FINAL TRANSCRIPT Destiny Media Technologies, Inc. First Quarter Results Event Date/Time: January 14, :00 p.m. E.T. Length: 30 minutes

Transcription

1 Destiny Media Technologies, Inc. First Quarter Results Event Date/Time: January 14, :00 p.m. E.T. Length: 30 minutes

2 CORPORATE PARTICIPANTS Jeff Elliott Three Part Advisors Fred Vandenberg Destiny Media Technologies Inc. Chief Financial Officer Steven Vestergaard Destiny Media Technologies Inc. Chief Executive Officer CONFERENCE CALL PARTICIPANTS Hubert Mak Cormark Securities Analyst Walter Schenker Maz Partners Analyst Phillip Mitchell Contra Mundum Capital Management Analyst 2

3 PRESENTATION Operator Good afternoon, ladies and gentlemen, and welcome to Destiny Media Technologies, Inc. First Quarter Results conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for a question. If anyone has any difficulties hearing the conference, please press star, zero for Operator assistance at any time. I would like to remind everyone that this call is being recorded on January 14 th, ahead. I would now like to turn the conference over to Mr. Jeff Elliott, Investor Relations. Please go Jeff Elliott Three Part Advisors call today. Thank you, Operator, and hello, everyone. Good afternoon and thank you for joining us on the Before we begin, I d like to announce we ll be referring to today s press 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 Such forward-looking statements are based upon 3

4 current beliefs and expectations of Management and are subject to risk and uncertainties which could cause actual results to differ materially from those forward-looking statements. Such risks are more 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 ll discuss certain non-gaap financial measures. These non-gaap financial measures are presented in the supplemental disclosures and should not be considered in isolation of or as a substitute for 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 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. I will now turn the call over to Fred. Fred Vandenberg Chief Financial Officer, Destiny Media Technologies, Inc. call. Thanks, Jeff. I will be very brief, but I will be available to answer any questions later on in the 4

5 Play MPE is a content delivery system that record labels use to deliver music for promotional purposes and currently constitutes 99 percent of our revenue. Play MPE revenue grew by 7 percent over the prior year as a result of a 14 percent increase in revenue in the United States and a 145 percent increase in revenue in Australia. Revenue in Europe had a minor increase before considering exchange impacts, but with the US dollar strengthening relative to the euro, our European revenue declined by approximately 6 percent. The revenue in the United States increased with all major labels and, again, showed an increase in the independent group, which has seen revenue grow in every quarter, every like quarter with only one exception for the past six and a half years. Total expenses grew by 17.6 percent, which is primarily attributed to an increased staffing for the development of Clipstream, with the addition of some engineers, software engineers and our Chief Operating Officer, and to director compensation. With that, I ll just turn it over to Steve. Yes, thanks, Fred, and thank you all for joining us on our call today. So we just had a call six weeks ago and we had Christmas in between, so not a lot s happened but I m happy to go through with questions. But we continue to make progress with returning to growth in our Play MPE business and the commercialization of our Clipstream products, and before I get into an update on each of our 5

6 businesses, I ll give a brief overview of the Company for those investors who are relatively new on the call here. So as Fred said, we have two business lines. The first one is Play MPE, which is a distribution system that record companies use to securely distribute pre-released music to radio stations, trade press, DJs and other trusted music industry participants. We sell the service to all of the major record labels and a growing list of more than a thousand independent record labels. This business currently generates more than 95 percent of our revenue and is a nice, steady, projectable recurring revenue business that we can rely on for you know, as a foundation for future growth. So over the past couple of years, we invested significant time and effort to build out the infrastructure of this business to suit the enterprise level demands of the major labels and their distribution partners as they ve gone global with us. As well, we have had significant development to ease the usability of the system without compromising its security. With this infrastructure and usability development behind us, we are really well positioned to begin to grow this business significantly, beginning as soon as, basically, right now. We believe we ve only reached about 10 percent market penetration, and I might add that this business has significant fixed costs but very low variable costs, other than sales and marketing, so a large portion of each incremental dollar of sales falls to the bottom line so we re pretty excited going forward on this product. 6

