Destiny Media Technologies' (DSNY) Fred Vandenberg on Q3 2017 Results - Earnings Call Transcript

| About: Destiny Media (DSNY)

Destiny Media Technologies, Inc. (OTCQB:DSNY) Q3 2017 Earnings Conference Call July 17, 2017 5:00 PM ET

Executives

Fred Vandenberg - Chief Executive Officer and Chief Financial Officer

Analysts

Hubert Mak - Cormark Securities Inc

Walter Schenker - MAZ Partners

Operator

Good afternoon ladies and gentlemen, thank you for joining us today on the call today. Before we begin, I’d like to announce that we will be referring to today’s earnings release, which was sent to the newswire 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 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.

With that, I will now turn the call over to your host, Fred Vandenberg, Chief Executive Officer and Chief Financial Officer. Please go ahead.

Fred Vandenberg

Thanks, Joanna. I’ll talk briefly about our quarterly results and then move on into a discussion on recent events. Our music distribution system, Play MPE continues to represent 99% of our revenue. This revenue grew by 3% and came from every major territory we have. While this growth is modest, it represents the sixth straight quarter of increasing sales for Play MPE.

We continue to grow revenue from a variety of efforts depending on the nature of the territory. For example, we added resellers and recipients in the list – recipient list in Scandinavia, and we grew revenue in the United States from improvements to our problematic selling in the U.S.

We did expect to apply successful strategies in new territories more fully. Going forward, a new version of Play MPE should lead to increased use across all territories; the more significant advancement will be the release publishing tool. This tool will finally allow Mac users to send content.

Total expenditures declined by 17% due in part to a number of small items including the reduction and depreciation, which reflects our move to external hosting, which has reduced our capital investment needs and we have been able to reduce those hosting costs by making more efficient use of those services.

As a result of the above, net income grew to $166,000 from a small loss in the previous year. Combined with reductions in accounts receivable, our cash balance increased to $1.2 million. We expect cash to continue to grow this year as we believe an increased cash balance provides financial stability and is reassuring to stakeholders. EBITDA was a little more than 200,000 higher than any quarter in the last four years.

As was previously announced, Steven Vestergaard was dismissed as our CEO on June 28. The Board of Directors concluded that he was not the right person to execute on our strategy going forward. There has been no adverse change in the potential of Play MPE, its customers, or its revenue base or our relationship with Universal Music, indeed I believe that relationship is stronger than it has been in years.

We will also continue to pursue extracting value from the Clipstream technology. There will be a change in how we execute on that strategy to capture value from Clipstream, a reduction in unnecessary expenditures or activities, a clear and more collaborative effort on Play MPE and a chain store corporate culture.

Along with this change and two other personnel changes, there’s a gross annual reduction of approximately CAD$460,000 related to salaries and wages. We will also be reviewing the suitability of certain other costs.

For example, we have been pursuing the MPE trademark as distinct from the Play MPE trade, sorry we have been pursuing the MPE trademark as distinct from the Play MPE trademark in several territories and we do not think there is value there.

We have also been maintaining servers that maintained legacy products that produced no revenue, in creating a cost and providing a distraction to existing employees. I will note that reducing costs is not our main motivation, rather we wish to allocate costs and people’s entity to produce resources that grow revenue. I will be reviewing the scope of a new CFO to ensure that we have proper segregation of duties for control purposes.

With Play MPE, the development, business development, and operations teams all have resources that have been involved since the beginning and bring tremendous institutional memory industry relationships and know how. We are known within the industry for having superior customer service and technical support. I have been involved in the business development and day to day operations for Play MPE since inception .

For example, I transitioned the first customers to paid agreements in 2008 and built out the released preparation department which accounts for one third of our revenue today. More importantly, I have been an internal advocate for this business throughout the years and with hopes that we would invest more and more appropriately in development and business development.

Near the end of the quarter, we adopted our web uploader to integrate into UMG’s distribution channel. This will make it easier for UMG sub labels to communicate and send appropriate content for distribution to their own distribution office and we think this will increase use of UMG. We will continue to focus on areas that make it easier for customers to buy.

The web encoder or released publishing tool has despite some fits and starts now reached the prototype stage and we have shared demonstrations with UMG. This is an extremely important milestone as we transition from a PC based distribution tool to a browser based system. Our next stage is an internal alpha version followed by customer data which we expect to be ready by the end of this calendar year.

