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.

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.

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.

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 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.

Paul Kedrosky on Fannie & Freddie

On his Infectious Greed blog, Paul Kedrosky summarizes the Fannie and Freddie intervention:

Details on the just-announced Fannie/Freddie bailout plans were initially scant, but the OFHEO and Treasury websites now have most of what you're looking for. Here is the gist:

1. The two mortgage giants will open Monday under Treasury control
2. New CEOs and boards are inbound
3. Common shareholders are being massively diluted as preferred of a preferred/warrant deal that is being held out as offering taxpayers upside
4. The U.S. is now buying MBS securities direct from GSEs in the open market, and there is no explicit limit specified
5. The U.S. just [added] a planet-sized new (red) line item on its national balance sheet [one would think it also added some offsetting assets too]

For those of you who like more words, here is OFHEO's description of the bailout's key elements:

There are several key components of this conservatorship:

First, Monday morning the businesses will open as normal, only with stronger backing for the holders of MBS, senior debt and subordinated debt.

Second, the Enterprises will be allowed to grow their guarantee MBS books without limits and continue to purchase replacement securities for their portfolios, about $20 billion per month without capital constraints.

Third, as the conservator, FHFA will assume the power of the Board and management.

Fourth, the present CEOs will be leaving, but we have asked them to stay on to help with the transition.

Fifth, I am announcing today I have selected Herb Allison to be the new CEO of Fannie Mae and David Moffett the CEO of Freddie Mac. Herb has been the Vice Chairman of Merrill Lynch and for the last eight years chairman of TIAA-CREF. David was the Vice Chairman and CFO of US Bancorp. I appreciate the willingness of these two men to take on these tough jobs during these challenging times. Their compensation will be significantly lower than the outgoing CEOs. They will be joined by equally strong non-executive chairmen.

Sixth, at this time any other management action will be very limited. In fact, the new CEOs have agreed with me that it is very important to work with the current management teams and employees to encourage them to stay and to continue to make important improvements to the Enterprises.

Seventh, in order to conserve over $2 billion in capital every year, the common stock and preferred stock dividends will be eliminated, but the common and all preferred stocks will continue to remain outstanding. Subordinated debt interest and principal payments will continue to be made.

Eighth, all political activities -- including all lobbying -- will be halted immediately. We will review the charitable activities.

Lastly and very importantly, there will be the financing and investing relationship with the U.S. Treasury, which Secretary Paulson will be discussing. We believe that these facilities will provide the critically needed support to Freddie Mac and Fannie Mae and importantly the liquidity of the mortgage market.

One of the three facilities he will be mentioning is a secured liquidity facility which will be not only for Fannie Mae and Freddie Mac, but also for the 12 Federal Home Loan Banks that FHFA also regulates. The Federal Home Loan Banks have performed remarkably well over the last year as they have a different business model than Fannie Mae and Freddie Mac and a different capital structure that grows as their lending activity grows. They are joint and severally liable for the Bank System’s debt obligations and all but one of the 12 are profitable. Therefore, it is very unlikely that they will use the facility.

A Conversation with the CFO of Destiny Media Technologies (DSNY.OB)

After reading Destiny Media Technology's Q3 release, I spoke with Fred Vandenberg, the company's CFO, earlier today. I asked him about the decline in revenues y-o-y from its Clipstream product. He said that Destiny's focus had been on the MPE service (in terms of development, sales, etc.), so Clipstream suffered somewhat from that neglect, but he reiterated its advantages over Flash (e.g., that it uses 90% less bandwith, that it requires less processing power, etc.), and also reiterated his company's prediction in today's release that Clipstream revenues would increase significantly in the company's fiscal Q1 (since Destiny's fiscal year begins on September 1st, Q1 will be the Sep-Nov quarter).

I asked Vandenberg if he was familiar with Aaron Edelheit's VIC write-up of his company, and he said that he was. In light of today's announcement that Destiny expects to be profitable in its Q1 quarter, I asked him if he thought Edelheit's estimate of ~10 cents per share in fiscal '09 earnings sounded on target. Unsurprisingly, since Destiny Media didn't provide a specific earnings estimate for Q1, Vandenberg didn't want to get pinned down on a specific estimate for all of '09, citing some variables earnings would depend on (e.g., how many contracts get signed, etc.). He did, however, reiterate his confidence that Destiny Media would be profitable in its fiscal Q1.

In his VIC write-up, Edelheit had predicted that most of the companies that were using Destiny Media's MPE service on a trial basis would become paying clients this year. I asked Vandenberg about this, and he said that had been the case so far this year.

Vandenberg also said that one factor holding back MPE revenues somewhat has been that the pricing system has been complex. In trying to make the pricing flexible, Destiny Media may have gone so far in that direction that they made it too complicated, and that complexity may be inhibiting some clients from using the service as much as they would otherwise. Vandenberg said that Destiny was in the process of simplifying the pricing system and that process of simplifying it should be completed within the next few weeks. He said simplifying that pricing should lead to an increase in MPE service revenues.

Destiny Media Announces its Q3 Numbers

Today, apparently without any advance notice, Destiny Media Technologies (DSNY.OB) announced its Q3 numbers (the company's fiscal year ends on August 31st), Press Release: "Destiny Media Reports Record Revenues for Q3 2008". The company's revenue went up and its quarterly loss narrowed on a y-o-y basis.

Also today, I spoke with Fred Vandenberg, the CFO of Destiny Media. I have some business to attend to first, but I will post notes from our conversation here later today.