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Executives

Brett Maas – IR, Hayden Communications

Randy Selman – Chairman, President, and CEO

Robert Tomlinson – CFO

Analysts

Alan Menzer [ph] – Alcar Associates [ph]

Gary Purcell – Basic Investors

Fred Milligan – Sanders Morris Harris

Onstream Media Corp. (OTCQB:ONSM) F3Q08 (Qtr End 06/30/08) Earnings Call Transcript August 14, 2008 4:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Onstream Media fiscal 2008 third quarter financial results conference call. All lines have been placed in a listen-only mode and the floor will be opened for your questions and comments following the presentation. (Operator instructions) At this time, it is my pleasure to turn the floor over to your host, Brett Maas, sir the floor is yours.

Brett Maas

Good afternoon and welcome to the Onstream Media conference call. I’d like to point out that during the course of the conference call, there may be statements made relating to future results of the company that are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Actual results, performance or achievements could differ materially from those anticipated in such forward-looking statements and as a result of certain factors, including those set forth in the company’s filings with the Securities and Exchange Commission.

It should also be noted that the webcast of today’s conference call may be found on the internet by visiting the Onstream Media corporate website at www.onstreammedia.com and then selecting company at the top of the webpage and then clicking on press releases. At that web page, you will find a link to the news release we issued to announce the company’s fiscal 2008 third quarter financial results and webcast. An archived version of the webcast will shortly be accessible from the press releases page and will be available for at least 12 months, pursuant to SEC guidelines.

Finally, those interested in reviewing our recently filed 10-K-SB which contains all of the financial information being discussed today, you can find this document also via our corporate web site by selecting company and under that heading, Investor Relations, and then clicking on SEC filings where all of our recent SEC filings can be found, as well as via the EDGAR database directly at www.sec.gov and then search for the company filings.

In addition, Onstream intends to file with the SEC a registration statement on Form S-4 which will include a joint proxy statement, prospectus of Onstream and Narrowstep, and other relevant materials in conjunction with the proposed transaction. Investors and security holders may obtain free copies of the documents filed with the SEC by Onstream at www.onstreammedia.com or by contacting myself at Hayden Communications via telephone at 646-536-7331.

Investors and securities holders are urged to read the join proxy statement, prospectus and the relevant materials when they become available before making any voting or investor decision with respect to the proposed transaction. Please refer to the slide for additional information.

At this time, I’d like to introduce Randy Selman, President and Chief Executive Officer, Onstream Media. Randy, the floor is yours.

Randy Selman

Good afternoon and thank you for joining us. Today, we will review our results for the third quarter fiscal 2008 the period ended June 30, 2008. We’ll also update our overall strategic progress and the outlook for the fourth quarter. With me today is our Chief Financial Officer, Robert Tomlinson.

At the end of our last fiscal year we announced expectations of 14% top line growth for the current fiscal year. This guidance included the new contribution of Infinite conferencing, which we acquired in April last year. Through nine months in the fiscal year it is obvious we will exceed this guidance and 2008 will be a record year for Onstream.

We now have 1000’s of customers including more than half of the fortune 1000 to whom we can cross sell additional services and technologies. We are well positioned for continued success in 2009 and beyond and management is increasingly confident in our competitive position.

Year-to-date our sales are up 65.0% including the effects of the Infinite conferencing merger. Beginning this quarter our financial comparisons include prior year revenues from the infinite acquisition as it was acquired on April 27, last year. This explains why our consolidated growth rate has appeared to have slowed compared to the second quarter when the prior year second quarter included no contribution from Infinite.

However when looking at the comparisons in this third quarter fiscal 2008, the third fiscal quarter last year included approximately two months of Infinite. Organically we grew our sales approximately 9% in the third quarter and have posted 16.7% organic growth year-to-date. We had anticipated our organic growth to accelerate during the third quarter as we expected some of our catalysts which we’ve been talking about for sometime to start generating revenue. I will discuss the catalysts later in the call; however, we continue to post revenue growth expanding our customer base and setting the stage for long-term profitability.

During the quarter we also announced the acquisition of Narrowstep which we believe is one of, if not the final components needed for Digital Media Services platform. I’ll discuss the rational for this merger later in the conference call and explain our overall business strategy and how the combination of all the technologies further differentiates us within the industry.

Next let me turn this over to Robert for the review of the financials. Robert?

Robert Tomlinson

Thank you, Randy. Good afternoon. As you can see on this slide our consolidated operating revenue was approximately $4.5 million for the three months ended June 30, 2008, an increase of approximately 707,000 or 18.7% from the corresponding quarter in the prior fiscal year. The increase was primarily due to increased revenues of the Web Communications Services group.

