Destiny Media Technologies' (DSNY) CEO Steve Vestergaard on Q4 2016 Results - Earnings Call Transcript

| About: Destiny Media (DSNY)

Destiny Media Technologies, Inc. (OTCQB:DSNY) Q4 2016 Earnings Conference Call November 29, 2016 5:00 PM ET

Executives

Fred Vandenberg - CFO

Steve Vestergaard - CEO

Analysts

Walter Schenker - MAZ Partners

Craig Webb - North Shore Acupuncture

Kevin Dede - Rodman & Renshaw

Operator

Thank you for joining us today on the call. Before we begin I’d like to announce that we will be referring to today’s earnings release, which was sent to the newswires earlier this afternoon. I’d also like to 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.

Such forward-looking statements are based upon 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 fully discussed in the company’s filings with the SEC and SEDAR, and the company does not assume any obligation to update information contained in this call.

During this conference call, we will discuss certain non-GAAP financial measures. The non-GAAP financial measures are presented in the supplemental disclosures and should not be considered in isolation of or as a substitute of or superior to the financial information prepared in accordance with GAAP and should be read in conjunction with the company’s financial statements filed with the SEC and SEDAR.

The non-GAAP financial measures used in the company’s presentation may differ from similarly titled measures presented by other companies, a reconciliation of the non-GAAP financial measures to the most comparable GAAP financial measures can be found in the earnings press release.

On today’s call are Steve Vestergaard, the Chief Executive Officer; and Fred Vandenberg, the Chief Financial Officer.

With that, I’ll turn it over to Fred.

Fred Vandenberg

Thank you. I will very briefly describe our financial results for the year. Total revenue was consistent with the prior year, Play MPE continues to represent more than 98% of our revenue, and after starting the year on a down note, Play MPE revenue grew in each of the final three quarters in all of our geographic segments. During the latter half of the year, we added resellers and recipient list in Sweden and Denmark, and positive results can be seen by a 300% growth in independent record label revenue in that segment in our fourth quarter.

While most of our technical development during the first half of the year centered around our move to an externally hosted system, we added to our product with the launch of the no login streams, which allows the recipient to preview music within an email, and the first stage of our web encoder near the end of the fiscal year. We also streamlined payment processing and enhanced technical support increasing Play MPE’s ease of use.

Additionally, in order to capture additional market share, we are testing the market with a modified Play MPE offering that is intended to increase the music available to our recipients, while capturing distributions that do not have a large promotions budget. We have seen some initial signs of growing revenue as a result.

Year-over-year expenditures fell by 14%, the main causes are reduction in salaries and wages and severance cost from the prior year. Offsetting these drops were increasing technology costs. Cash closed in at $660,000 at the end of the year, EBITDA for the quarter was $17,000, which is the second straight positive EBITDA.

With that, I’ll turn it over to Steve and I’ll be on the call for the questions later.

Steve Vestergaard

Thank you, Fred and thanks to all of you for joining us on the call today. It’s amazing how fast the year goes by, but then when we look back and look at what we’ve accomplished, it’s hard not to feel proud of the stats here. It helped us reduced our Play MPE loss from a year ago by literally 92% bringing the company within speeding [ph] distance of being profitable again. Against this backdrop of improving fiscal performance, the company is being investing in hiring new talent, we’re investing in infrastructure, and we’re investing in new software development.

If you look at our expenses, R&D is our largest expense at $1.3 million and we’re investing really heavily into the future of the company and we’re investing in both products Play MPE and Clipstream. So emphasis is being in laying the foundation for growth in fiscal 2017 in the implementation of our disciplined commercialization strategy. So our main product Play MPE, which generates most of our revenue as Fred said, currently is the secure automated system that record labels used to move broadcast quality new music releases securely to trusted recipients such as radio, internet radio, bloggers, DJs, and VIPs.

All the major labels are active customers along with many independents, and as we grow recipients in new geographies, incremental revenue and margins are extremely high. So again this system represents the bulk of our current revenue. So we’ve had really good success this year, especially the last three quarters in growing into new geographies and bringing on local resellers to compete the pace [ph] of the product internationally. This local support has been really important, especially in non-English speaking countries as customers like the safety of somebody that they can talk to locally in a local time zone.

