Destiny Media update

I mentioned last month that I had sold out of Destiny Media Technologies (OTC BB: DSNY.OB). At the time, I noted,

I still like the company's story, and I expect it will post relatively impressive numbers in its upcoming fiscal Q1 (seasonally, its strongest quarter), but I got the sense from the reaction of some Destiny longs to the guidance the company issued back in October that some of them had overly optimistic ideas about the company's growth potential next year. Some seemed to assume that the sequential growth the company had predicted from Q4 to Q1 would continue at the same clip going forward. They also seemed to ignore that Destiny's fiscal Q2 is its weakest seasonally.

I'd like to see what that Q2 looks like. Depending on those results, I may buy back into this if the price looks attractive relative to my sense of the company's forward earnings prospects.

All still true today, though I should add (and probably should have added then) that, in the course of several conversations with him, Destiny Media's CFO Fred Vandenberg struck me a straight shooter and a good guy. Destiny issued this release after midnight on Thursday, Destiny Media Q1 Record Revenues Jump 89%: Third Consecutive Profitable Quarter Shows Over 39% Increase in Operating Income.

The stock had a small bump on Thursday, then dropped 15% yesterday, to 44 cents per share, a penny below the price at which I sold it last month. Perhaps other shareholders are having the same valuation concerns I had last month. With six-tenths of a penny in earnings per share in its seasonally-strongest quarter, I remain skeptical of Aaron Edelheit's estimate of 5 cents in fiscal 2010 earnings. Still interested in seeing what its Q2 looks like.

Stupid Cheap?

That's how Aaron Edelheit ("issambres839") describes shares of Destiny Media Technologies (OTC BB: DSNY.OB) in his latest comment on the Value Investors Club:

I estimate that Destiny can earn 5 cents a share in fiscal 2010 (ending August 31st), on at close to 100% revenue growth. The revenue growth will be driven by more music being sent digitally and an increase in their international business. Destiny only trades at around 8 times my earnings estimate, despite tremendous growth and operating margins around 50%. Operating margins in the last quarter were already 34% and trending higher. That is why the company announced a buyback as well. I expect Destiny to continue to announce great results and the share price to keep bouncing higher.

This stock is stupid cheap.

Attempting to value a company based in its future earnings makes sense, particularly for little-followed micro caps such as DSNY (or AYSI¹, for that matter). If you think you can see future earnings that the market hasn't priced into the stock yet, you can profit by buying the stock now, before those earnings materialize and the market values the stock accordingly. As Niels Bohr said though, "Prediction is very difficult, especially if it's about the future.". For an example of that, let's look back at what Edelheit wrote about DSNY at the beginning of 2008:

Trading at seven times my fiscal 2009 (ends August 31st) earnings estimate, Destiny Media with its 90% plus gross margins and recurring revenue stream is a undiscovered gem for both technology and value investors alike.

[...]

The company currently has a market cap of around $30 million. Assuming my revenue estimate of $11 million is correct, the company will earn $0.10 in pre-tax profits in fiscal 2009. The company should probably be valued at a multiple of 15 to 20 times that number. That would give you a valuation of $1.50 to $2 per share.

Using a price to sales measure on $11 million, 10 times price to sales for a 90% gross margin, highly recurring business seems fair, giving the company a value of $2.11 per share.

[...]

If the company can continue to grow to my revenue estimate of $16 million in 2010, it will earn $0.20 per share, making $4 per share an easy target in 18 months.

[...]

Whether the stock goes to $2 or $4 is really a moot point with the stock at $0.68 per share.

So, two years ago, Edelheit predicted that DSNY would earn 10 cents a share in its fiscal 2009 (and 20 cents in its fiscal 2010). It ended up earning 1 cent per share, in its fiscal 2009, most of which was the result of a refund of previously paid taxes. I don't fault Edelheit for getting those predictions wrong -- like Niels Bohr said, predictions about the future are tough. But I don't see how confident he can be in his current earnings prediction. Edelheit seems unchastened by his 2009 predictions being off by an order of magnitude. I tried to ask him about this on his blog, but for some reason my comment didn't post.

To reiterate a point I've made here before about Destiny Media Technologies, I like the company's story, and it has been moving in the right direction recently by becoming profitable, growing its revenue and earnings, etc. My concern is its price relative to its future earnings.