To break this down the Web Communications Services group revenues were approximately $3.4 million for the third quarter, an increase of approximately $578,000 or 20.3% from the corresponding prior fiscal year quarter. This increase was primarily due to the inclusion of approximately $1.8 million of audio and web conferencing revenues from Infinite in this year’s third quarter, compared to approximately $1.3 million in the prior year third quarter which as Randy mentioned included only two months of Infinites operations.

In addition we also experienced an increase in webcasting division sales of approximately $92,000 or 6.2% over the corresponding prior fiscal year quarter, arising from increased production services sales and the continuation of the past growth in our revenues from audio-only event, primarily the single reseller of our financial webcast. Our digital media services group produced approximately $1.1 million of revenue in this quarter up approximately $129,000 or 14% compared to the prior year third fiscal quarter.

The majority of the growth came from a 70.4% increase in our DMSP hosting division. We have continued to grow this division, albeit from modest beginnings and have more 275 DMSP customers as of the current date up from approximately 171 customers at the end March. Randy, will elaborate on this division of our business in a few minutes.

As you can see from this slide, our total year-to-date revenue has increased by approximately $5.2 million or 64.9% to approximately $13.2 million compared to approximately $8 million last year. Our webcasting revenues are up 25.3% year-to-date reaching almost $4.5 million compared to approximately $3.6 million last year.

Our digital media services group has experienced 7.4% growth year-to-date reaching over $3.2 million on revenues from approximately $3 million last year. Although, the group’s revenues only increased by approximately $223,000 the DMSP and hosting division included in that group actually had a revenue increase of approximately $576,000 representing a 113.3% increase.

This slide shows the highlights of our third quarter financial results. As you can see our gross margin percentage was 65.6% compared to 67.6% in the third fiscal quarter last year. The slight decrease in gross margin was primarily due to the cost of bandwidth and other services to maintain redundant overlapping technical operation centers, during our transition to a larger and more cost effective location.

Beginning last quarter and continuing into this quarter we increased our research and development spending in several areas, specifically this related to investments in our DMSP and Web Communications groups and this spending was designed to augment our existing service offerings and accelerate the development of customer requested additional services.

Although, some of these labor costs are capitalizable under current accounting standards not all of them are and thus in this short term this increased R&D investment has impacted our operating results. However, we believe the majority of the investment will be complete by the quarter ended March 31, 2009. We are confident these activities will expand our leadership position from a technical standpoint and further differentiate Onstream in the marketplace and Randy, will speak more about this topic later in the call.

The net loss for the third quarter of fiscal 2008 was approximately $1.7 million or a $0.04 loss per share, which includes approximately $1.6 million of non-cash expenses. Therefore the cash used in operations before changes in working capital was only $82,000 as compared to $142,000 for the comparable prior year period.

Year-to-date our gross margin has improved to 67.6% as compared to 63.9% for the comparable prior year period. This increase was primarily due to 80% gross margin percentage on Infinite's audio and web conferencing revenues.

Our net loss year-to-date was approximately $5.3 million, which has decreased by approximately $7.7 million or 59.4% compared to the approximately $13 million loss for the first nine months of fiscal 2007. This year-to-date net loss of $5.3 million includes approximately $5 million in non-cash expenses.

This slide provides more detail on our operating cash flow. With the virtual elimination of interest expense in the current fiscal year thus far there are only two remaining categories of non-cash expenses of significance affecting the company’s operating statement; depreciation and amortization and consultant and employee compensation paid in shares an options.

As you can see we significantly reduced our non-cash expenses on a year-to-date basis, compared to the prior year period. However, we continue to see increased depreciation and amortization expense, compared to corresponding prior year periods primarily as a result of the amortization of the tangible and intangible assets acquiring connection with the Infinite Conferencing transaction, which was closed in April 2007.

Compensation is paid in shares and options by the company to consultants as well as employees. However, the company currently anticipates that a consulting agreement with an equity component will be entered into on a very limited basis if at all in the future. The non-cash expense of approximately $230,000 related to such items for consultants in the third quarter of fiscal 2008 represents an approximately $25,000 reduction from the second quarter of fiscal 2008.

Furthermore, these non-cash professional fee expenses to continue to decrease during the reminder of fiscal year 2008 as existing agreements continue to expire. We also reduced our cash using operations significantly from approximately $1.6 million for the first nine months of the prior fiscal year to only approximately $252,000 for the nine months ended June 30, 2008, both numbers before working capital changes.

Turning to the balance sheet we had approximately $875,000 in cash as of the end of the third fiscal quarter. The company stockholders equity was approximately $29.3 million as of June 30 2008. We have received approximately $2 million in financing proceeds during the fiscal year thus far secured by software and equipment as well as our accounts receivable.