So revenues only increased 3%, but every single geography showed an increase especially in the last three quarters. So early international adoption is expected to reflect continuing recurring increases as the initial trial usage is scaled. So just to get an idea of the geographies we’re now starting to work with, I ask you to check our real time statistics. So that’s at tinyurl.com/placedapps, so again tinyurl.com/placedapp, it’s all one word.

With early revenues in new geographies, revenues are being generated 24 hours per day, 7 days a week across all time zones, and because most of our costs are fixed, new revenues are really high margin. So for an example, Q3 showed the power of the leverage of the high margins. So in Q3, it only took a 9% revenue increase and only a 14% expense decrease to reduce the year-over-year loss by literally 99%.

So we’ve continued to automate development of Play MPE, we’re improving the backend, we’re improving performance, we’re offering new services to our customers. We launched a new website, we updated the logo last fall, and our focus is being trying to modernize and cleanup our messaging and make it really easy for people to buy. We're currently working -- back to the easy to buy, we're currently working on tools to make it easier for more promo staff that are maybe a little less sophisticated at the labels to self-serve a news assistant without going through their content management department.

Our brand new release creation tool is well received and we’re adding marketing features such as individually streaming, which Fred just referenced that plays directly in the email, which only plays for the intended recipient. Not only does this save the customer from the bother of logging into the player, the increased activity directly impacts our revenues as we don't charge when the recipient doesn't interact in many cases.

On the marketing side, we're also emphasizing travel and face-to-face marketing, so our staff spend more time with decision makers. For example, we have a business development rep in Europe as I speak meeting with the majors to help them increase usage across the Continent. It can take a couple of quarters for new geographic revenue to ramp up. We were planting the seeds for harvest in the new fiscal year.

So our second business unit is Clipstream, which consists of an online video hosting system and a new proprietary player. So the hosting system, the online video platform market is an interesting one. There are about 30 major providers, so it is fairly crowded segment, but one where demand is high growth with high recurring margins. With our label Play MPE customers, they’ve demanded a hosting service that is 24x7 that never goes down for even a few seconds, which is secure, offering detailed recurring reporting, and the ability to scale for providing super high performance.

I don't know if people realize how difficult this is, most hosting systems go down once in a while, but ours never goes down. Whereas most other providers just offer access to an off the shelf content delivery network which offers no customization such as individual watermarking. We’ve built our own custom content delivery system, so we’ve built a layer of logic on top of hardware that’s owned by Amazon, and Amazon has servers all over the world in many countries and in almost every continent.

Our automated software can light up and close down servers around the world matching demand to usage; ensuring content is delivered from a server geographically close to the end user. This means the continent should play without rebuffering and much more reliably even other offerings. And the reason is that the content is basically closer. We've been adding features to the system in two week spreads all through the year. And our features set is becoming quite competitive. We don't press release the improvements every two weeks, so we invite investors to sign up for free trial to see the current status of the system. It's a completely automated and coding, hosting reporting system that lets you embed high reach secured videos easily and safely into your webpage.

So we’re marketing it, we're still in the development phase even with the hosting system. We have a few early customers in the market research, advertising and educational markets they're giving us valuable feedback, which we're using to build out new functionality. So revenues are still modest, but the opportunity is large. We're expecting to start advertising the system again after Christmas.

So we're going to target customers where security is importance, where audio quality is important, I don’t know if you read the other press release, but we're literally doubled the quality of a CD and super-super high fidelity, and where high reach is important. We’ve also build out an API, which is best way to think of it is it's the way to plug our functionality into somebody else's system. So that lets customers link our functionality directly into their own offering.

As one example, an online dating site could plug our whole backend and to allow their users to upload videos and pay us a royalty every time the video is played. We’ve let them do an unbranded solution and let it appear to be a feature in their own system. And we think there is a lot of potential for the API business.

