Rightscorp's (RIHT) CEO Christopher Sabec on Q1 2014 Results - Earnings Call Transcript

May.13.14 | About: Rightscorp, Inc. (RIHT)

Rightscorp, Inc. (OTCQB:RIHT) Q1 2014 Earnings Conference Call May 13, 2014 4:15 PM ET

Executives

Andrew Haag - Managing Partner, IRTH Communications

Christopher Sabec - CEO

Robert Steele - COO & CTO

Analysts

Michael Altobell - Paragon Portfolio Management

Jeremy Ro - Integra

Fred Goldstein - Moors & Cabot

Tim Bestler - When To Trade Group

Operator

Greetings, and welcome to Rightscorp 2014 First Quarter Conference Call. At this time, all participants are in a listen-only-mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce Andrew Haag, Managing Partner of IRTH Communications. Mr. Haag, you may begin.

Andrew Haag

Thanks, Donna. Good afternoon, everyone. I'd like to welcome all of you to Rightscorp's Q1 2014 conference call. With us today are Rightscorp's CEO Christopher Sabec, and COO and CTO Robert Steele; both also founders of the company.

Before I turn the call over to Christopher, I'd like to remind you all that this call management's prepared remarks contains forward-looking statements which are subject to risk and uncertainties and management may make additional forward-looking statements during the question-and-answer session. Therefore, the company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995.

Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors not limited to general economic and business conditions, competitive factors, changes in the business strategy or development plans, the ability to attract and retrain qualified personnel, and changes in legal and regulatory requirements. In addition, any projections as to the company's future performance represent management's estimate as of today May 13, 2014. Rightscorp assumes no obligation to update these projections in the future as market conditions change.

This afternoon, the company is going to file its 10-Q with the SEC and has already issued a press release announcing its results.

So participants on this call may have not already done so may look to look at those documents as we provide a summary of these results on the call.

I would like to now turn the call over to Rightscorp's CEO Christopher Sabec, who will give an over of the company's business activities and developments for the first quarter 2014. Christopher will then turn the call over to Robert Steele who will provide an overview of the company's key financial performance and operating metrics and we will then have a short Q&A. Christopher?

Christopher Sabec

Thank you, Andrew. Hello, everyone, and thank you for joining us on our call today. Those of you who have been following our company for some time now know that we made great progress and we are excited to share with you today. For those of you who've only recently started to follow Rightscorp, we welcome you to our company and given the several significant milestones that we have achieved and will discuss today, this is a fantastic time to be involved with Rightscorp.

Rightscorp has what many believe is the only viable solution to the file sharing problem that has cost owners of copyrighted intellectual property billons of dollars. Our results demonstrate this reality. Our first quarter ended March 31, 2014 reflected the solid growth trend that our company is delivering.

Our revenues increased 284% over the same period in the prior year. And we are proud to say that this is our ninth quarter of reporting steadily increasing revenues. This comes on the heels of delivering 236% increase in revenues for the year ended December 31, 2013 as compared to the prior year 2012. We are able to deliver these results as we have a scalable business model and a proprietary technology that sets us apart as a solid solution for the industry.

Rightscorp has effectively demonstrated to the owners of copyrighted IP that our process has proven to work. And this business is generating responses and is monetizing copyright successfully everyday.

We are in talks with key industry leaders and executives who are looking for a solution to the billion dollar copyright infringement problem that has been vexing the entertainment industry. There are there major key metrics that in going forward will be the focus of our business and the primary growth drivers. First, is the addition of copyrights that we acquire and sign on to represent. We call this our authorized copyright catalog. By definition, this is content that has been approved by artist and other owners of copyrighted IP for us to exclusively represent against infringement on the peer-to-peer networks that we monitor.

At the end of the first quarter 2014, we reported that we have surpassed over 1 million copyrights, which include music, movies and other digital content.

Second is our ingestion rate. This is the process of adding content from our approved catalog to our proprietary copyright monetization system. We feel this is a key driver for continued growth.

