"I just hope people don't get sick of us. I'm sick of us and I'm in Destiny's Child"
- Beyonce Knowles
2013 was a phenomenal year for equity investors. Only 7.8% of the companies in the S&P 500 Index declined in price while the index overall generated a total return of 32%. You would have needed to try really, really hard to lose money in 2013 as a long-only investor.
2013 was also notable in that lower quality, smaller, and more speculative names performed the best as shown below:
Specific examples of this lunacy abound. One in particular that has caught my attention is Destiny Media Technologies Inc. (OTCQX:DSNY). Despite a 10% drop in sales and a 79% drop in EBITDA over the 12-month period ending November 2013 (to $3.5 million and $200K respectively), Destiny's stock exploded higher in 2013 by over 200%:
The current capitalization of the company is shown below:
Obviously, the nominal earnings make the P/E multiple meaningless, but at nearly 20x revenue it is obvious that this is a company being valued on future assumed explosive growth. To put that EV/Sales number in context:
In 23 years of existence Destiny has generated cumulative losses of $5.7 million as of November 2013:
So why have investors bid up the shares of Destiny to such lofty levels? Is it justified? I will attempt to answer both questions here.
Destiny Media is a Vancouver Canada-based software company that was founded in 1991 as a video game developer. After several mutations, the company now has two lines of business, "PlayMPE" and "Clipstream," each of which is described below:
This product has been in the market for nearly 12 years and provides a secure digital distribution platform allowing record labels to distribute pre-release music and other content to radio stations and other trusted recipients (DJs, industry press, etc.). Content is encrypted and the system adds an inaudible watermark to content so "leaks" can be plugged.
Play MPE is a decent little business for Destiny but has been stagnant for several years, and I see little reason to indicate that it is much of a growth business, revenue is eroding, and competitors are cropping up. Below are the Play MPE revenues for the past 8 years:
Revenue has declined modestly for each of the past 3 years and is hovering around 2010 levels. Note the above figures are for the fiscal year ended August. In the most recent (November) quarter, Play MPE revenue declined about 13% over the prior year quarter:
A single Play MPE customer accounts for about half of total company revenue. The customer is Universal Music Group (UMG). In April 2013, Destiny announced that its agreements with UMG would be replaced by a new global agreement. While the press release touted a "guaranteed minimum" and "an accelerator provision," it seems the net result is that UMG simply squeezed Destiny for better terms, as revenue immediately dropped after signing the deal. In the conference call for the May 2013 quarter the CFO noted:
"I'm sure that you've all noticed that revenue has taken a step back."
"Revenue for Play MPE in Q3 fell by 14%, this occurred entirely as a result of renewed agreement with UMG, Universal Music Group. Under this agreement while the volume of the transactions is growing, what is considered chargeable - it has changed….but in general we're competing with lower quality less secure systems and we have to typically balance the promotions peoples' interests with the various record labels with higher functionality aspect of Play MPE thus when entering new markets when the value of the Play MPE system is not well understood and they are the cheaper competitor this pricing model should smooth that transition over"
Fast forward to the January 2014 conference call and it was confirmed that Play MPE was still stuck at the minimums with UMG, and the CEO expressed some frustration:
"I had hoped that this process would have gone a lot more quickly. To some extent it's a bit frustrating because it's out of our control. There's nobody for us to go out there and sell. We've already sold the parent company."
Okay. In any case a cursory look at the competitive landscape confirms my view that this is not really a growth business, and in fact has some serious threats from lower-cost, nimble competitors.
Competition is increasing with companies such as ipool and Haulix. Haulix charges US$999 per month for unlimited storage, bandwidth and watermarking and looks like a very adequate solution offering security and protection, advanced tracking, downloading and stream, and campaign management, and a review of social media sites confirms it is well regarded. A simple Google search for "Haulix PlayMPE" yielded some interesting first page hits and tweets, for example:
I also came across a July 2013 interview with Thomas Nassiff, a record label manager and web content manager for Fuse TV where he noted:
For fun I punched "PlayMPE" into Twitter and immediately found some interesting fresh tweets:
Okay a few more:
I am not completely literate in the jargon of hip Millennials, but I'm pretty sure having them refer to your product as an "arse biscuit" is a negative (but if they called it "sick" that would be constructive, apparently).
