Wednesday, January 14, 2009

Destiny Media is Still Losing Money


That's the bad news from today's earnings release from Destiny Media Technologies (OTCBB: DSNY.OB) (Hat Tip: Albert). The good news is that the company's revenues increased 55% year-over-year in its fiscal 1Q09 while its operating expenses decreased 44% y-o-y, and its cash burn rate decreased by 98% year-over-year (Destiny Media's 10-Q).

I spoke with Destiny Media's CFO Fred Vandenberg a few minutes ago, and asked him about the company's efforts to control costs, the "going concern" language in its filings, and the previous predictions of "imminent" profits. Vandenberg said that certain steps were taken to reduce costs in Q1, the effects of which wouldn't be felt until Q2 (e.g., a small headcount reduction). He also noted that the "going concern" language was put in the filings to comply with regulations as per the company's auditors.

In layman's terms he seemed confident in the company's viability though. He noted that the cash used in the company's operations in Q1 -- $13,008 -- was the sort of deficit that, in a pinch, could be handled by, for example, him deferring salary for a few months rather than requiring the company to seek additional capital. He also noted the company's sequentially improved working capital position. Regarding the previous predictions of imminent profitability, Vandenberg said he had never made them, and deferred to Destiny's CEO, Steve Vestergaard, suggesting I ask him about it. I was unable to reach Vestergaard today, but I will post an update if and when I'm able to follow up with him about this.

The image above, comes from Destiny Media's website.

11 comments:

Albert said...

I wonder what the issue is with regard to the fees per download. Obviously, there is something wrong with Edelheit's estimate of how DSNY's business works. Perhaps it's the fact that, IIRC, one of the large North American record companies has still not signed an exclusive deal with DSNY. Perhaps instead the fee per download is not nearly what he estimated, or that the number of transactions isn't nearly as high as he predicted.

I appreciate the fact that the company has cut costs significantly, but they sure seem a very long way from making all that much money. I think their quarterly revenue only increased by like $65,000. That doesn't seem like much. Maybe you could ask whether the CFO has seen a downturn in the number of sends as the financial crisis has deepened. Alternately, does he believe that there is significant room for further penetration into the US market. Maybe a more basic question is whether he knows if the companies with which DSNY has an exclusive agreement distribute ALL of their music to stations via the PlayMPE system, or whether they also still use overnight mail for example.

I'm a little concerned that the top line number is just not going to grow all that fast, or all that much period (unfortunately).

DaveinHackensack said...

I'll try to get a hold of the CEO and run those questions by him, Albert.

Albert said...

While you're at it, ask him if he could go on over to PhotoChannel's HQ and at least show those guys how to start cutting expenses...

DaveinHackensack said...

Heh, funny.

Waniel Dahl said...

Wow. Almost breaking even.

What a blue chip!

Albert said...

You know what else I'd like to know about, but won't come from talking to the CEO, is why Edelheit's estimates for gross margin is SOOOO far off. He was talking about having a company be on a run rate of about 10-11 million dollars a year in revenues, with 90% margins. Yup, 90%. I just can't see how they're going to keep growing the top line and still reduce their expenses.

DaveinHackensack said...

Albert,

I'm not sure about Edelheit's revenue estimates, but it's clear that, at the very least, he overestimated how long it would take for the company to become profitable. I think he expected it to be profitable last summer, if memory serves.

Regarding gross margins though, once enough (essentially all?) music companies are on board, I could see DSNY having extremely high margins. What's their cost for providing the Play MPE service at that point? Electricity for the servers, maybe some phone bills for customer service? It's like running an information-based website business at that point. Getting to that point: flying out to Australia and taking music execs out to lunch to sell them on the idea -- that sort of thing is expensive.

Dr. Paul Price said...

SLM Corp.: The Best Stock in America Today?
Posted by: stockdocx99 (IP Logged)
Date: November 28, 2007 09:17PM


SLM Corp. [NYSE: $37.78] As of 4 PM Nov. 28, 2007

I admit it... I'm in love with Sallie Mae. Please don't tell my wife.
Sallie Mae is my absolute #1 best buy right now for a variety of reasons. Why?

1) Student Loans are one of the most predictable growth businesses in America. In 1997 SLM's loans/share were $83.85 versus an estimated $400+ /share this year- a 377% increase in 10 years. Value Line predicts 20% compounded growth in student loans/share over the next 3 - 5 years as well.