Earlier this year, we announced of the additional equity investment that we received through our going public transaction enabled the company to further automate or process for ingestion copyrights and we had achieved a 400% boost in ingestion rate. We continue to make great strides in advancing and accelerating this ingestion rate.

Third is the number of participating Internet Service Providers or ISPs that forward our notices and settlement offers. We send our notices directly to the ISPs notifying them of their customers that are violating our client's copyrights by distributing their property without approval or authorization over the ISPs network. ISPs then forward our notices to their customers. They do this to remain in compliance with the Safe Harbor and not to incur a potential third-party liability of $150,000 for infringement that is defined under the Digital Millennium Copyright Act or the DMCA.

The more ISPs that cooperate with us, the more settlements we receive. During the quarter, we reported to have received settlements from subscribers of more than 60 ISPs, including 5 in the top 10. We recently reported that this number has now increased to over 70. As Rightscorp continues to send notices on every infringement it finds to all U.S. ISPs, more ISPs become compelled to corporate in order to comply with copyright laws and to avoid potential third-party liability.

These three factors directly impact our top-line growth and help drive our business revenues. We have been gaining solid momentum in all key aspects of our business. And with that said, we are still merely scratching the service of the enormous opportunity that we have in front of us.

Our triple-digit revenue growth is a strong start in the New Year and we believe that we are well-positioned to continue to capitalize on this opportunity through the balance of the year.

With that said, I'd like to share some recent developments consistent with our goal of expanding our operating business revenues.

At the end of March 31, 2014, we reported that we were authorized on a copyright catalog of over 1 million copyrights, which included award wining films and over 10 tracks in the Billboard Hot 100. This was validation from the entertainment industry that our method for protecting digital assets and paying content owners their fair share was effective and proven.

We'd like now to disclose that the authorized copyright catalog has increased to over 1.5 million copyrights. We reported more than 40,000 copyrights in our system. Now this number is over 80,000. The boost in ingestion rate means that we now have the capacity to increase the content in our system by more than 20x the current levels without any new clients or additions to our authorized copyright catalog, though of course, we will continue to build on that number.

The current number of copyrights that we have on our system roughly represents 5% of what we have under contracts so further automation of our system and processes to increase ingestion is a point of focus that will allow us to continue to drive increases in our revenues.

We also announced that we settled more than 60,000 cases of copyright infringement and collected payments from distributors through notification sent by their ISPs. We now can disclose that this number has increased to 72,000. This is a major accomplishment for a company of our size. And as for a positive business traction, this number continues to increase daily.

On a global scale, according to NetNames, approximately 24% of all bandwidth is used for copyright infringement in North America, Europe, and the Asia Pacific. Illegal Internet traffic that violates copyrights is ramping and remains a worldwide issue. So we took steps to expand our services internationally. First, by retaining a Canadian law firm that specializes in entertainment law. This is a significant step as it not only represented a new market expansion in our business model but also addressed a market that was an easy driver for growth, the international market.

In our business, once we get approval to collect from a client and load content into our system, by the nature of what we do, we are tracking infringements from all over the world. We sought to launch in the U.S. as our first major market as we understand the laws here. Canada was a logical next step for international expansion as it is an English speaking country and recent reports noted a high level of unauthorized peer-to-peer distribution occurring in that region.

There is a report that Canadians downloaded more unauthorized music than residents of any other country and approximately 2.5 times as much as Americans. Also the legal climate in Canada shows that courts are willing to support and stand up to the rights of intellectual property owners. In support of this, a recent Canadian federal court decision made an order for an ISP to handover 2,000 names of customers that allegedly violated copyrighted works by illegally downloading movies. We are excited that this venture and we'll continue to update our investors on the progress being made in Canada.

We also set our sights on other parts of the world and recently filed for patent protection in Europe, China, Israel, Japan, Brazil, and India. On a recent trip to the UK, we met with parties to explore how our solution to operate under the laws there. Our objective has been international digital loss prevention service providing help to protect copyright owners against the unauthorized download of content, including music, movies, videos, books, software, and games.