7 Our second line of business is our Clipstream video streaming technology. This is a new technology that s been under development since We had another technology that was branded the same, but this is brand new. Clipstream is an innovative technology that lets any modern web browser render high quality video without the need for a player or specialized third party infrastructure on the Internet. The industry spends more than $10 billion on this infrastructure annually and Clipstream can provide an attractive alternative and cost savings to a significant portion of the spending. Beside the cost savings, there are multiple other benefits to our Clipstream technology which we ve provided detail in our investor presentation and website, so in the interest of time, I won t go through all of the benefits on this call unless somebody wants to ask me the question. To summarize, Clipstream has a very strong value proposition that goes beyond cost savings and we are very excited about the significant potential for this new technology. Now I ll review the progress of each of our businesses. So regarding our Play MPE business, in the first quarter, we continued to show revenue growth in the United States and Australia, and as Fred said, it resulted in a 7 percent increase over last year. I know 7 percent isn t bad but it s a nice start and we think we can grow this business a lot more quickly as we go through As we said last quarter, it s been easy for us to rely on the predictable, reliable cash flow from Play MPE and the majors have been great supporting our growth, but going forward, we re going to be a little bit more proactive in growing these revenue streams. We ve been recruiting for executive leadership for Play MPE and have been restructuring to clarifying staff roles and reporting relationships. 7

8 We ll also be hiring additional people to assist with sales and marketing. We ve also been completing and launching mobile apps to make the system accessible to radio and label staff when they re traveling. It s a better service to music reviewers and other recipients that don t need broadcast quality and some of the other functionality that s available on the computer-based MPE players for radio. Based on label demand, we ve been building out a browser-based encoder that will make it easier for staff through the majors to create and send songs. Moving on to Clipstream, I don t have a lot to update since our last report, which was just late last year, but we continue to make progress behind the scenes. We have ongoing development to advance the reliability, functionality and performance of the underlying core Clipstream video engine, with expanded testing to all major mobile platforms. So Clipstream video is being tested on all major PC, Mac, OS, Android, Blackberry and IOS browsers, you know, dozens of the most popular mobile devices. So I ve been getting a lot of inquiries. You know, especially here now in the New Year, people want to know where we re at with the raw engine, so what we ve decided to do is to create a special tab in our Showcase which we call Beta, and this tab s going to be updated on a fairly regular basis, you know, as often as every couple of days, so you guys can take a look and see where we re at. The videos that are on the Showcase site currently, some of them well, actually, all of them are quite old and they don t reflect the latest technology. So if you want to take a look at that, you ve got to go to My.clipstream.com, go into the Showcase tab and there s a tab there called Beta, and I won t get into it too much but I welcome questions on that. 8

9 As we said last quarter, we have identified at least a dozen market segments where we think Clipstream technology is applicable and better than the alternatives, and have chosen our first four segments to commercialize. The first segment is a cloud-based solution that we beta launched in the second quarter of fiscal The second segment is to the market research industry that uses Clipstream to test market movie trailers, ads and other high value content where the security aspect of Clipstream and the high play rate has a significant value proposition. The third segment is in the advertising market, where Clipstream s ability to be seen on any modern web browser is really important. We re also developing new interactive functionality for Clipstream that ll be another important differentiator in the market, but we can do things like, you know, detect the fat finger syndrome where somebody accidentally clicks on ads but that ad shouldn t count as a play, or where the ad is playing off the site or where somebody wants to take the ad and make it interactive. So we have a value that we can offer to this market, this huge market that no other streaming solution can provide, you know, and so cost isn t the only savings. The fourth market segment is licensing the raw Clipstream engine, and we expect that, you know, that could be a big driver of growth in As we begin to have success commercializing these four market segments, we ll update the market on our developments. This year, we expect to complete the testing and plan to step up spending significantly on our sales and marketing efforts. Under the leadership of our new VP of Clipstream, Dale 9

10 Borland, we ve continued to recruit and we ve been in the process of hiring and recruiting fairly aggressively with engineers, project management professionals, QA, and we re still recruiting sales, marketing and support staff. While we ll continue to have a significant effort on development, we expect this year, this 2015 year to mark the transition of the Company to a greater focus on sales and marketing over development. You know, the development risk is behind us and we are all well positioned to show growth in our business over the next several years, and I m very excited to see how hard work we ve done building infrastructure and product development will begin to translate into increased sales, earnings and shareholder value for So with that, we will now open the call for questions. Q & A Operator Thank you. Ladies and gentlemen, should you have a question, please press star, followed by one on your touchtone phone. If you are using a speakerphone, please lift your handset before pressing any keys. One moment, please, for your first question. Your first question comes from Hubert Mak from Cormark Securities. Please go ahead. Hubert Mak Analyst, Cormark Securities 10

