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.

Out of Destiny

Sold out of Destiny Media (OTC BB: DSNY.OB)@ $0.45 today. In the comment thread to the previous post, Paul Price brought up some points I had been thinking about for a while, and which I had discussed with other commenters here on previous occasions. The last two quarters have established Destiny as a viable company, and one that I think may be consistently profitable going forward. But do its future earnings justify its current price? I don't know. As I noted in the comment thread of the previous post, with an inherently high margin business, profits should grow nicely, but they are starting from a low base. At $0.305, having a feel for the stock, it looked cheap ahead of what I expected would be a positive report, so I increased my position by about 50%; at $0.46, I'm not so sure. I took advantage of the high volume today to exit at $0.45.

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.

Looking for a new post on Destiny Media?

Here you go.

Green Destiny

Destiny Media Year End Results Exceed Guidance. From that release:

Q4 Revenue up 77% Over Prior Year; EBITDA Increases to 266% of Prior Quarter

* Press Release
* Source: Destiny Media Technologies
* On 1:08 am EST, Monday November 30, 2009



* Companies: Destiny Media Technologies Inc

VANCOUVER, British Columbia, Nov. 30 /PRNewswire-FirstCall/ -- Destiny Media Technologies (OTC Bulletin Board: DSNY - News) is pleased to announce results for the quarter and year ended August 31, 2009.

Revenues of $2,560,447 were 62% higher than the prior year and quarterly revenues of $872,569 were 31% higher than the prior quarter. Net income was $610,831 for the company's first profitable year. Earnings before interest, taxes depreciation and amortization (EBITDA) grew to over $300,000 for the quarter ahead of management's preliminary results. The company has had quarter to quarter revenue improvement in eleven out of the twelve most recent quarters and quarter to quarter growth in Play MPE® access revenue in fifteen of the sixteen most recent quarters.

Destiny is also announcing that its board of directors has authorized a program to repurchase up to 1 million shares of the company's common stock at a maximum share purchase price of $0.80 per share. The repurchases will be at times and in amounts as the company deems appropriate and will be made through open market transactions.

[...]

Based on preliminary Q1 financial information, Destiny believes it will achieve first quarter fiscal 2010 revenue of at least $1,000,000, representing an increase of at least 14% over the previous quarter and 102% over Q1 fiscal 2008.

Recall that we added more DSNY.OB at $0.305 a couple of weeks ago, noting that we suspected it would trade higher after it released its earnings.

Added Destiny

Picked up some more Destiny Media (OTC BB: DSNY.OB) shares at $0.305 today. I suspect they will be trading higher after the company releases its earnings later this month. We'll see.

A Conversation with the CFO of Destiny Media Technologies

Below are notes from my conversation last night with Fred Vandenberg, Destiny Media Technologies (OTC BB: DSNY.OB) CFO. Below that is a verbatim quote from him taken (with his permission, of course) from a follow up e-mail he sent me this afternoon.

General Notes:

- Currently working with auditors on preparing 10-K, which Fred anticipates will be filed in late November.

- Wanted to reiterate that the revenue and EBITDA growth guidance mentioned in this week's press release refers to sequential quarterly, not annual, growth. <-- Clarification, since not everyone reads the comment threads here, and since I have seen this point misinterpreted elsewhere: Fred did not offer any earnings guidance beyond next fiscal year's Q1. Also, if memory serves, the company's fiscal Q1 tends to be its strongest seasonally, and its Q2 tends to be its weakest. So based on that (not on any specific guidance from the company) I would expect a sequential decline in revenue and EBITDA from Q1 to Q2.

- Cash position is growing, and the rate at which it is growing is rising as well.

- No need to raise funds for capex or operations.

- Said there is an internal group dedicated to working on how to grow the Clipstream business, but he has been more focused on PlayMPE. Deferred to CEO on Clipstream.

Notes on Yangaroo Case:

- Expected motion to dismiss would be unlikely to succeed, but filed it under advice of counsel as part of a broader legal strategy.

- Yangaroo has approached Destiny Media Technologies on more than one occasion seeking a merger. Destiny Media rejected these approaches.

- Yangaroo's case is currently in discovery regarding an issue of extraterritoriality (meaning that the Yangaroo patent cannot even be asserted against Destiny). Yangaroo's lawsuit may not survive a close examination of this issue. Although DSNY management believes that Yangaroo's case lacks merit for a number of reasons, to be efficient, Destiny's legal team is focusing on the issue which it believes is easiest to demonstrate.