We believe that Rightscorp is a leader in this space and we offer investors a unique opportunity to participate in our growth through the monetization of copyrights in what is clearly a multibillion dollar opportunity. Our business is highly scalable and we are very optimistic about the future. We believe in our ability to execute and expect to maintain consistent growth for this foreseeable future.

Now, I would like to turn the call over to my business partner and co-founder Robert Steele, who will provide an update on the financial and operational progress that we have made, as well as our plans for operational and infrastructure expansion to support our future growth. Robert?

Robert Steele

Thanks, Christopher. For the first quarter ending March 31, 2014, Rightscorp generated total revenues of $188,933, which was up 284% from $49,256 in the same period in 2013. That is double the revenues in all of 2012 and already 50% of all that we did -- already 50% of what we did in all of 2013.

Sequentially, revenues rose 22% from $155,381 in the fourth quarter of 2013. The growth in revenues was driven by an increase in the number of active copyrights uploaded into Rightscorp automated system and by the growing number or ISPs forwarding our notices and suspending services to repeat infringers. Increasing these levers for growth is important to assess, it produces a multiplier effect on our business metrics.

For the first quarter of 2014, operating expenses totaled $829,389, compared with $318,954 for prior year quarter. The increase in fees was due to increased fees paid to copyright holders in the period. Our general and administrative expenses were $692,015 for the quarter ended March 31, 2014, compared to $272,282 for the year ago quarter, due to increased wages, professional and investment banking fees, and travel and other expenses related to securing financing.

We have also increased cost due to further accelerating ingestion and collection processes.

Sales and marketing cost increased to $31,308 for the first quarter of 2014, up from $14,635 for the first quarter of 2013, due to an increased presence at industry conferences to meet potential clients. Depreciation and amortization expenses were $11,599 during first quarter ended March 31, 2014, an increase of $4,190 compared to $7,409 from the year ago quarter.

Our solid top-line growth has been driven by three major factors, as Christopher mentioned earlier. The addition of copyrights we acquire and sign on to represent, the number of copyrights ingested into our system, and the number of ISPs that are working with Rightscorp.

Our team has also been working diligently to support the increased copyrights into our system. And on an executive level we have been focusing on growing our relationships with major players in the industry from major movie studios, record labels, bestselling authors, and others.

ISPs are also recognizing the value we offer by providing them information that helps them stay in compliance with copyright laws and not create liability for themselves and their shareholders. From where we sit, we do not see this growth trend slowing.

As management and founders of the company, we are pleased with these results and yet we also know that we have to stay focused to bring this company too and breakthrough the $100 million a year revenue number that we all believe this business can achieve and grow fast.

On the industry level, we are pursuing an immediate $2.3 billion opportunity by enabling copyright holders to monetize their property by providing infringers a convenient low cost $20 per infringement agreement to settle and reduce their liability from a potential claim of $150,000 in the courts.

The Recording Industry Association of America states that since peer-to-peer copyright infringement emerged in 1999 music sales in the U.S. has dropped 53%, from $14.6 billion to $7 billion in 2013. We estimate that approximately 100 billion songs were illegally downloaded on file sharing networks over the last 12 months.

To put things into perspective, there is an estimated 27 million copyrights that can be monetized through our system. And we have 1.5 million of those in our authorized copyright catalog and we are in talks with a majority of major music publishers covering the additional music copyrights.

On the film side, we announced a deal to represent a major movies studio in which 14 of its films that we were authorized to monitor, generated cumulative gross sales in excess of $3.50 billion. This was an advancement of our footprint into films and motion pictures. And now Rightscorp is representing two studios work, as well as other video and film content.

We also announced that we were targeting the $15 billion book publishing industry. With the success in growth of e-books and the advent of technology, there is a high demand for protection from hackers and publishing companies. E-books and e-readers have become very popular since the release of the Kindle in late 2007. And the creation of digital formats opens them up to digital theft and copyrighted infringement. With a $3 billion market and growing, the digital book market is an ideal place to add protection and secure additional revenues.