Although there is no currently additional borrowing capacity available under these arrangements we believe that we could obtain additional financing based on approximately $350,000 secured by accounts receivable in excess of the amount required to support the existing facility plus approximately $700,000 secured by software and equipment purchased and paid for us during the past year, which is not included in the software and equipment identified as collateral for the currently outstanding debt. Therefore in-light of our reduced burn rate, we believe that we have sufficient resources to fund our continued operations.

I would now like to turn it back over to Randy.

Randy Selman

Thank you, Robert, for the overview of our fiscal 2008 third quarter operating results and financial position. During the third quarter we produced approximately 1,900 webcasts compared to approximately 1,300 webcasts in the prior year third quarter. Year-to-date webcasting revenues increased 25.3% and we produced approximately 5,100 webcasts versus approximately 3,200 webcasts for the corresponding prior fiscal year period.

Our customer base continues to expand including many Fortune 1000 corporations and a wide range of entertainment organizations and government agencies. Our focus remains on increasing the average revenue per client by offering new services and increasing the number of video webcasts we produce.

In January, we introduced iEncode, the full-featured turnkey standalone webcasting solution. To-date we have delivered this product to key test customers and are making some adjustments to the user interface based on their feedback. We have shipped units to several resellers and will soon launch joint sales and marketing programs with them. In addition we began negotiations with the key hardware manufacturer to joint market to combine product.

The iEncode version of Visual Webcaster is designed to operate inside a corporate LAN environment with both unicast the ability to reach remote internet viewers and multicast internal behind the corporate firewall capabilities. iEncode enables our clients to instantly webcast to a virtually unlimited number of viewers through Onstream Media’s partnership with Akamai, utilizing their content delivery network. The iEncode appliance is also fully compatible with Onstream Media’s, digital media services platform for archiving intelligent indexing and retrieval.

As I’ve discussed previously, there are several revenue streams built into iEncode’s business model. We generate revenue from the sale of the Appliance Hardware with expected margins of 65% to 80% depending on whether sold direct or through distributions. We will also generate high margin recurring revenue from either a per webcast platform fee or a committed monthly recurring fee for unlimited usage with the very minimum corresponding cost.

Finally, we will include a DMSP account, which then provides the iEncode users the bandwidth and storage of the webcasts with 70% or better margins. We continue to expect that each iEncode user will utilize on average approximately $25,000 per year in webcasts usage. The appliance contains almost all of the required infrastructure and is client administered so there is very little or no corresponding costs associated with scaling the product.

Our DMSP segment continues to grow; we had a 185 clients including 14 major clients as of May 15 2008 and we expanded this to 240 clients as of June 30, including 22 major accounts generating more than $150,000 per month in overall revenues. As of today, the number of DMST clients is over 275 and growing. This is in part due to referrals for Akamai, but our marketing initiatives are also generating leads. Right now, we have several hundreds leads we are processing. High-profile accounts using the DMST include Bonnier, Televisa, Studio Dell, Dell Green PC and the Masters Championship with IBM.

Speaking of Akamai, we recently announced several public sector wins as a result of our expanded Akamai relationship which now includes a government business referral program in addition to the enterprise referral program benefiting our DMST growth. In addition, we have renegotiated our contract with Akamai and as a result have reduced our cost of bandwidth by 40%.

In addition, to the new government lead referral program, we’ve been working closely with Akamai on the Qwest’s networks contract, which we won the stake in last year. As you may recall, this was a 10-year $48 billion contract and is the largest communication services contract in the world. Because of the scale of this contract, progress has been slow. It is now our understanding that although it has taken more than a year since the contract was signed, that the government has just being under place initial orders under the contract. We’ve received several RP requests and have processed them with expectations of order flow to begin before the end of our fiscal year.

Let me add that we are not the only company who is frustrated with the low pace of this contract. Many of the company spent substantial dollars on their proposals for this contract and they’ve also waited more than a year to see initial revenue. These companies have told us that they too are disappointed in this slow process, however it’s simply the nature of a very large government contract, but as we said, we hope to see the benefit of this contract in the fourth quarter.

During the quarter, we also announced a strategic partnership with Proforma, a leading provider of graphic communication solutions. Proforma will significantly increase our feet on the street, getting a network of more than 650 independently owned and operated offices, who will now offer a private label version of Onstream's Infinite conferencing audio and web conferencing services as well as our webcasting and webinars services to their customer base.

Proforma member service over 50,000 medium-to-large businesses; we've already begun the product training to Proforma’s members for the use of webinars and web conferences and we’re hopeful this will assistant them in presenting Onstream service offerings. We recently presented at their annual conference, presenting to approximately a third of their franchises.

