variable bit rate compression, where we get -- these are the original or the near original back.

We also have a really powerful recipient list. So when they send music up themselves, generally, it goes into the spam filter and it’s ignored. Whereas in the Play MPE system, they are up there side by side with content from the majors, and independents are telling us all the time that they shocked at -- shocked is the wrong word, they are pleasantly surprised at the high play rates that they get, and they get the real time reporting.

So we are going through a bit of an educational process with some of them, but it really makes it difficult for us to predict. But in answer to your question, we are targeting the whole market. I mean, it's a natural monopoly, and our goal is to get 100% of whatever that opportunity is. Fred, maybe you could add some color to that as well.

Fred Vandenberg

Well, it really depends on the market that you are talking about. There is layering on geographic markets. There is recipient types, media versus radio versus DJs, as Steve mentioned. Our markets right now are traditionally the United States and Australia, where we are very -- our portion of the market is very high. Scandinavia where -- when I say Scandinavia, that actually includes Finland, but the penetration that we have is fairly high, but we can always layer on other geographic markets, or expand within the markets where we do have good penetration. For example, we could expand with Sony in the United States, where the use is not as wide as we would like to see.

Hubert Mak - Cormark Securities

Okay. Just in terms of your revenue being somewhat relying on the UMG. So, are you seeing them still aggressively pushing it, what's the risk of them like slowly moving forward?

Steven Vestergaard

I could answer this one. So they are aggressively pushing. One of the things they put into the contract, was a clause that effectively rewards them with lower pricing, only on the incremental, if they use a whole pile, so if they go way above the minimum, and recently negotiated hard to get that in there, is that's completely their intent. But they are replacing sending out CDs, where they admit cost of 3.50 a CD, my belief is that the costs are over $20 and it’s just getting hidden in general and administrative. But they get huge savings for the [inaudible] that's instant, they get real time reporting, get real time security, and at the parent level, the value has kind of come out -- it actually went out from their last CEO that the intent is to use us company-wide as their anti-piracy solution.

We haven't seen that change. We have got a very good relationship with them, and they are pushing hard and we expect -- the thing that I am unsure of is, when it’s going to happen, but I am very confident that it’s going to happen. So I am confident on the roll out, I just don't have good sense of exactly what the timing is.

Hubert Mak - Cormark Securities

Okay. Moving on to the Clipstream. In the press release, you guys talked about [inaudible], and I think on this call, it was just like next week. I guess I am trying to understand is when could you [conference that], it will be on time say next week, or next couple of weeks?

Steven Vestergaard

It’s effectively ready now. So it’s like when you do painting, you are never do, you can always make one more stroke with the paintbrush. And that's what we are doing. We are making it better and better, and it’s effectively done and ready to go now in this week. It did make sense for us to release it before thanksgiving. I can't promise that there won't be any last minute issues, but my expectation at this point. It is just kind of ready to go, and we are hoping to launch it by the end of next week.

Hubert Mak - Cormark Securities

Okay. So basically --

Steven Vestergaard

There is no technical risk. The stuff we are working on is things like marketing, copy, and centering of graphics, it’s all the -- FedEx is not really technology.

Hubert Mak - Cormark Securities

Okay. If it wasn't for US thanksgiving, could you actually roll-out today?

Steven Vestergaard

I wouldn't roll it out today. We could potentially roll it out to the end of this week.

Hubert Mak - Cormark Securities

Then in terms of the pricing structure, I know you did comment about the monthly fee, from $5 to $5,000. What is your stance in terms of where you guys kind price as to, where most customers will fall into here?

Steven Vestergaard

It’s dependent on customer type. For web developer, I'd like to see them bump up to around $100 a month. For other customers -- for a typical small business, I'd like to see them bump up to around $50 a month. With the strategy, as we price the overage, so that, you may come in for $5, but if you use it a lot, next thing you know, you are spending more than $20, and you'd actually be better off to just upgrade to the next package up. So overage is fairly expensive on the early packages, and is quite, once you get up to -- where we think you need to go to, overage becomes a lot cheaper.

Hubert Mak - Cormark Securities

Where does your penetration --?