While Play MPE has not had significant growth over the last several years, there remains significant potential. With Clipstream the product is made up of two components, the engine and the Javascript, sorry the engine, the JavaScript codec, and the platform that hosts the engine. The patented engine for JavaScript video decompression gives good stream unique, alternative approach to online video from all other commercial solutions. We have determined that the platform requires a successful engine to be competitive as standard video hosting service would face entrenched [ph] competition.

Instead we will focus our sales and marketing on partnerships where we can incorporate Clipstream’s unique script based video decompression engine alongside conventional technologies. We believe that this is more appropriate and we hope that that takes advantage of gaps and conventional technologies like security or overcoming other limitations within a browser. We are going to be working towards a new business plan over the next six to eight weeks on how to best approach higher level partnerships and we will have more information on the next call.

Lastly, we issued options at the end of last month to directors and management at almost a 100% premium over recent trading at the time. I think that clearly shows that we are tied to actions that improve the shareholder value.

And with that, I will turn it over to questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question is from Hubert Mak. Please go ahead Hubert.

Hubert Mak

Hey, just a couple of questions here. First to start given that you have just got points – so can you just talk about the strategic direction of the company like the priority, which one is priority between Play MPE and Clipstream?

Fred Vandenberg

I guess we’ll hammer that home a little bit more clearly over the next six to eight week but as we work through our 2018 business plan, but our first priority right now is to release the web version of Play MPE, the web encoder for Play MPE. I should mention that we do have dedicated staff that are working on the Clipstream engine and those don’t overlap with Play MPE, but where there is overlap we’ll be focusing on getting the web encoder out.

Hubert Mak

Okay, and then the Clipstream, can you talk about sort of where we’re going to add in terms of commercialization with the -- in terms of the product cycle like where is that right now?

Fred Vandenberg

Well again, I think we are – there’s a bit of a pivot here that I think will be more clear over the next six to eight weeks, but we just released a new version in May and that significantly improved our – the quality both on desktop and mobile, but we think that the stage of the engine is a place where we can more appropriately extract the value by incorporating into existing conventional technologies as opposed to competing directly with them.

Hubert Mak

Can you elaborate on that as I mean partnerships or what -- like how are you guys approaching that?

Fred Vandenberg

That precisely it would be partnerships that we would be seeking and I’ll have more details in the next call.

Hubert Mak

Okay, and then just lastly on the Play MPE, I know you had eluded in terms of talking about the UMG agreement, but can you talk about how -- whether that renewal is coming up and/or what’s the status of that and how they are – any comment on in terms of how they are pushing it in terms of geographic?

Fred Vandenberg

Okay, a few things. The current agreement expires at the end of this calendar year, so we’ll try to renew it for January 2018. We’ve been working very collaboratively with them on development aspects, so we integrated our web uploader, I think I mentioned that and they are involved in the web encoder. So we’ve also been talking with them about various internal pricing models, I think one of the things that has potentially provided a bit of a hick up in their growth is that it’s not clear how much sub labels are being charged, and it might not have been appropriate how sub labels are charged. So we are trying to work with them and keep coming up with an internal pricing model that is distinct from how we charge that encourages global growth. We’ve received – you know part of the reason why we’ve built out the web encoder is that we continue to receive requests from various territories within the UMG for an encoder that can be used with the Mac. And also it’s -- I should mention that the web encoder, it can be more easily translated and it would be more user-friendly. So, we expect those things to result in a more widely distributed Play MPE use within UMG and other clients as well.

Hubert Mak

Okay. Thanks. I would pass the line.

Operator

Thank you. Your next question comes from Walter Schenker from MAZ Partners. Walter, please go ahead.

Walter Schenker

Thank you. I realize this is somewhat redundant. However as you are aware those of us on the outside have spent too many years, [indiscernible] from some changes hearing about Clipstream and the opportunity in Clipstream and that in fact Clipstream’s opportunity could far surpass Play MPE, if and -- when and if we could work out the next or final and next and final issues trying to make it work across a broad range of platforms from desktops to laptops to smaller formats.

The question then is, and I understand will be more clarification over time, I don't understand if it's a function of the technology and how it works or a view of the competitive environment or a view of the potential as to how we are supposed to look at, what the contribution of Clipstream might be going forward , I do appreciate one with the question I apologize, you know that there's been some change in assets within the company being allocated between the two different products. But I just don't have any feel whatsoever for what I'm hoping for out of Clipstream.

Fred Vandenberg

Okay. We’ll start answering that. So, outstripping Play MPE I think the presumption in that question is you know the Play MPE is where it is and it's going to stay there. And I think first of all I think there is tremendous growth potential with Play MPE. Now, whether you could outstrip that with Clipstream? It does depend significantly on the function of the engine. So, to the extent that we can get the engine to a quality sufficient for broader use, then we could take advantage of its unique approach and leverage that into a greater opportunity.