- If Yangaroo's lawsuit is unsuccessful, as Destiny Media is confident it will be, Destiny plans to pursue recovering its legal costs from Yangaroo.

- Fred Vandenberg reiterated that major record label clients of Destiny Media were aware of the Yangaroo dispute when they signed their contracts with Destiny Media. These companies are of course sensitive to intellectual property issues, due to the nature of their business, and conducted their own legal reviews of the situation before deciding to sign up as DSNY clients.

Quote from Fred Vandenberg's follow-up e-mail today:

I am very happy with what we have been able to accomplish over last year and 1/2 which to go from a company investing in the initial commercial push of Play MPE.

In Q2-Fiscal 2008
Revenue $360K
EBITDA (negative) ($718)K

Growing revenue in 5 of the 6 quarters since, turning a loss into income and then continuing the growth of that income

To Q4 - Fiscal 2009 - Revenue $860K to $875K - EBITDA $275K to $290K

That's more than a $1,000,000 improvement in EBITDA in 18 months and - in my opinion - that change comes at the most critical time in any business venture, and we have changed the entire nature of the business.

During that time we signed Warner, expanded to Europe and Australia, extended with UMG in the US and signed UMG in the UK (UMG International), amongst many other things.

We have also done quite a number of things behind the scenes and I think we're more efficient, provide greater value to our clients, and I am more and more optimistic that these behind the scenes activities will result in continued growth in revenue and profit and customer satisfaction well into the foreseeable future.

Rumors of the dollar's death: greatly exaggerated

So says Martin Wolf of the Financial Times in his most recent column. Excerpt:

It is the season of dollar panic. These panic-mongers are varied: gold bugs, fiscal hawks and many others agree that the dollar, the dominant currency since the first world war, is on its death bed. Hyperinflationary collapse is in store. Does this make sense? No. All the same, the dollar-based global monetary system is defective. It would be good to start building alternative arrangements.

It's worth reading Wolf's column in full, but he makes a point there similar to one David Merkel made on his Aleph blog¹ recently [Merkel]:

Whatever country of our world has the status of reserve currency must issue debt, and a lot of it, that other countries can invest in to park their idle cash balances.

Wolf sketches out the "Triffin dilemma" this leads to: an overhang of debt that eventually undermines confidence in the reserve currency. Wolf's proposed solution is to look for an alternative to the dollar as a reserve currency, but I wonder if a simpler alternative would make sense in the near-term: instead of having surplus countries buy up U.S. debt to satiate their demand for dollar-based assets, why doesn't the U.S. government offer them an equity-like investment instead? Specifically, why not offer shares in a sort of massive master limited partnership that would invest its assets in nuclear power plants and other infrastructure, and pay dividends out of the revenues generated from those infrastructure assets?

Unlike the proceeds from the sale of Treasuries, which can go to fund transfer payments and health care for retirees, or extended military expeditions, proceeds from the sale of shares in this master limited partnership would go toward increasing productive capacity, which would fuel future economic growth in the U.S. This idea is a similar to (but simpler than) one proposed by Professor Yu Qiao of the School of Public Policy and Management, Tsinghua University, Beijing, in the Financial Times last spring.

¹Speaking of Merkel's blog, last month he asked if any readers had any stock ideas to share. I mentioned three: USEG, AYSI.OB, and DSNY.OB. As of yesterday's close, they were up 26%, 390%, and 60%, respectively.

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.

Destiny Media Turns a Profit

Vandenberg comes through on his prediction of profitability, and the quarterly profit of $102,481 is almost seven times higher than my conservative, back-of-the-envelope estimate in the comments section of this post in April. From the company's press release:

Destiny Media Achieves First Operating Profit From Doubling of Play MPE(R) Revenues

VANCOUVER, British Columbia, July 14 /PRNewswire-FirstCall/ -- Destiny Media Technologies (OTC Bulletin Board: DSNY - News), the global leader in the secure distribution of pre-release music to radio and provider of instant play streaming media, is pleased to announce that third quarter revenues grew by 42% from the previous quarter (80% over the third quarter in fiscal 2008) on the strength of better than anticipated revenue for its Play MPE® system. During the quarter the Company became profitable and realized positive cash flow from operations. Play MPE® revenue grew by 114% from the same quarter in the prior year.