I even came across a Facebook group called "Play MPE Is One Of The 1600 Worst Things Of All Time" with 108 members where frustrated people gripe about Destiny's main revenue generator:
I encourage you to search out such commentary out on your own.
Another phenomenon that has been gaining traction is using social media for pre-release strategies - e.g. engaging with fans, streaming videos on YouTube or elsewhere, etc. as described here.
Below are the Google Trends results for 2013 searches for "Play MPE" vs. "Haulix":
The Google Trends search results for "Play MPE" since 2009 is also confirmatory of gradual erosion:
Despite the challenges facing Play MPE, for purposes of evaluating DSNY I view it as immaterial to the company's valuation - the hype around Destiny's "Clipstream" opportunity is responsible for the run up in the company's share price. Let's be generous and call Play MPE a $3.5 million flat business that could somehow generate a very healthy stable net income margin of 15%. That would yield earnings of about $700K. Applying a 15x multiple would value the Play MPE business at around $8 million which would equate to about $0.15 per share. Therefore "Clipstream" is what really matters in figuring out if DSNY is a winner or loser at the current price of $1.34.
Clipstream is a proprietary video streaming video solution whose principal purported benefits are:
For long time followers of Destiny Media, talk of "playerless audio and video" may seem familiar. That's because Destiny has been talking about it for at least 15 years! As Destiny's own document explains:
"When Napster came out, reducing the short term potential for digital music sales, Destiny's focus moved to our Clipstream® product line."
Napster, in case you forgot about it, was released in 1999. Indeed, even in this July 26, 2000 (not a typo) press release from Destiny touts Clipstream:
(www.clipstream.com), a java-based tool which enables web pages, e-mail and banners to stream audio without the use of a player; Video Clipstream(TM) (www.videoclipstream.com), a prototype technology for embedding streaming video into a web page or e-mail"
So what is this magic Clipstream technology? It's helpful to start with the earlier Clipstream efforts (say…from 1999 to 2011 or so) and how they evolved into the most recent iteration. The company itself does this by referring to the more recent iteration as "G2" or second generation. I apologize in advance if this is a bit too technical and I'll try to keep it high level.
In 1995, Sun Microsystems released the Java programming language, partly in response to Microsoft's operating system dominance at the time, and problems with writing and compiling software for a myriad of different platforms. The concept was "WORA," or "Write Once Run Anywhere" - each client computer/ browser regardless of platform would have a "Java virtual machine" that could run any program written (once) in the Java language. In the web environment, developers could write Java "applets" or programs that could be embedded in a website, which would be executed within the browser.
Readers who can still recall the olden days of the late 1990s and early 2000s may recall the mess of browser plugins, updates, "RealPlayer" spyware and other nonsense in the wild west days of the internet. Destiny thought it would throw its hat in the ring, and created the first generation of Clipstream (I will refer to it as G1).
Clipstream G1 was in essence a Java applet that could decode and display video that had been encoded in Destiny's proprietary format. So instead of, for example, having to install the RealPlayer or Adobe Flash video plugins to watch video on websites, the player itself was a Java applet that would automatically run within the browser.
G1 was released just over 13 years ago in December 2000:
While G1 technically worked, commercially it was a miserable failure. There are likely many reasons this is the case, but there are a few obvious standouts.
First, a peon company up against Adobe, Microsoft, and Real Networks trying to convince the world that its proprietary video format should be used is a bit silly to even think about.
Second, Java itself had some severe disadvantages. Slow performance was one disadvantage as Java tended to hog resources such as memory and CPU cycles, given the applets run on top of a running Java Virtual Machine, which in turn was run within a browser.
YouTube's adoption of the Flash format was a killer.
While users did not have to install a plug-in with Clipstream, they still needed to keep updating their Java client on a frequent basis.
Other problems included browsers that disabled Java applets by default due to security concerns, and business IT departments doing the same.