I think it’s important for us to take a step back and look at the company we have built. Much of our progress is not yet reflected in our financial result, but this industry is changing rapidly and we’ve created an organization that is ideally suited in this emerging market. This slide shows how big we’ve become and it speaks to the growth occurring in the industry.

Despite the scale and growth we’ve seen, the overall growth in the Digital Media sector has been slower than analysts and management expected. However, the analyst continue to discuss and report on an expected migration of dollars being spent in the broadcasting media, which are expected to shift towards internet-based video services, there are number of reasons for this.

First, the technology related to Internet-based video services has improved significantly in recent years. We now have the capability to produce high-definition quality video with all the same feature sets of satellite or broadcast transmission at favorable prices compared to the traditional offerings. Internet-based video services have also become more accepted in the industry. Finally the convergence of television and web based delivery of content is driving this transition.

Look at the Olympics, with the 12-hour time difference many of the more prominent events like that Great American Swimming come back in the 400-meter relay were broadcast very late at night East-Coast Time. The next day millions went online to view this great race in its entirety. Internet-based video services accelerate the transition of content from live broadcasts to the internet.

Our customer Televisa is a pioneer in this space. By managing all of their video content using internet based tools, they can quickly port popular videos to their website. They also use us to process user generated video, augmenting their web-based content and driving higher hit rates and more customer royalty. In fact we have processed and delivered more than a quarter of the billion videos for Televisa. This is the wave of the future and Onstream is at the forefront of this.

We believe the accelerating shift to Internet-based video service will soon result in a significant improvement in the overall sectors revenues. Our strong competitive position including our large established customer base and the powerful comprehensive offering we are creating puts Onstream in a particularly strong competitive position as this market matures.

As Robert, mentioned we’ve increased R&D investments will remain both competitive and relevant with the changing requirements of this emerging market. This increased R&D investment has in the short-term impacted our operating results, but has improved our competitive position and set the stage for us to benefit from this ongoing shift. When the shift really accelerates it will be increasingly important to having an established proven platform to meet this demand. This shift will focus the primary source of the company’s revenue growth from the webcasting and conferencing divisions to the digital media services division.

Looking at the DMSP slide, you can see that our development team has been busy creating what we believe is the complete solution for virtually any type or size customer to participate and use internet video services to promote their products and services to targeted one answers via the web.

We’ve created a diversified offering giving customers at every step of the continuum an entry point that meets their current requirements and allows them to grow without having to migrate to different platforms as their needs change. Smaller customers can easily start with our store and stream account, for as little as a $100 per month they can store, stream, add meta-data and publish virtually every type of digital media file both live and on-demand. This system supports live broadcasting and popular format such as Flash, Windows and QuickTime.

For the more advanced users such as publishers, broadcasters and other more sophisticated content developers we will soon release streaming publisher. Streaming publisher provides additional features such as automated transcoding of video files to Windows, Real, Flash, QuickTime at any speed. A complete report generating portal for comprehensive statistical information about the video assets stored in DMSP, permissioning to enable only authorized personnel to access certain content, Player picker, which allow the client to select from a set of available player templates with basic customization as to colors and logo, RSS Feeds to identify and alert that new content has been added and secure streaming to protect the streams from unauthorized access.

Our DMST professional provides not only additional features intended for companies, wishing the process their content for better internet exposure, but also a complete line of professional services that provide everything from customized players, physical media, processing, user generated video integration using our patent pending technology and monetization functions such as pay-per-view and ad insertion integrating with major ad servers.

Our client can start out simply putting video files into their DMST account and publishing them to the web to provide a video experience on their website. As they grow they can implement a more sophisticated player technology that enables them to provide videos in more formats, manage larger collections of videos, provide a user-friendly online video selection capability and have all the tools required to make a comprehensive video user experience on their website.

More advanced clients can make use of the automated meta-tagging and video search optimization that will make a video more findable by the major search engines, a technology that we believe will enable us to offer our clients a more effective way to generate leads and draw clients to their websites.

The fourth box in the slide is the reason we are acquiring Narrowstep. The first three boxes are all the tools that are required for anyone to upload, store, stream process, monetize and deliver video on the web. Narrowstep Telvos technology takes the platform to the next level. Integrating Telvos into the DMSP will not only provide the TV on the web experience with all the quality channels and superb user experience, but also enables us to offer web on the TV.

Advertising insertion, pay-per-view, high-definition quality, play list generator, digital rights management and advanced content management are all part of the Narrowstep’s Telvos technology. When the integration of Telvos and DMST is completed, Onstream will have a single platform that will enable any creator of content to not only stream it on the web, but make it also available to the next generation of set top boxes in the home.