So because we can offer different users, different versions of the content because of our proprietary CDN is smart. We add a layer of functionality that’s not available anywhere else. That said the hosting market as a commodity business and although we're going to provide a standard H.264 player to match what everybody else is offering as a base system. Our home run is going to be with our new JavaScript player.

So the best way to understand is we're going to be marketing a standalone high-end, high margin recurring revenue automated self-serve video hosting system in the New Year, to start with that can be H.264 and current JavaScript Clipstream. It can thought of as a service that exists outside of our JavaScript player, but because we offering standard player we can reliably after revenues early in calendar 2017 with the goal of Clipstream quickly going cash flow positive and self-funding.

So we’ve held this hosting system back to-date, as we’ve had difficulty getting the quality up in our proprietary player and to-date we’ve held back marketing of the online video platform waiting for our own player to be ready.

So the JavaScript technology is extremely innovative, disruptive and there are a couple of dozen pending granted patterns, which are listed in our 10-K and once perfected we expect to license to large players outside of its use in our own OVP system. So this is the homerun opportunity, as we’ll have a monopoly over JavaScript playback in countries we patented in and we become a fourth way of delivering video. The three standard ways are to use a chip in your phone, a plug-in like flash or a browser supported format like H.264.

The problem is that these formats are across platform and they are not flexible. They are locked in the standards that were designed years ago. By comparisons as a software base solution our technology is very flexible and we can easily rollout the latest technologies. As an example, currently we are supporting HEVC the successor to H.264 that’s not available anywhere else in the internet via browser, and we can quickly support new formats like virtual reality as an example and instantly have 100% cross platform support on HTML5 compliant browsers.

It’s being challenging thought and it’s been frustrating for us as it has for you guys. The challenge is that JavaScript doesn’t give the obligation and not to access to reliable timing, reliable CPU, memory and bandwidth as the other three techniques. It is difficult to meet minimum quality levels on all resource constraint devices or more commonly new computers loaded download with viruses and application running in the background. Lot of people have fast computers, but they have got a lot of crap that’s running and kind of tying up the CPU and the memory.

So we took our all proprietary codec as far as we could and decided to abandon support for the codec used in 4K TVs. It’s the most efficient, most advanced codec on the market today and again it’s not available in browsers on the internet outside of Clipstream. So as an example, of the research that’s been done into it, I encourage investors to visit tinyurl.com/hevc-bbc. Again that’s tinyurl.com/hevc-bbc to see a research paper comparing it to what YouTube uses.

We can take a look at that and see what the advantages are over YouTube. As an example, we have been able to reduced bandwidth usage by 62% and increase quality by 78% by adopting HEVC. This means much lower hosting cost to us and higher profits to us compared to other OBP providers, would also means that we should have almost completely eliminated rebuffering for all viewers and the reason is that smaller bandwidth is more likely to fit inside people with small pipes.

So we’ve rolled out the first version of HEVC last month and customers have been really happy with it. So, it’s all pretty new, that said there are still finding some issues with memory, CPU and timing on computers. The bandwidth issue is fixed, but the resource issue the symptom is that the frame rate becomes unsteady and the quality automatically degrades on a fraction of your computers.

So we’re going to be rolling out fixes on a regular basis in two weeks spreads, we are not going to press release it. So keep coming back and taking a look at our demos, but we expect to be ready for some early marketing of the OVP system early in 2017. The solution was to assume there will obviously a percentage of the population that has a memory or CPU constrain machine. And so we have been able to beat that by offloading timing and some processing to the processing chip on the users graphics card. So instead of using the main board on the computer we’re jumping off to the graphics support and we are using the chip there.

It’s been a long time coming and a he lot of work with great risk comes great rewards and a high video and audio quality software based patented playback system that is secure across platforms and future proof it’s going to be something that has a potential to become a new standard. So on that note, I’ll turn the call over to questions. Thank you.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from Walter Schenker MAZ Partners. Walter, please go ahead.