The real kick in the teeth for Clipstream G1 and other Java-based technologies came about when the iPhone and Android platforms emerged. Apple's iOS and Android do not run Java. Oops. As the world has gone mobile with iPhones, Android phones, iPads and other tablets, it's not surprising what little revenue Destiny was able to scrape together for Clipstream G1 started eroding pretty fast. Below shows the Clipstream revenue since 2006 (a year before the iPhone launch and the first year Destiny started breaking out Clipstream vs. Play MPE revenue):
From a very low base, Clipstream revenue has declined for 7 years in a row. I am frankly surprised that there is any revenue at all. I wonder if a meaningful (100%?) may be related to the audio-only version of Clipstream or another niche product lumped in with "Other" called "Radio Destiny" which the 2009 10-K describes as:
"Destiny currently markets Internet radio under the "Radio Destiny" brand as a software sale to hobbyists who broadcast using their own bandwidth. Destiny provides a directory (www.stationdirectory.com) to access these hobbyist signals."
Check it out at stationdirectory.com. Thankfully "Geezer Radio" is still on the air. But as a perfect example of one of the problems with Java outlined earlier, my browser's default security killed the applet:
With that background, we can now focus on Destiny's new shiny bauble, Clipstream G2, which has what has sent Destiny's stock price into the stratosphere and has allowed the company to even explore a NASDAQ listing.
It's easiest to think about Clipstream G2 in the context of G1. The purported benefits are quite similar - namely a "playerless" video format (thus less need to transcode into different formats) with some security and tracking ability, and the ability to have the media cache on a client or ISP server. This latter point seems to be touted as a new feature of G2 but the 2009 10-K notes the following with respect to G1:
"Clipstream® media will automatically cache because it is an ordinary web component, just like a graphic or a block of text. This means that Clipstream will save up to 90% on bandwidth cost (over 90% for ads), while providing much more reliable playback This standards-based approach means that there is no limit to simultaneous streams."
Source: 2009 10-K
"A method performed by a computer system for rendering video content on a user-computing platform that is one type of a plurality of different user-computing platform types, the method comprising: transmitting a script to the user-computing platform, the script configured to be interpreted by an application program operating on any one of the plurality of user-computing platform types; wherein transmitting the script causes the script to be interpreted by the application program operating on the user-computing platform to cause the interpreted script to directly decode encoded video data accessible to the user-computing platform into decoded video data comprising one or more frame images."
Source: Destiny Media patent filing
Sounds great, right? The whole world should just move over to the Clipstream format and we can have web browsers do all of the decoding and display work. Apple or Google should have thought of this, right?
There are two main types of programming languages - "compiled" and "interpreted." A compiled language involves writing a program and having it packaged up (compiled) for a specific platform (e.g. operating system and CPU). The key advantage is that the program is far more efficient - think of it as custom made for the computer that runs it. Disadvantages are that it must be compiled for different platforms before distribution.
In contrast, an "interpreted" language converts the program's code into the 1s and 0s that a CPU understands on the fly. The key advantage is that every platform can read the code, but at what cost? The key cost is performance - the client computer has to do more "stuff" so this uses resources such as the CPU/processor and memory. The chart below may help a bit.
But video is a hog. It's not hard to imagine why. For example a modern high-definition (1080p) video can have over 2 million pixels in the frame, and a single second of video can have 30 or more frames, meaning in that blink of an eye 60 million pixels need to be instructed individually on what combination of colors to display. It takes a LOT of computing horsepower.
This is one reason that the industry has moved towards standards as much as possible (and away from propriety formats like "Clipstream"). With a standard video format (e.g. H.264, which is a current popular format), it's possible to actually put the decoder right into the chip silicon. Intel, Apple, Qualcomm, and others have put the video decoders right into the chips, and for multiple formats (H.264, MPEG-4, WMV etc.). This is incredibly efficient as the silicon is dedicated for that purpose so it uses far less power and keeps the general processor, etc. free for other tasks.
It is for this reason that Apple killed Adobe's flash. In the mobile world, processor-intensive activities like rendering video or a 3D game has to be done in hardware. Period. Apple's note on why they killed flash is instructive:
(click to enlarge)
HTML5 is the latest version of the markup language used to design websites. Prior versions of the HTML standard had no native video support. HTML5 adds a <video> tag with some descriptive information that tells a browser that something is a video and its size, format, etc. Estimates are that 80-90% of browsers are HTML5 compliant. HTML5 is relevant in that as it sits the standard does not agree on a video format (something Destiny enjoys pointing out). However H.265 is a leading contender to become the next video standard (with hardware decoders built into chips as described here and here. Interestingly the HTML5 Working Group, while not agreeing on a video format, did provide guidelines in what it considers desirable for HTML5 video implementations:
(click to enlarge)Source: Wikipedia
Clipstream of course has zero chance of becoming an adopted standard (it is a proprietary format), but it's interesting that even the HTML5 Working Group points to low decode processor use and the need for hardware video decoders being important.