Imagine publishing a video about virtually any topic and the entire population can view it either on their home TV equip with an internet based set top box or via the web in a TV like broadcast. When the shift and broadcast advertising accelerates into high gear, the combined platform DMSP and Telvos will have the complete solution.

Now I want to share the overall business strategy for this entire program as we now believe we are positioned to accomplish our vision in this market. By the end of the second fiscal quarter ending March 2009 we will complete the essential components of the DMSP and have the Telvos integrated and upgraded as well. We already had success in developing a client base for the DMSP that includes all of the categories on the slide such as publishers like Bonnier and SNW, broadcasters such as Televisa, PBS and C-SPAN, many colleges and universities, consumer products companies such as Dell and many other enterprises and government agencies; in fact we have over 200,000 video assets in our DMSP library.

With the integration of the Telvos and DMSP technologies we can deliver all this content to set-top boxes. We can also establish Internet TV on any site and offer all the available content. Simply providing the content is not the entire solution; in fact several companies client they can provide some or all of this capability. The differentiator comes in the content processing done by the DMSP.

Professional services such as logging, indexing, meta-tagging, optimization and classification. We can take a piece of a video content and extract all the necessary information about the video to classify it, determine its quality, identify its content matter, optimize it and create an alert that the video is available. What that means is we can set up a channel based system on virtually every consumer interest subject from sports to medicine, to science and hobbies that subject matter experts can administer and offer to virtually anyone on the web or home TV.

Our next steps to continue to develop the technology to interface with the set-top boxes and expand our relationships with the manufacturers who are excited about the platform and the content it contains and the content creators that will be excited by the distribution, both the internet television and the set-top box companies will be able to provide.

Finally, the business model is still the same for the DMSP. The content developers will subscribe to the DMSP incur transaction fees, bandwidth, storage charges and the set-top box companies can realize revenues from subscriptions and most of all advertising which we will also participate in.

Just as the music and publishing industries have been disintermediated, we believe so will the $150 billion television industry. Onstream and our clients will be able to capitalize on this shift; the possibilities are endless. Although, not as accelerated as we would like to see we are pleased with our overall accomplishments during the first nine months of fiscal 2008 and as a result we are increasing guidance estimates to 45% growth rate over the prior year. This would indicate total revenue of approximately $17.5 million for fiscal 2008.

As I previously stated in our current projections and guidance for the balance of the year does not include our key catalysts for growth including Quest, our Auction Video initiatives and sales of iEncode, although we believe at this point in our fourth quarter they will no longer result in any meaningful revenue contribution for the remainder of fiscal 2008. However, we are still anticipating a significant effect on our 2009 revenues from these opportunities.

Although we experienced a small cash loss for the June ending quarter primarily due to increased R&D expenditures, we will closely monitor these costs which are related to our DMSP and Web Communications segments and will strive to minimize the impact of these additional expenditures we’ll have on our operating results in the near term and as a result we anticipate a minimal if any burn rate in the fourth quarter.

With that being said on behalf of our dedicated employees, management team and Board of Directors, I’d like to thank each of you for taking the time to be with us today and with the help of our operator, we will now open it up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question is coming from Alan Menzer [ph] from Alcar Associates [ph]; please pose your question.

Alan Menzer – Alcar Associates

Hi, Randy.

Randy Selman

Hi, Alan. How are you?

Alan Menzer – Alcar Associates

Okay. I guess and not to be facetious, the best part of the quarter is were still trading and it’s still in business given where the stock is trading and I know as we’ve discussed a number of times, you don’t control that, but to some extent the investors are attracted to what senior management has to say when they are out there and it just seems with the pressure on the stock and this is through a third party I grant to, but I heard from a broker recently that it’s been a large shareholder putting pressure on the stock. Could you comment on that and it seems to be on an ongoing basis. So I don’t know who it is the folks that you’re talking to, but they are not doing anything for the stock.

Number two, given the performance of the stock and I speak for a lot of stockholders, clients of mine and so far that I think the company should take another look at the salary structure of senior management much less giving the senior managements an increase going forward and maybe you should take a step back as you would’ve courageously done if you will some time back and think about taking a 25% decrease until the company’s stock performance warrants an increase in senior management salaries?

Randy Selman

I appreciate the comments let’s part, start with the part one. It is an unfortunate circumstance that the stock price isn’t reflecting the gains of the company. The stock price was significantly higher when the company had less capabilities, had less revenues, had less clients etc, so it’s not really tracking with the performance of the company. That being said, there was obviously all types of situations that occur in the marketplace.

We can certainly look at the sector overall and see that many of the companies in the current sector have seen very substantial reductions in their current evaluations, their stock prices, in many cases have dropped 50%, 60% even 80% even Akamai, our flagship company is about a third of where it used to be.