Walter Schenker

Hi Steve, two questions actually. One, could you just review again for Play MPE the change in the annual contract pricing as we go -- it’s almost December, as we go into 2017, when it changes and sort of what level of change you might expect and revenue you might expect if usage levels stay the same? I realize usage could pull back. And the second question is having a much younger as we all were when we first heard about the other side of the business, it still seems as if on every call there is some issues. When do we get to a point where there are no issues, and we actually see some announcements of a major player either licensing or utilizing the technology for Clipstream?

Steve Vestergaard

Okay, fair enough. So in answer to the first one, we have a variety of pricing models depending on the market and depending majors versus independents and whether we do the encoding and whether they do the encoding, some are transaction based. I mean in some markets, we have all unique contracts. Generally we don’t disclose the terms, generally we are required to be confidential. But I kind of get what you’re asking, we sometimes have contracts that are flat rates where if usage is much above the flat rate, we see a pickup in the following year.

Generally anybody that’s had that kind of contract is either maintained or increased, but you know that’s kind of forward-looking, it is not something I can comment on. But those kind of contracts are generally working in our favor. In the markets that we have tried them in, it's been pretty effective and we may actually expand some of the all you can eat stuff.

In terms of your second question…

Walter Schenker

And I am sorry, just to cut you off, Steve. And the all you can eat contract for one of your largest customers' changes over January 1, when does that change over?

Steve Vestergaard

If you are asking me about Universal in particular, their contract, their year one expires December 31.

Walter Schenker

Okay, so in theory there may be a change in revenue just from the all you can eat nature of it starting January 1?

Steve Vestergaard

There would be a potential, again that’s kind of a forward-looking question right.

Walter Schenker

Yes okay.

Steve Vestergaard

In terms of your second question, Clipstream has always had the same four problems and the problems are bandwidth, CPU, memory, and timing. Bandwidth was the biggest one and not only that we completely eliminate that by going to HEVC, we now use way less bandwidth than what YouTube is using. So YouTube uses H.264 and we’re significantly, significantly lower and when I talk with the 30 competitors, our HEVC uses way less bandwidth than any of them. So that means that we not only save a ton of money on our hosting costs, but we give a better experience to the end users, because it’s not going to rebuffer on them.

Our second big problem is timing, and we have addressed the timing issue. So our frames are now rock solid, equal length, and we have been able to fix that. That’s actually not in the current demo on this site, but it will be in a demo that we’re going to release shortly, probably before Christmas.

So the remaining two problems are CPU and memory and where we run into it generally is either older computers, devices like the iPad, or on computers where people have a bunch of crap running in the background, it’s actually fairly common for people that have like adware and trojans and viruses and stuff running in the background. And when they experience that, our software automatically degrades quality and sometimes it degrades it so badly that it’s not acceptable.

We are fixing that last one, that’s what we’re working on right now, and the way we’re fixing it is to offload to the GPU. So what’s new is last month we released HEVC and completely replaced our own codec. So we've been working so many years at our own codec, we realized we took it as far as we could, but we're now licensing the codec for the use in 4K TVs.

And that's basically fixed two of the four problems, and the other two of the four problems we’re fixing by going to the GPU and the huge graphics processing unit. What’s taking so much time is we've been a little reluctant to give up our own stuff, maybe a little too stubborn, but now that we have things are going a lot faster, so in answer to your question early in the New Year.

Walter Schenker

And just last question, you have some cash on the balance sheet at this point and you're not burning cash anymore of any consequence. At this point you're comfortable, may not be thrilled, but you're comfortable with the balance sheet?

Steve Vestergaard

Yeah, so we're basically breakeven. I think we're like just tiny into the red for the current quarter, pocket change. Play MPE is growing, expenses on Play MPE are probably going to stay steady. Clipstream is going to start paying for itself. We’re not expecting Clipstream expenses to increase in anyway. So a short answer is no, we're not looking to raise money, we should be fine with where we're at.

Walter Schenker

Okay, thank you.

Steve Vestergaard

No problem.

Operator

Thank you. [Operator Instructions] There are no further questions at this time. Please proceed.