While it's clear that the world isn't talking about "Clipstream" and beating a door to Destiny's HQ in Vancouver, given even G2 has been touted by Destiny for several years there are a few people here and there that have weighed in on the technology. One discussion I found particularly interesting is here. The comments to this article are insightful and consistent with my conclusions. For example:
I suppose that is techno-speak for calling Clipstream G2 an "arse biscuit."
"I don't think you're ready for this jelly"
- Bootylicious, Destiny's Child
For fun I decided to put my layman technology skills to the test. I signed up for a free trial Clipstream account (Destiny's "YouTube For Business" hosted video offering) and tested their sample video on a modern PC. Below are the specs - an Intel Core i7 CPU @2.67ghz with 4GB of RAM running on the Windows 7 Professional platform.
The Intel chip includes hardware video decoding for many formats (including H.264/AVC, the format YouTube has standardized on). Geeks can read more about my PC's chip here.
Below is a screen shot of the low-quality cartoon that Destiny uses as its sample video. Personally, if I was showing off video technology I would grab a high definition camcorder and take some stunning high-res images, but I think I know why they didn't do that.
Using the built-in Windows process monitor I was able to track the CPU usage over a minute or so as I ran the video. The output is below (please have fun and do the same on your own computer - don't take my word for it!):
Note this is a high-end multi-core chip, that actually has 4 CPUs on a single chip, but Windows has turned off (parked) CPU 1 and CPU 3 so only the other two cores are running. You can see that running this little Clipstream cartoon chewed up nearly half the CPU horsepower on CPU2 and also took a decent bite out of CPU 0. Including even the parked CPUs the total average CPU utilization of the combined cores was about 16% (15.98% as shown in the Internet Explorer/ iexplore.exe process).
As a point of comparison I looked for a low quality cartoon on YouTube and used the Donald Duck cartoon below as a comparative benchmark (note I closed all other programs while running both tests):
Here is the output of my little test on the YouTube video:
The CPU utilization is virtually nil. And the average CPU utilization for Internet Explorer is 0.38% vs. the 15.98% for Clipstream. It's clear that the video decoding in the YouTube video is being done on the dedicated circuitry on the chip - keeping the CPU free and clear, and using far less energy (i.e. battery life in the mobile world).
As a final non-scientific layman's test of Clipstream, I fired up this cartoon on my 1st generation iPad. I was quite surprised to see this (captured with my iPhone camera):
In case you can't read it, in trying to play this video on my iPad, Clipstream had to stop the action and note "Downgrading, slow CPU," and then once "downgraded" gave me a lower-quality version of the cartoon.
For the record, here are the video specs of my iPad 1:
There may be a customer here or there that doesn't really care about using standard video formats, or things like mobile battery life for performance, and maybe for small clips (like a 30-second ad spot) it wouldn't really matter. But I'm having a tough time thinking about who would want to use this.
The company's target markets seem a bit scattered:
Market research companies doing video surveys? As #2 on the list? Really?
Destiny touts a few bells and whistles like the ability to watermark videos (no big deal) and lock playback to specific devices. Perhaps there are a few niches that might find that attractive (e.g. MI6 sending training videos to James Bond).
My impression is that the company really believes in the product and the CEO is passionate about it in online interviews and conference calls.
But there are a ton of video solutions out there. One I came across was Kaltura - an extremely comprehensive open -source (i.e. free) video platform that works with the standard video formats as described here:
Destiny likes to talk about transcoding (converting a video from one format to another) as being a big problem. But it is a fact of life and actually of great benefit - to be able to efficiently provide the best video as efficiently as possible on every platform. It's not just about compatibility. Netflix does this with a company called eyeIO:
Oh, and speaking of Kaltura, I was bemused to happen across a video pumping Destiny Media's stock here at "Investmentpitch.com" that Destiny actually put out a press release on:
What I found funny is that the video touting Clipstream is actually being run on the Kaltura platform as shown here:
From the disclaimer here it seems that Destiny shelled out up to $2500 in cash or stock to "produce this information, according to the disclaimer shown at the end of Ms. Barber's "story":
Perhaps InvestmentPitch.com should be the first Clipstream G2 customer?