"The Company has 'crossed the chasm'^[1] into profitability and we expect revenues, income and positive cash flow to continue to grow into the foreseeable future", commented Destiny CFO, Fred Vandenberg. "We have experienced 17% compounded quarter over quarter revenue growth over the past eleven quarters which has resulted in income from operations. We project revenue to continue to rise in our fourth quarter leading to a conservatively estimated 30% increase in net income and to realize a profit for the year ended August 31, 2009."

According to Destiny CEO, Steve Vestergaard, "We have worked closely with the record labels to build a system that works well with their internal business processes and they are comfortable relying on our system as they phase out physical CD's completely. We expect our profits from Play MPE® business to grow into the foreseeable future as the labels expand usage internally and we expand internationally. In addition, we expect to layer in new revenue streams for Clipstream® products that will begin rolling out in Q1 of next year."

^[1]Here, Vandenberg appears to be alluding to Geoffrey Moore's bestseller on technology marketing, Crossing the Chasm. At the turn of the century, when I was a business development director for a financial/Internet start-up, the initial outside investor, a venture capitalist with a Harvard MBA and an undergrad engineering degree, recommended another of Moore's books to me, Inside the Tornado: Strategies for Developing, Leveraging, and Surviving Hypergrowth Markets. Can't say it offered any revelatory advice: our initial growth, such as it was, owed more to old-fashioned elbow grease and salesmanship than it did to any of Moore's ideas, but I do remember a humorous bit of self-deprecation in Moore's intro to the 1999 edition of his book, the first edition of which had been published in 1995:

According to the index, in the entire manuscript of Inside the Tornado the Internet is referenced precisely three times. How in the world did I completely miss what will arguably be the grandest tornado of all time? Well, all I can say is that it's a gift.

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.

Two Press Releases from Destiny Media

Destiny Media Technologies (OTC BB: DSNY.OB) issued two press releases within the last several hours.

The first relates to the company's dispute with Yangaroo (TSX Venture: YOO.V), "Destiny Media Responds to Press Release From Canadian Competitor". Excerpt:

VANCOUVER, British Columbia, May 6 /PRNewswire-FirstCall/ -- Destiny Media Technologies, Inc. (OTC Bulletin Board: DSNY - News), the industry's leading secure digital media distribution company, is pleased to respond to a press release issued this afternoon by Yangaroo Inc. (TSX: YOO, Pink Sheets: YOOIF). Yangaroo offers a web based product that competes with Destiny's Play MPE® system in Canada.

According to their release, Yangaroo states that a claim for patent infringement against Destiny was filed in Wisconsin today for a patent issued yesterday. Destiny has not yet been served with this claim but is familiar with this patent and Destiny's management is confident that the claims are without merit. Destiny previously filed a $25 million slander and defamation suit against Yangaroo, for misleading Destiny's customers regarding the limits of Yangaroo intellectual property rights.

Destiny first began offering the MPE® system in 1999 and has its own patent for a Digital Media Distribution Method and System (USPTO 7466823) with foreign priority dating to March 2000. Yangaroo applied for their US patent May 8th 2003, four years after MPE® launched. Yangaroo listed Destiny's MPE® patent as prior art in their own application, clearly admitting that the MPE® system predated their application.

Yangaroo's original patent application was unsuccessful and they received a final rejection on December 15, 2008, forcing them to abandon all 109 of their original claims. They wrote and submitted a new single claim in January 2009 and this single claim patent was granted yesterday. Their new claim describes a method of distributing music that takes a different approach than that used by MPE®.

According to Destiny CEO, Steve Vestergaard, the suit is frivolous and only intended to create confusion in the marketplace. "They say imitation is the best form of flattery, but intellectual property law protects the invention that comes first, so their claims that we might infringe on a claim they only wrote a few months ago are ridiculous. Play MPE® is well on the way to becoming the global standard as over one thousand labels, including all the majors have chosen our system to send their new music to radio and we will protect our customer's ability to use the system they prefer."

The second press release announces a new deal in Australia, "Destiny Media Announces Partnership Between Play MPE(R) and Australian Independent Record Labels Association". Excerpt:

VANCOUVER, British Columbia, May 7 /PRNewswire-FirstCall/ -- Destiny Media Technologies, Inc. (OTC Bulletin Board: DSNY - News), the industry's leading secure digital media distribution company, is pleased to announce that Australian partner, The Shooting Star Picture Company has established a partnership with the Australian Independent Record Labels Association (AIR) to provide media distribution services for Australia's 300+ indie record companies through the Play MPE® music delivery software.