11 Hey, guys. Maybe just firstly on the Play MPE here, you know, can you guys talk a little, sort of the renewal and (inaudible), like maybe you can provide any sort of update on that, as well as, like, maybe the progress of the rollout. You know, if you guys had some kind of relatively decent success on the Europe, obviously on kind of cost and currency, so can you just kind of talk about that as well? Yes, so one of the things that I kind of mentioned on previous conference calls is that if you go to the front page of our DSNY.com site and you go to the bottom right corner there, there s a little live link where you can see real time statistics, and in terms of our rollout with any of the labels, that s probably the best way to watch it because what happens is they do testing in different markets, and you can kind of see that in real time. Often, it doesn t hit revenue that much. Like, if they, you know, send a hundred people in Belgium or something, you know, that might be $50 to us. It s not impacting, but it shows that we re getting the foundation in place for the rollout. But I think your question was about the Universal contract that expired in December. So they ve decided to extend the old terms on an interim basis and we re currently negotiating new terms with them. We re not expecting any negative revenue impact. You know, if it might even be possible that there s a positive impact, but we re restructuring to better match the terms to the way they do business. Hubert Mak Analyst, Cormark Securities 11

12 Okay, and I guess just a maybe lastly on the Play MPE though, like, are you able to sort of maybe, you know, given the growth rate that you guys had on Q1, would that be sustainable for the rest or the year, or do you think that s going to increase going forward? Yes, so I think I ll let Fred speak to what caused the growth in this quarter, but it wasn t from the majors. It was more independents and, you know, some of our regional markets like Australia. But, Fred, do you want to take kind of a run at that one? Fred Vandenberg Chief Financial Officer, Destiny Media Technologies, Inc. Yes, sure, sure. Hubert, what where we will grow revenue really, we break our Play MPE segments down by country and then we split it between majors and independents, and then in some of the larger countries, like for the US for example, we split it into genres. So we re attacking different markets in different ways and I think, as I m sure you know, there s a seasonality to our revenue growth where typically Q2 is a little bit of a slower quarter than Q1, but we do expect to see growth throughout the year and where we see that, we ll be we are planning on focusing on both the US majors and the US independents, and throughout different genres of music, we expect to continue to grow Australian revenue. As you may know, we had a bit of a step back a couple of years ago and now we ve recovered that market and it s just a matter of gaining traction with all the remaining independent labels there. 12

13 We also intend to focus on major labels in Europe, in the UK specifically, and independents in Scandinavia and Scandinavia, when I say Scandinavia, I mean including Finland. So there s different things we re doing in those different markets, but with the addition of some marketing staff in Play MPE, I think we re taking a bit more proactive approach to marketing and gaining traction that way. Yes, and I think that s the exact right word, the word proactive. It s been a little bit easy for us to rely on the majors because the majors have been out there growing the market for us. You know, they re rolling into new markets, they re training their own staff, they re talking to radio, and we ve had a tendency to try and rely on the majors for growth. So when the majors stumble a bit, if our contacts at the major, you know, senior executives get let go or they have a change in their business plan or whatever, you know, we re kind of beholden to their business strategy. So one of the things that s changed in the last three months is we ve become very proactive. I don t know if you saw the press release, but we hired Karen on an interim basis to run the Play MPE division. You know, we ve got Dale running the Clipstream division. Both of them have very strong sales and marketing experience with a history of success, and you re going to see a whole bunch of new Play MPE initiatives. Probably the first one I can probably talk about it now is, in the next week or so, we re expecting to see our new newsletter go out, so on a regular basis, we re going to be sending a newsletter out to the industry. You know, we re targeting the independents but it s going to be a little 13

14 low key. It s an industry newsletter that s going to talk about the industry and about successes and, you know, it s not going to be advertorial but we re starting to do initiatives like that where we think we can really start quickly growing the independent revenue. We need the majors to be dominant in the market for the independents to see any value, but we have we already have markets like the US or Australia or Northern Europe where we already are dominant. So once we have that dominance, we can take that intellectual asset, and with proper proactive marketing, we think we can grow the independent revenue really quickly. I don t know if Fred mentioned it in his spiel there, but in 25 of the last 26 quarters, we ve grown that independent revenue, and that s we actually think that you know, we re 10 percent into the market. We think over 50 percent of our potential growth could be with that independent market where we have a lot of control. We just have to be proactive with sales and marketing. Hubert Mak Analyst, Cormark Securities Okay. Maybe just switch over to Clipstream here, you know, I think you kind of talked about it a little bit here, but yes, can you sort of talk a little bit about what technical things that need to be finalized here from now until March, because it sounds like in your press release that you did indicate, like, a launch in March 15 here. Is that an official launch versus Beta, because I m just trying to sense the timing here? 14