Not too surprising for a company that uses its stock ticker as its website address (dsny.com)
I may become more optimistic if someone actually starts buying this stuff but from the most recent conference call it doesn't sound like customers are beating down the door for "Clipstream." Here are some choice quotes from the CEO (with some admittedly sarcastic commentary by me in [square brackets]):
"So as promised on our last call, we had a major milestone this quarter as we quietly made our disruptive Clipstream technology live just before the end of the quarter; then we press released it, announcing it on December 4th. So the feedback from our first users is extremely promising."
[Shhh. Keep it quiet, when you're disrupting a $5B industry you don't want the customers to find out]
"We were pleased to see that there were no bugs, but as expected, there were some usability issues that we addressed within three weeks of launch. So examples included Amazon servers would hang up on users if their Internet connection was slow, or users would try to encode video without having the source code actually installed. For example, if you want to feed a QuickTime video into Clipstream, you have to have QuickTime installed."
[Really? Blaming Amazon Web Services, the most robust infrastructure-as-a-service platform on the planet for "hanging up" on users?].
"As I made clear earlier in the year, this soft launch period was planned and expected. It's why Microsoft puts out new versions of Windows after launch or why Google does limited invite-only Lab versions of new software. You need to release the product into the world to get this early feedback. There's so many different computer types, source video types, and you don't know what is going to confuse a new user unless you let them try it."
[Translation - we're still in beta after all these years?]
"So it's only been just over five weeks since we press released our launch and only three weeks since the last version, and that includes the Christmas holiday period. I talked to a lot of investors, and I find many have unrealistic expectations, thinking we'd get our first multimillion dollar deal within days of making the product publicly available. That's not realistic, and no one here inside the Company expected that."
[Sooo....your stock is up 200% on the year and you tell investors they have "unrealistic expectations" - strong buy!]
"We're starting some search engine advertising this week, and we expect to be more aggressive in about two weeks with advertising and PR efforts...
"Our sales strategy will be to bring in more senior level talent for direct high level sales, and to build remote sales offices, to do automated recurring sales through the website, and to sign up resellers and build partnerships with companies already in the space. We're exploring licensing our technology so that we can integrate into other company's software, and we may do some minor acquisitions as we grow."
[Nice crisp go-to-market strategy of pumping ads to search engines, enterprise sales at a "high level," remote sales offices, selling off the website, resellers, partnerships, licensing, and heck let's even buy some companies]
"Yeah. So we saw Clipstream revenue out of the gate, but it's small. I mean it's people signing up for a $5 a month account or a $20 a month account. As expected, we would actually anticipate that some of our biggest customers are going to initially start with kind of a low price trial to with their first video."
[Gotta start somewhere when you have such disruptive technology]
"A good way to think of it, though, is every month we expect to have more customers than the month before."
[I should hope so....]
"We have had sign-ups. Probably some of the paying customers are probably even investors. So the system is wide open. Anybody can come in and put their credit card in, but it's been minor."
"We haven't started marketing this system yet…"
"In terms of video advertising there isn't really a good solution to put video on cell phones."
[Is a solution that seems like it would eat up battery life the right one?]
"Even some of our existing customers in the recording industry are probably going to be interested in displaying their music videos, so big corporate licences are a big opportunity."
[Music videos online, what a great idea. If only there were somewhere I could go to see those]
And here is what I view as a perplexing statement based on everything I've determined about the technology so far:
[That does sound like magic, a little too much...]
"If your CPU is limited, maybe you've got a bunch of programs running in the background or if your bandwidth's limited or you have a bad connection, it'll automatically downgrade that to the highest that you're able to support."
[Okay now I'm confused, didn't you just say the technology was "magical" and hardly uses any CPU?]