So, obviously that’s one issue, so the industry as a whole is not being recognized by the investment community for the potential that it has and as I stated in my speech I believe that it’s very clear. There is going to be a big shift, there is going to be revenue flow in and these are the types of investments people should be looking very carefully at and hopefully soon we’ll be able to convey that message to the right years and see increased volume.

Second, they are problems with investors all the time in stock, some people get discouraged, some people can’t wait so long; some people have other reasons that they have to sell shares. I’m not going to speculate today on all of the problems that are affecting our stock or whether one or two or three individuals have been leading on the stock or selling the stock. Obviously, stock is being sold and not enough of its being bought and we’re seeing a downward trend. Although, we’re showing improved performance every quarter-over-quarter and the company is growing and making the right technology acquisitions and building value.

I believe your comments on the management salaries, is a valid comment and we believe that if there becomes a time when this company cannot pay that the current salary to the company, if the cash flow requires us to go to the market to do anything that we don’t expect is going to be just showing signs of improvement. We will consider that, we’ve done it several times in the past. We’ve gone without salaries in the past and we’ll do what’s necessary to keep the company at a flow and maintain the value that we can.

I’m going to tell you that the December time is a bad time for Tech stocks, it’s been a rule of some, I don’t know why that is, companies don’t change it or we haven’t seen, significant seasonal changes, although once in a while we’ll get a couple of holidays in the same quarter which could effect our results, but for the most part the summer time doesn’t really affected it. We showed decent revenue growth.

The primary issue even in the slowing economy, we are not really seeing that effect. The primary issue is simply right now is stock problem with the stock price not a corporate problem. We really believe as I told you in this call, we’re on to something very big here, and we expect that there is going to be great results coming down the pipe.

As those revenue dollars shift from the television broadcast industry to the internet, we’re going to be position to take advantage of the very substantial part of it, and the segments is not very big, and its about to see, according to some estimates $80 billion to $100 billion of revenues coming in, because it’s more effective to advertise in an Internet-based video than television according to several analyst.

Alan Menzer – Alcar Associates

Randy I think, now would stated is a critical time. I think we’re facing probably 4.5 months from now, given where the stock is reserve split again, and a lot of people that have been around since the last one, won’t be around for the next one. So, as far as it being critical, I think it’s today that it is critical.

Randy Selman

Again the issue you’re bringing up, and like I said we’ll take a look at it, but the issue you’re bringing out is a matter of cash flow, the company can offered to pay its management, we’ll retain that management. The company can afford to pay that management, we won’t retain that management.

We need this management, we need this management to stay in-place and fulfill the requirements that we just outlined in this conference call, and to the extent that we can’t pay competitive salaries. We’re not going to be able to maintain them, and I think that would be a bigger burden for the shareholders than to simply see a little cash flow cut, that could possibly be offered, that we don’t really need, because we have sufficient capital on hand, and we’re virtually breakeven on cash flow.

On to the extent of that changes, believe me the management will step up like we’ve always have.

Alan Menzer – Alcar Associates

That’s not an issue it’s still the matter of management creditability giving the fact that we’ve had a poor stock price since November, before when we went under a dollar, and now as they said, with 4.5 month potentially from a reverse split. Also it doesn’t seem that management stepped up to the place, and purchase to cease price with any stock. The last purchases I’ll believe pull through were last I think January, when the stock was around the same levels, thank it was a better a 15,000 to 20,000 shares purchased. So, that also would give investors a little room to say, hey management believes in the company their purchasing at these low levels, may be we should go out and do it, but I don’t see any of that.

Randy Selman

Well, that’s not true. To be honest with you, the management team in this company, although we were not wealth individuals like many of you are, and don’t have the (inaudible) stock in the tens of thousands of dollars on an average basis. We are pretty heavily leveraged in our own personal life; I can certainly attest to that and prove that to anyone who wants to see the proof. The problem is again, it’s not the cash flow, so we could save $20, $5000, $100,000. Management is stepping up; we’re doing everything we can, we are working as hard as we can.

I’ve been on the road, I’ve met more than 500 institutions over the past year and a half, and I can say that I believe that once these catalyst hit, once this product platform is finished, we’re going to see the investment, its going to comeback in, and I believe we are going to able well accomplished before the end of the year.

Operator

Thank you. Our next question is coming from Gary Purcell of Basic Investors. Please pose your questions.

Gary Purcell – Basic Investors

Hi, Randy, how are you doing?

Randy Selman

I am good, Gary, how are you?

Gary Purcell – Basic Investors

Okay. I back you with on the other comments that came in. As long as the company’s fundamentally sound, increasing business, making acquisitions, doing all the right things. I personally am very heavily involved in the stock. It hurts that the stock is down at these levels, but I also looked at it as an unbelievable opportunity.

