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.

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 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.