¹I could certainly be off with AYSI, but the math seems simpler and clearer to me in its case. During its best quarter it earned 6.8 cents per share. That was with one mill running at full capacity. Now it has two mills running at full capacity, spurred in part by a long-term supply deal with one of the largest mining companies in the world. Let's say the company earns 10 cents per quarter next year with two mills running at full blast. Annualize that and give it a 10x multiple and you have a $4 target (that doesn't take into account the other two mills the company says it plans to build, its recent deal in Indonesia, other possible business, etc.). An exogenous event (e.g., China's economy falling off a cliff) could nix that scenario, but in the event that doesn't happen, I doubt my low-end prediction of 40 cents in 2010 earnings will be off by a factor of ten. We'll see though.

A neglected asset class?

In an exchange with Aaron Edelheit on his blog earlier this week (in the comment thread of this post of his, "Why are you sitting in cash?"), I pointed out that, even if one were bearish on the U.S. dollar, it might not make sense to diversify out of it now if one believes that the stock market is overvalued. That's because, if history is a guide, the dollar will rally (at least temporarily) when the stock market corrects. At that point, after the dollar rally, it might make more sense to diversify into non dollar-denominated assets.

Richard Bernstein made a similar point in his column in yesterday's Financial Times ("Lessons of investing are ignored"), noting the negative correlation of U.S. Treasuries to stocks and other asset classes:

Investors should be trying to emulate their Chinese and Japanese overweight positions in Treasuries. Instead, Wall Street is striving to get the Chinese and Japanese to “diversify” like everyone else. In my opinion, the Chinese and Japanese should ignore the advice and stick with their Treasuries.

[...]

Treasuries are today’s “alternative” asset class. Treasuries’ returns continue to be negatively correlated to equities, yet they remain widely underowned because investors consider them overly risky.

Update: Yahoo! Finance's current headline: "Stocks fall for 3rd day as dollar strengthens".

Questions for the CFO of Destiny Media Technologies?

Destiny Media Technologies (OTC BB: DSNY.OB) is going to be releasing its earnings tomorrow. The company's CFO, Fred Vandenberg, was kind enough to offer to speak with afterwords. I plan to call him after I've had a chance to read over the filing. If you have any questions you'd like me to ask him, feel free to leave them in the comment thread below.

Quick Destiny Media Update

After noticing that shares of Destiny Media Technologies (OTC BB: DSNY.OB) dropped 23% today on about 10x average volume, I put in a quick call to Destiny's CFO, Fred Vandenberg. He didn't have any explanation for the move, though he suspected short sellers. He also seemed to be in a good mood while mentioning that Destiny would be releasing its Q3 numbers tomorrow and updating its investor site, DSNY.com.

Recall from my conversation with Vandenberg after Destiny released its Q2 numbers, that Vandenberg had predicted that Destiny would turn a profit in its Q3. Destiny's CEO Steve Vestergaard had falsely predicted profitability more than once in the past, but this was the first time that Vandenberg, the company's CFO, had done so. Vandenberg has tended to be conservative, as befits an accountant, in his comments to me.

Edelheit versus Buster on PNDMF

Reader N.L. draws my attention to an exchange between Aaron Edelheit ("issambres839") and "buster736" on PNI Digital Media (formerly PhotoChannel; OTCBB: PNDMF.OB) on the Value Investors Club. Below are a few excerpts from this exchange.

Edelheit/issambres839:

I continue to view this as a mispriced growth stock. I can make a credible case that if they continue to grow organically, get Wal-Mart and some of their existing initiatives start to work, in 2011, this stock could easily earn $1 per share. I'm guessing the stock would be close to $15 or higher. The risk/reward in this situation seems very attractive.

P.S. 2010 numbers could be low.

buster736:

With all due respect, In your original write up about PNI in 2007 you had the company earning 1.09 in 2009. The company is going to be lucky to show a profit this year. Now you are saying that you believe they will do $1 in 2011. The company has gotten both Sam's club and costco as you originally postulated, yet earnings have been no where close to what you estimated in the past and your estimates have been pushed out at least two years. What has differed from your model to what the company has actually done (why haven't the earnings been there?) Have transactions been lighter? have you wat to low on your costs? What gives you confidence that this model even scales and you estiamtes will be anywhere close this time?