Steven Vestergaard

The answer to your question. As an example, I would expect at a minimum, $5,000 a month would be where a lot of ad agencies would [land], and I can see them go a lot higher than that. On companies, you probably have to be a fairly big company to get above $400 a month, we have a $400 package. I would say most companies would either be the $50 or $99 package. Web developers doing stuff on behalf of others, I could see a lot falling in $100. Lot of bigger companies, they could see falling in the $2,500 a month package. But at the end of the day, the packages are what they are, they are just packages. It’s going to come down to the actual usage, and that has been really difficult for us to model, and so that's why we want to launch.

In the first 90 days, we will see what the usage is, and we may play with the package. One of the things we have difficulty is, you know, when you have a cell phone, you are allocated so many minutes, but you may not use them. You may only use 10% of your allocated minutes, and the rest are wasted. Well the same applies to Clipstream, if you don't use your minutes in a month, they don't carry forward to the next month, as we don't have a good sense what the utilization is going to be, so we are not going to know that until we have been up and running.

So people keep looking for forward looking guidance on Clipstream, we can't give that today. Come next quarter, we probably can give a better sense of where the numbers are going to fall. We will see how many customers we have in a month. We will see what packages they kind of fall into. We could see what their utilization rates are.

Hubert Mak - Cormark Securities

Would you expect for Q1 and Q2 timeframe is when you --?

Steven Vestergaard

Well the product is expected to launch in December, so that's actually our Q2 -- sorry, Q1, as November 30.

Hubert Mak - Cormark Securities

Right. So you will provide some next --?

Steven Vestergaard

I am expecting revenue in Q2. This is great from the beginning of the quarter. We are not going to market too heavily, until we are really comfortable that people aren't having problems. So I am expecting a couple of weeks where it is out there, but we don't market too hard, and then coming out in Christmas, we are going to really push and spend a lot of money on branding and advertising.

Hubert Mak - Cormark Securities

Okay. And what is the economics of the solution, just to call base, what's the margin like?

Steven Vestergaard

Like I said, the margins are a bit hard to figure out, because if the utilization is lower, our margins are higher. So a better way to answer your question is, what's the worst case. I am expecting the worse case margins are going to be around 60%. If the content recycles, and doesn't get the server, doesn't get Amazon, then our margins are near 100%, and we have very little costs. Its going to be kind of hard to figure out, until we see real numbers. It is possible, the way its priced, if somebody in the top package uses exactly 100% of their minutes every month, it is possible for our margins to get lower than 60%. But we expect that case to be a real outlier.

On the lower end, actually the $5 and $20 month packages, probably are most lucrative, just the way we priced it.

Hubert Mak - Cormark Securities

Okay. And lastly, in terms of the inbound customers, I know you just mentioned that some have gone cold. But have you recently talked to some of these inbound calls, and if that's the case, can you just talk about the pipeline what you are seeing now --?

Steven Vestergaard

Yeah, I don't want to say anything non-public, so I don't want to go down that road. So as an example, I am personally going with Yoshi, one of our Directors, to Japan on the week of December 9th, and the purpose is to meet customers that have been waiting, that have been in the queue. Similarly, there is North American customers, some of them we haven't talk to in a month, intentionally. I have told them, stop bothering me and wait until its ready. But we are expecting its going to take a bit of time to wake some of those up, but the Q is not bad. There are big Fortune 100 companies that have expressed interest. Now whether that turns into a sale or not, let's see. Some of them will for sure.

Hubert Mak - Cormark Securities

Have these actually seen some of the most recent technology, or is it like sort of really old version?

Steven Vestergaard

The demos that are on the site are -- I think there is a couple of recent ones, but generally, they are older in codes. We haven't bothered reencoding some of the old video. We haven't put any effort into marketing. We wanted to make sure that the product was ready to go, before we pushed it out. So generally no, they haven't been looking at it.

Hubert Mak - Cormark Securities

Okay. So you don't have much feedback in terms of the most recent sort of technology on these --?