The stock performs the market takes it up, if there are couple of crazy shareholders that buy and sell and buy and sell it’s not a trading stock. It’s a stock that you accumulate and in the future if you’re in the right area, the way with the future, okay, this company will be like unbelievable and I’ve been picking up the stock at these levels, my clients are like, they are very, very disappointed on how the stock has been performing, but as far as they are concerned I mean I have been picking up the stock everyday.

I think its like, if this stock was 388, and you are 10 times better than the companies ever been okay, it goes on cycles, it just goes on cycles, but I believe you just concentrate on building your business and the stock will take care of itself. At this point, that’s my personal feeling.

Randy Selman

I appreciate your comments, and I understand I mean we are all very frustrated. I mean understand, we get paid salaries that cover our expenses and enable us to live in South Florida, which is where we choose to put the company because of the available talent from companies that use to be the area technology companies like IBM and others and we were able to draw from those talent pools. Now we have, offices around the county, we have facilities in Colorado with one of most talented engineering staff and the issue that you’re bringing up is the same issue for us.

The fact that the stock price is down every single one of our options etc, are also underwater. This is not a management team that has millions and millions of shares sitting in the bank. We are management teams that is dependent on the stock price just as much as our shareholders to see benefit. This is not going to mean anything, your carrier if that stock price isn’t very substantially higher, when its time to leave.

Gary Purcell – Basic Investors

Okay how significant is Akamai or like. In other words now you have two small government contracts that are going to equal a million and a half, how many other government contracts are out there for the potential of you, picking up a tremendous amount of business?

Randy Selman

Well that the fact that these types of government agencies that are approaching us the whole point and what happening is the government is realizing it needs to have better communications with it’s constituents and so therefore they are using webcasting and Digital Media services to get the messages out to their citizens. So, every state of the potential client and every municipalities of potential client and all the government agencies and we expect that has the Qwest project finally starts to turn that we start to see government agencies, there is a, I believe its 173 agencies in 191 countries that all potential clients for us and there has been allocated fund.

This is so frustrating to be here a year and half later after we worked very hard on that proposal, won the proposal, won the bid and part of the team of major corporation and if you have to see revenues from the largest communications deal in the history of the United States, it’s very, very frustrating at every point. So, we’re doing what we can, we’re working with Akamai, we’re working with Qwest, we’re working with other members of the team in order to accelerate this to eventually get that revenue stream started because I believe it will be very meaningful to Onstream.

Gary Purcell – Basic Investors

And when should this Narrowstep be completed?

Randy Selman

We’re intending to file the S-4 here within the next few days, once the S-4 is approved by the SEC, we’ll file the proxy to the shareholders. The typical vote will probably take 30 to 60 days, so probably October timeframe we should be offset to close and go.

Gary Purcell – Basic Investors

Okay.

Randy Selman

Meanwhile just let me, let you know that we are already all over our Narrowstep, we’ve got we had Narrowstep higher one of our top guys in Europe, who’s running our London office now and as already concluding some nice transactions over there, will be announcing. We are intergrading the product already, the engineers in both Poland and in our Colorado spring facility have been designing and researching the integration and some several of the components are already started. So, we’re very excited about this integration and when its done, this platform, we’ll do it all and I think it’s perfectly positioned for what’s about to come.

Gary Purcell – Basic Investors

Okay, thank you, Randy.

Randy Selman

Thank you, Garry.

Operator

(Operator instructions)

Robert Tomlinson

While we are waiting for questions to come in from the listening audience, I’ve received a question from one of our Internet listeners.

Internet Question

Based on your guidance of minimal, if any burn in the Q4, should we then expect the company to be cash flow positive in Q1?

Robert Tomlinson

That's the reason right now we’re not cash flow positive, even a few dollars is we are managing cash right now to affect the highest level of engineering that we could possibly sustain right now to complete these products. We’ve got a second version of iEncode, which is going to incorporate the users input from the first level. So, that’s got to get completed quickly, so you can get that box out.

We have the streaming publisher product, which we’re going to be introducing here shortly. We’ve got a various features on Publisher Pro, which is all about video search engine optimization, and automated meta-tagging technology, which is the primary differentiator that’s got to get finished and several other smaller projects for some clients. With of all that work going on, we had to concentrate on getting those products completed and we’ve expanded the expenses for those products.

As a result, we are trying to manage the cash to try this stay close to break-even with an $82,000 loss for the quarter, which we could have easily cut down on a couple of people or cut down a couple of projects in-turn that positive, but understand if we do we are not going to get the products finished in time. We’ve got just maintain competitive advantage, we’ve got to stay ahead of our competition.