2) Impeccable balance sheet. Value Line gives SLM an A+ financial strength rating and their highest [#1] safety ranking.

3) Very high EPS visibility. SLM shares get a 95th percentile ranking from Value Line for earnings predictability. The median estimate for 2008 is $3.20 and Value Line sees $4.50/ share EPS over the next 3 - 5 years.

4) Historically cheap valuation parameters. At today's price of $37.78 SLM trades for under 11.9X the 2008 concensus estimate of $3.20 /share in core earnings. This compares with a 10-year median P/E of 19X and represents the lowest average multiple since 1994. The absolute share price is right near 4-year lows while the revenues, book value and earnings should all hit all-time records in the year ahead.

5) Special Situation upside that is HUGE. Bank of America, JP Morgan Chase and J.C. Flowers [a private equity group] signed a deal to take SLM private at $60 /share earlier this year before the credit crunch. The P-E group is trying to weasel out of the deal now that junk bond yields have risen. They offered a compromise $50 cash plus warrants estimated to be worth $2 - 8 /SLM share but SLM directors have taken them to court to enforce the original terms - a $60 buyout or a $900 MM break-up fee. The case is fast tracked in Delaware courts and may be heard before year end.

I believe SLM's case has strong merit and that they will either get the buyout, the $0.9 Billion fee or perhaps the parties will settle on the courthouse steps. Thus, holders of Sallie Mae today could see returns of better than 50% within months if things go well.

What if they lose in court? At a normal 19 multiple of next year's EPS projections SLM shares will be $60.80 on straight fundamentals. In fact, these shares hit $54.40, $56.50, $58.30 and $58 at their peaks in each year from 2004 - 2007 without any deals [and with lower sales and earnings than currently]. When the buy-out was announced at $60 last Spring the buyers obviously expected SLM would be worth a lot more than that or they wouldn't have been bidding.

6) A good yield? Probably. As part of the buy-out agreement SLM suspended their $0.25 quarter dividend. Previous to the deal they had paid continously for years and had raised the payout every year. It was $0.17 annually in 1997 and was at a $1.00 rate this year pre-deal - a six-fold increase in 10 years. If the deal falls through they will almost certainly reinstate the dividend at even higher than the old quarterly rate. Even the old rate would equal a 2.65% yield, by far the best yield ever for SLM shares. If they receive the $900 million break-up fee they may also pay out a special one-time distribution to their shareholders.

Conclusion:

Sallie Mae is a great growth company at a non-growth valuation. It has a pristine balance sheet and a chance at a quick payoff from their signed sales agreement. With or without a sale of the whole company these shares are likely to see $55 - 65 within 12 - 18 months - a gain of 45% - 72% [not counting any reinstituted dividend payments]. Risk looks to be extremely low from near a 4 - year absolute low price quote.

This is a financial company that has absolutely nothing to do with sub-prime paper, mortgages or housing, yet it is trading like banks and mortgage firms with lots of risk.

Think 'the market' is telling you a deal won't get done? Remember Dow Jones. Right before the DJ - Murdock deal was accepted at $60 cash you could have bought DJ at $47 - 48 as many thought the family controlled shares wouldn't sell. Unlike DJ, SLM has tremendous value even without a buyout, yet like DJ you could see an immediate substantial return with a court victory that leads to the sale at $60 [or a negotiated $54 - 58] or the receipt of the agreed upon break-up fee.

JK said...

Well, maybe next quarter. They're close.

Waniel Dahl said...

What the critics don't understand is that I sold every one of my dogs right at the top. So this postings about my licentious affair with SLM corp without my wife's knowledge is all beloney.

What I don't mention in my postings is when I sell my dogs. Believe me I didn't lose any money of all of those putrid picks last year. in fact I made money on a lot of them when I averaged down and they did a dead cat bounce and I sold them for a profit. ( Go figure!) - used a little bit of 14 day RSI and MACD to time them though - it will be a blasphemy to mention that at GF)

Anyway, DSNY is an issue with uncertain earnings which will most probably go to the tubes like our Viet Nam (They are infact 2 separate words) friend's pick.

Stockdoc said...

Someone is again posting as me (Cannot figure out why the whole world is obsessed with a poor dental hygienist)

Grrrr..I am going to kill this person...

errrr...where are my glasses and dentures?