For many artists and owners who copyright intellectual property, the Internet is a field of broken dreams for the talent, time, capital, and commitment they put into developing and creating assets is then given away for free without the owners or creatures permission. The said truth here is that some people are getting paid. Technologist, advertisers, and marketers are making money off consumers and yet the actual owners of the content are not reaping the rewards of their property being distributed, the need for equitable settlements for the artist and content owners while we work so diligently every day.

There are a lot of exciting events in our pipeline and we believe that we are on track for another record year. We have built out a very efficient and effective operating model that is seeing traction and significant growth.

We would like to thank all of you for supporting our story and sharing our vision. We look forward to sharing our progress with you again in the next quarter.

We would now like to open up the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions).

Our first question is coming Michael Altobell of Paragon Portfolio Management. Please proceed with your question.

Michael Altobell - Paragon Portfolio Management

Although the dollar figure looks like a little under $100,000 a month in revenue I wanted to know if you feel this growth going forward is sustainable to get over $1 million a month or may be even more than that? What are your thoughts there?

Robert Steele

Yes, this is Robert Steele speaking. We're very confident that it's scalable and part of the reason why we have this confidence is because we have nine quarters of track record that each time we increase that number of copyrights ingested that revenues go up. And if we look at the historical trend we see that the amount of revenues we get each month versus the copyrights that are ingested ranges between $1 per month and $2 per month, and that range has been steady for nine quarters. So, yes, each time we -- so, for instance, we noted the 80,000 copyrights in the system and current revenues are tracking right within that same band. So it appears to us that every time we scale the number of copyrights ingested in the system that revenues go up accordingly and, as we discussed, we got a 20x built in that's already under contract.

Michael Altobell - Paragon Portfolio Management

Okay. One quick follow-up to that. Based at the current expense rate, what's the revenue level needed to bring the company to breakeven and/or profitability?

Robert Steele

Right now it looks like the $300,000 a month with that bring us to breakeven. So that would be roughly a 3x increase in ingested copyrights and still only about 20% of what we have under contracts to get to probability.

Michael Altobell - Paragon Portfolio Management

Got you. Thanks, Robert.

Operator

Thank you. Our next question is coming from Joe Thomas of NLV (ph) Financial. Please proceed with your question.

Unidentified Analyst

Hi, Robert. My question pertains to the generation of revenue, and you may have covered this, but I thought you could go over it again. What percent is coming from the ISPs and what percent from the individuals? And where do you see the area of greatest growth? Where you're going to get the revenue? Who do you see as generating the money?

Robert Steele

Great question. 100% of our revenue comes from the individual subscribers how have been sharing content on their networks who are paying the settlement fees. So the ISP just functions as an intermediary to forward the payment notice, the payments come from the endusers who actually have been using the Bit torrent software. So that's how the revenue model works.

Unidentified Analyst

Okay. You’re not getting any from ISPs end, no money from ISP. It's all from individual k?

Robert Steele

Right. Right, and so when we hundreds of billions of financial fees distributed illegally. Each one of the those represents a potential $20 bill that we can sell.

Unidentified Analyst

Okay.

Robert Steele

So that's why we believe it's a very big market. Consider the 22% of all worldwide internet traffic that's being used for this function represents hundreds of billions of opportunities to send notices and get paid.

Operator

(Operator Instructions). Our next question is coming from Jeremy Ro of Integra.

Jeremy Ro - Integra

Robert and Chris, how are you guys doing?

Robert Steele

Great.

Christopher Sabec

Great.

Jeremy Ro - Integra

Quick question. You guys had mentioned expansion into Canada. What does do that do for revenues? And you had mentioned the $800,000 or in excess $800,000 of operational cost. What does that do to operational cost?

Robert Steele

The good news is that the incremental cost to open up a new country, particularly a English speaking country is almost negligible. There's a little bit of upfront cost on doing the formatting in the computer system, but once that formatting is done the ongoing cost increase is negligible. And that's one of things that's very important about this business model. We can already see all the infringements worldwide. So that's a sunk cost. The cost of accumulating the data on the infringers is already being paid for in the business model. So that's why this is a great business model for expanding internationally because its very low cost deploy once we've set the system up for the local currency and for the local currency. That's the first part of the answer.