Destiny Media's CFO on the Company's Dispute with Yangaroo

In the comment thread of a previous post ("A Conversation with the CFO of Destiny Media"), a commenter raised questions about the company's dispute with Yangaroo (TSX Venture: YOO.V). I had asked Fred Vandenberg, Destiny Media's CFO, for an updated statement on the dispute, and today he e-mailed me one. Here it is:

On the Patent Dispute:

David:

The uncertainty and doubt you bring up regarding Yangaroo's Canadian patent and US patent application is a nuisance and it is unfortunate that we have to invest any resources at all in this matter. We are, however, very confident in a successful outcome of the Canadian litigation we initiated. We have gone through extensive legal reviews which appear to support this belief. We believe that our system existed first (this being the most salient reason we could not infringe) but we also believe, and consistent with our counsel’s advice, that we simply do not have the essential features in their patent. Further, to accommodate our global expansion, the Play MPE system expands and evolves over time and while we believe there would be no infringement at any point in time, we believe it would be exceedingly (and more) difficult to find infringement over the breadth of time.

If you come across anything from Yangaroo directly which states, or suggests, that we do infringe, or on what possible basis we do infringe, I would be interested in seeing this.

The MPE system was developed by Destiny in 1999 and we received a US patent granted with a priority date of March 2000. This is also filed with WIPO (world intellectual property organization). This is also cited as prior art in Yangaroo's US patent application. Presumably, the examiner reviewing their application has differentiated our patent from their patent.

Per the points posted on your blog:

a) The patent has not kept us from operating the Play MPE system on a commercial basis in Canada.

b) It appears that Yangaroo may shortly receive a patent in the US. Yangaroo has made our US customers, most notably EMI and Warner (see press release February http://www.wmg.com/news/year/2009/sortBy/desc/newspage/4), aware of this pending US patent. Thus both EMI and Warner Music Group undertook internal and external legal reviews. Destiny had extensive discussions with both counsels. Both, subsequent to their respective legal reviews, chose to sign agreements with Play MPE and both continue to use our system on a commercial basis. We believe they would only do so if they were comfortable that there is no infringement. This is in addition to our agreement with Universal Music Group. http://new.umusic.com/News.aspx?Year=2008 (see June 6, 2008 press release by Universal).

[Below] are some links for further information: We had initiated the lawsuit in Canada to establish through the courts that we do not infringe as a direct consequence to threats made by Yangaroo's management to potential customers that were interested in using our MPE system. Yangaroo had threatened certain labels with lawsuits and going so far as to say it was "illegal" to use our system.

[statement of claim: http://dsny.com/news/releases/Statement_of_Claim_March8_06web.pdf]
http://dsny.com/invalidity/Aug2005-opinion.pdf
http://dsny.com/invalidity/comfort-dec2005.rtf

Fred Vandenberg also added this in a separate e-mail:

On CEO/CFO Purchases:

David

You had mentioned that you had noticed Destiny’s CEO and CFO have been buying shares so I checked and over the course of the last two years we (Steve [Vestergaard, Destiny's CEO] at over 330,000 and myself at 130,000) have purchased more than 460,000 shares which represents approximately $290,000 (Cdn currency) in addition to our existing holdings. This is more than a full year’s compensation for the combination of us. In the same time period, Cliff Hunt and John Heaven, Yangaroo’s CFO and CEO respectively, have purchased less than $20,000 (Cdn) of Yangaroo shares representing approximately 5% of their annual salaries.

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.

Destiny Media Update

Destiny Media Technologies (OTC BB: DSNY.OB) mailed out a hard copy investor update booklet this week, which included the web address of a site that tracks usage stats for the company's secure music delivery service, Play MPE: Play MPE Stats. That site currently shows 189,577 "sends" in the past 7 days. Since Destiny Media gets paid per send, I called Destiny Media's CFO Fred Vandenberg to ask him what average fee the company received per send. Vandeberg didn't have an average number, but he said that Destiny generally charged $0.50 per send for major labels, and $0.60 per send for independents. He mentioned that some number of the sends might not generate fees for Destiny if these were between two individuals at the same label, for instance. Vandenberg added that if they found that this sort of traffic represented a significant percentage of the total, then Destiny Media might charge for these internal sends in future contracts.