15 Well, the official soft launch was December 2013, but you know, as we went out to market, we found out that it wasn t market ready. You know, feedback that we got from potential customers was that there were things that were missing, including quality, that made it a product that wouldn t be easy to sell, and so instead of investing in sales and marketing a year ago, unfortunately, we re a little bit a year behind the eight ball but we ve put that money into development. To show you how close we are, the big thing is the engine. Like I said, we set up that Beta tag so you can kind of watch as we improve the system. We re down to just a couple of known issues. One known issue is that we don t have full screen support on mobile. I m expecting that to go live as soon as next week. But the important thing to know about Clipstream is it s not one product. So we actually are already marketing the market research product. The cloud product is available but we haven t been marketing it. The ad product is still missing features. We ve hired an ad consultant, and we re working with the ad agencies and we re building out further functionality. We actually don t expect that product to be ready until May. But in terms of the whole suite of products, the biggest thing that s been holding us back is this throttling issue, and this throttling issue s been a big problem that took a whole rewrite. It s done now, so if you go to the Beta section, you can kind of test the throttling yourself. Again, there are some known bugs but, you know, we re right at the end of it here. I can t give you any timing but we re really close. We re down to, you know, one page of bugs. Hubert Mak Analyst, Cormark Securities 15

16 Okay, and then maybe just lastly on this, you guys are obviously still hiring here. Like, when do you expect to see any meaningful revenue here coming through for Clipstream here? You know, obviously with your market research, you already have that, it looks like (inaudible) your existing customers here, but on your cloud stuff, what s the thought here? Well, there s so many variables that I ve been advised not to answer that question directly. But in terms of the things that would stop us from generating revenue, the big one has been the quality, and that s almost behind us. In terms of other big ones, other big ones would be having the right staff, the right human capital, and over the last three months, we ve done a good job of bringing new talent in that s able to kind of run with it. So we re literally building out the marketing strategy right now. Again, I ve been advised not to answer that question directly because there s so many variables, but we re really close. Hubert Mak Analyst, Cormark Securities Okay, and sorry, I just want to throw one more here. You know, obviously, from the CES (phon), there s been a lot of talk about 4K here. Like, what s your compatibility here from a 4K perspective, like whether you guys can support that or how you think that s going to impact your business? 16

17 Yes, somebody actually asked me that a year ago. It came up this morning in a couple of s. We can support 4K. We can support higher than 4K. I don t know if people are aware, but our audio quality, for example, is much higher than anybody else s. But we re kind of fighting between two possibilities. One is to be as cross-platform as possible but to try to be as cross-platform as possible, that means you got to support the person that s got, you know, a really low quality mobile connection with a really lousy CPU in their ebook reader versus you can go the other way where there s lots of bandwidth available and there s lots of CPU available, and so we generally try to pick the middle ground where we can reach as many people with, you know, as reasonable a quality as possible. But for specialized applications, you know, if somebody came to us and they wanted to do 4K, and we re allowed to say, Well, the computer can t be older than, let s say, four years old and it s got to run a decent browser, you know, not some crippled browser, then yes, we can address that. That s not a problem. Hubert Mak Analyst, Cormark Securities Okay, thanks. I ll pass it by. Okay. Operator 17

18 Thank you. Your next question comes from Walter Schenker from Maz Partners. Please go ahead. Walter Schenker Analyst, Maz Partners Hi. As we hopefully move into the commercialization of Clipstream, looking from the outside, is the are initial customers, customers who are likely to be generating does someone try this and pay you $100, $1,000, $10,000, $100,000, a million dollars? I m just trying to get some idea of, as you look at different markets, you know, are we getting a lot of $50 users, or is this something where you sign someone up and it s a six figure user? So, again, (audio interference) that kind of question. That s a really good question. I ve said this a few times. We ve identified at least two dozen markets and the ways we benefit those markets really vary depending on the vertical. So in some verticals, we save them a ton of money because they don t have to transcode, they don t have to spend as much on hosting, we recycle the bandwidth, but other verticals don t necessarily care about that. In some verticals, we offer the security, so security s important to companies where they have remote staff and they don t want their internal corporate videos to be, you know, widely available on the Internet. You know, I m sure Sony wishes that they had better streaming security on their movie server. But then there s completely opposite verticals. Like, if I go to the advertising vertical, Coca-Cola would love nothing better than to see their commercials pirated 18