Edelheit:

You are absolutely correct that my estimates have been wide off the mark from my original report. A couple of things happened that ruined that estimate:

1)They bought a money losing operation in Pixology that they thought they could easily turn around. That was wrong, but it helped get them Costco.

2)They underestimated what it would take to get Costco up and running.

3)CVS uptake has been very slow and most uptake of online uploading versus walking into the store has not met my expectations.

4)The economy fell off a cliff last year and their core biz which was growing organically at 50% plus is now 15-20%.

Those are the main reasons, also my estimating of earnings was a bit high. I don't think looking back I did a good job estimating how expenses would ramp.

That said, I have been saying pretty consistently that I expect $0.25 a share in cash EPS for 2009. This has not changed for some time now. Remember that this excludes amortization.

Also, when I talk about over $1 a share in eps for 2011 or in the future, I try now to be much more cautious, and use words like "could." I mention that number only in the context of winning Wal-Mart.

I encourage you to do your own research and come up with your own estimates. I have made plenty of mistakes in the past year, that's for sure, but I think that I'm trying to my best to estimate a fast growing company that has gone through some growing pains.

I think there is still a tremendous amount of opportunity and the company is now profitable, EBITDA positive and cash flow positive and is growing despite one of the worst economies in decades.

I hope that helps.

Bright Lights, Peak Oil

Hat tip to Aaron Edelheit (with a second assist to Paul Kedrosky) for this article by Chris Turner in the Walrus magazine (which looks like a Canadian version of the Atlantic magazine before the Atlantic's recent, garish redesign): "An Inconvenient Talk: Dave Hughes's guide to the end of the fossil fuel age".

From this article, Dave Hughes, a geologist/doomsayer, appears to be Canada's answer to Matt Simmons. For some reason (perhaps in tribute to the upcoming 25^th anniversary of Jay McInerney's novel Bright Lights, Big City) Chris Turner refers to himself in this article in the second person. Here's a taste:

Dave had to start out fifteen minutes earlier than the requisite ungodly hour so he could pick you up at your house. So you wouldn’t drive yourself. Save a few hydrocarbons, he’d joked. He’s a coal man, a geologist, and he always refers to the holy trinity of fossil fuels whose flames have stoked the past 200 years of industrial growth — coal, natural gas, and especially oil — in that same semi-technical way: hydrocarbons. Dave Hughes has a lot to say about hydrocarbons, mainly how there’s no possible way to keep running the engine of a modern global economy for much longer at the pace we’re burning them. Which is why you felt compelled to join him in the black chill of this late-autumn morning. Because that seems like a pretty big deal.

The uninspired photo above of Dave Hughes (that's the best backdrop they could come up with in Calgary and its environs?) accompanies the article and is credited to "Wilkosz + Way".

Edelheit versus Cramer

Aaron Edelheit returns to blogging after a three week rest with a broadside against Jim Cramer, "Jim Cramer is Full of It". Excerpt:

Jim Cramer is a liar, a whore of financial community, and a person who really pretends to tell it like it is, but actually misleads people as much as he can.

An excerpt of my response:

[Y]ou have a much smaller audience on the VIC, but haven’t you inaccurately hyped a stock or two there, promising that it’s earnings are about to “explode”? And remember, Cramer was preaching caution back when the Dow was around 11,000, telling investors to sell any stocks they couldn’t let ride for 5 years — and you attacked him for it at the time.

Perhaps a little more introspection is in order.

More at Aaron's blog.

Edelheit Agonistes

From the comment thread last month on his pick Hemisphere GPS (TSX: HEM.TO) on the Value Investors Club:

issambres839 (Aaron Edelheit):

How does a company that has no debt go from having a $250 million market cap to a $15 million market cap excluding net working capital?

While clearly $5 per share last May was too high in hindsight, is US$0.75 a little ridiculous?

Judging from the price action since then, apparently $0.75 was a "little ridiculous", but this one of the responses Edelheit got last month to his question:

oogum858:

Hi Issambres. . .I don't know anything about this company, but to your question of:

"How does a company that has no debt go from having a $250 million market cap to a $15 million market cap excluding net working capital?"

Obviously one potential answer is "Because the company is worth $15mm"

Given the desperate nature of your question I wanted to at least write down the most obvious response. I do this not to be a jerk, but because you seem to be insanely frustrated and at the very least it's good to try to think clearly about such things. Mr. Market revalues companies all the time and it can be really exasperating when you think he/it/whatever is totally wrong. But you have to make allowances for the divergent opinion. I'm sure you're thinking about this question all the time, so sorry if this seems condescending. . but i dunno... how else could an uninformed VIC member answer your question?