Steven Vestergaard

No. We are taking some feedback from the customers that are active. So for example, we have been adding market research companies, and they are very happy, and they are working with big brands. Some of the biggest brands in the world. Movie trailers, that you'd be very familiar with. TV commercials that you have seen from some of the biggest brands in the world. And trust me, when it doesn't work, they complain, and they are very happy with the quality, they are very happy with the penetration. Generally, they haven't been using mobile at all, because its just too difficult. Even if you get something like Android, there is so much variation from one Android to the next. Just because you have video that plays on Android, doesn't mean it plays on all Android.

Where so far, the [inaudible] cross-platform, they are really happy. People have been trying and paying us, the feedback has been really good.

Hubert Mak - Cormark Securities

Okay. Sorry I just have one more here. Has your [cost paying] customers, especially in the market research side right now?

Steven Vestergaard

Only the market research -- that's the only space we are selling in currently.

Hubert Mak - Cormark Securities

Okay.

Steven Vestergaard

So we see a 95% of our revenues is Play MPE, the other 5% is generally market research. Its not [it gets] revenue opportunity for us, but the users are big brand name customers. It's kind of funny to say, I am using test market customers to test market our systems, but that's exactly what we are doing. They are kind of getting [inaudible] in, and it has been working well for us.

Hubert Mak - Cormark Securities

Right. Okay. Thanks. That's all.

Operator

Thank you. (Operator Instructions). Our next question comes from [Patrick Lauder] from [Al Consultants]. Please go ahead.

Unidentified Analyst

Hi Steve, it's Pat for Montreal. I heard your presentation. I wanted to know, would it be possible if you could put up the stats, like you did for MPE on the website? I mean, I find that fantastic, and if you can give a good idea of which license is going up and stuff and by how much? Without putting any dollars there, if you can put maybe the number of customers, what level customer, I don't know, something creative like that?

Steven Vestergaard

It’s a little bit tough. You are not the first one to ask for that. It’s a little tough to turn those stats into dollars, because it’s a little complicated. For example, somebody sends a box set with 20 songs on it. Its not 20 times the price of a single. So we have got the complexity of the different pricing models. But different customers, independents pay a little bit differently than the major. The independent would pay a percent minimum, generally, their codes are helped with our staff, our staff will help create the code for them, so they cost us a little bit more.

On the other hand, you have got majors, where they are paying us a minimum, but their usage is below the minimum. So we have talked about that, it’s a little bit difficult to accurately translate that into something that somebody could tie into a model to guesstimate where those are.

Unidentified Analyst

But talking about Clipstream really, we are hoping to see something --

Steven Vestergaard

In terms of Clipstream, we have talked about that. We may do something that gives an idea of how many users there are. One concern is, nobody wants to be the first customer of something brand new, and the concern is that I might dissuade, the early customers to know that they are customer number 20 or something. There are thousands of people before them. We will probably wait until we have some decent numbers first.

Unidentified Analyst

That would be great. I mean, if you could divide it in, like the $50 customers so many, or the $100 customers, just ballpark it type of thing, and then everybody would be thrilled. I mean, you see the stock going up, as the customers were [inaudible].

Steven Vestergaard

Well, we are going to do that exactly. But the goal is to provide as much transparency and feedback to investors as we can. So we would look at trying to find some ways, letting you guys know what's going on. But we also plan to -- when something significant happens, we will put our corporate update press releases to let you know that we closed a bigger customer.

Unidentified Analyst

Yeah, that's what I was hoping to hear.

Steven Vestergaard

Yeah, we are not going to make you wait until the next quarter, if something material happens.

Unidentified Analyst

Super. The other question was, working towards getting on the NASDAQ. Are you committed to the NASDAQ? Have you ever about thought about going to the AMEX and then working up to the New York Stock Exchange completely?

Steven Vestergaard

We are looking forward to exchanges. I think for a tech company, NASDAQ probably makes more sense.

Unidentified Analyst

And then, the timeframe again for that would be?

Steven Vestergaard

One of the issues is, they have the requirements. So we go back and forth with them with comment letters. One of our requirements is share price for example, we are trying to -- on the edge, where they like to see us beat. We are going through the process. We put in the application, we got some comments back. It could be as soon as January, or it could be later, it depends on how quick we address what their concerns are.

Unidentified Analyst

What about getting overall into the TSE?

