Fred Vandenberg, the CFO of Destiny Media Technologies (OTC BB: DSNY.OB) returned my call today. Below are some notes from our conversation.
- Vandenberg is confident that the company's revenues will be 30% greater sequentially in its Q3 and that the company will be profitable in Q3. He said the 30% increase estimate was "conservative". Although the company's CEO, Steve Vestergaard, has incorrectly predicted profitability more than once in the past, this is the first time in my conversations with him that the CFO, Fred Vandenberg, has predicted profitability.
- Vandenberg expected expenses to remain inline next quarter.
- He believes Q4 and Q1 2010 will show continued sequential growth in revenues.
- He agrees with Vestergaard's point about seasonality in Play MPE revenues, noting that Destiny's fiscal Q1 (which straddles the calendar year-end) tends to be the busiest for Play MPE revenues, and its Q2 tends to be the weakest, with Q3 and Q4 closer to Q1 in revenue levels. Says seasonality may have been obscured in previous years by minimum charges.
- Deferred to Vestergaard on discussions of Clipstream, but essentially said that, as a small company, they've been focusing more on Play MPE, because that's where they can get imminent profitability.
- I asked about the note in the 10-Q about that the company will need to raise additional funds. Vandenberg suggested that this was there to satisfy the auditors and said that, since the company would be profitable next quarter, it wouldn't need external financing to keep the lights on, but might consider such financing down the road to pay for an expansion, if the money were available at a reasonable price.
- Said that the potential revenue for digital distribution for the company in North America was about $20 million, though Destiny may not approach that target as fast as they had hoped. Wouldn't get too specific here, but it seems that there may be a need to increase adoption within organizations that have signed agreements with Destiny1. Said potential revenue from digital distribution globally ex-North America was another $40 million, and revenue may grow faster internationally2.
- Clarified the issue of sends somewhat. Said Destiny has a sliding scale for sends greater than one song, e.g. "small bundles", "albums", and "boxed sets". I asked which of these 'packages' the average send consisted of and what the charge for that 'package' was. He said he'd try to get back to me with that info; I'll post it on this blog if he does. If, for example, the average 'package' was a small bundle, and Destiny charged $x per small bundle, we'd be better able to estimate Play MPE revenue from the send stats.
In the comment thread of the previous post on Destiny Media ("Destiny Media Technologies: Still Losing Money"), reader J.K. made a good argument for selling the stock:
Closed my position in DSNY today and bought CRY.
I love the DSNY concept.
But I'm not going to hold on to an overpromising, underperforming, money losing penny stock right now. If they become profitable in the near future I may re-enter. Somehow I doubt I'll miss any big move by doing this, should I want to buy back in, but who knows. Also, if the dollar collapses against the loonie due to high commodity prices and Fed dilution, as I anticipate, then it will be even harder for them to become profitable soon.
Based on my conversation with Vandenberg today though, I am inclined to hold DSNY for another quarter.
1I've had some experience with this sort of situation. Several years ago, when I worked as a business development director for a financial internet start-up, I signed firm-wide deals with a number of financial services firms to use my company's service. The first one of these deals I landed was with a firm where the home office had a lot of influence in what was done by its regional employees, and so there was fairly broad adoption. The second of these deals I closed was with a smaller firm in the San Francisco Bay area, where I had known one of the principals from a previous job. Months after closing that deal, not one of this company's hundred plus brokers had used our system. It didn't matter that the benefits of the system were apparent to me and to the firm's principals: the firm's brokers had different ideas. As important, perhaps, this smaller firm didn't have any staff assigned to promote our system internally. In contrast, the first company I signed up did have such a staff and made good use of it. The lesson here is that it's not enough to have a better mousetrap, and it's not even enough, necessarily, for senior executives of a client firm to agree that you have a better mousetrap: the firm's end-users need to be convinced too.
2By way of explanation, Vandenberg mentioned that the adoption of Play MPE is more top-down in some markets. In Sweden, for example, he said that the labels tended to set the standard and the radio stations fell in line.
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6 comments:
Thanks for the post and sharing the information. I assume he meant Q3 revenues would 30% over Q2 right, and not YOY? If that's the case, that's only about a 10% increase over the Q1 numbers, since Q2 was down 16% over Q1.
I just have a hard time seeing them increasing revenue all that quickly. This could be a multi-year process, not just a matter of another quarter.
If Q3 revs are 10% higher than Q1, with profitability of a penny per share, is that enough to keep you in it for a little while longer? I think I might need to see more announcements of deals signed with other major domestic or international labels.
Interesting...Curious Dave, what would you need to see for you to add to your position? Just profitablility?
PNWIF didn't have a huge rally when they became profitable, and I figure the little known DSNY will have a similar muted reaction, giving me time to get back in at that point. And if they continue to be unprofitable -a real risk, regardless of your convo- I can save myself the pain of this dipping further.
I heard a rumor on one of the boards that Destiny's competition Yangaroo (Canada) was recently issued a US patent which could shut Destiny down as it did in Canada with the Canadian patent. And Yangaroo has filed an infringement case agains Destiny in Canada. I sold my position until this and other legal issues (lawsuit) are clear up. This is far too speculative and the patent thing scares me. Took a loss but I'm not complaining. I guess due diligents is key with all micros.
Albert,
Yes, he meant Q3 revenues would be 30% over Q2, not YOY. According to my math, if expenses remain constant, the Q3 profit will be much less than a penny per share, since it will only be about $14k gross (Q2 revenues of $467,488 x 1.3 = $607,734; $607,734 - Q2 expenses of $593,037 = $14,697. You've got to divide that by ~51 million to get PPS).
One point to bear in mind though, is that a high margin business has some inherent leverage with respect to its profits, once it becomes profitable. Relatively small increases in revenues above the point of profitability will lead to much faster growth in profits.
J.K.,
Profitability would be enough to keep me holding, but probably not enough to get me to add more. A quarter of sequential growth after that would be more encouraging. Another factor, besides my convo with Vandenberg, that has kept me holding is the tiny volume in this stock. I don't have a big position in dollar terms, but it's enough shares that I'd have trouble selling them without moving the market.
Again, your reasoning makes sense. There's a good chance that the reaction would be muted if DSNY does turn a profit next quarter. It would still be a risky stock then (though less risky than it is now), and there still isn't much appetite for risk in this market. There may not be for some time. In the case of PNWIF though, I think it being better known might have worked against it. Perhaps most of the typical investors for PhotoChannel were already soured on the company by the time it finally turned a profit. There's definitely less patience for unprofitable companies these days, and for good reason: there are still plenty of deals among profitable companies.
Musicpop,
Welcome to Blogger! I see that I was the second person to check out your profile.
I mentioned to Destiny that they ought to update their statements on the Yangaroo dispute, and Vandenberg said he'd get an updated paragraph on that to me. I'll post that here when he does. In the meantime, I'll note that Destiny has not been "shut down" in Canada -- the company is doing business there -- and Destiny is the plaintiff in the two lawsuits pending relating to the dispute.
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