Some other interesting comments there, and some thoughtful responses from Edelheit. Worth reading.

PhotoChannel and Facebook

Reader N.L. shared with me the following correspondence he had with PhotoChannel (OTC BB: PNWIF.OB) today.

N.L.'s e-mail to PhotoChannel:

Is it fair to say that Photochannel is no longer in the running for facebook as a company called imagekind seems to be working with them? Any other social networking sites or flickr on the radar screen?

PhotoChannel's response to N.L.:

Thank you for your interest.

While I can’t speak definitively about Imagekind and their relationship with Facebook, it is of no mounting concern for us at PNI.

It seems that they have created a fan-page on Facebook. Artists who sell their art via Imagekind, and are also users of Facebook, can become fans of the fan page, and thereby attract new fans, with the hopes of selling more art via Imagekind. This type of marketing is a common strategy of both big and small companies, including some of PNI’s key customers. Wal-Mart Canada, for example, has a photo gift presence on Facebook already which can be used as an on ramp to further sales.

As a company, we are pursuing corporate level partnerships with leading retailers and sites, including Facebook and Flickr, the two you mentioned. In terms of marketing, we also guide and support our existing partners in devising and implementing messaging and strategies that will drive sales through the PNI platform.

I hope that answers your question.

Simon Cairns

PNI Digital Media

PhotoChannel Update

Last month, PhotoChannel (OTC BB: PNWIF.OB) announced, among other news, that Robert Chisholm had resigned as CFO, and was replaced by Simon Bodymore, formerly, the Company's VP of Finance. At the time, the company announced that Mr. Chisholm had been retained as a consultant to help with the transition, and that Mr. Chisholm was also considering "other long-term opportunities with the Company". Yesterday, the company announced that Mr. Chisholm had joined the company's board of directors.

Reader N.L. asked me to speculate on this. As I mentioned to him via e-mail, I didn't have any speculation to offer, but I do have a few clarifications after speaking with David Bremner in PhotoChannel's investor relations department today. According to Mr. Bremner:

- The plan had long been for Mr. Bodymore to replace Mr. Chisholm at CFO. Initially, the idea had been to do so at the end of the company's fiscal year, last fall, but when the stock market went into (to use the technical investor relations term) the shitter, the company decided to hold off on the change until the annual meeting last month.

- The company had also long planned to add Mr. Chisholm to the board of directors. It couldn't do so last month, because Mr. Chisholm first needed to get approval from his current business partners in an unrelated venture.

- None of the seven board members announced last month has resigned; instead, the company has expanded the number of directors to eight to accommodate Mr. Chisholm.

As always, readers are free to add their own thoughts in the comments below.

Update: Reader N.L. says to expect a business update from PhotoChannel tomorrow.

A Conversation with the CFO of Destiny Media

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.

Revisiting Liberals and Tax Paying

In a post last month we asked, "Are Liberals Less Inclined to Pay Their Taxes". In a post last week, the blogger Audacious Epigone drew on data from the General Social Survey (GSS) to address this question, "Liberals and tax cheating" (Hat tip: Aaron Edelheit). Excerpt:

With the embarrassing number of hopeful Obama appointments running into tax cheating problems (the latest being Ron Kirk), it's natural to wonder if evasion by high profile leftists is illustrative of a real world trend, or just a string of unfortunate anecdotes.

The GSS provides some relief for that wonder. It provides the results for 2,418 people queried on whether or not cheating on taxes is wrong, by political orientation. The first graphic from the GSS shows the distribution of responses. The second graph shows the mean tax compliance score, computed by designating "not wrong" as 1, "a bit wrong" as 2, "wrong" as 3, and "seriously wrong" as 4, and then averaging the responses for each of the seven categories of political orientation (click for higher resolution).

Politics	Compliance
Strong Lib	2.70
Liberal	3.05
Weak Lib	3.00
Moderate	3.07
Weak Con	3.14
Conservative	3.35
Strong Con	3.27

The standard deviation for the dataset is .76, so the difference between self-described conservatives and extreme liberals is nearly one full SD. Amalgamating the responses into three categories yields one-third a SD between liberals and conservatives:

Politics	Compliance
Liberal	3.00
Moderate	3.07
Conservative	3.25

Liberals do not consider cheating on taxes to be as morally problematic as conservatives do. This presents an obvious moral quandary of its own, as, putatively less surprisingly, liberals are more likely than conservatives are to favor greater amounts of taxation and wealth redistribution.