That quality is – internally, we look at that quality in three stages. Like Stage I would be that the viewer of Clipstream video would be – would have a quality that they can -- is perceived to be as good as other conventional technologies. Stage II would be that we are metrically the same, and Stage III is that we’re better. We are getting closer to with what a Stage I would look like and figuring out whether we’re subjectively the same as -- conventional technologies a bit is a bit new one. But we don't feel that at this stage pursuing those opportunities or pursuing a hosted solution for monthly accounts is the best use of resources.

Walter Schenker

And again just to try and drag a little bit more out and I’m not saying you’re not trying to help. Looking at three stages as you defined, Clipstream, we are definitely not at the third stage. We are not at the second stage. We may be close to or at the first stage, which is sort of visual perception. Is that correct?

Fred Vandenberg

I don’t think we're there yet, whether we can get there in the short term is a different question. And I think that figuring out and making that assessment is a very new I understand it really is something that we have to figure out what that is. You don't look at it as everybody gets the same or everyone perceives the same quality, it’s a sufficient amount of people that would perceive of the same quality so that you can sell. So it doesn't prevent you from selling.

I don't – we’re not there yet, but can we get there that's an assessment we’re going to make over the next six to eight months. But in the in the short term we’re certainly we’re to focus on partnership opportunities where we can take advantage of Clipstream’s unique approach.

Walter Schenker

Okay. And then just bouncing back to Play MPE, you have expressed an optimism, hopefully well-founded as to growth opportunities in Play MPE an [Indiscernible] of the technology without making a shorter intermediate term forecast, also try pushing their Play MPE therefore over some time frame undetermined, can grow at double digits as opposed to 3% to 2% that we’ve seen for some period of time now if it works the way you hope?

Fred Vandenberg

Yes. Okay. So, I would expect continued growth as we are, as we improve on certain aspects more collaboration with our list management department and that’s natural thing. We’ll also be able to add in more, we’re using different territories. So I think we’ll be able to improve the speed of our revenue growth as well.

The web encoder that's a pervasive and significant change, we should be able to expand using existing territories. We should be able to expand use with existing customers and by adding customers, but also I think it will help, expand in territories where we don't have a significant presence. And I think when it comes to Play MPE revenue you have to take a step back and revisit how we actually grow Play MPE revenue. When we enter a territory we tend to go for major-label use, and so that's a bit of a step in terms of a revenue as opposed to a nice steep slope of growth.

And once we do that we add recipient lists and then try to sell to independent labels, the major labels tend to use their own lists. They sometimes they use ours too. But when we typically enter a territory we add major-label content, get some revenue there, leverage there, leverage that use to sell to independents, and we sell independent by creating their own recipient lists.

So, there is many areas where we can grow geographically. In the UK for example we have -- we only have a universal that uses us significantly. But if we add one of the other measures that makes it much easier for us to sell to independent. In Scandinavia we finally added recipient list last year and you see that growth starting to take off. It’s not a big territory, it’s not a huge revenue, but we think that based on our experience with United States where you seen independent label revenue grow. I don't know I have the stats off the top my head, but I would think for the last 48 quarters or something like this you would see growth in every one but two or three. And I think we’ll try to replicate that in new territories.

Walter Schenker

Okay. And therefore the growth is not tied necessarily to an annual contract with UMG but really broadening the customer base both with major labels and independent.

Fred Vandenberg

That fair. UMG and were they there -- I said there, we are working really well with them and I think our relationship is better. That’s also translated into their billable usage now. This is something that they used to charge internally versus what we charged them, but them billable usage is higher than it’s been – than it’s ever been over the last couple of months and we think that bodes well for us successfully negotiating with UMG but also I think it helps us make them pivot on how they price internally, internationally so that it encourages their growth internationally and if we start adding territories even small ones those things will start to add up like we add a lot of use in South Africa or Germany or France or you know wherever it is, I think we can leverage that into getting the major and then selling it to independents.

Walter Schenker

Okay, thank you.

Operator

Thank you. [Operator Instructions] At this time there appears to be no further questions, you may proceed.

Fred Vandenberg

Okay, thanks to everyone for joining the call. If you have any questions or the sort, you can email me at fredv@dsny. I do have to be careful about disclosure, but I’m happy to clarify anything that we have said in the call. And thanks very much.

Operator

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

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