Steven Vestergaard

We have looked at that too. We have talked -- it's a fairly costly process. I don't know if it makes sense to do both. But, we have looked at that.

Unidentified Analyst

And do you have any plans in hiring a big name salesperson? Someone with Google experience or --?

Steven Vestergaard

Yeah, we have actually -- I can't say we have actively recruited. But what we have been doing is, reaching out to our investors and institutional investors, telling them that that's something that we are interested in. And names have been coming back to me. We haven't seen anybody that's the right person yet, but if we were to hire a person like that, we would be looking towards May of next year. We would be looking towards setting up a satellite office somewhere, even if it was Vancouver, somewhere outside of the development office. Like I said, we had looked at Silicon Valley, but its going to depend where we hire that person from.

Unidentified Analyst

When are we going to be able to see Clipstream videos that are largely like -- if we were to buy for our own purposes, there was a few of those that have invested back in Montreal, who wanted to actually buy -- one man speaking French in that -- for the service. Is it possible that you could be improving it still over time? Is like Clipstream fully developed, and it will never get any better?

Steven Vestergaard

No, there is actually -- two things, one is, yeah, we are improving it and we are improving it a lot. We have locked it down, just so we could get launched. But there is a separate track going on, where we are improving the engine, besides the – [inaudible] get the engine that we are launching with, but we are also improving the engine in the background.

So we are steadily improving it. But there is no limit to the upper quality. We could go as high as you want us to go. The issue is, as we go higher, it takes more bandwidth and it takes more CPU. So we have the challenge of trying to work on the latest computers, with all the [delta whistles] and the huge bandwidth and the huge CPU speeds. But also its work on the iPad one or the old Android tablets. eBook readers is a perfect example, where there is no horsepower, there is no memory, there is no CPU. So what you see today, is bit of a tradeoff to where we need it to go to reach as many people as possible.

But that said, the system auto detects. So if you have a decent system, it will go to 960 pixels wide, which is HD. The lowest HD is 720 for example. And 960 is generally 50% more than YouTube offers. YouTube's highest is usually 640. Usually, 640, 480 or 320. But to get that, you need to have at least 4 megabits a second and a decent computer.

That said, the typical user has -- or the medium user has 6 megabits a second. If you look at the new Sprint network coming out, it has a minimum of 60 megabits a second. So our 4 megabits a second is a fraction of what's going to be available. So it’s a problem that kind of fixes itself automatically, like next year, way more people will have enough bandwidth and enough CPU to get our HD version. So over time, the quality will just kind of automatically improve.

Unidentified Analyst

And what does that --

Steven Vestergaard

For that code time, you can also choose to encode to a higher quality. You can go higher than 960. But as you do that, you are starting to limit to who can view it, because less people have enough bandwidth and less people have enough CPU.

Unidentified Analyst

And are you finished with the patents, or are we basically patented it out, or are you looking to file more? You think its fully protected where it is now?

Steven Vestergaard

Clipstream is fully protected now, I think. In terms of MPE, we have got a watermark pattern in Europe that we are waiting for. We have got some initial comments back, so we are hopeful that something is going to happen in the next couple of months here. They are way behind -- we originally applied for that in 2006. We are sitting here in 2013, almost 2014. So its seven to eight years that we have been waiting. A very frustrating process.

In terms of Clipstream, if somebody tries to infringe on it, the patent office has the concept that, if you are being infringed, you could jump to the front of the line, instead of waiting seven or eight years to have your patents heard, you can hear it within typically, 60 to 90 days. So if that happens or somebody does try to copy us, we would go through that process.

Unidentified Analyst

Okay. That's it for me. Just wanted to say, I appreciate all your hard work you are doing out there. Appreciate that. Thank you.

Operator

Thank you. Your next question comes from Ranjit Narayanan from Global Securities. Please go ahead.

Ranjit Narayanan - Global Securities

Yeah, thanks. Just a really quick follow-up. Steven, on the watermarking and the locking, do you see a cross-sell opportunity to some of your existing Play MPE customers, who also have video content that they wish to distribute in a secure manner?