Matt Simmons on the Outlook for Oil and Natural Gas Prices

Hat tip to Aaron Edelheit for this PDF of Matt Simmons's PowerPoint presentation to the Commercial Club of Boston last month: "The Oil and Gas System is Sick". I hope it won't ruin any surprise if I tell you that Simmons, the author of the book Twilight in the Desert, thinks oil and natural gas prices are heading much higher. I happen to agree, but I'd feel surer if Simmons offered a compelling explanation for the massive correction in oil and natural gas prices last fall. On p.33 of the PDF he lists three common explanations,

–Speculators left the game that created spike
–Unraveling economy killed off demand
–Gluts are now endemic:

~Tank farms brimming with oil
~Super-tankers now floating oil gluts

■But, none of these “facts” were true.
■Only clear fact: “Crude oil fell 74% in 12 weeks” (September 22nd–December 22nd).

And then on P.34 Simmons offers this,

Are We Missing “The Black Swan?”

■Credit default swap index soared as crude oil plunged.
■Credit freeze began when oil collapsed.
■This had to hurt traders’ ability to own oil contracts.
■If any traders ever had to liquidate contracts, this would cause oil prices to temporarily fall.
■Glencore(aka Marc Rich & Co AG) Energy Trading credit default swaps illustrate the squeeze.

Which seems to contradict his point on the previous slide that the collapse wasn't the result of speculators leaving the game. Perhaps Simmons explicated this during a Q&A.

The image above, of the cover of Simmons's book, comes from Barnes & Noble's website.

PhotoChannel Turns a Profit

From the company's press release ("PhotoChannel Reports Profitable First Quarter"):

FIRST QUARTER FISCAL 2009 HIGHLIGHTS

- Net profit of $940,644 versus a loss of $1,082,600 for
the comparable period of fiscal 2008

- Record revenues of $7.2 million, up 67% year-over-year

- Transactional revenues of $5.8 million, up 91% year-over-year

- Non-GAAP adjusted EBITDA(1) of $2.8 million, compared
to an adjusted EBITDA loss of $117,483 in the first quarter
of 2008 (adjusted EBITDA defined as net profit plus amortization
and stock-based compensation expense)

- Non-GAAP adjusted EBITDA representing 39% of net-revenues
for the quarter

- Earnings per share (EPS) of $0.03 versus a loss per share
of $0.03 for the comparable period of fiscal 2008

- Non-GAAP adjusted Earnings per share (EPS)(1) of $0.08
versus $0.00 for the comparable period of fiscal 2008

- At December 31, 2008 the Company had approximately $3.1
million cash on its balance sheet

ORDER METRICS

- Over 4.9 million orders were transacted in the first quarter
of fiscal 2009

- Average daily orders of approximately 53,000 versus 15,000
for the same period of fiscal 2008, a 240% increase year-over-year

- Peak day saw over 134,000 orders placed and over 5.2 million
images pass through the PNI Platform

PhotoChannel Update

On Wednesday, PhotoChannel (OTC BB: PNWIF.OB) issued a somewhat Delphic press release ("PhotoChannel Announces the Launch of the PNI Open Access Project"). In it the company announced,

The PNI Open Access Project has been created for non-PNI customers to be able to take advantage of and utilize the power of the PNI Platform's "Routing Tier" that currently delivers millions of images and orders from PNI hosted websites to its customer's stores and production facilities.

There was nothing in the press release about revenue projections related to this project, or the reactions of PhotoChannel's current clients to it, so reader N.L. did some legwork on this and was kind enough to share what he found with us.

The first time N.L. contacted the company today, investor relations forwarded him a morning research note from Merriman Curhan Ford, which offered no specific insights into the Open Access Project (beyond some general speculation about the size of the potential market opportunity, e.g., the number of Facebook users), but did offer some general guidance on PhotoChannel. From the research note,

We expect strong December quarter results next week, where we are projecting revenue growth of 99% coupled with the company turning profitable with $0.05 in EPS, as well as a sequential more than doubling of EBITDA (going to $3.7M from $1.7M in 4Q08). In our opinion this will be the quarter that we (and everyone else) have been waiting for – the emergence of PhotoChannel into profitable territory. Not only did PhotoChannel generate same-store sales of approximately 40% in the December quarter, but the company is also now experience a solid revenue ramp with its newest retail partners, Costco USA and Sam’s Club.