19 like crazy. You know, the more people that see it, the better. But what they care about is things like interactivity and mobile support than, you know, reaching as many people as possible. So what we ve realized is there s different features that benefit the different verticals. There s different pricing models that benefit the different verticals, and so in answer to your question, we re kind of you know, we ve chosen four to start with, but the four go from the low end. Like, if I take the cloud, the cloud itself serves if you wanted to go in and try it yourself, you can. Put in your credit card and it starts at $4.95 a month, you know, so if you re you know, that s the high volume, low revenue model which we see as almost like our foot in the door. It s a form of marketing. Versus you could go to licensing the raw engine. I don t want to mention any brands, but you can imagine if we took the engine to a big telco or a big Internet company or a big video hosting site or whatever, and we just license that raw technology into their engine, you know, and all that might be a multi-million dollar license on an annual basis. So strategically, we re going to try four different strategies all at the same time. Some are going for the low end, some are going for the high end. You know, obviously, the higher the opportunity, the longer the sales cycle. Another question that you didn t ask but other people have sent me s on this this morning is, you know, when are we going to start singing from the rooftops? That s going to be one of our focuses once we re really happy with the engine, is to get awareness. So as much as we chase 19

20 Clipstream revenue in 2015, we re going to be chasing Clipstream awareness. We want Clipstream to be a household name, but we don t want it to be a household name until we re happy with, you know, exactly what the offering is. Walter Schenker Analyst, Maz Partners Okay, thank you. Operator Thank you. Your next question comes from Phillip Mitchell from Contra Mundum Capital Management. Please go ahead. Phillip Mitchell Analyst, Contra Mundum Capital Management Yes, hi there. Has Mr. Borland identified any new particular, you know, markets or segments that you guys had not, you know, thought about previously? I can t say that we haven t thought about them, but it s very effective to have us now working as a group because, you know, I have my strong thoughts, Fred has strong thoughts, other people in the Company have strong thoughts, and based on his experience, he also has strong thoughts. So, for example, a couple of verticals that I wasn t going to focus on initially that he might we re still actually 20

21 building out our strategy but would be, like, education and government. Not just him but other people in the Company also have rolodexes where they can go back to companies that they ve worked with, you know, in the past and there may be opportunities that I didn t see right away. I think we all agree that it s a combination of the integration strategy which has the benefit that if I integrate into an ad agency s offering, that I now you know, if they had 500 sales people, that one sale to them is now leveraged into their network, and we can grow a lot quicker by doing that integration thing, integrating into ISPs, doing integrating into software, like other software products but also, at the same time, following a parallel strategy where we try and sell it ourselves. So the short answer to your question is, you know, we re not totally sure. Like, so as we get our first sales, that s kind of a form of market research. It helps tell us if our pricing s right, it helps us tell if our pitch and our benefits are right and it helps tell us if we re chasing the right opportunities. So we re expecting a little bit of flex over the next couple of quarters, so as we roll it out, realistically, our strategy s probably going to change a little bit. Phillip Mitchell Analyst, Contra Mundum Capital Management Okay, great. Thanks a lot. Okay. 21

22 Operator one. Thank you. Ladies and gentlemen, should you have a question, please press star, followed by There are no further questions at this time. Please proceed. Okay. As I say at every conference call, and I know we just had one a little over a month ago, we both Fred and I, and actually Dale too and Karen, we all welcome interaction with investors. If you have any questions, suggestions, you know, here s a company you guys should be talking to, we completely welcome that. You can either send an or give us a quick call, and I know sometimes it s a bit intimidating to ask a question in this forum, so we welcome one-on-one. As well, Three Part Advisors is ready; you know, any time you want, feel free to reach out to them to set up a call. So on that note, thanks a lot and I look forward to talking to you next call. Operator Ladies and gentlemen, this concludes your conference call today. We thank you for participating and ask that you please disconnect your lines. 22