Steven Vestergaard

Yes. We are getting a lot of demand for that, and also outside of music. Our music label customers could be our first Clipstream customers. Obviously, they have music videos that we are currently protecting and distributing for them, but they also want to stream those videos. They are heavy users of YouTube. They could pull a lot of that and put it on their own artists websites.

For those [inaudible] music industry, we will be talking to a lot of movie studios, that have come to us saying, we love your solution for music, could you adopt it, work for us for our movies, and the business could be big there. They spend $250,000 to duplicate and send a video out. The challenge we have as a company is to not spread or substitute them. So that's an opportunity we probably will chase, but probably not in the next quarter or two. So its out there.

There are opportunities waiting for us, where we could make very minor modifications to the Play MPE system and generate new revenue. But as of today, our biggest opportunities are to grow Play MPE as it exists, and to launch Clipstream.

Ranjit Narayanan - Global Securities

All right. Thanks.

Operator

Thank you. Mr. Vestergaard, there are no further questions at this time. Please proceed.

Steven Vestergaard

I see, there is one more question.

Operator

Pardon me.

Steven Vestergaard

Looks like there is one more question in the queue.

Operator

Yes. Pardon me. We do have our last question, it does come from Hubert Mak from Cormark Securities. Please go ahead.

Hubert Mak - Cormark Securities

Hey. I just want to follow-up on -- what you are thinking here in terms of advertising opportunity and what's the timeframe and when do you think you can get sort of your future is and --?

Steven Vestergaard

I am expecting to add clients out of the gate. So what an ad client can do today, is take their -- they have their McDonalds commercials update. They can drag and drop it into our uploader. They get it linked back. They can reach tens of millions of impressions, because we are using Amazon in the backside. We also load balance to other continents. So if somebody in Europe accesses it, they will get the European version, so they get much higher quality than if they are trying to catch North America.

So, we think advertisers are going to love the current offering, but there is a lot of things that they want from us, that are not in the current offering. So to get 100% of the ad market, there is things that we need to build out. So for example, in North America especially, they use real time bidding networks, add insertion technology, they audit the streams of third parties. They audit to make sure that everything is working. They only got reporting systems. So, there is not so much development, as much as integrating our metadata with servers from other providers, that will be part of that ecosystem.

So I could see us building that out, as much as over the next 12 months. So for me to say, I have a product that reaches all advertisers, I would say, it would take up to a year.

Hubert Mak - Cormark Securities

So today then, what kind of percentage --?

Steven Vestergaard

Well as an example, imagine, I am a big daily newspaper. Let's say the USA Today or something, and I want to run ads on my own website. I don't care about ad insertion technology, I just want to sell an advertiser a video spot on my website. That customer could use it today. We have everything that they need, and that's a big customer that could pay us a lot of money.

Similarly, there is ad agencies that will do campaigns that are just on a simple website. Maybe they run it on Yahoo!'s website or something, but they are not doing it across websites. They could use us today. Someone that could use us today is something like a real time bidding network, where they put the ad out and all the sites, the MSNs, the Yahoo!s and everything, their servers bid at real time to see who gets the ads. They offer this space. We are not going to be compatible with that out the gate. But the people that we are compatible with, as of today, -- as of the launch, next week, that business is worth hundreds of millions of dollars already.

So I think the ad opportunity is over $1 billion; and for us to get to that, we have to build stuff out over the next year. But to sell as of today, we can generate hundreds of millions already, or we can address hundreds of millions already.

Hubert Mak - Cormark Securities

Okay, great. Thanks.

Steven Vestergaard

So I think that was our last caller.

Operator

Yes. There are no more questions at this time. Please proceed.

Steven Vestergaard

Okay well, Fred and I appreciate everybody joining the call here. Again, the call is very well attended. Not everybody is comfortable asking questions on a call like this. We welcome follow-ups. Both Fred and I are very reachable. We encourage you to reach out to us, either by email or phone, and we also welcome visits from investors to the office, if you want to come check out what are up to, just make sure you make an appointment first.

Thank you. Appreciate your time, and see you next quarter.

Operator

Ladies and gentlemen, this concludes your conference call today. We thank you for participating and ask that you please disconnect your lines.

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