·Reiterating Buy. In our opinion, PhotoChannel is poised to become a leading provider to the digital photofinishing market by offering a fully integrated solution to retailers — having already locked up most of the top photofinishing retailers in the U.S., Canada and the U.K. – with global digital print revenues estimated to eclipse $100B by 2010. We continue to believe using a 15-20x P/E multiple is conservative and achievable—yielding appreciation potential to the $4.25-5.50 range on our FY10 EPS estimate of $0.28.

Expecting a double-digit multiple on any stock in this secular bear market seems a tad too optimistic to me, but it would be encouraging to see PhotoChannel become profitable and continue growing revenues.

N.L. also checked Issambres839/Aaron Edelheit's comment on Value Investors Club, but Edelheit had no specific information either and instead offered similar speculation as the Merriman analyst. After contacting PhotoChannel directly again, N.L. got this vague response:

This is just an "opportunity" for PNI. The company will go into more detail on the Feb 25 conference call.

N.L. noted in an e-mail to me that the recent positive performance of PhotoChannel's stock has been in spite of the overall market weakness (e.g., closing up about 9% today; see the chart above).

PhotoChannel in Forbes

Earlier this week, Forbes asked Stephen Roseman, the founder of hedge fund Thesis Capital, for his small cap picks ("Small Stocks Worth Buying"). One of the three stocks Roseman mentioned was PhotoChannel:

Finally, Roseman likes Photochannel Network (otcbb: PHCHF.OB^[sic] - news - people ), a stock that investors might be wary of because its $45 million market cap suggests a lack of liquidity though its 54,000 average share volume suggests that there is a market in the stock.

"As the world is still migrating to digital photography, this is very much a growth business trading at a 'value' valuation," Roseman says. "They are benefiting from the recession-resistant nature of the industry (same-store sales were up 28% in the September quarter and 40% in the December quarter), and their gross margins are getting better as they do more volume--they have gone from 50% several quarters ago to over 70% in the December quarter. While they have an adequate balance sheet, they are growing their revenues and cash flow rapidly and have a bright future with strong technological tailwinds. There are only a few analyst estimates out there because the company isn't well-covered, but by my estimates, it's trading at a single-digit multiple, while growing in excess of 100% per year."

The image above comes from the Forbes article.

^[Sic]Forbes includes the old, invalid symbol for PhotoChannel. The current, correct one is PNWIF.OB. Perhaps because Forbes didn't use the correct symbol, this article didn't come up under "Headlines" on Yahoo! Finance.

PhotoChannel Update

Reader Norman L. asks via e-mail about my thoughts on this week's release by another Edelheit pick, PhotoChannel (OTCBB: PNWIF.OB). My first thought is that it would have been helpful if the company broke out its Q4 results, so we could see if management's (and Edelheit's) prediction that Q4 would be EBITDA-positive was correct (On the Value Investors Club, Edelheit estimated Q4 EBITDA of $0.10 to $0.12 per share.). On PhotoChannel's conference call, management reiterated its prediction of positive EBITDA in Q4 and positive EPS in Q1 2009 though.

Aside from that, my thoughts:

- 127% year-over-year increase in revenues is encouraging.

- 107% year-over-year increase in expenses wasn't encouraging, though my concern is ameliorated somewhat by a) most (~75%) of these being non-cash expenses; b) management's claims that much of the cash expenses represented start-up, non-ongoing, costs related to new clients.

- $3 million in cash and no debt is encouraging.

- Let's see how Q4 EBITDA compares with Edelheit's estimate, and let's see if the company does finally turn a profit in Q1.

The banner image above is from PhotoChannel's website.

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.

Destiny Media Update 1.09.09

In a post last summer ("A Conversation with the CFO of Destiny Media Technologies (DSNY.OB)") I mentioned that Destiny Media CFO Fred Vandenberg reiterated his prediction that his company would be profitable in its fiscal 1Q09 (the quarter that ended at the end of November). I called Vandenberg Friday to follow up and he said they would be releasing info about the quarter this week, so we should see soon if his prediction was correct.