In one case, we have to catch up with a very highly funded competitor that has a portion of our system, and has one-sum business, but with our overall product strategy we think, we could certainly beat that competitor within a very short time with the products that we’re developing, and so in answering the question about positive cash flow, we believe that we’re going to have constant contribution from our Narrowstep deal. Although, currently Narrowstep is burning some cash the combination at the time. Within a short period of time we should be able to turn it around.

We have the capital coming in from the acquisition to cover that short-term burn rate and then as soon as that’s completed, we should be able turn cash flow positive and remain that way. We’re seeing wonderful additions in our Conferencing division, it’s major resellers and such have joined us and that will contribute to revenues, webcasting is growing, the DMSP I think has done very well and we’re going to be expanding the marketing as soon as we have additional cash to do so. So, I think, all in all, I think things are picking up and we were on the right track.

Operator

Thank you. Our next question is coming from Fred Milligan of Sanders Morris and Harris. Please pose your question.

Fred Milligan – Sanders Morris Harris

Hi, Randy.

Randy Selman

Hi Fred, how are you?

Fred Milligan – Sanders Morris Harris

Good. What's the organic growth for the year? You’re talking about 45% increase in revenues, what was the organic growth?

Randy Selman

I think we’ve mentioned it, let me get it real quick here, 16.7% year-to-date organic growth.

Fred Milligan – Sanders Morris Harris

And that’s what you’d expect for the year, something around that 16% level?

Randy Selman

We may see more organic growth in the fourth quarter, since all of the growth in the fourth quarter is going to be attributed to the…

Fred Milligan – Sanders Morris Harris

So, let’s say that the growth is 17% obituary, okay for the year? Now, would that have to the basis for next year, and the 17% organic growth will continue, or else you might develop?

Randy Selman

No, not at all, we anticipate substantially higher growth rates next year. Let me explain some other factors on the organic growth. Number one, the DMSP platform itself puts store and stream with a couple of other nice features and some other capabilities. Now DMSP with streaming publisher move to the next level and can certainly increase their client base.

On that basic platform we are able to put about 250 somewhat clients that are strictly storing stream clients, the rest of them are our major clients that use other service and professional services that are on the platform as well, but as we complete these additional product offerings we will be able to certainly accelerate the growth of the number of users as well as the cost that we can charge each one of these users and that alone although it showed I believe over a 100% growth this year and over a $600,000 it’s going to start to expand much more rapidly.

As far as the catalyst revenues, we anticipate substantial organic growth from our iEncode device, which we will have fully functional and shipping in the first quarter. We expect certainly to see revenues coming out of this Qwest deal. I think that we’ve waited long enough and it’s time for them to start spending some of that money, and not to mention there is some very big, other things we’ve mentioned our eBay hosting their agreement. We think there will be revenues very soon in that area we expect…

Fred Milligan – Sanders Morris Harris

Excuse me, very soon what does that mean? First quarter?

Randy Selman

May be as soon as the first quarter, we are looking at working with them on some other projects. I am not going to discuss at this point in time, but I would like to say that we are progressing in that relationship. We also anticipate very soon maybe getting our patent granted, which should also afford us additional opportunities to generate revenues from licensing fees. There is a lot of things that are going to contribute revenue growth next year.

Not to mention, once to the Telvos platform is integrated, there is a pretty substantial number of clients that will come over and be included in our revenues, not to mention, the current run rate that they’re at now. So, now I think that we will see substantially higher than 70% organic growth as well as acquired growth for the coming year. I am not going to give a guidance number yet for 2009, but we will be ready to give one next quarter.

Fred Milligan – Sanders Morris Harris

If it’s better than 30%, I’d give everybody a raise.

Randy Selman

I feel that those numbers that we’ve discussed from last year are doable next year. We should be able to see substantial growth. I am not going to give you definitive number, but I think it should better than what you just said.

Fred Milligan – Sanders Morris Harris

Better than 30%.

Randy Selman

I honestly believe we should be able to do that, yes.

Fred Milligan – Sanders Morris Harris

Still give everybody a raise.

Randy Selman

Thank you, Fred.

Fred Milligan – Sanders Morris Harris

Thank you, see you.

Randy Selman

Although everyone [ph] may not agree.

Operator

There appear to be no further questions at this time.

Randy Selman

Okay. We appreciate everyone for joining us today and we look forward to announcing our end of year results sometime in the December timeframe and this concludes our conference call. Thank you all; bye-bye.

Operator

Thank you. This does conclude today’s teleconference. We thank you for your participation. You may disconnect your lines at this time and have a wonderful day.

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Source: Onstream Media Corp. F3Q08 (Qtr End 06/30/08) Earnings Call Transcript
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