"But by summer we're hoping to have a much more-have a lot more senior people and a much bigger sales force set up to do direct sales."
[Translation - watch for expenses to start ballooning. If we build it they will come.]
"we believe that having a NASDAQ listing earlier will help us with sales, will help us with promotions, will help us with media coverage. We find some of our best salespeople are actually our own investors, so if we have 5 times the liquidity, all those new retail investors and institutions will be out there helping us."
Governance doesn't impress me too much. The board is comprised of the following four individuals:
Steve Vestergaard (CEO)
Edward Kolic (Director and Former employee)
Lawrence Langs (Director)
Yoshitaro Kumagai (Director)
According to the most recent proxy document filed on January 17, 2014, the board had exactly one meeting for the entire fiscal year:
One meeting. Really??!!?
The Audit Committee meets only once per year as well. Audit Committees are charged with oversight of financial reporting and disclosure. How can a single meeting be considered sufficient?
Furthermore, while the company does have an Audit Committee (as required under securities regulations), it does not have a Compensation Committee.
An interesting tidbit is that according to Destiny's 10-K filing, the company entered into a consulting agreement with director Kumagai:
You can see that it is a commercial arrangement whereby Mr. Kumagai receives $24,000 per year for consulting services, and a commission of 10% of "new business successfully closed." We know from the above that zero commission was paid in 2013, but what about other years? Zero in 2012. Zero in 2011. The agreement began on October 2010 and it seems Mr. Kumagai has delivered no new business under the arrangement.
Perhaps something to bring up at the one board meeting they have every year. Maybe it's just me but if I ran a business and hired a salesperson who didn't sell a single dollar's worth of business over a 3-year period I would probably not keep that person on as a salesperson (you know, because of the whole "sales" thingy).
It seems Mr. Kumagai is involved with Mr. Vestergaard in another venture, Brisio Innovations in which Mr. Vestergaard is a director in the company and largest (11%) shareholder.
But these are minor items in the grand scheme.
The chart below shows the P&L for Destiny going back to 1999.
Valuation is a bit of a head scratcher with Destiny. As shown previously I generously give a value of about $8 million, or $0.15 per share for the Play MPE business. The UMG deal was only signed for 24 months in April 2013 so it's possible that 13 months from now this business could take another hit if UMG decides to renegotiate again or move to lower cost offerings like Haulix.
Regarding Clipstream it is difficult to assign a value. I expect expenses will continue to ramp up in sales and marketing and it's unclear how much traction Clipstream will ultimately get. My instinct based on my work outlined here is that success will be slow, sporadic, and ultimately disappointing. The CEO's comments on the conference call that many existing investors have "unrealistic expectations" seems to indicate this. Peak "Clipstream and Other" revenue under the G1 days maxed out at around $1.1M. I see no reason to pay more for the Clipstream opportunity now than Play MPE is worth (15 cents per share on my rough estimate), which would value the company about 75% lower than where it's trading now ($0.30 vs. current price of $1.34).
I view the current implied value of Clipstream at over $50 million ($1.00+ per share) as extremely optimistic. I started casually writing this article at the end of January when the stock was in the $1.65 range. It's continued to deflate and is now trading at $1.34 as of today. I would not be at all surprised to see DSNY back in the 50-60 cent range it was at a year ago:
The fact that the CFO just filed for a proposed sale of securities for about half of his shares does not exactly inspire confidence.
Finally, a few caveats to my work here. I could be wrong. Maybe there really is some "magic" to the Clipstream technology. I tried to find it and understand the pros and cons as best as I could and came up short (pun intended). I expect several people will post here and explain how dumb I am. I will listen to them and keep an open mind. Maybe they will be right. Anyone going long or short these companies should definitely do their own homework. $70 million market cap companies can be dangerous shorts, especially those that seem to have aggressive PR. But I think I'll do it anyway.
"I get nervous when I don't get nervous"
- Beyonce Knowles
Additional disclosure: This article reflects my personal views only. I have a small short position in DSNY. All data and calculations presented are accurate to the best of my knowledge but have not been vetted, checked, proofread, or independently verified. This article should not be relied upon for any purpose other than for entertainment. I have experience in technology and technology investments but am not an engineer, computer scientist, or expert on video technologies. I welcome comments and or corrections.