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.

Destiny Media Technologies: Still Losing Money

Destiny Media Technologies (OTC BB: DSNY.OB) filed its 10-Q announced its fiscal second quarter (November 1, 2008 through February 28, 2009) results today: a net loss of $97,882 (or less than one cent per share) on revenues of $467,488. These revenues represent a 30% increase over the same period last year, but a sequential drop of 16% from Destiny Media's fiscal first quarter. In today's press release, Destiny's CEO, Steve Vestergaard said,

"We're expecting our rapid revenue growth to continue as North American label usage continues to expand and new agreements are signed outside of North America. The company expects to show an operating profit based on Q3 revenues which are projected to increase at least 30% over Q2."

In response to this release, reader Albert left the following comment on the previous post:

I looked back at your posts talking about DSNY in light of today's earnings announcement. What management has told you seem clearly not to have materialized in any meaningful way. They are not profitable. Were not in the first quarter as they claimed they would be, are again not profitable in the second quarter. I am beginning to have real doubts about whether they will be any time soon.

I would also like to look at how their clipstream revenue has improved, if at all. Back last july, you said the CFO told you that clipstream revenue would take a big jump in Q1 I believe. If I have time, I would like to see how that has played out.

Any thoughts.

I spoke to Destiny CFO Fred Vandenberg briefly this evening; he didn't have time to talk but said he'd call me back in the morning, at which time I plan to ask him some questions of my own. But here are my initial thoughts response to Albert's comment. In my conversations with him, Fred Vandenberg has generally been conservative, but Destiny Media's CEO, Steve Vestergaard, has clearly over-promised and under-delivered with respect to his predictions of profitability. For example, in this press release on July 14^th, 2008, he said,

"We've built a foundation where we can confidently say we expect to be profitable by Q1 (Sept. - Nov.)

And in this press release on September 19^th, 2008, he said,

"The company is not seeking external financing and is looking forward to imminent profitability.”

As Albert noted, Destiny hasn't been profitable in either its first or second quarters this fiscal year. In addition, in contrast to Vestergaard's statement last September, the company notes in today's 10-Q that,

The Company will need to raise additional funds to complete its business plan due to its significant working capital deficiency.

Steve Vestergaard has at least been eating some of his own dog food though: Over the last couple of years he has been buying stock in DSNY, most of the time at prices well above current prices.

Albert is also correct in noting that Destiny Media's Clipstream revenues haven't improved as predicted, and that's one of the questions I plan to ask Fred Vandenberg tomorrow (if anyone has other questions they would like me to ask, please feel free to leave them in the comment thread, and I'll try to get them answered if I get them in time). I've been focusing more on the company's Play MPE revenues though. I plan to ask Vandenberg about this as well tomorrow, but, offhand, it seems like the revenues ought to be higher from this.

If you look at the Play MPE Stats, there were about 160,000 "sends" in the last 7 days. That's in the ballpark of the number I saw when I checked this a few weeks ago, about 170,000. A quick back-of-the-envelope bit of arithmetic makes me think that either revenues ought to be higher going forward or that a significant percentage of these sends are internal sends that don't generate revenue for Destiny. Let's say sends average 150,000 per week going forward, so 150,000 x 12 weeks = 1,800,000. Let's say that these sends generate revenue at the lower of the two price points Vandenberg mentioned in our conversation last month ("Destiny Media Update"), $0.50. Assuming no internal sends, that would be $900k in quarterly revenue. Vandenberg did acknowledge in our previous conversation that some of these sends were internal, and he did decline to estimate an average amount revenue per send, but maybe I can get some more clarity on this tomorrow.

Edeleheit Updates Again on PhotoChannel

As Albert noted in the previous post's comment thread, Edelheit offered an update on PhotoChannel (OTCBB: PNWIF.OB). PhotoChannel's stock has gotten hammered recently (along with most other stocks, of course), but Edelheit is still bullish on the company's fundamentals. From the Value Investors Club:

They actually just presented at the Merriman conference and had a lot of positive things to say including:

1)They have launched Kodak China and Kmart Australia

2)They are working on a Facebook photo application

3)They haven`t seen any slowdown in orders

4)There is an opportunity to get Kodak India, which has 14,000 locations

Clearly there is a large seller out there and it is pressuring the stock, but in my opinion this has nothing to do with fundamentals.

[...]

there are many small caps and many Canadian small caps that are getting decimated. Photochannel is not alone.

Consider this. I estimate that on an EBITDA basis, PNWIF will earn $0.10 per share in the December quarter alone.