Second part of the answer is we really don't have any forecast yet. We're going to have to see what percentage of the Canadian ISPs want to comply. As we discussed, we have 70 ISPs in the U.S. that are complying at some level. So we won't really know what the payout is going to be in Canada until we see how that goes.

Jeremy Ro - Integra

Thanks, guys. I appreciate it.

Operator

(Operator Instructions). Our next question is coming from Fred Goldstein, Moors & Cabot. Please proceed with your question.

Fred Goldstein - Moors & Cabot

What kind of money do you need to grow? Basically, you've gone from a small number to a relatively small number but get bigger opportunities but in the other hand big opportunities cost big cash. Where do you stand and how do you expect to generate that cash or how are you going to raise the dough?

Robert Steele

With our current instruments in place we have the money needed to fund the company through the end of the year. And every month revenue has been going up. So it is possible that we could get to cash flow positive by the end of the year with the existing financing instruments that we have. So that's the goal. That's what Christopher and I are doing today is trying to accomplish that goal of getting the company to cash flow by the end of the year with existing financings that we have. So we're getting close to $100,000 a month we need to be at $300,000 a month to be cash flow positive and its possible that that could happen with the existing financings we have.

Fred Goldstein - Moors & Cabot

But that doesn’t make the stock go up. What makes the stock go up is earnings and sales, you're going to need a lot more cash than you're talking and it doesn’t seem like you're really planning for it?

Robert Steele

Christopher, do you have anything to add?

Christopher Sabec

Well, we can operate the business in the current money that we have in place, sort of current instruments that we have in place. But we are exploring the opportunity for an additional raise when appropriate. We just don't want to dilute the current shareholders prematurely. So we're having discussions and exploring options. We have several different ideas and thoughts are passed for an additional raise when necessary,

Robert Steele

And then I guess one of things maybe that I wasn’t expressing is that if we are able to get the company cash flow positive on the existing financings that we have in place then we are on a very high growth trajectory, which I do believe will be very compelling from the overall value of the company.

Christopher Sabec

Right, we will be generating $300,000 a month.

Robert Steele

And growing because what we tried to express on this call is that every time we put copyrights into the system revenues go up. And we've got built in 20x increase. So that's what should be exciting and should get us into tens of millions of dollars in revenue and growing to a $100 million in revenues.

Operator

Thank you. Our next question is coming from Tim Bestler of When To Trade Group. Please proceed with your question.

Tim Bestler - When To Trade Group

Hi. My question pertained, if I was a music promoter, in other words, I have got recording studio and I am producing music, how would I go -- would they contact you? In other words, would the music promoter contact you guys and say, I'd like to protect some of my material, some of my artist and things like that? And if so, what would the process be?

Christopher Sabec

Well, the person that would contact this is rights order, either the person that wrote the song and owns that copyright of the song or the person who paid for and owns the recording. And they contact us and it's a simple four page agreement that they sign and giving us authorization to scan for their infringements and send notices on their behalf. And then, we collect money that people pay either online or by calling our office and sending a check. And then, we collect daily but pay quarterly. So then we would pay them every quarter 50% of the net receipts that we collect on that particular track.

Well, what more typically happens as opposed to one off like that we get large catalogs? Bertelsmann gave us, BMG is Bertelsmann, we got a million contracts -- a million copyrights with them under their -- that one contract. The two film companies that we work with, we have close to 1,000 films on that, just those two contracts. So it's usually not one offs. Like you described it's more people that have a portfolio of copyrights already that they are suffering a loss on the Internet because of the illegal trading and they are the people who call us.

Tim Bestler - When To Trade Group

Okay. Excellent. Yeah. Thank you so much.

Operator

Thank you. At this time, I'd like to turn the floor back over for any additional or closing comments.

Andrew Haag

This is Andrew Haag. So with that, I'd like to thank all of Rightscorp's shareholders and supporters for their participation on the call today and their support to the company. And this concludes Rightscorp's 2014 Q1 Conference Call. Thank you.

Christopher Sabec

Thank you, everyone.

Operator

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.

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