Steve Vestergaard

Okay. So I appreciate everybody calling in. As I hear on every call that sometimes it's a little comfortable to ask questions publically, both Fred and I very reachable, you can either call us or send us an email and set up a conference call. We actually welcome calls and questions and even constructive criticism from investors because that's how we make ourselves better. So don't be afraid to reach out to us. Thank you everybody for your time. And I guess we'll conclude the call.

Operator

Pardon me. There is a question in the queue that question does come from Craig Webb from North Shore Acupuncture. Craig, please go ahead.

Craig Webb

Hi, Steve. Yeah, I'm just clarifying, I think from the first caller or the last caller the only caller that just called in, I think his question regarding the MPE side was you with the announcement of the two year contract with Universal, it was quite plainly stated that the first year was going to be the same essentially flat revenue wise keeping the same revenue as what had been achieved in the past. However, the second year was -- would see an increase in revenue from that contract.

And so, as I think I'm just clarifying that I think well that's what I was to understand with the announcement of the Universal contract. So and I think that's what perhaps the first caller was alluding to was that there was going to be an increase that would stay plainly stated that there would be an increase in the MPE revenue with Universal the second year around.

Steve Vestergaard

So in answer to your question, some of the terms are confidential, but basically increased usage in year one would imply increased payment in year two. And so year two would start in January, but whether or not there is increased usage is kind of non-public at this point.

Craig Webb

Okay, fair enough. But I just restated that year one would be flat, but year two with the way the how the contract was stylized it was -- should show an increase in year two. Anyway, that's all I was clarifying so yeah.

Steve Vestergaard

When we entered into the contract, we definitely expected increased revenue in year two. So that would be a positive result for sure.

Craig Webb

Alright, okay. Well thanks for clarifying that appreciate.

Steve Vestergaard

But I remind you that our next quarter is November-December-January. So that new contract will be January or that new term will be January 1. So it will be in the last third of the next quarter.

Craig Webb

Yeah. And so okay I just I think one other thing with the Clipstream you say going into the new year, can you state like when I mean it's kind of open ended when you'd be able to hitting it.

Steve Vestergaard

So I kind of alluded to that. You're going to see improvements every two weeks even now before Christmas. So we’ve started using GPU, the first GPU improvements are going to come out before Christmas. I don’t want to lock down a date, but we are talking, we are not talking a whole pilot quarters, we’re -- this is something that’s pretty immanent. I think I mentioned in the preamble that we are going to start marketing the cloud system in January.

Craig Webb

Yeah, okay.

Steve Vestergaard

The current version of HVEC is actually good enough that we can make money of it, we are not going to market it heavily, but the customers that are coming to us aren’t complaining, they are happy now. But what we are find is on a fractionate computers and also on tablets where resources are limited it is down grading. And so that something I’d really like to fix by using the GPU prior to really ramping up.

Craig Webb

Okay. When you do say we should notice upgrades every couple of weeks, where are we looking, are we looking at the demons on the website there or?

Steve Vestergaard

Yes. So, we are doing sprints, so we’ll update the cloud system. We may not necessarily update the demos every sprint, but you can coming for a free trial and you can encode your own videos and see the improvements.

Craig Webb

Yeah, when upgrade the demos on the website, I mean it’s plain to see for people, so it would be nice to see those upgrades regularly. Sorry.

Steve Vestergaard

When anytime there is a significant improvement we will re-encode them it is a little bit of work to re-encode so many videos.

Craig Webb

Okay. Okay. Well, thanks very much, appreciate it.

Steve Vestergaard

Okay. Well before we close off let’s give another change to see if there are any other questions.

Operator

Your next question does come from Kevin Dede from Rodman. Kevin, please go ahead.

Kevin Dede

Hi, Steve. Thanks for taking my question. I was just wondering those tinyurl references that you offered is there a change that you might make those available on your own website at least a hyperlink to them?

Steve Vestergaard

Sure, not sure we we’re going to put them, but absolutely we can do that.

Kevin Dede

Great, thank you.

Steve Vestergaard

Yeah.

Operator

Thank you. There are no further questions.

Steve Vestergaard

Okay. Thank you, again I appreciate everybody’s time and look forward to the next call and you’re welcome to call us in between.

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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