I also asked Vandenberg about the company's Clipstream secure video delivery software. He said the firm was planning on promoting it more this year, and mentioned one potential application for it: dailies, the raw footage produced every day by film crews, which is later edited and synched to a soundtrack. Vandenberg said that, currently, dailies were transported via courier, so, for example, a film crew shooting in Vancouver might use Fed Ex to send its dailies to an editor in Los Angeles. With Clipstream, the film crew could send the dailies digitally instead. I asked Vandenberg if this was true for crews using old fashioned film stock too, i.e., did Destiny Media have some sort of technology to convert that to digital. He declined to answer that question. Destiny's second quarter numbers should be out in mid-April.

Below is a commercial, obviously modeled on the Mac versus PC ads, for Destiny's Play MPE secure music delivery service.

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.

The Sopranos' Over-the-Top Take on Selling a Sketchy Stock

In the comment thread of an earlier post ("Destiny Media Update"), a commenter's Sopranos reference brought to mind this scene, set in the boiler room of a 'boutique' investment bank, where an honest broker is disciplined for refusing to pump shares of a scam dot-com company called Webistics to his clients.

A Concern about Edelheit

In a previous post ("You pick the next post"), I mentioned I was thinking of writing a post about a concern I had about Aaron Edelheit's investment process. Perhaps that wasn't the best choice of words. I think Edelheit's general strategy of trying to buy obscure North American companies trading at single-digit multiples to his estimates of their forward earnings makes sense (although, as I've mentioned elsewhere, post-October there may be a better balance of risk versus reward in looking for currently profitable companies trading at low earnings multiples). Edelheit's track record is also impressive. The concern I have, which was prompted by a couple of his recent blog posts, is about whether Edelheit maintains an appropriate level of skepticism in his interactions with the management of the companies in which he invests.

ThinkEquity's 8^th commandment of research (See the previous post for the other nine, "ThinkEquity's Ten Commandments of Research") is relevant here:

5 Independent Sources for Each Initiation of Coverage.

We will have regular dialogue with company management, but they will always see the glass as "half full."

One of the challenges of investing in micro-cap companies is that there are often few, if any, independent sources of information on the company, so an investor is more reliant on information supplied by the company itself (e.g., its SEC filings, conference calls, etc.). Because of that, it's important to maintain a level of skepticism when evaluating forward-looking statements by management. This is easier said than done, particularly after one has invested in a position: we all like to believe our initial thesis was right, and this can compromise our objectivity in evaluating information subsequently.

In fairness to Edelheit, he seems to limit his investments to companies where the managers put their money where their mouths are, by buying their own stock (e.g., Nasdaq.com shows that Destiny Media's insiders have been buying their company's stock over the last year).

These were the two posts that made me question Edelheit's level of skepticism, "Excellent Video on Car Bailouts", and "Adversity and Underprivilege". In the first post, Edelheit wrote approvingly of an appearance by New York Times columnist Tom Friedman on CNBC, and in the second post, Edelheit wrote approvingly of an essay by Malcolm Gladwell. Friedman and Gladwell are both highly-influential, best-selling writers, but they tend toward glib oversimplifications. A healthy level of skepticism is warranted when reading them. In his recent posts on Friedman and Gladwell, Edelheit's apparent credulity made me wonder if he has been similarly credulous in evaluating statements made by managers of the companies he owns. Of course, it's reasonable to assume that he is more rigorous in his vocation of investing than in his avocation of blogging, but since he is blogging eponymously, he may want to consider whether his recent posts may have raised the same concern in his clients or potential clients who read his blog.

For a skeptical take on Tom Friedman's commentary about the Detroit automakers, see my recent posts "Iraq, the Automakers, and the Limitations of Technology", and "Great Moments in Business Journalism". For a skeptical take on Malcolm Gladwell, see Michiko Kakutani's review of Gladwell's latest book, "Outliers", in the New York Times. Below is an excerpt from Kakutani's review.

Both [of Gladwell's two previous bestsellers, "The Tipping Point" and "Blink"] use PowerPoint-type catchphrases (like the “stickiness factor” and “the Rule of 150”) to plant concepts in the reader’s mind. And both project a sort of self-help chirpiness, which implies that they are giving the reader useful new insights into the workings of everyday life.

“Outliers,” Mr. Gladwell’s latest book, employs this same recipe, but does so in such a clumsy manner that it italicizes the weaknesses of his methodology. The book, which purports to explain the real reason some people — like Bill Gates and the Beatles — are successful, is peppy, brightly written and provocative in a buzzy sort of way. It is also glib, poorly reasoned and thoroughly unconvincing.